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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1997
Commission file number 0-13833
GEORGE MASON BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1303470
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(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
11185 Main Street, Fairfax, Virginia 22030
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(Address of principal executive office) (Zip Code)
(Registrant's Telephone number, including area code) (703) 352-1100
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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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to
this Form 10-K [X].
At March 9, 1998 the aggregate market value of the voting stock of the
registrant held by non-affiliates of the registrant was approximately $188.4
million computed at $41.50 per share. The number of shares outstanding of the
registrant's Common Stock ($1.11 Par Value) was 5.3 million shares at March 9,
1998.
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PART I
ITEM 1. BUSINESS
GENERAL
George Mason Bankshares, Inc., ("GMBS" or the "Company") is a multi-bank
holding company established as a Virginia Corporation in 1984. The Company's
headquarters are located in Fairfax, Virginia. GMBS owns all of the outstanding
stock of George Mason Bank ("GMB" or the "Bank"), which was incorporated in
1977 and opened for business in 1979. GMB provides a wide range of financial
services principally to individuals and to small and medium-sized businesses,
is community-oriented and offers services customarily provided by full-service
banks, including individual and commercial checking, savings and time deposit
accounts, commercial loans, real estate and consumer loans, trust and brokerage
services, travelers' checks, and safe deposit facilities. GMB operates 21
offices throughout the Washington, D.C. Metropolitan area. All but one of GMB's
offices offer 24-hour automated teller machines ("ATMs") which are linked with
other automated teller machines regionally through HONOR(R) and nationally
through PLUS(R). In addition, GMB has 7 off-site ATMs.
The business strategy of GMBS is to provide its customers with the
financial sophistication and range of products offered by regional banks while
maintaining the quick response and services of a community bank.
During 1991, in contrast to many regional and community banks which were
cutting expenses and employees, GMBS began a major expansion of its branch
system, operations area, and personnel. This expansion followed a policy
decision in early 1991 to hire experienced banking officers, who were available
from merged institutions or from regional banks which had been subject to
governmental enforcement actions. Total full-time equivalent employees have
increased from approximately 90 at December 31, 1991 to 217 at December 31,
1997. Since November 1991, the Company, through its subsidiaries, has (i)
established a new office in Vienna through the purchase of certain assets from
the Federal Deposit Insurance Corporation (the "FDIC"); (ii) opened an office
in McLean that was acquired from the Resolution Trust Corporation; (iii)
acquired a 10,000 square foot building in Tysons Corner; (iv) purchased the
insured deposits of another financial institution, including additional branch
offices in Reston and Tysons Corner; (v) bought a five-story, 28,000 square
foot office building in Chantilly to house a branch office and an
operations/customer service center; (vi) opened four branch offices in
Arlington County; (vii) opened its first two offices in Loudoun County; (viii)
constructed an office in the Fair Lakes shopping center in Fairfax, Virginia,
(ix) opened its first office serving Prince William County; (x) consummated its
first merger resulting in the Company's first offices in Washington, D.C.; and
(xi) opened its first two offices in Maryland.
George Mason Mortgage Company ("GMMC"), a wholly owned subsidiary of GMB,
is engaged in the operation of a general mortgage and agency business. GMMC
currently operates seven offices. The main office of GMMC is located in
Fairfax, with two offices in Prince William County, one in Loudoun County, one
in West Virginia, and two in Maryland. At December 31, 1997, GMMC employed 105
persons. GMMC primarily originates permanent residential mortgage loans
(including VA, FHA, conforming and nonconforming loans) to be sold in the
secondary market. These loans are for single family, owner-occupied residences.
Its loans have either adjustable or fixed rate terms, with a variety of
maturities tailored to effectively serve its market. GMMC is also active in
sponsoring Community Homebuyers Programs for low-to-moderate income families.
Over the last three years, GMMC has steadily increased its market share.
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PLANNED MERGER WITH UNITED BANKSHARES, INC.
On December 10, 1997, GMBS, United Bankshares, Inc., a West Virginia
corporation ("United"), and George Mason Holding Company, a wholly owned
subsidiary of United ("Merger Sub"), entered into an Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") and the related Plan of
Merger pursuant to which Merger Sub will be merged with and into GMBS and GMBS
will become a wholly owned subsidiary of United (the "Merger"). Under the
Merger Agreement, each share of the common stock, par value $1.11 per share, of
GMBS ("GMBS Common Stock") outstanding immediately prior to the effective time
of the Merger will be converted into the right to receive 1.7 shares (the
"Exchange Ratio") of the common stock, par value $2.50 per share, of United
("United Common Stock"). The Exchange Ratio was adjusted from 0.85 of a share
to 1.7 shares as a result of a 100% stock dividend on the United Common Stock
payable March 27, 1998 to record holders of United Common Stock as of March 13,
1998.
The Merger Agreement was approved by GMBS' shareholders at a special
meeting held on March 9, 1998. It is anticipated that the Merger will close on
April 2, 1998.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report on Form 10-K or in future filings by GMBS
with the Securities and Exchange Commission, in GMBS' press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," "believe" or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties. Factors which may
cause actual results to differ materially from those contemplated by such
forward-looking statements include, among other things, the following
possibilities: (i) expected cost savings from the Merger cannot be fully
realized; (ii) deposit attrition, customer loss or revenue loss following the
Merger; (iii) higher than expected costs or difficulties relating to the
integration of the businesses of the parties to the Merger; (iv) changes in
general economic conditions; (v) changes in policies by regulatory agencies;
(vi) fluctuations in interest rates; (vii) a significant increase in
competition in the banking industry and (viii) changes in the securities
markets. GMBS wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made. GMBS
does not undertake, and specifically disclaims any obligation, to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
COMPETITION
The Company operates in a competitive environment, competing for deposits
and loans with commercial banks, thrift institutions and other financial
institutions. Numerous mergers and consolidations involving Maryland, Virginia
and Washington, D.C. banks have occurred recently, resulting in an
intensification of competition in the banking industry in the Company's
geographical market. The Company also competes with money market mutual funds
for funds from depositors. Many of the Company's competitors possess greater
financial resources or have substantially higher lending limits than does the
Company.
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Recent changes in Federal banking laws are expected to facilitate
interstate branching and merger activity among banks. Since September 1995,
with exceptions, certain bank holding companies are authorized to acquire banks
throughout the United States. In addition, since July 1, 1997, certain banks
have been permitted to merge with banks located in different states. Such
changes may result in an even greater degree of competition in the banking
industry and the Company may be brought into competition with institutions with
which it does not presently compete. There can be no assurance that the
profitability of the Company will not be adversely affected by increased
interstate branching and merger activity in the banking industry in the future.
SUPERVISION AND REGULATION
The Company and GMB are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on and provide
for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended for the
protection of depositors.
Beginning with the enactment of the Financial Institutions Reform Recovery
and Enforcement Act of 1989 ("FIRREA") and following with the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous additional
regulatory requirements have been placed on the banking industry in the past
several years, and additional changes have been proposed. The operations of the
Company and the Bank may be affected by legislative changes and the policies of
various regulatory authorities. The Company is unable to predict the nature or
the extent of the effect on its business and earnings that fiscal or monetary
policies, economic control, or new federal or state legislation may have in the
future.
The following is a brief summary of certain statutes, rules and
regulations affecting the Company and GMB. To the extent that the following
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions.
GMBS. The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "BHC Act") and Chapter 13 of the Virginia
Banking Act (the "Virginia Act").
The BHC Act. Under the BHC Act, the Company is subject to periodic
inspection by the Board of Governors of the Federal Reserve System (the
"Federal Reserve") and is required to file periodic reports of its operations
and such additional information as the Federal Reserve may require. The
Company's activities are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries, or engaging
in any other activity that the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
With certain limited exceptions, the BHC Act requires every bank holding
company to obtain the prior approval of the Federal Reserve before (i) acquiring
substantially all the assets of any bank, (ii) acquiring direct or indirect
ownership or control of any voting shares of any bank if after such acquisition
it would own or control more than 5% of the voting shares of such bank (unless
it already owns or controls the majority of such shares), or (iii) merging or
consolidating with another bank holding company.
In addition, and subject to certain exceptions, the BHC Act and the
Federal Change in Bank Control Act, together with regulations thereunder,
require Federal Reserve approval (or, depending on the circumstances, no notice
of disapproval) prior to any person or company acquiring "control" of a
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bank holding company, such as the Company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. With respect to corporations with
securities registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), under Federal Reserve regulations control will be
rebuttably presumed to exist if a person acquires at least 10% of any class of
voting securities of the corporation. The regulations provide a procedure for
challenge of the rebuttable control presumption.
Under the BHC Act, the Company is generally prohibited from engaging in,
or acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, non-banking activities, unless the Federal Reserve, by
order or regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the activities that the Federal Reserve has determined by regulation to
be proper incidents to the business of banking include operating a mortgage,
finance, credit card or factoring company, making or servicing loans and
certain types of leases, engaging in certain insurance and discount brokerage
activities, performing certain data processing services, acting in certain
circumstances as a fiduciary or investment or financial advisor, owning savings
associations, and making investments in certain corporations or projects
designed primarily to promote community welfare.
In accordance with Federal Reserve policy, the Company is expected to act
as a source of financial strength and commit resources to support its banks.
Under the BHC Act, the Federal Reserve may require a bank holding company to
terminate any activity or relinquish control of a non-bank subsidiary (other
than a non-bank subsidiary of a bank) upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of
the bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or nonbank subsidiary if the agency determines that divestiture may aid
the depository institution's financial condition.
In the liquidation or other resolution by any receiver of a bank insured
by the FDIC, the claims of depositors have priority over the general claims of
other creditors. Hence, in the event of the liquidation or other resolution of
a banking subsidiary of the Company (such as GMB) the general claims of the
Company as creditor of such banking subsidiary would be subordinate to the
claims of the depositors of such banking subsidiary, even if the claims of the
Company were not by their terms so subordinated.
The Virginia Act. All Virginia bank holding companies must register with
the Virginia State Corporation Commission (the "Virginia Commission") under the
Virginia Act. A registered bank holding company must provide the Virginia
Commission with information regarding the financial condition, operations,
management, and intercompany relationships of the holding company and its
subsidiaries. The Virginia Commission may also require additional information
it deems necessary to keep itself informed about whether the provisions of
Virginia law and the regulations and orders issued thereunder by the Virginia
Commission have been complied with, and may make examinations of any bank
holding company and its subsidiaries.
Under the Virginia Act, it is unlawful without the prior approval of the
Virginia Commission for any Virginia bank holding company to acquire direct or
indirect ownership or control of more than 5% of the voting securities of any
bank or other bank holding company. In addition, Chapter 15 of the Virginia Act
allows interstate banking by permitting banking organizations from other states
to acquire Virginia banking organizations if the Virginia banking organization
to be acquired has been in existence and
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continuously operated as a bank for a period of two years. In addition,
Virginia bank holding companies are permitted to acquire banks in any state.
REGULATION OF GMB. GMB is a state-chartered institution organized under
Virginia law and, as such, is subject to examination and regulation by the
Virginia Commission. GMB is also a member of the Federal Reserve System and,
therefore, is supervised and examined by the Federal Reserve. The Federal
Reserve is GMB's primary federal regulator.
General. Deposits in the Bank are insured by the FDIC up to a maximum
amount (generally $100,000 per depositor, subject to aggregation rules). GMB's
state and federal regulators regulate or monitor all areas of the bank's
operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rate risk
management, establishment of branches, corporate reorganizations, maintenance
of books and records, and adequacy of staff training to carry on safe lending
and deposit gathering practices. The Federal Reserve requires the bank to
maintain certain capital ratios and imposes limitations on the bank's aggregate
investment in real estate, bank premises, and furniture and fixtures. The bank
is currently required by the Federal Reserve to prepare quarterly reports on
its financial condition and to conduct an annual audit of its financial affairs
in compliance with minimum standards and procedures prescribed by the Federal
Reserve.
Under FDICIA, all insured institutions must undergo regular on-site
examination by their appropriate banking regulator. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency or agencies. FDICIA also directs the FDIC
to develop with other agencies a method for insured depository institutions to
provide supplemental disclosure of the estimated fair market value of assets
and liabilities, to the extent feasible and practicable, in any balance sheet,
financial statement, report of condition or any other report of any insured
depository institution. FDICIA, as amended by the Riegle Community Development
and Regulatory Improvement Act of 1994, also requires the federal banking
regulatory agencies to prescribe, by regulation or guideline, standards for all
insured depository institutions relating, among other things, to: (i) internal
controls, information systems, and audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset
quality. The regulatory agencies adopted joint guidelines for all areas except
asset quality in July 1995 and joint guidelines setting qualitative standards
on asset quality and earnings standards in August 1996.
Transactions with Affiliates and Insiders. GMB is subject to the
provisions of Section 23A of the Federal Reserve Act, which places limits on
the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates, including the Company. In addition,
limits are placed on the amount of advances to third parties collateralized by
the securities or obligations of affiliates. Most of these loans and certain
other transactions must be secured in prescribed amounts. GMB is also subject
to the provisions of Section 23B of the Federal Reserve Act that, among other
things, prohibits institutions from engaging in transactions with certain
affiliates unless the transactions are on terms substantially the same, or at
least as favorable to such institution or subsidiaries, as those prevailing at
the time for comparable transactions with non-affiliated companies. The Bank is
subject to restrictions on extensions of credit to executive officers,
directors, certain principal shareholders, and their related interests. Such
extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties and (ii) must not involve more than
the normal risk of repayment or present other unfavorable features.
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Branching. Under current Virginia law, GMB may open branch offices
throughout Virginia, Maryland and the District of Columbia with prior
regulatory approval. In addition, with prior regulatory approval as appropriate
under the circumstances, GMB will be able to acquire existing banking
operations in Virginia.
Under the recently passed federal legislation discussed above, which
became effective June 1, 1997, banks may merge or consolidate across state
lines. Under the federal legislation, states may authorize banks from other
states to engage in branching across state lines.
Community Reinvestment Act. The Federal Community Reinvestment Act
requires that, in connection with examinations of financial institutions within
their jurisdiction, the Federal Reserve, the FDIC, the OCC, or the Office of
Thrift Supervision (the "OTS") shall evaluate the record of the financial
institutions in meeting the credit needs of their local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those institutions. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or
facility. GMB has always had "satisfactory" ratings with respect to compliance
with CRA.
Other Regulations. Interest and certain other charges collected or
contracted for by the bank are subject to state usury laws and certain federal
laws concerning interest rates. The bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or other
prohibited factors in extending credit, the Fair Credit Reporting Act of 1978
governing the use and provision of information to credit reporting agencies,
the Fair Debt Collection Act governing the manner in which consumer debts may
be collected by collection agencies, and the rules and regulations of the
various federal agencies charged with the responsibility of implementing such
federal laws. The deposit operations of the banks also are subject to the Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve Board to implement that act,
which govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services, and the Truth-in-Savings Act,
which requires accurate disclosures of certain items related to deposit
accounts such as annual percentage yield ("APY"), duration of APY, minimum
balance requirements and information about fees and penalties. The banks'
brokered deposit activities are subject to an FDIC rule that permits only "well
capitalized" institutions to obtain brokered deposits. "Adequately capitalized"
institutions may obtain brokered deposits if they receive a waiver from the
FDIC. This rule also prohibits institutions that are not "well capitalized"
from soliciting deposits at rates significantly higher than prevailing rates.
DEPOSIT INSURANCE. The deposits of GMB are currently insured to a maximum
of $100,000 per depositor, subject to certain aggregation rules. The FDIC has
implemented a risk-related assessment system for deposit insurance premiums.
All depository institutions have been assigned to one of nine risk assessment
classifications based upon certain capital and supervisory measures. The
deposits of the bank are subject to the rates of the Bank Insurance Fund
("BIF") of the FDIC. The BIF assessment rates range from $0.00 per $100 of
domestic deposits for institutions in the lowest risk category to $0.27 per
$100 of domestic deposits for institutions in the highest risk category.
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DIVIDENDS. A source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by GMB to the
Company depends on the Bank's earnings and capital position and is limited by
federal law, regulations, policies and Virginia law. In addition, the Federal
Reserve has stated that bank holding companies should refrain from or limit
dividend increases or reduce or eliminate dividends under circumstances in
which the bank holding company fails to meet minimum capital requirements or in
which its earnings are impaired. Under current supervisory practices, prior
regulatory approval is required if cash dividends declared in any given year
exceed net income for that year plus retained earnings of the two preceding
years.
The Bank may not pay dividends from its paid-in-capital. All dividends
must be paid out of undivided profits then on hand, after deducting expenses,
including reserves for losses and bad debts. The approval of the Federal
Reserve is required if the total of all dividends declared by the Bank in any
calendar year exceeds the total of its net profits for that year combined with
its retained net profits for the preceding two years, less any required
transfers to surplus. Under FDICIA, the Bank may not pay a dividend if, after
paying the dividend, the Bank would be undercapitalized. See "Capital
Regulations" below.
CAPITAL REGULATIONS. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies, account for off-balance
sheet exposure, and minimize disincentives for holding liquid assets. The
resulting capital ratios represent qualifying capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the federal regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of the
minimums. The current guidelines require all bank holding companies and
federally-regulated banks to maintain a minimum risk-based total capital ratio
equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common shareholders' equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but
excludes goodwill and most other intangibles and excludes the allowance for
loan and lease losses. Tier 2 capital includes the excess of any preferred
stock not included in Tier 1 capital, mandatory convertible securities, hybrid
capital instruments, certain qualifying subordinated debt and intermediate
term-preferred stock, and general reserves for loan and lease losses up to
1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds,
which have a 50% rating, and direct obligations of or obligations guaranteed by
the United States Treasury or United States Government agencies, which have a
0% rating. On September 6, 1996, the Federal Reserve and the OCC revised their
risk-based capital rules to supplement and adjust their risk-based capital
ratios for certain banks whose trading activity (on a worldwide consolidated
basis) equals 10 percent or more of total assets or $1 billion or more. These
new rules became effective January 1, 1997 but compliance is not required until
January 1, 1998.
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The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least
100 to 200 basis points.
FDICIA established a capital-based regulatory scheme designed to promote
early intervention for troubled banks and requires the FDIC to choose the least
expensive resolution of bank failures. The capital-based regulatory framework
contains five categories of compliance with regulatory capital requirements:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." To qualify
as a "well capitalized" institution, a bank or bank holding company must have a
leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less than
6%, and a total risk-based capital ratio of no less than 10%, and the bank must
not be under any order or directive from the appropriate regulatory agency to
meet and maintain a specific capital level.
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, interest rates
on deposits, and other activities; (iv) improve their management; (v) eliminate
management fees; or (vi) divest themselves of all or part of their operations.
Bank holding companies controlling financial institutions can be called upon to
boost the institutions' capital and to partially guarantee the institution's
performance under their capital restoration plans.
In August of 1995, the federal bank regulatory agencies revised their
capital adequacy guidelines to provide explicitly for consideration of interest
rate risk in the overall determination of a bank's minimum capital requirement.
The intended effect is to ensure that banking institutions effectively measure
and monitor their interest rate risk and that they maintain adequate capital
for the risk. A banking institution deemed to have excessive interest rate risk
exposure may be required to maintain additional capital.
UNIFORM FINANCIAL INSTITUTIONS RATING SYSTEM (UFIRS)
UFIRS is a supervisory rating system used by the Federal Reserve and the
OCC and the other federal regulators to evaluate the soundness of depository
institutions on a uniform basis. The agencies have implemented this system
through CAMEL ratings that evaluate banks according to five factors: capital
adequacy, asset quality, management, earnings, and liquidity. The federal
regulators have added a sixth factor, sensitivity to market risk, effective
January 1, 1997. The rating system is now referred to as CAMELS.
GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The Company is affected by monetary policies of regulatory agencies,
including the Federal Reserve, which regulates the national money supply in
order to mitigate recessionary and inflationary pressures. Among the techniques
available to the Federal Reserve are engaging in open market transactions in
United States Government securities, changing the discount rate on bank
borrowings,
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changing reserve requirements against bank deposits and limiting interest rates
that banks may pay on time and savings deposits. These techniques are used in
varying combinations to influence the overall growth of bank loans, investments
and deposits. Their use may also affect interest rates charged on loans or paid
on deposits. The effect of governmental policies on the earnings of the Company
cannot be predicted.
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions, including proposals
to consolidate the federal bank regulatory agencies. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Company cannot predict whether any of
these proposals will be adopted or, if adopted, how these proposals would
affect the Company.
ITEM 2. PROPERTIES
The principal office of GMBS and GMB is located at 11185 Main Street,
Fairfax, Virginia. GMB has 20 additional branch offices. The addresses of these
branch offices are: 4221 Walney Road, Chantilly, VA; George Mason University,
University Center, Fairfax, VA; 1320 Old Chain Bridge Road, McLean, VA; 1801
Reston Parkway, Reston, VA; 7787 Leesburg Pike, Falls Church, VA; 226 Maple
Avenue West, Vienna, VA; 3289 Woodburn Road, Annandale, VA; 6402 Williamsburg
Boulevard, Arlington, VA; 4005 Wilson Boulevard, Arlington, VA; 4501 Daly
Drive, Chantilly, VA; 13060 Fair Lakes Boulevard, Fairfax, VA; 5335 Lee
Highway, Arlington, VA; 21036 Tripleseven Road, Sterling, VA; 9872 Liberia
Avenue, Manassas, VA; 2300 Ninth Street, Arlington, VA; 531-A East Market
Street, Leesburg, VA; 7626 Old Georgetown Road, Bethesda, MD; 1667 K Street,
NW, Wash, DC; 4900 Massachusetts Avenue, NW, Wash, DC; and 1225 Eye Street, NW,
Wash, DC.
GMB owns the building which contains the Chantilly office. This five-story
building is used as the operations and customer service center for GMB. GMB
also owns the three-story building in which the Falls Church branch is located
and the building in which the Fair Lakes branch is located. The other offices
of GMB are leased. See Note 10 to GMBS' consolidated financial statements for
additional information concerning GMB's obligations under these lease
agreements.
GMMC's corporate headquarters is located at 4035 Ridge Top Road, Suite
100, Fairfax, VA. The other six offices of GMMC are located at 2750 Killarney
Drive, Lakepoint One, Suite 105, Woodbridge, VA; 7900 Sudley Road, Manassas,
VA; 448 Viking Drive, Suite 250, Virginia Beach, VA; 6110 Executive Boulevard,
Rockville, MD; 65 Duke Street, Prince Frederick, MD; and Old Town Center, Suite
10, South Princess Street, Shepherdstown, WV.
ITEM 3. LEGAL PROCEEDINGS
In the course of its operations, GMBS, GMMC and GMB 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 GMBS'
business, financial position, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to shareholders during the last
quarter of fiscal 1997.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
STOCK PRICE
The common stock of the Corporation is traded over-the-counter under the
Nasdaq National Market System symbol GMBS. The high and low sales price for
common shares traded during the last two years were:
<TABLE>
<CAPTION>
DURING THE QUARTER ENDED LOW PRICE HIGH PRICE
<S> <C> <C>
December 31, 1997 $35.50 $40.00
September 30, 1997 26.25 37.13
June 30, 1997 19.75 29.25
March 31, 1997 20.50 23.00
December 31, 1996 18.50 23.25
September 30, 1996 18.50 20.63
June 30, 1996 19.00 22.25
March 31, 1996 17.83 23.25
</TABLE>
There were approximately 740 shareholders of record of the Company's
common stock (the "Company Common Stock") at March 9, 1998. There were
approximately 1,916 beneficial shareholders at March 9, 1998. The Company
Common Stock closed at a price of $41.50 per share on March 9, 1998.
Additional information required under Item 5 is hereby incorporated herein by
reference to note 22 of the Company's consolidated financial statements.
11
<PAGE> 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1997 1996 1995 1994 1993
---------- -------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................. $ 64,506 $ 53,727 $ 44,119 $ 33,659 $ 28,734
Interest expense................ 32,561 26,264 19,949 11,627 9,840
---------- -------- -------- -------- --------
Net interest income 31,945 27,463 24,170 22,032 18,894
Provision for loan losses....... 20 181 18 167 620
Net interest income after
provision..................... 31,925 27,282 24,152 21,865 18,274
Noninterest income.............. 16,644 14,852 10,359 5,390 3,611
Noninterest expense............. 36,808 32,179 26,124 20,453 16,600
---------- -------- -------- -------- --------
Income before taxes............. 11,761 9,955 8,387 6,802 5,285
Income taxes.................... 3,681 3,072 2,095 1,830 1,279
---------- -------- -------- -------- --------
Income before cumulative
effect........................ 8,080 6,883 6,292 4,972 4,006
Cumulative effect of change
in accounting principle....... - - - - 217
---------- -------- -------- -------- --------
Net Income...................... $ 8,080 $ 6,883 $ 6,292 $ 4,972 $ 4,223
========== ======== ======== ======== ========
PER SHARE DATA:
Basic earnings per share........ $ 1.58 $ 1.38 $ 1.30 $ 1.05 $ 0.94
Diluted earnings per share...... 1.54 1.35 1.28 1.04 0.92
Cash dividends.................. 0.56 0.46 0.38 0.29 0.23
Book value at period end........ 14.45 12.80 12.18 10.18 10.21
Dividend payout ratio (1)....... 35.4% 33.3% 29.2% 27.6% 24.5%
BALANCE SHEET DATA:
Total assets.................... $1,026,569 $872,470 $679,596 $550,799 $461,184
Loans, net...................... 450,639 367,954 294,029 240,651 215,313
Mortgage loans held for
resale........................ 90,611 72,983 55,482 18,506 21,831
Securities...................... 373,669 345,433 261,934 222,914 180,353
Deposits........................ 819,302 693,594 554,464 460,802 372,889
Shareholders' equity............ 76,036 64,344 57,927 46,776 46,833
Actual common shares
outstanding................... 5,261 5,028 4,755 4,594 4,553
PERFORMANCE RATIOS:
Return on average assets........ 0.90% 0.92% 1.05% 1.02% 0.99%
Average equity to average assets 7.58% 8.00% 8.72% 9.68% 9.34%
Return on average equity........ 11.76% 11.21% 11.75% 10.21% 10.62%
Net interest margin (tax-
equivalent)................... 3.81% 3.95% 4.43% 4.93% 4.68%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans.............. 1.24% 1.51% 1.85% 2.36% 2.55%
Allowance for loan losses to
nonperforming loans........... 5.42x 3.58x 1.47x 1.76x 1.45x
Nonperforming assets to
period end loans and
other real estate............. 0.23% 0.53% 1.29% 1.44% 2.00%
Net charge-offs to average
total loans................... 0.00% 0.02% 0.11% 0.00% 0.53%
CAPITAL AND LIQUIDITY RATIOS:
Leverage........................ 7.9% 7.6% 8.8% 9.6% 10.3%
Risk-based:
Tier 1 capital................ 12.0% 12.3% 13.7% 14.1% 14.8%
Total capital................. 12.9% 13.4% 14.9% 15.3% 16.1%
</TABLE>
____________________
(1) Dividend payout ratio is calculated by dividing dividends per share by
basic earnings per share.
12
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding
and evaluating the financial condition and results of operations of GMBS. This
discussion should be read in conjunction with GMBS' consolidated financial
statements and accompanying notes included herein. This analysis provides an
overview of the significant changes that occurred during the periods presented.
Effective May 17, 1996, Palmer National Bancorp, Inc., the holding company for
Palmer National Bank, merged into Mason Holding Corporation, a subsidiary of
GMBS. The merger was accounted for as a pooling of interests. Accordingly, all
financial data for periods prior to the merger have been restated to reflect
the financial position and results of operations on a combined basis from the
earliest period presented.
FINANCIAL SUMMARY
Net income totaled $8.08 million for 1997, compared to $6.88 million for
1996, representing an increase of 17.4%, and marking the Company's sixth
consecutive year of record earnings. Net income for 1995 totaled $6.29 million.
Basic and diluted earnings per share for 1997 were $1.58 and $1.54
respectively, compared to $1.38 and $1.35 for 1996 and $1.30 and $1.28 for
1995. Return on average assets and equity for 1997 were 0.90% and 11.76 %
respectively, compared to 0.92% and 11.21% for 1996 and 1.05% and 11.75% for
1995.
Total assets increased to $1.0 billion at December 31, 1997, compared to
$872.5 million at December 31, 1996, and $679.6 million at December 31, 1995.
The growth in assets for 1997 represented an increase of $154.1 million, or
17.7% over total assets at year-end 1996, while growth in assets between 1996
and 1995, totaled $192.9 million, or 28.4%.
Loans, net of unearned income, increased by $82.7 million, or 22.1%, to
$456.3 million at December 31, 1997, compared to $373.6 million at December 31,
1996. Loans, net of unearned income at December 31, 1995, totaled $299.6
million. Mortgage loans held for resale totaled $90.6 million at year-end 1997,
compared to $73.0 million at the close of 1996 and $55.5 million at December
31, 1995.
Total deposits were $819.3 million at December 31, 1997, compared to
$693.6 million at December 31, 1996, and $554.5 million at year-end 1995. These
deposit totals reflect increases of 18.1% between 1997 and 1996 and 25.1%
between 1996 and 1995. Securities sold under agreements to repurchase and
other borrowed funds increased to $122.8 million at December 31, 1997, compared
to $105.9 million at December 31, 1996, an increase of 16.0%.
Shareholders' equity at December 31, 1997, was $76.0 million, compared to
$64.3 million at December 31, 1996, and $57.9 million at December 31, 1995.
Book value per share of GMBS Common Stock at December 31, 1997 was $14.45,
compared to $12.80 at December 31, 1996, and $12.18 at December 31, 1995.
EARNINGS ANALYSIS
NET INTEREST INCOME. Net interest income is GMBS' primary source of
earnings and represents the difference between interest and fees earned on
earning assets and the interest expense paid on interest bearing liabilities.
Net interest income on a fully taxable equivalent basis totaled $32.6 million
for 1997, compared to $28.1 million for 1996 and $24.9 million for 1995,
representing an increase of 15.8% from 1996 to 1997 and 12.8% from 1995 to
1996. The improvements in net interest income for 1997 and 1996 were
attributable to a higher volume of earning assets, which was partially offset
by a narrowing of the
13
<PAGE> 14
spread between interest rates earned on loans, securities, federal funds sold
and other investments and the rates paid on deposits and other borrowed funds
(net interest spread). TABLE 1 presents 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. TABLE 2 presents GMBS'
analysis of changes in interest income and interest expense relating to rate
and volume.
TABLE 1. AVERAGE BALANCES AND INTEREST RATES (TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Securities:
U.S. Treasury.......... $8,878 $511 5.76% $23,123 $1,331 5.76% $41,313 $2,235 5.41%
Federal Agency......... 32,380 2,150 6.64% 26,997 1,691 6.26% 46,091 3,574 7.75%
Mortgage-Backed........ 306,209 19,497 6.37% 233,689 14,899 6.38% 134,315 8,104 6.03%
State and Political
Subdivision (1)........ 21,785 1,633 7.50% 21,519 1,628 7.57% 19,029 1,495 7.86%
Other.................. 3,240 222 6.85% 2,994 201 6.71% 3,191 242 7.58%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total Securities...... 372,492 24,013 6.45% 308,322 19,750 6.41% 243,939 15,650 6.42%
Loans: (2)..............
Commercial (1)......... 103,995 9,793 9.42% 100,882 10,056 9.97% 108,917 10,699 9.82%
Real Estate-
Construction........... 46,824 4,596 9.82% 31,014 2,910 9.38% 34,823 4,155 11.93%
Real Estate-
Mortgage (3)........... 262,447 21,709 8.27% 227,977 18,616 8.17% 146,745 12,429 8.47%
Consumer............... 53,214 4,199 7.89% 25,228 2,139 8.48% 7,031 715 10.17%
-------- ------- ---- -------- ------- ---- ------- ------ -----
Total Loans........... 466,480 40,297 8.64% 385,101 33,721 8.76% 297,516 27,998 9.41%
Total Money Market
Investments............ 15,431 840 5.44% 16,370 863 5.27% 16,110 1,006 6.24%
Trading Account......... - - - 2,069 66 3.19% 5,479 230 4.20%
-------- ------- ---- -------- ------- ---- ------- ------ -----
Total Interest-Earning
Assets................. 854,403 65,150 7.63% 711,862 54,400 7.64% 563,044 44,884 7.97%
Noninterest- Earning
Assets
Cash and Due from
Banks.................. 27,351 25,655 22,829
Other Assets........... 19,616 19,203 16,262
Allowance for Loan
Losses................. (5,666) (5,662) (5,821)
Unearned Discount
and Loan Fees.......... (797) (975) (1,223)
-------- -------- --------
Total Noninterest-
Earning Assets........ 40,504 38,221 32,047
-------- -------- --------
Total Average Assets.... $894,907 $750,083 $595,091
======== ======== ========
</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) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding.
(3) Includes Mortgage Loans Held for Resale and Home Equity Lines of Credit.
14
<PAGE> 15
<TABLE>
<CAPTION>
1997 1996 1995
____________________________ ______________________________ ___________________________
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
____________________________ ______________________________ ___________________________
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Bearing Liabilities
Interest Checking Deposits.......... $ 50,647 $ 1,063 2.10% $ 45,953 $ 945 2.06% $ 43,974 $ 1,086 2.47%
Money Market Deposits............... 87,068 2,643 3.04% 102,817 3,101 3.02% 115,730 3,662 3.16%
Savings Deposits.................... 93,086 4,053 4.35% 57,235 2,465 4.31% 23,748 945 3.98%
Certificates of Deposit............. 292,567 16,030 5.48% 221,034 12,158 5.50% 168,145 9,522 5.66%
Certificates of Deposit $100,000... 82,337 4,493 5.46% 70,561 3,827 5.42% 46,853 2,656 5.67%
-------- ------- ----- -------- ------- ----- -------- ------ -----
Total Interest-Bearing Deposits.... 605,705 28,282 4.67% 497,600 22,496 4.52% 398,450 17,871 4.49%
Total Borrowed Funds................. 88,996 4,279 4.81% 79,458 3,768 4.74% 44,980 2,079 4.62%
-------- ------- -------- ------- -------- ------
Total Interest-Bearing
Liabilities....................... 694,701 32,561 4.69% 577,058 26,264 4.55% 443,430 19,950 4.50%
Noninterest-Bearing Liabilities
Total Demand Deposits.............. 124,731 105,376 94,449
Other Liabilities.................. 7,624 7,649 5,008
-------- -------- --------
Total Noninterest-Bearing
Liabilities........................ 132,355 113,025 99,457
-------- -------- --------
Total Liabilities.................... 827,056 690,083 542,887
-------- -------- --------
Shareholders' Equity................. 67,851 60,000 52,204
-------- -------- --------
Total Liabilities and
Shareholders' Equity............... $894,907 $750,083 $595,091
======== ======== ========
Interest Spread...................... 2.94% 3.09% 3.47%
===== ===== =====
Net Interest Margin.................. $32,589 3.81% $28,136 3.95% $24,934 4.43%
======= ===== ======= ===== ======= =====
Cost to Fund Earning Assets.......... 3.81% 3.69% 3.54%
===== ===== =====
</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.
15
<PAGE> 16
TABLE 2. RATE AND VOLUME ANALYSIS (TAX EQUIVALENT BASIS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
TOTAL CHANGE DUE TO: TOTAL CHANGE DUE TO:
INCREASE --------------------- INCREASE ---------------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- ---- ------ ---------- ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Securities:
U.S. Treasury........................ $(820) $(0) $(820) $(904) $80 $(984)
Federal Agency....................... 459 122 337 (1,883) (402) (1,481)
Mortgage-Backed...................... 4,598 (26) 4,624 6,795 799 5,996
State and Political Subdivision (1) 5 (15) 20 133 (63) 196
Other................................ 21 4 17 (41) (26) (15)
------ ------
Total Securities..................... 4,263 153 4,110 4,100 (31) 4,131
Loans (2):
Commercial (1)....................... (263) (573) 310 (643) 146 (789)
Real Estate-Construction............. 1,686 203 1,483 (1,245) (791) (454)
Real Estate-Mortgage (3)............. 3,093 278 2,815 6,187 (693) 6,880
Consumer............................. 2,060 (313) 2,373 1,424 (426) 1,850
------ ------
Total Loans.......................... 6,576 (550) 7,126 5,723 (2,519) 8,242
Total Money Market Investments (23) 27 (50) (143) (159) 16
Trading Account...................... (66) - (66) (164) (21) (143)
TOTAL INTEREST INCOME................ 10,750 (143) 10,893 9,516 (2,347) 11,863
INTEREST EXPENSE:
Interest Checking Deposits........... 118 21 97 (141) (190) 49
Money Market Deposits................ (458) 17 (475) (561) (152) (409)
Savings Deposits..................... 1,588 44 1,544 1,520 187 1,333
Certificates of Deposit.............. 3,872 (63) 3,935 2,636 (359) 2,995
Certificates of Deposit >$100,000 666 27 639 1,171 (173) 1,344
------ ------
Total Interest-Bearing Deposits 5,786 899 4,887 4,625 178 4,447
Total Borrowed Funds................. 511 59 452 1,689 95 1,594
------ ------
TOTAL INTEREST EXPENSE............... 6,297 943 5,354 6,314 302 6,012
------ ------
NET INTEREST INCOME.................. $4,453 (1,181) 5,634 $3,202 (3,388) 6,590
====== ======
- ----------------------------
</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) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding.
(3) Includes Mortgage Loans Held for Resale and Home Equity Lines of Credit.
16
<PAGE> 17
In 1997, average earning assets increased by $142.5 million, or 20.0%, to
$854.4 million, compared to $711.9 million for 1996. In 1996, average earning
assets increased by $148.8 million or 26.4% over 1995. Average total loans
(including mortgage loans held for resale), the largest component of earning
assets, grew to $466.5 million in 1997, compared to $385.1 million in 1996, and
$297.5 million in 1995. Average total loans represented 54.6% of average
earning assets for 1997, compared to 54.1% for 1996 and 52.8% for 1995. In
1997, the securities portfolio, which included securities available-for-sale
and securities held-to-maturity averaged $372.5 million and comprised 43.6% of
earning assets. The securities portfolio comprised 43.3% of average earning
assets for both 1996 and 1995, respectively.
The growth in earning assets for 1997 and 1996 was primarily funded by an
increase in average interest bearing liabilities. Average interest bearing
deposits increased to $605.7 million in 1997 from $497.6 million in 1996, and
$398.5 million in 1995, representing increases of 21.7% from 1996 to 1997 and
24.9% from 1995 to 1996. The largest increase in interest bearing deposits was
in certificates of deposit which accounted for 77.1% and 77.3% of the total
increase in average interest bearing deposits for 1997 and 1996 respectively.
Average certificates of deposit, including certificates of deposit over $100
thousand, for 1997 were $374.9 million, compared to $291.6 million for 1996, an
increase of 28.6%. Average certificates of deposit for 1995 were $215.0
million. The increases in certificates of deposit are a result of GMBS'
expansion strategy of offering attractive rates combined with the customers'
desire to take advantage of the higher interest rates offered by certificates
of deposit when compared to the rates on money market accounts and similar
instruments. Average savings deposits increased to $93.1 million in 1997 from
$57.2 million in 1996, an increase of $35.9 million or 62.6%. The increase in
savings accounts was the result of a pricing strategy to offer a savings
product with the highest rate in the local market that would provide
significant cross selling opportunities, but still have a lower cost of funds
than most certificates of deposit. Average borrowed funds, primarily consisting
of overnight repurchase agreements and short and long-term advances from the
Federal Home Loan Bank of Atlanta, increased by $9.5 million in 1997, and $34.5
million in 1996. Average demand deposits for 1997 rose 18.4%, to $124.7
million. Average demand deposits for 1996 increased by 11.6%, to $105.4 million
from $94.4 million in 1995.
GMBS' net interest margin for 1997 decreased to 3.81%, from 3.95% for
1996. The decrease in the net interest margin was primarily attributable to an
increase in the cost to fund earning assets of 12 basis points as the yield on
earning assets remained stable. GMBS' rate paid on interest bearing liabilities
for 1997 was 4.69%, a 14 basis point increase over 1996. GMBS' net interest
margin for 1996 decreased to 3.95%, from 4.43% for 1995. The 48 basis point
decrease in the net interest margin was attributable to a 33 basis point
decline in the yield on earning assets combined with a 15 basis point increase
in the cost to fund earning assets. The decrease in the yield on earning
assets was primarily attributable to a decrease in loan yields, as the yield on
the securities portfolio remained stable. GMBS' average rate paid on interest
bearing liabilities for 1996 was 4.55%, compared to 4.50% for 1995.
PROVISION FOR LOAN LOSSES. It is management's policy to maintain an
allowance for loan losses at a level sufficient to absorb all potential losses
inherent in the loan portfolio. The provision for loan losses represents the
charge to earnings to cover these potential future losses. The amount of the
provision charged to expense each year is dependent upon an assessment of the
loan portfolio quality, current economic conditions and trends, financial
condition of specific borrowers, past loan loss experience and net charge-offs
during that year.
The provision for loan losses for 1997 was $20 thousand, compared to $181
thousand for 1996 and $18 thousand for 1995. For a more detailed discussion of
nonperforming assets and the allowance for loan losses, see "--Asset Quality."
17
<PAGE> 18
GAIN ON SALES OF SECURITIES AVAILABLE-FOR-SALE. Gains from the sale of
securities available-for-sale totaled $42 thousand in 1997, compared to $560
thousand in 1996 and $653 thousand in 1995. The securities sold in 1997, 1996
and 1995 were the result of liquidity needs, changes in market interest rates,
changes in prepayment and extension risk and other general asset/liability
management considerations.
GAIN ON SALE OF MORTGAGE LOANS HELD FOR RESALE. Gains on sale of mortgage
loans held for resale for 1997 increased to $11.4 million, compared to $9.8
million for 1996 and $6.4 million for 1995. GMMC, which opened its first
office in Maryland in 1996 and three new offices during 1995, has steadily
increased its market share in the Washington Metropolitan area with loan
closings totaling $742 million in 1997, $616 million in 1996, and $393 million
in 1995.
SERVICE CHARGES AND OTHER INCOME. Service charges and other income
increased to $5.2 million in 1997, compared to $4.4 million in 1996, an
increase of 18.4%. Service charges and other income for 1995 totaled $3.2
million. The increase in service charge income was partially attributable to
the addition of trust, asset management and brokerage services along with
increased income from ATM surcharges and overdraft fees.
NONINTEREST EXPENSES. In support of the Company's strategic growth, total
noninterest expenses totaled $36.8 million for 1997, $32.2 million for 1996 and
$26.1 million for 1995, representing increases of $4.6 million, or 14.4%,
between 1997 and 1996, and $6.1 million, or 23.2%, between 1996 and 1995.
Salaries and employee benefits, the single largest category of noninterest
expense, totaled $21.0 million for 1997, compared to $18.6 million for 1996,
representing an increase of $2.5 million, or 13.3%. The increase in salaries
and employee benefits accounted for 53.2% of the total increase in noninterest
expenses for 1997. Salaries and employee benefits increased by $4.2 million
during 1996, an increase of 29.2% over 1995. The single largest increase in
noninterest expenses for 1996 was attributable to commissions and salaries
expense at GMMC. GMMC's employee related expenses totaled $8.0 million for
1996 compared to $4.9 million for 1995, an increase of 63.1%. This $3.1
million increase accounted for 51.2% of the total increase in noninterest
expenses.
Occupancy and furniture and equipment expenses increased by $661 thousand,
or 12.6%, in 1997, to $5.9 million, and $991 thousand, or 23.3% in 1996, to
$5.2 million. Occupancy and furniture and equipment expenses for 1995 totaled
$4.3 million.
Other operating expenses, which includes advertising, public relations,
business development, merger related expenses, insurance, professional fees,
data processing, expenses of foreclosed properties, office supplies, and
various other overhead costs, totaled $9.9 million in 1997, compared to $8.4
million in 1996 and $7.5 million in 1995. These amounts reflect increases of
18.0% between 1997 and 1996 and 11.5% between 1996 and 1995.
INCOME TAX EXPENSE. Reported income tax expense for the year ended
December 31, 1997 was $3.7 million compared to $3.1 million for 1996, and $2.1
million for 1995. The effective tax rate for 1997 was 31.3%, compared to 30.9%
for 1996 and 25.0% for 1995. The lower tax rate in 1995 primarily relates to
the reversal of the valuation allowance at PNBI which had been previously
established for net operating losses and other temporary differences. Note 9 to
GMBS' consolidated financial statements provides a reconciliation between the
amount of income tax expense applying the Federal statutory income tax rate and
GMBS' actual income tax expense.
18
<PAGE> 19
BALANCE SHEET ANALYSIS
SECURITIES. The securities portfolio is presently comprised of U.S.
Treasury securities, U.S. Government Agency securities, U.S. Agency mortgage
backed securities, U.S. Agency and private issue collateralized mortgage
obligations, taxable and tax-exempt state and political subdivision securities,
and Federal Reserve Bank and Federal Home Loan Bank stock. These securities
provide a stable, yet diversified, income stream and represent a source of
collateral for repurchase agreements and public funds. GMBS relies on its
securities portfolio to ensure safe levels of liquidity, to risk manage
interest rate exposure, to enhance the overall credit quality of GMBS' asset
base, and to generate interest income. The cash flows from these securities are
relatively predictable and satisfy GMBS' needs for liquidity.
At December 31, 1997, the securities portfolio included approximately
$199.8 million in Collateralized Mortgage Obligations (CMOs). These CMOs,
which were predominantly planned amortization class (PAC) and accretion
directed (AD) CMOs, have the same high credit quality as traditional mortgage
backed securities, and provide greater predictability of cash flows because
there is a principal repayment schedule that must be satisfied. Because of
their conservative characteristics, these PAC and AD CMOs have less market
value volatility and a lower yield than traditional mortgage backed securities
and other classes of CMOs. GMBS' CMO portfolio at December 31, 1997 had an
average life of 1.7 years with a yield of 6.39%.
GMBS' securities portfolio at December 31, 1997 consisted of securities
available-for-sale of $321.7 million (86.1% of the securities portfolio) and
securities held-to-maturity totaling $52.0 million (13.9% of the securities
portfolio). Securities available-for-sale at December 31, 1996 totaled $280.9
million (81.3% of the securities portfolio) and securities held-to-maturity
totaled $64.6 million (18.7% of the securities portfolio). Securities
classified as held-to-maturity are intended to be held until their final
maturity date, while securities available-for-sale may be sold in response to
changes in market interest rates, changes in prepayment or extension risk,
management of the Federal tax position, liquidity needs and other
asset/liability management issues. Held-to-maturity securities are reported at
amortized cost and securities available-for-sale are reported at fair value,
with any unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. The Company does not currently have
a trading portfolio.
The securities available-for-sale portfolio on December 31, 1997 had an
unrealized gain of $1.4 million and the securities held-to-maturity portfolio
had an unrealized gain of $1.1 million. On December 31, 1996, the securities
available-for-sale portfolio had an unrealized loss of $760 thousand, while the
securities held-to-maturity portfolio had an unrealized gain of $783 thousand.
One of the primary functions of GMBS' securities portfolio is to manage
interest rate risk exposure. Management uses the securities portfolio, which
consists predominantly of fixed rate securities, to hedge against changes in
the loan portfolio, which consists of floating and fixed rate loans, as well as
changes in deposit rates, which are both variable and fixed. Therefore, any
negative impact of holding below market securities should be partially offset
by increases in earnings in the loan portfolio and corresponding increases in
the market value of fixed rate liabilities. Also, the securities portfolio,
which has an average repricing term of approximately 2.5 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. For a more
detailed discussion of interest rate risk management, see "--Asset/Liability
Management."
Note 3 to the consolidated financial statements details the amortized
cost, market value and scheduled maturities of the available-for-sale and
held-to-maturity portfolios at December 31, 1997, 1996 and 1995.
19
<PAGE> 20
Additionally, TABLE 3 reflects the amortized cost, yield and contractual
maturity of securities available-for-sale and securities held-to-maturity at
December 31, 1997.
AVAILABLE-FOR-SALE PORTFOLIO (1)
<TABLE>
<CAPTION>
DUE IN 1 DUE AFTER 1 DUE AFTER 5 DUE AFTER
YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS 10 YEARS TOTAL
--------------- ---------------- ----------------- -------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities..... $3,493 5.77% $6,517 5.77% $0 0.00% $0 0.00% $10,010 5.77%
U.S. Government Agency
Securities.................. 1,249 5.83% 5,687 6.52% 17,339 6.49% 2,000 7.41% 26,275 6.54%
Mortgage-backed Securities... 1,005 6.14% 34,474 6.61% 96,392 6.55% 144,626 6.58% 276,497 6.57%
State & Political Subdivision
Securities (2).............. 0 0.00% 595 8.09% 489 7.26% 3,009 7.23% 4,093 7.36%
Equity & Other Securities.... 0 0.00% 250 5.71% 0 0.00% 3,160 6.93% 3,410 6.84%
------ ---- ------- ---- -------- ---- -------- ---- -------- ----
Total........................ $5,747 5.85% $47,523 6.50% $114,220 6.54% $152,795 6.61% $320,285 6.56%
====== ==== ======= ==== ======== ==== ======== ==== ======== ====
</TABLE>
HELD-TO-MATURITY PORTFOLIO
<TABLE>
<CAPTION>
DUE IN 1 DUE AFTER 1 DUE AFTER 5 DUE AFTER
YEAR OR LESS THROUGH 5 YEARS THROUGH 10 YEARS 10 YEARS TOTAL
--------------- --------------- ---------------- -------------- -------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agency
Securities.................. $0 0.00% $483 8.61% $0 0.00% $0 0.00% $483 8.61%
Mortgage-backed Securities... 0 0.00% 16,544 6.52% 9,518 6.22% 6,942 6.67% 33,004 6.47%
State & Political Subdivision
Securities (2).............. 0 0.00% 3,275 7.53% 10,023 7.53% 5,232 7.64% 18,530 7.56%
------ ---- ------- ---- -------- ---- -------- ---- ------- ----
Total........................ $0 0.00% $20,302 6.73% $19,541 6.89% $12,174 7.09% $52,017 6.87%
====== ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
- ------------------------
(1) Available-for-sale securities are presented at amortized cost.
(2) The yield on State and Political Subdivision Securities is included on a
taxable-equivalent basis using a 34% tax rate.
LOAN PORTFOLIO. The loan portfolio constitutes the largest segment of
earning assets and is a significant source of interest and fee income for the
Company. Gross loans increased by $82.7 million from 1996 to 1997, and $73.9
million from 1995 to 1996, representing increases of 22.1% and 24.6%
respectively. The loan portfolio at December 31, 1997 was composed of 26.8% in
commercial loans, 10.1% in real estate construction loans, 38.3% in real
estate-mortgage loans, 11.1% in home equity loans, and 13.7% in consumer loans.
The loan portfolio at December 31, 1996 consisted of 27.0% commercial, 8.6%
real estate construction, 41.9% real estate-mortgage, 11.8% home equity, and
10.7% consumer loans. The loan portfolio mix did not change significantly from
December 31, 1996, with the exception of consumer loans and real estate
construction loans, which grew by 56.2% and 43.9% respectively. The growth in
consumer loans was primarily attributable to indirect auto loans, which totaled
$50.0 million at December 31, 1997, compared to $28.7 million at December 31,
1996. The growth in the consumer loan portfolio was attributable to GMBS'
strategy to further diversify the loan portfolio, which has traditionally been
concentrated in real estate and commercial lending.
20
<PAGE> 21
The real estate loan portfolio is comprised of both commercial and
residential loans on properties, primarily in the Washington Metropolitan area.
Real estate mortgage loans totaled $175.3 million at December 31, 1997.
Approximately 59% of mortgage loans consisted of loans secured by commercial
properties and approximately 41% consisted of residential mortgages. Risk in
the commercial mortgage portfolio is controlled through conservative
underwriting, based on an analysis of independent appraisals and historical
cash flow generated by the underlying commercial property. Risk in the
residential mortgage portfolio is controlled through analysis of market
appraisals of the collateral, as well as the sufficiency and stability of the
borrowers' historical income sources. Real estate construction loans
constituted 10.1% of the total loan portfolio at December 31, 1997, compared to
8.6% on December 31, 1996. This concentration of risk is minimized by limiting
the speculative unit/lot inventory that GMBS will finance in any project and by
maintaining conservative loan-to-value ratios. Moreover, these projects are
dispersed over a significant number of submarkets and across a diversified
group of high quality builders. Economic and market factors affecting this
industry grouping are reviewed frequently and adjustments are made to coincide
with trends identified through analysis of relevant factors. In addition, GMMC
pre-qualifies contract buyers to add validity to the repayment source for
pre-sold units.
Commercial loans are well diversified as to the purpose and types of
organizations, companies and individuals, which helps to minimize risk within
this category of loans. Loans to government contractors constitute 27% of the
commercial loan portfolio. Concentration risk is mitigated in this area by the
direct assignment of prime government receivables due to these borrowers. In
addition, GMBS performs frequent borrowing base reviews to assess the quality
of underlying receivable assets for this group of borrowers. Finally,
independent accounting firms are engaged to perform periodic field audits to
determine compliance with borrowing agreements and to verify the borrowers'
pledged receivables. The remainder of GMBS' commercial loan portfolio consists
of loans typically extended to commercial, professional and retail concerns for
the financing of working capital, equipment, fixed assets and other commercial
purposes. Conservative loan-to-value ratios, cash flow coverage and debt
service ratios are employed to mitigate standard risk factors in these credits.
Mortgage loans held for resale totaled $90.6 million at December 31, 1997,
$73.0 million at December 31, 1996, and $55.5 million at December 31, 1995. The
increase in mortgage loans held for resale are the result of the activities of
GMMC, which originates permanent mortgage loans that are sold in the secondary
market.
During 1994, product development efforts were focused on an innovative
home equity product that was priced below the prime rate. Since December 31,
1993, home equity loans have grown from $10.2 million to $50.5 million. In
addition, GMBS has focused its efforts on small business lending, government
contract lending, lending to the medical community and indirect auto lending.
The continued efforts to expand consumer lending and business banking
relationships in 1998 will help to continue to diversify the loan portfolio.
TABLE 4 summarizes the composition of the loan portfolio at the periods
indicated, and TABLE 4A presents the maturities of commercial and real estate
construction loans as of December 31, 1997.
21
<PAGE> 22
TABLE 4. LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO LOANS TO
GROSS GROSS GROSS GROSS GROSS
1997 LOANS 1996 LOANS 1995 LOANS 1994 LOANS 1993 LOANS
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $122,290 26.8% $100,986 27.0% $ 91,268 30.4% $103,575 41.8% $ 92,698 41.7%
Real Estate-Construction 46,348 10.1% 32,203 8.6% 32,614 10.9% 36,913 14.9% 44,480 20.0%
Real Estate-Mortgage.... 175,296 38.3% 156,958 41.9% 131,789 43.8% 76,930 31.0% 64,846 29.2%
Home Equity Lines....... 50,539 11.1% 44,141 11.8% 31,962 10.6% 21,978 8.9% 10,190 4.6%
Consumer................ 62,603 13.7% 40,083 10.7% 12,874 4.3% 8,583 3.4% 9,962 4.5%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross Loans........... 457,076 100.0% 374,371 100.0% 300,507 100.0% 247,979 100.0% 222,176 100.0%
Deferred Loan Fees &
Unearned Discount...... (768) (758) (949) (1,523) (1,222)
-------- -------- -------- -------- --------
Loans (net of unearned
income)................ 456,308 373,613 299,558 246,456 220,954
-------- -------- -------- -------- --------
Allowance for Loan
Losses................. (5,669) (5,659) (5,529) (5,805) (5,641)
-------- -------- -------- -------- --------
Loans, net.............. 450,639 367,954 294,029 240,651 215,313
-------- -------- -------- -------- --------
Mortgage loans held for
resale................. 90,611 72,983 55,482 18,506 21,831
-------- -------- -------- -------- --------
Total Loans (Net)....... $541,250 $440,937 $349,511 $259,157 $237,144
======== ======== ======== ======== ========
</TABLE>
TABLE 4A. MATURITY SCHEDULE OF SELECTED LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OVER ONE
ONE YEAR THROUGH OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
------- ------- ------- --------
<S> <C> <C> <C> <C>
Commercial.................... $32,904 $70,931 $18,455 $122,290
Real Estate Construction...... 41,254 4,034 1,060 46,348
------- ------- ------- --------
Total....................... $74,158 $74,965 $19,515 $168,638
======= ======= ======= ========
Loans with predetermined rates $4,459 $49,688 $14,196 $68,343
Loans with variable rates..... 69,699 25,277 5,319 100,295
------- ------- ------- --------
Total....................... $74,158 $74,965 $19,515 $168,638
======= ======= ======= ========
</TABLE>
DEPOSITS. Deposits continue to represent GMBS' most stable and
fundamental funding source, as GMBS continues to benefit from its growing
retail network, quality customer service and reputation for safety and
soundness. GMBS offers individuals and businesses a variety of deposit
accounts, including checking, savings, money market, and certificates of
deposit, which are obtained primarily from the communities which GMBS services.
Deposits totaled $819.3 million at December 31, 1997, compared to $693.6
million at December 31, 1996, representing an increase of $125.7 million, or
18.1%. Demand deposits totaled $176.8 million and represented 21.6% of total
deposits at December 31, 1997, compared to $132.4 million (19.1% of total
deposits) at December 31, 1996. Savings deposits grew by $20.3 million to
$182.8 million at December 31, 1997.
22
<PAGE> 23
Certificates of deposit $100 thousand and over at December 31, 1997
totaled $93.5 million. Certificates of deposit $100 thousand and over totaled
$81.9 million and $64.6 million at December 31, 1996 and 1995, respectively.
Total brokered deposits at year-end 1997 totaled $198 thousand, compared to
$2.2 million on December 31, 1996, and $2.1 million on December 31, 1995. GMBS
does not rely on brokered deposits as a source of funding, but will solicit
brokered deposits from time-to-time when the interest rates on these deposits
are particularly attractive.
TABLE 5 shows the components of average deposits and interest rates and
TABLE 6 shows the maturity schedule of certificates of deposit $100 thousand
and over.
TABLE 5. DEPOSIT ANALYSIS
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
AVERAGE AVERAGE AVERAGE
BALANCE AVERAGE RATE BALANCE AVERAGE RATE BALANCE AVERAGE RATE
-------- ------------- --------- ------------ -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-BEARING DEPOSITS
Interest Checking Deposits........... $ 50,647 2.10% $ 45,953 2.06% $ 43,974 2.47%
Money Market Deposits................ 87,068 3.04% 102,817 3.02% 115,730 3.16%
Savings Deposits..................... 93,086 4.35% 57,235 4.31% 23,748 3.98%
Certificates of Deposit.............. 292,567 5.48% 221,034 5.50% 168,145 5.66%
Certificates of Deposit >$100,000.... 82,337 5.46% 70,561 5.42% 46,853 5.67%
-------- ----- -------- ----- -------- -----
Total Interest-Bearing Deposits..... 605,705 4.67% 497,600 4.52% 398,450 4.49%
Total Demand Deposits............... 124,731 0.00% 105,376 0.00% 94,449 0.00%
-------- ----- -------- ----- -------- -----
Total Deposits...................... $730,436 3.87% $602,976 3.73% $492,899 3.63%
======== ===== ======== ===== ======== =====
</TABLE>
TABLE 6. MATURITY OF CDS $100,000 AND OVER
<TABLE>
DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Three months or less $18,318 19.6% $11,314 13.8% $21,838 33.8%
Over three months to six months 57,386 61.4% 12,328 15.1% 8,971 13.9%
Over six months to twelve months 11,602 12.4% 44,377 54.2% 23,025 35.7%
Over twelve months 6,214 6.6% 13,858 16.9% 10,729 16.6%
------- ------ ------- ------ ------- ------
Total $93,520 100.0% $81,877 100.0% $64,563 100.0%
======= ====== ======= ====== ======= ======
</TABLE>
SHORT-TERM BORROWINGS ANALYSIS
The major component of short-term borrowings is funds acquired from
securities sold under repurchase agreements. These repurchase agreements
generally mature daily or on demand. Average repurchase agreements for 1997
totaled $72.1 million, or 81.0% of total short-term borrowings.
Other short-term borrowings consisted of Federal funds borrowed from
correspondent banks, advances from the Federal Home Loan Bank of Atlanta and
U.S. Treasury tax and loan deposit notes which are payable on demand. TABLE 7
summarizes short-term debt and weighted average interest rates for 1997, 1996
and 1995.
23
<PAGE> 24
TABLE 7. SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31,.......................... $120,809 $102,898 $56,747
Weighted average interest rate at December 31.... 5.26% 4.68% 4.14%
Average daily amount outstanding................. $ 88,996 $ 74,876 $44,076
Weighted average interest rate during the year... 4.81% 4.66% 4.46%
Maximum outstanding at any month end............. $127,003 $102,898 $56,747
MEMORANDUM ITEM:
FHLB Short-Term Advances Outstanding............. $21,000 $ 1,000 $ 1,000
</TABLE>
CAPITAL RESOURCES
Shareholders' equity at December 31, 1997 was $76.0 million, compared to
$64.3 million on December 31, 1996 and $57.9 million on December 31, 1995.
Factors contributing to the increase in equity for 1997 were earnings of
$8.1 million; new shares issued through various employee stock option and
dividend reinvestment plans, resulting in additional equity of $5.0 million and
an increase in the unrealized holding gains and losses in the securities
available-for-sale portfolio of $1.5 million. The increase in equity was
partially offset by the regular quarterly cash dividend totaling $2.9 million
($0.56 per share).
Contributing to the increase in equity for 1996 were net income of $6.9
million and additional capital from option and dividend plans of $3.3 million.
Shareholders' equity was reduced by the cash dividend of $2.2 million ($0.46
per share) and a $1.6 million decrease in the unrealized holding gains and
losses in the securities available-for-sale portfolio.
The growth in shareholders' equity during 1995 was primarily attributable
to $6.3 million in earnings and an increase in the unrealized holding gains and
losses on securities available-for-sale of $4.7 million. Additional factors
contributing to the equity increase in 1995 were additional equity of $1.6
million from the various stock option and dividend plans. The largest reduction
in shareholders' equity during 1995 resulted from the regular quarterly
dividend, which totaled $1.5 million for the year, or $0.38 per share.
Various regulatory agencies, including the FRB, have adopted risk-based
capital requirements for assessing bank holding companies and capital adequacy.
These standards define capital and establish minimum capital requirements in
relation to assets and off-balance sheet exposure as adjusted for credit risk.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among bank holding
companies and banks, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate risk weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance sheet items.
The capital requirements classify capital into two tiers, referred to as
Tier 1 and Tier 2. Tier 1 capital generally includes common shareholders'
equity less deductions for goodwill and other intangibles, and Tier 2 capital
is primarily a portion of the general valuation allowance for loan losses and
certain qualifying debt instruments. The final minimum requirement for the
ratio of total capital to risk-adjusted assets is 8%.
24
<PAGE> 25
In addition, the FRB has established minimum leverage ratio requirements
for bank holding companies that provided for a minimum ratio of Tier 1 capital
to total average quarterly assets, less goodwill and other intangible assets.
The minimum leverage ratio for bank holding companies receiving the highest
rating under the regulatory rating system and meeting certain other specified
criteria is 3%. All other banking organizations are required to maintain a
leverage ratio of at least 4% to 5%.
At December 31, 1997, GMBS' Tier 1 and total risk-based capital ratios
were 12.0% and 12.9%, respectively, compared to 12.3% and 13.4% at December 31,
1996, and 13.7% and 14.9% at December 31, 1995. GMBS' leverage ratio was 7.9 %
at December 31, 1997, 7.6% at December 31, 1996 and 8.8% at December 31, 1995.
As shown in TABLE 8 and note 16 to the consolidated financial statements, GMBS'
capital structure places it well above the FRB's guidelines. GMBS maintains a
strong capital base to take advantage of business opportunities, while ensuring
that it has the resources to protect against the risks inherent in its
business.
TABLE 8. SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------- --------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
TIER 1 CAPITAL:
Common Stock..................................................... $ 5,840 $ 5,581 $ 5,278
Surplus.......................................................... 43,163 38,472 35,523
Retained Earnings................................................ 26,308 21,094 16,416
Treasury Stock & unearned ESOP................................... 0 0 (42)
Unrealized holding gains(losses) on securities available for sale 725 (803) 752
-------- -------- --------
Total Shareholders' Equity...................................... 76,036 64,344 57,927
Less: unrealized (gains)losses on securities available for sale.. (725) 803 (752)
Less: disallowed intangibles..................................... (153) (204) (256)
-------- -------- --------
Total Tier 1 Capital............................................ 75,158 64,943 56,919
TIER 2 CAPITAL:
Qualifying allowance for loan losses............................. 5,669 5,659 5,195
-------- -------- --------
Total Tier 2 Capital............................................ 5,669 5,659 5,195
-------- -------- --------
TOTAL RISK-BASED CAPITAL......................................... $ 80,827 $ 70,602 $ 62,114
======== ======== ========
Risk Weighted Assets............................................. $625,455 $527,449 $415,559
RATIOS:
Tier 1 Capital to risk weighted assets.......................... 12.0% 12.3% 13.7%
Total risk-based capital ratio................................... 12.9% 13.4% 14.9%
Leverage Ratio-Tier 1 Capital to quarterly average assets less
intangibles..................................................... 7.9% 7.6% 8.8%
</TABLE>
ASSET QUALITY
CREDIT POLICIES. GMBS employs extensive written policies and procedures
to enhance management of credit risk. The loan portfolio is managed under a
specifically defined credit process. This process includes formulation of
portfolio management strategy, guidelines for underwriting standards and risk
assessment, procedures for ongoing identification and management of credit
deterioration, and regular portfolio reviews to estimate loss exposure and to
ascertain compliance with GMBS' policies. GMBS' loan approval policies provide
for various levels of officer lending authority. In general, the largest
unsecured
25
<PAGE> 26
individual lending authority currently granted by the Company is $100 thousand
and the largest secured lending authority given to any one individual is
currently $500 thousand. A combination of approvals from four officers, two of
whom must be the President and Senior Credit Officer, may lend up to an
aggregate of $1.0 million on an unsecured basis, and $2.5 million on a secured
basis to any one borrower. Loans which, in the aggregate, exceed $1.0 million
on an unsecured basis, or $2.5 million on a secured basis, must be approved
both by the Officers' Loan Committee and the Board Loan Committee comprised of
GMB's President, Senior Credit Officer and three members of the Board of
Directors who serve on a rotating basis.
A major element of credit risk management is the diversification of risk.
GMBS' objective is to maintain a diverse loan portfolio to minimize the impact
of any single event or set of circumstances. Concentration parameters are based
upon individual risk factors, policy constraints, economic conditions,
collateral and products. GMBS has no highly leveraged transaction loans or
loans to foreign countries. GMB generally does not make loans outside its
market area unless the borrower has an established relationship with GMB and
conducts its principal business operations within GMB's market area.
Consequently, GMB and its borrowers are directly affected by the economic
conditions prevailing in its market area. In particular, GMB has been very
active in lending to builders of single family homes in Northern Virginia.
Although considered to be a real estate transaction, the credit risk associated
with these loans has been managed through the use of conservative underwriting
criteria. In general, GMB lends on single family homes which have been
pre-sold to qualified homebuyers and GMB limits its exposure on lot loans and
speculative units. Other than loans to single family homebuilders, GMB does not
presently have a significant exposure to any one individual client or industry.
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 year is
dependent upon an assessment of the loan portfolio quality, current economic
trends and conditions, financial condition of specific borrowers, past loan
experience and the net charge-offs during that year.
Judgments of lending officers and senior management, opinions of an
independent loan review consulting firm, bank regulatory agencies and advice
from GMBS' independent public accountants are considered in reviewing and
assessing the adequacy of the allowance for loan losses. Management believes
that the allowance for loan losses at December 31, 1997 was adequate to cover
credit losses inherent in the loan portfolio.
Net charge-offs declined to $10 thousand in 1997, compared to $51 thousand
for the same period last year. Net charge-offs for 1995 totaled $294 thousand.
The ratio of net charge-offs to average total loans was 0.00% in 1997 compared
to 0.02% in 1996 and 0.11% in 1995. A detailed analysis of charge-offs,
recoveries and provision for loan losses is provided in TABLE 9. The ratio of
allowance for loan losses to total loans at year-end 1997 was 1.24%, compared
to 1.51% at year-end 1996 and 1.85% at year-end 1995. For a more detailed
discussion of nonperforming assets and past due loans, see "-Nonperforming
Assets and Past Due Loans."
26
<PAGE> 27
TABLE 9. ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................. $ 5,659 $ 5,529 $ 5,805 $ 5,641 $ 6,119
Provision charged to expense................... 20 181 18 167 620
Charge-offs:
Commercial and other.......................... 129 86 92 274 361
Consumer...................................... 115 47 36 22 123
Real Estate-Mortgage.......................... 15 41 300 236 1,147
Real Estate-Construction...................... 0 0 63 1 0
-------- -------- -------- -------- --------
Total Charge-offs............................ 259 174 491 533 1,631
Recoveries:
Commercial and other.......................... 55 34 35 165 316
Consumer...................................... 32 11 30 14 111
Real Estate-Mortgage.......................... 162 78 112 325 106
Real Estate-Construction...................... 0 0 20 26 0
-------- -------- -------- -------- --------
Total Recoveries............................. 249 123 197 530 533
Net Charge-Offs................................ 10 51 294 3 1,098
-------- -------- -------- -------- --------
Balance at end of period....................... $ 5,669 $ 5,659 $ 5,529 $ 5,805 $ 5,641
======== ======== ======== ======== ========
Average Total Loans (1)........................ $411,924 $330,837 $263,194 $235,497 $206,145
Total Loans at December 31,(1)................. $456,308 $373,613 $299,558 $246,456 $220,954
Ratio of net charge-offs to average total loans 0.00% 0.02% 0.11% 0.00% 0.53%
Ratio of allowance for loan losses to total
loans at year end............................. 1.24% 1.51% 1.85% 2.36% 2.55%
</TABLE>
- ----------
(1) Total loans are reported net of unearned income and do not include
Mortgage Loans Held for Resale
TABLE 9A. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996 1995 1994 1993
------ ------ ------- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial.......................... $1,928 $ 934 $706 $967 $950
Consumer............................ 543 256 224 195 256
Real Estate-Mortgage................ 2,289 2,650 3,041 3,100 2,853
Real Estate-Construction............ 506 511 729 685 662
Unallocated......................... 403 1,308 829 858 920
-------- -------- -------- -------- --------
Total............................... $5,669 $5,659 $5,529 $5,805 $5,641
======== ======== ======== ======== ========
PERCENTAGE ALLOCATION TO TOTAL LOANS
Commercial.......................... 26.8% 27.0% 30.4% 41.8% 41.7%
Consumer............................ 13.7% 10.7% 4.3% 3.4% 4.5%
Real Estate-Mortgage................ 49.4% 53.7% 54.4% 39.9% 33.8%
Real Estate-Construction............ 10.1% 8.6% 10.9% 14.9% 20.0%
-------- -------- -------- -------- --------
Total............................... 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- --------
Total Loans (Gross)................. $457,076 $374,371 $300,507 $247,979 $222,176
======== ======== ======== ======== ========
</TABLE>
27
<PAGE> 28
NONPERFORMING ASSETS AND PAST DUE LOANS. Nonperforming assets, consisting
of nonaccrual loans, restructured loans and other real estate, totaled $1.0
million at December 31, 1997, compared to $2.0 million at December 31, 1996,
and $3.9 million at December 31, 1995.
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 by $441
thousand during 1997 to $1.0 million, compared to $1.5 million at December 31,
1996. Nonaccrual loans at December 31, 1995 totaled $3.0 million. GMBS had
loans totaling $95 thousand at the end of 1996 and $744 thousand at the end of
1995, as to which the loan terms were modified to provide for a reduced rate of
interest due to the financial condition of the borrower. There were no loans at
December 31, 1997 where loan terms were modified due to the financial condition
of the borrower.
The Company had no other real estate at year-end 1997. Other real estate
totaled $398 thousand at December 31, 1996, compared to $109 thousand at
December 31, 1995. The properties and collateral securing these loans are
constantly reevaluated and loan balances written down as deemed necessary.
TABLE 10 details nonperforming assets and past due loans and the related
asset quality ratios for the past five years.
TABLE 10. CREDIT QUALITY
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans.............................. $ 1,046 $ 1,487 $ 3,024 $ 1,709 $ 3,695
Restructured Loans............................ -- 95 744 1,595 204
-------- -------- -------- -------- --------
TOTAL NONPERFORMING LOANS................... 1,046 1,582 3,768 3,304 3,899
Other Real Estate............................. -- 398 109 237 534
-------- -------- -------- -------- --------
TOTAL NONPERFORMING ASSETS.................. 1,046 1,980 3,877 3,541 4,433
Loans past due 90 days or more and
accruing interest............................ 839 -- -- 10 780
-------- -------- -------- -------- --------
TOTAL NONPERFORMING ASSETS AND LOANS
PAST DUE 90 DAYS OR MORE.................... $ 1,885 $1,980 $3,877 $ 3,551 $ 5,213
======== ======== ======== ======== ========
Total Loans at December 31, (1)............... $456,308 $373,613 $299,558 $246,456 $220,954
Allowance for Loan Losses..................... 5,669 5,659 5,529 5,805 5,641
Total Assets.................................. 1,026,569 872,470 679,596 550,799 461,184
ASSET QUALITY RATIOS:
Allowance for Loan Losses to Period end Loans. 1.24% 1.51% 1.85% 2.36% 2.55%
Allowance for Loan Losses to Nonperforming
Loans (Multiple)............................. 5.42x 3.58x 1.47x 1.76x 1.45x
Total Nonperforming Loans to Total Loans...... 0.23% 0.42% 1.26% 1.34% 1.76%
Total Nonperforming Assets to Total Assets.... 0.10% 0.23% 0.57% 0.64% 0.96%
Nonperforming Assets to Total Loans plus Other
Real Estate.................................. 0.23% 0.53% 1.29% 1.44% 2.00%
Nonperforming Assets and Loans Past Due 90
Days or More to Total Loans and Other Real
Estate........................................ 0.41% 0.53% 1.29% 1.44% 2.35%
</TABLE>
- ------------------
(1) Total Loans are reported net of unearned income and do not include
Mortgage Loans Held for Resale
28
<PAGE> 29
POTENTIAL PROBLEM ASSETS. GMBS adheres to a policy of continual review and
monitoring of extensions of credit for possible adverse conditions that may
affect contractual repayments and institutes appropriate actions to minimize
any potential loss. GMBS maintains an internal list of loans for management
that includes performing loans that have been identified as requiring a closer
level of monitoring. Approximately 2.2% of the total loan portfolio appeared on
this internal list as of December 31, 1997. Loans appearing on the internal
list at December 31, 1997 included $5.8 million in special mention, $4.3
million in loans classified as substandard, and $45 thousand in loans
classified as doubtful or loss. In management's judgment, there are no other
loans which represent material credits which cause management to have serious
doubts as to the ability of borrowers to comply with their respective loan
repayment terms.
At December 31, 1997, loans that were 30 to 89 days past due totaled $1.3
million.
ASSET/LIABILITY MANAGEMENT
LIQUIDITY, MARKET RISK 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.
The objective of liquidity management is to maintain sufficient cash flows
to meet the demand for funds from both depositors and borrowers. GMBS manages
its liquidity position by maintaining adequate levels of liquid assets, which
include cash and due from banks, Federal funds sold and the securities
available-for-sale portfolio. GMBS also maintains additional sources of
liquidity through a variety of short- term borrowing arrangements. GMBS
maintains Federal funds lines with the Federal Home Loan Bank of Atlanta and a
number of larger regional and money-center banking institutions. The Federal
Home Loan Bank of Atlanta has extended a secured line of credit in the amount
of $95 million. Note 8 to the consolidated financial statements provides
further details on GMBS' borrowing arrangements.
At December 31, 1997, cash equivalents and securities available-for-sale
totaled $412.3 million, compared to $345.8 million at December 31, 1996. In
addition, GMBS' strong capital position, a large core deposit base, the quality
of assets and continued earnings power will help support GMBS' long-term
liquidity needs.
An important element of asset/liability management is the monitoring of
GMBS' sensitivity to interest rate movements. Interest rate sensitivity, the
Company's most significant market risk, is the exposure to adverse changes in
net interest income resulting from fluctuations in interest rates and the
mismatch of repricing opportunities between assets and liabilities. The Company
utilizes a variety of interest sensitivity reports ("gap") to analyze the
Company's ability to reprice its assets and liabilities over specific time
intervals.
The data in TABLE 11 reflects contractual repricing or maturities of
various assets and liabilities at December 31, 1997. Securities are presented
based on their estimated cash flows, and mortgage loans held for resale, are
included in the one to 90-day category. 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
repricing characteristics will reprice to the same degree. Therefore, GMBS'
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 11 also presents interest
sensitivity on an income statement basis using Beta adjustments. Beta
adjustments give recognition to the fact that assets and liabilities do not
reprice to the same degree and are designed to predict changes in consumer
deposit rates and other interest rates, based on changes in the prime rate.
GMBS' cumulative gap at the one-year repricing period showed
29
<PAGE> 30
that GMBS was liability sensitive by $195.2 million, or 19.0% of total assets
at December 31, 1997. On a Beta adjusted basis, GMBS' cumulative gap showed an
asset sensitive position of $1.5 million, or .15%, indicating that the
interest rate risk position of the Company was relatively neutral.
TABLE 11. INTEREST RATE GAP ANALYSIS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
1-90 91-180 181-365 1-5 OVER 5
DAYS DAYS DAYS YEARS YEARS
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Federal Funds Sold........................... $55,052 - $ - $ - $ -
Securities................................... 29,437 33,630 47,117 221,896 40,222
Mortgage Loans Held for Resale............... 90,611 - - - -
Loans........................................ 204,534 15,212 7,452 183,880 45,998
-------- -------- -------- -------- --------
Total...................................... 379,634 48,842 54,569 405,776 86,220
-------- -------- -------- -------- --------
Cumulative Totals.......................... 379,634 428,476 483,045 888,821 975,041
INTEREST-SENSITIVE LIABILITIES:
Interest Checking Accounts................... 61,441 - - - -
Savings Accounts............................. 102,857 - - - -
Money Market Deposit Accounts................ 79,905 - - - -
Certificates of Deposit...................... 213,909 36,492 62,812 85,083 -
Federal Funds Purchased...................... 20,000 - - - -
Repurchase Agreements........................ 74,809 - - - -
FHLB - Advances.............................. 20,000 500 500 2,000 -
U.S. Demand Notes............................ 5,000 - - - -
-------- -------- -------- -------- --------
Totals..................................... 577,921 36,992 63,312 87,083 -
-------- -------- -------- -------- --------
Cumulative Totals.......................... 577,921 614,913 678,225 765,308 765,308
-------- -------- -------- -------- --------
Gap........................................ ($198,287) $11,850 ($8,743) $318,693 $ 86,220
======== ======== ======== ======== ========
Cumulative Gap............................. ($198,287) ($186,437) ($195,180) $123,513 $209,733
======== ======== ======== ======== ========
Adjustments:
Beta Adjustments
Interest Checking (beta factor .15)........ 52,225 - - - -
Savings Accounts (beta factor .10)......... 92,571 - - - -
Money Market Accounts (beta factor .35).... 51,938 - - - -
-------- -------- -------- -------- --------
Cumulative Beta Adjusted Gap................. ($1,553) $10,297 $ 1,554 $320,247 $406,467
======== ======== ======== ======== ========
As Reported Information:
Interest-Sensitive Assets/Interest-
Sensitive Liabilities (Cumulative):......... 65.69% 69.68% 71.22% 116.14% 127.41%
Cumulative Gap/Total Assets.................. (19.32%) (18.16%) (19.01%) 12.03% 20.43%
Beta Adjusted Information:
Interest-Sensitive Assets/Interest-
Sensitive Liabilities (Cumulative):......... 99.59% 102.46% 100.32% 156.32% 171.49%
Cumulative Gap/Total Assets.................. (0.15%) 1.00% 0.15% 31.20% 39.59%
</TABLE>
In addition to gap analysis, the Company uses income simulation models to
forecast future interest rate exposure under different interest rate scenarios.
In order to measure the effect of interest rates on GMBS' net interest income,
management takes into consideration the expected cash flows from all assets and
liabilities under various interest rate scenarios. Assumptions used in the
model include management's projection of the impact of changing rates on
payment schedules for loans and securities, the expected magnitude of the
repricing of specific asset and liability categories, historical deposit rates,
historical yield curve relationships, customer preferences, historical and
expected spread relationships and changes in market conditions. These
assumptions are inherently uncertain and as a result, the analysis cannot
precisely
30
<PAGE> 31
measure the impact of changing interest rates on net income. Actual results
will differ from simulated results due to timing, magnitude and frequency of
interest rate changes, changes in market conditions, management strategies, and
other factors. GMBS 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 is primarily fixed rate, to hedge against
movements in the loan portfolio, which contains fixed and variable rate assets.
Management's goal is to maximize and stabilize the net interest margin by
limiting exposure to interest rate changes. Based on the simulation analysis at
December 31, 1997, the Company would experience a 5% decrease in net income
with an immediate and parallel drop in interest rates of 100 basis points.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This faulty recognition could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Based on a recent assessment, GMBS determined that it will be required to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. GMBS
currently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions are not made, or are not completed in a timely manner, the Year
2000 Issue could have a material impact on GMBS' operations.
GMBS has initiated formal communications with all of its significant
suppliers to determine the extent to which GMBS' interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. In addition, formal communications to significant customers are being
prepared and will be mailed in the second quarter of 1998. GMBS' total Year
2000 project costs and estimates to complete include the estimated costs and
time associated with the impact of third party Year 2000 Issues based on
presently available information. However, there can be no guarantee that the
systems and applications of other companies on which GMBS systems rely will be
converted in a timely manner or that a failure to convert by another company,
or a conversion that is incompatible with GMBS' systems and applications, would
not have a material adverse effect on GMBS.
GMBS will utilize both internal and external resources to reprogram, or
replace, and test the Year 2000 modifications. GMBS anticipates completing the
Year 2000 project within one year but not later than December 31, 1998, which
is prior to any anticipated impact on GMBS' operating systems. The total cost
of the Year 2000 project is estimated at $600,000 and is being funded through
cash flows, which will be expensed as incurred. The Year 2000 costs are not
expected to have a material adverse effect on GMBS' results of operations or
cash flows. To date, GMBS has incurred and expensed less than $5,000 related
to the assessment of, and preliminary efforts in connection with, the Year 2000
project and the development of a Year 2000 plan of operation.
The costs of the Year 2000 project and the date on which GMBS believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party vendor
modification plans and other factors. There can be no guarantee, however, that
these estimates will be achieved and actual results could differ materially
from those anticipated. Specific factors that might cause
31
<PAGE> 32
such material differences include, but are not limited to, the availability and
cost of trained programming personnel, the ability to locate and correct all
relevant computer coding, and similar uncertainties.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
price of goods and services, since such prices are affected by inflation.
NEW ACCOUNTING STANDARDS
SFAS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." SFAS No. 123
provides companies with an alternative to APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock-based compensation plans.
This standard was adopted in 1996. GMBS does not intend to adopt this
alternative. Therefore, there was no effect on the 1997, 1996 and 1995
financial statements. Note 14 to the consolidated financial statements details
required pro forma disclosures for awards granted in 1997, 1996 and 1995.
SFAS NO. 125, "ACCOUNTING FOR THE TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES." SFAS 125 was issued in June 1996.
SFAS 125 clarifies and provides consistent guidance for distinguishing
transfers of financial assets that are sales from transfers that are
borrowings. The standard is based on a financial components approach that
focuses on control. Under that approach, after a transfer of financial assets,
an entity recognizes the financial and servicing assets it controls and
liabilities it has incurred, and derecognizes liabilities when extinguished.
SFAS 125 is effective for specified transactions occurring after December 31,
1996. In October 1996, Statement of Financial Accounting Standards No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB No. 125" (SFAS
127), was issued. SFAS 127 defers until after December 31, 1997, the effective
date of paragraphs 9-12 of SFAS 125 for repurchase agreement, securities
lending, dollar roll and similar transactions and the effective date of
paragraph 15 for all transactions. Earlier or retroactive application is not
permitted. Adoption of SFAS 125 did not, and is not expected to, have a
material impact on the Corporation.
SFAS NO. 128, "EARNINGS PER SHARE." SFAS No. 128 establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. SFAS 128 simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, "Earnings per Share," and makes them comparable to international EPS
standards. The Corporation adopted SFAS 128 on December 31, 1997 and all
prior-period EPS data presented have been restated.
32
<PAGE> 33
SFAS NO. 130, "REPORTING COMPREHENSIVE INCOME." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. Reclassification of financial statements for earlier
periods provided for comparative purposes will be required. Adoption of SFAS
No. 130 is not expected to have a material impact on the Company.
33
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
George Mason Bankshares, Inc.
Consolidated Financial Statements
Period ended December 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.......................... 35
Audited Financial Statements
Consolidated Balance Sheets............................. 36
Consolidated Statements of Income....................... 37
Consolidated Statements of Shareholders' Equity......... 38
Consolidated Statements of Cash Flows................... 39
Notes to Consolidated Financial Statements.............. 40-70
</TABLE>
34
<PAGE> 35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
George Mason Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of George
Mason Bankshares, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of The Palmer National
Bancorp, Inc., which statements reflect net interest income constituting 16% of
the related consolidated net interest income for the year ended December 31,
1995. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
The Palmer National Bancorp, Inc., is based solely on the report of other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of George Mason Bankshares, Inc.
at December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Washington, D.C.
January 22, 1998
35
<PAGE> 36
GEORGE MASON BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------- --------
(In thousands, except per share data)
<S> <C> <C>
ASSETS
Cash and due from banks $35,640 $41,158
Federal funds sold 55,052 23,800
---------- --------
Total cash and cash equivalents 90,692 64,958
Securities available-for-sale 321,652 280,859
Securities held-to-maturity 52,017 64,574
Mortgage loans held for resale 90,611 72,983
Loans, net of deferred loan fees and unearned discount 456,308 373,613
Less: Allowance for loan losses (5,669) (5,659)
---------- --------
Loans, net 450,639 367,954
Bank premises and equipment, net 9,351 10,019
Accrued income receivable 4,939 4,480
Prepaid expenses and other assets 4,422 4,186
Deferred income taxes 2,246 2,059
Other real estate 0 398
---------- --------
TOTAL ASSETS $1,026,569 $872,470
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $176,803 $132,415
Interest checking 61,441 49,002
Savings 182,762 162,414
Time 398,296 349,763
---------- --------
Total deposits 819,302 693,594
Securities sold under agreements to repurchase
and other borrowed funds 122,809 105,898
Accrued expenses and other liabilities 7,694 7,979
Dividends payable 728 655
---------- --------
TOTAL LIABILITIES 950,533 808,126
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01; authorized 1,000
Shares; no shares issued or outstanding 0 0
Common stock, par value $1.11; authorized 9,000
shares; issued and outstanding 5,261 shares in 1997
and 5,028 shares in 1996 5,840 5,581
Surplus 43,163 38,472
Retained earnings 26,308 21,094
Unrealized holding gain (loss) on securities
available-for-sale, net of tax 725 (803)
---------- --------
TOTAL SHAREHOLDERS' EQUITY 76,036 64,344
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,026,569 $872,470
========== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 37
GEORGE MASON BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $40,143 $33,594 $27,676
Interest on federal funds sold and repurchase agreements 840 863 1,006
Interest on securities:
Taxable 22,380 18,120 14,384
Tax-exempt 1,143 1,150 1,053
------- ------- -------
TOTAL INTEREST INCOME 64,506 53,727 44,119
INTEREST EXPENSE
Interest on deposits 28,282 22,496 17,870
Interest on securities sold under agreements to
Repurchase and other borrowed funds 4,279 3,768 2,079
------- ------- -------
TOTAL INTEREST EXPENSE 32,561 26,264 19,949
------- ------- -------
NET INTEREST INCOME 31,945 27,463 24,170
PROVISION FOR LOAN LOSSES 20 181 18
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 31,925 27,282 24,152
OTHER INCOME
Service charges 3,911 2,927 2,124
Gain on sales of trading securities 0 66 180
Gain on sales of securities available-for-sale 42 560 653
Gain on sales of mortgage loans held for resale 11,404 9,836 6,366
Other 1,287 1,463 1,036
------- ------- -------
TOTAL OTHER INCOME 16,644 14,852 10,359
OTHER EXPENSES
Salaries and employee benefits 21,012 18,550 14,353
Occupancy 3,476 3,064 2,436
Equipment 2,429 2,180 1,817
Other operating expenses 9,891 8,385 7,518
------- ------- -------
TOTAL OTHER EXPENSES 36,808 32,179 26,124
------- ------- -------
INCOME BEFORE INCOME TAXES 11,761 9,955 8,387
INCOME TAXES 3,681 3,072 2,095
------- ------- -------
NET INCOME $ 8,080 $ 6,883 $ 6,292
======= ======= =======
BASIC EARNINGS PER SHARE $1.58 $1.38 $1.30
======= ======= =======
DILUTED EARNINGS PER SHARE $1.54 $1.35 $1.28
======= ======= =======
CASH DIVIDENDS DECLARED PER SHARE $0.56 $0.46 $0.38
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
37
<PAGE> 38
GEORGE MASON BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON TREASURY UNREALIZED
STOCK STOCK AND
SHARES COMMON RETAINED UNEARNED GAIN (LOSS) ON
OUTSTANDING STOCK SURPLUS EARNINGS ESOP SECURITIES TOTAL
----------- ------ -------- --------- -------- ------------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 4,594 $5,099 $34,072 $11,616 $(102) $(3,909) $46,776
Net income 6,292 6,292
Common stock issuance 161 179 1,451 1,630
Purchase of treasury stock (21) (21)
ESOP shares earned 81 81
Cash dividends (1,492) (1,492)
Change in unrealized
holding gain (loss) on
available-for-sale
securities 4,661 4,661
------ ------ ------- ------- ----- ------ -------
Balance, December 31, 1995 4,755 5,278 35,523 16,416 (42) 752 57,927
Net income 6,883 6,883
Common stock issuance 276 306 2,988 3,294
Retirement of treasury stok (3) (3) (39) 42
Cash dividends (2,205) (2,205)
Change in unrealized
holding gain (loss) on
available-for-sale
securities (1,555) (1,555)
------ ------ ------- ------- ----- ------ -------
Balance, December 31, 1996 5,028 5,581 38,472 21,094 0 (803) 64,344
Net income 8,080 8,080
Common stock issuance 233 259 4,691 4,950
Cash dividends (2,866) (2,866)
Change in unrealized
holding gain (loss) on
available-for-sale
securities 1,528 1,528
------ ------ ------- ------- ----- ------ -------
BALANCE, DECEMBER 31, 1997 5,261 $5,840 $43,163 $26,308 $ 0 $ 725 $76,036
====== ====== ======= ======= ===== ====== =======
</TABLE>
See notes to consolidated financial statements.
38
<PAGE> 39
GEORGE MASON BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
YEAR ENDED DECEMBER 31
1997 1996 1995
------- ------- -------
(In thousands)
<C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $8,080 $6,883 $6,292
Adjustments to reconcile net income to net cash
used in operating activities:
Net amortization (accretion) on securities 688 (62) (81)
Depreciation and amortization 2,159 1,610 1,132
Provision for loan losses 20 181 18
Gain on sales of securities available-for-sale (42) (560) (653)
Provision for deferred income taxes (939) (130) (420)
Change in assets and liabilities:
Decrease (increase) in trading securities 5,693 (394)
Increase in mortgage loans held for resale (17,628) (17,501) (36,976)
Increase in accrued income receivable, prepaid
expenses and other assets (297) (1,758) (896)
Increase in other liabilities 1,323 1,919 3,226
------- ------- -------
Net cash used in operating activities (6,636) (3,725) (28,752)
INVESTING ACTIVITIES
Proceeds from sales and maturities of
available-for-sale securities 103,039 153,061 106,293
Proceeds from maturities of held-to-maturity securities 12,462 6,949 18,549
Purchase of available-for-sale securities (141,386) (247,738) (145,446)
Purchase of held-to-maturity securities (917) (2,831) (10,376)
Net increase in loans (82,695) (74,236) (53,474)
Purchase of property and equipment (1,301) (1,788) (3,460)
------- ------- -------
Net cash used in investing activities (110,798) (166,583) (87,914)
FINANCING ACTIVITIES
Net increase in deposits 125,708 139,130 93,662
Net increase in borrowed funds 16,911 45,151 20,618
Repayment of ESOP debt (81)
Net proceeds from sales of common stock 3,342 3,294 1,630
Purchase of treasury stock (21)
ESOP shares earned 81
Dividends paid (2,793) (1,948) (1,413)
------- ------- -------
Net cash provided by financing activities 143,168 185,627 114,476
------- ------- -------
Net increase (decrease) in cash and cash equivalents 25,734 15,319 (2,190)
Cash and cash equivalents at beginning of year 64,958 49,639 51,829
------- ------- -------
Cash and cash equivalents at end of year $90,692 $64,958 $49,639
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $32,467 $25,625 $19,134
======= ======= =======
Income taxes paid $ 3,576 $ 3,229 $ 2,210
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
39
<PAGE> 40
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
George Mason Bankshares, Inc. (the Corporation) is a bank holding company
headquartered in Fairfax, Virginia. The Corporation owns all of the
outstanding stock of its subsidiaries, George Mason Bank and Mason Holding
Corporation (referred to collectively hereafter as "the Bank"). The Bank
operates banking sites throughout Northern Virginia, Washington, D.C., and
Maryland.
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of the
Corporation, the Bank, and the Bank's subsidiaries, George Mason Mortgage
Corporation and Mason Advertising, Inc. Significant intercompany accounts and
transactions have been eliminated in consolidation.
PRESENTATION OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, certificates of deposit held for
investment with an original maturity date of three months or less, and federal
funds sold. Generally, federal funds are purchased and sold for one-day
periods. Cash flows from loans not held for resale, demand, interest checking,
savings and time deposits are reported net. Cash flows from loans held for
resale are shown net, as an operating cash flow.
SECURITIES
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Corporation
has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale or trading. Available-for-sale
securities are stated at fair value, with unrealized gains and losses, net of
tax, reported as a separate component of shareholders' equity.
40
<PAGE> 41
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES (CONTINUED)
Trading securities are held for resale in anticipation of short-term
market movements. Trading securities, consisting of debt securities, are
stated at fair value. Gains and losses, both realized and unrealized, are
included in earnings.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security using methods which approximate level yields.
Such amortization or accretion is included in interest on securities.
Interest and dividends are included in interest on securities. Realized gains
and losses are included in gain on sales of securities available-for-sale. The
cost of securities sold is based on the specific identification method.
MORTGAGE LOANS HELD FOR RESALE
Mortgage loans held for resale to investors are carried at the lower of
cost or market as determined by investors' commitment prices. Loan origination
and commitment fees and certain direct loan origination costs are deferred
until the time of sale.
LOANS
Unearned interest on discounted loans is amortized to income over the life
of the loans. For all other loans, interest is accrued daily on the
outstanding balances. Interest is not accrued on loans if the collection of
such interest is doubtful.
Loan fees are amortized over the life of the loans, using methods which
approximate level yields. The Corporation is generally amortizing these
amounts over the contractual life.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's judgment as to the
amount necessary to adequately provide for the risk of future losses in the
loan portfolio. While it is the Corporation's policy to write off in the
current period those loans or portions of loans on which a loss is considered
probable, there continues to exist the risk of future losses which cannot be
quantified precisely or attributed to specific loans. In assessing the
adequacy of the allowance for loan losses, management relies on its ongoing
review of the loan portfolio, general economic conditions and trends, financial
conditions of specific borrowers, past loan loss experience, and net
charge-offs during the year. This review takes into consideration the
judgments not only of the responsible lending officers and senior management,
but in addition, bank regulatory agencies that review the loan portfolio as a
part of the regular bank examination process.
41
<PAGE> 42
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation of property and equipment is computed principally
by the straight-line method over the estimated useful lives. The estimated
useful lives of buildings and improvements on leased property are between eight
and 50 years, and the estimated useful lives of furniture and equipment are
between three and 30 years.
Improvements to leased property are amortized over the lesser of the life
of the lease or life of the improvements. Maintenance and repairs of property
and equipment are charged to operations and major improvements are capitalized.
Upon retirement, sale or other disposition of property and equipment, the cost
and accumulated depreciation are eliminated from the accounts and gain or loss
is included in operations.
OTHER REAL ESTATE
Other real estate acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management, and the real estate is carried at the lower of
carrying amount or fair value less cost to sell.
INCOME TAXES
The Corporation uses the liability method of accounting for income taxes.
Deferred tax assets and liabilities are determined based on differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities (i.e., temporary differences) and are measured at the enacted
rates that will be in effect when these differences reverse.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (SFAS 128), was issued. SFAS 128 establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. SFAS 128 simplifies
the standards for computing earnings per share previously found in APB Opinion
No. 15, "Earnings per Share," and makes them comparable to international EPS
standards. The Corporation adopted SFAS 128 on December 31, 1997 and all
prior-period EPS data presented have been restated.
In June 1996, Statement of Financial Accounting Standards No. 125,
"Accounting for the Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125), was issued. SFAS 125 clarifies and
provides consistent guidance for distinguishing transfers of financial assets
that are sales from transfers that are borrowings. The standard is based on a
financial components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and liabilities it has incurred, and derecognizes
liabilities when extinguished. SFAS 125 is effective for specified
transactions occurring after December 31, 1996. In October 1996, Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
42
<PAGE> 43
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Certain Provisions of FASB No. 125" (SFAS 127), was issued. SFAS 127 defers
until after December 31, 1997, the effective date of paragraphs 9-12 of SFAS
125 for repurchase agreement, securities lending, dollar roll and similar
transactions and the effective date of paragraph 15 for all transactions.
Earlier or retroactive application is not permitted. Adoption of SFAS 125 did
not, and is not expected to, have a material impact on the Corporation.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), was issued. SFAS 123
requires entities that have followed Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations to either adopt a fair value method of accounting for
stock-based compensation (as described by SFAS 123) or continue to follow APB
25 and provide additional pro forma disclosures in the footnotes to the
financial statements.
The Corporation has elected to follow APB 25 and related Interpretations
in accounting for its employee stock options because, as discussed in Note 14,
the alternative fair value accounting provided for under SFAS 123, requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Corporation's employee stock options approximates the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications were made to the prior year financial statements
to conform to current-year presentation.
2. RESTRICTIONS ON CASH BALANCES
The Corporation is required by the Board of Governors of the Federal
Reserve System and by state banking laws to maintain certain minimum cash
balances consisting of vault cash and deposits in the Federal Reserve Bank or
in other commercial banks. Such restricted balances totaled $11,563,000 as of
December 31, 1997.
43
<PAGE> 44
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES
The amortized cost, market value, gross unrealized gains and losses, and
fair value of the securities portfolio were as follows:
SECURITIES AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. Treasury $ 10,010 $ 19 $ (7) $ 10,022
U.S. government agencies
and corporations 26,275 76 (26) 26,325
States and political
subdivisions 4,093 106 4,199
Mortgage-backed securities 276,497 1,572 (373) 277,696
Other securities 3,410 3,410
-------- ------ ------- --------
TOTAL $320,285 $1,773 $ (406) $321,652
======== ====== ======== ========
December 31, 1996:
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 2,772
-------- ------ ------- --------
Total $281,619 $ 726 $(1,486) $280,859
======== ====== ======== ========
December 31, 1995:
U.S. Treasury $ 34,022 $ 275 $ (16) $ 34,281
U.S. government agencies
and corporations 15,172 133 (7) 15,298
States and political
subdivisions 8,161 358 (7) 8,512
Mortgage-backed securities 125,526 1,173 (106) 126,593
Other securities 2,811 90 (4) 2,897
-------- ------ ------- --------
Total $185,692 $2,029 $ (140) $187,581
======== ====== ======== ========
</TABLE>
44
<PAGE> 45
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES (CONTINUED)
SECURITIES HELD-TO-MATURITY
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1997:
U.S. government agencies
and corporations $ 483 $ 19 $ 502
States and political subdivisions 18,530 808 $ (13) 19,325
Mortgage-backed securities 33,004 375 (62) 33,317
------- ------ ----- -------
TOTAL $52,017 $1,202 $ (75) $53,144
======= ====== ====== =======
December 31, 1996:
U.S. government agencies
and corporations $ 4,671 $ 56 $ 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
======= ====== ====== =======
December 31, 1995:
U.S. government agencies
and corporations $ 8,471 $ 152 $ 8,623
States and political subdivisions 15,027 533 $ (27) 15,533
Mortgage-backed securities 45,162 903 (123) 45,942
------- ------ ------ -------
Total $68,660 $1,588 $(150) $70,098
======= ====== ====== =======
</TABLE>
45
<PAGE> 46
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES (CONTINUED)
The amortized cost and estimated fair value of securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(In thousands)
<S> <C> <C>
Due in one year or less $ 4,742 $ 4,742
Due after one year through five years 12,799 12,826
Due after five years through ten years 17,828 17,883
Due after ten years 5,009 5,095
Mortgage-backed securities 276,497 277,696
Equity securities 3,410 3,410
-------- --------
TOTAL $320,285 $321,652
======== ========
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(In thousands)
<S> <C> <C>
Due in one year or less
Due after one year through five years $ 3,758 $ 3,906
Due after five years through ten years 10,023 10,474
Due after ten years 5,232 5,447
Mortgage-backed securities 33,004 33,317
-------- --------
TOTAL $ 52,017 $ 53,144
======== ========
</TABLE>
Gross gains of $71,000 and gross losses of $29,000 were realized in 1997.
Gross gains of $728,000 and gross losses of $168,000 were realized in 1996.
Gross gains of $773,000 and gross losses of $120,000 were realized in 1995.
On December 31, 1995 (pursuant to the transition provisions of the
Financial Accounting Standards Board staff's Special Report on SFAS 115), the
Corporation transferred securities with amortized cost of $15,695,000 from the
held-to-maturity category to the available-for-sale category. The unrealized
gains associated with securities transferred were $357,000.
46
<PAGE> 47
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS
The composition of loans was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Commercial $122,290 $100,986
Real estate - construction 46,348 32,203
Real estate - other 225,835 201,099
Consumer 62,603 40,083
-------- --------
Total loans 457,076 374,371
Less: Deferred loan fees and unearned discounts (768) (758)
-------- --------
Loans, net of deferred loan fees and unearned discounts 456,308 373,613
Less: Allowance for loan losses (5,669) (5,659)
-------- --------
LOANS, NET $450,639 $367,954
======== ========
</TABLE>
Loans on which interest is not being accrued or for which the terms have
been modified to provide for a reduced rate of interest because of financial
conditions of borrowers were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Nonaccruing loans $1,046 $1,487
Restructured loans 95
------- -------
TOTAL $1,046 $1,582
======= =======
Allocation of general reserve to nonaccruing loans $ 158 $ 223
======= =======
</TABLE>
The average nonaccruing loan balances and interest income earned with
respect to nonaccruing and restructured loans were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Average nonaccruing loans $1,204 $2,067 $2,342
Income anticipated under original loan agreements 189 194 563
Income recorded 80 160 297
</TABLE>
47
<PAGE> 48
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year $5,659 $5,529 $5,805
Provision for loan losses 20 181 18
Amounts charged off (259) (174) (491)
Recovery of amounts charged off 249 123 197
------ ------ ------
BALANCE, END OF YEAR $5,669 $5,659 $5,529
====== ====== ======
</TABLE>
6. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and accumulated
depreciation and amortization were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Land $ 1,051 $ 1,240
Building and improvements on leased property 7,059 5,848
Furniture and equipment 8,862 9,097
------- -------
Total 16,972 16,185
Less accumulated depreciation and amortization (7,621) (6,166)
------- -------
BANK PREMISES AND EQUIPMENT, NET $ 9,351 $10,019
======= =======
</TABLE>
48
<PAGE> 49
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEPOSITS
The Corporation held time deposits in denominations of $100,000 or more
totaling $93,520,000 and $81,877,000 at December 31, 1997 and 1996,
respectively.
As of December 31, 1997, the scheduled maturities of certificates of
deposit for the respective years ending December 31 were as follows (in
thousands):
<TABLE>
<S> <C>
1998 $313,213
1999 40,782
2000 19,389
2001 15,072
2002 9,840
--------
TOTAL $398,296
========
</TABLE>
8. INDEBTEDNESS
The Corporation's indebtedness was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
--------- --------- -------
(In thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase $ 74,809 $ 97,469 $53,391
Advances from the FHLB of Atlanta 23,000 4,000 5,000
Other borrowings 25,000 4,429 2,356
-------- -------- -------
TOTAL $122,809 $105,898 $60,747
======== ======== =======
</TABLE>
Securities sold under agreements to repurchase are entered into
principally as accommodations to customers. As of December 31, 1997 and 1996,
the securities sold under agreements to repurchase had weighted average
interest rates of 4.62% and 4.65%, respectively, and matured overnight.
49
<PAGE> 50
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INDEBTEDNESS (CONTINUED)
Information concerning securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Average daily balance during the year ended $ 72,123 $ 59,710
Average interest rate during the year ended 4.62% 4.38%
Maximum month-end balance during the year ended $ 91,256 $ 97,469
Securities underlying the agreements at December 31:
Carrying value $108,330 $103,298
Estimated fair value 108,887 103,375
</TABLE>
The Corporation has a line of credit with the Federal Home Loan Bank of
Atlanta (FHLB of Atlanta) totaling $95 million with $23 million drawn against
it as of December 31, 1997. The line of credit expires during the year ending
December 31, 2004. Of the $23 million drawn at December 31, 1997, $20 million
was a short term advance that bore interest at 5.89% and was repaid in January
1998, and $3 million bears interest at 6.11% with principal payments of
$500,000 due every six months with the final payment due during the year ending
December 31, 2000. Securities and loans with carrying values of $20,534,000
and $58,257,000, respectively, at December 31, 1997 were pledged as collateral
for the line of credit with the FHLB of Atlanta.
The Corporation maintains federal funds lines with a number of larger
regional and money-center banking institutions. As of December 31, 1997, the
Corporation had lines of credit available totaling $72,882,000.
50
<PAGE> 51
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The Corporation's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------- -------
(In thousands)
<S> <C> <C>
Securities available-for-sale $ 415
Allowance for loan losses $1,710 1,572
Deferred compensation 359 303
Other 976 364
------- -------
Total deferred tax assets 3,045 2,654
Securities available-for-sale 374
Depreciation 292 451
Other 133 144
------- -------
Total deferred tax liabilities 799 595
------- -------
NET DEFERRED TAX ASSET $2,246 $2,059
======= =======
</TABLE>
Income taxes were composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Current $4,620 $3,202 $2,515
Deferred (939) (130) (8)
Change in valuation allowance (412)
------- ------- -------
PROVISION FOR INCOME TAXES $3,681 $3,072 $2,095
======= ======= =======
</TABLE>
Current income taxes are primarily related to federal income taxes.
51
<PAGE> 52
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation between the amount of reported income taxes and the
amount computed by multiplying the applicable statutory federal income tax rate
was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rates $3,999 $3,385 $2,852
Adjustments to federal income tax
Resulting from:
Tax-exempt income (488) (391) (358)
Change in valuation allowance (412)
Other 170 78 13
------- ------- -------
PROVISION FOR INCOME TAXES $3,681 $3,072 $2,095
======= ======= =======
</TABLE>
The income taxes applicable to securities transactions for 1997, 1996, and
1995 were $15,000, $190,000, and $283,000, respectively. The Corporation's
effective tax rates were 31.3%, 30.9%, and 25.0%, for the years ended December
31, 1997, 1996, and 1995, respectively.
10. COMMITMENTS AND CONTINGENCIES
The Corporation's original headquarters building was constructed on land
leased for an initial term of twenty-five years ending July 31, 2003. The
Corporation has the option to renew the lease and extend the term for three
successive terms of ten years each. The building and any improvements on the
land become the property of the lessor at the termination of the lease and any
renewals thereof, without any compensation being paid to the Corporation.
During the term of the lease and any renewals thereof, the Corporation must pay
all real estate taxes as additional rent. The rent for the initial twenty-five
year term and any renewal terms is adjusted on each fifth anniversary of the
lease by the percentage increase or decrease in the Consumer Price Index for
urban Washington, D.C. over the preceding five years.
The Corporation has also leased office space for branches and for the
offices of George Mason Mortgage Corporation. These leases have various
expiration dates, and require minimum annual rentals. Many of the leases have
one or more renewal options.
52
<PAGE> 53
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 1997, the total minimum future rental commitments under
these leases for the respective years ending December 31 and thereafter were as
follows (in thousands):
<TABLE>
<S> <C>
1998 $2,297
1999 1,497
2000 1,409
2001 1,314
2002 1,041
Thereafter 1,839
------
TOTAL $9,397
======
</TABLE>
The total rental expense for the years ended December 31, 1997, 1996, and
1995 was $2,297,000, $2,044,000, and $1,551,000, respectively.
The Corporation, in the normal course of its business, is the subject of
legal proceedings instituted by customers and others. In the opinion of the
Corporation's management, there were no legal matters pending as of December
31, 1997, which would have a material effect on the financial statements.
11. TRANSACTIONS WITH DIRECTORS AND OFFICERS
The Corporation has banking transactions in the ordinary course of
business with directors, principal officers, and their affiliated companies
(commonly referred to as related parties) on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others. All loans with directors and officers are performing
in accordance with their original terms.
Aggregate loan transactions with related parties were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
Balance, beginning of year $15,890 $16,015
New loans 4,350 5,954
Repayments (1,465) (6,079)
---------- ----------
BALANCE, END OF YEAR $18,775 $15,890
========== ==========
</TABLE>
53
<PAGE> 54
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. TRANSACTIONS WITH DIRECTORS AND OFFICERS (CONTINUED)
These related parties had deposits with the Bank totaling $4,625,000 and
$8,708,000 at December 31, 1997 and 1996, respectively.
12. CAPITAL ACCOUNTS
For each year presented, basic earnings per share were computed by
dividing net income by the weighted average number of shares outstanding during
the respective years. The weighted average number of shares outstanding during
the years ended December 31, 1997, 1996, and 1995 were 5,105,000, 4,980,000,
and 4,833,000, respectively.
For each year presented, diluted earnings per share were computed by
dividing net income by the weighted average number of shares outstanding during
the respective years plus the number of common stock equivalents related to
stock options outstanding during the respective years. The number of common
stock equivalents related to outstanding stock options during the years ended
December 31, 1997, 1996, and 1995 were 142,000, 108,000, and 71,000,
respectively.
During the year ended December 31, 1997, a non-cash increase to the
surplus account of $1,608,000 was recorded to account for a tax benefit
received in connection with the exercise of non-qualified stock options.
On December 14, 1995, the Corporation ratified a three-for-two stock split
effective January 31, 1996 and payable February 9, 1996. This three-for-two
stock split effected an increase in authorized shares to 9,000,000. The effect
of this three-for-two stock split has been reflected in all years presented.
Virginia state banking laws restrict the availability of surplus for the
payment of dividends. At December 31, 1997, $48,947,000 was so restricted for
George Mason Bank.
13. PROFIT-SHARING PLANS
For the year ended December 31, 1995 and the period ended July 31, 1996,
the Corporation had a profit-sharing plan for those employees who met the
eligibility requirements set forth in the plan. The amount of the contribution
to the plan was at the discretion of the Corporation's Board of Directors. The
Corporation contributed $221,000 to the plan for the year ended December 31,
1995.
For the year ended December 31, 1995 and the period ended July 31, 1996,
the Corporation had a 401(k) plan which covered all employees who had completed
at least one full year of continuous service and were at least twenty-one years
old. The participants contributed up to 13% of their annual compensation. The
Corporation matched the employees' contributions to a maximum of 4.5% of annual
compensation. For the year ended December 31, 1995, the Corporation
contributed $191,000.
54
<PAGE> 55
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. PROFIT-SHARING PLANS (CONTINUED)
As of August 1, 1996, the Corporation combined the profit sharing and
401(k) plans. The combined plan covers all employees who have completed at
least 1,000 hours of service. The participants may contribute up to 13% of
their annual compensation. The Corporation contributes 2% of all eligible
employees' annual compensation and matches the employees' contributions to a
maximum of 3% of compensation. The Corporation may contribute additional
amounts to the plan at the discretion of the Board of Directors. For the years
ended December 31, 1997 and 1996, the Corporation contributed $875,000 and
$595,000 to the combined plan.
As of September 1, 1996, the Corporation adopted an executive deferred
compensation plan. The plan covers the chief executive officer and certain
other executives of the Corporation. Each participant may defer any or all of
his salary and bonus remaining after such participant has deferred at least 3%
of his salary under the combined profit sharing and 401(k) plan. The
Corporation provides a matching contribution to the plan equal to 50% of the
participants' contribution up to 10% of the participants' annual salary. For
the years ended December 31, 1997 and 1996, the Corporation contributed $32,000
and $7,000, respectively.
14. STOCK OPTION AND PURCHASE PLANS
The Corporation's various stock option plans provide for the issuance of
options to purchase shares of common stock at an exercise price no less than
the market value on the date of grant. The options generally vest six months
after the grant date and expire ten years after the grant date. The
Corporation has authorized and reserved 36,400 shares of its common stock for
future grants under these plans.
The Corporation's employee stock purchase plan provides for the issuance
of options to purchase shares of common stock at 90% of the market value on the
date of grant. The options vest immediately and expire one year after the
grant date. There were no remaining options outstanding at December 31, 1997
with exercise prices at 90% of the grant-date market values, and there are no
remaining authorized and reserved shares of its common stock available for
future grants under this plan.
The Corporation granted certain directors, in lieu of director fees,
rights to shares of the Corporation's common stock. The director stock options
are issued with no exercise price and are fully vested six months after the
grant date. Compensation expense recognized in connection with options granted
in lieu of directors fees was $63,000, $85,000, and $76,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined
as if the Corporation has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
55
<PAGE> 56
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate 5.64% 6.62% 6.62%
Dividend yield 2.50% 2.50% 2.50%
Volatility factor of the expected market price of
the Corporation's common stock .27 .23 .23
Expected life of options (in years) 2.00 2.48 2.42
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Corporation's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options was amortized to expense over the options' vesting periods. The
effects of applying SFAS 123 for providing pro forma disclosures are not likely
to be representative of the effects on reported net income for future years.
The Corporation's pro forma net income (in thousands) and pro forma basic and
diluted earnings per share based on options issued during 1997, 1996, and 1995
were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income $7,763 $6,596 $6,080
Pro forma basic earnings per share $ 1.52 $ 1.32 $ 1.26
Pro forma diluted earnings per share 1.48 1.30 1.24
</TABLE>
56
<PAGE> 57
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
A summary of activity for the Corporation's stock options with exercise
prices equal to the grant-date market values for the three years ended December
31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- ------------------- ------------------
SHARES WEIGHTED- SHARES WEIGHTED- SHARES WEIGHTED-
UNDER AVERAGE UNDER AVERAGE UNDER AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE
(IN 000S) PRICE (IN 000S) PRICE (IN 000S) PRICE
-------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 395 $13.06 551 $11.49 590 $10.86
Granted 129 21.50 77 18.47 74 13.76
Exercised (196) 13.23 (230) 11.08 (112) 9.71
Forfeited (2) 21.50 (3) 13.14 (1) 12.96
---- ---- ----
OUTSTANDING AT
END OF YEAR 326 16.25 395 13.06 551 11.49
==== ==== ====
EXERCISABLE AT
END OF YEAR 326 16.25 388 12.94 515 11.26
==== ==== ====
1997 1996 1995
----------- ----------- -----------
Range of exercise prices
at end of year $9.73-21.75 $9.73-21.13 $9.73-14.92
Weighted-average remaining contractual
life at end of year 7.32 YEARS 7.29 years 7.74 years
Weighted-average fair values of
options granted in the year $3.62 $3.64 $2.92
</TABLE>
57
<PAGE> 58
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
Of the 326,000 outstanding stock options at December 31, 1997, 141,000 had
exercise prices that were between $9.73 and $12.83. The weighted-average
exercise price and weighted-average remaining contractual life of these options
were $11.49 and 5.60 years, respectively. The remaining 185,000 stock options
outstanding as of December 31, 1997 had exercise prices that were between
$14.92 and $21.75. The weighted-average exercise price and weighted-average
remaining contractual life of these options were $19.89 and 8.63 years,
respectively.
A summary of activity for the Corporation's stock options with exercise
prices at 90% of the grant-date market values for the three years ended
December 31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- ------------------
SHARES WEIGHTED- SHARES WEIGHTED- SHARES WEIGHTED-
UNDER AVERAGE UNDER AVERAGE UNDER AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE
(IN 000S) PRICE (IN 000S) PRICE (IN 000S) PRICE
------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 24 $17.66 22 $12.74 24 $11.67
Granted 0 27 17.75 30 12.51
Exercised (20) 16.57 (21) 13.23 (25) 11.64
Forfeited (4) 18.14 (4) 14.69 (7) 11.99
---- ---- ----
OUTSTANDING AT
END OF YEAR 0 24 17.66 22 12.74
==== ==== ====
EXERCISABLE AT
END OF YEAR 0 24 17.66 22 12.74
==== ==== ====
1996 1995
------------ -----------------
Range of exercise prices
at end of year $16.65-18.68 $11.85-13.80
Weighted-average remaining
contractual life at end of year .54 years .52 years
Weighted-average fair values of
options granted in the year $3.26 $2.30
</TABLE>
58
<PAGE> 59
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
A summary of activity for the Corporation's director stock options for the
three years ended December 31 was as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of year 11 8 3
Granted 3 4 5
Exercised (1)
---- --- ----
OUTSTANDING AT END OF YEAR 14 11 8
==== === ====
EXERCISABLE AT END OF YEAR 14 10 5
==== === ====
</TABLE>
15. DEFERRED COMPENSATION PLANS
The Corporation has a deferred compensation plan for two former key
employees which provides that benefits are to be paid in monthly installments
for a period of ten years beginning in January 1995. The accrued benefit
obligation related to the plan totaled $595,000 and $655,000 as of December 31,
1997 and 1996, respectively. The accrued benefit obligation was computed using
a 7.85% discount rate.
The Corporation entered into supplemental post-retirement agreements with
six key officers under which each officer is entitled to either a
post-retirement benefit payable in equal monthly installments over fifteen
years beginning at age sixty-five, or a death benefit, payable to the officer's
beneficiary in the event of death of the officer in equal monthly installments
over fifteen years. If the key officer elects early retirement at age
fifty-five with ten years of service, the officer is entitled to a reduced
post-retirement benefit amount. The Corporation is accruing the liability
related to these post-retirement benefits over the estimated service period of
each of the officers. As of December 31, 1997 and 1996, the Corporation had
accrued $407,000 and $182,000, respectively, related to these post-retirement
benefit agreements. The accrued benefit obligation was calculated using
discount rates of 7% to 8%. The Corporation has purchased life insurance
policies to fund these post-retirement benefits.
59
<PAGE> 60
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. REGULATORY MATTERS
The Corporation is subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Corporation's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
The Corporation is required to maintain minimum risk-based and leverage
capital as defined by the federal banking agencies. The measurement of
risk-based capital takes into account the credit risk of both the balance sheet
assets and off-balance sheet exposures. The regulatory guidelines require
minimum risk-based capital ratios of 4.0% for Tier 1 capital and 8.0% for total
capital. In addition, a minimum leverage ratio of Tier 1 capital to quarterly
average assets of 3.0% is required for strong banking organizations. A bank is
considered "well capitalized," the highest regulatory category, if it has the
following minimum ratios: Tier 1 capital of 6.0%, total risk-based capital of
10.0%, and Tier 1 leverage ratio of 5.0%. The capital ratios of the
Corporation were as follows:
<TABLE>
<CAPTION>
WELL
CAPITALIZED
DECEMBER 31 REGULATORY
1997 1996 MINIMUMS
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
CAPITAL:
Tier 1 capital $ 75,158 $ 64,943
Tier 2 capital 5,669 5,659
-------- --------
TOTAL CAPITAL $ 80,827 $ 70,602
======== ========
ASSETS:
Risk-weighted assets $625,455 $527,449
Average assets (fourth quarter) 946,969 849,883
RATIOS:
Tier 1 capital to risk-weighted assets 12.0% 12.3% 6.0%
Total capital to risk-weighted assets 12.9% 13.4% 10.0%
Tier 1 leverage to average assets 7.9% 7.6% 5.0%
</TABLE>
60
<PAGE> 61
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. REGULATORY MATTERS (CONTINUED)
The capital ratios of George Mason Bank, the Corporation's largest banking
subsidiary, were as follows:
<TABLE>
<CAPTION>
WELL
CAPITALIZED
DECEMBER 31 REGULATORY
1997 1996 MINIMUMS
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
CAPITAL:
Tier 1 capital $ 69,224 $ 48,104
Tier 2 capital 5,669 4,180
-------- --------
TOTAL CAPITAL $ 74,893 $ 52,284
======== ========
ASSETS:
Risk-weighted assets $574,126 $462,622
Average assets (fourth quarter) 946,833 757,147
RATIOS:
Tier 1 capital to risk-weighted assets 12.1% 10.4% 6.0%
Total capital to risk-weighted assets 13.0% 11.3% 10.0%
Tier 1 leverage to average assets 7.3% 6.4% 5.0%
</TABLE>
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the balance sheet. The contract or notional amounts of those instruments
reflect the extent of involvement the Corporation has in particular classes of
financial instruments. The Corporation's exposure to credit loss in the event
of nonperformance by the other parties to the financial instruments for
commitments to extend credit and standby letters of credit is represented by
the contractual notional amount of those instruments. The Corporation uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
61
<PAGE> 62
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
Financial instruments whose contract amounts represented credit risk were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Commitments to extend credit $192,776 $197,030
Standby letters of credit 14,456 18,994
-------- --------
TOTAL $207,232 $216,024
======== ========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of conditions established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Standby letters of credit are
conditional commitments issued by the Corporation to guarantee the performance
of a customer to a third party. The Corporation uses the same credit standards
on a case-by-case basis in evaluating commitments to extend credit and standby
letters of credit as it does when funding loans, including the determination of
the type and amount of collateral, if required.
As of December 31, 1997, substantially all mortgage loans held for resale
were identically matched with commitments from outside investors to purchase
such loans. These investors are national and regional mortgage bankers and
savings and loan institutions whose credit worthiness is evaluated annually.
The terms of these commitments are generally sixty to ninety days and are
entered into in an effort to limit the Corporation's exposure to interest rate
fluctuations.
18. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
The loan portfolio is well-diversified among industries. Generally, the
loans are secured by assets or stock. The loans are expected to be repaid from
cash flow or proceeds from the sale of selected assets of the borrowers. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include cash, securities,
accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties and residential properties.
62
<PAGE> 63
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 163
Deposits at bank subsidiaries $ 5,023 5,400
------- -------
Cash and cash equivalents 5,023 5,563
Investment in bank subsidiaries 70,103 59,067
Accrued income receivable and other assets 2 17
Income tax receivable 1,955 441
------- -------
TOTAL ASSETS $77,083 $65,088
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Dividends payable $ 728 $ 655
Accrued expenses 319 89
------- -------
TOTAL LIABILITIES 1,047 744
SHAREHOLDERS' EQUITY
Common stock 5,840 5,581
Surplus 43,163 38,472
Retained earnings 26,308 21,094
Unrealized gain (loss) on available-for-sale securities 725 (803)
------- -------
TOTAL SHAREHOLDERS' EQUITY 76,036 64,344
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $77,083 $65,088
======= =======
</TABLE>
64
<PAGE> 64
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Dividend income $ 331 $1,191
Interest and other income $ 233 359 382
Operating expenses 886 541 435
------ ------ ------
Income (loss) before income tax benefit
and equity in undistributed earnings of
bank subsidiaries (653) 149 1,138
Income tax benefit 232 94 56
------ ------ ------
Income before equity in undistributed earnings
of bank subsidiaries (421) 243 1,194
Equity in undistributed earnings
of bank subsidiaries 8,501 6,640 5,098
------ ------ ------
NET INCOME $8,080 $6,883 $6,292
====== ====== ======
</TABLE>
64
<PAGE> 65
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------- --------- --------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,080 $ 6,883 $ 6,292
Equity in undistributed earnings
of bank subsidiaries (8,501) (6,640) (5,098)
Gain on sale of securities available-for-sale (84) (198)
Change in assets and liabilities:
Decrease (increase) in other assets 109 190 292
(Decrease) increase in accounts payable 230 (108) 155
------- ------ -------
Net cash provided by operating activities (82) 241 1,443
INVESTING ACTIVITIES
Cash invested in bank subsidiaries (1,007)
Proceeds from sales and maturities
of securities 1,154 1,248
------- ------ -------
Net cash (used in) provided
by investing activities (1,007) 1,154 1,248
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 3,342 1,647 1,628
Dividends paid (2,793) (1,948) (1,413)
------- ------- -------
Net cash provided by (used in)
financing activities 549 (301) 215
------- ------- -------
Net increase in cash and cash equivalents (540) 1,094 2,906
Cash and cash equivalents at beginning of year 5,563 4,469 1,563
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,023 $ 5,563 $ 4,469
======= ======= =======
Income tax refund $ 364 $ 34 $ 423
======= ======= =======
</TABLE>
65
<PAGE> 66
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS: The carrying amount of cash and cash
equivalents is a reasonable estimate of fair value.
SECURITIES: Fair values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
LOANS: For certain homogeneous categories of loans, such as some
residential mortgages and other consumer loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for
the same remaining maturities.
ACCRUED INCOME RECEIVABLE: The carrying amount of accrued income
receivable is a reasonable estimate of fair value.
DEPOSITS: The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining maturities.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS:
The carrying amount of securities sold under agreements to repurchase and other
borrowed funds is a reasonable estimate of fair value.
ACCRUED EXPENSES AND OTHER LIABILITIES: The carrying amount of accrued
expenses and other liabilities is a reasonable estimate of fair value.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN: The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair value of guarantees and letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
Unrecognized financial instrument accrual and deferral fees were not considered
material.
66
<PAGE> 67
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Corporation's financial instruments were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
------------------------ --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 90,692 $ 90,692 $ 64,958 $ 64,958
Securities 373,669 374,796 345,433 346,216
Loans 546,919 547,798 446,596 448,332
Less allowance for loan losses 5,669 5,669 5,659 5,659
---------- ---------- -------- --------
Net loans 541,250 542,129 440,937 442,673
Other 4,939 4,939 4,480 4,480
---------- ---------- -------- --------
TOTAL FINANCIAL ASSETS $1,010,550 $1,012,556 $855,808 $858,327
========== ========== ======== ========
Financial liabilities:
Deposits $ 819,302 $ 817,219 $693,594 $694,256
Securities sold under
agreements to repurchase and
other borrowed funds 122,809 122,721 105,898 105,866
Other 8,422 8,422 8,634 8,634
---------- ---------- -------- --------
TOTAL FINANCIAL LIABILITIES $ 950,533 $ 948,362 $808,126 $808,756
========== ========== ======== ========
</TABLE>
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. The disclosures also do not
include deposit base intangibles. Accordingly, the aggregate fair value amount
presented should not be interpreted as representing the underlying value of the
Corporation.
67
<PAGE> 68
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. BUSINESS COMBINATIONS
On September 11, 1997, the Corporation and United Bankshares, Inc.
(United), a bank holding company that had total assets of $2.7 billion at
December 31, 1997 and is headquartered in West Virginia, announced the signing
of a definitive agreement for a merger of the two companies. Under the
agreement, the Corporation will be merged into a separate subsidiary of United.
The business combination will be structured as a pooling of interests and will
provide a tax-free exchange of 1.7 shares of United Common stock for each
common share of the Corporation, as adjusted for a 100% stock split effected in
the form of a dividend which was declared by United and is payable on March 27,
1998 to United shareholders of record as of March 13, 1998. The proposed
merger is expected to close during the second quarter of 1998, subject to
regulatory approval.
On May 17, 1996, the Corporation merged with The Palmer National Bancorp,
Inc. (Palmer). Palmer was a bank holding company with banking facilities in
the District of Columbia and a mortgage banking office in Montgomery County,
Maryland. The business combination was accounted for using the pooling of
interests method. The Corporation issued 924,599 shares of its common stock to
the Palmer shareholders.
The operating results for the period from January 1, 1996 to May 17, 1996,
for each of the entities combined were as follows (in thousands, except for per
share data):
<TABLE>
<CAPTION>
GMBI PALMER
-------- -------
<S> <C> <C>
Net interest income $ 8,231 $1,654
Net income 2,149 70
Proceeds from the sale of common stock 925 1,651
Unrealized holding loss on
available-for-sale securities (3,205) (96)
Dividends declared 401 0
Dividends per share $ 0.10 0
</TABLE>
68
<PAGE> 69
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. BUSINESS COMBINATIONS (CONTINUED)
The net interest income and net income for the year ended December 31,
1995 for each of the entities and combined were as follows (in thousands):
<TABLE>
<CAPTION>
COMBINED
GMBI PALMER CORPORATION
---- ------ -----------
<S> <C> <C> <C>
Net interest income $19,837 $4,333 $24,170
Net income 5,423 869 6,292
</TABLE>
69
<PAGE> 70
GEORGE MASON BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE
DATA) (1)
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
DEC 31 SEP 30 JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31
------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest
income $17,250 $16,651 $15,875 $14,730 $14,905 $14,256 $12,498 $12,068
Interest
expense 8,611 8,563 8,015 7,372 7,754 7,060 5,871 5,579
------ ------- ------- ------- ------- ------- ------- -------
Net interest
income 8,639 8,088 7,860 7,358 7,151 7,196 6,627 6,489
(Recoveries)
provision for loan
losses (3) 11 8 4 0 0 0 181
Gains (losses) on
sales of trading
securities and
securities
available-for-sale 2 0 (1) 41 232 8 68 318
Other income 4,268 5,054 3,684 3,596 3,459 3,527 3,567 3,673
Other expense 9,841 10,013 8,600 8,354 7,855 8,107 7,973 8,244
Income Taxes 925 1,006 929 821 954 815 667 636
------ ------ ------ ------ ------ ------ ------ ------
$2,146 $2,112 $2,006 $1,816 $2,033 $1,809 $1,622 $1,419
====== ====== ====== ====== ====== ====== ====== ======
BASIC EARNINGS
PER SHARE $ 0.41 $ 0.41 $ 0.40 $ 0.36 $ 0.40 $ 0.36 $ 0.33 $ 0.30
====== ====== ====== ====== ====== ====== ====== ======
DILUTED
EARNINGS
PER SHARE $ 0.40 $ 0.40 $ 0.39 $ 0.35 $ 0.40 $ 0.35 $ 0.32 $ 0.28
====== ====== ====== ====== ====== ====== ====== ======
CASH DIVIDENDS
DECLARED
PER SHARE $ 0.14 $ 0.14 $ 0.14 $ 0.14 $ 0.13 $ 0.12 $ 0.11 $ 0.10
====== ====== ====== ====== ====== ====== ====== ======
WEIGHTED AVERAGE
SHARES OUTSTANDING
PLUS COMMON STOCK
EQUIVALENTS 5,351 5,266 5,172 5,147 5,133 5,099 5,082 5,029
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(1) On May 17, 1996, the Corporation merged with The Palmer National Bancorp,
Inc. Financial data for the quarter ended March 31, 1996 has been
restated to reflect the results of operations on a combined basis from the
earliest period presented.
70
<PAGE> 71
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Palmer National Bancorp, Inc.,
And Subsidiaries:
We have audited the consolidated balance sheets of The Palmer National
Bancorp, Inc. ("Bancorp," a Delaware corporation), and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995 (not presented separately herein). These
consolidated financial statements are the responsibility of Bancorp's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Palmer National
Bancorp, Inc., and Subsidiaries as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As explained in Note 1 of the notes to the financial statements, effective
January 1, 1993, Bancorp changed its method of accounting for income taxes and,
effective December 31, 1993, changed its method of accounting for securities.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.,
February 14, 1996, except
With respect to the matter
Discussed in Note 20, as to
Which the date is May 17, 1996
71
<PAGE> 72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name and age of each director or
executive officer; all other positions and offices, if any, now held with GMBS;
principal occupations during the last five years; the year in which such person
first became a director or executive officer of GMBS; and the number and
percentage of shares of GMBS Common Stock beneficially owned as of March 9,
1998.
<TABLE>
<CAPTION>
DIRECTORS AND DIRECTOR OR
EXECUTIVE OFFICERS, EXECUTIVE OFFICER NUMBER SHARES PRINCIPAL OCCUPATIONS
THEIR AGES & OF GMBS COMMON STOCK DURING PAST 5 YEARS AND
POSITIONS WITH GMBS SINCE (1) (% OF CLASS) (2) CERTAIN OTHER DIRECTORSHIPS
- ------------------- ----------------- ---------------- ---------------------------------
<S> <C> <C> <C>
Alan L. Box (46),................... 1993 24,929(3) Executive Vice President and
Director of GMBS and Director of GMB (0.47%) Chief Operating Officer,
American Tower Systems, Fairfax
William G. Buck (51),............... 1994 6,096(4) President & CEO, Buck &
Director of GMBS and Director of GMB (0.11%) Assoc., Inc., Real estate
brokerage, development &
property management,
Arlington
Randolph W. Church, Jr. (63),....... 1993 9,891(5) Attorney, Managing
Director of GMBS, Director of GMB (0.19%) Partner, Hunton &
and Director of GMMC Williams, Fairfax Office
Bernard H. Clineburg (49),.......... 1992 76,016(6) President and Chief
Director of GMBS, Director of GMB (1.43%) Executive Officer of GMBS,
and Chairman of GMMC President and Chief
Executive Officer of GMB
James J. Consagra, Jr. (37),........ 1994 32,170(7) Treasurer of GMBS and
Treasurer of GMBS and (0.60%) Executive Vice President
Executive Vice President of GMB of GMB
C. Barrie Cook, M.D. (73),.......... 1977 51,421(8) Chairman Fairfax Hospital
Chairman of GMBS, Director of GMB (0.97%) Department of Pathology;
and Director of GMMC Vice Chairman of the Board
of American Medical
Laboratories, Inc.,
Chantilly (Former Chairman)
Elizabeth C. Dahlin (66),........... 1987 4,391 Retired Vice President /
Director of GMBS, Director of GMB (0.08%) Executive Director, George
and Director of GMMC Mason University
Foundation, Inc., George
Mason University;
Director, George Mason
University Instructional
Foundation; Director,
George Mason University
Telecommunications Board,
Fairfax
Edward S. DeBolt (59),.............. 1986 31,080(9) Marketing Executive;
Director of GMBS and Director of GMB (0.59%) President of The DCM
Group, McLean
Kevin F. DeCoste (43),.............. 1993 40,308(10) Secretary of GMBS and
Secretary of GMBS and (0.75%) Executive Vice President
Executive Vice President of GMB of GMB
</TABLE>
72
<PAGE> 73
<TABLE>
<CAPTION>
DIRECTORS AND DIRECTOR OR
EXECUTIVE OFFICERS, EXECUTIVE OFFICER NUMBER SHARES PRINCIPAL OCCUPATIONS
THEIR AGES & OF GMBS COMMON STOCK DURING PAST 5 YEARS AND
POSITIONS WITH GMBS SINCE (1) (% OF CLASS) (2) CERTAIN OTHER DIRECTORSHIPS
- ------------------- ----------------- ---------------- -------------------------------
<S> <C> <C> <C>
Lawrence K. Doll (48),.............. 1987 2,449 Residential Land Developer, President
Vice Chairman of the Board of GMBS (0.05%) of The Lawrence Doll Company,
and Director of GMB Fairfax
William H. Gordon (51),............. 1992 9,687(11) President of William H.
Director of GMBS and Director of GMB (0.18%) Gordon Associates, Inc.,
Chantilly
Webb C. Hayes, IV (49),............. 1996 Executive Vice President
Director and Executive Vice 90,421(12) of GMBS; Former Chairman,
President of GMBS (1.70%) President and Chief
Executive Officer of GMB,
N.A.; Director of CERBCO,
Inc. and Instituform East,
Inc., Landover, MD
William A. Hazel (62),.............. 1991 35,583(13) Chairman of the Board of
Director of GMBS (0.67%) William A. Hazel, Inc.,
Chantilly
Barnard F. Jennings (72),........... 1989 Retired Chief Judge of the
Director of GMBS, Director of GMB 37,320(14) 19th Judicial Circuit
and Director of GMMC (0.70%) Court of Virginia; Former
partner in law firm of
Kelly, Jennings, Louk &
Farley
Edward H. Kaplan (59),.............. 1996 101,988(15) Self-employed, real estate
Director of GMBS (1.92%) investments, Washington,
D.C.
Arthur Kellar (75),................. 1977 59,236(16) Retired Chairman of the
Director of GMBS (1.12%) Board, EZ Communications,
Inc., Fairfax; Director,
American Radio Systems;
Director, Precision Tune
Paul E. Kyle (53),.................. 1993 12,007(17) President, King Wholesale,
Director of GMBS and Director of GMB (0.23%) Inc., Chantilly
John M. McMahon (57),............. 1996 140,603 Chairman of the Board of
Director of GMBS (2.65%) Miller & Long Co., Inc.,
Bethesda, MD
Beneficial ownership of GMBS Common
Stock by all Directors and
Executive Officers as a group (18 765,596
persons) (14.11%)
</TABLE>
- --------------------------------- (footnotes following table)
(1) For Directors whose terms of office show service since 1977 or 1979,
includes terms of office as a Director of GMB prior to formation of GMBS.
(2) In calculating the number of shares of GMBS Common Stock which are
beneficially owned (and thus the percentage of GMBS Common Stock
beneficially owned), a person is deemed to own GMBS Common Stock if that
person has the right to acquire beneficial ownership of GMBS Common Stock
within sixty (60) days through the exercise of any option, warrant or
right, or through the conversion of any security.
(3) Includes 12,327 shares held by Judy Box, Mr. Box's wife and 275 phantom
shares pursuant to the GMBS Directors' Stock Investment and Deferred Fees
Plan. Mr. Box is the son-in-law of Mr. Kellar.
(4) Includes 600 shares held as custodian for Mr. Buck's children and 2,215
phantom shares pursuant to the GMBS Directors' Stock Investment and
Deferred Fees Plan.
(5) Includes 8,225 shares owned jointly with Lucy C. Church, Mr. Church's
wife.
73
<PAGE> 74
(6) Includes 39,877 shares owned jointly with Cheryl L. Clineburg, Mr.
Clineburg's wife and 27,425 shares which may be acquired upon exercise of
options within 60 days.
(7) Includes 31,000 shares which may be acquired upon exercise of options
within 60 days.
(8) Includes 10,005 shares held jointly with Jean C. Cook, Dr. Cook's wife,
16,875 shares held by Mrs. Cook individually, 234 shares held by Fairfax
Pathology Assoc. Ltd. Retirement Account for the benefit of Dr. Cook and
2,508 phantom shares pursuant to the GMBS Directors' Stock Investment and
Deferred Fees Plan.
(9) Includes 1,079 shares held in an individual retirement arrangement by
Sharron DeBolt, Mr. DeBolt's wife.
(10) Includes 38,000 shares which may be acquired upon exercise of options
within 60 days.
(11) Includes 5,269 shares held jointly with Anne P. Gordon, Mr. Gordon's wife
and 2,932 phantom shares pursuant to the GMBS Directors' Stock Investment
and Deferred Fees Plan.
(12) Includes 2,250 shares held by Sara F. Hayes, Mr. Hayes' wife and 10,000
shares which may be acquired upon exercise of options within 60 days..
(13) Includes 1,017 phantom shares pursuant to the GMBS Directors' Stock
Investment and Deferred Fees Plan.
(14) Includes 5,427 shares held by Nancy Lee Jennings, Judge Jennings' wife and
1,376 phantom shares pursuant to the GMBS Directors' Stock Investment and
Deferred Fees Plan.
(15) Includes 241 phantom shares pursuant to the GMBS Directors' Stock
Investment and Deferred Fees Plan.
(16) Includes 19,855 shares held by Elizabeth Kellar, Mr. Kellar's wife. Mr.
Kellar is the father-in-law of Mr. Box.
(17) Includes 2,441 phantom shares pursuant to the GMBS Directors' Stock
Investment and Deferred Fees Plan.
74
<PAGE> 75
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table presents information concerning the annual and
long-term compensation of those individuals who were, at December 31, 1997,
GMBS' Chief Executive Officer and the three most highly compensated executive
officers other than the Chief Executive Officer whose salary and bonus for
fiscal 1997 exceeded $100,000 (collectively, the "Named Executive Officers").
This table presents compensation for services rendered in all capacities to
GMBS and its subsidiaries in 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATON
ANNUAL COMPENSATION AWARDS
---------------------- -------------
NAME AND PRINCIPAL STOCK OPTIONS ALL OTHER
OCCUPATION YEAR SALARY(1) BONUS(2) (#) (3) COMPENSATION
- ---------------------- ---- --------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Bernard H. Clineburg..
President and Chief 1997 $270,625 $240,440 30,000 $21,746(4)
Executive Officer of 1996 243,417 240,440 21,000 18,991
GMBS and GMB 1995 206,525 145,000 18,000 23,361
Kevin F. DeCoste
Secretary of GMBS and 1997 $143,583 $ 90,000 10,000 $14,358(5)
Executive Vice 1996 125,292 90,000 7,500 14,498
President of GMB 1995 112,917 52,000 0 15,106
James J. Consagra, Jr.
Treasurer of GMBS and 1997 $111,468 $ 90,000 10,000 $10,031(6)
Executive Vice 1996 89,031 90,000 7,500 9,537
President of GMB 1995 78,333 45,000 0 9,492
Webb C. Hayes, IV.....
Executive Vice 1997 $202,083 $ 90,000 10,000 $10,517(8)
President of GMBS 1996 192,750(7) $ 75,000 0 12,740
</TABLE>
(1) Does not include compensation paid to Mr. Clineburg for services as a
director of GMBS and its subsidiaries, totaling $14,750, $19,250 and
$21,300 for 1997, 1996, and 1995 respectively.
(2) Represents bonuses accrued for the year.
(3) Does not include rights pursuant to employee stock purchase plans which
are generally available to all salaried employees.
(4) Reflects employer contribution of $8,000 to GMBS' combined 401 (k) and
profit sharing plan and a $13,746 employer contribution to the executive
deferred compensation plan.
(5) Reflects employer contribution of $7,179 to GMBS' combined 401 (k) and
profit sharing plan and a $7,179 employer contribution to the executive
deferred compensation plan.
(6) Reflects employer contribution of $5,573 to GMBS' combined 401 (k) and
profit sharing plan and a $4,458 employer contribution to the executive
deferred compensation plan.
(7) Mr. Hayes employment with GMBS began at the consummation of the
acquisition by GMBS of Palmer National Bancorp, Inc. (May 17, 1996). The
information set forth in the table above, represents his compensation for
the entire year.
(8) Reflects employer contribution of $8,000 to GMBS' combined 401 (k) and
profit sharing plan and $2,517 paid in premiums on split-dollar and
key-man life insurance.
75
<PAGE> 76
OPTIONS. The following table provides information on grants of stock
options in 1997 to the Named Executive Officers. None of GMBS' benefit plans
permit the granting of stock appreciation rights.
OPTION GRANTS IN 1997 (2)
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANT DATE
OPTIONS GRANTED TO EXERCISE PRESENT
GRANTED EMPLOYEES PRICE PER EXPIRATION VALUE
(#) (1) IN 1997 SHARE ($) DATE ($) (3)
--------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Bernard H. Clineburg.. 30,000 23.31% $21.50 1/10/07 $108,600
Kevin F. DeCoste...... 10,000 7.77% $21.50 1/10/07 $ 36,200
James J. Consagra, Jr. 10,000 7.77% $21.50 1/10/07 $ 36,200
Webb C. Hayes, IV..... 10,000 7.77% $21.50 1/10/07 $ 36,200
</TABLE>
- ----------------------------
(1) These options were granted in January 1997 pursuant to the 1994 Employee
Stock Option Plan and become exercisable six months after the grant date.
(2) Does not include rights pursuant to employee stock purchase plans which
are generally available to all salaried employees.
(3) Option values are based on the Black-Scholes option pricing model which
includes assumptions for variables such as interest rates, stock price
volatility and future dividend yield. The assumptions used in the model
are as follows: expected volatility of .269, risk-free rate of return of
5.64%, dividend yield of 2.5%, and time to exercise of 2 years. Whether
the model assumptions used will prove to be accurate cannot be known at
the date of grant. The actual value that an executive officer may realize
from his options (assuming that they are exercised) will depend solely on
the gain in the stock price over the exercise price when the shares are
sold.
The following table presents, for the Named Executive Officers,
information regarding (i) their exercises of stock options in 1997 and (ii) the
number and value of all their unexercised stock options at December 31, 1997.
AGGREGATED OPTION EXERCISES
IN 1997 AND DECEMBER 31, 1997 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DEC. 31, 1997 (#) DECEMBER 31, 1997
SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ ($)(2)EXERCISABLE/
NAME ON EXERCISE (#) (1) UPON EXERCISE ($) UNEXERCISABLE (1) UNEXERCISABLE
- ---------------------- ------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Bernard H. Clineburg.. 109,300 $2,605,349 27,425 / 0 $ 542,407 / $0
Kevin F. DeCoste...... 7,500 $86,563 46,000 / 0 $ 1,121,855 / $0
James J. Consagra, Jr. 0 0 31,000 / 0 $ 707,810 / $0
Webb C. Hayes, IV..... 0 0 10,000 / 0 $177,500 / $0
</TABLE>
- ----------------------------
(1) Does not include rights pursuant to employee stock purchase plans, which
are generally available to all salaried employees.
(2) Based upon a market value of $39.25 per share, which was the closing price
on December 31, 1997.
76
<PAGE> 77
SUPPLEMENTAL RETIREMENT BENEFITS. Under a Supplemental Retirement
Agreement entered into on July 21, 1997, the Company is required to pay Mr.
Clineburg, monthly installment payments of $20,161, for 15 years following his
death or retirement at the age of 65. The agreement also provides for reduced
benefits for early retirement after age 55 and 10 years of service. A life
insurance policy on Mr. Clineburg's life is held in a trust with cash and face
values intended to satisfy the funding of the Company's payment obligation. In
the event of termination without cause or constructive termination (as defined
in the agreement), and provided that Mr. Clineburg refrains from employment
with a significant competitor (as defined in the agreement) for an 18 month
period, the present value of the Supplemental Retirement Benefits shall be paid
to Mr. Clineburg in the form of 180 equal monthly payments commencing at the
later of Mr. Clineburg's termination of employment or on attainment of age 55.
Under a Supplemental Retirement Agreement assumed by the Company in
connection with the merger with Palmer National Bancorp, Inc., the Company is
required to pay Mr. Hayes, monthly installment payments of $8,333, for 15 years
following his death or retirement at the age of 65. The agreement also
provides for reduced benefits for early retirement after age 55 and 10 years of
service. A life insurance policy on Mr. Hayes' life is held in a trust with
cash and face values intended to satisfy the funding of the Company's payment
obligation.
EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements
with Mr. Clineburg and Mr. Hayes.
Mr. Clineburg's agreement commenced on August 1, 1995, and is for an
initial term of three years. After the third year, the agreement automatically
will be extended from day-to-day, so that on any day the remaining term shall
be three years, provided that in no event shall the term extend more than ten
years from the commencement date. Under the agreement Mr. Clineburg serves as
President and Chief Executive Officer of GMBS and GMB, and was entitled to an
initial base salary of $216,500, subject to annual increases. (Mr. Clineburg's
current base salary is $285,000). Mr. Clineburg also receives directors' fees
including an annual retainer fee of $3,500. During the term of the agreement
Mr. Clineburg is eligible to receive bonuses and stock options under GMBS
incentive bonus plans, and is entitled to participate in any and all
employment benefit plans in effect for senior executives of GMBS. In the event
of termination without cause (as defined in the agreement), Mr. Clineburg will
continue to receive his base salary in effect on the date of the termination
for a period of 18 months. In the event of a terminating event occurring
subsequent to a change in control of GMBS (as defined in the agreement), Mr.
Clineburg will be entitled to receive an aggregate amount equal to 2.99 times
his average compensation (including salary, bonuses, directors' fees and
retainers) over the most recent five-year period. In the event of a
termination of his employment agreement, Mr. Clineburg will be required to keep
certain information confidential and may not compete with the Company for a
period of six months.
Mr. Hayes' agreement commenced on March 18, 1996, for an initial term of
one year. Thereafter, the agreement automatically extends from day-to-day, so
that on any day the remaining term shall be one year. Under the agreement Mr.
Hayes serves as an Executive Vice President of GMBS. During the term of the
agreement, Mr. Hayes is entitled to an initial base salary of $195,000 subject
to annual increases (Mr. Hayes current base salary is $205,000), and is
eligible to receive bonuses, stock options and other benefits under such
benefit plans in effect for senior executives. In the event of termination
without cause (as defined in the agreement), Mr. Hayes will continue to receive
his base salary and benefits for a period of one year and will be required to
keep certain information confidential and may not compete with the Company
for a period of 12 months.
77
<PAGE> 78
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The members
of the Human Resources and Compensation Committee during 1997 were Alan L. Box,
Randolph W. Church, Elizabeth C. Dahlin, Edward S. DeBolt, William A. Hazel,
John M. McMahon, and William G. Buck. None of these individuals is an executive
officer, employee or former employee of GMBS or any of its subsidiaries.
COMPENSATION OF DIRECTORS. Each director other than Messrs. Clineburg and
Hayes receives an annual retainer of $2,500. Mr. Clineburg receives an annual
retainer of $3,500. Each director of GMBS other than Mr. Hayes receives a fee
of $500 for attending each meeting of the Board of Directors. Members of
committees other than Messrs. Clineburg and Hayes receive $250 for attending
each meeting of a committee on which they serve.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 9, 1998, there was no person who owned of record or was known
by management to own beneficially more than 5% of the outstanding shares of
GMBS Common Stock, its only issued and outstanding class of voting securities
other than United, as a result of the Stock Option Agreement entered into with
GMBS in connection with the Merger Agreement. Under the Stock Option
Agreement, GMBS granted to United an option (the "Option") to purchase, under
certain circumstances, up to 1,018,000 shares of GMBS Common Stock at a price,
subject to certain adjustments, of $34.375 per share. The Stock Option
Agreement provides that in no event may the number of shares for which the
Option is exercisable exceed 19.9% of the issued and outstanding shares of
George Mason Common Stock.
Additional information called for by this Item as it relates to Security
ownership of management is included in tabular form under Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and officers of GMBS and certain corporations and firms
with which these individuals are associated are customers of GMB in the
ordinary course of business, or are indebted to GMB for loans of $60,000 or
more, and it is anticipated that they will continue to be customers of and
indebted to GMB in the future. All such loans, however, were made in the
ordinary course of business, did not involve more than normal risk of
collectibility or present other unfavorable features, and were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the same time for comparable GMB transactions with unaffiliated
persons, although directors were regularly allowed the lowest interest rate
available on personal loans.
In connection with his resignation as Chief Executive Officer and Chairman
of GMBS in 1994, the Company entered into an agreement with Marshall H. Groom
pursuant to which the Company agreed to pay him $85,000 annually, to provide
coverage for him and his spouse under the Company's group health insurance plan
and to maintain a term life insurance policy for Mr. Groom in the amount of
$408,000. Under the terms of this ten-year agreement, Mr. Groom has agreed to
provide consulting services from time to time as required in the discretion of
the Chief Executive Officer and Board of Directors.
Outside of normal customer relationships with GMB, none of the directors
or officers of GMBS or the corporations or firms with which such persons are
associated, currently maintains or has maintained within the past 12 months any
significant business with GMBS.
78
<PAGE> 79
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)(a) The following consolidated financial statements of the Company are
included herein under Item 8.
1. Report of Ernst & Young LLP, Independent Auditors.
2. Consolidated Balance Sheets for December 31, 1997 and 1996.
3. Consolidated Statements of Income for the years ended December
31, 1997, 1996, and 1995.
4. Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996, and 1995.
5. Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995.
6. Notes to Consolidated Financial Statements.
(a)(1)(b) The following report is included herein under Item 8.
1. Report of Arthur Andersen LLP, Independent Auditors on the
consolidated financial statements of The Palmer National Bancorp,
Inc., and Subsidiaries as of December 31, 1995 and 1994, and for
the years ended December 31, 1995, 1994 and 1993, not included
herein.
(a)(2) Schedules to the Consolidated Financial Statements required by Article
9 of Regulation S-X are not required under the related instructions or
are inapplicable, and therefore have been omitted.
(a)(3) The following exhibits required to be filed by Item 601 of Regulation
S-K are filed herewith:
(b) No reports on Form 8-K were required to be filed during the last
quarter of 1997.
<TABLE>
<S> <C>
Exhibit 2A Definitive Merger Agreement with The Palmer National Bancorp,
Inc. (incorporated herein by reference to Exhibit 10AF to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995).
Exhibit 2B Amendment No. I to Definitive Merger Agreement with The Palmer
National Bancorp, Inc. (incorporated herein by reference to
Exhibit 10AH to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
Exhibit 2C Amended and Restated Agreement and Plan of Merger, dated as of
December 10, 1997, by and among United Bankshares, Inc., George
Mason Bankshares, Inc. and George Mason Holding Company
(incorporated herein by reference to Exhibit 2.1 to the
Registration Statement on Form S-4 of United Bankshares, Inc.
(333-44993).
Exhibit 2D Plan of Merger of George Mason Bankshares, Inc. and George Mason
Holding Company (incorporated herein by reference to Exhibit 2.2
to the Registration Statement on Form S-4 of United Bankshares,
Inc. (333-44993).
</TABLE>
79
<PAGE> 80
<TABLE>
<S> <C>
Exhibit 3A Articles of Incorporation of George Mason Bankshares, Inc., as
amended (incorporated herein by reference to Exhibit 3A to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995).
Exhibit 3B Fifth Amended Bylaws of George Mason Bankshares, Inc., (dated
February 24, 1996 incorporated herein by reference to Exhibit 3B
to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
Exhibit 10A Lease for the Vienna branch site (incorporated herein by
reference to Exhibit 10A to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
Exhibit 10B Lease for the McLean branch site site (incorporated herein by
reference to Exhibit 10B to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
Exhibit 10C Restated and Amended Deferred Compensation Agreements of Mr.
Groom and Mr. Wimer dated as of May 1, 1984 and August 1, 1984,
respectively (incorporated herein by reference to Exhibit 10C to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
Exhibit 10D Land Lease for GMB, Lease and Addendum to Lease for George Mason
University branch (incorporated herein by reference to Exhibit
10D to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995).
Exhibit 10E Assignment and Contract of Sale for purchase of Chantilly,
Virginia proposed branch site and Contract of Sale for parking
area site (incorporated herein by reference to Exhibit 10E to the
Company's Annual Report on Form 10-K for the year ended December
31, 1995).
Exhibit 10F Lease for Woodburn Avenue branch site (incorporated herein by
reference to Exhibit 10F to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
Exhibit 10G reserved
Exhibit 10H 1986 Incentive Stock Option Plan (incorporated herein by
reference to Exhibit 10H to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
Exhibit 10I 1986 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 10I to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
Exhibit 10J 1992 Employee Stock Option Plan (incorporated herein by reference
to Exhibit 28.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1992).
Exhibit 10K 1992 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 28.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1992).
Exhibit 10L Purchase of Chantilly Operations Center (incorporated herein by
reference to Exhibit 10L to the Company's Annual Report on Form
10-K for the year ended December 31, 1992).
</TABLE>
81
<PAGE> 81
<TABLE>
<S> <C>
Exhibit 10M Purchase of Tysons branch site (incorporated herein by reference
to Exhibit 10M to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992).
Exhibit 10N Lease for Reston branch site (incorporated herein by reference to
Exhibit 10N to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992).
Exhibit 10O 1993 Employee Stock Option Plan (incorporated herein by reference
to Exhibit 10.15 to the Company's Registration Statement on Form
S-2, No. 33-61546).
Exhibit 10P Lease for Arlington branch site (incorporated herein by reference
to Exhibit 10P to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996).
Exhibit 10Q Lease for Ballston branch site (incorporated herein by reference
to Exhibit 10Q to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
Exhibit 10R Lease for Prince William branch site (incorporated herein by
reference to Exhibit 10R to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
Exhibit 10S Lease for Loudoun County branch site (incorporated herein by
reference to Exhibit 10S to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
Exhibit 10T Purchase and construction of Fair Lakes branch site (incorporated
herein by reference to Exhibit 10T to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994).
Exhibit 10U Lease for Fair Oaks Mall ATM site (incorporated herein by
reference to Exhibit 10U to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
Exhibit 10V Consulting agreement - Marshall H. Groom (incorporated herein by
reference to Exhibit 10V to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
Exhibit 10W Consulting agreement -Charles Wimer (incorporated herein by
reference to Exhibit 10W to the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
Exhibit 10X Lease for Daly Drive branch site (incorporated herein by
reference to Exhibit 10X to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995).
Exhibit 10Y Lease for Lee Harrison branch site (incorporated herein by
reference to Exhibit 10Y to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995).
Exhibit 10Z Lease for South Arlington branch site (incorporated herein by
reference to Exhibit 10Z to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
Exhibit 10AA Lease for Fairfax Hospital ATM site (incorporated herein by
reference to Exhibit 10AA to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
</TABLE>
81
<PAGE> 82
<TABLE>
<S> <C>
Exhibit 10AB Lease for Manassas Mortgage Banking Office (incorporated herein
by reference to Exhibit 10AB to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995),
Exhibit 10AC Lease for Virginia Beach Mortgage Banking Office (incorporated
herein by reference to Exhibit 10AC to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995).
Exhibit 10AD Lease for Woodbridge Mortgage Banking Office (incorporated herein
by reference to Exhibit 10AD to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
Exhibit 10AE Lease for GMMC corporate headquarters (incorporated herein by
reference to Exhibit 10AE to the Company's Annual Report on Form
10-K for the year ended December 31, 1995).
Exhibit 10AF Employment Contract-Bernard H. Clineburg (incorporated herein by
reference to Exhibit 10AE to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995).
Exhibit 10AG (reserved)
Exhibit 10AH (reserved)
Exhibit 10AI Lease for Leesburg branch site (incorporated herein by reference
to Exhibit 10AI to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996).
Exhibit 10AJ Lease for 1667 K Street branch site (incorporated herein by
reference to Exhibit 10AJ to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
Exhibit 10AK Lease for 1225 Eye Street branch site (incorporated herein by
reference to Exhibit 10AK to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
Exhibit 10AL Lease for 4900 Massachusetts Avenue branch site (incorporated
herein by reference to Exhibit 10AL to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
Exhibit 10AN Lease for Rockville, Maryland Mortgage Banking Office
(incorporated herein by reference to Exhibit 10AN to the
Company's Annual Report on Form 10-K for the year ended December
31, 1996).
Exhibit 10AO Lease for Bethesda, Maryland branch site (incorporated herein by
reference to Exhibit 10AO to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
Exhibit 10AP Lease for Rockville, Maryland branch site (incorporated herein by
reference to Exhibit 10AP to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
</TABLE>
82
<PAGE> 83
<TABLE>
<S> <C>
Exhibit 10AQ Employment Contract - Webb C. Hayes IV (incorporated herein by
reference to Exhibit 10AQ to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
Exhibit 10AR 1994 Employee Stock Option Plan (incorporated herein by reference
to Exhibit 10AR to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996).
Exhibit 10AS Supplemental Retirement Benefits Agreement for Bernard H.
Clineburg (incorporated herein by reference to Exhibit 10AS to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
Exhibit 10AT Stock Option Agreement, dated as of September 11, 1997, between
United Bankshares, Inc. and GMBS (incorporated herein by
reference to Exhibit (c) 2.2 to the Company's Form 8-K filed on
September 17, 1997.
Exhibit 11 Statement re: Computation of Per Share Earnings.
Exhibit 21 Subsidiaries of the Registrant.
Exhibit 23 Consent of Ernst & Young LLP
Exhibit 27 Financial Data Schedule
</TABLE>
83
<PAGE> 84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly authorized this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GEORGE MASON BANKSHARES, INC.
Date: March 24, 1998 By: /s/ BERNARD H. CLINEBURG
------------------------------------
Bernard H. Clineburg
President and Chief Executive Officer
84
<PAGE> 85
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
---------------------------- ----------------------------- --------------
<S> <C> <C>
/s/ BERNARD H. CLINEBURG Director, President and March 24, 1998
---------------------------- Chief Executive Officer
Bernard H. Clineburg (Principal Executive Officer)
/s/ ALAN L. BOX Director March 24, 1998
----------------------------
Alan L. Box
/s/ RANDOLPH W. CHURCH, JR. Director March 24, 1998
----------------------------
Randolph W. Church, Jr.
/s/ C. BARRIE COOK, M.D. Director March 24, 1998
----------------------------
C. Barrie Cook, M.D.
/s/ ELIZABETH CARLSON DAHLIN Director March 24, 1998
-----------------------------
Elizabeth Carlson Dahlin
/s/ EDWARD S. DeBOLT Director March 24, 1998
-----------------------------
Edward S. DeBolt
/s/ WILLIAM H. GORDON Director March 24, 1998
-----------------------------
William H. Gordon
/s/ WEBB C. HAYES IV Director March 24, 1998
-----------------------------
Webb C. Hayes IV
/s/ WILLIAM A. HAZEL Director March 24, 1998
-----------------------------
William A. Hazel
/s/ BARNARD F. JENNINGS Director March 24, 1998
-----------------------------
Barnard F. Jennings
/s/ EDWARD H. KAPLAN Director March 24, 1998
-----------------------------
Edward H. Kaplan
/s/ PAUL E. KYLE Director March 24, 1998
-----------------------------
Paul E. Kyle
/s/ JAMES J. CONSAGRA, JR. Treasurer March 24, 1998
-----------------------------
James J. Consagra, Jr. (Principal Financial
and Accounting Officer)
</TABLE>
Copies of the 1997 annual report filed with the Securities and Exchange
Commission on Form 10-K and supplemental quarterly information may be obtained
by writing: George Mason Bankshares, Inc., Attn: Treasurer, 4221 Walney Road,
Chantilly, Virginia 20151.
85
<PAGE> 1
EXHIBIT 11. EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE:
Net income...................................... $8,080 $6,883 $6,292
Weighted average common shares outstanding...... 5,105 4,980 4,833
BASIC NET INCOME PER SHARE...................... $ 1.58 $ 1.38 $ 1.30
====== ====== ======
DILUTED NET INCOME PER SHARE:
Net income...................................... $8,080 $6,883 $6,292
Stock and stock equivalents (average shares):
Weighted average common shares outstanding..... 5,105 4,980 4,833
Stock options (a).............................. 142 108 71
------ ------ ------
Total stock and stock equivalents............... 5,247 5,088 4,904
DILUTED NET INCOME PER SHARE.................... $ 1.54 $ 1.35 $ 1.28
====== ====== ======
</TABLE>
- ----------------------------
(a) Shares were assumed to be repurchased at the average stock prices for the
years ended December 31, 1997, 1996 and 1995.
86
<PAGE> 1
EXHIBIT 21. SUBSIDIARIES OF THE REGISTRANT.
George Mason Bank
George Mason Mortgage Company (subsidiary of George Mason Bank)
<PAGE> 1
EXHIBIT 23. CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Number 33-71428 on Form S-8 dated November 9, 1993 of our report dated January
22, 1998, with respect to the consolidated financial statements of George Mason
Bankshares, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
/s/ ERNST & YOUNG LLP
Washington, D.C.
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 35,640
<INT-BEARING-DEPOSITS> 642,499
<FED-FUNDS-SOLD> 55,052
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 321,652
<INVESTMENTS-CARRYING> 52,017
<INVESTMENTS-MARKET> 53,144
<LOANS> 456,308
<ALLOWANCE> (5,669)
<TOTAL-ASSETS> 1,026,569
<DEPOSITS> 819,302
<SHORT-TERM> 122,809
<LIABILITIES-OTHER> 7,694
<LONG-TERM> 0
<COMMON> 5,840
0
0
<OTHER-SE> 70,196
<TOTAL-LIABILITIES-AND-EQUITY> 1,026,569
<INTEREST-LOAN> 40,143
<INTEREST-INVEST> 23,523
<INTEREST-OTHER> 840
<INTEREST-TOTAL> 64,506
<INTEREST-DEPOSIT> 28,282
<INTEREST-EXPENSE> 32,561
<INTEREST-INCOME-NET> 31,945
<LOAN-LOSSES> 20
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 36,808
<INCOME-PRETAX> 11,761
<INCOME-PRE-EXTRAORDINARY> 8,080
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,080
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 7.63
<LOANS-NON> 1,046
<LOANS-PAST> 839
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,659
<CHARGE-OFFS> 259
<RECOVERIES> 249
<ALLOWANCE-CLOSE> 5,669
<ALLOWANCE-DOMESTIC> 5,669
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 403
</TABLE>
