Exhibit 99(a)
Consolidated Financial Statements
George Mason Bankshares, Inc.
PERIOD ENDED DECEMBER 31, 1997
WITH REPORT OF INDEPENDENT AUDITORS
George Mason Bankshares, Inc.
Consolidated Financial Statements
Period ended December 31, 1997
CONTENTS
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
34
Report of 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.
/s/ Ernst & Young
_________________
Washington, D.C.
January 22, 1998
35
George Mason Bankshares, Inc.
Consolidated Balance Sheets
December 31
1997 1996
-------------------------
(In thousands, except per share data)
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
=========================
See notes to consolidated financial statements.
36
George Mason Bankshares, Inc.
Consolidated Statements of Income
Year Ended December 31
1997 1996 1995
------------------------------------------
(In thousands, except per share data)
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
==========================================
See notes to consolidated financial statements.
37
George Mason Bankshares, Inc.
Consolidated Statements of Shareholders' Equity
Common Treasury Unrealized
Stock Stock and Gain (Loss)
Shares Common Retained Unearned on
Outstanding Stock Surplus Earnings ESOP Securities Total
-----------------------------------------------------------------------------------------
(In thousands)
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 stock (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
=========================================================================================
See notes to consolidated financial statements.
38
George Mason Bankshares, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31
1997 1996 1995
------------- --------------- --------------
(IN THOUSANDS)
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
============= ============== =============
See Notes to Consolidated Financial Statements.
39
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
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
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
1. 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 Certain Provisions of FASB No. 125"
(SFAS 127), was issued. SFAS 127 defers until after
42
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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
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
GROSS Gross
AMORTIZED Unrealized Unrealized Fair
COST Gains Losses Value
---------------------------------------------------------------------
(IN THOUSANDS)
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
====================================================================
44
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
3. SECURITIES (CONTINUED)
SECURITIES HELD-TO-MATURITY
GROSS Gross
AMORTIZED Unrealized Unrealized Fair
COST Gains Losses Value
----------------------------------------------------------------
(IN THOUSANDS)
December 31, 1997:
U.S. government agencies $ 483 $ 19 $ 502
and corporations
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
================================================================
45
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:
SECURITIES AVAILABLE-FOR-SALE AMORTIZED Estimated
COST Fair Value
-------------------------------
(IN THOUSANDS)
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
===============================
Securities Held-to-Maturity AMORTIZED Estimated
COST Fair Value
-------------------------------
(IN THOUSANDS)
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
===============================
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
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
4. LOANS
The composition of loans was as follows:
DECEMBER 31
1997 1996
-------------------
(IN THOUSANDS)
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
====================
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:
DECEMBER 31
1997 1996
-----------------
(IN THOUSANDS)
Nonaccruing loans $1,046 $1,487
Restructured loans 95
-----------------
TOTAL $1,046 $1,582
=================
Allocation of general reserve to nonaccruing loans $ 158 $ 223
=================
The average nonaccruing loan balances and interest income earned with respect to
nonaccruing and restructured loans were as follows:
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------------
(IN THOUSANDS)
Average nonaccruing loans $1,204 $2,067 $2,342
Income anticipated under original loan agreements 189 194 563
Income recorded 80 160 297
47
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:
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------------------
(IN THOUSANDS)
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
==========================
6. BANK PREMISES AND EQUIPMENT
The major classes of bank premises and equipment and accumulated depreciation
and amortization were as follows:
DECEMBER 31
1997 1996
------------------
(IN THOUSANDS)
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
==================
48
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):
1998 $313,213
1999 40,782
2000 19,389
2001 15,072
2002 9,840
--------
Total $398,296
========
8. INDEBTEDNESS
The Corporation's indebtedness was as follows:
DECEMBER 31
1997 1996 1995
-----------------------------
(IN THOUSANDS)
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
=============================
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
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:
YEAR ENDED DECEMBER 31
---------------------
1997 1996
---------------------
(DOLLARS IN THOUSANDS)
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
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
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
9. INCOME TAXES
The Corporation's deferred tax assets and liabilities were as follows:
DECEMBER 31
1997 1996
----------------- ------------------
(IN THOUSANDS)
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
================= ==================
Income taxes were composed of the following:
YEAR ENDED DECEMBER 31
1997 1996 1995
----------------- ------------------ -----------------
(IN THOUSANDS)
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
================= ================== =================
Current income taxes are primarily related to federal income taxes.
51
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:
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------- --------------- --------------
(IN THOUSANDS)
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
=============== =============== ==============
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
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):
1998 $2,297
1999 1,497
2000 1,409
2001 1,314
2002 1,041
Thereafter 1,839
-----------------
Total $9,397
=================
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:
YEAR ENDED DECEMBER 31
1997 1996
------------------ -----------------
(IN THOUSANDS)
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
================== =================
53
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.
54
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
13. PROFIT-SHARING PLANS (CONTINUED)
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.
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
55
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
14. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
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:
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------- ---------------- -------------
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
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
56
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
14. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
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:
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------ ----------------- ------------------
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
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:
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
----------- -------------- ------------ ------------- ------------ -------------
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
57
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:
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
----------- -------------- ------------ ------------- ------------ -------------
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
58
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):
1997 1996 1995
------------------ ----------------- -----------------
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
================== ================= =================
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
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:
Well
Capitalized
DECEMBER 31 Regulatory
1997 1996 Minimums
---------------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
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%
60
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:
Well
Capitalized
DECEMBER 31 Regulatory
1997 1996 Minimums
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
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%
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
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:
December 31
1997 1996
------------------ -----------------
(IN THOUSANDS)
Commitments to extend credit $192,776 $197,030
Standby letters of credit 14,456 18,994
------------------ -----------------
TOTAL $207,232 $216,024
================== =================
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
62
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
18. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK (CONTINUED)
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.
19. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY
BALANCE SHEETS
DECEMBER 31
1997 1996
------------------ ----------------
(IN THOUSANDS)
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
================== ================
63
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
19. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------- -------------- ---------------
(IN THOUSANDS)
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
=============== ============== ===============
64
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
19. CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY (CONTINUED)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1997 1996 1995
--------------- ---------------- ---------------
(IN THOUSANDS)
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
=============== ================ ===============
65
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
66
George Mason Bankshares, Inc.
Notes to Consolidated Financial Statements (continued)
20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
The estimated fair values of the Corporation's financial instruments were as
follows:
DECEMBER 31
1997 1996
-------------------------------- --------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- ---------------- --------------
(IN THOUSANDS)
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
================ ================ ================ ================
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
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):
GMBI Palmer
------------------- ---------------------
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
68
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):
Combined
GMBI Palmer Corporation
--------------- ---------------- --------------
Net interest income $19,837 $4,333 $24,170
Net income 5,423 869 6,292
69
George Mason Bankshares, Inc.
Selected Financial Information (continued)
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE
DATA) (1)
1997 1996
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
----------------------- ----------- ----------- ----------- ----------- ----------- -----------
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
----------------------------------------------- -----------------------------------------------
NET INCOME $ 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
======================= =========== =========== =========== =========== =========== ===========
(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