================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended December 31, 2000 ----------------- OR [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From To ---------------- ---------------- Commission file number 333-38673 RB ASSET, INC. -------------- (Exact name of registrant as specified in its charter) Delaware 13-5041680 ------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 645 Fifth Avenue Eight Floor, New York, New York 10022 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Company's telephone number, including area code: (212) 848-0201 --------------- Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- The number of shares of the Registrant's Common Stock, $.01 par value, outstanding as of February 14, 2001 was 7,100,000. The number of shares of the Registrant's 15% Non-cumulative Perpetual Preferred Stock, Series A, $.01 par value, outstanding as of February 14, 2001 was 937,277. ================================================================================ RB ASSET, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 TABLE OF CONTENTS

INDEX PAGE ---- ~~INDEX~~ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition as of ~~September~~December 3031, 2000 (unaudited) and June 30, 2000........................................... 31 Consolidated Statements of Operations for the three and six months ended ~~September~~December 3031, 2000 and 1999 (unaudited).................................. 42 Consolidated Statements of Changes in Stockholders' Equity for the ~~three~~six months ended ~~September~~December 3031, 2000 and 1999 (unaudited) .................... 53 Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~September~~December 3031, 2000 and 1999 (unaudited)........................................... 64 Notes to the Consolidated Financial Statements ......................... 86 Item 2. Management's Discussion and Analysis of Financial Condition and the Results of Operations .............................................. 1412 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 1918 PART II. OTHER INFORMATION Item 1. Legal Proceedings ........................................................... 2019 Item 2. Changes in Securities ....................................................... 2120 Item 3. Defaults Upon Senior Securities ............................................. 2120 Item 4. ~~Submissions~~Submission of Matters to a Vote of Securities Holders ....................... 2120 Item 5. Other Information ........................................................... 2120 Item 6. Exhibits and Reports on Form 8-K ............................................ 2120 SIGNATURE....... ................................................................................... 2221

-i- PART I. FINANCIAL INFORMATION Item 1. Financial Statements RB ASSET, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2000 and June 30, 2000 (dollars in thousands)

Assets (Unaudited) ~~September~~December 3031, June 30, 2000 2000 ------------ -------- Real estate assets: Real estate held for investment, net of accumulated depreciation of $6,~~146~~517 and $ 5,550, respectively $ ~~101~~104,~~249~~080 $ 99,321 Real estate held for disposal 52,~~876~~040 2,040 Allowance for fair market value reserve under SFAS-121 (40) (40) ----------------- ----------------- Total real estate held for disposal, net 52,~~836~~000 2,000 Investments in joint ventures 1,454 1,454 ----------------- ----------------- Total real estate assets ~~108~~107,~~539~~534 102,775 Loans receivable: Secured by real estate 32,~~328~~288 32,339 Commercial and consumer 73,~~247~~967 7,247 Allowance for possible credit losses (139,~~341~~694) (13,341) ----------------- ----------------- Total loans receivable, net 26,~~234~~561 26,245 Cash, due from banks and cash equivalents 3432,~~367~~715 33,666 Cash, due from banks - restricted 7,500 7,500 Investment securities available for sale 1,~~316~~260 1,170 Other assets 2,~~414~~086 2,425 ----------------- ----------------- Total Assets $ ~~180~~177,~~370~~656 $ 173,781 ================= ================= Liabilities and Stockholders' Equity Increasing Rate Junior Subordinated Notes due 2006 $ 13,~~095~~158 $ 12,527 Borrowed funds 5751,~~517~~667 52,033 Other liabilities 1213,~~828~~459 12,379 ----------------- ----------------- Total Liabilities 8378,~~440~~284 76,939 ----------------- ----------------- Commitments and contingencies (Note 3) Stockholders' equity: 15% non-cumulative preferred stock, ~~Series~~series A par value $1, liquidation value $25 (1,400,000 shares authorized, 937,~~777~~277 issued and outstanding at ~~September~~December 3031, 2000 and 937,777 937 938 issued and outstanding at June 30, 2000) ~~938 938~~ Common stock par value $1 (30,000,000 shares authorized, 7,100,000 shares issued and outstanding at ~~September~~December 3031, 2000 and June 30, 2000) 7,100 7,100 Additional paid in capital 100,~~439~~429 100,439 Accumulated deficit (108,~~565~~056) (10,507) Securities valuation account (~~982~~1,038) (1,128) ----------------- ----------------- Total Stockholders' Equity 9699,~~930~~372 96,842 ----------------- ----------------- Total Liabilities and Stockholders' Equity $ ~~180~~177,~~370~~656 $ 173,781 ================= ================= ~~See notes to Consolidated Financial Statements~~

See notes to Consolidated Financial Statements 1 RB ASSET, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Three and Six Months Ended December 31, 2000 and 1999 (dollars in thousands, except per share data) (Unaudited)

Three months ended ~~September~~Six 30months ended December 31, December 31, -------------------------------- -------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Revenue: Rental revenue and operations: Rental income and other property revenue $ 4,~~020~~419 $ 43,~~031~~763 $ 8,439 $ 7,794 Property operating and maintenance expense (23,~~572~~081) (2,~~714~~784) (5,653) (5,499) Depreciation - real estate held for investment (~~604~~577) (~~571~~569) (1,181) (1,140) --------------- --------------- --------------- --------------- Net rental operations ~~844~~761 ~~746~~410 1,605 1,155 Net gain on sale of real estate ~~838~~3,141 -994 3,979 963 Interest income: Loans receivable ~~334~~403 ~~569~~237 737 807 Money market investments and other ~~194~~188 ~~172~~174 382 346 --------------- ----------------- ~~Total interest income 528 741~~ --------------- --------------- Total interest income 591 411 1,119 1,153 Gain on satisfaction of loan asset -- 429 -- 429 Total revenues 4,493 2,~~210~~244 16,~~487~~703 3,700 --------------- --------------- --------------- --------------- Expenses: Interest expense: Increasing Rate Junior Subordinated Notes due 2006 ~~318~~321 ~~288~~291 639 579 Borrowed funds ~~686~~526 ~~659~~531 1,212 1,204 Other 2 3 2210 --------------- --------------- --------------- --------------- Total interest expense 847 824 1,~~007~~854 ~~969~~1,793 Other expenses: Salaries and employee benefits 5964 5147 123 99 Legal and professional fees ~~299~~361 ~~202~~340 660 542 Management fees ~~591~~595 578 1,186 1,156 Other 86(8) ~~177~~90 78 236 --------------- --------------- --------------- --------------- Total other expenses 1,~~035~~012 1,~~008~~055 2,047 2,033 Total expenses 21,~~042~~859 1,~~977~~879 3,901 3,826 --------------- --------------- --------------- --------------- Income (~~Loss~~loss) ~~income~~ before provision for income taxes ~~168~~2,634 365 2,802 (~~490~~126) Provision for income taxes 124 182 350 363 --------------- --------------- --------------- ~~Provision~~--------------- ~~for~~Net income ~~taxes 226 182 Net~~ (loss) ~~income~~2,510 ~~(58)~~183 2,452 (~~672~~489) Dividends declared on preferred stock -- -- -- -- --------------- --------------- --------------- --------------- Net income (loss) ~~income~~ applicable to common stock $ ~~(58)~~2,510 $ 183 $ 2,452 $ (~~672~~489) =============== =============== =============== =============== Basic and diluted income (loss) ~~income~~ per common share $ (0.~~01)~~35 $ 0.03 $ 0.35 $ (0.0907) =============== =============== =============== ===============

See notes to Consolidated Financial Statements 2 RB ASSET, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Six months ended December 31, 2000 and 1999 (dollars in thousands) (Unaudited)

Series A Non- cumulative Perpetual Additional Retained Accumulated Total Preferred Common Paid-in Earnings Comprehensive Stockholders' Stock Stock Capital (Deficit) Income(Loss) Equity ------------ ---------- ------------- --------------- --------------- ---- ------------- Balances at June 30, 1999 $ 938 $ 7,100 $ 100,439 $ (10,956) $ (1,004) $ 96,517 Net loss for the ~~three~~six months ended ~~September~~December 3031, 1999 -- -- -- (~~672~~489) -- (~~672~~489) Preferred stock dividends payable -- -- -- -- -- -- Change in comprehensive income resulting from changes in unrealized loss on securities available-for-sale -- -- -- -- (~~147~~169) (~~147~~169) ------------ ---------- ------------- --------------- ---------------- --------------- Balances at ~~September~~December 3031, 1999 $ 938 $ 7,100 $ 100,439 $ (11,~~628~~445) $ (1,~~151~~173) $ 95,~~698~~859 ============ ========== ============= =============== ================ =============== Balances at June 30, 2000 $ 938 $ 7,100 $ 100,439 $ (10,507) $ (1,128) $ 96,842 Net ~~loss~~income for the ~~three~~six months ended ~~September~~December 3031, 2000 -- -- -- ~~(58)~~2,452 -- ~~(58)~~2,452 ~~Preferred~~Reduction ~~stock~~in ~~dividends~~Stockholders' ~~payable~~Equity -(1) - - -(11) -- -- (12) resulting from Preferred Stock Exchange Change in comprehensive income resulting from changes in unrealized loss on securities available-for-sale -- -- -- -- ~~146~~90 ~~146~~90 ------------ ---------- ------------- --------------- ---------------- --------------- Balances at ~~September~~December 3031, 2000 $ ~~938~~937 $ 7,100 $ 100,~~439~~428 $ (108,~~565~~055) $ (~~982~~1,038) $ 9699,~~930~~372 ============ ========== ============= =============== ================ ===============

See notes to Consolidated Financial Statements 3 RB ASSET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended December 31, 2000 and 1999 (dollars in thousands) (Unaudited)

~~Three~~Six months ended ~~September~~December 3031, --------------------------------- 2000 1999 ---------------- --------------- Operating Activities: Cash flows provided by / (used in) Operating Activities: Net ~~loss~~income $/ (58loss) $ 2,452 $ (~~672~~489) Adjustments to reconcile net ~~loss~~ income (loss) to cash provided by/ (used in) operating activities: Net gain on sale of real estate assets (~~838~~3,979) (963) Net gain on satisfaction of loan assets -- (429) Depreciation and amortization ~~604~~1,181 ~~571~~1,140 Amortization of capitalized issuance costs and accretion of issuance discount - Increasing Rate Junior Subordinated Notes due 2006 4998 4082 Change in operating assets and liabilities: Net (increase) / decrease in accrued interest receivable (~~110~~2) 85186 ~~Net~~Increase ~~increase~~ in accrued interest payable, net of accrued interest payable capitalized as additional principal - Increasing Rate Junior Subordinated Notes due 2006 ~~254~~571 ~~166~~408 Net increase / (decrease) in accrued income taxes ~~169~~114 (~~180~~281) Net increase / (decrease) in accrued expenses and other liabilities ~~537~~837 (~~179~~944) Net decrease ~~(increase)~~ in prepaid expenses and other assets ~~121~~341 ~~(659)~~886 ~~Net~~Cash ~~cash~~effect ~~provided~~of byincreases in allowance for possible credit losses -- 76 --------------- --------------- Net cash (used in) / provided by operating activities ~~728~~1,613 ~~828~~(328) ---------------- --------------- Investing Activities: Cash flows provided by Investing Activities: Net repayment of loans secured by real estate, net 1151 23,~~279~~310 Net (origination)/repayment of commercial and consumer loans -(367) 8509 Proceeds from partnership distributions - investments in joint ventures -- 2524 Proceeds related to sales of real estate held ~~for~~9,894 ~~sale~~ 1,~~048~~472 - Additional fundings on real estate held (611,~~570~~776) (~~314~~1,063) --------------- --------------- Net cash provided by / (used in) ~~provided by~~ investing activities (52,~~511~~198) 2224,~~998~~252 ---------------- ---------------

(Continued on next page) See notes to Consolidated Financial Statements 4 RB ASSET, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended December 31, 2000 (dollars in thousands) (Unaudited) (Continued from previous page)

~~Three~~Six months ended ~~September~~December 3031, -------------------------------- 2000 1999 ---------------- ---------------- Financing Activities: Cash flows used in Financing Activities: ~~Decrease~~Increase in restricted cash -- (23,~~059~~497) Proceeds from borrowed funds 68,~~179~~719 -- Repayment of borrowed funds (~~695~~9,085) -- ---------------- ---------------- Net cash ~~provided by~~ (used in)/ provided by financing activities ~~5,484~~(366) (23,~~059~~497) ---------------- ---------------- Net ~~increase~~(decrease)/increase in cash, due from banks and cash equivalents ~~701~~ (~~889~~951) 427 Cash, due from banks and cash equivalents - beginning of period 33,666 14,780 ---------------- ---------------- Cash, due from banks and cash equivalents - end of period $ 3432,~~367~~715 $ 1315,~~891~~207 ================ ================ Supplemental Disclosure of Cash Flow Information Cash paid for: Interest $ ~~660~~1,228 $ 1,~~251~~792 Federal, state and local income and franchise taxes ~~138~~364 ~~387~~670 Supplemental Disclosure of Non-cash Transactions Accrued interest capitalized as additional principal - Increasing Rate 7 Junior Subordinated Notes due 2006 $ 518 $ 48487

See notes to Consolidated Financial Statements 5 RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 (dollars in thousands) (Unaudited) 1. Organization and Formation of the Company RB Asset, Inc. (the "Company") is a Delaware corporation whose principal business is the management of its real estate assets, mortgage loans and investment securities, under a business plan intended to maximize shareholder value. As a result of the completion of reorganization steps (the "Reorganization") in the fiscal year ended June 30, 1998, the Company succeeded to the assets, liabilities and business of River Bank America ("River Bank" or the "Predecessor Bank"). Unless the context otherwise requires, references to the business, assets and liabilities of the Company prior to May 22, 1998 include the business, assets and liabilities of the Predecessor Bank. This report is for the six months ended December 31, 2000. On May 22, 1998, under a plan that was approved by its stockholders, River Bank completed its Reorganization into a Delaware corporation named RB Asset, Inc. Prior to the Reorganization, River Bank was a New York State chartered stock savings bank and was regulated by the New York State Banking Department ("the Banking Department" or the "NYSBD") and, until December 31, 1997, the Federal Deposit Insurance Corporation (the "FDIC"). In connection with the Reorganization, on June 23, 1998, the Predecessor Bank was dissolved and its legal existence terminated. Upon such dissolution, the capital stock of River Bank was canceled and the stock transfer records of River Bank were closed. On that date, common and preferred stockholders of River Bank received shares of RB Asset, Inc. on a share-for-share basis so that RB Asset, Inc. was owned by the same stockholders, in the same proportions, as owned by the Predecessor Bank on the record date. The transfer of assets, liabilities and business of River Bank to RB Asset, Inc. was expected to qualify as a tax-free reorganization under the Internal Revenue Code and, as such, the Company expects that certain tax attributes of the Predecessor Bank have been preserved. On June 28, 1996, the Predecessor Bank had consummated the transactions (the "Branch Sale") contemplated by the Purchase of Assets and Liability Assumption Agreement (the "Branch Agreement") by and between the Predecessor Bank and HSBC Bank USA ("HSBC"), a banking corporation formerly known as Marine Midland Bank. Following consummation of the Branch Sale, all retail banking operations of the Predecessor Bank ceased. Pursuant to the terms of the Branch Agreement, HSBC assumed $1,159.6 million of deposit liabilities (the "Assumed Deposits") and acquired assets with an aggregate carrying value of $1,066.6 million (the "Transferred Assets"). The Transferred Assets consisted primarily of loans secured by real estate, mortgage-backed and investment securities, and 11 bank branch offices, inclusive of the name East River Savings Bank. Included in the Transferred Assets was approximately $32.4 million of loans in which the Predecessor Bank was granted subordinated participation interests. Also included in the Transferred Assets were the proceeds of dispositions from five individual asset sale transactions with parties other than HSBC, aggregating $60.4 million, composed of real estate assets, loans and other receivables (the "Asset Sale Transactions"). The Asset Sale Transactions were structured to include ongoing recourse to, and participation by, the Predecessor Bank with respect to the assets sold, based upon the net proceeds realized on disposition of assets by the purchasers. At June 30, 1996, the Predecessor Bank retained $285.5 million in assets, including primarily real estate assets and non-performing loans. The balance of the assets retained after the Branch Sale primarily consisted of performing loans (including loans sold with recourse, subordinated participations, junior subordinated participations, loans to facilitate the sale of real estate owned and mortgage and other loans) and a modest amount of cash and investment securities (collectively, the "Retained Assets"). Over the five year period preceding the Branch Sale, the Bank's primary loan origination focus was single-family (one-to-four units) and, to a lesser extent, multi-family (five or more units) residential loans secured by properties in the New York City metropolitan area. Primarily as a result of conditions imposed by the NYSBD and the terms of the HSBC Facility, subsequent to June 28, 1996, the Predecessor Bank and the Company have not originated a material amount of loans. 6 RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 (dollars in thousands) (Unaudited) Following the Branch Sale, the Company engaged RB Management Company, LLC (the "Management Company") to manage its operations on a day-to-day basis, including developing and recommending strategies to the Company's Board of Directors regarding the ongoing management of assets. The Management Company is a privately-owned entity that was newly formed in June 1996 and is controlled by Alvin Dworman, who owns 39.8% of the outstanding Common Stock of the Company. The Management Company was engaged pursuant to a Management Agreement (the "Management Agreement") with an initial term expiring on June 30, 2001. In December, 2000 the Board of Directors of the Company renewed the Management Agreement for a term of an additional five years on essentially similar terms as the initial Management Agreement. At the time of the closing of the Branch Sale, the Predecessor Bank obtained from HSBC a loan facility (the "Facility") consisting of eleven independent mortgage loans with additional collateral, in an aggregate amount of approximately $100.0 million. The Facility has been reduced by repayment activity to $39.2 million at December 31, 2000. On January 31, 2000, the Company completed a refinancing of the outstanding balance of the existing HSBC Facility. Under the terms of the refinancing the principal balance was reduced by $1.3 to $49.5 million and the terms of the refinancing provide for amortization of the HSBC Facility over a term of 20 years and extended the maturity of the HSBC Facility through January 31, 2005. The HSBC Facility is secured by a first lien on two properties, certain cooperative shares and a restricted cash collateral account (the "Special Collateral") in the amount of $7.5 million. Under the terms of the HSBC Facility, HSBC has retained the right to approve declaration or payment of dividends on the Company's Preferred Stock as well as other capital transactions. As a consequence of the refinancing of the HSBC Facility, all loan collateral under the previous Facility agreement, other than specified above, including all cash balances held by HSBC in excess of the $7.5 million Special Collateral was released from all liens held by HSBC. The Predecessor Bank had previously received notice that the approvals necessary to declare or pay dividends on the Predecessor Bank's outstanding shares of 15% noncumulative perpetual Preferred Stock, Series A, par value $1.00 per share ("Predecessor Preferred Stock") would not be provided. In June 1996, the Predecessor Bank's Board of Directors declared a Predecessor Preferred Stock dividend for the quarter ending June 30, 1996, payment of which was subject to the receipt of required approvals from the FDIC and the NYSBD (the Predecessor Bank's regulators at the time), as well as HSBC (the Predecessor Bank's and the Company's principal lender). Primarily as a result of the above, neither the Company's or the Predecessor Bank's Board of Directors have taken any action regarding a quarterly dividend on the Predecessor Preferred Stock or the Company's 15% noncumulative perpetual preferred stock, Series A, $1.00 par value ("Company Preferred Stock") for any of the quarterly periods ended from September 30, 1996 through December 31, 2000. Although the Company is no longer subject to the jurisdiction of either the FDIC or the NYSBD, declaration or payment of future dividends on the Company Preferred Stock will continue to be subject to the approval of HSBC for so long as the Facility remains outstanding. The Company has received notice from HSBC that the approval necessary to declare or pay dividends on the Company Preferred Stock will not be provided at this time. There can be no assurance that the Board of Directors of the Company will deem it appropriate to pay dividends on the Company Preferred Stock, even if permitted to do so by HSBC. The Company is subject to the information requirements of the Securities Exchange Act of 1934 (the "Exchange Act") as amended and is presently required to file periodic reports and other information with the Securities Exchange Commission (the "SEC"). During the six months ended December 31, 2000, the Company reported net income applicable to common shares of $2.5 million or $0.35 per share. Significant factors contributing to the Company's operating results during this six month period include rental income from real estate operations of $8.4 million and gains on the sale of real estate of $4 million, partially offset by real estate property and maintenance expenses of $5.6 million, a net interest loss (interest expense on borrowed funds in excess of interest income from loan assets) of $735,000, other operating expenses of $2.0 million, depreciation expenses of $1.2 million and provision for income taxes of $350,000. 7 RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 (dollars in thousands) (Unaudited) 2. Presentation of Interim Financial Statements The accompanying unaudited consolidated financial statements of the Company include all adjustments which management believes necessary for a fair presentation of the Company's financial condition at December 31, 2000, the results of its operations for the three and six months ended December 31, 2000 and 1999 and the statements of changes in stockholders'equity and cash flows for the six months ended December 31, 2000 and 1999. Adjustments are of a normal recurring nature. These unaudited consolidated financial statements have been prepared in conformity with the accounting principles and practices in effect as of December 31, 2000, as set forth in the consolidated financial statements of RB Asset, Inc., at such date. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of RB Asset, Inc. as of June 30, 2000. The consolidated financial statements include the accounts of RB Asset, Inc. and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Due to the anticipated short-term nature of such investments, unconsolidated real estate partnerships are generally carried at cost, subject to periodic assessment of fair value. Losses on sales or dispositions and any adjustments related to redetermination of fair value are charged, as real estate charge-offs to operations of the period in which such charges occurred. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the Company's financial position as of December 31, 2000, the results of operations for the three and six months ended December 31, 2000 and 1999, and changes in stockholders' equity and cash flows for the six months ended December 31, 2000 and 1999. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of financial condition and operations for the period. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for possible credit losses and the valuation of investments in real estate. Management believes that the allowance for possible credit losses is adequate and that loans secured by real estate and real estate held for investment are properly valued. While management uses available information to establish reserves, future additions to the allowance or write downs of other real estate owned or real estate held for investment may be necessary based on changes in economic conditions, as well as changes in management strategies. Management determines the appropriate classification of debt and equity securities (collectively, "marketable" securities) at the time of purchase and reevaluates such designation as of each balance sheet date. Available-for-sale securities are stated at estimated fair value, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The cost of marketable securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income from investments. Interest and dividends are included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than- temporary are included in net securities gains and losses. The cost of securities sold is based on the specific identification method. At December 31, 2000, the balance of stockholders' equity included a cumulative $1,038,250 unrealized loss on marketable securities classified as available-for-sale. The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate of 35% to the income (loss) before provision for income taxes primarily due to state and local income and franchise taxes and limitations on the recognition of tax benefits of net operating losses. At December 31, 2000, the Company reviewed its potential current and deferred federal and state tax liabilities in light of the results of operations for the Company since June 30, 2000. As a result of this analysis, the 8 RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 (dollars in thousands) (Unaudited) Company recognized income tax expense in the amount of $124,000, during the quarter ending December 31, 2000. For the purpose of the statements of cash flows, cash equivalents are defined as those amounts included in cash and due from banks and money market investments. Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation. 3. Commitments and Contingencies At December 31, 2000, the Company had deferred tax assets that were primarily attributable to NOLs, an allowance for loan losses and suspended passive activity losses and credits which were partially offset by a deferred tax liability in its consolidated financial statements. However, a valuation allowance was set up equal to the amount of the difference between the tentative deferred tax asset and the tentative deferred tax liability due to the uncertainty of the Company's ability to utilize the deferred tax assets in the future. Accordingly, neither a net overall asset nor a net overall liability was reflected in the Company's consolidated financial statements. Under current tax law, the Company's ability to utilize certain tax benefits in the future may be limited in the event of an "ownership change," as defined by the Internal Revenue Code Section 382 and the regulations thereunder. In the event that the Reorganization in Note 1 were to be deemed to be an ownership change, or if, transactions in the Company's capital stock subsequent to the Reorganization result in an ownership change, the subsequent utilization of net operating loss carryforwards, suspended passive activity losses and credits, alternative minimum tax credit carryforwards and certain other built-in losses would be subject to an annual limitation as prescribed by current tax regulations. The application of this limitation could have a material effect on the Company's ability to realize its deferred tax assets. The Company is of the view that no ownership change of the Company will be deemed to have occurred as a result of the Reorganization or otherwise. However, the application of Section 382 is in many respects uncertain. In assessing the effects of prior transactions and of the Reorganization under Section 382, the Company has made certain legal judgments and certain factual assumptions. The Company has not requested or received any rulings from the IRS with respect to the application of Section 382 to the implementation of the Reorganization and the IRS could challenge the Company's determinations. In the normal course of the Company's business, there are outstanding various claims, commitments and contingent liabilities. The Company also is involved in various other legal proceedings which have occurred in the ordinary course of business. Management, based on discussions with legal counsel, believes that the Company will not be materially affected by the actions of any outstanding legal proceedings. However, there can be no assurance that any outstanding legal proceedings will not be decided adversely to the Company and have a material adverse effect on the financial condition and the results of operations of the Company. See Note 6. 4. Earnings per share Earnings per share were based upon 7,100,000 weighted average shares of Common Stock outstanding during the three and six months ended December 31, 2000 and 1999, respectively. The Company had no securities outstanding that were convertible to common stock at December 31, 2000 or 1999. 5. Comprehensive Income As of July 1, 1998, the Company adopted Statement of Accounting Standards No. 130, "Reporting Comprehensive Income " ("SFAS-130"). SFAS-130 establishes new rules for the reporting and display of 9 RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 (dollars in thousands) (Unaudited) comprehensive income and its components. However, the adoption of this Statement has had no effect on the Company's net income or stockholders' equity. SFAS-130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. During the three months ended December 31, 2000 and 1999, total comprehensive income (loss) was $2,454 and $161, respectively. During the six months ended December 31, 2000 and 1999, total comprehensive income (loss) was $2,542 and $(658), respectively. The following table describes the components of comprehensive income and accumulated comprehensive income for the dates indicated:

Components of Comprehensive Income (Loss) (Unaudited): Three months ended ~~September~~December 3031, 2000 1999 ----------------- ----------------- Net income / (loss) ~~income~~$ 2,510 $ 183 Unrealized losses on securities (5856) (22) ----------------- ---------------- Comprehensive income / (loss) $ 2,454 $ 161 ================= ================ Six months ended December 31, 2000 1999 ----------------- ---------------- Net income / loss $ 2,452 $ (~~672~~489) Unrealized gains / (losses) on securities ~~146~~90 (~~147~~169) ----------------- ---------------- Comprehensive income / (loss) $ 882,542 $ (~~819~~658) ================= ================= Components of Accumulated Comprehensive Income (Unaudited): ~~September~~December 3031, ~~June~~December 3031, 2000 ~~2000~~1999 ----------------- ---------------- Unrealized (losses) ~~gains~~ on securities $ (~~982~~1,038) $ (1,~~128~~173) ----------------- ---------------- Accumulated comprehensive income (loss) ~~income~~ $ (~~982~~1,038) $ (1,~~128~~173) ================= =================

6. Legal Proceedings The Company is involved in various legal proceedings occurring in the ordinary course of business. Management of the Company, based on discussions with litigation counsel, believes that such proceedings will not have a material adverse effect on the financial condition or operations of the Company. There can be no assurance that any of the outstanding legal proceedings to which the Company is a party will not be decided adversely to the Company's interests and have a material adverse effect on the financial condition and operations of the Company. By letter, dated May 22, 1998, counsel for certain holders of shares of the Company's Preferred Stock advised the Company that such holders objected to the Reorganization. Specifically, such counsel alleged that the Reorganization (I) constituted a "liquidation" of River Bank America in violation of the terms of the 10 RB ASSET, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000 (dollars in thousands) (Unaudited) certificate of designations of the Predecessor Preferred Stock by failing to provide for the payment to the holders of the Predecessor Preferred Stock of the liquidating distribution required by the certificate of designations of $25.00 per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was illegal under the New York Banking Law (the "NYBL") which provides, in the case of a voluntary liquidation, that the liquidating corporation shall distribute its remaining assets among its shareholders according to their respective rights and interests, (iii) violated a commitment made in River Bank's proxy statement, dated May 13, 1996, to retire the Predecessor Preferred Stock following approval and finalization of the sale of certain of its branches and assets to HSBC and (iv) constituted a breach of duty owed by River Bank's Board of Directors to the holders of the Predecessor Preferred Stock. The Company believed such allegations were without merit. However, in an effort to resolve these claims on an amicable basis, representatives of the Company and such holders had discussed from time to time since the date of such letter, certain proposals under which the Company would offer to exchange a new security for the Company Preferred Stock. In October, 1998, the Company proposed to representatives of such holders to effect an exchange offer upon substantially the terms and conditions of the Exchange Offer. On October 27, 1998, 11 holders of Company Preferred Stock who claimed to beneficially own, in the aggregate, 849,000 shares (approximately 60.6% of the outstanding shares) of Company Preferred Stock (the "Organized Group") commenced a lawsuit entitled Strome Global Income Fund et al. v. River Bank America et. al. ( the "Complaint" ) in Supreme Court of the State of New York, County of New York, Index No. 605226198 (the "Action" ), against the Company, certain of its predecessors and certain of its directors (collectively, the "Defendants"). The complaint in the Action alleged (the "Allegations"), among other things, that (i) the Defendants breached the certificate of designations relating to the Predecessor Preferred Stock by fraudulently transferring assets of River Bank and by illegally amending the certificate of designations, (ii) the Defendants fraudulently conveyed the assets of River Bank, thereby depriving the holders of a liquidating distribution, (iii) the Defendants violated the NYBL by liquidating River Bank without making the liquidating distribution required by the NYBL and by denying holders appraisal rights to which they were entitled by the NYBL, (iv) the Defendants breached their fiduciary duty to holders by depriving them of their liquidating distribution, (v) the defendants breached their duty of disclosure by omitting from the Proxy Statement dated March 27, 1998 material facts relating to the holders' rights to receive a liquidating distribution, their appraisal rights for their shares and the requirement that holders vote as a class with respect to the amendment of the certificate of designations, (vi) the Defendants' implementation of the liquidation of River Bank and the amendment of the certificate of designations were ultra vires and should be declared void and (vii) the intentionally tortious nature of the Defendants' conduct bars them from seeking indemnification for their actions and, therefore, the Defendants should be enjoined from seeking indemnification for damages or attorney's fees relating to the action. The Company believes that the Allegations are without merit and intends to vigorously oppose the Action. Consequently, the Company and the other defendants responded to the Action by filing a motion to dismiss on December 21, 1998 which was argued before the court on March 23, 1999. The court issued its decision on December 2, 1999. The court granted in part the Company's motion and dismissed the causes of action based upon fraudulent conveyance, breach of fiduciary duty, breach of duty of disclosure and ultra vires acts and ordered the remainder of the Action to continue. Both the Plaintiffs and the Defendants have completed discovery and filed motions for summary judgement on June 29, 2000. The motions remain pending before the court. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition: At December 31, 2000, the consolidated assets of the Company totaled $177.7 million, an increase of $3.9 million, or 2.2%, as compared with total assets at June 30, 2000. Real estate held for investment, net of accumulated depreciation, increased $4.7 million, or 4.8%, from $99.3 million at June 30, 2000 to $104 million at December 31, 2000. The increase in real estate held for investment, net of accumulated depreciation at December 31, 2000 as compared with the balance at June 30, 2000, was primarily attributable to funding for capital improvements of $9 million, partially offset by reductions in carrying value attributable to sales of $3.3 million and accumulated depreciation of $1 million. Real estate held for disposal, net of allowance for fair market value reserve under Statement of Accounting Standards No. 121 (SFAS-121), remained unchanged at December 31, 2000 from the balance of $2.0 million at June 30, 2000. The balance categorized as real estate held for disposal at December 31, 2000 are apartment units which are expected to be sold within the next twelve months. Total loans, net of the related allowance for possible credit losses, increased $316,000, or 1.2%, from $26.2 million at June 30, 2000 to $26.5 million at December 31, 2000. The $316,000 increase in real estate loans, net, during the six months ended December 31, 2000, was primarily attributable to the origination of a $900,000 commercial real estate loan, offset by normal scheduled principal repayments. The Company's allowance for possible credit losses related to loans secured by real estate decreased by $3.6 million from a balance of $13.3 million at December 31, 2000. This decrease in loan loss reserves was proportionate with the corresponding decrease in the Commercial and Consumer Loans, which represented the write off of a fully reserved commercial loan. The Company's allowance for possible credit losses is maintained at a level which management considers adequate based on its periodic review of the Company's loans secured by real estate portfolios and certain individual loans, taking into consideration, among other things, the likelihood of repayment, the diversity of the borrowers, the type of loan, the quality of the collateral, current market conditions and the associated risks. At December 31, 2000, the allowance for possible credit losses was 26.8% of total loans as compared to 33.7% at June 30, 2000. Cash, due from banks and cash equivalents decreased by $951,000, or 2.82%, from $33.7 million at June 30, 2000 to $32.7 million at December 31, 2000. The decrease in cash, due from banks and cash equivalents was primarily attributable to the voluntary debt reduction of $7.5 million offset by a positive cash flow from total operating revenues and available asset sales proceeds less scheduled asset fundings and the payment of operating expenses. At December 31, 2000, HSBC had restricted a total of $7.5 million in funds, held on deposit at HSBC, in accordance with the terms of the Branch Sale and the Facility agreements. HSBC had restricted $7.5 million at June 30, 2000. Restricted funds held by HSBC are not available to the Company for settlements of any of the Company's current obligations. The restricted cash reserves arose from the sale of assets which had served as primary or supplemental collateral for the HSBC Facility. The restricted cash held by HSBC is intended to serve as substitute collateral for the HSBC Facility, until such time as the HSBC Facility is reduced in accordance with the Company's Asset Management Plan and the HSBC Facility Agreements. See "Liquidity and Capital Resources," below. Borrowed funds decreased by $366,000 or .7% from $52 million at June 30, 2000 to $51.6 million at December 31, 2000. The decrease was primarily attributable to a voluntary debt reduction payment of $7.5 million and regular scheduled debt reduction payments of $1.5 million, partially offset by additional borrowing of $8.7 million on the construction loan facility. During the six months ended December 31, 2000, total stockholders' equity increased by $2.5, or 7.9%, to $99.3 million, as compared with $96.8 million at June 30, 2000. This increase was due to the net income recorded for the six months ended December 31, 2000 in the amount of $2.45 million and an increase in the securities valuation account (allowance for unrealized losses on marketable securities) of $90,000. 12 The following table summarizes the calculation of the Company's book value per share at December 31, 2000 and June 30, 2000.

~~September~~December 3031, June 30, 2000 2000 ----------------- ---------------- Total stockholders' equity $ 9699,~~930~~372,000 $ 96,842,000 Less: liquidation value of preferred stock ($25 per share issued and outstanding) 23,~~444~~432,000 23,444,000 ----------------- ---------------- Net stockholders' equity $ 7375,~~486~~940,000 $ 73,398,000 ================= ================ Total shares of Common Stock issued and outstanding 7,100,000 7,100,000 ================= ================ Book value per share $ 10.3570 $ 10.34 ================= ================

Results of Operations: General. The Company reported net income attributable to common shares of $2.5 million, or $0.35 per basic and diluted share, for the three months ended December 31, 2000, an increase of $2.3 million, compared with net income attributable to common shares of $183,000, or $0.03 per share, for the three month period ended December 31, 1999. The Company reported net income attributable to common shares of $2.4 million, or $ 0.35 per basic and diluted share, for the six months ended December 31, 2000, an increase of $2.9 million as compared with a net loss attributable to common shares of $488,000, or $0.07 per share, for the six month period ended December 31, 1999. The primary reason for the increase in the Company's net operating results for the quarter ended December 31, 2000, as compared to the same quarter in the previous year, was an increase in net revenue from rental operations of $351,000, or 85.6% and the effects of increased sales and net gains on dispositions of real estate held for sale which increased $2.1 million. The primary reason for the increase in the Company's net operating results for the six months ended December 31, 2000, as compared to the same six months in the previous year, was the effects of increased sales and net gains on dispositions of real estate held for sale which increased $3 million and an increase in net revenues from operations of $450,000 or 39%. Partially offsetting this increased income was an increase in net interest loss (interest expense on borrowed funds in excess of interest income from loan assets) of $100,000. In addition, there was a $429,000 gain on satisfaction of loan assets recognized in the six month period ended December 31, 1999. Net Rental Operations. For the three months ended December 31, 2000, net rental operations resulted in income of $761,000, an increase of $351,000, or 85.6%, from $410,000 for the same three month period in the previous year. For the six months ended December 31, 2000, net rental operations resulted in income of $1.6 million, an increase of $449,000 from the $1.15 million recorded for the same six month period in the previous year. The increase in net rental operating revenue for the three month period ended December 31, 2000 and the increase in the income recorded from net rental operations for the six month period ended December 31, 2000, as compared with the same periods in the previous year, were due to various, individually immaterial operating factors affecting aggregate rental income and expenses within the Company's rental properties. Net Gain on the Sale of Real Estate Assets. Net gain on sale of real estate of $3.1 million was recorded for the quarter ended December 31, 2000, an increase of $2.1 million, as compared with the net gains on sale of real estate held of $1 million in the quarter ended December 31, 1999. 13 For the quarter ended December 31, 2000, there was a gain on sale of real estate held for investment of $5.6 million, offset by the cost of a $2.5 million construction warranty liability settlement, net of recoveries for related insurance coverage. The resulting net gain of $3.1 million was primarily attributable to the sale of $8.8 million of real estate held for investment which had a carrying value of $3.2 million. Included in the sale of $8.8 million was $834,000 which was related to the sale of 2 co-operative units at one of the Company's multi-family housing projects with a carrying value of $174,000, for which a gain in the amount of $660,000 was recognized and the sale of one of three buildings of an office complex real estate investment in Atlanta, GA for approximately $8 million which had a carrying value of $3 million for which a gain of $5 million was recognized. Interest Income. For the three months ended December 31, 2000, total interest income was $591,000, an increase of $180,000, or 43.8%, from $411,000 recorded for the same quarter in the previous year. Loan interest increased $166,000, or 70.4%, from $237,000 in the quarter ended December 31, 1999 to $403,000 for the same quarter in the current year. This increase in loan interest income was due to the acquisition of an additional performing loan through the asset swap and purchase agreement with HSBC on January 31, 2000. The additional interest income on this particular loan is partially offset by a reduced average balance for loan assets resulting from satisfactions and the effects of normal amortization and repayment activity. For the three months ended December 31, 2000, loan interest income was $403,000, an increase of $166,000, or 70%, from $237,000 for the same quarter in the previous year. The $166,000 increase in loan interest income in the quarter ended December 31, 2000, as compared with the same quarter in the previous year, was primarily due to the acquisition of a performing loan in the January 31, 2000 HSBC Asset swap and purchase agreement. In addition to the increase in loan interest income in the three months ended December 31, 2000, as compared with the same three month period in the previous year, there was an increase in other interest income to $188,000, an increase of $14,000, or 8.1%, in the quarter ended December 31, 2000 as compared with other interest income of $174,000 recorded in the quarter ended December 31, 1999. Other interest income increased $36,000 for the six month period ended December 31, 2000 or 10.4% from $346,000 in the same quarter of the previous year to the six month period ended December 3,1, 2000. The increase in other interest income was due to an increase in the average balance of funds held in interest-bearing money market accounts during both the quarter and the six month period ended December 31, 2000 as compared with the same quarter and six month period in the previous year. Interest Expense. During the three months ended December 31, 2000, the Company recorded interest expenses in the amount of $847,000, an increase of $23,000, or 2.8%, as compared with interest expenses of $824,000 in the same quarter of the previous year. Interest expense for borrowed funds declined $19,000, or 3.5%, from $545,000 in the quarter ended December 31, 1999 to $526,000 for the same quarter in the current year. This decline in interest expense on borrowed funds was partially offset by the recognition of $321,000 in interest expense related to the Company's Increasing Rate Junior Subordinated Notes due 2006. During the six months ended December 31, 2000, the Company recorded interest expense in the amount of $1.85 million, an increase of $61,000, or 3.4%, as compared with interest expense of $1.8 million in the same six month period of the previous year. This increase in interest expense was primarily attributable to the recognition of $639,000, an increase of $60,000 or 10.3% from the six month period in the previous year, in interest expense related to the Company's Increasing Rate Junior Subordinated Notes due 2006. Interest expense for borrowed funds remained approximately the same for the six months ended December 31, 1999 and the same six month period of the current year. During the quarter ended December 31, 2000, the Company borrowed an average of $39.6 million, a decline of $11 million, or 21.7%, as compared with average borrowings of $50.6 million during the same quarter of the previous year. During the six month period ended December 31, 2000, the Company borrowed an average of $43.8 million, a decline of $6.8 million, or 13.4% as compared with average borrowings of $50.6 million during the same six month period of the previous year. The decline in the average amount of borrowed funds was attributable to regular loan repayments, repayments funded by asset sales and a voluntary loan repayment of $7.5 million. The average interest rate paid to HSBC on borrowed funds was 4.65% and 4.56% for the three and six months ended December 31, 2000, respectively, as compared to 4.20% and 4.76%, respectively, for the same three and six month period of the previous year. The increase in rates paid to HSBC in the three month 14 period ended December 31, 2000, as compared with the same period in the previous year, was primarily due to an increase in prevailing interest rates. The average interest rate is attributable to the renegotiation of the Company's interest rate with HSBC. Under the terms of the renegotiated interest rate agreements with HSBC, which became effective October 1, 1998, the Company receives interest rate reductions for borrowed funds, calculated using a formula that considers certain compensating balances held in bank accounts with HSBC. The interest expense rate reductions received under the new rate schedule agreement with HSBC are in lieu of interest income that had been earned on those deposited funds. During the quarter ended December 31, 2000 a reduction in interest expense on borrowed funds of approximately $417,000 was recognized. Other Expenses. During the quarter ended December 31, 2000, the Company recorded total other expenses in the amount of $1 million, a decrease of $43,000, or 4.1%, as compared with other expenses of $1.1 million in the same quarter of the previous year. Other expenses decreased in the quarter ended December 31, 2000, as compared with the quarter ended December 31, 1999, primarily as a result of differences in the timing of certain non-recurring expense payments. During the six months ended December 31, 2000, the Company recorded total other expenses in the amount of $2.05 million, an increase of $14,000, or .69%, as compared with other expenses of $2.03 million in the same six months of the previous year. Other expenses increased in the six months ended December 31, 2000, as compared with the six months ended December 31, 1999, primarily as a result of differences in the timing of certain non-recurring expense payments. The Company engaged RB Management Company, LLC (the "Management Company") to manage the operations of the Company after the Branch Sale, including the management and disposition of Company assets. The Management Company was a newly formed, privately-owned entity controlled by Alvin Dworman, who owns 39.8% of the outstanding Common Stock of the Company. During the three and six months ended December 31, 2000, the Company accrued $670,000 and $1.27 million, respectively in fees payable to the Management Company, of which $73,000 and $81,000, respectively, related to fees incurred for the successful disposition of assets. During the three and six months ended December 31, 1999, the Company accrued $748,000 and $1.4 million, respectively in fees payable to the Management Company, of which $170,000 and $298,000, respectively, related to fees incurred for the successful disposition of assets. Provision for Income Taxes. Statement of Financial Accounting Standards No. 109 (SFAS-109), "Accounting for Income Taxes," requires the Company to recognize a deferred tax asset relating to the unrecognized benefit for all temporary differences that will result in future tax deductions and for all unused NOL and tax credit carryforwards, subject to, in certain circumstances, reduction of the asset by a valuation allowance. A valuation allowance is recorded if it is more likely than not that some portion or all of the deferred tax asset will not be realized based on a review of available evidence. Realization of tax benefits for deductible temporary differences and unused NOL and tax credit carryforwards may be based upon the future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and, if appropriate, from tax planning strategies. The high levels of loan charge-offs and other losses, which were largely responsible for losses during the periods, effectively eliminated federal income tax liability for the quarters ended September 30, 1998 and 1997. The Company's income tax provision includes state and local taxes on the greater of combined entire net income, combined alternative entire net income or combined taxable assets. Certain subsidiaries provide for state and local taxes on a separate company basis on income, capital, assets or an alternative minimum tax. The provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate of 35% to the reported loss before provision for income taxes primarily due to state and local income and franchise taxes and limitations on the recognition of tax benefits of net operating losses. During the three and six months ended December 31, 2000, the Company recorded a net provision for income taxes of $124,000 and $350,000, respectively. During the three and six months ended December 31, 1999, the Company recorded a net provision for income taxes of $182,000 and $363,000, respectively. Income taxes recorded by the Company primarily reflect the effects of operations on its current state and local income tax liability at December 31, 2000 and 1999, respectively. 15 Liquidity and Capital Resources The Company must maintain sufficient liquidity to meet its funding requirements for debt repayments related to asset sales, operating expenses and development costs related to certain real estate projects, and to satisfy the regulatory requirements described below. On January 31, 2000, the Company completed a refinancing of the outstanding balance of the existing HSBC Facility. Under the terms of the refinancing the principal balance was reduced by $1.3 to $49.5 million and the terms of the refinancing provide for amortization of the HSBC Facility over a term of 20 years and extended the maturity of the HSBC Facility through January 31, 2005. The HSBC Facility is secured by a first lien on two properties, certain cooperative shares and a restricted cash collateral account (the Special Collateral) in the amount of $7.5 million. Under the terms of the HSBC Facility, HSBC has retained the right to approve declaration or payment of dividends on the Company's Preferred Stock as well as other capital transactions. As a consequence of the refinancing of the HSBC Facility, all loan collateral under the previous Facility agreement, other than specified above, including all cash balances held by HSBC in excess of the $7.5 million Special Collateral was released from all liens held by HSBC. The HSBC Facility has an annual interest rate equal to the Prime lending rate, or the three-month London Interbank Offered Rate (LIBOR) plus 2%, at the option of the Company. Notwithstanding the foregoing, interest on the Facility shall accrue at 2% per annum on the portion of the outstanding Facility balance that is equal to the combined balances of the Special Collateral account and unrestricted funds that remain on deposit with HSBC. The Company will make monthly payments to HSBC of interest, as calculated according to the formula outlined above, and scheduled principal reductions based on a hypothetical loan amount of $34.8 million. Minimum scheduled principal reduction payments under this provision of the Facility agreement approximate $800,000 per year. The Loan Agreement requires that while any amounts remain outstanding under the Facility, the Company must receive HSBC's prior written consent to, among other things, materially alter its charter or by-laws, incur additional corporate indebtedness and liens, make any distributions to stockholders or repurchases or redemptions of capital stock, acquire additional assets, exchange existing assets with a third party or assume additional liabilities as a result of any proposed merger transaction. In order to facilitate the development of the Company's three-building office complex in Atlanta, Georgia, in May 2000 the Company obtained $23.5 million construction loan facility (the "Construction Loan") financed by Bank of America and secured by two buildings under development within this office complex. At December 31, 2000, approximately $12.4 million had been advanced under the Construction Loan, as compared with approximately $3.7 at June 30, 2000. The completion of the development of this project is anticipated prior to June 30, 2001. The Construction Loan has an annualized rate equal to LIBOR plus 2% and a maturity date in May 2003. The loan allows for the deferral of interest until May 2003 or such time as the collateral buildings are disposed of through sale. The Company has incurred approximately $41,000 in interest during the year ended June 30, 2000 and an additional $392,000 during the six months ended December 31, 2000 related to the Construction Loan, which have been accounted for as an additional investment in the office complex. At December 31, 2000 the Company had $39.2 million in borrowed funds outstanding under the Facility provided by HSBC Bank and $12.4 million under the Construction Loan provided by Bank of America. The Company actively monitors and manages its cash inflows and outflows in the management of the Facility with HSBC and invests, to the extent possible, all available cash balances. The Company seeks to maintain liquidity within the range of 5% to 10% of total assets, with amounts above that level considered necessary to meet the projected cash requirements of new investments and endeavors such as real estate developments. Liquidity for this purpose is defined as unrestricted cash. At December 31, 2000, the Company's liquidity ratio, as so defined, amounted to 18.5%, which was consistent with the maintenance range. 16 Recent Accounting Developments From time to time the Financial Accounting Standards Board ("FASB") adopts accounting standards (generally referred to as Statements of Financial Accounting Standards, or "SFASs") which set forth required generally accepted accounting principles. Set forth below is a description of certain of the accounting standards recently adopted by the FASB which are relevant to financial institutions such as the Company. SFAS No. 133 and No. 137. On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS-133). SFAS-133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, which was deferred until June 30, 2000 as a result of the promulgation of SFAS-137, requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to the Company's limited use of derivative instruments, the adoption of SFAS-133 does not have a significant effect on the Company's results of operations or its financial condition. Other Pronouncements. In December, 1999, the Securities and Exchange Commission (the "SEC") released Staff Accounting Bulletin No. 101, "Revenue Recognition ("SAB No. 101"), to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. Specifically, SAB No. 101 provides guidance on lessors' accounting for contingent rent. SAB No. 101 explains the SEC staff's general framework for revenue recognition. SAB No. 101 does not change existing literature on revenue recognition, but rather clarifies the SEC's position on preexisting literature. SAB No. 101 did not require the Company to change existing revenue recognition policies and therefore had no impact on the Company's financial position or results of operations at December 31, 2000. From time to time the Financial Accounting Standards Board ("FASB") adopts accounting standards (generally referred to as Statements of Financial Accounting Standards, or "SFASs") which set forth required generally accepted accounting principles. Impact of Inflation The consolidated financial statements and related consolidated data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of dollars over time due to inflation. The primary impact of inflation on the operations of the Company is reflected in increased operating costs and, generally, increases in interest rates paid on borrowed funds. Over any given term, however, interest rates do not necessarily move in the same direction or in the same magnitude as changes in prices for goods and services. Risks Associated with Forward-Looking Statements This Form 10-Q, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward- looking statements involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following, which are discussed in greater detail in the "Risk Factors" section of the Company's Registration Statement on Form S-4 (File No. 333-386730 and File No. 333-386730-01) filed with the Securities and Exchange Commission ("SEC"), general economic conditions, which will among other things, affect demand for commercial and residential properties, availability and credit worthiness of prospective tenants, lease rents and the availability of financing: difficulty of locating suitable investments; competition; risks of real estate acquisition, development, construction and renovation; vacancies at existing commercial properties; dependence on rental income from real property; adverse consequences of debt financing; risks of investments in debt instruments, including 17 possible payment defaults and reductions in the value of collateral; illiquidity of real estate investments; lack of prior operating history; and other risks listed from time to time in the Company's reports filed with the SEC. Therefore, actual results could differ materially from those projected in such statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk The primary market risk facing the company is interest rate risk on its borrowed funds, mortgage notes and notes receivable. The Company does not hedge interest rate risk using financial instruments nor is the Company subject to foreign currency risk. The Company has assessed the market risk for its variable rate debt and believes that a 1% increase in interest rates (as measured by changes in the LIBOR rate) would result in an approximate $392,000 increase in interest expense based on approximately $39.2 million outstanding at December 31, 2000. See Note 14, "Borrowed Funds," contained within the Consolidated Financial Statements dated June 30, 2000. In addition, the Company has issued $13.5 million in Increasing Rate Junior Subordinated Notes due 2006. The Subordinated Notes provide for a steadily increasing interest cost after December 15, 2001. A substantial increase in general interest rates would potentially prevent the Company from refinancing the Subordinated Notes at a rate favorable to the Company. See Note 27, "Preferred Stock Exchange Offer" and Note 24, "Increasing Rate Junior Subordinated Notes," contained within the Consolidated Financial Statements at June 30, 2000. The fair value of the Company's long term debt, mortgage notes, notes receivable and other financial assets is estimated based on discounting future cash flows at interest rates that management believes reflect the risks associated with long term debt, mortgage notes, notes receivable and other financial assets of similar risk and duration. See Note 22, "Fair Value of Financial Instruments," within the Consolidated Financial Statements at June 30, 2000. 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in various legal proceedings occurring in the ordinary course of business. Management of the Company, based on discussions with litigation counsel, believes that such proceedings will not have a material adverse effect on the financial condition or operations of the Company. There can be no assurance that any of the outstanding legal proceedings to which the Company is a party will not be decided adversely to the Company's interests and have a material adverse effect on the financial condition and operations of the Company. By letter, dated May 22, 1998, counsel for certain holders of shares of the Company's Preferred Stock advised the Company that such holders objected to the Reorganization. Specifically, such counsel alleged that the Reorganization (I) constituted a "liquidation" of River Bank America in violation of the terms of the certificate of designations of the Predecessor Preferred Stock by failing to provide for the payment to the holders of the Predecessor Preferred Stock of the liquidating distribution required by the certificate of designations of $25.00 per share, plus all accrued, undeclared and unpaid dividends thereon, (ii) was illegal under the New York Banking Law (the "NYBL") which provides, in the case of a voluntary liquidation, that the liquidating corporation shall distribute its remaining assets among its shareholders according to their respective rights and interests, (iii) violated a commitment made in River Bank's proxy statement, dated May 13, 1996, to retire the Predecessor Preferred Stock following approval and finalization of the sale of certain of its branches and assets to HSBC and (iv) constituted a breach of duty owed by River Bank's Board of Directors to the holders of the Predecessor Preferred Stock. The Company believed such allegations were without merit. However, in an effort to resolve these claims on an amicable basis, representatives of the Company and such holders had discussed from time to time since the date of such letter, certain proposals under which the Company would offer to exchange a new security for the Company Preferred Stock. In October, 1998, the Company proposed to representatives of such holders to effect an exchange offer upon substantially the terms and conditions of the Exchange Offer. On October 27, 1998, 11 holders of Company Preferred Stock who claimed to beneficially own, in the aggregate, 849,000 shares (approximately 60.6% of the outstanding shares) of Company Preferred Stock (the "Organized Group") commenced a lawsuit entitled Strome Global Income Fund et al. v. River Bank America et. al. ( the "Complaint" ) in Supreme Court of the State of New York, County of New York, Index No. 605226198 (the "Action" ), against the Company, certain of its predecessors and certain of its directors (collectively, the "Defendants"). The complaint in the Action alleged (the "Allegations"), among other things, that (I) the Defendants breached the certificate of designations relating to the Predecessor Preferred Stock by fraudulently transferring assets of River Bank and by illegally amending the certificate of designations, (ii) the Defendants fraudulently conveyed the assets of River Bank, thereby depriving the holders of a liquidating distribution, (iii) the Defendants violated the NYBL by liquidating River Bank without making the liquidating distribution required by the NYBL and by denying holders appraisal rights to which they were entitled by the NYBL, (iv) the Defendants breached their fiduciary duty to holders by depriving them of their liquidating distribution, (v) the defendants breached their duty of disclosure by omitting from the Proxy Statement dated March 27, 1998 material facts relating to the holders' rights to receive a liquidating distribution, their appraisal rights for their shares and the requirement that holders vote as a class with respect to the amendment of the certificate of designations, (vi) the Defendants' implementation of the liquidation of River Bank and the amendment of the certificate of designations were ultra vires and should be declared void and (vii) the intentionally tortious nature of the Defendants' conduct bars them from seeking indemnification for their actions and, therefore, the Defendants should be enjoined from seeking indemnification for damages or attorney's fees relating to the action. The Company believes that the Allegations are without merit and intends to vigorously oppose the Action. Consequently, the Company and the other defendants responded to the Action by filing a motion to dismiss 19 on December 21, 1998 which was argued before the court on March 23, 1999. The court issued its decision on December 2, 1999. The court granted in part the Company's motion and dismissed the causes of action based upon fraudulent conveyance, breach of fiduciary duty, breach of duty of disclosure and ultra vires acts and ordered the remainder of the Action to continue. Both the Plaintiffs and the Defendants have completed discovery and filed motions for summary judgement on June 29, 2000. The motions remain pending before the court. Item 2. Changes in Securities Subsequent to the expiration of the Exchange Offer, the Company accepted private requests for the exchange of its Series A Preferred Stock from individuals under terms identical to those of the Exchange Offer. As a result, 500 shares of the Company's Series A Preferred Stock were exchanged during the quarter ended December 31, 2000. As a result of the exchange, the Company's total Stockholder's Equity was reduced by $12,400 and its liabilities increased by the same amount (composed of a net increase in Increasing Rate Junior Subordinated Notes due 2006 of $12,900, offset by a net decrease in other liabilities of $500). Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Securities Holders None. Item 5. Other Information At a Board of Directors meeting held on December 21, 2000, the Board of Directors acted to expand the Board of Directors from nine to eleven directors thereby creating two additional vacancies in addition to three other vacancies on the Board. Further, acting in accordance with the By-Laws of the Company, the Board of Directors filled all five vacancies by appointing Mr. Jerome R. McDougal and Mr. Francis L. Bryant, Jr. (who had previously been incumbent directors) and Ms. B.J. Hoppe to the 2003 class of directors and Mr. Nelson L. Stephenson and Mr. Stephen Mann to the 2002 class of directors. Mr. Alvin Dworman, Mr. James J. Houlihan, Jr. and Mr. Edward V. Regan remained in office in the 2001 class of directors, Mr. David A. Shapiro remained in office in the 2002 class of directors and Mr. David J. Liptak and Jeffrey E. Susskind remained in office as directors elected by the holders of the Company's outstanding preferred stock. The Board of Directors also acted to engage Ernst & Young, LLP as independent auditors of the Company for the fiscal year ending June 30, 2001 upon recommendation of the Audit Committee of the Board of Directors. The Board of Directors elected take the action discussed above to avoid the time and expense of calling and convening an annual meeting of the stockholders of the Company. Item 6. Exhibits and Reports on Form 8-K None. 20 SIGNATURE Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RB ASSET, INC. (Registrant) Date: February 14, 2001 By: /s/ Nelson L. Stephenson ------------------ --------------------------------- Nelson L. Stephenson President and Chief Executive Officer (principal executive and principal financial officer) 21

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