U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Commission File Number: 000-24561
RESOURCE BANKSHARES CORPORATION
(Exact name of small business issuer as specified in its charter)
Virginia 54-1904386
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
3720 Virginia Beach Blvd., Va. Beach, VA.23452
(Address of principal executive offices)
(757) 463-2265
Issuer's telephone number
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or of such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ___
At September 30, 1998, 2,479,446 shares of Resource Bankshares Corporation's
common stock, $1.50 par value, were outstanding.
Transitional small business disclosure format: Yes___ No X
<PAGE>
RESOURCE BANKSHARES CORPORATION
FORM 10-QSB
SEPTEMBER 30, 1998
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1998
and December 31, 1997 3
Statements of Income for the periods
ended September 30, 1998 and 1997 4
Statements of Cash Flows for the
periods ended September 30, 1998 and 1997 5
Statements of Stockholder's Equity for the
the period ended September 30, 1998 6
Notes to Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis or
Plan of Operations 10 - 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 5. Other Information 15 - 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RESOURCE BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
(Dollars in Thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $2,729 $2,612
Interest bearing deposits with banks 9,008 9,679
Federal funds sold 1,900 1,920
Funds advanced in settlement of mortgage loans 24,324 23,744
Securities available for sale 9,451 12,432
Securities held to maturity 1,395 2,742
Loans, net of unearned income:
Commercial 75,116 50,713
Real estate - construction 47,241 37,626
Commercial real estate 13,739 9,016
Residential real estate 35,703 49,416
Installment and consumer loans 4,991 3,819
------------ -----------
TOTAL LOANS 176,790 150,590
Allowance for loan losses (2,539) (2,573)
------------ -----------
NET LOANS 174,251 148,017
Other real estate owned 488 684
Premises and equipment 3,260 3,237
Other assets 3,101 2,701
Accrued interest 1,567 1,562
------------ -----------
$231,474 $209,330
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $18,037 $11,493
Interest bearing 183,139 158,015
------------ -----------
TOTAL DEPOSITS 201,176 169,508
FHLB advances 9,300 20,950
Other liabilities 2,970 2,661
Accrued interest 677 609
------------ -----------
TOTAL LIABILITIES 214,123 193,728
------------ -----------
STOCKHOLDERS' EQUITY
Common stock, par value $1.50 a share
Shares authorized: 6,666,666
Shares issued and outstanding:
1998 - 2,479,446; 1997 2,453,380 3,719 3,680
Additional paid-in capital 10,855 10,769
Retained earnings 2,713 856
Accumulated other comprehensive income 64 297
------------ -----------
17,351 15,602
------------ -----------
$231,474 $209,330
============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
RESOURCE BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1998 1997 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $3,963 $2,162 $11,268 $5,990
Interest on investment securities 453 296 1058 879
Interest on funds advanced 519 305 2,625 683
Interest on federal funds sold 25 5 51 40
------- ------- ------- -------
Total interest income 4,960 2,768 15,002 7,592
------- ------- ------- -------
Interest expense:
Interest on deposits 2,739 1,413 7,796 3,972
Interest on short-term borrowings 135 116 864 161
------- ------- ------- -------
Total interest expense 2,874 1,529 8,660 4,133
------- ------- ------- -------
Net interest income 2,086 1,239 6,342 3,459
Provision for loan losses 25 68 150 113
------- ------- ------- -------
Net interest income after
provision for loan losses 2,061 1,171 6,192 3,346
------- ------- ------- -------
Noninterest income:
Mortgage banking income 1,447 1,230 5,744 2,831
Service charges 255 63 595 208
Gain on sale of loans and other real estate 8 10 10 10
------- ------- ------- -------
1,710 1,303 6,349 3,049
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 1,454 1,106 5,260 2,848
Occupancy expenses 282 144 811 392
Depreciation and equipment maintenance 218 112 580 320
Stationery and supplies 65 32 229 102
Marketing and business development 92 54 263 136
Professional fees 52 25 127 63
Outside computer services 135 66 439 151
Provision for funds advanced 6 265
FDIC insurance 14 3 38 9
Expenses associated with other real estate 33 3 36 12
Other 184 166 954 386
------- ------- ------- -------
2,535 1,711 9,002 4,419
------- ------- ------- -------
Income before income tax 1,236 763 3,539 1,976
Income tax 433 260 1,239 672
------- ------- ------- -------
Net income $803 $503 $2,300 $1,304
======= ======= ======= =======
Basic earnings per common share (Note 5) $0.32 $0.26 $0.93 $0.67
======= ======= ======= =======
Diluted earnings per common share (Note 5) $0.30 $0.23 $0.85 $0.61
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements
<PAGE>
RESOURCE BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30 September 30
1998 1997
(Dollars in thousands)
<S> <C> <C>
Operating activities
Net income $ 2,300 $ 1,304
Adjustments to reconcile to net cash
used by operating activities:
Provision for losses on loans and other real estate owned 150 113
Depreciation and amortization 231 183
Gain on sale of investments - (98)
Amortization of investment securities
premiums, net of discounts 69 16
Gain on sale of loans or other real estate owned (2) (10)
Loss on premises and equipment (4) 6
Deferred loan origination fees, net of costs (25) (29)
Changes in:
Funds advanced in settlement of mortgage loans (579) (7,539)
Interest receivable (49) (268)
Interest payable 68 78
Other assets (243) (2,075)
Other liabilities 309 1,464
-------- --------
Net cash used operating activities 2,225 (6,855)
Investing activities:
Proceeds from sale of real estate owned, net of costs - 8
Proceeds from sales and maturities of
available-for-sale securities 4,501 2,143
Proceeds from maturities of
held-to-maturity securities 1,302 -
Purchases of available-for-sale securities (1,897) (1,883)
Loan originations, net of principal repayments (26,160) (12,560)
Purchases of premises, equipment and other assets (244) (387)
-------- --------
Net cash used investing activities (22,498) (12,679)
Financing activities:
Proceeds from sale of stock 125
Cash dividends declared (443) (242)
Net (repayments) proceeds in FHLB advances (11,650) 6,264
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 4,035 (1,516)
Net increase in certificates of deposit 27,633 19,555
-------- --------
Net cash provided by financing activities 19,700 24,061
Increase in cash and cash equivalents (573) 4,527
Cash and cash equivalents at beginning of period 13,210 4,133
-------- --------
Cash and cash equivalents at end of period $ 12,637 $ 8,660
======== ========
Supplemental schedules and disclosures of cash flow information:
Cash paid for:
Interest on deposits and other borrowings $ 8,592 $ 3,555
======== ========
Schedule of noncash investment activities:
Foreclosed real estate ($ 1,359) ($ 8)
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
RESOURCE BANKSHARES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
(A)
----------- -------------- ------------ ------------ -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,453,380 $ 3,680 $ 10,769 $ 856 $ 296 $ 15,601
Comprehensive income - - 2,300 (232) 2,068
Proceeds from common stock issued 26,066 39 86 125
Cash dividend declared
$ .06 per share - - (147) (147)
Cash dividend declared
$ .06 per share - - (147) (147)
Cash dividend declared
$ .06 per share (149) (149)
---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 1998 2,479,446 $ 3,719 $ 10,855 $ 2,713 $ 64 $ 17,351
========== ========== ========== ========== ========== ==========
</TABLE>
(A) As restated for 2 for 1 stock split
See notes to consolidated financial statements.
<PAGE>
RESOURCE BANKSHARES CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
Organization and Summary of Significant Accounting Policies
(1) GENERAL
Resource Bankshares Corporation, a Virginia Corporation (the "Company"),
was incorporated under the laws of the Commonwealth of Virginia on February 4,
1998, primarily to serve as a holding company for Resource Bank (the "Bank").
On July 1, 1998, all Resource Bank common stock, $3.00 par value (the
"Bank Stock") was converted to the common stock, $1.50 par value, of the Company
(the "Holding Company Common Stock") on a two share for one share exchange
basis, making the Bank a wholly owned subsidiary of the Company (the
"Reorganization"). In order to effect the Reorganization, the Company issued
approximately 2,453,380 shares of common stock. Accordingly, the average number
of shares outstanding and per share amounts for earnings, dividends declared,
and book value have been restated for all periods presented to give affect to
the conversion.
All requisite regulatory approvals and the satisfaction of all other
conditions to the Reorganization have been completed. The Reorganization was
effective on July 1, 1998. The financial statements reflect the financial
position, results of operations, and cash flows of the Company for the period
ended September 30, 1998. The financial statements conform to generally accepted
accounting principles and to general banking industry practices. The interim
period financial statements are unaudited; however, in the opinion of
management, all adjustments in the normal recurring nature which are necessary
for a fair presentation of the financial statements included herein have been
reflected in the financial statements. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the
full year.
(2) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing deposits, and federal funds sold.
(3) SECURITIES
The amortized costs, gross unrealized gains, gross unrealized losses, and
fair values for securities at September 30, 1998, are shown in the table below.
<PAGE>
(3) CONTINUED
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale: Costs Gains Losses Values
- ----------------------------------------------------------------------------
U.S. Government Agencies $7,603 $ 97 $7,700
Other securities 1,596 1,596
Corporate securities 155 155
- ----------------------------------------------------------------------------
TOTALS $9,354 $ 97 $9,451
- ----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Held-to-Maturity: Costs Gains Losses Values
- ----------------------------------------------------------------------------
U.S. Government and agency
securities $ 649 $ 5 $ 654
Municipal securities 746 21 767
- ----------------------------------------------------------------------------
TOTALS $1,395 $ 26 $1,421
- ----------------------------------------------------------------------------
(4) ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Balance as of January 1, 1998 $2,573
Provision for loan losses 150
Loans charged off (243)
Recoveries 59
------
Balance at September 30, 1998 $2,539
======
(5) NET INCOME PER SHARE
The Bank adopted Financial Accounting Standards Board (FASB) Statement
No. 128, Earnings Per Share, on December 31, 1997. This statement
established standards for computing and presenting earnings per shares
(EPS). This statement supersedes standards previously set forth in APB
Opinion No. 15, Earnings Per Share. FASB No. 128 requires dual
presentation of basic and diluted EPS on the face of the income
statement, and it requires a reconciliation of the numerator and
denominator of the diluted EPS computation. This Statement is effective for
financial statements
<PAGE>
(5) CONTINUED
issued for periods after December 15, 1997. In accordance with the requirements
of this Statement, all prior period EPS have been restated to reflect the change
in reporting requirements.
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised, converted
into common stock or resulted in the issuance of common stock that then shares
in the earnings of the entity. The average number of basic shares outstanding
for the nine months ended September 30, 1998 and 1997 were 2,479,446 and
1,935,748, respectively. The diluted average number of shares for the nine
months ended September 30, 1998 and 1997 were 2,697,877 and 2,126,853,
respectively.
(6) COMPREHENSIVE INCOME
Comprehensive income for the nine months ended September 30, 1998 is as follows:
Net income $ 2,300
Other comprehensive
income, net of
taxes of $ 34,044 $ (232)
--------------
Comprehensive income $ 2,068
Other comprehensive income consists only of unrealized gains or losses on
available for sale securities as illustrated below:
Accumulated other
Comprehensive income
Beginning balance $ 296
Current period unrealized loss (232)
--------------
Ending balance $ 64
No reclassification adjustment was necessary as no realized gains or losses were
included in net income for the period.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE DATA)
Financial Condition and Results of Operations
On June 9, 1998, the shareholders of Resource Bank ("Bank") approved an
Agreement and Plan of Reorganization, dated April 10, 1998, as amended (the
Agreement), relating to the formation of a bank holding company structure with
Resource Bankshares Corporation (hereinafter referred to, together with the
Bank, as "the Company") serving as the holding company of the Bank. This
transaction was consummated on July 1, 1998.
In addition to historical information, the following discussion
contains forward looking statements that are subject to risks and uncertainties
that could cause the Company's actual results to differ materially from those
anticipated. These forward looking statements include, but are not limited to,
the effect of increasing interest rates on the Company's profitability and the
adequacy of the Company's allowance for future loan losses. Several factors,
including the local and national economy and the demand for residential mortgage
loans and the adequacy of the Company's Year 2000 compliance, may adversely
affect the Company's ability to achieve the expected results. Readers are
cautioned not to place undue reliance on these forward looking statements, which
reflect management's analysis only as of the date of this Report.
On December 1, 1997, the Bank acquired Eastern American Bank, FSB,
("Eastern American") in a business combination accounted for under the purchase
method of accounting, whereby the purchase price has been allocated to the
underlying assets acquired and liabilities assumed based on their respective
fair values at the time of acquisition. In an exchange of common shares, the
Bank acquired $66,514 in assets (including cash of $12,539), $48,082 in net
loans, and assumed $52,844 in deposit liabilities. Accordingly, these acquired
assets and liabilities contributed to the growth in total assets and liabilities
of the Company for the nine months ended September 30, 1998. The Company's nine
months results include results of operations from Eastern American Bank for the
nine months ended September 30, 1998.
Total assets at September 30, 1998 were $231,474, up 10.6% from $209,330
at December 31, 1997, reflecting growth in loans. The principal components of
the Company's assets at the end of the period were $10,846 in securities,
$13,637 in cash and cash equivalents, $24,324 in funds advanced in settlement of
mortgage loans and $174,251 in net loans. During the nine month period, gross
loans increased 17.4% or $26,200. The Company's lending activities are a
principal source of income.
Total liabilities at September 30, 1998 were $214,123, up from $193,728 at
December 31, 1997, with the increase almost entirely represented by $31,668 or
18.7% growth in deposits. Non-interest bearing demand deposits increased $6,544
or 56.9% and represented 20.7% of total deposit growth. The Company's deposits
are provided by individuals and businesses located within the communities served
as well as the national market.
<PAGE>
Total shareholders' equity at September 30, 1998 was $17,351. At December
31, 1997, total shareholder's equity was $15,602.
The Company had net income of $2,300 for the nine months ended September
30, 1998 compared with net income of $1,304 for the comparable period in 1997,
an increase of 76.4%. During the third quarter, net income increased to $803 or
59.6% over the same period in 1997.
Profitability as measured by the Company's return on average assets (ROA)
was 1.3% for the nine months ended September 30, 1998, down .2% from the same
period of 1997. A key indicator of performance, the return on average equity
(ROE) was 18.7% and 18.9% for September 30, 1998 and 1997, respectively.
Net interest income represents a principal source of earnings for the
Company. The first component is the loan portfolio. Making sound loans that will
increase the Company's net interest margin is the first priority of management.
The second component is gathering core deposits to match fund the loan
production. The Company also uses electronic funding of deposits and Federal
Home Loan Bank ("FHLB") advances to fund loan growth either for asset and
liability management purposes or for a less expensive source of funds.
Net interest income, before provision for loan losses, increased from
$3,459 for the nine months ended September 30, 1997 to $6,342 for the same
period in 1998. During the third quarter, net interest income increased from
$1,239 in 1997 to $2,086 in 1998.
Non-interest income increased from $3,049 for the nine months ended
September 30, 1997 to $6,349 for the same period in 1998. During the third
quarter, non-interest income increased from $1,303 in 1997 to $1,710 in 1998.
This increase was primarily from income derived from mortgage banking
operations. The general decline in interest rates, which began in 1995 and
continued through the third quarter of 1998, was a factor in the increase of
mortgage banking income. For the nine months ended September 30, 1998, the
Company had an increase in mortgage banking income of 102.9% or $2,913 to $5,744
over the same period of 1997. During the third quarter of 1998, mortgage banking
income increased 17.6% or $217 to $1,447 over the same period in 1997. Because
of the uncertainty of future loan origination volume and the future level of
interest rates, there can be no assurance that the Company will realize the same
level of mortgage banking income in future periods. Other non-interest income
consists of service charges. This increase of 186.1% to $595 for the period
ended September 30, 1998 was primarily attributable to service charges on
deposit accounts which increased with the addition of Eastern American.
For the nine months ended September 30, 1998, the Company had an increase
in non-interest expense of $4,583 or 103.7% over the same period in 1997. During
the third quarter of 1998, non-interest expense increased $824 or 48.2% over the
same period in 1997. All areas of non-interest expense were affected by the
increased volume in the mortgage banking operations and the merger with Eastern
American. The largest component of non-interest expense, salaries and employee
benefits which represents 58.4% of total non-interest expense, increased 84.7%
to $5,260 for the nine months ended September 30, 1998 over the same period in
1997. Occupancy expense increased by 106.9% to $811, depreciation and equipment
maintenance increased by 81.3% to $580, stationery and office supplies increased
by 124.5% to $229, marketing and business development increased by 93.4% to $263
and outside computer services increased by 190.7% to $439 for the nine months
ended September 30, 1998 over the same period in 1997.
<PAGE>
Funds are advanced in settlement of mortgage loans originated on behalf of
investor banks. Mortgage banking income is recognized when the related mortgage
is transferred to the investor bank. Based on the increased volume, market
conditions and the changes thereto that could prompt potential losses,
management made a provision for funds advanced of $265 during the nine months
ended September 30, 1998 and had no such provision during the same period of
1997.
In establishing the allowance for loan losses, management considers a
number of factors, including loan asset quality, related collateral and economic
conditions prevailing during the loan's repayment. In its loan policies,
management emphasizes the borrower's ability to service the debt, the borrower's
general creditworthiness and the quality of collateral. The allowance for loan
losses as a percentage of quarter-end loans at September 30 was 1.4% and 1.2%
for 1998 and 1997, respectively. A provision for loan losses of $150 and $113
was provided during the nine months ended September 30, 1998 and 1997,
respectively.
While the Company believes it has sufficient allowance for its existing
portfolio, there can be no assurances that an additional allowance for losses on
existing loans may not be necessary in the future, particularly if the economy
worsens.
At September 30, 1998, the Company had $711 in non-accrual loans and
$1,203 of loans past due 90 days or more that are still accruing. Management
believes losses, if any, will be minimal, although no assurance can be given in
this regard. Loans are generally placed in nonaccrual status when the collection
of principal and interest is 90 days or more past due, unless the obligation is
both well-secured and in the process of collection.
<PAGE>
Liquidity represents the institution's ability to meet present and future
financial obligations. Liquid assets include cash, interest bearing deposits
with banks, federal funds sold, investments and loans maturing within one year.
The Company's funding requirements are supplied from a range of traditional
sources, including various types of demand deposits, money market accounts,
certificates of deposit and short-term borrowings. Federal Home Loan Bank
("FHLB") advances are utilized as funding sources by the Company. At September
30, 1998, there were $9,300 in FHLB advances outstanding. At September 30, 1997,
$13,500 in advances were outstanding. The Company has a warehouse line of credit
collateralized by first mortgage loans amounting to $50,000 which expires
December 2, 1998. Also available is a variable rate line of credit on which the
Company may borrow up to $13,200. This arrangement expires November 3, 1998, and
can be prepaid at anytime by the Company. The Company has no reason to believe
these arrangements will not be renewed. The Bank had no outstanding warehouse
advances at September 30, 1998 and 1997. At September 30, 1998, $9,300 was
outstanding in other advances. At September 30, 1997, $13,500 was outstanding in
other advances. Federal funds sold to correspondent institutions were $1,900 on
September 30, 1998 and $4,140 at September 30, 1997.
Management seeks to ensure adequate liquidity to fund loans and meet
the Company's financial requirements and opportunities. To provide liquidity for
current, ongoing and unanticipated needs, the Company maintains short-term
interest bearing certificates of deposits, federal funds sold, and a portfolio
of debt securities. The Company also structures and monitors the flow of funds
from debt securities and from maturing loans. As securities are generally
purchased to provide a source of liquidity, most are classified as securities
available-for-sale when purchased. Unrealized holding gains and losses for
available-for-sale securities are excluded from earnings and reported as a net
amount in a separate component of stockholders' equity until realized.
Securities are composed primarily of governmental or quasi-governmental
agencies.
The Company's financial position at September 30, 1998 reflects liquidity
and capital levels currently adequate to fund anticipated future business
expansion. Capital ratios are in excess of required regulatory minimums for a
well capitalized institution. The assessment of capital adequacy depends on a
number of factors such as asset quality, liquidity, earnings performance, and
changing competitive conditions and economic forces. The adequacy of the
Company's capital is reviewed by management on an ongoing basis. Management
seeks to maintain a capital structure that will assure an adequate level of
capital to support anticipated asset growth and to absorb potential losses.
The capital adequacy standards are based on an established minimum for
Risk-Based Capital, Tier 1 Risk-Based Capital and the Tier 1 Leverage Ratio.
The following table summarizes the Company's regulatory capital ratios at
September 30, 1998.
Required Ratio Actual Ratio
Tier 1 risk-based 4.00% 8.24%
Total risk-based 8.00% 9.45%
Tier 1 leverage 4.00 to 5.00% 7.12%
The Company is in full compliance with all relevant regulatory capital
requirements.
The effect of changing prices on financial institutions is typically
different from other industries as the Company's assets and liabilities are
monetary in nature. Interest rates are significantly impacted by inflation, but
neither the timing nor the magnitude of the changes are directly related to
price level indices. Impacts of inflation on interest rates, loan demand and
deposits are reflected in the financial statements. The mortgage banking
operations provide somewhat of a natural interest rate hedge, in that the
Company is interest rate sensitive in the six-month period. When interest rates
decline, the Company's earnings will be negatively impacted in the six-month
period but the mortgage operation's volume will increase. The reverse will
happen in rising interest rate markets.
<PAGE>
Year 2000 Issue
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations.
Since August, 1996, the Company has been in compliance with Federal
Reserve and Federal Financial Institutions Examination Council (FFIEC)
guidelines for resolution of the Year 2000 issue. The phases outlined by the
regulators are assessment, renovation, validation, and implementation.
Assessment includes establishing an action plan, risk ratings and inventories of
hardware, applications and communications as well as any additional systems that
impact the ability to do business. For system or piece of equipment defined as
critical to the Company's ability to do business, the Company must have a
contingency plan which is subject to the same guidelines from the regulators.
Renovation is fixing systems or applications that have Year 2000 issues as well
as upgrading or replacing hardware. Validation includes testing the systems,
applications and hardware to be certain that they are Year 2000 compliant.
Implementation of the tested compliant systems is the final step in the process,
which includes integrating applications to be certain they will run together as
well as separately.
Inventory and assessment of all Information Technology Systems is
complete. The Company has no propriety or in-house developed systems or
software, so Non-Information Technology Systems which affect the Company are
limited to infrastructure and communications. All systems have been inventoried,
assessed and the vendors contacted for Y2K information. Testing is under way or
complete on all critical systems. Year 2000 compliance is part of the decision
making process for new purchases, contracts and upgrades.
The Company changed data processors in late 1997 and is processed by a
Service Bureau which houses and maintains all hardware, software and backups
applicable to updating and maintaining the Company's customer and financial
records. Because this is the area of greatest risk to the Company, this
arrangement means the Company must carefully oversee the efforts of the vendor
to ensure Year 2000 compliance is complete and timely. The data processor's
service bureau and business partners which supply software and auxiliary
products have been renovated and tested satisfactory by outside auditors. The
data processor has supplied a series of reports of their progress, and, most
recently a copy of their Year 2000 audit. Implementation of the tested systems
will take place through a series of software upgrades through first quarter 1999
which management believes will help to identify and correct problems well before
the final deadline.
Other major vendor relationships provide hardware and software which
provide network communications with the data processor as well as remote bank
locations. Hardware in all bank locations has been tested and a sampling will be
re-tested for validation by another vendor by the end of 1998. Operating systems
software was tested, upgraded if necessary with vendor supplied patches, and
tested in conjunction with the hardware tests. Bank ATM's are in the process of
being scheduled for renovation by the vendor.
<PAGE>
The Company's Year 2000 project is currently on schedule and costs
directly attributable to the Year 2000 project have not been substantial to date
due to the fact that the change in data processors and the acquisition of a bank
in late 1997 required a complete upgrade of all desktop computer systems and
servers. Year 2000 compliance was an important part of all purchases and any
known issues were corrected. However, future costs of testing by outside vendors
may exceed $100 thousand based on the best estimates available as of this date.
These funds will be financed internally.
Because the Company had a detailed Business Continuation Plan before the
Year 2000 Project began, various potential business interruptions and
alternatives were already documented which would permit a short term continuance
as long as the data processor preserves the ability to update records. Loss of
the data processor is the greatest risk to the Company and a contingency plan
under these circumstances is difficult to put in place because of the time
required to change data processors. For this reason, the Year 2000 compliance of
all data processing companies is being strictly monitored by outside auditors
and regulators and the Company is receiving regular reports regarding their
progress. Since the Company's Year 2000 issues produce exposure which could
result in an adverse impact on the Company's earnings, management intends to
review these progress reports carefully as well as monitor the system as the
millennium gets closer and forward dates begin to reflect the new century.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or of which the property of the Company is subject.
ITEM 2. CHANGES IN SECURITIES
On March 16, 1998, June 25, 1998 and September 24, 1998, the Company
announced a quarterly dividend of $.06 per share to be paid to shareholders of
record on March 31, 1998, June 30, 1998 and September 30, 1998, respectively.
ITEM 5. OTHER INFORMATION
The Securities and Exchange Commission (the "SEC") recently amended the
proxy rules to provide that a registrant, such as the Company, may specify in
its proxy statement or form of proxy for its annual meeting of shareholders that
proxies solicited by the registrant will confer discretionary authority to vote
with regard to matters that may be raised at the meeting, including matters to
be raised by shareholders that were not properly submitted to the registrant as
shareholder proposals in accordance with SEC Rule 14a-8, if the registrant did
not have notice of such matters at least 45 days before the date on which the
registrant first mailed its proxy materials for the prior year's annual meeting
of shareholders. The Company first mailed its proxy materials for its 1998
Annual Meeting of Shareholders on April 29, 1998. Under the SEC's amended proxy
rules, the 45 day deadline for notice to the Company of non-rule 14a-8 matters
to be raised at the Company's 1999 Annual Meeting of Shareholders is March 16,
1999.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The registrant includes herein the following exhibits.
Exhibit No. Item
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarterly period covered in the report, the Company filed a
current report on Form 8-K, dated July 1, 1998, reporting the Agreement
and Plan of Reorganization, dated as of April 10, 1998 and related Plan of
Share Exchange (the "Agreement") which provided for the reorganization of
Resource Bank under a bank holding company structure. Resource Bankshares
Corporation was organized to serve as the holding company for the Bank.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the under-signed, thereunto
duly authorized.
RESOURCE BANKSHARES CORPORATION
/s/ Lawrence N. Smith 11-12-98
______________________________________ Date:________
Lawrence N. Smith
President & Chief Executive Officer
/s/ Eleanor J.Whitehurst 11-12-98
_____________________________________ Date:________
Eleanor J. Whitehurst
Senior Vice President & Chief
Financial Officer
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