UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 000-24561
RESOURCE BANKSHARES CORPORATION
(Exact name of Registrant as specified in its charter)
Virginia 54-1904386
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3720 Virginia Beach Blvd., Virginia Beach, Virginia 23452
(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code: 757-463-2265
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $1.50 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing sale price of the registrant's common stock on
March 1, 1999 as reported in The Wall Street Journal, was $40,755,000.
The number of shares outstanding of the registrant's common stock as of March
1,1999:2,474,158.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Part I .......................................................................................................... 3
Item 1. Business ...................................................................................... 3
Item 2. Properties .................................................................................... 16
Item 3. Legal Proceedings ............................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 16
Part II ......................................................................................................... 16
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters .......................... 16
Item 6. Selected Consolidated Financial Data .......................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 19
Item 7a. Quantitative and Qualitative Disclosures about Market Risk .................................... 25
Item 8. Financial Statements and Supplementary Data ................................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......... 26
Part III ........................................................................................................ 26
Item 10. Directors and Executive Officers of the Registrant ............................................ 26
Item 11. Executive Compensation ........................................................................ 26
Item 12. Security Ownership of Certain Beneficial Owners and Management ................................ 26
Item 13. Certain Relationships and Related Transactions ................................................ 26
Part IV ......................................................................................................... 26
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 26
Consolidated Financial Statements ...................................................................... 26
</TABLE>
2
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Part I
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,
statements regarding the Company's management of credit risk, credit policies
generally, allowances for loan losses, and the affect of increasing interest
rates on the Company's profitability. Several factors, including the local and
national economy, the demand for residential mortgage loans, and the adequacy of
the Company's Year 2000 readiness could have a material affect on the Company's
anticipated 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 Form 10-K.
Item 1.Business
Resource Bankshares Corporation (the "Company" or "Resource
Bankshares"), a Virginia corporation, was established in 1998 and is
headquartered in Virginia Beach, Virginia. The Company was capitalized as the
result of a two for one share exchange with Resource Bank (the "Bank"), a
Virginia state chartered bank. In a share exchange that became effective July 1,
1998, the shareholders of Resource Bank exchanged each of their shares of the
Bank's common stock for two shares of the Company's common stock, and the Bank
thereby became a wholly owned subsidiary of the Company. The Company conducts
virtually all of its business through the Bank. In this Form 10-K, the term
"Company" refers to Resource Bankshares Corporation and Resource Bank
collectively, unless the context otherwise requires.
The Bank opened for business September 1, 1988. After four years of
initial losses the Bank was recapitalized, and a new management team and new
Board of Directors took control January 1, 1993. Headquartered in Virginia
Beach, the Bank operates three full service banking offices - one each in
Virginia Beach, Herndon and Reston, Virginia. The Herndon and Reston branches
were acquired in December 1997 when Eastern American Bank, FSB (Eastern
American) merged into the Bank. Prior to that time the Bank operated only one
banking office in Virginia Beach. All bank branches now operate under the name
Resource Bank. A fourth branch location in Chesapeake, Virginia, is expected to
open during the second quarter of 1999.
The Bank serves customers throughout Virginia, providing banking
services primarily to individuals and businesses located in south Hampton Roads
in southeast Virginia, and Fairfax County in northern Virginia. The Bank markets
its services to consumers, small to medium sized businesses and professional
people and emphasizes personal relationship banking. A full range of services is
offered including checking and savings accounts, certificates of deposit and
charge cards, as well as services typically associated with larger banks, such
as sweep account capacity, automatic reconcilement, and corporate credit cards.
The Bank is a Preferred Lender under the Small Business Administration (SBA)
program in both the Richmond, Virginia and Washington, DC SBA districts and
ranked number 4 in loan volume (27 loans totaling $7.31 million) in the Richmond
district in fiscal year 1998.
The Bank's mortgage division originates residential one to four family
unit mortgage loans and sells them to investors in the national secondary
market. During 1998, the Bank originated and sold mortgage loans in excess of
$600 million. The mortgage division originates loans from the three bank
3
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locations as well as from its two mortgage offices in Richmond, and one office
each in Chesapeake, Reston, and Bowie, MD. An additional mortgage loan
origination office is scheduled to open in Virginia Beach in April 1999. During
1998 the mortgage division also operated mortgage branch offices in Colonial
Heights, Virginia, Hilton Head, SC, and several locations throughout the
northern Virginia region, but has since discontinued those operations.
Additionally, the Bank originates loans throughout the southwestern United
States through its wholesale operations, as well as through its participation in
a limited liability company specializing in relocation services. Mortgage
closing and shipping operations are conducted at the Bank's shipping office in
Virginia Beach, Virginia.
4
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AVERAGE BALANCES, INTEREST INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
The following table sets forth average balances of total interest earning assets
and total interest bearing liabilities for the periods indicated, showing the
average distribution of assets, liabilities, stockholders' equity and the
related income, expense and corresponding weighted-average yields and costs.
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance(1) Expense Rate(2) Balance(1) Expense Rate(2) Balance(1) Expense Rate(2)
--------- ------- ------- --------- ------- ------ ---------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest Earning Assets:
Securities $12,386 $712 5.75% $15,935 $1,009 6.33% $16,885 $1,185 7.02%
Loans(3) 168,271 15,352 9.12% 93,839 8,316 8.86% 69,488 6,268 9.02%
Interest bearing deposits
in other banks 11,870 623 5.25% 4,127 232 5.62% 4,411 137 3.11%
Other earning assets (4) 39,934 3,059 7.66% 13,153 1,380 10.49% 6,688 705 10.54%
------ ----- ----- ------ ----- ------ ----- --- -------
Total interest earning
assets 232,461 19,746 8.49% 127,054 10,937 8.61% 97,472 8,295 8.51%
Noninterest earning assets:
Cash and due from banks 3,027 1,700 1,760
Premises and equipment 3,286 965 614
Other assets 4,669 1,480 2,027
Less: Allowance for loan
losses (2,775) (1,252) (993)
------- ------- -----
Total noninterest earning
assets 8,207 2,893 3,408
----- ----- -----
Total Assets $240,668 $129,947 $100,880
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest Bearing Liabilities:
Interest bearing deposits:
Demand/MMDA accounts $11,437 384 3.36% $8,543 285 3.34% 7,787 261 3.35
Savings 19,334 916 4.74% 2,289 93 4.06% 779 23 2.95%
Certificates of deposit 158,740 9,016 5.68% 96,370 5,318 5.52% 76,932 4,317 5.61%
------- ----- ----- ------ ----- ----- ------ ----- -----
Total interest bearing
deposits 189,511 10,316 5.44% 107,202 5,696 5.31% 85,498 4,601 5.38%
FHLB advances and other
borrowings 17,806 1,020 5.73% 4,959 287 5.79% 1,617 89 5.50%
Total interest bearing
liabilities 207,317 11,336 5.47% 112,161 5,983 5.33% 87,115 4,690 5.38%
Noninterest bearing liabilities:
Demand deposits 13,595 6,898 5,800
Other liabilities 3,007 1,090 799
----- ----- ---
Total liabilities 16,602 7,988 6,599
Stockholders' equity 16,749 9,798 7,166
Total liabilities and
stockholders' equity $240,668 $129,947 $100,880
======== ======== ========
Interest spread (5) 3.02% 3.28% 3.13%
Net interest income/net
interest margin (6) $8,410 3.62% $4,954 3.90% $3,605 3.70%
====== ====== ======
</TABLE>
(1) Average balances are computed on monthly balances and Management believes
such balances are representative of the operations of the Corporation.
(2) Yield and rate percentages are all computed through the annualization of
interest income and expenses versus the average balances of their respective
accounts.
(3) Non-accrual loans are included in the average loan balances, and income on
such loans is recognized on a cash basis.
5
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(4) Consists of funds advanced in settlement of loans.
(5) Interest spread is the average yield earned on earning assets, less the
average rate incurred on interest bearing liabilities.
(6) Net interest margin is net interest income, expressed as a percentage of
average earning assets.
As the largest component of the Company's income, net interest income
represents the amount that interest and fees earned on loans and investments
exceeds the interest costs of funds used to support these earning assets. Net
interest income is determined by the relative levels, rates and mix of earning
assets and interest-bearing liabilities.
For the year ended December 31, 1998, net interest income was $8.4
million, an increase of approximately $3.5 million, or 69.8%, over the $4.95
million for the same period in 1997. Average interest earning assets increased
$105.4 million from 1997 to 1998 while average interest-bearing liabilities
increased $95.1 million. The yield on average interest-earning assets for the
year ended December 31, 1998 was 8.49% compared with 8.61% for the comparable
1997 period. The 1998 yield on loans was 9.12%, compared to 8.86% in 1997. The
cost on average interest-bearing liabilities increased 13 basis points during
1998 to 5.44%, compared to 5.31% during 1997.
Net interest income for the year-ended December 31, 1997 increased
37.5%, or approximately $1.35 million over 1996. Average interest earning assets
increased $29.6 million from 1996 to 1997 while average interest-bearing
liabilities increased $25.0 million. The yield on average interest-earning
assets for the year ended December 31, 1997 was 8.61% compared with 8.51% for
the comparable 1996 period. The 1997 yield on loans was 8.86%, compared to 9.02%
in 1996. The cost on average interest-bearing liabilities decreased seven basis
points during 1997 to 5.31%, compared to 5.38% during 1996.
The Company's net interest margin is sensitive to the volume of
mortgage banking division loan originations. All loans originated by the
mortgage banking division are sold, servicing released, in the secondary
mortgage market. Each mortgage loan originated is sold when the borrower
locks-in the interest rate on the loan. When the volume of mortgage loan
originations increases, typically in a declining interest rate environment,
"funds advanced in settlement of mortgage loans" increases. This balance sheet
item represents funds advanced to close mortgage loans, pending delivery of the
loans to the loan purchaser. Until a mortgage loan is transferred to the
purchaser, the Company receives interest on the loan at the note rate. Funds
advanced in settlement of mortgage loans are financed to a large extent with
short term Federal Home Loan Bank borrowings. While such funds advanced
contribute to net interest income, the interest rate spread on this item is not
as great as the spread on the loan portfolio, which normally carries a higher
interest yield and is financed with lower cost deposits. Thus, as funds advanced
in settlement of mortgage loans increase, the interest spread and the net
interest margin decrease. The average balance of funds advanced in settlement of
mortgage loans was $39.9 million for the year ended December 31, 1998, compared
to $13.2 million in the year ended December 31, 1997.
Net interest income is affected by changes in both average interest
rates and average volumes of interest earning assets and interest bearing
liabilities. The following table sets forth the amounts of the total change in
interest income that can be attributed to changes in the volume of
interest-bearing assets and liabilities and the amount of the change that can be
attributed to changes in interest rates. The amount of the change not solely due
to rate or volume changes was allocated between the change due to rate and the
change due to volume based on the relative size of the rate and volume changes.
6
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<TABLE>
<CAPTION>
Year Ended December 31
1998 compared to 1997 1997 compared to 1996
Increase (Decrease) Increase (Decrease)
Due to Changes In: Due to Changes In:
--------------------------------------- ---------------------------------------
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Securities $(211) $(86) (297) $(64) $(112) $(176)
Loans (1) 8,721 (6) 8,715 2,792 (69) 2,723
Interest bearing
deposits in other banks 405 (14) 391 (8) 103 95
--- ---- --- --- --- --
Total $8,915 $(106) $8,809 $2,720 $(78) $2,642
------ ------ ------ ------ ----- ------
Interest Expense:
Interest bearing deposits $4,478 $142 $4,620 $1,152 $(57) $1,095
FHLB advances and
other borrowings 736 (3) 733 193 5 198
--- --- --- --- - ---
Total $5,214 $139 $5,353 $1,345 $(52) $1,293
------ ---- ------ ------ ----- ------
Increase(decrease) in net
interest income $3,701 ($245) $3,456 $1,375 ($26) $1,349
====== ====== ====== ====== ===== ======
</TABLE>
(1) Loans include funds advanced in settlement of loans.
INTEREST RATE SENSITIVITY ANALYSIS
Management evaluates interest sensitivity through the use of an
asset/liability management reporting gap model on a quarterly basis and then
formulates strategies regarding asset generation and pricing, funding sources
and pricing, and off-balance sheet commitments in order to decrease sensitivity
risk. These strategies are based on management's outlook regarding interest rate
movements, the state of the regional and national economies and other financial
and business risk factors. In addition, the Company establishes prices for
deposits and loans based on local market conditions and manages its securities
portfolio under policies that take interest risk into account.
7
<PAGE>
The following table presents the amounts of the Company's interest
sensitive assets and liabilities that mature or reprice in the periods
indicated.
<TABLE>
<CAPTION>
December 31, 1998
Maturing
--------------------------------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-------- ------ ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Investment securities $7,452 $775 $1,073 $543 $9,843
Loans 108,051 16,907 41,892 21,672 188,522
Other interest-earning assets 25,208 - - - 25,208
------ ------ ----- ----- ------
Total interest-earning assets 140,711 17,682 42,965 22,215 223,573
------- ------ ------ ------ -------
Interest-Bearing Liabilities:
Deposits
Demand and savings - - 33,453 - 33,453
Time deposits, $100,000 and over 3,191 6,011 516 - 9,718
Other time deposits 40,086 102,500 4,679 - 147,265
Other interest-bearing liabilities - 2,000 5,300 - 7,300
------ ----- ----- ----- -----
Total interest-bearing liabilities 43,277 110,511 43,948 - 197,736
------ ------- ------ ----- -------
Period Gap $97,434 $(92,829) $(983) $22,215 $25,837
------- --------- ------ ------- -------
Cumulative Gap $97,434 $4,605 $3,622 $25,837
------- ------ ------ -------
Ratio cumulative gap to total
interest-earning assets 43.58% 2.06% 1.62% 11.56%
------ ----- ----- ------
</TABLE>
The December 31, 1998 results of the rate sensitivity analysis show
that the Company had $97.4 million more in assets than liabilities subject to
repricing within three months or less and was, therefore, in an asset sensitive
position.
The cumulative gap at the end of one year was a positive $4.6 million,
an asset-sensitive position. Approximately $125.0 million, or 66.3% of the total
loan portfolio, matures or reprices within one year or less. An asset-sensitive
institution's net interest margin and net interest income generally will be
impacted favorably by rising interest rates, while that of a liability sensitive
institution generally will be impacted favorably by declining rates.
Increases and decreases in the Company's mortgage banking income
(which consists primarily of gains on sales of mortgage loans) tend to offset
decreases and increases in the net interest margin. In a climate of lower or
declining interest rates, the Company's net interest margin will tend to
decrease as the yield on interest earning assets decreases faster than the cost
of interest bearing liabilities. Mortgage banking income, in contrast, tends to
increase in times of lower or declining interest rates, as refinancing activity
leads to an increase in mortgage loan originations. In a climate of rising or
higher interest rates, the net interest margin will tend to increase, while a
decrease in mortgage loan originations leads to a decrease in mortgage banking
income.
8
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INVESTMENT PORTFOLIO
The following tables present certain information on the Company's
investment securities portfolio:
Securities Available for Sale (1)
1998 1997 1996
---- ---- ----
U.S. Government Agencies $6,868 $9,802 $15,799
Federal Reserve Bank Stock 434 297 246
Federal Home Loan Bank Stock 1,162 2,233 747
Other 155 100 100
--- --- ---
$8,619 $12,432 $16,892
====== ======= =======
(1) Carried at fair value
Securities Held to Maturity (2)
1998 1997 1996
---- ---- ----
U.S. Government Agencies $478 $1,996 -
State and Municipal 746 746 -
--- --- ---
$1,224 $2,742 -
(2) Carried at cost, adjusted for amortization of premium or accretion of
discount using the interest method.
Gross unrealized losses on securities available for sale were $2,000
at December 31, 1998 and there were no unrealized losses at December 31, 1997.
Gross unrealized gains were $95,000 and $449,000 at December 31, 1998 and 1997,
respectively. At December 31, 1996 gross unrealized gains and losses on
securities available for sale were $90,000 and $125,000, respectively.
At December 31, 1998 and December 31, 1997 gross unrealized gains on
securities held to maturity were $30,000 and $11,000 respectively. At December
31, 1998 and 1997, gross unrealized losses on securities held to maturity were
$1,000 and $37,000, respectively.
The following table presents information on the maturities of the
Company's investment securities at December 31, 1998.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Due in:
One year or less $111 $111 $ - $ -
One to five years 570 576 500 503
Five to ten years 483 504 - -
After ten years 60 61 6,274 6,365
Federal Reserve Bank Stock - - 434 434
Federal Home Loan Bank Stock - - 1,162 1,162
Other - - 155 155
------ ------ ------ ------
$1,224 $1,252 $8,525 $8,619
====== ====== ====== ======
</TABLE>
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<PAGE>
In 1998 the average yield on investment securities was 5.75%, compared
to 6.33% in 1997. At December 31,1998 and December 31, 1997, all securities with
a maturity of over 10 years carried variable interest rates. The maturity
characteristics of the Company's investment securities portfolio did not change
materially from December 31, 1997 to December 31, 1998.
LOAN PORTFOLIO
The table below classifies loans, net of unearned income, by major
category and percentage distribution at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
Description Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $68,569 $ 36.37% $50,713 33.68% $34,021 41.50% $25,005 42.77% $3,444 8.39%
Real Estate 115,790 61.42 96,058 63,79 43,195 52.69 28,214 48.26 21,730 52.96
Consumer 4,163 2.21 3,819 2,53 4,759 5.81 5,245 8.97 15,860 38.65
----- ----- ----- ---- ----- ----- ----- ---- ------ -----
Total $188,522 100.00% $150,590 100.00% $81,975 100.00% $58,464 100.00% $41,034 100.00%
======== ======= ======== ======= ======= ======= ======= ======= ======= =======
</TABLE>
MATURITY SCHEDULE OF LOANS
The table below presents information regarding the maturity of loans at
December 31, 1998:
December 31, 1998
Over one
One Year through Five Years
or less Five Years or more
Commercial $38,578 $22,780 $7,211
Real estate - construction 44,606
Commercial real estate 6,267 25,069 11,147
Residential real estate - 3,439 25,263
Installment and consumer loans 364 3,798 -
--- ----- -------
$89,815 $55,086 $43,621
NONPERFORMING ASSETS
Unless well secured and in the process of collection, the Company
places loans on non-accrual status after being delinquent greater than ninety
days, or earlier in situations in which the loans have developed inherent
problems that indicate payment of principal and interest may not be made in
full. Whenever the accrual of interest is stopped, previously accrued but
uncollected income is reversed. Thereafter, interest is recognized only as cash
is received. The loan is reinstated to an accrual basis after it has been
brought current as to principal and interest under the contractual terms of the
loan. As of December 31, 1998, 1997, and 1996, non-accrual loans amounted to
$533,000, $3,059,000 and $50,000, respectively.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $533 $3,059 $50 $ 57 $52
Loans contractually past due 90 days or
more and still accruing 412 1,339 371 13 10
Troubled debt restructuring - - - - -
--- --- --- --- ---
Total nonperforming loans 945 4,398 421 70 62
Other real estate owned 647 684 50 71 91
--- --- -- -- --
Total nonperforming assets $1,592 $5,082 $471 $141 $153
====== ====== ==== ==== ====
Nonperforming assets to period-end total
loans and other real estate .84% 3.36% 0.57% 0.24% 0.37%
</TABLE>
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<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is increased by the provision for loan
losses and reduced by loans charged off net of recoveries. The allowance for
loan losses is established and maintained at a level judged by management to be
adequate to cover any anticipated loan losses to be incurred in the collection
of outstanding loans. In determining the adequate level of the allowance for
loan losses, management considers the following factors: (a) loan loss
experience; (b) problem loans, including loans judged to exhibit potential
charge-off characteristics, loans on which interest is no longer being accrued,
loans which are past due and loans which have been classified in the most recent
regulatory examination; and (c) anticipated economic conditions and the
potential impact these conditions may have on individual classifications of
borrowers.
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The following table presents the Company's loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of period $2,573 $1,040 $854 $492 $512
Loans charged off:
Commercial 126 2 5 21 124
Real Estate 141 56 109 148 11
Consumer 20 7 6 17 63
-- - - -- --
Total 287 65 120 186 198
Recoveries of loans previously charged off:
Commercial 1 34 6 23 116
Real Estate 40 - - - -
Consumer 23 9 10 13 12
-- - -- -- --
Total 64 43 16 36 128
-- -- -- -- ---
Net loans charged off 223 22 104 150 70
Provision for loan losses 150 155 290 512 50
--- --- --- --- --
Allowance acquired through business
combination - 1,400 - - -
- ----- ----- ---- -----
Allowance for loan losses end of period $2,500 $2,573 $1,040 $854 $492
===== ------ ====== ==== ====
Average total loans (net of unearned
income) $168,271 $93,839 $69,488 $48,465 $35,714
Total loans (net of unearned income) at
period-end $188,522 $150,590 $81,975 $58,464 $41,034
Ratio of net charge-offs to average loans 0.13% 0.02% 0.15% 0.31% 0.20%
Ratio of provision for loan losses to
average loans 0.09% 0.17% 0.42% 1.06% 0.14%
Ratio of provision for loan losses to net
charge-offs 67.26% 704.55% 278.85% 341.33% 71.43%
Allowance for loan losses to period-end
loans 1.33% 1.71% 1.27% 1.46% 1.20%
</TABLE>
In establishing the allowance for loan losses, in addition to the
factors described above, management considers the following risk elements in the
loan portfolio.
12
<PAGE>
Construction lending often involves larger loan balances with single
borrowers. Construction loans involve risks attributable to the fact that loan
funds are advanced upon the security of the home under construction, which is of
uncertain value prior to the completion of construction. If there is a default,
the Company may be required to complete and sell the home.
Commercial real estate loans typically involve larger loan balances
concentrated with single borrowers or groups of related borrowers. Additionally,
the payment experience on loans secured by income producing properties is
typically dependent on the successful operation of a business or a real estate
project and thus may be subject to a greater extent, to adverse conditions in
the real estate market or in the economy generally.
Consumer loans entail risks, particularly in the case of consumer loans
which are unsecured, such as lines of credit, or secured by rapidly depreciable
assets such as automobiles. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance as a result of the greater likelihood of damage, loss
or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, thus
are more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and involved laws, may limit the
amount which can be recovered on such loans. Such loans may also give rise to
claims and defenses by a consumer loan borrower against an assignee of such
loan, and a borrower may be able to assert against such assignee claims and
defenses which it has against the seller of the underlying collateral.
Commercial business loans typically are made on the basis of the
borrower's ability to make repayment from cash flow from its business and are
secured by business assets, such as commercial real estate, accounts receivable,
equipment and inventory. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral for commercial business
loans may depreciate over time and cannot be appraised with as much precision as
residential real estate.
DEPOSITS
The table below presents average deposits and average rates paid, by
major category, at the dates indicated:
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
Demand/MMDA accounts $11,437 3.36% $8,543 3.34% $7,787 3.35%
Savings 19,334 4.74% 2,289 4.06% 779 5.95%
Certificates of deposit 158,740 5.68% 96,370 5.52% 76,932 5.61%
------- ------ ------
Total interest bearing deposits 189,511 5.44% 107,202 5.31% 85,498 5.38%
Non interest bearing deposits 13,595 - 6,898 - 5,800 -
Total average deposits $203,106 5.08% $114,100 4.99% $91,298 5.04%
======== ======== =======
</TABLE>
13
<PAGE>
The following table is a summary of time deposits of $100,000 or more
by remaining maturities at December 31, 1998:
Amount Percent
Three months or less $3,191 32.84%
Three to twelve months 6,011 61.85%
Over twelve 516 5.31%
--- -----
Total $9,718 100.00%
====== =======
SHORT TERM BORROWING
The following table sets forth the consolidated short term borrowing.
Borrowings represent advances to the Bank by the Federal Home Loan Bank of
Atlanta and are secured by Federal Home Loan Bank stock, investment securities
and first mortgage loans. During 1998, the Bank purchased federal funds on an
unsecured basis for three consecutive days from a correspondent bank.
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Balance at period end $2,000 $13,650 $7,237
Average balance during period $17,806 $4,959 $1,617
Average rate 5.65% 5.79% 5.50%
Maximum outstanding during period $46,420 $13,650 $7,237
RETURN ON EQUITY AND ASSETS
The following table sets forth ratios for Resource Bankshares and
its subsidiaries considered to be significant indicators of Resource Bankshares'
profitability and financial condition during the periods indicated:
RETURN ON EQUITY AND ASSETS
1998 1997 1996
---- ---- ----
Return on average assets 1.27% 1.40% 1.45%
Return on average equity 18.19% 18.59% 20.46%
Dividend payout ratio 21.24% 15.06% 6.58%
Average equity to average asset ratio 6.95% 7.54% 7.10%
Competition
The Company operates in highly competitive environments, competing for
deposits and loans with major regional and national banks, as well as other
financial institutions, many of which have greater financial resources than the
Company. Most maintain numerous banking locations and many perform services,
such as trust services, which the Company does not offer. Many of these
competitors have higher lending limits than the Company.
14
<PAGE>
Regulation and Supervision of Resource Bank
The Bank operates as a state chartered bank and is subject to
supervision and regulation by the Bureau of Financial Institutions ("BFI") of
the State Corporation Commission. As a member of the Federal Reserve System
("FRB"), the Bank is also supervised and regularly examined by the FRB. The
state and federal banking laws and regulations govern virtually all areas of the
Bank's operations including maintenance of cash reserves, loans, mortgages,
maintenance of minimum capital, mergers, payment of dividends, establishment of
branches and other aspects of operations.
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") which insures that member banks pay depositors to the
extent provided by law in the event an insured bank is closed without adequately
providing for the claims of depositors. The majority of the Bank's deposits are
subject to the deposit assessments of the Bank Insurance Fund ("BIF") of the
FDIC. A portion of the deposits of the Bank (those acquired as a result of the
merger with Eastern American) are subject to assessments imposed by the Savings
Association Insurance Funds ("SAIF") of the FDIC.
The earnings and growth of the banking industry are affected by the
general conditions of the economy and by the fiscal and monetary policies of the
Federal Government and its agencies, including the FRB Bank. The Board of
Governors regulates money and credit conditions and, as a result, has a strong
influence on interest rates and on general economic conditions. The effect of
such policies in the future on the business and earnings of the Bank cannot be
predicted with certainty.
Regulation and Supervision of Resource Bankshares
As a bank holding company, Resource Bankshares is subject to state and
federal banking and bank holding company laws and regulations which impose
specific requirements or restrictions and provide for general regulatory
oversight with respect to virtually all aspects of its operations.
The Company is registered under the Bank Holding Company Act ("BHCA")
and is subject to regulation by the Federal Reserve. The Federal Reserve has
jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger
or consolidation proposed by a bank holding company. The Company is required to
file with the FRB periodic and annual reports and other information concerning
its own business operations and those of its subsidiaries. In addition, the BHCA
requires a bank holding company to obtain FRB approval before it acquires,
directly or indirectly, ownership or control of any voting shares of a second or
subsequent bank if, after such acquisition, it would own or control more than 5%
of such shares, unless it already owns or controls a majority of such voting
shares. FRB approval must also be obtained before a bank holding company
acquires all or substantially all of the assets of another bank or merges or
consolidates with another bank holding company.
A bank holding company may not, without providing prior notice to the
FRB, purchase or redeem its own stock if the gross consideration to be paid,
when added to the net consideration paid by the company for all purchases or
redemptions by the company of its equity securities within the preceding 12
months, will equal 10% or more of the company's consolidated net worth unless it
meets the requirements of a well-capitalized and well-managed organization.
The Company is subject to various federal securities laws and is
required to make certain periodic filings with the Securities and Exchange
Commission ("SEC") as well as file certain reports on the occurrence of certain
material events. The Company files quarterly, annual and current reports with
the SEC. In addition, directors, officers and certain shareholders and senior
management are subject to further reporting requirements including obligations
to submit to the SEC reports of beneficial ownership of the Company's
securities.
15
<PAGE>
Employees
At December 31, 1998, the Bank had 149 full time and 13 part time
employees, in its banking and mortgage operations. None of its employees is
represented by any collective bargaining unit, and the Company believes
relations with its employees are good.
Item 2. Properties
The Company leases all of its banking and mortgage origination offices.
Leases covering banking operations are long term with renewal provisions
designed to assure the Company that it will continue to operate in the
facilities for the foreseeable future. Details of the Company's leases may be
reviewed in Note 12 of the Notes to Consolidated Financial Statements included
as Exhibit 99.1 of this Form 10-K. The Company purchased a four acre lot in
Herndon, Virginia in December 1997 for future construction of a Northern
Virginia regional office which management anticipates will accommodate the
Company's administration and branch offices that are currently located in
Herndon. The project is currently in the design phase with completion of the
facility expected in 2000.
Item 3. Legal Proceedings
In the ordinary course of business, the Company may, from time to time,
be party to various legal proceedings. The Company does not believe the outcome
of these proceedings, individually or in the aggregate, will have a material
adverse effect on the Company's business, financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the Company's shareholders for a vote
during the fourth quarter of 1998.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock is listed on the American Stock Exchange
("Amex") under the symbol "RBV". Prior to July 23, 1998, the Company's Common
Stock was listed on the Nasdaq National Market System ("Nasdaq/NM") under the
symbol "RBKV". The high and low closing sales prices of the Company's common
stock during 1998 and 1997, as well as information on cash dividends, are set
forth in the following table. All per share figures have been adjusted to
reflect a two-for-one stock split on July 1, 1998.
At the time the current management assumed control of the Bank's day to
day operations in 1993, the Bank had accumulated a significant deficit. The Bank
was prohibited from paying dividends under Virginia banking law until it had
restored any deficits in its capital funds as originally paid in. Additionally,
Federal Reserve Board regulations limit the payment of dividends to net profits,
as defined, of the current year, plus retained net profits of the previous two
years. Consequently, until 1996, these regulations precluded the Bank from
paying dividends.
In each of January 1996 and April 1997, the Bank's Board of Directors
approved a one-time dividend of $0.05 and $0.125 per share, respectively,
contingent upon approval of the Board of Governors of the Federal Reserve System
and the Virginia Bureau of Financial Institutions. Subsequently, the dividends
were approved by the relevant regulatory authorities, subject to certain
provisions of Regulation H of the Federal Reserve System. These provisions
16
<PAGE>
required the Bank to obtain approval of at least two-thirds of the holders of
its Common Stock. Accordingly, the shareholders approved the $0.05 dividend at
the 1996 Annual Meeting of Shareholders and the $0.125 dividend at the 1997
Annual Meeting of Shareholders. As a result of the Company's improved financial
position, such approvals are no longer required as long as the Company continues
to achieve satisfactory earnings.
AMEX 1998 HIGH LOW CASH DIVIDEND PAID
Fourth Quarter $21.00 $16.50 $0.06
Third Quarter (July 23 -
September 30) 24.50 16.88 0.06
NASDAQ/NM 1998
Third Quarter (July
1-July 22) 24.00 22.50
Second Quarter 25.00 20.00 0.06
First Quarter 23.00 18.00 0.06
1997
Fourth Quarter 22.50 13.75 ----
Third Quarter 14.50 11.75 0.125
Second Quarter 13.00 9.25 ----
First Quarter 10.25 9.00 ----
The Company's 2,476,824 common shares outstanding were held by approximately
872 shareholders of record at March 25, 1999.
17
<PAGE>
Item 6.Selected Consolidated Financial Data
The following consolidated summary sets forth selected financial data
for the Company and its subsidiaries for the periods and at the dates indicated.
The following summary is qualified in its entirety by the Company's financial
statements included as part of this Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
INCOME STATEMENT DATA: (Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Gross interest income .................... $19,746 $10,937 $8,295 $6,046 $3,988
Gross interest expense ................... 11,336 5,983 4,690 3,500 1,905
Net interest income ...................... 8,410 4,954 3,605 2,546 2,083
Provision for possible loan losses ....... 150 155 290 512 50
Net interest income after provision for
loan losses ............................ 8,260 4,799 3,315 2,034 2,033
Non-interest income ...................... 7,943 4,520 2,755 2,012 1,341
Non-interest expense ..................... 11,565 6,533 4,451 3,285 2,904
Income before income taxes ............... 4,638 2,786 1,619 761 471
Income taxes (benefit) ................... 1,591 965 153 (144) (180)
Net income ............................... 3,047 1,821 1,466 905 651
PER SHARE DATA (1):
Net income (2) ........................... $1.24 $ 0.92 $ 0.79 $ 0.54 $ 0.39
Cash dividends ........................... .24 0.125 0.05 - -
Book value at period end ................. 7.18 6.36 4.47 3.44 2.68
Tangible book value at period end ........ 7.18 6.36 4.47 3.44 2.68
PERIOD-END BALANCE SHEET DATA:
Total assets ............................. $233,460 $209,330 $115,836 $87,352 $63,735
Total loans (net of unearned income) ..... 188,522 150,590 81,975 58,464 41,034
Total deposits ........................... 206,219 169,508 99,179 80,905 54,918
Long-term debt ........................... 5,300 7,300 - - -
Shareholders' equity ..................... 17,789 15,602 8,655 5,810 4,525
PERFORMANCE RATIOS
Return on average assets ................. 1.27% 1.40% 1.45% 1.24% 1.18%
Return on average shareholders' equity ... 18.19% 18.59% 20.46% 17.93% 14.38%
Average shareholders' equity to average
total assets ........................... 6.96% 7.54% 7.10% 6.90% 8.16%
Net interest margin (3) .................. 3.62% 3.90% 3.70% 3.62% 4.00%
Earnings to fixed charges
Excluding interest on deposits ......... 5.55x 10.32x 17.52x 4.16x 5.57x
Including interest on deposits ......... 1.41x 1.46x 1.34x 1.30x 1.25x
ASSET QUALITY RATIOS
Net charge-offs to average loans ......... .13% 0.02% 0.15% 0.31% 0.20%
Allowance to period-end loans ............ 1.33% 1.71% 1.27% 1.46% 1.20%
Allowance to nonperforming loans ......... 264.55% 58.50% 247.03% 1220.00% 793.55%
Nonaccrual loans to loans ................ 0.28% 2.03% 0.06% .10% 0.13%
Nonperforming assets to loans and
foreclosed properties .................. .84% 3.36% 0.57% 0.24% 0.37%
Risk-based capital ratios
Tier 1 capital ......................... 9.23% 9.69% 10.22% 9.61% 10.23%
Total capital .......................... 10.48% 10.93% 11.45% 10.86% 11.28%
Leverage capital ratio ................... 7.52% 9.67% 7.04% 6.25% 7.22%
Total equity to total assets ............. 7.62% 7.45% 7.47% 6.65% 7.10%
</TABLE>
18
<PAGE>
- ------------------
(1) All per share figures have been adjusted to reflect a two-for-one stock
split on July 1, 1998.
(2) Net income per share is computed using the weighted average outstanding
shares.
(3) Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Corporation's net yield
on its earning assets.
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
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,
statements regarding the Company's management of credit risk, credit policies
generally, allowances for loan losses, and the affect of increasing interest
rates on the Company's profitability. Several factors, including the Virginia
and national economy, the demand for residential mortgage loans, and the
adequacy of the Company's Year 2000 readiness could have a material affect on
the Company's anticipated 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 Form 10-K.
On December 1, 1997, the Bank acquired Eastern American Bank, FSB, in
a business combination accounted for under the purchase method of accounting,
whereby the purchase price was allocated to the underlying assets acquired and
liabilities assumed based on their respective fair values at the time of
acquisition. In exchange for issuing shares of the Bank's common stock to
Eastern American Bank's shareholders, the Bank acquired $66,514,000 in assets
(including cash of $12,539,000), $48,082,200 in net loans, and assumed
$52,844,000 in deposit liabilities. Accordingly, these acquired assets and
liabilities contributed to the growth in total assets and liabilities of the
Bank for the year ended December 31, 1997 (See Note 18 to the consolidated
financial statements). The Company's 1997 results include results by operations
from the former Eastern American Bank for the month of December 1997.
The following discussion should be read in conjunction with the
Company's Financial Statements and Notes thereto included as Exhibit 99.1 of
this Form 10-K.
Results of Operations and Financial Condition
The Company had net income of $3,046,800, $1,821,200 and $1,466,200
for 1998, 1997 and 1996, respectively. This constituted net basic earnings per
common share of $1.24 for 1998, $0.92 for 1997, and $0.79 for 1996. With the
diluted effect of common stock equivalents, earnings per common share increased
by 36.1% to $1.13 for 1998, from $0.83 in 1997 and $0.76 in 1996. The expanded
levels of earning assets increased net interest income during 1998 significantly
over 1997 and 1996. This factor, along with managed expense control and
expansion of the business loan portfolio, provided the basis for increased
earnings.
At December 31, 1998, 66.3% of total loans were due in one year or
less. Floating rate loans with maturities of one year or less represented 58.2%
of total loans, and the remainder of such loans had fixed rates.
Average loans, net of unearned income, to average deposits were 82.8%,
82.2% and 76.1% in 1998, 1997 and 1996, respectively.
19
<PAGE>
Net Interest Income
Net interest income, before provision for loan losses, increased by
69.8% in 1998 over 1997 to $8,409,983. Net interest income increased by 37.4% in
1997 over 1996 to $4,954,100. The increases in net interest income in 1998 and
1997 were closely proportionate with the increase in average earning assets and
interest bearing liabilities during 1998 and 1997, respectively. During 1998,
due to the Eastern American Bank merger that closed in December 1997 and the
continued expansion of commercial lending activities, average loans increased
79.3% to $168,271,463. Average loans increased 35% in 1997 to $93,839,500. Due
to the merger transaction and the competitive pricing of the Company's deposit
products, average total deposits increased 78.0% to $203,105,754 in 1998.
Average total deposits increased 25.0% to $114,100,000 in 1997. Average funds
borrowed from the Federal Home Loan Bank increased by 259.0% to $17,794,425 in
1998 and by 206.7% in 1997. As part of its mortgage banking operations, funds
were advanced on behalf of investor banks in settlement of mortgage loans.
Average funds advanced in settlement of such loans increased 203.6% to
$39,934,270 in 1998. Average funds advanced in settlement of mortgage loans
increased by 96.7% in 1997 to $13,153,300. Average securities decreased 22.3% to
$12,386,419 in 1998, and decreased by 5.6% to $15,934,900 in 1997. Average
certificates of deposit invested at other banks declined slightly, down 6.2%
from 1997 to 1998, to $937,808. Average certificates of deposit invested at
other banks were $1,000,000 in 1997 and 1996.
Allowance for Loan Losses
The ratio of net loans charged off to average loans outstanding was
0.13%, 0.02% and 0.15% in 1998, 1997 and 1996, respectively. The allowance for
loan losses as a percentage of loans at year end was 1.33%, 1.71% and 1.27% at
December 31, 1998, 1997 and 1996, respectively. The level of non-performing
loans at year end was $945,000, $4,398,000 and $421,000 in 1998, 1997 and 1996,
or 0.50%, 2.92% and 0.51% of total loans, respectively. Management made a
provision for loan losses of $150,000 in 1998, $155,000 in 1997 and $290,000 in
1996.
The majority of non-accrual loans emanated from Eastern American Bank
at the time of the merger in December 1997. The Company executed a plan to
substantially reduce the level of non-accruing loans in its Northern Virginia
portfolio during 1998. As the result of significant reductions in problem assets
and the addition of several experienced commercial lending officers, management
believes that asset quality within the Northern Virginia loan portfolio at
December 31, 1998, was comparable to the rest of the Bank.
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. While management
believes that the allowance is sufficient for the existing loan portfolio, there
can be no assurances that an additional allowance for losses on existing loans
may not be necessary in the future, particularly if economic conditions within
the Company's market areas were to deteriorate.
Potential Problem Loans
At December 31, 1998, the Company had $533,000 in non-accrual loans, a
reduction of 82.6% from December 31, 1997. The Company had $412,000 in loans
past due 90 days or more that were still accruing at December 31, 1998. In
addition to loans on either non-accrual status or loans past due 90 days or more
and still accruing, management had identified $1,220,000 of loans that have been
internally classified. These loans require more than normal attention and are
potentially problem loans.
20
<PAGE>
At December 31, 1997, the Bank had $3,059,000 in non-accrual loans and
$1,339,000 of loans past due 90 days or more that were still accruing. In
addition to loans on either non-accrual status or loans past due 90 days or more
and still accruing, the Bank had identified $1,842,800 of loans that were
internally classified.
Noninterest Income and Noninterest Expenses
Noninterest income was $7,943,413 in 1998, an increase of 75.7% over
1997. This increase was due to the merger transaction with Eastern American Bank
and income derived from mortgage banking operations. Noninterest income was
$4,520,000 in 1997 a 64.1% increase over 1996, derived primarily from mortgage
banking operations. The general decline in market interest rates, which began in
1995 and continued into 1998, was a factor in the increase of mortgage banking
income of 71.7% in 1998 to $7,062,445. Mortgage banking income increased by
69.4% in 1997 over 1996 to $4,111,000. 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 noninterest income from fees and service charges
in 1998, increased by 115.2% to $880,968, mainly from the increased volume of
deposit account activity after the merger transaction.
Total noninterest expense was $11,565,616 in 1998, a 77.0% increase
over 1997. All areas of noninterest expenses were affected by the increased
volume in the mortgage banking operations and the merger transaction. As the
result of the merger with Eastern American Bank, approximately 30 full-time
employees and 3 office locations were integrated into the Bank's operations.
Total noninterest expense was $6,533,000 in 1997, an increase of 46.8% over
1996. The largest component of noninterest expense, salaries and employee
benefits, increased 65.7% in 1998 over 1997 to $6,686,381. Salaries and employee
benefits increased 52.0% in 1997 to $4,035,900. This category comprised 57.8% of
the total noninterest expense in 1998, 61.8% in 1997 and 59.7% in 1996.
Occupancy expense increased 90.7% in 1998 over 1997 to $1,089,447. Occupancy
expense increased 46.2% in 1997 over 1996. Depreciation and equipment
maintenance expense increased 65.7% in 1998 over 1997 to $759,330. Depreciation
and equipment maintenance expense increased 29.9% in 1997 over 1996. Outside
computer service expense increased 125.5% to $547,160 in 1998. Outside computer
service expense increased 87.4% in 1997 to $242,900. Federal Deposit Insurance
Corporation ("FDIC") premiums increased 321% to $52,580 in 1998 over 1997.
FDIC premiums increased 522.6% to $12,500 in 1997 from $2,000 in 1996.
As the result of the merger with Eastern American Bank, FDIC insurance
premiums are assessed on the Bank's deposit base on a pro rata basis whereby
approximately 68 percent of the Bank's deposits are subject to Bank Insurance
Fund ("BIF") rates, and approximately 32 percent of deposits are subject to
Savings Association Insurance Fund ("SAIF") rates. This ratio of BIF and SAIF
assessment rates was established at the time of merger, based on the relative
sizes of the Bank and Eastern American Bank deposit bases at December 1, 1997.
See "Part I. Item 1. Business - Regulation and Supervision of Resource Bank."
Income Taxes
Applicable income taxes on 1998 earnings amounted to $1,590,933,
resulting in an effective tax rate of 34.3% compared to 34.6% in 1997 and 9.5%
in 1996.
The effective rate differed from statutory rates for the year ended
December 31, 1996, due to the Bank's utilization of net operating loss
carryforwards for financial statement purposes during 1996. As a result, the
Bank recorded a deferred tax asset and related income tax benefit of $448,127
for the realization of these loss carryforwards in 1996. All net operating loss
carryforwards were fully utilized in the year ended December 31, 1997 for
financial statement and income tax return purposes.
21
<PAGE>
Liquidity
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. Large certificates
of deposit accounted for 4.71%, 2.2% and 0.10% of total deposits at December 31,
1998, 1997 and 1996, respectively. Federal Home Loan Bank of Atlanta ("FHLB")
advances were also utilized as funding sources, with $7,300,000 and $20,950,000
in such advances outstanding at December 31, 1998 and December 31, 1997,
respectively. Pursuant to the terms of a variable rate line of credit with the
FHLB, the Bank may borrow up to $30,000,000. This FHLB credit facility has no
expiration date, but is re-evaluated periodically to determine the Bank's
creditworthiness, and can be prepaid at anytime. Additionally, the Bank has a
warehouse line of credit collateralized by first mortgage loans, amounting to
$50,000,000 which expires December 2, 1999. As of December 31, 1998, there was
no balance drawn from this line of credit. Management has no reason to believe
these arrangements will not be renewed.
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. Net unrealized appreciation, net of tax effect, on securities
available-for-sale was $60,929 and $296,400 at December 31, 1998 and 1997,
respectively. The Company from time to time also maintains short-term interest
bearing certificates of deposit with other financial institutions. These
certificates of deposit amounted to $0 and $1,000,000 at December 31, 1998 and
1997, respectively. Federal funds sold to correspondent institutions were
$800,000 and $1,920,000 at year end 1998 and 1997, respectively.
The Company raised approximately $9,200,000 of additional capital in
the first quarter of 1999 by issuing 368,000 Trust Preferred Securities at a
price of $25.00 per Security. The Trust Preferred Securities feature a 9.25%
coupon. The Company has, in turn, purchased $5,000,000 of non-cumulative 9.25%
Preferred Stock issued by the Bank. This Preferred Stock will qualify as Tier 1
capital for the Bank for regulatory purposes. Management believes that this
additional Tier 1 capital will provide the Bank with an increased loans to one
borrower limitation, and the ability to continue to grow its balance sheet while
maintaining its well capitalized status. The Preferred Stock 9.25% coupon will
match the coupon of the Trust Preferred Securities.
The remainder of funds generated by the Trust Preferred Securities
offering, estimated at $3,900,000 after offering expenses, will be invested in
marketable securities and used by the Company in its stock repurchase program.
The marketable securities will be held as available-for-sale to meet liquidity
needs. The Company's stock repurchase program will be used to offset the
otherwise dilutive effects of stock options granted to the Company's management
as employment recruitment and retention perquisites.
Impact of Accounting Pronouncements
Financial Accounting Standards Board Statement No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management will assess the impact, if any,
on the Company's financial statements.
22
<PAGE>
The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-1, ACCOUNTING FOR COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE. This SOP is effective for financial statements for
fiscal years beginning after December 31, 1998. The SOP requires entities to
capitalize certain internal-use software costs once certain criteria are met.
Generally, internal costs with respect to software configuration and interface,
coding, installation to hardware, testing (including parallel processing), and
data conversion costs allowing access of old data by new systems should be
capitalized. All other data conversion costs, training, application maintenance,
and ongoing support activities should be expensed. The Company will adopt this
SOP in 1999 and does not expect it to have a material effect on the Company's
consolidated financial condition or consolidated results of operations.
The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-5, REPORTING ON THE COSTS OF STARTUP ACTIVITIES, in April
1998. The SOP requires such costs to be expensed as incurred instead of being
capitalized and amortized. It applies to startup activities and costs of
organization of both development state and established operating activities, and
it changes existing practice for some industries. The SOP broadly defines
startup activities as those one-time activities that relate to the opening of a
new facility, introduction of a new product or service, doing business in a new
territory, initiating a new process in an existing facility, doing business with
a new class of customer or beneficiary, or commencing some new operation. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. Consistent with banking industry practice it is the
Company's policy to expense such costs. Therefore, this SOP is not expected to
materially affect the Company's financial position or results of operations.
Capital Resources and Adequacy
The Federal Reserve Board, the FDIC and the Office of the Comptroller of
the Currency have issued substantially similar risk-based and leverage capital
guidelines applicable to banking organizations they supervise. Due to the Bank's
capitalization, the Company is classified as "well capitalized".
The Company's year-end capital-to-asset ratio was 7.62% at December
31, 1998 as compared to 7.45% at December 31, 1997.
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 December 31, 1998.
Required Ratio Actual Ratio
-------------- ------------
Tier 1 risk-based 4.00% 9.23%
Total risk-based 8.00% 10.48%
Tier 1 leverage 4.00 to 5.00% 7.52%
The Company is in full compliance with all relevant regulatory capital
requirements.
Year 2000 Compliance
The ability of the Company's computers, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a 2-digit year after 1999 is commonly referred to as the "Year 2000"
issue. The Year 2000 issue is the result of computer programs and equipment
which are dependent on "embedded chip technology" using two digits rather than
23
<PAGE>
four to define the applicable year. Any of the Company's computer programs or
equipment that are date dependent may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, or a temporary inability to
process transactions, or otherwise engage in similar normal business activities.
The Company adopted a five phase plan of action developed by the Federal
Financial Institutions Examination Council ("FFIEC") to address Year 2000
issues. During phase one, "awareness," the Company developed an overall strategy
and timetable for the completion of all Year 2000 requirements. Phase two,
"assessment," involved analyzing, prioritizing and putting all internal systems,
both information technology (IT) and non-IT systems, on track for Year 2000
compliance according to the timetable established in the awareness phase. The
Company has no proprietary or in-house developed systems or software, so non-IT
systems are limited to infrastructure and communications. During the third
phase, "renovation," necessary upgrades were ordered for hardware and software.
In addition, each of the Company's vendors was contacted regarding their Year
2000 progress. Phases one through three have been completed.
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 with regard to
Year 2000 issues, 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 has renovated and tested its systems and has supplied a series of
reports of their progress. The final stages of its live data testing was
scheduled during the first quarter of 1999 and to date all applications have
tested Year 2000 ready.
As the Company proceeds with the fourth phase, "validation," it will
continue to monitor the validation of all its vendors' systems, as well as
continue validation of its internal systems through ongoing actual real life
testing of all the new upgrades and components. The Company will continue
testing and validation throughout the remainder of 1999 to ensure the continuing
reliability of its systems.
The final phase, "implementation," will occur at the turn of the
century with the readiness to execute contingency plans if necessary.
Contingency plans include alternatives for each critical system, which should
allow business to continue with little or no interruption past the turn of the
century. These alternatives are being subjected to the same process as the
Company's primary service providers. Additionally, the contingency plans include
performing tasks manually if necessary, until the appropriate applications are
operational.
In addition to verifying its internal and vendor supplied systems, the
Company has provided compliance certification questionnaires to its customers in
order to determine their ability to be Year 2000 compliant. If a customer does
not respond to the questionnaire or if its response does not provide the Company
with adequate assurance that such customer's failure to be Year 2000 compliant
would not have a material adverse effect on the Company, the Company is entitled
to take steps to terminate its relationship with the customer before December
31, 1999.
Costs to date directly attributable to the Year 2000 project have not
been substantial 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 management believes that any known issues were corrected. The Year
2000 progress of all data processing companies is being monitored by outside
auditors and regulators and the Company receives regular reports regarding the
progress. Costs to date total $35,000; however, testing by outside vendors may
exceed $100 thousand based on best estimates available to date. Management
anticipates that these funds will be financed internally.
Because the Company had a detailed Business Continuation Plan before
the Year 2000 plan 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
24
<PAGE>
the data processor is the greatest risk to the Company. The Year 2000 progress
of all data processing companies is being monitored by outside auditors and
regulators and the Company receives regular reports regarding the progress.
While a change of data processors would be time consuming, the Company's
contingency plans include alternatives for each critical system, as well as
plans to perform tasks manually if necessary, until appropriate applications are
operational.
The Company's Year 2000 readiness is subject to supervision by the
Federal Reserve System through examination for compliance with the guidance
issued by the FFIEC. Should the Company's readiness be found deficient , it
could be subject to informal enforcement actions such as written notification of
deficiencies to be remediated, to formal enforcement actions such as civil
penalties, temporary cease and desist orders requiring immediate corrective
actions, and the possible public release of any such cease and desist order.
If the Company and its customers, suppliers and vendors were not Year
2000 compliant by January 1, 2000, the most reasonably likely worst case
scenario would be a temporary shutdown of operations. Any such shutdown could
have a material adverse effect on the Company's results of operations, liquidity
and financial position.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Management's methodology to measure interest rate sensitivity includes
an analysis of the potential gain or loss in future fair values of interest rate
sensitive instruments. The Company's analysis assumes a hypothetical 200 basis
point instantaneous and parallel shift in the yield curve in interest rates. A
present value computation is used in determining the effect of the hypothetical
interest rate changes on the fair value of its interest rate sensitive
instruments as of December 31, 1998. Computations of prospective effects of
hypothetical interest rate changes are based on many assumptions, including
relative levels of market interest rates, loan prepayments and deposit decay.
They should not be relied upon as indicative of actual results. Further, the
computations do not contemplate certain actions management could undertake in
response to changes in interest rates. Certain shortcomings are inherent in this
method of analysis. If market conditions vary from assumptions used in the
calculation of present value, actual values may differ from amounts disclosed.
However, if a hypothetical, parallel and instantaneous 200 basis point increase
and decrease were experienced, net fair values of interest sensitive instruments
would be decreased by $957,000 and increased by $621,000, respectively.
This fair value analysis, performed for the Company by a third party
vendor, tends to overstate interest rate risk within the Company's balance
sheet. The analysis assigns the contractual long term maturity to mortgage loans
within the funds advanced for settlement account. Such loans are generally held
by the Company for less than 60 days, being pre-sold to third party purchasers
when the individual borrowers lock in their interest rates. This extension of
loan terms within this category of the Company's balance sheet increases
interest rate risk sensitivity calculated by the analysis.
The analysis also does not include a forecast of loan and deposit volume
changes due to the hypothetical 200 basis point interest rate change. In
addition, anticipated increased volume in the Company's mortgage banking
operation from a 200 basis point decrease in rates is not included in the
analysis. This expected volume increase in mortgage lending as the result of a
decline in interest rates would positively impact the Company's earnings.
The standard algebraic formula for calculating present value is
utilized. The calculation discounts the future cash flows of the Company's
portfolio of interest rate sensitive instruments to present value utilizing
techniques designed to approximate current market rates for securities, current
offering rates for loans, and the cost of alternative funding for the given
maturity of deposits, and then assumes a 200 basis point instantaneous and
parallel shift in these rates. The difference between these numbers represents
the resulting hypothetical change in the fair value of interest rate sensitive
instruments.
Other significant assumptions used in the calculation include: (1) no
growth in volume (i.e., replacement of maturities in like instruments, with no
change in balance sheet mix); (2) constant market interest rates reflecting the
average rate from the last month of the given quarter; and (3) pricing spreads
to market rates derived from an historical analysis, or from assumptions by
instrument type.
25
<PAGE>
The Company is not engaged in investment strategies involving
derivative financial instruments. Asset and liability management is conducted
without the use of forward-based contracts, options, swap agreements, or other
synthetic financial instruments.
Item 8. Financial Statements and Supplementary Data
The following financial statements are included in Exhibit 99.1 of this
Form 10-K.
Balance sheets - December 31, 1998 and 1997
Statements of income - Years ended December 31, 1998 and 1997
Statements of stockholders' equity - Years ended December 31, 1998 and 1997
Statements of cash flows - Years ended December 31, 1998 and 1997
Notes to financial statements - December 31, 1998 and 1997
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
In accordance with General Instruction G(3) of Form 10-K, the
information called for in Part III is incorporated by reference from the
Company's Proxy Statement to be filed no later than April 30, 1999 in connection
with the Company's 1999 Annual Meeting of Shareholders.
Part IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements of the Company as of
December 31, 1998 and 1997 and for the years then ended, and the auditors'
report thereon are included in this Form 10-K as Exhibit 99.1:
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years Ended December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity - Years Ended December 31,
1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements Report of Independent Auditors
26
<PAGE>
2. Financial Statement Schedules - None.
3. The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this Form 10-K and such Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K in quarter ended December 31, 1998: None
(c) The exhibits on the accompanying Exhibit Index are filed or
incorporated by reference as part of this Form 10-K and such Exhibit
Index is incorporated herein by reference.
(d) Financial Statements excluded from Annual Report pursuant to Rule
14a-3(b)- Not applicable.
27
<PAGE>
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
---------------------
President and Chief Executive Officer
Date: 3/29/1999
/s/ Eleanor J. Whitehurst
-------------------------
Senior Vice President and Chief Financial Officer
Date: 3/29/1999
28
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lawrence N. Smith and John B. Bernhardt and each
of them individually, as his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place,
and stead, in any and all capacities, to sign any and all amendments to this
report, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
In accordance with Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ John B. Bernhardt Chairman of the Board Date: 3/29/1999
- --------------------- Director
John B. Bernhardt
/s/ Lawrence N. Smith President Date: 3/29/1999
- --------------------- Chief Executive Officer
Lawrence N. Smith (Principal Executive Officer)
Director
/s/ Eleanor J. Whitehurst Senior Vice President Date: 3/29/1999
- ------------------------- Chief Financial Officer
Eleanor J. Whitehurst (Principal Financial and
Accounting Officer)
/s/ Alfred E. Abiouness Director Date: 3/29/1999
- -----------------------
Alfred E. Abiouness
/s/ Thomas W. Hunt Director Date: 3/29/1999
- ------------------
Thomas W. Hunt
/s/ Louis Ray Jones Director Date: 3/29/1999
- -------------------
Louis Ray Jones
/s/ Arthur Russell Kirk Director Date: 3/29/1999
- -----------------------
Arthur Russell Kirk
/s/ Elizabeth A. Twohy Director Date: 3/29/1999
- ----------------------
Elizabeth A. Twohy
</TABLE>
29
<PAGE>
EXHIBIT INDEX
RESOURCE BANKSHARES CORPORATION
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of April 8, 1997 *
between Resource Bank and Eastern American Bank FSB. (Incorporated by
reference to Resource Bank's Proxy Statement previously filed with the
Federal Reserve on June 24, 1997.)
3.1 Amended and Restated Articles of Incorporation of Resource Bankshares *
Corporation. (Incorporated by reference to Registrant's Form 8-K previously
filed with the Commission on July 1, 1998.)
3.2 Bylaws of Resource Bankshares Corporation. (Incorporated by reference to *
Registrant's Form 8-K previously filed with the Commission on July 1, 1998.)
4.1 Certificate of Trust of Resource Capital Trust I. (Incorporated by reference *
to the Registrant's Registration Statement on Form S-2, Commission File No.
333-70361, previously filed with the Commission on January 8, 1999.)
4.2 Trust Agreement dated December 23, 1998 between Resource Bankshares *
Corporation and Wilmington Trust Company. (Incorporated by reference to the
Registrant's Registration Statement on Form S-2, Commission File No.
333-70361, previously filed with the Commission on January 8, 1999.)
4.3 Form of Amended and Restated Declaration of Trust for Resource Capital Trust *
I. (Incorporated by reference to the Registrant's Registration Statement on
Form S-2, Commission File No. 333-70361, previously filed with the Commission
on January 8, 1999.)
4.4 Form of Junior Subordinated Indenture between Resource Bankshares Corporation *
and Wilmington Trust Company, as Trustee. (Incorporated by reference to the
Registrant's Registration Statement on Form S-2, Commission File No.
333-70361, previously filed with the Commission on January 8, 1999.)
4.5 Form of Capital Security (included in Exhibit 4.3 above). (Incorporated by *
reference to the Registrant's Registration Statement on Form S-2, Commission
File No. 333-70361, previously filed with the Commission on January 8, 1999.)
4.6 Form of Junior Subordinated Debt Security (included in Exhibit 4.4 above). *
(Incorporated by reference to the Registrant's Registration Statement on Form
S-2, Commission File No. 333-70361, previously filed with the Commission on
January 8, 1999.)
30
<PAGE>
4.7 Form of Guarantee Agreement with respect to Trust Securities issued by *
Resource Capital Trust I. (Incorporated by reference to the Registrant's
Registration Statement on Form S-2, Commission File No. 333-70361, previously
filed with the Commission on January 8, 1999.)
4.8 Form of Escrow Agreement among McKinnon & Company, Inc., Resource Capital *
Trust I, Resource Bankshares Corporation and Wilmington Trust Company.
(Incorporated by reference to the Registrant's Registration Statement on Form
S-2, Commission File No. 333-70361, previously filed with the Commission on
January 8, 1999.)
10.1 Director's Stock Option Agreement dated June 15, 1989. (Incorporated by *
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on April 28, 1993.)
10.2 Non-Employee Director Incentive Stock Option Plan dated June 15, 1989. *
(Incorporated by reference to Registrant's Form 10-KSB previously filed with
the Federal Reserve on April 28, 1993.)
10.3 Lease Agreement dated November 1, 1990 by and between Birchwood Mall *
Associates and Resource Bank and letter dated November 12, 1992 from Resource
Bank to Fleder, Caplan, Jaffee Associates to amend the lease. (Incorporated
by reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on April 28, 1993.)
10.4 Resource Bank 1993 Long-Term Incentive Plan. (Incorporated by reference to *
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
22, 1994.)
10.5 Resource Bank 1993 Long-Term Incentive Plan, First Amendment. (Incorporated *
by reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 30, 1995.)
10.6 Lease Agreement dated September 22, 1994 by and between Resource Mortgage and *
A.R. Marketing, Inc. (Incorporated by reference to Registrant's Form 10-KSB
previously filed with the Federal Reserve on March 30, 1995.)
10.7 Assignment of Lease dated February 28, 1994 with Resource Mortgage to *
Contract Publishing, Inc. (Incorporated by reference to Registrant's Form
10-KSB previously filed with the Federal Reserve on March 30, 1995.)
10.8 Resource Bank 1994 Long-Term Incentive Plan. (Incorporated by reference to
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
30, 1995.)
31
<PAGE>
10.9 Lease Agreement and Addendum to Lease both dated April 20, 1995, and First *
Lease Amendment dated December 13, 1995 to Lease by and between Glen Forst
Professional Center Associates and Resource Bank. (Incorporated by reference
to Registrant's Form 10-KSB previously filed with the Federal Reserve on
March 20, 1996.)
10.10 Lease Agreement dated April 1, 1994 by and between Whooping Crane Limited *
Partnership and Southern Mortgage Financial Company. (Incorporated by
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 20, 1996.)
10.11 Resource Bank Retirement Savings Plan. (Incorporated by reference to *
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
20, 1996.)
10.12 Resource Bank 1993 Long-Term Incentive Plan, Second Amendment. (Incorporated *
by reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 31, 1997.)
10.13 Lease Agreement and Addendum to Lease both dated May 1, 1996 by and between *
Birchwood Mall Associates and Resource Bank. (Incorporated by reference to
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
31, 1997.)
10.14 Resource Bank 1994 Long-Term Incentive Plan, First Amendment. (Incorporated *
by reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 31, 1997.)
10.15 Resource Bank 1996 Long-Term Incentive Plan, Amended and Restated.
(Incorporated by reference to Registrant's Form 10-KSB previously filed with
the Federal Reserve on March 31, 1998.)
10.16 Lease Agreement dated July 22, 1997 by and between Washington Real Estate *
Investment Trust and Resource Bank. (Incorporated by reference to
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
31, 1998.)
10.17 Lease Agreement dated July 19, 1993 by and between Reston North Point Village *
Limited Partnership and Eastern American Bank, FSB. (Incorporated by
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 31, 1998.)
10.18 Lease Agreement dated July 18, 1995 by and between The Richmond Corporation *
and Eastern American Bank, FSB. (Incorporated by reference to Registrant's
Form 10-KSB previously filed with the Federal Reserve on March 31, 1998.)
10.19 Lease Agreement dated October 31, 1995 by and between Elden Investments, *
L.L.C. and Eastern American Bank, FSB. (Incorporated by reference to
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
31, 1998)
32
<PAGE>
10.20 Lease Agreement dated October 24, 1994 by and between Greenbrier Point *
Partners, L.P. and CitizensBanc Mortgage Company and Assignment, Assumption
and Release Agreement dated January 7, 1997 among Citizens Mortgage Company,
Resource Bank and Greenbrier Point Partners, L.P. (Incorporated by reference
to Registrant's Form 10-KSB previously filed with the Federal Reserve on
March 31, 1998.)
10.21 Lease Agreement dated December 5, 1996 and Amendment dated August 5, 1997 by *
and between The Bon Air Green Company and Resource Bank. (Incorporated by
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 31, 1998.)
**10.22 Employment Agreement dated January 1 , 1999 by and between Resource Bank and
T. A. Grell, Jr.
**21.1 Subsidiaries of Registrant.
**23.1 Consent of Goodman & Company, L.L.P.
**24.1 Powers of Attorney (included on signature page)
**27.1 Financial Data Schedule
**99.1 Consolidated Financial Statements
</TABLE>
- ------------------------------------
* Not filed herewith; incorporated by reference.
** Filed herewith.
EXHIBIT 10.22
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made as of January 1, 1999,
between Resource Bank ("Resource"), and T. A. Grell, Jr. ("Employee").
WHEREAS, Resource wishes to employ Employee to serve as its President
and Chief Operating Officer, and Employee is willing to accept such employment
in accordance with the terms of this Agreement; and
WHEREAS, Employee recognizes the importance to Resource and to the
public of maintaining the high standards and quality associated with Resource's
name and reputation, and is willing to maintain such high standards and quality;
NOW, THEREFORE, it is agreed as follows:
(1) TERM OF EMPLOYMENT: Subject to the provisions of this Agreement,
Resource will employ Employee as its President and Chief Operating
Officer for an initial term of five (5) years, beginning on January 1,
1999 and expiring on December 31, 2003 ("Initial Term"). Not less than
six (6) months prior to the expiration of the Initial Term, Resource's
Board of Directors (the "Resource Board of Directors") shall conduct
and complete a review of Employee's performance.
1.1 If the Resource Board of Directors determines upon such review
that Employee has performed in accordance with Resource's
performance criteria, no further action will be necessary, and
Resource shall employ Employee for an additional two-year
period under the terms herein. Thereafter, this Agreement
shall automatically renew for successive two-year periods
unless either party gives three (3) months written notice
prior to the expiration of any two-year term.
1.2 If the Resource Board of Directors determines upon such review
that Employee has not performed in accordance with Resource's
performance criteria, it shall so notify Employee in writing
at least three (3) months prior to the expiration of the
Initial Term hereof that this Agreement will not be renewed
("Notice of Non-Renewal"), and this Agreement shall expire and
the employment created herein shall end at the conclusion of
the Initial Term. Employee shall also receive three additional
month's regular base salary following expiration pursuant to
Resource's regular pay schedule.
1.3 The regular base salary payable both prior to and following
expiration as provided in subparagraph 1.2 shall not be paid
if Employee competes with Resource as that term is used in
subparagraphs 7.2 and 7.3 hereof.
1.4 Resource, in its sole discretion, shall have the option but
not the obligation of relieving Employee of actually
performing any services following the giving of a Notice of
Non-Renewal. Employee shall nonetheless be paid as provided in
subparagraph 1.2 provided he neither seeks or accepts
employment in competition with Resource as provided in
subparagraph 1.3 nor breaches any other provision hereof.
(2) DUTIES: During the period of employment hereunder, Employee will
devote his best efforts and substantially his full time to the business
and affairs of Resource, perform such services not inconsistent with
his position as are designated by the Resource Board of Directors, and
use his best efforts to promote the interest of Resource. Employee
pledges that during the term of this Agreement,
34
<PAGE>
Employee shall not, directly or indirectly, engage in any business
that could detract from Employee's ability to apply his best efforts to
the performance of his duties hereunder. Employee further agrees to
comply with all rules, regulations and policies established or issued
by Resource.
(3) COMPENSATION: Resource will pay Employee a regular base salary
commensurate with his position and performance, such salary to be
determined from time to time by the Resource Board of Directors, but to
be not less than $200,000 upon the initiation of this Agreement. Such
salary will be payable in periodic installments on the same basis as
that of other employees of Resource who hold executive positions. In
addition, Employee will be eligible to participate in Resource's Bonus
Program as determined from time to time by the Resource Board of
Directors.
(4) BENEFITS: Employee will participate in the various employee benefit,
disability and retirement plans provided for similarly situated
employees according to the terms and conditions of those plans, as
determined by the Resource Board of Directors. During each full year of
employment, Employee shall have five weeks paid vacation. During
Employee's employment with Resource, Employee will be provided with an
automobile allowance in the amount of $500.00 per month. Resource
reserves the right to modify, eliminate, or add to any of the foregoing
benefits as it deems appropriate.
(5) DEATH: If Employee should die during the term of this Agreement,
Resource will, in lieu of payments due under other provisions of this
Agreement, pay to Employee's estate for a period of 3 months,
Employee's regular base salary at the time of the Employee's death plus
any previously accrued and unpaid compensation. Thereafter, Resource
will have no further obligation to Employee or his estate under this
Agreement.
(6) DISABILITY: In the event that Employee, by reason of physical or
mental incapacity or disability ("Disability"), is unable, with or
without reasonable accommodation, to perform his duties and
responsibilities under this Agreement, then Resource will pay to
Employee his regular base salary for a six (6) month period following
the date on which the Disability first begins, after which time it is
intended that the payments under the disability insurance maintained by
Resource for Employee will be in effect. Thereafter, Resource will have
no obligation to pay Employee any compensation under this Agreement;
provided, however, that for a period of one (1) year following the date
the Disability first begins, Employee shall have the right to return to
employment under this Agreement if Employee, with or without reasonable
accommodation, is again able to fully perform his duties. Upon such a
return to employment, Employee shall work as mutually agreed upon by
Resource and Employee, and Employee shall receive the same compensation
and benefits as set forth in this Agreement, subject to appropriate
proration of compensation if Employee works less than the same schedule
he had previously worked.
(7) TERMINATION WITHOUT CAUSE; SEVERANCE PAY:
7.1 Resource may terminate Employee's employment immediately and
without cause. However, if Resource terminates employee's
employment pursuant to this Section 7.1, Resource shall pay to
Employee his regular base salary payable in periodic
installments on the same schedule as other executive employees
of Resource through the lesser of (i) the remainder of the
Initial Term of this Agreement or (ii) a period of thirty-six
(36) months following the date on which employment is
terminated ("Severance Pay"). Notwithstanding the foregoing,
in the event Employee elects to compete with Resource or any
of its subsidiaries as described below, Resource's obligation
to pay the Severance Pay shall terminate immediately.
35
<PAGE>
7.2 Employee agrees that in the event he competes, directly or
indirectly, with Resource or any of its subsidiaries within a
30-mile radius of any Resource office, or any of its
subsidiaries' offices, that exist on the date of such
termination he will forfeit any remaining Severance Pay from
the first date of such competition.
7.3 It is the specific intent of the parties that as long as
Employee is receiving Severance Pay, Employee shall be
restricted from competing directly or indirectly within a
thirty mile radius of any segment of Resource's or its
subsidiaries' business in which Employee engaged prior to the
termination of employment and from any segment of Resource's
and its subsidiaries' business, about which Employee acquired
proprietary or confidential information, during the course of
his employment. Resource's and its subsidiaries' business
shall mean the business of banking and mortgage lending.
Employee agrees that competition shall include engaging in
competitive activity, either as an individual, as a partner,
as a joint venturer with any other person or entity, or as an
employee, agent, or representative of any other person or
entity, or otherwise being associated in a competitive
capacity with any business entity which directly or indirectly
competes with Resource or any of its subsidiaries. Employee
further agrees that for as long as he receives severance pay,
he will not induce or attempt to induce any of the employees
of Resource or its affiliates to terminate their agreement.
7.4 Resource and Employee have examined in detail this paragraph 7
and agree that the restraint imposed upon Employee is
reasonable in light of the legitimate interests of Employer,
and it is not unduly harsh upon Employee's ability to earn a
livelihood.
7.5 Notwithstanding any provision of this Agreement to the
contrary, any payments made to Employee pursuant to this
Agreement, or otherwise, are subject to and conditional upon
their compliance with 12 U.S.C. ss. 1828(k) and any
regulations promulgated thereunder.
(8) TERMINATION FOR CAUSE: The employee's employment may be terminated at
any time by Resource for "cause." As used in this Agreement, the term
cause may mean personal dishonesty; gross neglect related to
employment; incompetence; willful misconduct; breach of loyalty or
fiduciary duty to Employer; intentional failure to perform assigned or
agreed upon duties; willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses); or material breach
of any provision of this Agreement. Termination by Resource for cause
shall be determined by the vote of at least 51% of all of the members
of the Resource Board of Directors. If the employment is so terminated,
Employee will be entitled to receive any regular salary earned and
employee benefits accrued as of the date of such termination, but
Resource will have no further obligation to Employee hereunder from and
after such date.
(9) TERMINATION BY EMPLOYEE: Employee may resign from the employment of
Resource at any time upon ninety (90) days prior written notice. Upon
such resignation, Employee shall have no rights to any further
compensation or benefits after the ninety (90) day notice period has
expired. Resource reserves the option but not the obligation to relieve
Employee from performance of work during this period, but absent
subsequent breach hereof, Resource shall be obligated to pay Employee
the Employee's regular base salary for the entire 90-day notice period.
(10) CHANGE OF CONTROL: If there shall occur a "Change of Control of
Resource" as defined below, the employee may be assigned such other
duties, responsibilities and compensation as would be reasonably
equivalent under the circumstances and acceptable to the Employee in
his reasonable discretion. Upon such occurrence, if the Employee shall
not be given such reasonably equivalent duties, responsibilities and
36
<PAGE>
compensation, he may be terminated or he may resign; and, in either
such case, Employee shall receive in lieu of any payments pursuant to
paragraph 7, a one-time payment of 2.99 times the average of the last
three (3) years' regular base salary, or if employed less than three
years, a one-time payment of 2.99 times Employee's regular base salary
in effect when the change of control occurs. As used in this paragraph
10, a Change of Control of Resource shall be deemed to have occurred if
any of the following occur:
10.1 Any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) is or becomes
the beneficial owner, directly or indirectly, of securities of
Resource representing twenty-five percent (25%) or more of the
combined voting power of Resource's then outstanding
securities; or
10.2 During any period of two consecutive calendar years,
individuals who at the beginning of such period constitute the
Resource Board of Directors cease for any reason to constitute
a majority thereof unless the election by Resource's
Shareholders of each new director was approved by a vote of at
least two-thirds of the Resource directors then still in
office who were directors at the beginning of the period.
10.3 The approval by Resource's shareholders of the merger or
consolidation of Resource with any other corporation or
business organization, the sale of substantially all of the
assets of Resource or the liquidation or dissolution of
Resource, unless, in the case of a merger or consolidation,
the directors of Resource in office immediately prior to such
merger or consolidation will constitute at least two-thirds of
the directors of the surviving corporation or business
organization of such merger or consolidation and any parent
(as such term is defined in Rule 12b-2 under the Securities
Exchange Act of 1934) of such corporation or business
organization.
(11) REQUIRED PROVISIONS:
11.1 If Employee is suspended and/or temporarily prohibited from
participating in the conduct of Resource's affairs by a notice
served under the Federal Deposit Insurance Act, Resource's
obligations under this Agreement shall be suspended as of the
date of service. If the charges in the notice are dismissed,
Resource may, in its discretion, (i) pay Employee all or part
of the compensation withheld while its obligations under the
Agreement were suspended, and (ii) reinstate (in whole or in
part) any of its obligations which were suspended.
11.2 If Employee is removed and/or permanently prohibited from
participating in the conduct of Resource's affairs by an order
issued under the Federal Deposit Insurance Act, all
obligations of Resource under this Agreement shall terminate
as of the effective date of the order, but the Employee's
vested rights shall not be affected.
11.3 If Resource is in default as defined in the Federal Deposit
Insurance Act, all obligations under this Agreement shall
terminate as of the date of default, but the operation of this
subparagraph 11.3 shall not affect any of Employee's vested
rights.
(12) NONDISCLOSURE:
12.1 Employee agrees to hold and safeguard any information about
Resource and its subsidiaries gained by Employee during the
course of Employee's employment. Employee shall not, without
the prior written consent of Resource, disclose or make
available to anyone for use outside Resource's and its
subsidiaries' organization at any time, either during his
37
<PAGE>
employment or subsequent to any termination of his employment,
however such termination is effected, whether by Employee or
Resource, with or without cause, or expiration or nonrenewal
of this Agreement, any information about Resource and its
subsidiaries or its customers or suppliers, whether or not
such information was developed by Employee, except as required
in the performance of Employee's duties for Resource and its
subsidiaries.
12.2 Employee understands and agrees that any information about
Resource and its subsidiaries or Resource's and its
subsidiaries' customers is the property of Resource or its
subsidiaries and is essential to the protection of Resource's
and its subsidiaries' goodwill and to the maintenance of
Resource's and it subsidiaries' competitive position and
accordingly should be kept secret. Such information shall
include, but not be limited to, information containing
Resource's and its subsidiaries' promotional plans and
strategies, pricing strategies, customers and prospective
customers, customer lists, identity of key personnel in the
employ of customers and prospective customers, computer
programs, system documentation, manuals, ideas, or any other
records or information belonging to Resource and its
subsidiaries or relating to Resource's and its subsidiaries'
business.
(13) NON-SOLICITATION OF EMPLOYEES: Employee agrees that during his
employment hereunder and for a period of one year following termination
of Employee's employment, whether such termination is voluntary or
involuntary, effected by Resource or by Employee, regardless of cause,
Employee shall not, directly or indirectly, hire, solicit or induce or
attempt to hire, solicit or induce, any employee of Resource to become
employed by Employee or any other person or entity or to perform
services for remuneration for Employee or any other person or entity
regardless of the structure or nature of any such remunerative
relationship. For purposes of this paragraph 13, an employee of
Resource shall mean any individual who was employed by Resource or any
of its subsidiaries at the time of Employee's termination or at any
time during the six-month period immediately preceding such
termination. This paragraph does not apply in the event of "Change of
Control of Resource" as defined in paragraph 10.
(14) ENTIRE AGREEMENT: This Agreement and your offer letter dated November
9, 1998 supersede any and all other agreements, either oral or in
writing, between the parties hereto with respect to the employment of
Employee by Resource or any affiliate of Resource and contains all the
covenants and agreements between the parties with respect to such
employment. Each party to these Agreements acknowledges that no
representations, inducements, promises or agreements, orally or
otherwise, have been made by any party, or anyone acting on behalf of
any party, which are not embodied herein, and that no other agreement,
statement or promise not contained in this Agreement and your offer
letter dated November 9, 1998 will be valid or binding. Any
modification of these Agreements will be effective only if it is in
writing signed by the party to be charged.
(15) BINDING EFFECT: This Agreement will be binding upon and inure to the
benefit of each of the parties and their successors.
(16) LAW GOVERNING AGREEMENT: This Agreement will be governed and
construed in accordance with the laws of the Commonwealth of Virginia.
(17) CONFLICT WITH REGULATIONS: The requirements of 12 C.F.R. ss.
563.39(b) (the "Employment Agreement Regulations") shall be made part
of this Agreement and are incorporated by reference. If any provision
of this Agreement conflicts with the Employment agreement Regulations,
the Employment Agreement Regulations shall govern.
38
<PAGE>
(18) PARTIAL INVALIDITY: If any provision of this Agreement is held by a
court of competent jurisdiction to be invalid, void or unenforceable,
the remaining provisions will nevertheless continue in full force and
effect.
(19) SEVERABILITY: If any clause or provision of this Agreement is held to
be illegal, invalid, or unenforceable under present or future laws
effective during the term hereof, then the remainder of this Agreement
shall not be affected thereby, and in lieu of each clause or provision
of this Agreement which is illegal, invalid or unenforceable, and
specifically including the restrictions on competition in paragraph 7,
there shall be added, as a part of this Agreement, a clause or
provision as similar in terms to such illegal, invalid or unenforceable
clause or provision as may be possible and as may be legal, valid, and
enforceable.
(20) NOTICES: Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by
mail, registered or certified, postage prepaid, with return receipt
requested. Mailed notices will be addressed to the parties at the
addresses appearing herein, but each party may change his address by
written notice in accordance with this paragraph. Notices delivered
personally will be deemed communicated as of actual receipt; mailed
notices will be deemed communicated as of five (5) days after mailing.
TO: Resource Bank
Attention: Debra C. Dyckman
3720 Virginia Beach Boulevard
Virginia Beach, Virginia 23452
TO: T. A. Grell, Jr.
5350 Lake Lawson Road
Virginia Beach, VA 23455
(21) COUNTERPARTS: This Agreement may be executed in counterparts,
together which shall constitute one and the same instrument.
IN WITNESS WHEREOF, Resource Bank has caused this Agreement to be
executed in its name and behalf by its proper officers, thereunto duly
authorized, and Employee has set his hand as of the date first above written.
EMPLOYEE'S NAME RESOURCE BANK
/s/ T.A. Grell, Jr. By:/s/ Lawrence N. Smith
- ------------------- ---------------------
Signature Lawrence N. Smith
T. A. Grell, Jr. Its: Chief Executive Officer
- ------------------- ------------------------
Printed Name
Date: __________________________ Date __________________________
Exhibit 21.1
SUBSIDIARIES
1. Resource Bank, a Virginia corporation, is a wholly owned subsidiary of
Resource Bankshares Corporation.
2. Resource Service Corporation, a Virginia corporation, is a wholly owned
subsidiary of Resource Bank.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Resource Bankshares Corporation
We consent to incorporation by reference in the Registration Statement on Form
S-8 (Registration No. 333-58417) of Resource Bankshares Corporation of our
report dated January 28, 1999, except for Note 21 as to which the date is March
24, 1999, relating to the consolidated balance sheets of Resource Bankshares
Corporation and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders equity and cash flows for the
years then ended, which report appears in the December 31, 1998 Annual Report of
Resource Bankshares Corporation.
/s/ GOODMAN & COMPANY, L.L.P.
- -----------------------------
One Commercial Place
Norfolk, Virginia
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,325
<INT-BEARING-DEPOSITS> 3,356
<FED-FUNDS-SOLD> 800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,619
<INVESTMENTS-CARRYING> 1,224
<INVESTMENTS-MARKET> 1,252
<LOANS> 186,022
<ALLOWANCE> 2,500
<TOTAL-ASSETS> 233,460
<DEPOSITS> 206,219
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 2,152
<LONG-TERM> 5,300
0
0
<COMMON> 3,715
<OTHER-SE> 14,074
<TOTAL-LIABILITIES-AND-EQUITY> 233,460
<INTEREST-LOAN> 15,352
<INTEREST-INVEST> 712
<INTEREST-OTHER> 3,682
<INTEREST-TOTAL> 19,746
<INTEREST-DEPOSIT> 10,316
<INTEREST-EXPENSE> 11,336
<INTEREST-INCOME-NET> 8,410
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,566
<INCOME-PRETAX> 4,638
<INCOME-PRE-EXTRAORDINARY> 4,638
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,047
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.13
<YIELD-ACTUAL> 3.62
<LOANS-NON> 533
<LOANS-PAST> 412
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,573
<CHARGE-OFFS> 287
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 2,500
<ALLOWANCE-DOMESTIC> 2,500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31,
1998 AND 1997
[RESOURCE BANK LOGO HERE]
RESOURCE BANKSHARES
CORPORATION AND SUBSIDIARY
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
GOODMAN & COMPANY, LLP
Member Summit International Virginia Offices
Associated Offices In Principal Norfolk o Richmond o Newport News o Petersburg
U.S. and International Cities Colonial Heights o McLean o Roanoke
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
Virginia Beach, Virginia
We have audited the accompanying consolidated balance sheets of
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY'S management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of RESOURCE
BANKSHARES CORPORATION AND SUBSIDIARY as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
January 28, 1999, except for Note 21,
as to which the date is March 24, 1999
- 1 -
<PAGE>
<TABLE>
<CAPTION>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CASH AND DUE FROM BANKS $ 4,324,515 $ 2,611,891
INTEREST BEARING DEPOSITS WITH BANKS 3,356,290 9,678,732
FEDERAL FUNDS SOLD 800,000 1,920,000
FUNDS ADVANCED IN SETTLEMENT OF MORTGAGE LOANS 21,052,486 23,744,135
INVESTMENT SECURITIES
Available for sale (amortized cost of $8,525,386
and $11,983,198, respectively) 8,619,123 12,432,253
Held to maturity (fair value of $1,251,795 and
$2,715,856, respectively) 1,223,636 2,742,032
LOANS, NET 186,022,421 148,016,531
OTHER REAL ESTATE OWNED 647,038 684,591
PREMISES AND EQUIPMENT 3,281,220 3,236,907
OTHER ASSETS 2,531,513 2,701,190
ACCRUED INTEREST 1,602,190 1,561,756
------------------------------------
$ 233,460,432 $ 209,330,018
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing deposits $ 15,782,703 $ 11,493,456
Interest-bearing deposits 190,436,492 158,014,876
------------------------------------
206,219,195 169,508,332
FHLB ADVANCES 7,300,000 20,950,000
OTHER LIABILITIES 1,500,274 2,661,013
ACCRUED INTEREST 651,531 608,856
------------------------------------
215,671,000 193,728,201
------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $10 per share, 500,000
shares authorized; none issued and outstanding - -
Common stock, $1.50 par value - 6,666,666 shares
authorized; shares issued and outstanding:
1998 - 2,477,124 ; 1997 - 2,453,380 3,715,686 3,680,070
Additional paid-in capital 10,702,187 10,769,249
Retained earnings 3,310,630 856,122
Accumulated other comprehensive income 60,929 296,376
------------------------------------
17,789,432 15,601,817
------------------------------------
$ 233,460,432 $ 209,330,018
====================================
</TABLE>
THE NOTES TO THE FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest and fees on loans $ 15,352,330 $ 8,315,741
---------------------------------
Interest on investment securities:
Interest and dividends on securities available for sale 641,318 1,103,257
Interest on securities held to maturity 70,517 15,414
---------------------------------
711,835 1,118,671
---------------------------------
Interest on federal funds sold 623,189 123,227
Interest on funds advanced in settlement of
mortgage loans 3,059,074 1,379,856
---------------------------------
TOTAL INTEREST INCOME 19,746,428 10,937,495
---------------------------------
INTEREST EXPENSE
Interest on deposits 10,316,463 5,695,994
Interest on short-term borrowings 1,019,982 287,430
---------------------------------
TOTAL INTEREST EXPENSE 11,336,445 5,983,424
---------------------------------
NET INTEREST INCOME 8,409,983 4,954,071
PROVISION FOR LOAN LOSSES (150,000) (155,254)
---------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,259,983 4,798,817
---------------------------------
NONINTEREST INCOME
Mortgage banking income 7,062,445 4,110,868
Service charges 760,581 290,004
Other 120,387 119,447
---------------------------------
7,943,413 4,520,319
---------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 6,686,381 4,035,860
Occupancy expenses 1,089,447 571,231
Depreciation and equipment maintenance 759,330 458,126
Professional fees 162,124 120,439
Outside computer service 547,160 242,871
FDIC insurance 52,580 12,452
Stationery and supplies 526,495 295,875
Marketing and business development 343,157 205,073
Other 1,398,942 591,399
---------------------------------
11,565,616 6,533,326
---------------------------------
INCOME BEFORE INCOME TAXES 4,637,780 2,785,810
INCOME TAX EXPENSE 1,590,933 964,648
---------------------------------
NET INCOME $ 3,046,847 $ 1,821,162
=================================
BASIC EARNINGS PER COMMON SHARE $ 1.24 $ 0.92
=================================
DILUTED EARNINGS PER SHARE $ 1.13 $ 0.83
=================================
</TABLE>
THE NOTES TO THE FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
- 3 -
<TABLE>
<CAPTION>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------------
Additional Retained
Common Stock Paid-in Earnings
-------------------------------
Shares Amount Capital (Deficit)
-------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 1,935,748 $ 2,903,622 $ 6,497,615 $ (723,072)
COMPREHENSIVE INCOME:
Net income - - - 1,821,162
Changes in unrealized appreciation
(depreciation) on securities
available for sale, net of reclassification
adjustment and tax effect - - - -
Total comprehensive income
COMMON STOCK ISSUED AS A RESULT
OF BUSINESS COMBINATION 517,632 776,448 4,271,634 -
CASH DIVIDENDS PAID
$.25 PER SHARE - - - (241,968)
-------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 2,453,380 3,680,070 10,769,249 856,122
COMPREHENSIVE INCOME:
Net income - - - 3,046,847
Changes in unrealized appreciation
(depreciation) on securities
available for sale, net of reclassification
adjustment and tax effect - - - -
Total comprehensive income
PROCEEDS FROM EXERCISE OF STOCK
OPTIONS 32,732 49,098 95,900 -
REACQUISITION OF COMMON STOCK (8,988) (13,482) (162,962) -
CASH DIVIDENDS PAID
$.24 PER SHARE - - - (592,339)
-------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 2,477,124 $ 3,715,686 $ 10,702,187 $ 3,310,630
===================================================================
<CAPTION>
Accumulated
Other
Comprehensive
Income
(Loss) Total
---------------- ----------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ (23,104) $ 8,655,061
COMPREHENSIVE INCOME:
Net income - 1,821,162
Changes in unrealized appreciation
(depreciation) on securities
available for sale, net of reclassification
adjustment and tax effect 319,480 319,480
-------------
Total comprehensive income 2,140,642
-------------
COMMON STOCK ISSUED AS A RESULT
OF BUSINESS COMBINATION - 5,048,082
CASH DIVIDENDS PAID
$.25 PER SHARE - (241,968)
----------------------------------
BALANCE, DECEMBER 31, 1997 296,376 15,601,817
COMPREHENSIVE INCOME:
Net income - 3,046,847
Changes in unrealized appreciation
(depreciation) on securities
available for sale, net of reclassification
adjustment and tax effect (235,447) (235,447)
-------------
Total comprehensive income 2,811,400
-------------
PROCEEDS FROM EXERCISE OF STOCK
OPTIONS - 144,998
REACQUISITION OF COMMON STOCK - (176,444)
CASH DIVIDENDS PAID
$.24 PER SHARE - (592,339)
----------------------------------
BALANCE, DECEMBER 31, 1998 $ 60,929 $ 17,789,432
==================================
</TABLE>
THE NOTES TO THE FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,046,847 $ 1,821,162
Adjustments to reconcile to net cash
used by operating activities:
Provision for losses on loans and other real estate owned 150,000 155,254
Provision for losses on funds advanced on settlement of
mortgage loans 270,651 -
Loss on sale of investment securities - 45,313
Depreciation and amortization 310,867 265,047
Amortization of investment securities
premiums, net of discounts 66,064 21,170
Loss (gain) on disposition of premises and equipment (4,006) 11,198
Gain on sale of real estate owned (10,137) -
Deferred loan origination fees, net of costs 181,416 (152,955)
Changes in:
Funds advanced in settlement of mortgage loans 2,420,998 (12,709,392)
Interest receivable (40,434) (445,545)
Interest payable 42,675 92,699
Other assets 296,305 (1,003,497)
Other liabilities (1,160,739) (75,474)
---------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 5,570,507 (11,975,020)
---------------------------------
INVESTING ACTIVITIES
Cash acquired in business combination - 12,539,233
Proceeds from sales and maturities of available-for-sale -
securities 5,322,265 7,972,963
Proceeds from maturities of held-to-maturity securities 1,485,129 28,654
Purchases of available-for-sale securities (1,897,250) (2,589,000)
Proceeds from maturities of time deposits 1,000,000 -
Loan originations, net of principal repayments (39,656,489) (18,318,736)
Proceeds from sales of foreclosed real estate 1,366,874 -
Proceeds from sales of premises and equipment 41,344 -
Purchases of premises and equipment and other assets (399,276) (2,237,125)
---------------------------------
NET CASH USED BY INVESTING ACTIVITIES (32,737,403) (2,604,011)
---------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of stock options 144,998 -
Payments to reacquire common stock (176,444) -
Cash dividends paid (592,339) (241,968)
Proceeds (repayments) from FHLB advances (13,650,000) 7,413,500
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 5,511,311 (2,618,793)
Net increase in certificates of deposit 31,199,552 20,104,201
---------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,437,078 24,656,940
---------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,729,818) 10,077,909
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,210,623 3,132,714
---------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,480,805 $ 13,210,623
=================================
SUPPLEMENTAL SCHEDULES AND DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for:
Income taxes paid $ 2,108,479 $ 24,802
Interest on deposits and other borrowings $ 11,293,770 $ 5,674,357
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Transfers from loans to real estate acquired
through foreclosure $ 1,319,184 $ -
</TABLE>
THE NOTES TO THE FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
- 5 -
<PAGE>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BUSINESS
Resource Bankshares Corporation (the "Corporation") is a Virginia
corporation organized in June 1998 by Resource Bank (the "Bank") for the purpose
of becoming a unitary holding company of the Bank. The Corporation's assets
consist primarily of its investment in the Bank.
The Bank is a state-chartered commercial bank headquartered in Virginia
Beach, Virginia where its commercial bank and operations office is located. The
Bank was organized in April, 1987, and commenced operations on September 1,
1988. The Bank's primary market areas are Fairfax County and Virginia Beach,
Virginia and, to a lesser extent, in the surrounding cities of the South Hampton
Roads area.
The Bank's principal business consists of providing a broad range of
lending and deposit services to individual and commercial customers with an
emphasis on those services traditionally associated with independent community
banks. These services include checking and savings accounts, certificates of
deposit and charge cards. The Bank's lending activities include commercial and
personal loans, lines of credit, installment loans, home improvement loans,
overdraft protection, construction loans, and other commercial finance
transactions.
The Bank also operates a mortgage company which, as a division of the
Bank, originates residential mortgage loans and subsequently sells them to
investors. A competitive range of mortgage financing is provided through offices
in the Richmond and Hampton Roads metropolitan areas, and the northern
Virginia/Washington, D.C. metropolitan area.
Resource Service Corporation, a wholly owned subsidiary of the Bank, has
been inactive through December 31, 1998 and has no significant assets or
liabilities.
In December, 1997, the Bank acquired a financial institution operating in
northern Virginia. It provides lending and deposit services to individual and
commercial customers. It formerly operated two branches under the name Eastern
American Bank.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements include the accounts of Resource
Bankshares Corporation and its wholly-owned subsidiary, Resource Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(NOTES CONTINUED ON NEXT PAGE)
- 6 -
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest bearing deposits with banks and
federal funds sold. Generally, federal funds are sold for one-day periods.
Interest bearing deposits with maturities extending beyond 90 days are not
considered cash equivalents for cash flow reporting purposes. Such deposits
amounted to $1,000,000 as of December 31, 1997. The Corporation had no such
deposits at December 31, 1998.
SECURITIES
Securities that management has both the positive intent and ability to
hold to maturity are classified as securities held to maturity and are carried
at cost, adjusted for amortization of premium or accretion of discount using the
interest method. Securities purchased for trading purposes, if any, are held in
the trading portfolio at market value, with market adjustments included in
noninterest income. Securities not classified as held to maturity or trading are
classified as available for sale. Available for sale securities may be sold
prior to maturity for asset/liability management purposes, in response to
changes in interest rates or prepayment risk, to increase regulatory capital or
other similar factors. Securities available for sale are carried at fair value,
with any adjustments to fair value, after tax, reported as a separate component
of other comprehensive income.
Interest and dividends on securities, including the amortization of
premiums and the accretion of discounts, are reported in interest and dividends
on securities using the interest method. Gains and losses on the sale of
securities are recorded on the trade date and are calculated using the specific
identification method. Declines in the fair value of individual held-to-maturity
and available for sale securities below their cost that are other than
temporary, if any, are included in earnings as realized losses.
FUNDS ADVANCED IN SETTLEMENT OF MORTGAGE LOANS
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.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when control
over the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) the assets have been isolated from the Corporation,
(2) the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets,
and (3) the Corporation does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
(NOTES CONTINUED ON NEXT PAGE)
- 7 -
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are stated at their
outstanding unpaid principal balances net of any deferred fees or costs on
originated loans, or unamortized premiums or discounts on purchased loans.
Interest income is accrued on the unpaid principal balance. Discounts and
premiums are amortized to income using the interest method. Loan origination
fees, net of certain direct origination costs, are deferred and recognized as an
adjustment to the yield (interest income) of the related loans.
ALLOWANCE FOR LOAN LOSSES
A loan is considered impaired, based on current information and events,
if it is probable that the Bank will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
The adequacy of the allowance for loan losses is periodically evaluated
by the Bank, in order to maintain the allowance at a level that is sufficient to
absorb probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of the Bank's historical loss experience, known
and inherent risks in the loan portfolio, including adverse circumstances that
may affect the ability of the borrower to repay interest and/or principal, the
estimated value of collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.
Such factors as the level and trend of interest rates and the condition of the
national and local economies are also considered. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgements of information available to them at the time of their examination.
The allowance for loan losses is established through charges to earnings
in the form of a provision for loan losses. Increases and decreases in the
allowance due to changes in the measurement of impaired loans, if applicable,
are included in the provision for loan losses. Loans continue to be classified
as impaired unless they are brought fully current and the collection of
scheduled interest and principal is considered probable.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
(NOTES CONTINUED ON NEXT PAGE)
- 8 -
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful, or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
OTHER REAL ESTATE OWNED
Real estate acquired through foreclosure is initially recorded at the
lower of fair value or the loan balance at date of foreclosure. Property that is
held for resale is carried at the lower of cost or fair value minus estimated
selling costs. Costs relating to the development and improvement of property are
capitalized, whereas those relating to holding the property are charged to
expense.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its fair value minus estimated selling costs.
RESTRUCTURED LOANS
Loans are considered troubled debt restructurings if, for economic or
legal reasons, a concession has been granted to the borrower related to the
borrower's financial difficulties that the Bank would not have otherwise
considered. The Bank has restructured certain loans in instances where a
determination was made that greater economic value will be realized under new
terms than through foreclosure, liquidation, or other disposition. The terms of
the renegotiation generally involve some or all of the following
characteristics: a reduction in the interest pay rate to reflect actual
operating income, an extension of the loan maturity date to allow time for
stabilization of operating income, and partial forgiveness of principal and
interest.
(NOTES CONTINUED ON NEXT PAGE)
- 9 -
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESTRUCTURED LOANS (continued)
The carrying value of a restructured loan is reduced by the fair value of
any assets or equity interest received, if any. In addition, if the present
value of future cash receipts required under the new terms does not equal the
recorded investment in the loan at the time of restructuring, the carrying value
would be further reduced by a charge to the allowance. In addition, at the time
of restructuring, loans are generally classified as impaired. A restructured
loan that is not impaired, based on the restructured terms and that has a stated
interest rate greater than or equal to a market interest rate at the date of the
restructuring, is reclassified as unimpaired in the year immediately following
the year it was disclosed as restructured.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
For financial reporting purposes, assets are depreciated over their estimated
useful lives using the straight-line and accelerated methods. For income tax
purposes, the accelerated cost recovery system and the modified accelerated cost
recovery system are used.
GOODWILL
Goodwill related to the purchase of the mortgage company is amortized
over five years using the straight-line method. At December 31, 1998, this
goodwill had been fully amortized.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements, and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of investment securities,
deferred loan fees, allowance for loan losses, allowance for losses on
foreclosed real estate, accumulated depreciation and intangible assets for
financial and income tax reporting. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled.
DEFERRED COMPENSATION PLANS
The Corporation maintains deferred compensation and retirement
arrangements with certain officers. The Corporation's policy is to accrue the
estimated amounts to be paid under the contracts over the expected period of
active employment. The Corporation purchased life insurance contracts to fund
the expected liabilities under the contracts.
(NOTES CONTINUED ON NEXT PAGE)
- 10 -
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK COMPENSATION PLANS
FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
encourages all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period, which is usually the vesting period. However, it also allows an entity
to continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, whereby compensation
cost is the excess, if any, of the quoted market price of the stock at the grant
date (or other measurement date) over the amount an employee must pay to acquire
the stock. Stock options issued under the Corporation's stock option plan have
no intrinsic value at the grant date, and under Opinion No. 25 no compensation
cost is recognized for them. The Corporation has elected to continue with the
accounting methodology in Opinion No. 25 and, as a result, has provided pro
forma disclosures of net income and earnings per share and other disclosures, as
if the fair value based method of accounting had been applied. The pro forma
disclosures include the effects of all awards granted on or after January 1,
1995.
EARNINGS PER COMMON SHARE
The Corporation adopted Financial Accounting Standards Board (FASB)
Statement No. 128, EARNINGS PER SHARE, on December 31, 1997. This statement
establishes standards for computing and presenting earnings per share (EPS).
This Statement supersedes standards previously set in APB Opinion No. 15,
EARNINGS PER SHARE. FASB Statement 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 basic EPS computation
with the numerator and denominator of the diluted EPS computation. This
Statement is effective for financial statements issued for periods ending after
December 15, 1998. In accordance with the requirements of this Statement, all
prior period EPS data 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 shared
in the earnings of the entity.
COMPREHENSIVE INCOME
The Corporation adopted FASB Statement No. 130, REPORTING COMPREHENSIVE
INCOME, as of January 1, 1998. Accounting principles generally require that
recognized revenue, expenses, gains and losses be included in net income.
However, certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate component of
comprehensive income, and reported in the consolidated statements of
stockholders' equity. The adoption of FASB Statement No. 130 had no effect on
the Corporation's net income or shareholders' equity.
(NOTES CONTINUED ON NEXT PAGE)
- 11 -
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COMPREHENSIVE INCOME (continued)
<TABLE>
<CAPTION>
The components of other comprehensive income and related tax effects are
as follows:
Years Ended December 31,
1998 1997
<S> <C> <C>
Unrealized holding gains (losses) arising during the year
on available-for-sale securities $ (355,317) $ 438,749
Reclassification adjustment for losses (gains) realized in
income - 45,313
--------- ---------
Net unrealized gains (losses) (355,317) 484,062
Tax effect 119,870 (164,582)
---------- ------------
Net-of-tax amount $ (235,447) $ 319,480
============ ==========
</TABLE>
SEGMENT REPORTING
During the year ended December 31, 1998, the Corporation adopted FASB
Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE, which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
financial reports issued to shareholders. Operating segments are components of
an enterprise about which separate financial information is available that is
evaluated regularly by management in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, standby letters of credit, and financial guarantees written. Such
financial instruments are recorded in the financial statements when they become
payable.
USE OF ESTIMATES
The preparation of financial statements requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. While management uses available information to recognize
losses on loans and foreclosed real estate, future additions to the allowances
may be necessary based on changes in local economic conditions and other
factors.
(NOTES CONTINUED ON NEXT PAGE)
- 12 -
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECLASSIFICATIONS
Certain reclassifications have been made to prior year's information to
conform with the current year presentation.
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required by the Federal Reserve Bank to maintain average
reserve balances. The average amount of these reserve balances was approximately
$421,000 for the year ended December 31, 1998. On December 31, 1998, the
required reserve balance was $343,000.
NOTE 4 - SECURITIES
Securities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
DECEMBER 31, 1998 Cost Gains Losses Value
-------------------------- ------------ ---------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. GOVERNMENT AGENCIES $ 6,774,386 $ 95,312 $ 1,575 $ 6,868,123
FEDERAL RESERVE BANK
STOCK 434,300 - - 434,300
FEDERAL HOME LOAN BANK
STOCK 1,161,700 - - 1,161,700
OTHER 155,000 - - 155,000
--------- ------- ------- ---------
$ 8,525,386 $ 95,312 $ 1,575 $ 8,619,123
=========== ======== ======= ===========
SECURITIES HELD TO MATURITY
U.S. GOVERNMENT AND AGENCY
SECURITIES $ 477,675 $ 7,156 $ 1,461 $ 483,370
STATE AND MUNICIPAL SECURITIES 745,961 22,464 - 768,425
--------- -------- ------- ---------
$ 1,223,636 $ 29,620 $ 1,461 $ 1,251,795
=========== ======== ======= ===========
December 31, 1997
Securities available for sale
U.S. Government agencies $ 9,352,448 $ 449,055 $ - $ 9,801,503
Federal Reserve Bank stock
297,250 - - 297,250
Federal Home Loan Bank
stock 2,233,500 - - 2,233,500
Other 100,000 - - 100,000
--------- ------- ------- ---------
$ 11,983,198 $ 449,055 $ - $ 12,432,253
============ ========= ======== ============
</TABLE>
(NOTES CONTINUED ON NEXT PAGE)
- 13 -
<PAGE>
NOTE 4 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
-------------------------- ------------ ---------
<S> <C> <C> <C> <C>
Securities held to maturity
U.S. Government and agency
securities $ 1,995,739 $ 11,310 $ 36,193 $ 1,970,856
State and municipal securities 746,293 - 1,293 745,000
--------- ------- ------- ---------
$ 2,742,032 $ 11,310 $ 37,486 $ 2,715,856
=========== ======== ======== ===========
</TABLE>
Federal Reserve Bank stock, Federal Home Loan Bank stock and other
securities are restricted securities, carried at cost, and periodically
evaluated for impairment. These securities are restricted, do not have a readily
determinable fair value, and lack a market.
At December 31, 1998 and 1997, respectively, approximately $200,000 and
$1,671,000, was pledged to secure deposits of the U.S. Government or the
Commonwealth of Virginia.
The amortized cost and fair value of securities by maturity date at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Securities held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $110,647 $110,493 $ - $ -
Due from one to five years 570,291 575,985 500,000 503,095
Due from five to ten years 482,854 504,117 - -
Due after ten years 59,844 61,200 6,274,386 6,365,028
Federal Reserve Bank stock - - 434,300 434,300
Federal Home Loan Bank stock - - 1,161,700 1,161,700
Other - - 155,000 155,000
------------- ------------- ------------- -------------
$ 1,223,636 $ 1,251,795 $ 8,525,386 $ 8,619,123
============= ============= ============= =============
</TABLE>
Securities due after ten years have variable rates which change with
market conditions.
Gross realized gains and losses on available-for-sale securities were:
December 31,
--------------------
1998 1997
---- ----
Gross realized gains:
U.S. government agencies $ - $ -
=========== ===========
Gross realized losses:
U.S. government agencies $ - $ 45,313
============ ===========
(NOTES CONTINUED ON NEXT PAGE)
- 14 -
<PAGE>
NOTE 5 - LOANS
Loans consist of the following:
December 31,
----------------------
Gross loans: 1998 1997
------- -----
Commercial $ 68,568,799 $ 50,712,937
Real estate - construction 44,606,768 37,626,006
Commercial real estate 42,482,709 9,015,703
Residential real estate 28,701,731 49,415,863
Installment and consumer loans 4,162,607 3,819,368
------------ -----------
Total gross loans 188,522,614 150,589,877
Less - allowance for loan losses (2,500,193) (2,573,346)
------------ -----------
Loans, net $ 186,022,421 $148,016,531
============ ============
A summary of the activity in the allowance for loan losses account is as
follows:
Years Ended December 31,
1998 1997
------------------------------
Balance, beginning of year $ 2,573,346 $ 1,040,247
Allowance acquired through business combination - 1,400,000
Provision charged to operations 150,000 155,254
Loans charged-off (287,238) (65,051)
Recoveries 64,085 42,896
------------------------------
Balance, end of year $ 2,500,193 $ 2,573,346
==============================
Accounting standards require certain disclosures concerning restructured
loans, regardless of whether or not an impairment loss exists. At December 31,
1998 and 1997, such loans amounted to $2,078,079 and $65,000, respectively.
Management does not believe an impairment loss exists with respect to these
loans. Impaired loans amount to $532,674 and $3,048,976 as of December 31, 1998
and 1997, respectively. Both restructured and impaired loans have a valuation
allowance allocation of $179,687 and $450,183 at those respective dates.
Substantially all of the loans considered impaired at December 31, 1998 were
acquired in the business combination with Eastern American Bank in December,
1997. For the years ended December 31, 1998 and 1997, the average recorded
investment in impaired loans and restructured loans was approximately $1,699,686
and $754,100, respectively. The Bank recognized $46,332 and $34,570 of interest
income on both categories of loans during the years ended December 31, 1998 and
1997, respectively.
Loans on which the accrual of interest has been discontinued amounted to
$532,674 and $3,048,976 at December 31, 1998 and 1997, respectively. If interest
on those loans had been accrued, such income would have approximated $16,394 and
$11,964 for 1998 and 1997, respectively. No interest was recognized or received
on these loans in 1998 and 1997.
(NOTES CONTINUED ON NEXT PAGE)
- 15 -
<PAGE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
1998 1997
Land $ 1,725,000 $ 1,725,000
Leasehold improvements 1,343,155 1,295,293
Equipment, furniture and fixtures 1,371,583 1,212,476
-------------- -----------
4,439,738 4,232,769
Less - accumulated depreciation (1,158,518) (995,862)
-------------- -----------
$ 3,281,220 $ 3,236,907
============== ===========
Depreciation charged to operating expense for the years ended December 31,
1998 and 1997 was $310,867 and $265,047, respectively.
NOTE 7 - DEPOSITS
Interest-bearing deposits consist of the following:
December 31,
--------------------------
1998 1997
------------ ------------
Money market and NOW account deposits $ 12,731,482 $ 11,554,162
Savings deposits 20,721,917 20,677,173
Time deposits $100,000 and over 9,717,569 1,228,198
Other time deposits 147,265,524 124,555,343
------------ ------------
$190,436,492 $158,014,876
============ ============
The scheduled maturities of time deposits were as follows:
December 31,
---------------------------
(IN THOUSANDS)
1998 1997
---------------------------
Less than one year $ 151,788 $ 120,155
One to five years 5,195 5,629
Over five years - -
--------------------------
$ 156,983 $ 125,784
===========================
(NOTES CONTINUED ON NEXT PAGE)
- 16 -
<PAGE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances consist of the following:
December 31,
----------------------------
1998 1997
----------------------------
Variable rate (6.20% at December 31, 1997)
FHLB advance due November 28, 1998 $ - 9,650,000
7.53% FHLB advance due April 3, 1998 - 1,000,000
5.37% FHLB advance due July 1, 1998 - 1,000,000
5.68% FHLB advance due December 28, 1998 - 2,000,000
5.42% FHLB advance due October 28, 1999 2,000,000 2,000,000
5.69% FHLB advance due February 6, 2000 300,000 300,000
5.88% FHLB advance due September 24, 2002 5,000,000 5,000,000
----------------------------
$ 7,300,000 20,950,000
============================
Information regarding FHLB advances is summarized below:
Weighted average rate 5.65% 5.79%
============== ============
Average balance $ 17,794,40 $ 4,959,000
===========================
Maximum outstanding at month end $ 46,420,00 $ 20,950,000
===========================
As of December 31, 1998 and 1997, respectively, advances are
collateralized by FHLB stock with a cost of $1,161,700 and $2,233,500. In
addition, securities amounting to $5,900,000 and $7,600,000 are pledged against
these advances, as of December 31, 1998 and 1997, respectively. First mortgage
loans amounting to $10,179,587 also serve to provide additional collateral for
these advances at December 31, 1998. Pursuant to the terms of the variable rate
line of credit, the Bank may borrow up to $30,000,000. The FHLB advances
arrangement has no expiration date, but is reevaluated periodically to determine
the Bank's credit worthiness. Additionally, the Bank has a warehouse line of
credit collateralized by first mortgage loans, amounting to $50,000,000 and
expiring December 2, 1999. As of December 31, 1998, the Bank had not drawn from
this line of credit.
NOTE 9 - STOCKHOLDERS' EQUITY
At December 31, 1998, the Corporation is in full compliance with all
relevant regulatory capital requirements. Prior to 1998, under state law, the
Bank was not able to pay dividends until it had restored any deficits in its
capital funds as originally paid in, or unless permission was obtained from the
State Corporation Commission and approved by stockholders. During April, 1997,
the Board of Directors approved a $.25 per share dividend, totalling $241,968,
which was approved by the State Corporation Commission and shareholders. The
cash dividends were paid to stockholders in October, 1997. As a result of the
Bank's improved financial condition, such approvals are no longer required as
long as the Bank continues to achieve satisfactory earnings. In 1998, the Board
established a quarterly dividend policy, which resulted in a declaration of a
$.06 per share dividend for each quarter of 1998.
(NOTES CONTINUED ON NEXT PAGE)
- 17 -
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
During 1998, stock options were exercised resulting in the issuance of
32,732 additional common shares. On July 1, 1998, the Corporation effected a two
for one stock split in relation to the formation of the holding company. In the
fourth quarter of 1998, the Corporation reacquired 8,988 shares of its
outstanding common stock.
In December, 1997, the Bank issued 258,816 shares of its common stock in
a share exchange which resulted in the acquisition of Eastern American Bank,
FSB. Costs associated with the acquisition of $218,000 were capitalized and are
being amortized into expense over a fifteen year period on a straight-line
basis.
NOTE 10 - EMPLOYEE BENEFIT PLANS
401(K) PROFIT SHARING PLAN
The Corporation has a 401(k) Profit Sharing Plan whereby substantially
all employees participate in the Plan. Employees may contribute up to 15% of
their compensation subject to certain limits based on federal tax laws. The
Corporation makes matching contributions equal to 50% of the first 6% of an
employee's compensation contributed to the Plan. The Corporation may also make a
discretionary profit sharing contribution based on certain eligibility
requirements as set forth in the Plan. Employer account contributions vest to
the employee equally over a three year period. For the years ended December 31,
1998 and 1997, expenses attributable to the Plan amounted to $139,000 and
$89,000, respectively.
STOCK COMPENSATION PLANS
At December 31, 1998, the Corporation has four stock compensation plans
for its officers and directors. Each plan is a fixed option plan. Three of these
plans, the May 1993 Long-Term Incentive Plan, the December 1993 Long-Term
Incentive Plan, and the 1994 Long-Term Incentive Plan were implemented and
grants were made prior to the effective date of (FASB) Statement No. 123,
ACCOUNTING FOR STOCK BASED COMPENSATION. The Corporation applies APB Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in
accounting for all its plans. Accordingly, no compensation cost has been
recognized for these plans against earnings.
The Corporation's 1996 Long-Term Incentive Plan authorized the granting
of options to management personnel and directors of 47,000 shares of the Bank's
common stock in 1997. All options have 10 year terms, and become fully
exercisable when the Bank's average market price of its common stock has
attained at least $12.50 per share for at least thirty consecutive days. The
1997 stock options are not exercisable for five years from the date of grant. No
stock options were granted in 1998.
(NOTES CONTINUED ON NEXT PAGE)
- 18 -
<PAGE>
NOTE 10 - STOCK COMPENSATION PLANS (Continued)
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, and has been determined as if the
Corporation had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk free interest rate of 5.75%; no dividend
yields; volatility factors of the expected market price of Bank's common stock
of 29%, and a weighted-average expected life of the option of five years
beginning in 1997.
The Black-Scholes option model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Corporation's 1997 stock options been
determined based on the fair value method prescribed by FASB No. 123, the
Corporation's net income and earnings per share would have been reduced to the
pro-forma amounts indicated for the year ended December 31:
1998 1997
---------- ------------
Net income As reported $ 3,046,847 $ 1,821,162
Pro forma $ 3,000,535 1,774,850
Basic earnings per share As reported $ 1.24 $ .92
Pro forma $ 1.22 $ .89
Diluted earnings per share As reported $ 1.13 $ .83
Pro forma $ 1.11 $ .81
(NOTES CONTINUED ON NEXT PAGE)
- 19 -
<PAGE>
NOTE 10 - STOCK COMPENSATION PLANS (Continued)
The following is a summary of the Corporation's stock option activity,
and related information for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
------ -----
WEIGHTED - Weighted -
AVERAGE Average
EXERCISE Exercise
OPTIONS PRICE Options Price
------- -------- -------- -------
<S> <C> <C> <C> <C>
Outstanding - beginning of year $ 371,756 5.96 324,756 4.60
Granted - - 47,000 15.75
Exercised 32,732 4.43 - -
Forfeited - - - -
-----------------------------------------------------
Outstanding - end of year 339,024 6.16 371,756 5.96
-----------------------------------------------------
Exercisable - end of year $ 292,024 4.52 324,756 4.60
----------------------------------------------------
Weighted average fair value of
options granted during the
year $ - $ 5.81
======== =======
</TABLE>
NOTE 11 - INCOME TAXES
The principal components of the income tax expense were as follows:
December 31,
------------------------------------
1998 1997
-------------- -----------
Federal - current $ 1,589,996 $ 485,846
Federal - deferred 937 478,802
-------------- -----------
$ 1,590,933 $ 964,648
============== ===========
The differences between expected federal income taxes at statutory rates
to actual income tax expense are summarized as follows:
December 31,
1998 1997
Income tax expense computed at federal
statutory rates $1,576,845 $ 947,175
Tax effects of:
Nondeductible merger and reorganization
expenses 23,060 -
Other (8,972) 17,473
----------- ----------
$ 1,590,933 $ 964,648
============= ===========
(NOTES CONTINUED ON NEXT PAGE)
- 20 -
<PAGE>
NOTE 11 - INCOME TAXES (Continued)
The Corporation's deferred tax assets and liabilities and their principal
components are as follows:
December 31,
------------------------
1998 1997
--------- ------------
Deferred tax assets:
Intangible assets $ 141,800 $ 153,487
Bad debts and other provisions 682,800 615,448
Fixed assets 242,245 255,814
Other - 19,796
Deferred compensation 31,520 -
Deferred gain on sale of real estate 9,200 -
---------- -----------
Total deferred tax asset 1,107,565 1,044,545
---------- -----------
Deferred tax liabilities:
Loans 299,670 321,205
Deposits 594,610 637,340
Deferred fees 426,000 300,937
FHLB stock 17,821 17,821
Unrealized gain on securities
available for sale 31,871 152,679
Other 3,195 -
----------- -----------
Total deferred tax liability 1,373,167 1,429,982
----------- -----------
Net deferred tax liability $ (265,602) $ (385,473)
============ ===========
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Bank leases its main office in Virginia Beach along with offices of the
mortgage division and northern Virginia offices acquired through the business
combination. The leases provide for options to renew for various periods. All
escalation clauses based on fixed percentages are included in the disclosure
below. Pursuant to the terms of these leases, the following is a schedule, by
year, of future minimum lease payments required under non-cancelable lease
agreements.
Lease
Payments
--------
1999 $ 902,974
2000 905,226
2001 751,645
2002 711,755
2003 712,221
Thereafter 2,892,041
------------------
$ 6,875,862
==================
(NOTES CONTINUED ON NEXT PAGE)
- 21 -
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
Total lease expense was $801,120 and $392,222 for 1998 and 1997,
respectively.
The Corporation and the Bank are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the financial
position of the Bank.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Bank has loan and deposit transactions with its officers and
directors, and with companies in which the officers and directors have a
significant financial interest. A summary of related party loan activity during
1998 is as follows:
Balance, December 31, 1997 $ 1,268,416
Originations - 1998 1,618,358
Repayments - 1998 (1,044,365)
--------------
BALANCE, DECEMBER 31, 1998 $ 1,842,409
==============
In the opinion of Management, such loans are made in the ordinary course
of business at normal credit terms, including interest rate and collateral
requirements and do not represent more than normal credit risk.
There were no commitments to extend credit and letters of credit to
related parties at December 31, 1998.
Deposits from related parties held by the Bank at December 31, 1998 and
1997 amounted to $4,203,000 and $2,071,000, respectively.
NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Bank has outstanding at any time a significant dollar amount of
commitments to extend credit. To accommodate major customers, the Bank also
provides standby letters of credit and guarantees to third parties. Those
arrangements are subject to strict credit control assessments. Guarantees and
standby letters of credit specify limits to the Bank's obligations. The amounts
of loan commitments, guarantees and standby letters of credit are set out in the
following table as of December 31, 1998. Because many commitments and almost all
standby letters of credit and guarantees expire without being funded in whole or
in part, the contract amounts are not estimates of future cash flows.
<TABLE>
<CAPTION>
Variable Rate Fixed Rate
Commitments Commitments
------------- ------------
<S> <C> <C>
DECEMBER 31, 1998
Loan Commitments $ 95,358,583 $ 17,036,278
Standby letters of credit and guarantees written $ 4,033,347 $ -
</TABLE>
(NOTES CONTINUED ON NEXT PAGE)
- 22 -
<PAGE>
NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1997
Loan Commitments $ 53,810,327 $ 6,820,324
Standby letters of credit and guarantees written $ 2,946,393 $ -
</TABLE>
All of the guarantees outstanding at December 31, 1998 expire at various
dates between 1999 and 2000. Interest rates on fixed-rate commitments range from
6.5% on commercial loans to 18% on consumer debt as of December 31, 1998.
Loan commitments, standby letters of credit and guarantees written have
off-balance-sheet credit risk because only origination fees and accruals for
probable losses, if any, are recognized in the statement of financial position,
until the commitments are fulfilled or the standby letters of credit or
guarantees expire. Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that, in accordance with the
requirements of FASB Statement No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK, collateral or other security is of no value. The
Bank's policy is to require customers to provide collateral prior to the
disbursement of approved loans. For retail loans, the Bank usually retains a
security interest in the property or products financed, which provides
repossession rights in the event of default by the customer. For business loans
and financial guarantees, collateral is usually in the form of inventory or
marketable securities (held in trust) or property (notations on title).
Concentrations of credit risk (whether on or off balance sheet) arising
from financial instruments exist in relation to certain groups of customers. A
group concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Bank
does not have significant exposure to any individual customer or counterparty.
However, a geographic concentration arises because the Bank operates primarily
in southeastern Virginia.
<TABLE>
<CAPTION>
Installment
Residential Commercial Small and
Property Property Business Consumer Total
-------- -------- ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Loans and
receivables $ 73,308,499 $ 42,482,709 $ 68,568,799 $ 4,16$,607 $ 188,522,614
Credit
commitments 73,155,820 1,983,787 35,941,567 1,313,687 112,394,861
-------------- ------------- -------------- ------------- ---------------
$ 146,464,319 $ 44,466,496 $ 104,510,366 $ 5,476,294 $ 300,917,475
=============== ============== =============== ============== ===============
</TABLE>
The credit risk amounts represent the maximum accounting loss that would
be recognized at the reporting date if counterparties failed completely to
perform as contracted and any collateral or security proved to be of no value.
The Bank has experienced little difficulty in accessing collateral when
required. The amounts of credit risk shown, therefore, greatly exceed expected
losses, which are included in the allowance for loan losses.
As of December 31, 1998, the Corporation had $5,872,000 in deposits in
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation.
(NOTES CONTINUED ON NEXT PAGE)
- 23 -
<PAGE>
NOTE 15 - REGULATORY MATTERS
The Corporation (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's and the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Corporation's and the Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, the Corporation and the Bank meet all capital adequacy requirements to
which it is subject.
As of September 30, 1996, the most recent notification from the Federal
Reserve Bank of Richmond categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk- based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table. There is no significant difference between the Bank's amounts and ratios
and those for the Corporation on a consolidated basis.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 19,929,000 10.48% $ 15,209,920 > 8% $ 19,012,400 >10%
- -
TIER I CAPITAL
(TO RISK-WEIGHTED ASSETS) $ 17,552,000 9.23% $ 7,604,960 > 4% $ 11,407,440 >06%
- -
TIER I CAPITAL
(TO AVERAGE ASSETS) $ 17,552,000 7.52% $ 9,339,320 > 4% $ 11,674,150 >05%
- -
<CAPTION>
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $ 17,298,000 10.93% $ 12,657,680 > 8% $15,822,100 >10%
- -
Tier I Capital
(to Risk-Weighted Assets) $ 15,324,000 9.69% $ 6,328,840 > 4% $ 9,493,260 > 6%
- -
Tier I Capital
(to Average Assets) $ 15,324,000 9.61% $ 6,340,520 > 4% $ 7,925,650 > 5%
- -
</TABLE>
(NOTES CONTINUED ON NEXT PAGE)
- 24 -
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair value of the
Bank's financial instruments as of December 31, 1998 and 1997. FASB Statement
No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair
value of a financial instruments as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The carrying amounts in the table are included in
the balance sheets under the indicated captions.
<TABLE>
<CAPTION>
1998 1997
------ -----
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
--------- ------ -------- ------
(DOLLARS IN THOUSANDS) (Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 8,481 $ 8,481 $ 13,211 $ 13,211
Deposits in other banks - - 1,000 1,000
Loans, net 186,022 191,266 148,017 151,316
Investment securities 9,843 9,871 15,174 15,148
Funds advanced in settlement of
mortgage loans 21,052 21,052 23,744 23,744
Accrued interest receivable 1,602 1,602 1,562 1,562
Financial Liabilities:
Deposit liabilities 206,219 207,756 169,508 169,821
Short-term borrowings 2,000 2,000 13,650 13,650
Long-term borrowings 5,300 5,540 7,300 7,016
Accrued interest payable 652 652 609 609
</TABLE>
ESTIMATION OF FAIR VALUES
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
SHORT-TERM FINANCIAL INSTRUMENTS are valued at their carrying amounts
included in the Bank's balance sheet, which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments. This
approach applies to cash and cash equivalents, deposits in other banks, funds
advanced in settlement of mortgage loans, and short-term borrowings.
LOANS are valued on the basis of estimated future receipts of principal
and interest, discounted at various rates. Loan prepayments are assumed to occur
at the same rate as in previous periods when interest rates were at levels
similar to current levels. Future cash flows for homogeneous categories of
consumer loans, such as motor vehicle loans, are estimated on a portfolio basis
and discounted at current rates offered for similar loan terms to new borrowers
with similar credit profiles. The fair value of nonaccrual loans also is
estimated on a present value basis, using higher discount rates appropriate to
the higher risk involved.
(NOTES CONTINUED ON NEXT PAGE)
- 25 -
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
INVESTMENT SECURITIES are valued at quoted market prices if available.
For unquoted securities, the fair value is estimated by the Bank on the basis of
financial and other information.
The fair value of DEMAND DEPOSITS AND DEPOSITS WITH NO DEFINED MATURITY
is taken to be the amount payable on demand at the reporting date. The fair
value of FIXED - MATURITY DEPOSITS is estimated using rates currently offered
for deposits of similar remaining maturities. The intangible value of long-term
relationships with depositors is not taken into account in estimating the fair
values disclosed.
The carrying amounts of ACCRUED INTEREST RECEIVABLE AND PAYABLE, AND
CERTAIN OTHER ASSETS approximate fair value.
It is not practicable to separately estimate the fair values for
OFF-BALANCE-SHEET CREDIT COMMITMENTS, including standby letters of credit and
guarantees written, due to the lack of cost effective, reliable measurement
methods for these instruments.
NOTE 17 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations. The number of shares have
been restated for the two for one stock split in 1998.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income (numerator, basic and diluted) $ 3,046,847 $ 1,821,162
Weighted average shares outstanding (denominator) 2,467,031 1,978,884
------------ ------------
EARNINGS PER COMMON SHARE-BASIC $ 1.24 $ .92
============ ============
Effect of dilutive securities:
Weighted average shares outstanding 2,467,031 1,978,884
Effect of stock options 235,940 206,572
------------ ------------
Diluted average shares outstanding (denominator) 2,702,971 2,185,456
------------ ------------
EARNINGS PER COMMON SHARE - ASSUMING DILUTION $ 1.13 $ .83
============ ============
</TABLE>
(NOTES CONTINUED ON NEXT PAGE)
- 26 -
<PAGE>
NOTE 18 - BUSINESS COMBINATION
On December 1, 1997, the Bank acquired Eastern American Bank, FSB, in a
business combination accounted for under the purchase method of accounting. In
an exchange of shares, all of the issued and outstanding common and preferred
stock of Eastern American Bank were converted into the right to receive 258,816
shares of Resource Bank common stock, amounting to a purchase price of
$5,048,082. As a result of the combination, the Bank acquired $66,514,000 in
assets (including cash of $12,539,000), $48,082,200 in net loans, and assumed
$52,844,000 in deposit liabilities. The fair value of the assets acquired, net
of liabilities assumed, exceeded the purchase price by $547,000. Accordingly,
this excess was allocated to, and eliminated, certain property and equipment and
other non current assets of the acquired bank. The acquisition did not have a
material effect on the results of operations for the year ended December 31,
1997, as the results of operations only include Eastern American Bank's activity
for the month then ended. In 1998, the former Eastern American Bank's operations
were integrated into Resource Bank.
The following unaudited pro forma financial information for the year
ended December 31, 1997 is presented for informational purposes only. This
information assumes the business combination was consummated on January 1, and
is not necessarily indicative of the combined results of operations which would
actually have occurred had the transaction been consummated on that date or
which may be obtained in the future. This financial information includes the
actual separate operating results of the Bank and Eastern American through
November 30, 1997, the financial impact of all pro forma adjustments, and the
actual combined operating results of the Bank for the period December 1, 1997
through December 31, 1997. Dollars are in thousands, except per share data.
Unaudited Pro Forma
Results of Operations
Year Ended
December 31, 1997
-----------------
Total interest income $ 16,904
Net interest income $ 7,554
Net income $ 1,607
Basic earnings per common share $ .66
Diluted earnings per share $ .61
(NOTES CONTINUED ON NEXT PAGE)
- 27 -
<PAGE>
NOTE 19 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Resource Bankshares Corporation
is as follows:
DECEMBER 31,
BALANCE SHEET 1998
----------------
Assets
Cash and due from banks $ 56,868
Cash on deposit at Resource Bank 248,611
----------------
Total cash and due from banks 305,479
Due from Resource Bank 19,998
Investment in common stock of Resource Bank 17,613,122
----------------
TOTAL ASSETS $ 17,938,599
================
Liabilities and Stockholders' equity
Dividends payable $ 149,167
Stockholders' equity 17,789,432
----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,938,599
================
STATEMENT OF INCOME
Income
Dividends from Resource Bank $ 924,934
Interest on investments 162
----------------
Income before income taxes and equity in
undistributed net income of Resource Bank 925,096
Equity in undistributed net income of
Resource Bank 2,121,751
----------------
$ 3,046,847
================
(NOTES CONTINUED ON NEXT PAGE)
- 28 -
<PAGE>
NOTE 19 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)
Year Ended
December 31,
STATEMENT OF CASH FLOWS 1998
---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,046,847
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
Resource Bank (2,121,751)
Increase in other assets (19,998)
Increase in accrued expenses -
Increase in other liabilities 149,166
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,054,264
---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock upon
exercise of stock options 19,998
Payments to reacquire common stock (176,444)
Cash dividends paid on common stock (592,339)
---------------
NET CASH USED FOR FINANCING ACTIVITIES (748,785)
---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 305,479
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR -
---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 305,479
===============
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Corporation. The total amount
of dividends which may be paid at any date is generally limited to the retained
earnings of the Bank, and loans or advances are limited to 10% of the Bank's
capital stock and surplus on a secured basis.
At December 31, 1998, the Bank's retained earnings available for the payment of
dividends without prior regulatory approval was $2,978,000, and funds available
for loans or advances amounted to $1,457,000.
In addition, dividends paid by the Bank to the Corporation would be prohibited
if the effect thereof would cause the Bank's capital to be reduced below
applicable minimum capital requirements.
(NOTES CONTINUED ON NEXT PAGE)
- 29 -
<PAGE>
NOTE 20 - SEGMENT REPORTING
The Corporation has one reportable segment, its mortgage banking
operations. This segment originates residential loans and subsequently sells
them to investors. The Commercial banking and other banking operations provide a
broad range of lending and deposit services to individual and commercial
customers, including such products as construction loans, and other business
financing arrangements.
The accounting policies of the segment are the same as those described in
the summary of significant accounting policies. The Corporation evaluates
performance based on profit or loss from operations before income taxes.
The Corporation's reportable segment is a strategic business unit that
offers different products and services. It is managed separately because the
segment appeals to different markets and, accordingly, requires different
technology and marketing strategies.
The segment's most significant revenue and expense is non-interest income
and non-interest expense, respectively. The segments are reported below for the
years ended December 31.
<TABLE>
<CAPTION>
SELECTED FINANCIAL INFORMATION
Mortgage
Banking Commercial
Year Ended December 31, 1998 Operations and Other Total
---------- --------- ------
<S> <C> <C> <C>
Net interest income after provision for
loan losses $ - 8,259,983 8,259,983
Noninterest income 7,062,445 880,968 7,943,413
Noninterest expense (6,401,258) (5,164,358) (11,565,616)
----------- ---------- -----------
Net income before income taxes $ 661,187 3,976,593 4,637,780
=========== ========== ===========
Year Ended December 31, 1997
Net interest income after provision for
loan losses $ - $ 4,798,817 $ 4,798,817
Noninterest income 4,110,868 409,451 4,520,319
Noninterest expense (3,517,157) (3,016,169) (6,533,326)
----------- ------------- -------------
Net income before income taxes $ 593,711 $ 2,192,099 $ 2,785,810
=========== ============= =============
Commercial
SEGMENT ASSETS Mortgage and Other Total
1998 $ 514,989 $ 232,945,443 $ 233,460,432
1997 $ 775,396 $ 208,554,622 $ 209,330,018
</TABLE>
(NOTES CONTINUED ON NEXT PAGE)
- 30 -
<PAGE>
NOTE 21 - SUBSEQUENT EVENTS
On March 9, 1999, the Corporation issued 368,000 trust preferred
securities at a price of $25.00 per security, which resulted in proceeds of
approximately $9,200,000.
On March 24, 1999, the Corporation declared a quarterly dividend of
$.10 per share to be paid to shareholders of record as of April 4, 1999 on April
20, 1999.
* * * * *
- 31 -
<PAGE>
