<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
[ ] 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 on March 14, 2000 as reported in The
Wall Street Journal, was $19,943,030. For the purpose of the foregoing
calculation only, directors and executive officers of the registrant have been
deemed affiliates.
The number of shares outstanding of the registrant's common stock as of March 3,
2000:2,555,579.
Documents Incorporated by Reference
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 29, 2000, in connection with the Company's 2000
Annual Meeting of Shareholders.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I ......................................................................... 3
<S> <C>
Item 1. Business .......................................................3
Item 2. Properties ...................................................17
Item 3. Legal Proceedings .............................................17
Item 4. Submission of Matters to a Vote of Security Holders ...........18
PART II ........................................................................ 19
Item 5. Market for Registrants Common Stock and
Related Stockholder Matters........................ 19
Item 6. Selected Consolidated Financial Data ................... 20
Item 7. Management's Discussion and Analysis of
Financial Condition
and Results of Operations ......................... 22
Item 7a. Quantitative and Qualitative Disclosures
about Market Risk ................................ 26
Item 8. Financial Statements and Supplementary Data ................ 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............ 27
PART III....................................................................... 27
Item 10. Directors and Executive Officers of the Registrant ......... 27
Item 11. Executive Compensation ..................................... 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management ................................... 28
Item 13. Certain Relationships and Related Transactions ............ 28
PART IV ....................................................................... 28
Item 14. Exhibits, Financial Statements, Schedules and
Reports of Form 8-K ............................... 28
</TABLE>
2
<PAGE>
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, and the demand for residential mortgage loans 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 document.
Item 1. Business
Resource Bankshares Corporation (the "Company"), 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, the shareholders of the Bank exchanged each of their shares of
Bank common stock for two shares of the Company's common stock, and the Bank
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 five full service banking offices - one each in
Virginia Beach, Chesapeake, Newport News, Herndon and Reston, Virginia. The
Herndon and Reston branches were acquired in December 1997 when Eastern American
Bank, FSB (Eastern American) merged with the Bank. All bank branches now operate
under the name Resource Bank. Prior to the acquisition, the Bank operated only
one banking office in Virginia Beach. The branch location in Chesapeake,
Virginia, opened during the second quarter of 1999 and the Newport News,
Virginia branch opened during the first quarter of 2000. The Bank also began
offering online banking services, providing customers with the ability to
conduct banking business via a personal computer or other secure browser-enabled
device 24 hours per day through its Internet site, during the first quarter of
2000.
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 four in loan volume (29 loans totaling $5.9 million) in the
Richmond district in fiscal year 1999.
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 1999, the Bank originated and sold mortgage loans in excess of
3
<PAGE>
$286 million. The mortgage division originates loans from the four bank
locations as well as from its mortgage offices in Virginia Beach, Richmond,
Chesapeake, Reston, and Bowie, MD. 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 mortgage division office in Virginia Beach, Virginia.
4
<PAGE>
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.
Year ended December 31
----------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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>
Assets
Interest Earning Assets:
Securities $ 21,791 1,468 6.74% $ 12,386 $ 712 5.75% $ 15,935 $ 1,009 6.33%
Loans(3) 217,598 18,072 8.31% 168,271 15,352 9.12% 93,839 8,316 8.86%
Interest bearing
deposits in
other banks 5,974 293 4.90% 11,870 623 5.25% 4,127 232 5.62%
Other earning assets (4) 16,118 1,548 9.60% 39,934 3,059 7.66% 13,153 1,380 10.49%
------ ----- ----- ------ ----- ----- ------ ----- ------
Total interest earning
assets 261,481 21,381 8.18% 232,471 19,746 8.49% 127,054 10,937 8.61%
Non-interest earning
assets:
Cash and due
from banks 4,280 3,027 1,700
Premises and
equipment 3,717 3,286 965
Other assets 5,644 4,669 1,480
Less: Allowance
for loan losses (2,606) (2,775) (1,252)
------- ------- -------
Total non-interest earning
assets 11,035 8,207 2,893
------- ------ -------
Total Assets $272,516 $240,668 $129,947
======== ======== ========
Liabilities and Stockholders'
Equity
Interest Bearing
Liabilities:
Interest bearing
deposits:
Demand/MMDA accounts $ 12,362 410 3.32% $11,437 384 3.36% 8,543 285 3.34%
Savings 22,943 1,034 4.51% 19,334 916 4.74% 2,289 93 4.06%
Certificates of deposit 180,764 9,593 5.31% 158,740 9,016 5.68% 6,370 5,318 5.52%
------- ----- ----- ------- ----- ----- ------ ----- -----
Total interest bearing
deposits 216,069 11,037 5.11% 189,511 10,316 5.44% 107,202 5,696 5.31%
FHLB advances and other
borrowings 12,506 697 5.57% 17,806 1,020 5.73% 4,959 287 5.79%
Capital debt securities 7,528 702 9.33% - - - - - -
Total interest bearing
liabilities 236,103 12,436 5.27% 207,317 11,336 5.47% 112,161 5,983 5.33%
Non-interest bearing liabilities:
Demand deposits 16,541 13,595 6,898
Other liabilities 2,139 3,037 1,090
------ ------- ------
18,680 16,602 7,988
Total liabilities
Stockholders' equity 17,733 16,749 9,798
Total liabilities and
stockholders' equity $272,516 $240,668 $129,947
======== ======== ========
Interest spread (5) 2.91% 3.02% 3.28%
Net interest income/net
interest margin (6) $8,945 3.42% $ 8,410 3.62% $4,954 3.90%
====== ====== ======
</TABLE>
(1) Average balances are computed on daily balances and Management believes such
balances are representative of the operations of the Company.
(2) Yield and rate percentages are all computed through the annualization
of interest income and expenses versus the average balance of their respective
accounts.
5
<PAGE>
(3) Non-accrual loans are included in the average loan balances, and
income on such loans is recognized on a cash basis.
(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 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, 1999, net interest income was $8.95
million, an increase of approximately $536 thousand, or 6.4% over $8.41 million
for the same period in 1998. Average interest earning assets increased $29.0
million from 1998 to 1999 while average interest bearing liabilities increased
$28.8 million. The yield on average interest earning assets for the year ended
December 31, 1999 was 8.18% compared with 8.49% for the comparable 1998 period.
The 1999 yield on loans was 8.31% compared to 9.12% in 1998. The cost on
average interest bearing liabilities decreased twenty basis points during 1999
to 5.27%, compared to 5.47% during 1998.
Net interest income for the year-ended December 31, 1998 increased 69.8%,
or $3.46 million over 1997. Average interest earning assets increased $105.4
million from 1997 to 1998 while average interest bearing liabilities increased
$95.2 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 fourteen basis points during 1998
to 5.47%, compared to 5.33% during 1997.
The Company's net interest margin is sensitive to the loan origination
volume of the mortgage banking division. 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 commercial 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 $16.1 million for the year ended December 31, 1999, compared
to $39.9 million in the year ended December 31, 1998 and 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.
Since June 1999, the Federal Reserve Bank has increased interest rates five
times, raising short term rates by 125 basis points during this period. These
increases in market rates have resulted in corresponding increases in the prime
lending rate, as well as the cost of interest bearing deposits including
certificates of deposit. Further increases in rates may continue to occur, which
could result in slowed economic growth and reduced borrowing activities.
6
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
1999 compared to 1998 1998 compared to 1997 1997 compared to 1996
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in: Due to Changes in:
----------------------------- ------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
<S> <C>
Inerest Income:
Securities $ 616 $ 140 $ 756 $ (211) $ (86) $ (297) $ (64) $(112) $ (176)
Loans (1) 2,069 (860) 1,209 8,721 (6) 8,715 2,792 (69) 2,723
Interest bearing deposit in
other banks (291) (39) (330) 405 (14) 391 (8) 103 95
--------------------------------------------------------------------------------------------------
Total $2,394 $(759) $1,635 $8,915 $(106) $8,809 $2,720 $(78) $2,642
--------------------------------------------------------------------------------------------------
Interest Expense:
Interest bearing deposits $1,271 $ (550) $721 $4,478 $142 $4,620 $1,152 $(57) $1,095
FHLB advances and other
borrowings 138 241 379 736 (3) 733 193 5 198
--------------------------------------------------------------------------------------------------
Total $1,409 $(309) $1,100 $5,214 $139 $5,353 $1,345 $(52) $1,293
--------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $985 ($ 450) $535 $3,701 ($245) $3,456 $1,375 ($26) $1,349
==================================================================================================
</TABLE>
(1) Loans included funds advanced in settlement of loans.
Interest Rate Sensitivity Analysis
Management evaluates interest sensitivity through the use of an
asset/liability management reporting 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 re-price in the periods
indicated.
<TABLE>
<CAPTION>
December 31, 1999
Maturing or Repricing
--------------------------------------------------------------------------
Within 4-12 1-5 Over
3 Months Months Years 5 Years Total
-------- ------ ----- ------- -----
(Dollars in thousands)
<S> <C>
Interest-Earning Assets:
Investment securities $4,173 $1,312 $1,126 $16,584 $23,195
Loans 147,389 16,069 57,594 34,619 255,671
Interest bearing deposits 3,583 - - - 3,583
Other interest-earning assets 11,774 - - - 11,774
------ ------ ------ ------ ------
Total interest-earning assets 166,919 17,381 58,720 51,203 294,223
------- ------ ------ ------ -------
Interest-Bearing Liabilities:
Deposits
Demand and savings (1) - - 35,457 - 35,457
Time deposits, $100,000 and over 4,218 5,237 2,006 - 11,461
Other time deposits 52,573 115,231 29,853 - 197,657
Other interest-bearing
liabilities 13,000 - 300 5,000 18,300
Capital debt securities - - - 9,200 9,200
------- -------- ------- ----- -----
Total interest-bearing liabilities 69,791 120,468 67,616 14,200 272,075
------- ------- ------ ------ -------
Period Gap $97,128 $(103,087) $(8,896) $37,003 $22,148
------- ---------- -------- ------- -------
Cumulative Gap $97,128 $(5,959) $(14,855) $22,148
------- ---------- --------- -------
Ratio cumulative gap to
total interest-earning
assets 33.01% (2.03)% (5.05)% 7.53%
------- -------- --------- -------
</TABLE>
(1) Management has determined that interest checking, money market and savings
accounts are not sensitive to changes in related market rates and,
therefore, have been placed in the 1-5 years category.
The December 31, 1999 results of the rate sensitivity analysis show that
the Company had $97.1 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 negative $6.0 million, a
liability-sensitive position. Approximately $163.5 million, or 63.9% of the
total loan portfolio, matures or re-prices 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
8
<PAGE>
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.
Investment Portfolio
The following tables present certain information on the Company's
investment securities portfolio:
<TABLE>
<CAPTION>
Securities Available for Sale (1)
1999 1998 1997
---- ---- ----
<S> <C>
U. S. Government Agencies $4,662 $6,868 $9,802
Federal Reserve Bank Stock 587 434 297
Federal Home Loan Bank Stock 915 1,162 2,233
Preferred Stock 351 - -
Other 144 155 100
-----------------------------------------
$6,659 $8,619 $12,432
=========================================
</TABLE>
(1) Carried at fair value
<TABLE>
<CAPTION>
Securities Held to Maturity (2)
1999 1998 1997
---- ---- ----
<S> <C>
U. S. Government Agencies $151 $478 $1,996
State and Municipal 746 746 746
Corporate Bonds 7,208 - -
Preferred Stock 8,431 - -
-----------------------------------------
$16,536 $1,224 $2,742
=========================================
</TABLE>
(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 $115,000 at
December 31, 1999 and $2,000 at December 31, 1998 and gross unrealized gains
were $13,000 and $95,000 at December 31, 1999 and 1998, respectively. At
December 31, 1997 gross unrealized gains on securities available for sale were
$449,000 and there were no gross unrealized losses on securities available for
sale.
At December 31, 1999 and December 31, 1998 gross unrealized gains on securities
held to maturity were $4,000 and $30,000, respectively. At December 31, 1999 and
1998, gross unrealized losses on securities held to maturity were $2,155,000 and
$1,000, respectively. At December 31, 1997 gross unrealized gains and losses on
securities held to maturity were $11,000 and $37,000, respectively.
9
<PAGE>
The following table presents information on the maturities and weighted average
yields of the Company's investment securities at December 31, 1999. The weighted
average yields are calculated on the basis of book value of the investment
securities and on the interest income of the investments adjusted for
amortization of premium and accretion of discount.
<TABLE>
<CAPTION>
December 31, 1999
Held to Maturity Available for Sale
---------------- ------------------
Amortized Weighted Amortized Weighted
Cost Fair Value Average Yield Cost Fair Value Average Yield
--------------------------------------------------------------------------------------
<S> <C>
U. S. government agencies:
Within one year $ 65 $ 65 6.82% $ - $ -
After one year to five years - - - 772 760 6.24%
After five years through ten years 41 42 8.75% 304 302 6.22%
After ten years 45 43 6.80% 3,594 3,600 6.55%
------------------------- ---------------------------
Total 151 150 4,670 4,662
------------------------- ---------------------------
State and municipals:
Within one year 331 332 6.86% - - -
After one year to five years - - - - - -
After five years through ten years 415 412 7.42% - - -
After ten years - - - - - -
------------------------- ---------------------------
Total 746 744 - -
------------------------- ---------------------------
Other securties:
Within one year - - - - - -
After one year to five years - - - - - -
After five years through ten years - - - - - -
After ten years 7,208 6,529 7.98% - - -
------------------------- ---------------------------
Total 7,208 6,529 - -
------------------------- ---------------------------
Total debt securities $ 8,105 $ 7,423 $4,670 $4,662
Equity and others $ 8,431 $ 6,962 $2,090 $1,997
------------------------- ---------------------------
Total securities $16,536 $14,385 $6,760 $6,659
========================= ===========================
</TABLE>
10
<PAGE>
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,
1999 1998 1997 1996 1995
Description Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S><C>
Commercial $ 77,507 30.32% $ 68,569 36.37% $ 50,713 33.68% $34,021 41.50% $25,005 42.77%
Real Estate 173,789 67.97 115,790 61.42 96,058 63.79 43,195 52.69 28,214 48.26
Consumer 4,375 1.71 4,163 2.21 3,819 2.53 4,759 5.81 5,245 8.97
-------- -------- -------- ------- -------- ------ ------ ------- ------- -------
Total $255,671 100.00% $188,522 100.00% $150,590 100.00% $81,975 100.00% $58,464 100.00%
======== ======= ======== ======= ======== ======= ======= ======= ======= =======
</TABLE>
Commercial business loans totaled $77.5 million, or 30% of the Bank's loan
portfolio at December 31, 1999. These loans are typically 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.
Commercial real estate loans amounted to $132.2 million, or 52% of the loan
portfolio at December 31, 1999. These loans typically involve larger loan
balances concentrated with single borrowers or groups of related borrowers and
payment experience is typically dependent on the successful operation of a
business or real estate project.
Consumer or installment loans totaled $4.4 million, and accounted for less
than 2% of the Bank's loan portfolio at December 31, 1999. Consumer loans
include home improvement loans, automobile loans and unsecured lines of credit.
Maturity Schedule of Loans
The table below presents information regarding the maturity of loans at
December 31, 1999:
<TABLE>
<CAPTION>
December 31, 1999
One Year Over one through Five Years
or less Five Years or more Total
<S> <C>
Commercial $ 32,611 $30,275 $14,621 $ 77,507
Real estate - construction 48,224 17,452 2,400 68,076
Commercial real estate 25,969 21,511 16,679 64,159
Residential real estate 3,066 10,910 27,578 41,554
Installment and consumer loans 1,271 2,835 269 4,375
-----------------------------------------------------------------
$111,141 $82,983 $61,547 $255,671
=================================================================
</TABLE>
11
<PAGE>
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, 1999, 1998, and 1997, non-accrual loans amounted to $473,000, $533,000 and
$3,059,000, respectively.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Non-accrual loans $473 $ 533 $3,059 $ 50 $ 57
Loans contractually past due 90 days or
more and still accruing 270 412 1,339 371 13
Troubled debt restructuring - - - - -
----- ------ ------ ---- ----
Total nonperforming loans 743 945 4,398 421 70
Other real estate owned 31 647 684 50 71
----- ------ ------ ---- ----
Total nonperforming assets $774 $1,592 $5,082 $471 $141
==== ====== ====== ==== ====
Nonperforming assets to period-end total
loans and other real estate .30% .84% 3.36% 0.57% 0.24%
</TABLE>
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.
The provisions for loan loss taken by the Company for the years ended
December 31, 1999, 1998 and 1997 were $4,667,000, $150,000 and $155,000,
respectively. The significant increase in the provision for loan loss in 1999
was the result of the credit problems encountered within the Company's asset
based lending program, as discussed in Item 7 of this Form 10-K. Such credit
quality problems were exclusively related to this business unit, and the Company
is, as a result, exiting this market segment.
12
<PAGE>
The following table presents the Bank's loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Allowance for loan losses at
beginning of period $ 2,500 $ 2,573 $ 1,040 $ 854 $ 492
Loans charged off:
Commercial 4,436 126 2 5 21
Real Estate 84 141 56 109 148
Consumer 6 20 7 6 17
- -- - - --
Total 4,526 287 65 120 186
Recoveries of loans previously charged off:
Commercial 35 1 34 6 23
Real Estate 7 40 - - -
Consumer 3 23 9 10 13
-------- ------- -------- -------- --------
Total 45 64 43 16 36
-------- ------- -------- -------- --------
Net loans charged off 4,481 223 22 104 150
Provision for loan losses 4,667 150 155 290 512
-------- ------- -------- -------- --------
Allowance acquired through business
combination - - 1,400 - -
-------- ------- -------- -------- --------
Allowance for loan losses end of period $ 2,686 $ 2,500 $ 2,573 $ 1,040 $ 854
======== ======= ======== ======= =======
Average total loans (net of unearned
income) $217,598 $168,271 $ 93,839 $69,488 $48,465
Total loans (net of unearned income) at
period-end $255,671 $188,522 $150,590 $81,975 $58,464
Ratio of net charge-offs to average loans
2.06% 0.13% 0.02% 0.15% 0.31%
Ratio of provision for loan losses to
average loans 2.14% 0.09% 0.17% 0.42% 1.06%
Ratio of provision for loan losses to net
charge-offs 104.15% 67.26% 704.55% 278.85% 341.33%
Allowance for loan losses to period-end
loans 1.05% 1.33% 1.71% 1.27% 1.46%
</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.
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 corporation may be required to complete and sell the home.
13
<PAGE>
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 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
such as the Company, 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>
1999 1998 1997
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------------------------------------------------------------------------------
<S> <C>
Interest-bearing deposits
Demand/MMDA accounts $ 12,362 3.32% $ 11,437 3.36% $ 8,543 3.34%
Savings $ 22,943 4.51% 19,334 4.74% 2,289 4.06%
Certificates of deposit 180,764 5.31% 158,740 5.68% 96,370 5.52%
--------- ---------- ---------
Total interest bearing deposits 216,069 5.11% 189,511 5.44% 107,202 5.31%
Non interest bearing deposits 16,541 - 13,595 - 6,898 -
Total average deposits $232,610 4.74% $203,106 5.08% $114,100 4.99%
========= ========== =========
</TABLE>
14
<PAGE>
The following table is a summary of time deposits of $100,000 or more by
remaining maturities at December 31, 1999:
Amount Percent
--------- ---------
Three months or less $4,218 36.80%
Three to twelve months 5,237 45.69%
Over twelve months 2,006 17.50%
--------- ---------
Total $11,461 100.00%
--------- ---------
Short Term Borrowing
The following table sets forth consolidated short term borrowings. 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 1999, the Bank purchased federal funds on an unsecured
basis for up to thirty consecutive days from a correspondent bank.
Years Ended December 31,
1999 1998 1997
----------------------------------------
Balance at period end $13,000 $ 2,000 $13,650
Average balance during period $ 7,289 $17,806 $ 4,959
Average rate 5.60% 5.65% 5.79%
Maximum outstanding during period $16,000 $46,420 $13,650
Return on Equity and Assets
The following table sets forth ratios for the Company considered to be
significant indicators of the Company's profitability and financial condition
during the periods indicated:
Return in Equity and Assets
1999 1998 1997
--------------------------------------
Return on average assets -0.25% 1.27% 1.40%
Return on average equity -3.90% 18.19% 18.59%
Dividend payout ratio -160.00% 21.24% 15.06%
Average equity to average asset ratio 6.51% 6.95% 7.54%
Competition
The Bank 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
Bank. Most maintain numerous banking locations and many perform services, such
as trust services, which the Bank does not offer. Many of these competitors have
higher lending limits than the Bank. The Bank emphasizes personal relationship
15
<PAGE>
banking, service, and local management and decision making in its marketing
strategies. In addition, the bank offers courier services and Internet banking
to its clients in an effort to overcome its limited number of physical
locations.
The Bank has contracted with a nationally recognized Internet Banking
software company to provide a secure, comprehensive Internet package to market
its products and service its clientele. This Internet branch (www.resource
bankonline.com) provides customers with the ability to conduct banking business
via a personal computer or other secure browser-enabled device 24 hours per day.
The Bank offers special deposit accounts through this Internet branch, which
features competitive interest rates and ready access to funds on deposit.
Online bill payment and a download capability for most personal financial
software packages are also included in this program.
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 Virginia
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 subsidiary. 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.
16
<PAGE>
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.
Employees
At December 31, 1999 the Company had 175 full time and 16 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.
Executive Officers
T. A. Grell, Jr., has been President and Chief Operating Officer of the
Bank, and Executive Vice President of the Company since December 1998. From 1984
until joining the Company, he was a senior officer at Central Fidelity Bank,
which was later acquired by Wachovia Bank. He has 28 years experience in the
banking industry and is active in civic affairs.
Harvard R. Birdsong II, has been senior vice president of the Company since
December 1998 and senior vice president and chief credit officer of the Bank
since January 1997. Prior to joining the Bank, he was a senior credit officer at
Essex Savings Bank, where he was employed from 1984 through 1996. He has been
employed in the banking industry for 29 years and is active in civic affairs.
Debra C. Dyckman has been senior vice president of operations and secretary
of the Bank since 1992 and of the Company since its inception. She has been in
banking for 29 years and serves on the Board of Trustees of Cape Henry
Collegiate School.
Item 2. Properties
The Company leases its banking and mortgage origination offices. Leases
covering the banking operations are long term with renewal provisions designed
to assure the Bank that it will be able to operate in the facilities for the
foreseeable future. Details of the Bank's leases may be reviewed in Note 12 of
the Notes to Consolidated Financial Statements. The Bank purchased a four acre
lot in Herndon, Virginia in December 1997 for future construction of a Northern
Virginia regional office which will accommodate the Bank's administration and
branch offices that are currently located in Herndon. Construction is expected
to begin during 2000 with completion in 2001.
Item 3. Legal Proceedings
On November 5, 1999, AGM Development Corporation ("AGM"), Michael Agnew and
Barbara M. Agnew (collectively the "Agnews") (AGM and the Agnews collectively
the "Plaintiffs") filed a lawsuit against Resource Bank, the Company's wholly
owned banking subsidiary ("Bank"), in the Circuit Court for the City of Virginia
17
<PAGE>
Beach, Virginia ("Court"). AGM and the Agnews are the borrowers and guarantors
under certain loans which the Bank declared in default in August 1999
("Defaulted Loans"). For a detailed discussion of this loan default, see "Part
II. Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The lawsuit alleges that the Bank did not act in a commercially reasonable
manner when it seized and attempted to liquidate certain collateral that secured
the Defaulted Loans. In connection with this allegation, the Plaintiffs are
seeking a declaratory judgment that all obligations of the Plaintiffs to the
Bank have been satisfied and that the Bank is not entitled to seek deficiency
judgments against the Plaintiffs. Based on advice of counsel, management does
not believe that the relief sought by the Plaintiffs will be granted by the
Court.
The lawsuit also alleges that the Bank's proposed public auction of the
stock of a privately held company was not commercially reasonable. The stock was
owned by the Agnews individually, but was pledged by the Agnews to the Bank as
collateral for the Defaulted Loans. The lawsuit asked the Court to enjoin the
public auction that was scheduled on November 9, 1999. No injunction has been
granted. The public auction occurred as scheduled on November 9, 1999 and the
Bank bid for and purchased the stock on that date. Based on advice of counsel,
management believes that the public auction was conducted in accordance with
applicable law.
Thereafter, AGM and the Agnews amended the lawsuit and generally sought a
declaration from the Court that certain actions taken by the Bank in pursuing
liquidation of its various collateral were done so contrary to the requirements
of the Uniform Commercial Code of Virginia such that they were released from any
liability on the various indebtednesses they owe the Bank. The amended pleading
also requests unspecified monetary damages. The Bank has filed a Cross-Bill
seeking judgment against AGM and the Agnews in the amount of approximately
$3,500,000 under the Notes and the Guaranty as well as for fraud. AGM and the
Agnews have denied liability thereunder. The lawsuit is still in the pre-trial
discovery phase. No trial date has been set.
The Company and the Bank intend to vigorously defend all allegations made
by the Plaintiffs in the lawsuit. The Company does not believe that the lawsuit
will have a material adverse effect on the Company's business, financial
condition 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 1999.
18
<PAGE>
Part II
Item 5. Market for Registrants 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 1999 and 1998, and information concerning dividends paid on the
Company's common stock are set forth in the following table.
Cash Dividend
Amex 1999 High Low Paid
Fourth Quarter $15.25 $ 8.50 $0.10
Third Quarter 19.38 14.63 .10
Second Quarter 22.13 19.00 .10
First Quarter 22.50 17.25 .06
Amex 1998
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
The Company's 2,555,579 common shares outstanding were held by approximately 797
shareholders of record at March 6, 2000.
19
<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
1999 1998 1997 1996 1995
<S> <C>
Income Statement data: (Dollars in thousands, except per share data)
Gross interest income $ 21,381 $ 19,746 $ 10,937 $ 8,295 $ 6,046
Gross interest expense 12,435 11,336 5,983 4,690 3,500
Net interest income 8,946 8,410 4,954 3,605 2,546
Provision for possible loan losses 4,667 150 155 290 512
Net interest income after provision for
loan losses 4,279 8,260 4,799 3,315 2,034
Non-interest income 6,811 7,943 4,520 2.755 2,012
Non-interest expense 12,168 11,565 6,533 4,451 3,285
Income before income taxes (1,078) 4,638 2,786 1,619 761
Income taxes (benefit) (387) 1,591 965 153 (144)
Net income (691) 3,047 1,821 1,466 905
Per Share Data (1):
Net income (2) $ (.27) $ 1.24 $ 0.92 $ 0.79 $ 0.54
Cash dividends .40 .24 0.125 0.05 -
Book value at period end 6.25 7.18 6.36 4.47 3.44
Tangible book value at period end 6.25 7.18 6.36 4.47 3.44
Period-End Balance Sheet Data:
Total assets $306,690 $233,460 $209,330 $115,836 $87,352
Total loans (net of unearned income) 255,671 188,522 150,590 81,975 58,464
Total deposits 260,469 206,219 169,508 99,179 80,905
Long-term debt 14,500 5,300 7,300 - -
Shareholders' equity 15,870 17,789 15,602 8,655 5,810
Performance Ratios
Return on average assets (.25)% 1.27% 1.40% 1.45% 1.24%
Return on average shareholders' equity (3.90)% 18.19% 18.59% 20.46% 17.93%
Average shareholders' equity to average
total assets 6.51% 6.96% 7.54% 7.10% 6.90%
Net interest margin (3) 3.42% 3.62% 3.90% 3.70% 3.62%
Earnings to fixed charges
Excluding interest expense .24x 5.55x 10.32x 17.52x 4.16x
Including interest expense .91x 1.41x 1.46x 1.34x 1.30x
Asset Quality Ratios
Net charge-offs to average loans 2.06% .13% 0.02% 0.15% 0.31%
Allowance to period-end loans 1.04% 1.33% 1.71% 1.27% 1.46%
Allowance to nonperforming loans 361.51% 264.55% 58.50% 247.03% 1220.00%
Non-accrual loans to loans 0.19% 0.28% 2.03% 0.06% .10%
Nonperforming assets to loans and
foreclosed properties 0.30% 0.84% 3.36% 0.57% 0.24%
Risk-based capital ratios
Tier 1 capital 8.20% 9.23% 9.69% 10.22% 9.61%
Total capital 10.24% 10 .48% 10.93% 11.45% 10.86%
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
Leverage capital ratio 7.19% 7.52% 9.67% 7.04% 6.25%
Total equity to total assets 5.17% 7.62% 7.45% 7.47% 6.65%
</TABLE>
- -------------------
(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 Company's net yield on its
earning assets.
21
<PAGE>
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,
the affect of increasing interest rates on the Company's profitability, and
the adequacy of the Company's allowance for future loan losses. Several
factors, including the Virginia and national economies and the demand for
residential mortgage loans may adversely affect the Company's ability to achieve
expected results. Readers are cautioned not to place undue reliance on these
forward looking statements, which reflect management's analysis only as of the
date of this Report.
On December 1, 1997, the Bank acquired Eastern American Bank, FSB,
("Eastern American Bank") 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 an exchange of common shares, 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. The Bank's 1997
results included results by operations from Eastern American Bank for the month
of December 1997.
In 1998, the former Eastern American Bank operations were integrated into
the Bank. The Northern Virginia unit, derived from Eastern American Bank, has
since contributed significantly to average asset growth and has been accretive
to the Company's earnings.
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included as Exhibit 99.1 of this Form 10-K.
Results of Operations and Financial Condition
The Company had a net loss of $690,800 for 1999 and net income of
$3,046,800 and $1,821,200 for 1998 and 1997, respectively. This constituted net
basic earnings per common share of $(.27) for 1999, $1.24 for 1998, and $0.92
for 1997. With the diluted effect of common stock equivalents, earnings per
common share were $(.27) for 1999, $1.13 for 1998, and $0.83 in 1997. The loss
for the year ended December 31, 1999 was directly attributable to the $4,667,000
provision for loan losses taken in the third quarter. This provision for loan
loss occurred as a result of credit problems with a significant borrower within
the Company's asset based lending portfolio, as announced by the Company in
August 1999. The Company is in the process of exiting the asset based lending
business, which represented only 5% of the Company's total loan portfolio.
In regard to business segment reporting, the Company's mortgage banking
operations resulted in a net loss before income taxes of $418,897 for the year
ended December 31, 1999, as compared to net income before income taxes of
$661,187 for the year ended December 31, 1998. The operating loss in 1999 was
the result of decreased loan origination volume, caused by a general increase
in interest rates and the reorganization of the mortgage operation in 1999.
At December 31, 1999, 43.5% of total loans were due in one year or less.
Floating rate loans with maturities of one year or less represented 37.2% of
total loans, and the remainder of loans had fixed rates.
Average loans, net of unearned income, to average deposits were 93.6%,
82.8% and 82.2% in 1999, 1998 and 1997, respectively.
22
<PAGE>
Net Interest Income
Net interest income, before provision for loan losses, increased by 6.4% in
1999 over 1998 to $8,945,660 and 69.8% in 1998 over 1997 to $8,409,983. The 1999
increase in net interest income was closely proportionate with the increase in
average earning assets and interest bearing liabilities during 1999. During
1999, due to the continued expansion of commercial lending activities, average
loans increased 29.3% to $217,598,379. Due to the competitive pricing of the
Company's deposit products, average total deposits increased 14.5% to
$232,609,588. Average funds borrowed from the Federal Home Loan Bank and
correspondent banks decreased by 29.8% to $12,506,348 in 1999. 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
decreased 59.6% to $16,118,051 in 1999. Average securities increased 75.9% to
$21,791,325 and average interest bearing deposits in other banks decreased 49.7%
to $5,973,653 in 1999.
For a historical analysis of net interest income, see the table entitled
"Summary of Net Interest Income" in Part I - Item 1. of this Form 10-K. For an
analysis of the potential for a change in interest rates to impact the ability
of the Bank to generate future net interest income, see the table entitled
"Scheduled Maturity or Repricing" in Part I - Item 1. of this Form 10-K. This is
frequently referred to as the GAP analysis, which analyzes the difference
between interest-sensitive assets and liabilities for the repricing/maturity
periods indicated.
As can be seen from the historical analysis and the GAP analysis, the
Company is in an asset-sensitive position. In a period of rising interest rates,
the Company is positioned to increase future net interest income. Conversely, in
a period of declining interest rates the Company will be in a position to have a
decrease in future interest income. This managed GAP does not include the impact
of mortgage loan volume which provides a natural hedge against this GAP
position. Mortgage banking income tends to increase in times of lower or
declining interest rates, as refinancing effectively leads to an increase in
mortgage loan originations. In a climate of higher or rising interest rates,
mortgage loan originations, particularly refinancings, decrease and mortgage
banking income therefore decreases.
Allowance for Loan Losses
The ratio of net loans charged off to average loans outstanding was 2.06%
in 1999, 0.13% in 1998 and 0.02% in 1997. The allowance for loan losses as a
percentage of loans at year end was 1.04%, 1.33% and 1.71% at December 31, 1999,
1998 and 1997, respectively. The level of non-performing loans at year end was
$743,000, $945,000 and $4,398,000 in 1999, 1998 and 1997, or 0.29%, 0.50% and
2.92% of total loans, respectively.
Management made a provision for loan loss of $4,667,000 in 1999, $150,000
in 1998 and $155,000 in 1997. This significant increase in the provision for
loan loss in 1999 over previous years was the result of the previously noted
credit problems encountered within the Company's asset based lending program.
Such credit quality problems were exclusively related to this business unit, and
the Company is, as a result, exiting this market segment.
The majority of non-accrual loans emanated from Eastern American Bank at
the time of the merger in December 1997. The Company has executed a plan to
substantially reduce the level of non-accruing loans in its Northern Virginia
portfolio since the merger. As the result of significant reductions in problem
assets and the addition of several experienced commercial lending officers,
asset quality within the Northern Virginia loan portfolio at December 31, 1999,
resembled that of 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,
23
<PAGE>
management has emphasized 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, 1999, the Company had $473,000 in non-accrual loans, a
reduction of 11.3% from December 31, 1998. The Company had $270,000 in loans
past due 90 days or more that were still accruing at December 31, 1999. In
addition to loans on either non-accrual status or loans past due 90 days or more
and still accruing, management had identified $3,100,000 of loans that have been
internally classified. These loans require more than normal attention and are
potentially problem loans.
For the historical analysis of the Bank's loan loss experience, see the
table entitled "Summary of Loan Loss Experience" in Part I - Item 1. of this
Form 10-K.
Non-interest Income and Non-interest Expenses
Non-interest income was $6,811,342 in 1999, down 14.3% from $7,943,413 in
1998. Non-interest income increased in 1998 by 75.7% over 1997, due to the
merger transaction with Eastern American Bank and income derived from mortgage
banking operations. However, increases in market interest rates in 1999 caused a
decline in the residential mortgage market volume and a resultant decrease of
the Company's mortgage banking income of 19.2% to $5,709,225. Because of the
uncertainty of future loan origination volume and the future level of interest
rates, the Company may continue to experience reductions in mortgage banking
income in future periods. Service charge income decreased slightly (0.2%) to
$759,289 in 1999, and increased 85.8% to $760,581 in 1998, stemming from the
increased volume of deposit activity after the merger transaction in late 1997.
Total non-interest expense was $12,167,768 in 1999, an increase of 5.2%
from $11,565,616 in 1998. Non-interest expense increased in 1999 over 1998 as
the result of adding banking operations in Chesapeake and a loan office in
Newport News, Virginia, as well as incurring expenses specifically related to
the previously noted disposition of the credit problems encountered in the asset
based lending program. Non-interest expense increased in 1998 by 77.0% over
1997, as the result of the merger with Eastern American Bank. The largest
component of non-interest expense, salaries and employee benefits, increased
slightly (0.7%) in 1999 to $6,735,896, and by 65.7% in 1998 over 1997 to
$6,686,381. This category comprised 55.4% of the Company's total non-interest
expense in 1999, 57.8% in 1998, and 61.8% in 1997. Occupancy expense increased
to $1,185,861 in 1999 (up 8.9%) and by 90.7% in 1998 over 1997. Depreciation and
equipment maintenance expense increased by 22.0% in 1999 to $926,702, and 65.7%
in 1998 over 1997. The 1999 depreciation and equipment maintenance expense
increased as a result of the re-organization of the mortgage division and the
opening of the Chesapeake and Newport News branches. The 1998 increase resulted
from the merger and a one-time data processing systems conversion. Outside
computer service expense decreased by 11.3% in 1999 to $485,458. In 1998,
outside computer service expense increased 125.3% to $547,160 as a result of the
merger and the previously mentioned systems conversion. Professional fees
increased significantly (110%) in 1999 to $340,821, as the result of the
previously discussed credit problems in the asset based lending program.
Professional fees increased 34.6% in 1998 over 1997.
Federal Deposit Insurance Corporation ("FDIC") premiums increased 10.6% to
$58,125 in 1999, and by 322.3% to $52,580 in 1998 over 1997. As the result of
the merger, 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
24
<PAGE>
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.
Stationery and supplies expense decreased by 5.6% in 1999 to $496,814,
after increasing by 78.0% in 1998, primarily from the merger transaction.
Marketing and business development increased by 16.8% in 1999 to $400,938, after
increasing by 67.3% in 1998.
Income Taxes
The income tax benefit from the Company's 1999 loss was $386,958, resulting
in an effective tax rate of 35.9%. 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.
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 4.4% and 4.7% of total deposits at December 31, 1999 and 1998,
respectively. Federal Home Loan Bank of Atlanta ("FHLB") advances were also
utilized as funding sources, with $18,300,000 and $7,300,000 in such advances
outstanding at December 31, 1999 and December 31, 1998, respectively. Pursuant
to the terms of a variable rate line of credit with the FHLB, the Bank may
borrow up to 12% of the Bank's assets. This FHLB credit facility has no
expiration date, but is re-evaluated 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 is renewable annually. As
of December 31, 1999, 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 federal funds
sold, money market accounts and a portfolio of debt securities. The Company also
structures and monitors the flow of funds from debt securities and from maturing
loans. Securities are generally purchased to provide a source of liquidity. At
December 31, 1999, the Company had $6,658,954, fair market value, in securities
available-for-sale and $16,536,027, amortized cost, in securities
held-to-maturity. 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 of
governmental or quasi-governmental agencies, and preferred stocks and bonds of
corporations with a credit rating no less than Bb . Net unrealized appreciation,
net of tax effect, on securities available-for-sale was ($126,036) and $60,929
at December 31, 1999 and 1998, respectively. Federal funds sold to correspondent
institutions were $1,445,000 and $800,000 at year end 1999 and 1998,
respectively.
The Company raised approximately $9,200,000 of additional capital in the
first quarter of 1999 by offering 368,000 Trust Preferred Securities at a price
of $25.00 per Security. The Securities feature a 9.25% coupon. The Company, in
turn, purchased $7,350,000 of non-cumulative 9.25% Preferred Stock issued by the
Bank during the course of 1999. This Preferred Stock will qualify as Tier 1
capital for the Bank for regulatory purposes. This additional Tier 1 capital
provided 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 matches the coupon of the
Trust Preferred Securities. The remainder of funds generated by the Trust
Preferred Securities offering, estimated at $1,550,000 after offering expenses,
was invested in marketable securities and used by the Company in its stock
25
<PAGE>
repurchase program. These marketable securities are held as available-for-sale
to meet liquidity needs. The Company's stock repurchase program was implemented
in part to help offset the potential dilutive effect of stock options granted to
the Company's management as employment recruitment and retention perquisites.
During 1999 and 1998, the Company repurchased 29,099 and 8,988 shares,
respectively.
Capital Resources and Adequacy
The Federal Reserve Board, the FDIC and the Office of Thrift Supervision
have issued substantially similar risk-based and leverage capital guidelines
applicable to banking organizations they supervise. Due to the Bank's
capitalization, it is classified as "well capitalized".
The Company's year-end capital-to-asset ratio was 5.17% at December 31,
1999 as compared to 7.62% at December 31, 1998.
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, 1999.
Required Ratio Resource Resource
Bankshares Bank
----------------------------------------------
Tier 1 risk-based 4.00% 8.20% 9.01%
Total risk-based 8.00% 9.24% 10.05%
Tier 1 leverage 4.00 to 5.00% 7.19% 7.90%
The Company is in full compliance with all relevant regulatory capital
requirements.
Year 2000
The Company's preparation for the Year 2000 changeover proved to be fully
adequate, as no technical difficulties were experienced. The cost associated
with Year 2000 readiness was $95 thousand, and is considered immaterial.
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, 1999. 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 $1,200,000 and decreased by $113,000, respectively.
26
<PAGE>
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.
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.
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years ended December 31, 1999, 1998 and
1997
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998
and 1997
Notes to Financial Statements - December 31, 1999, 1998 and 1997
Quarterly unaudited financial information is contained in Note 21 of the
Notes to Financial Statements.
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
27
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
In accordance with General Instruction G(3), the information called for in
Part III is incorporated by reference from the Company's Proxy Statement to be
filed no later than April 29, 2000 in connection with the Company's 2000 Annual
Meeting of Shareholders.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports of 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, 1999, 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, 1999 and 1998
Consolidated Statements of Income - Years Ended December 31, 1999, 1998 and
1997
Consolidated Statements of Stockholders' Equity - Years Ended December
31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998
and 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
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, 1999: 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.
28
<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: 3/28/2000
/s/ Eleanor J. Whitehurst
Senior Vice President and Chief Financial Officer
Date:3/28/2000
29
<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>
<S> <C>
/s/ John B. Bernhardt
John B. Bernhardt Chairman of the Board Date:3/28/2000
/s/ Lawrence N. Smith President
Lawrence N. Smith Chief Executive Officer Date: 3/28/2000
(Principal Executive Officer)
Director
/s/ Eleanor J. Whitehurst Senior Vice President
Eleanor J. Whitehurst, Chief Financial Officer Date: 3/28/2000
(Principal Financial and
Accounting Officer)
/s/ Alfred E. Abiouness
Alfred E. Abiouness Director Date:3/28/2000
/s/ Thomas W. Hunt
Thomas W. Hunt Director Date:3/28/2000
/s/ Louis Ray Jones
Louis Ray Jones Director Date:3/28/2000
/s/ Arthur Russell Kirk
Arthur Russell Kirk Director Date:3/28/2000
/s/ Elizabeth A. Twohy
Elizabeth A. Twohy Director Date:3/28/2000
</TABLE>
30
<PAGE>
Exhibit Index
Resource Bankshares Corporation
<TABLE>
<CAPTION>
Exhibit
No. Description
<S> <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.)
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
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.)
</TABLE>
32
<PAGE>
<TABLE>
<S><C>
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.)
33
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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)
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. (Incorporated by reference to Registrant's Form 10-K
previously filed with the Securities & Exchange Commission on March 31, 1999)
10.23 Employment Agreement dated January 1, 1999, by and between Resource Bank and *
Harvard R. Birdsong, as amended. (Incorporated by reference to Registrant's
Form 10-Q previously filed with the Securities & Exchange Commission on August
16, 1999)
10.24 Employment Agreement dated January 1, 1999, by and between Resource Bank and *
Debra C. Dyckman, as amended. (Incorporated by reference to Registrant's Form
10-Q previously filed with the Securities & Exchange Commission on August 16,
1999)
10.25 Employment Agreement dated January 1, 1999, by and between Resource Bank and *
Lawrence N. Smith, as amended. (Incorporated by reference to Registrant's Form
10-Q previously filed with the Securities & Exchange Commission on August 16,
1999)
10.26 Employment Agreement dated January 1, 1999, by and between Resource Bank and *
Eleanor J. Whitehurst, as amended. (Incorporated by reference to Registrant's
Form 10-Q previously filed with the Securities & Exchange Commission on August
16, 1999)
10.27 First Amendment to Employment Agreement dated January 1, 1999, by and between *
Resource Bank and T.A. Grell, Jr. (Incorporated by reference to Registrant's
Form 10-Q previously filed with the Securities & Exchange Commission on August
16, 1999)
**21.1 Subsidiaries of Registrant. (Incorporated by reference to Registrant's Form *
10-K previously filed with the Securities & Exchange Commission on March 31,
1999)
34
</TABLE>
<PAGE>
<TABLE>
<S> <C>
**23.1 Consent of Goodman & Company, L.L.P.
**24.1 Powers of Attorney (included on signature page)
**27 Financial Data Schedule
**99.1 Consolidated Financial Statements
- --------------------
* Not filed herewith; incorporated by reference.
** Filed herewith.
</TABLE>
35
<PAGE>
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.
3. Resource Capital Trust I, a Delaware business trust, is a wholly-owned
subsidiary of Resource Bankshares Corporation.
<PAGE>
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 of Resource Bankshares Corporation of our report dated February 2, 2000,
relating to the consolidated balance sheets of Resource Bankshares Corporation
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders equity, and cash flows for each of the years
in the three year period ended December 31, 1999, which report appears in the
December 31, 1999 Annual Report on Form 10K of Resource Bankshares Corporation.
Norfolk, Virginia
March 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,482
<INT-BEARING-DEPOSITS> 2,138
<FED-FUNDS-SOLD> 1,445
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,659
<INVESTMENTS-CARRYING> 16,536
<INVESTMENTS-MARKET> 14,385
<LOANS> 252,984
<ALLOWANCE> 2,686
<TOTAL-ASSETS> 306,690
<DEPOSITS> 260,469
<SHORT-TERM> 13,000
<LIABILITIES-OTHER> 2,851
<LONG-TERM> 14,500
0
0
<COMMON> 3,808
<OTHER-SE> 12,062
<TOTAL-LIABILITIES-AND-EQUITY> 306,690
<INTEREST-LOAN> 18,746
<INTEREST-INVEST> 1,687
<INTEREST-OTHER> 948
<INTEREST-TOTAL> 21,381
<INTEREST-DEPOSIT> 11,036
<INTEREST-EXPENSE> 12,436
<INTEREST-INCOME-NET> 8,946
<LOAN-LOSSES> 4,667
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,168
<INCOME-PRETAX> (1,078)
<INCOME-PRE-EXTRAORDINARY> (1,078)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (691)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
<YIELD-ACTUAL> 3.42
<LOANS-NON> 473
<LOANS-PAST> 270
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,500
<CHARGE-OFFS> 4,526
<RECOVERIES> 45
<ALLOWANCE-CLOSE> 2,686
<ALLOWANCE-DOMESTIC> 2,686
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
Financial Statements
Years Ended
December 31, 1999 and 1998
[GRAPHIC OMITTED]
RESOURCE BANKSHARES
CORPORATION AND SUBSIDIARIES
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Resource Bankshares Corporation and Subsidiaries
Virginia Beach, Virginia
We have audited the accompanying consolidated balance sheets of Resource
Bankshares Corporation and Subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 1999.
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Goodman & Company, L.L.P.
Norfolk, Virginia
February 2, 2000
<PAGE>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
====================================================================================================
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,481,696 $ 4,324,515
Interest bearing deposits with banks 2,138,236 3,356,290
Federal funds sold 1,445,000 800,000
-----------------------------------
Cash and cash equivalents 7,064,932 8,480,805
Funds advanced in settlement of mortgage loans 11,773,851 21,052,486
Investment securities
Available for sale (amortized cost of $6,760,303
and $8,525,386, respectively) 6,658,954 8,619,123
Held to maturity (fair value of $14,385,283 and
$1,251,795, respectively) 16,536,027 1,223,636
Loans, net of allowance of $2,686,468 in 1999 and
$2,500,193 in 1998 252,984,101 186,022,421
Other real estate owned 31,370 647,038
Premises and equipment 4,076,620 3,321,639
Other assets 5,560,294 2,491,094
Accrued interest 2,003,536 1,602,190
-----------------------------------
$ 306,689,685 $ 233,460,432
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 15,893,948 $ 15,782,703
Interest-bearing deposits 244,574,926 190,436,492
-----------------------------------
260,468,874 206,219,195
Capital Trust borrowings 9,200,000 -
FHLB advances 18,300,000 7,300,000
Other liabilities 1,610,467 1,500,274
Accrued interest 1,240,805 651,531
-----------------------------------
290,820,146 215,671,000
===================================
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:
1999 - 2,538,913; 1998 - 2,477,124 3,808,370 3,715,686
Additional paid-in capital 10,578,811 10,702,187
Retained earnings 1,608,394 3,310,630
Accumulated other comprehensive income (loss) (126,036) 60,929
-----------------------------------
15,869,539 17,789,432
-----------------------------------
$ 306,689,685 $ 233,460,432
==================================
The notes to consolidated financial statements are an integral part of this statement.
-2-
</TABLE>
<PAGE>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
======================================================================================================================
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income
Interest and fees on loans $ 18,071,728 $ 15,352,330 $ 8,315,741
---------------------------------------------------
Interest on investment securities:
Interest and dividends on securities available for sale 706,217 641,318 1,103,257
Interest on securities held to maturity 981,227 70,517 15,414
===================================================
1,687,444 711,835 1,118,671
---------------------------------------------------
Interest on federal funds sold 73,997 623,189 123,227
Interest on funds advanced in settlement of
mortgage loans 1,548,039 3,059,074 1,379,856
===================================================
Total interest income 21,381,208 19,746,428 10,937,495
---------------------------------------------------
Interest expense
Interest on deposits 11,036,446 10,316,463 5,695,994
Interest on long-term borrowings 990,839 - -
Interest on short-term borrowings 408,263 1,019,982 287,430
---------------------------------------------------
Total interest expense 12,435,548 11,336,445 5,983,424
===================================================
Net interest income 8,945,660 8,409,983 4,954,071
Provision for loan losses (4,667,000) (150,000) (155,254)
===================================================
Net interest income after provision
for loan losses 4,278,660 8,259,983 4,798,817
---------------------------------------------------
Noninterest income
Mortgage banking income 5,709,225 7,062,445 4,110,868
Service charges 759,289 760,581 409,451
Other 342,828 120,387 -
---------------------------------------------------
6,811,342 7,943,413 4,520,319
===================================================
Noninterest expense
Salaries and employee benefits 6,735,896 6,686,381 4,035,860
Occupancy expenses 1,185,861 1,089,447 571,231
Depreciation and equipment maintenance 926,702 759,330 458,126
Professional fees 340,821 162,124 120,439
Outside computer service 485,458 547,160 242,871
FDIC insurance 58,125 52,580 12,452
Stationery and supplies 496,814 526,495 295,875
Marketing and business development 400,938 343,157 205,073
Other 1,537,153 1,398,942 591,399
===================================================
12,167,768 11,565,616 6,533,326
---------------------------------------------------
Income (loss) before income taxes (1,077,766) 4,637,780 2,785,810
Income tax expense (benefit) (386,958) 1,590,933 964,648
---------------------------------------------------
Net income (loss) $ (690,808) $ 3,046,847 $ 1,821,162
===================================================
Basic earnings per common share $ (0.27) $ 1.24 $ 0.92
===================================================
Diluted earnings per share $ (0.27) $ 1.13 $ 0.83
===================================================
The notes to consolidated financial statements are an integral part of this statement.
-3-
</TABLE>
<PAGE>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
===========================================================================================================================
Years Ended December 31, 1999, 1998 and 1997
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Retained
--------------------------- Paid-in Earnings
Shares Amount Capital (Deficit)
------------ ------------- -------------- --------------
<S> <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 declared
$.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 declared
$.24 per share - - - (592,339)
---------------------------------------------------------------------
Balance, December 31, 1998 2,477,124 3,715,686 10,702,187 3,310,630
Comprehensive income:
Net loss (690,808)
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 and warrants 90,888 136,332 389,216
Reacquisition of common stock (29,099) (43,648) (512,592)
Cash dividends declared
$.40 per share (1,011,428)
---------------------------------------------------------------------
Balance, December 31, 1999 $ 2,538,913 $ 3,808,370 $ 10,578,811 $ 1,608,394
=====================================================================
<CAPTION>
Accumulated
Other
Comprehensive
Income
(Loss) Total
-------------- --------------
<S> <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 declared
$.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 declared
$.24 per share - (592,339)
---------------------------------
Balance, December 31, 1998 60,929 17,789,432
Comprehensive income:
Net loss (690,808)
Changes in unrealized appreciation
(depreciation) on securities
available for sale, net of reclassification
adjustment and tax effect (186,965) (186,965)
--------------
Total comprehensive income (877,773)
--------------
Proceeds from exercise of stock
options and warrants 525,548
Reacquisition of common stock (556,240)
Cash dividends declared
$.40 per share (1,011,428)
---------------------------------
Balance, December 31, 1999 $ (126,036) $ 15,869,539
=================================
The notes to consolidated financial statements are an integral part of this statement.
- 4 -
</TABLE>
<PAGE>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
===========================================================================================================================
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (690,808) $ 3,046,847 $ 1,821,162
Adjustments to reconcile to net cash provided
(used) by operating activities:
Provision for losses on loans and other real estate owned 4,667,000 150,000 155,254
Provision for losses on funds advanced on settlement of
mortgage loans 275,000 270,651 -
Loss on sale of investment securities - - 45,313
Depreciation and amortization 475,212 310,867 265,047
Amortization of investment securities
premiums, net of discounts 47,426 66,064 21,170
Loss (gain) on disposition of premises and equipment 15,892 (4,006) 11,198
Gain on sale of real estate owned (12,932) (10,137) -
Deferred loan origination fees, net of costs 904,392 181,416 (152,955)
Changes in:
Funds advanced in settlement of mortgage loans 8,855,015 2,420,998 (12,709,392)
Interest receivable (401,346) (40,434) (445,545)
Interest payable 589,274 42,675 92,699
Other assets (2,968,422) 296,305 (1,003,497)
Other liabilities 500,620 (1,160,739) (75,474)
---------------------------------------------------
Net cash provided (used) by operating activities 12,256,323 5,570,507 (11,975,020)
===================================================
Investing activities
Cash acquired in business combination - - 12,539,233
Proceeds from sales, maturities and calls of available-for-sale
securities 3,003,770 5,322,265 7,972,963
Proceeds from maturities of held-to-maturity securities 321,750 1,485,129 28,654
Purchases of available-for-sale securities (1,252,675) (1,897,250) (2,589,000)
Purchases of held-to-maturity securities (15,760,235) - -
Proceeds from maturities of time deposits - 1,000,000 -
Loan originations, net of principal repayments (72,696,479) (39,656,489) (18,318,736)
Proceeds from sales of foreclosed real estate 940,620 1,366,874 -
Proceeds from sales of premises and equipment 1,400 41,344 -
Purchases of premises and equipment and other assets (1,247,479) (399,276) (2,237,125)
---------------------------------------------------
Net cash used by investing activities (86,689,328) (32,737,403) (2,604,011)
===================================================
Financing activities
Proceeds from Capital Trust borrowings 8,809,573 - -
Proceeds from exercise of stock options 525,548 144,998 -
Payments to reacquire common stock (556,240) (176,444) -
Cash dividends paid (1,011,428) (592,339) (241,968)
Proceeds (repayments) from FHLB advances 11,000,000 (13,650,000) 7,413,500
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 3,613,095 5,511,311 (2,618,793)
Net increase in certificates of deposit 50,636,584 31,199,552 20,104,201
===================================================
Net cash provided by financing activities 73,017,132 22,437,078 24,656,940
---------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,415,873) (4,729,818) 10,077,909
Cash and cash equivalents at beginning of year 8,480,805 13,210,623 3,132,714
---------------------------------------------------
Cash and cash equivalents at end of year $ 7,064,932 $ 8,480,805 $ 13,210,623
===================================================
Supplemental schedules and disclosures of cash
flow information
Cash paid for:
Income taxes paid $ 850,000 $ 2,108,479 $ 485,158
Interest on deposits and other borrowings $ 11,846,274 $ 11,293,770 $ 5,674,357
Supplemental schedule of non-cash investing and
financing activities
Transfers from loans to real estate acquired
through foreclosure $ 312,027 $ 1,319,184 $ -
The notes to consolidated financial statements are an integral part of this statement.
- 5 -
</TABLE>
<PAGE>
RESOURCE BANKSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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, 1999 and has no significant assets or
liabilities.
Resource Capital Trust, a wholly owned subsidiary of the Corporation, is a
finance subsidiary whose sole purpose is to hold Capital Trust securities.
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. The Corporation
had no such deposits at December 31, 1999 and 1998. Such deposits amounted to
$1,000,000 as of December 31, 1997.
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 adversely classified,
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 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.
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.
Advertising Costs
Advertising costs are expensed as incurred.
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 statement of operations, 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)
The components of other comprehensive income and related tax effects are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising
during the year on available-for-sale
securities $(287,742) $(355,317) $ 438,749
Reclassification adjustment for losses (gains)
realized in income - - 45,313
--------- --------- ---------
Net unrealized gains (losses) (287,742) (355,317) 484,062
Tax effect 100,777 119,870 (164,582)
--------- --------- ---------
Net-of-tax amount $(186,965) $(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.
Derivative Instruments and Hedging Transactions
On April 1, 1999, the Corporation adopted FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which established
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. The Corporation's adoption
of this statement did not materially impact the Corporation's consolidated
financial condition or consolidated results of operations.
Computer Software
During the year ended December 31, 1999, the Corporation adopted Statement
of Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. This SOP was 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 Corporation's adoption of
this SOP on January 1, 1999 did not materially impact the Corporation's
consolidated financial condition or results of operations.
(Notes continued on next page)
-12-
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Start-up Activities
During the year ended December 31, 1999, the Corporation adopted SOP 98-5,
Reporting on the Cost of Start-up Activities. The SOP requires such costs to be
expensed as incurred instead of being capitalized and amortized. It applies to
start-up activities and costs of organization for both development stage and
established operating 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 was effective for financial statements for fiscal years
beginning after December 15, 1998. Consistent with banking industry practice,
the Corporation's policy is to expense such costs. Therefore, its adoption, on
January 1, 1999, did not materially affect the Corporation's consolidated
financial position or results of operations.
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.
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
$676,000 for the year ended December 31, 1999. On December 31, 1999, the
required reserve balance was $499,000.
(Notes continued on next page)
-13-
<PAGE>
NOTE 4 - SECURITIES
Securities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities available for sale
U.S. government agencies $ 4,669,880 $ 13,180 $ 20,585 $ 4,662,475
Federal Reserve Bank
stock 587,250 - - 587,250
Federal Home Loan Bank stock 915,000 - - 915,000
Preferred stock 431,298 - 80,600 350,698
Other 156,875 - 13,344 143,531
----------- ----------- ----------- -----------
$ 6,760,303 $ 13,180 $ 114,529 $ 6,658,954
=========== =========== =========== ===========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Securities held to maturity
U.S. government and agency
securities $ 150,881 $ 2,409 $ 2,011 $ 151,279
State and municipal
securities 745,526 1,677 3,484 743,719
Corporate bonds 7,208,085 - 679,675 6,528,410
Preferred stock 8,431,535 - 1,469,660 6,961,875
----------- ----------- ----------- -----------
$16,536,027 $ 4,086 $ 2,154,830 $14,385,283
=========== =========== =========== ===========
December 31, 1998
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
=========== =========== =========== ===========
</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.
(Notes continued on next page)
-14-
<PAGE>
NOTE 4 - SECURITIES (Continued)
At December 31, 1999 and 1998, respectively, approximately $1,246,000 and
$200,000, was pledged to secure deposits of the U.S. government or the
Commonwealth of Virginia.
In conjunction with the Corporation's adoption of FASB Statement No. 133
which allows for a reassessment of intent with respect to the investment
portfolio, management elected to transfer securities with a fair value of
$11,356,845 at the time of transfer and an original cost of $11,254,689, from
the available for sale classification to the held to maturity classification as
of April 1, 1999. The difference of $102,156 has been recorded as an adjustment
to the amortized cost of the securities and is being amortized over their
respective lives.
The amortized cost and fair value of securities by maturity date at
December 31, 1999 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 $ 395,917 $ 397,488 $ - $ -
Due from one to five years - - 771,833 760,527
Due from five to ten years 455,545 454,241 303,592 302,078
Due after ten years 7,253,030 6,571,679 3,594,455 3,599,870
Federal Reserve Bank stock - - 587,250 587,250
Federal Home Loan Bank stock - - 915,000 915,000
Preferred stock 8,431,535 6,961,875 431,298 350,698
Other - - 156,875 143,531
----------- ----------- ----------- -----------
$16,536,027 $14,385,283 $ 6,760,303 $ 6,658,954
=========== =========== =========== ===========
</TABLE>
Gross realized gains and losses on available-for-sale securities were:
December 31,
------------
1999 1998 1997
----------- ----------- ----------
Gross realized gains:
U.S. government agencies $ - $ - $ -
=========== =========== ==========
Gross realized losses:
U.S. government agencies $ - $ - $ 45,313
=========== =========== ==========
During 1997 the Corporation received proceeds of $4,954,687 from the sale
of available-for-sale securities.
NOTE 5 - LOANS
Loans consist of the following:
December 31,
--------------------------------
Gross loans: 1999 1998
------------- -------------
Commercial $ 77,507,162 $ 68,568,799
Real estate - construction 68,075,931 44,606,768
Commercial real estate 64,158,463 42,482,709
Residential real estate mortgages 41,554,246 28,701,731
Installment and consumer loans 4,374,767 4,162,607
------------- -------------
Total gross loans 255,670,569 188,522,614
Less - allowance for loan losses (2,686,468) (2,500,193)
------------- -------------
Loans, net $ 252,984,101 $ 186,022,421
============= =============
(Notes continued on next page)
-15-
<PAGE>
NOTE 5 - LOANS (Continued)
A summary of the activity in the allowance for loan losses account is as
follows:
Years Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Balance, beginning of year $ 2,500,193 $ 2,573,346 $ 1,040,247
Allowance acquired through business
combination - - 1,400,000
Provision charged to operations 4,667,000 150,000 155,254
Loans charged-off (4,526,324) (287,238) (65,051)
Recoveries 45,599 64,085 42,896
----------- ----------- -----------
Balance, end of year $ 2,686,468 $ 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,
1999 there were no such loans, and at December 31, 1998, such loans amounted to
$2,078,079. Management does not believe an impairment loss exists with respect
to these loans. Impaired loans amount to $472,548 and $532,674 as of December
31, 1999 and 1998, respectively. Both restructured and impaired loans have a
valuation allowance allocation of $104,828 and $179,687 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. The average recorded investment in impaired loans and
restructured loans was approximately $828,846, $1,699,686 and $754,100 in 1999,
1998 and 1997, respectively. The Bank recognized $19,997, $46,332 and $34,570 of
interest income on both categories of loans during 1999, 1998 and 1997,
respectively.
Loans on which the accrual of interest has been discontinued amounted to
$472,548 and $532,674 at December 31, 1999 and 1998, respectively. If interest
on those loans had been accrued, such income would have approximated $17,045,
$16,394 and $11,964 for 1999, 1998 and 1997, respectively. After being
classified as nonaccrual, no interest was received or recognized on the cash
basis on these loans in 1999, 1998 and 1997.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
----------------------------
1999 1998
----------- -----------
Land $ 1,725,000 $ 1,725,000
Leasehold improvements 1,449,754 1,343,155
Equipment, furniture and fixtures 2,222,580 1,371,583
Software 444,619 196,423
----------- -----------
5,841,953 4,636,161
Less - accumulated depreciation (1,765,333) (1,314,522)
----------- -----------
$ 4,076,620 $ 3,321,639
=========== ===========
Depreciation charged to operating expense for 1999, 1998 and 1997 was
$475,212, $310,867 and $265,047, respectively.
(Notes continued on next page)
-16-
<PAGE>
NOTE 7 - DEPOSITS
Interest-bearing deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Money market and NOW account deposits $ 13,801,688 $ 12,731,482
Savings deposits 21,655,029 20,721,917
Time deposits $100,000 and over 11,461,070 9,717,569
Other time deposits 197,657,139 147,265,524
--------------- ---------------
$ 244,574,926 $ 190,436,492
=============== ===============
</TABLE>
The scheduled maturities of time deposits at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
Less than one year $ 177,259,480
One to two years 31,102,027
Three to five years 756,702
Over five years -
----------------
$ 209,118,209
================
</TABLE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS
Federal Home Loan Bank (FHLB) advances consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
5.97% FHLB advance due February 1, 2000 $ 13,000,000 -
5.07% FHLB advance due September 30, 2009 5,000,000 -
5.42% FHLB advance due October 28, 1999 - 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
----------------- -----------------
$ 18,300,000 $ 7,300,000
================= =================
Information regarding FHLB advances is summarized below:
1999 1998 1997
-------------- -------------- --------------
Weighted average rate 5.72% 5.65% 5.79%
============== ============== ==============
Average balance $ 10,136,728 $ 17,794,400 $ 4,959,000
============== ============== ==============
Maximum outstanding at month end $ 18,300,000 $ 46,420,000 $ 20,950,000
============== ============== ==============
</TABLE>
(Notes continued on next page)
-17-
<PAGE>
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS (Continued)
As of December 31, 1999 and 1998, advances are collateralized by FHLB stock
with a cost of $915,000 and $1,161,700, respectively. In addition, securities of
$3,982,000 and $5,900,000 are pledged against these advances, as of December 31,
1999 and 1998, respectively. First mortgage loans of $20,680,000 also serve to
provide additional collateral for these advances at December 31, 1999. Pursuant
to the terms of the variable rate line of credit, the Bank may borrow up to 12%
of the Bank's total assets. 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 of $50,000,000
collateralized by first mortgage loans and expiring December 2, 2000. As of
December 31, 1999, the Bank had not drawn from this line of credit.
Resource Capital Trust I (the Trust) is a wholly-owned special purpose
finance subsidiary of the Parent, operating in the form of a grantor trust. The
Trust was created in 1999 solely to issue capital securities and remit the
proceeds to the Corporation. The Corporation is the sole owner of the common
stock securities of the Trust. In 1999, the Trust issued 368,000 shares of
preferred stock capital securities (Trust preferred stock) with a stated value
of $25 per share, and a fixed dividend yield of 9.25% of the stated value. The
stated value of the Trust preferred stock is unconditionally guaranteed on a
subordinated basis by the Parent. The securities have a mandatory redemption
date of April 15, 2029, and are subject to varying call provisions at the option
of the Corporation beginning April 15, 2004. Through an inter-company lending
transaction, proceeds received by the Trust from the sale of the securities were
lent to the Parent for general corporate purposes.
The Trust preferred stock is senior to the Corporation's common stock in
event of claims against Resource, but is subordinate to all senior and
subordinated debt securities. The Corporation has the right to terminate the
Trust upon the occurrence of certain events, including (a) dividend payments on
the preferred stock securities are no longer deemed tax-deductible, or the Trust
is taxed on the income received from the underlying inter-company debt agreement
with the Parent, (b) the capital securities are no longer considered Tier 1
capital under Federal Reserve Bank guidelines, or (c) the Trust, through a
change of law, is deemed to be an investment company under the Investment
Company Act of 1940 and subject to that act's reporting requirements.
Shares of the Trust preferred stock are capital securities which are
distinct from the common stock or preferred stock of the Corporation, and the
dividends thereon are tax-deductible. Dividends accrued for payment by the Trust
are classified as interest expense on long-term debt in the consolidated
statement of operations of the Corporation. The Trust preferred stock is shown
as "Capital Trust Borrowings" and classified as a liability in the consolidated
balance sheets.
NOTE 9 - STOCKHOLDERS' EQUITY
At December 31, 1999, 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 stockholders. 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
$.10 and $.06 per share dividend for each quarter of 1999 and 1998,
respectively.
(Notes continued on next page)
-18-
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY (Continued)
In 1999, stock options and warrants were exercised resulting in the
issuance of 90,888 additional common shares. The Corporation also reacquired
29,099 shares of its outstanding common stock.
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 517,632 shares of its common stock (as
adjusted for the stock split) 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 1999, 1998 and 1997, expenses
attributable to the Plan amounted to $181,000, $139,000 and $89,000,
respectively.
Stock Compensation Plans
At December 31, 1999, 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. During 1999, this Plan was amended allowing
150,000 additional shares to management. The Corporation granted 90,500 of these
shares in 1999.
(Notes continued on next page)
<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.
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 1999 and 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:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ (690,808) $ 3,046,847 $ 1,821,162
Pro forma $ (815,864) $ 3,000,535 $ 1,774,850
Basic earnings per share As reported $ (0.27) $ 1.24 $ .92
Pro forma $ (0.32) $ 1.22 $ .89
Diluted earnings per share As reported $ (0.27) $ 1.13 $ .83
Pro forma $ (0.32) $ 1.11 $ .81
</TABLE>
The fair value of each option granted is estimated at the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Dividend yield 2.35% - -
Expected life 7 years - 5 years
Expected volatility 36% - 29%
Risk-free interest rate 6.25% - 5.75%
</TABLE>
(Notes continued on next page)
-20-
<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>
1999 1998 1997
--------------------------- ---------------------------- --------------------------
Weighted - Weighted - Weighted -
Average Average Average
Exercise Exercize Exercize
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of
year 339,024 $ 6.16 371,756 $ 5.96 324,756 $ 4.60
Granted 90,500 19.06 - - 47,000 15.75
Exercised 27,733 4.75 32,732 4.43 - -
Forfeited - - - - - -
--------- --------- --------- --------- -------- ---------
Outstanding -
end of year 401,791 9.17 339,024 6.16 371,756 5.96
--------- --------- --------- --------- -------- ---------
Exercisable - end
of year 264,291 $ 4.61 292,024 $ 4.62 324,756 $ 4.60
--------- --------- --------- --------- -------- ---------
Weighted average
fair value of
options granted
during the year $ 7.34 $ - $ 5.81
========= ========= =========
</TABLE>
Information pertaining to options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 3.00 - $ 6.25 264,291 5.1 years $ 4.63 264,291 $ 4.63
$15.75 - $17.37 49,500 7.2 years $ 15.83 - -
$18.50 - $21.75 88,000 9.5 years $ 19.65 - -
------ -----------
Outstanding at
end of year 401,791 6.3 years $ 9.30 264,291 $ 4.63
======= ===========
</TABLE>
(Notes continued on next page)
-21-
<PAGE>
NOTE 11 - INCOME TAXES
The principal components of the income tax expense (benefit) were as
follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal - current $ (957,512) $ 1,589,996 $ 485,846
Federal - deferred 570,554 937 478,802
----------- ----------- -----------
$ (386,958) $ 1,590,933 $ 964,648
=========== =========== ===========
</TABLE>
The differences between expected federal income taxes at statutory rates to
actual income tax expense are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense (benefit) computed at
federal statutory rates $ (366,440) $ 1,576,845 $ 947,175
Tax effects of:
Tax-exempt interest (18,716) (9,242) -
Nondeductible merger and
reorganization expenses 5,469 23,060 -
Other (7,271) 270 17,473
----------- ----------- -----------
$ (386,958) $ 1,590,933 $ 964,648
=========== =========== ===========
</TABLE>
The Corporation's deferred tax assets and liabilities, included in
liabilities, and their components are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Intangible assets $ 127,380 $ 141,800
Bad debts and other provisions 440,175 682,800
Fixed assets 241,565 242,245
Other 13,266 9,200
Deferred compensation 56,840 31,520
Unrealized loss on securities 65,962 -
----------- -----------
Total deferred tax asset 945,183 1,107,565
=========== ===========
Deferred tax liabilities:
Loans 278,140 299,670
Deposits 551,885 594,610
Deferred fees 829,140 426,000
FHLB stock 17,821 17,821
Unrealized gain on securities - 31,871
Other 6,520 3,195
----------- -----------
Total deferred tax liability 1,683,506 1,373,167
----------- -----------
Net deferred tax liability $ (738,323) $ (265,602)
=========== ===========
</TABLE>
(Notes continued on next page)
-22-
<PAGE>
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
-------------
2000 $ 1,044,842
2001 895,478
2002 859,947
2003 840,538
2004 598,980
Thereafter 2,385,924
-------------
$ 6,625,709
=============
Total lease expense was $878,234, $801,120 and $392,222 for 1999, 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
In the ordinary course of business, 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 1999 is as follows:
Balance, December 31, 1999 $ 1,842,409
Originations - 1999 5,294,127
Repayments - 1999 (1,254,236)
------------
Balance, December 31, 1999 $ 5,882,300
============
In the opinion of management, such loans are made at normal credit terms,
including interest rate and collateral requirements and do not represent more
than normal credit risk.
Commitments to extend credit to related parties amounted to $146,000 at
December 31, 1999. 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, 1999 and
1998 amounted to $4,194,000 and $4,203,000, respectively.
(Notes continued on next page)
- 23 -
<PAGE>
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, 1999 and 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, 1999
Loan commitments $103,368,922 $18,994,524
Standby letters of credit and guarantees written $ 5,553,074 $ -
December 31, 1998
Loan commitments $ 95,358,583 $17,036,278
Standby letters of credit and guarantees written $ 4,033,347 $ -
</TABLE>
All of the guarantees outstanding at December 31, 1999 expire at various
dates between 2000 and 2001. Interest rates on fixed-rate commitments range from
6.91% on commercial loans to 18% on consumer debt as of December 31, 1999.
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).
There are no commitments to extend credit on impaired loans at December 31,
1999.
(Notes continued on next page)
- 24 -
<PAGE>
NOTE 14 - CREDIT COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK (Continued)
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 and northern Virginia.
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.
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,
1999, the Corporation and the Bank meet all capital adequacy requirements to
which it is subject.
As of September 30, 1999, 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 Corporation's and the Bank's actual capital amounts and ratios are
presented in the table below. There is no significant difference between the
Bank"s amounts and ratios and those for the Corporation on a consolidated basis
as of December 31, 1998.
(Notes continued on next page)
- 25 -
<PAGE>
NOTE 15 - REGULATORY MATTERS (Continued)
<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, 1999:
Total Capital (to Risk-
Weighted Assets)
Consolidated $23,947,000 9.24% $ 20,732,000 more than or equal to 8% N/A N/A
Bank $25,921,000 10.05% $ 20,634,000 more than or equal to 8% $25,792,000 more than or equal to 10%
Tier I Capital (to Risk -
Weighted Assets)
Consolidated $21,261,000 8.20% $ 10,366,000 more than or equal to 4% N/A N/A
Bank $23,235,000 9.01% $ 10,315,000 more than or equal to 4% $15,473,000 more than or equal to 6%
Tier I Capital (to Average
Assets)
Consolidated $21,261,000 7.19% $ 11,826,000 more than or equal to 4% N/A N/A
Bank $23,235,000 7.90% $ 11,765,000 more than or equal to 4% $14,706,000 more than or equal to 5%
Amount Ratio Amount Ratio Amount Ratio
-------- -------- ---------- ---------- ---------- ----------
As of December 31, 1998:
Total Capital
(to Risk-Weighted Assets) $19,929,000 10.48% $ 15,209,920 more than or equal to 8% $19,012,400 more than or equal to 10%
Tier I Capital
(to Risk-Weighted Assets) $17,552,000 9.23% $ 7,604,960 more than or equal to 4% $11,407,440 more than or equal to 6%
Tier I Capital
(to Average Assets) $17,552,000 7.52% $ 9,339,320 more than or equal to 4% $11,674,150 more than or equal to 5%
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, 1999 and 1998. FASB Statement
No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of 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.
1999 1998
---------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ------------
(Dollars in thousands) (Dollars in thousands)
Financial Assets:
Cash and cash equivalents $ 7,065 $ 7,065 $ 8,481 $ 8,481
Loans, net 252,984 254,755 186,022 191,266
Investment securities 23,195 21,044 9,843 9,871
Funds advanced in settlement of
mortgage loans 11,774 11,774 21,052 21,052
Accrued interest receivable 2,004 2,004 1,602 1,602
</TABLE>
(Notes continued on next page)
- 26 -
<PAGE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Financial Liabilities:
Deposit liabilities 260,469 260,547 206,219 207,756
Short-term borrowings 13,000 13,000 2,000 2,000
Long-term borrowings 14,500 13,764 5,300 5,540
Accrued interest payable 1,241 1,241 652 652
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.
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.
(Notes continued on next page)
- 27 -
<PAGE>
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>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net (loss) income (numerator, basic and diluted) $ (690,808) $ 3,046,847 $ 1,821,162
Weighted average shares outstanding (denominator) 2,524,337 2,467,031 1,978,884
----------- ----------- -----------
Earnings per common share-basic $ (.27) $ 1.24 $ .92
=========== =========== ===========
Effect of dilutive securities:
Weighted average shares outstanding 2,524,337 2,467,031 1,978,884
Effect of stock options - 235,940 206,572
----------- ----------- -----------
Diluted average shares outstanding (denominator) 2,524,337 2,702,971 2,185,456
----------- ----------- -----------
Earnings per common share - assuming dilution $ (.27) $ 1.13 $ .83
=========== =========== ===========
</TABLE>
The effect of dilutive securities was not used to compute diluted earnings
per share for 1999 because the effect would have been antidilutive.
(Notes continued on next page)
- 28 -
<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)
- 29 -
<PAGE>
NOTE 19 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
<TABLE>
<CAPTION>
Financial information pertaining only to Resource Bankshares Corporation is as follows:
Balance Sheets
December 31, 1999 1998
================================================================================================
Assets
<S> <C> <C>
Cash and due from banks $ 450,218 $ 56,868
Cash on deposit at Resource Bank 1,024,087 248,611
-------------------------------
Total cash and due from banks 1,474,305 305,479
Investment securities available for sale 350,698 -
Due from (to) Resource Bank (71,109) 19,998
Investment in preferred stock of Resource Capital Trust 284,550 -
Investment in preferred stock of Resource Bank 7,350,000 -
Investment in common stock of Resource Bank 15,825,441 17,613,122
Other assets 583,206 -
-------------------------------
Total assets $ 25,797,091 $ 17,938,599
===============================
Liabilities and Stockholders' Equity
Interest payable $ 189,111 $ -
Dividends payable 253,891 149,167
Capital Trust borrowings 9,484,550 -
-------------------------------
9,927,552 149,167
Stockholders' equity 15,869,539 17,789,432
===============================
Total liabilities and stockholders' equity $ 25,797,091 $ 17,938,599
===============================
Statements of Operations
Years Ended December 31, 1999 1998
===============================================================================================
Income
Dividends from Resource Bank $ 1,290,213 $ 924,934
Interest on investments 30,674 162
Management fees 349,800 -
-------------------------------
1,670,687 925,096
===============================
Expenses
Interest expense - Capital Trust borrowings 702,075 -
Other expenses 179,798 -
-------------------------------
881,873 -
===============================
Income before income taxes and equity in
undistributed net income (loss) of Resource Bank 788,814 925,096
Equity in undistributed net income (loss) of
Resource Bank (1,653,106) 2,121,751
-------------------------------
Income (loss) before tax benefit (864,292) 3,046,847
Income tax benefit 173,484 -
-------------------------------
Net income (loss) $ (690,808) $ 3,046,847
================================
(Notes continued on next page)
- 30 -
</TABLE>
<PAGE>
NOTE 19 - CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Statements of Cash Flows
Cash flows from operating activities
Net income (loss) $ (690,808) $ 3,046,847
Adjustments to reconcile to net cash
provided by operating activities:
Accretion of investment securities discounts
net of premiums (4,448) -
Equity in undistributed net income (loss) of
Resource Bank 1,653,106 (2,121,751)
Increase in other assets (463,889) (19,998)
Increase in accrued expenses 189,111 -
Increase in other liabilities 104,725 149,166
-------------------------------
Net cash provided by operating activities 787,797 1,054,264
-------------------------------
Cash flows from investing activities
Purchases of available-for-sale securities (426,850) -
Purchase of Resource Capital Trust preferred stock (284,550) -
Purchase of Resource Bank preferred stock (7,350,000) -
-------------------------------
Net cash used by investing activities (8,061,400) -
-------------------------------
Cash flows from financing activities
Proceeds from Capital Trust borrowings 9,484,550 -
Proceeds from sale of common stock upon
exercise of stock options 525,548 19,998
Payments to reacquire common stock (556,240) (176,444)
Cash dividends paid on common stock (1,011,429) (592,339)
-------------------------------
Net cash provided (used) for financing activities 8,442,429 (748,785)
-------------------------------
Net increase in cash and cash equivalents 1,168,826 305,479
Cash and cash equivalents at beginning of year 305,479 -
-------------------------------
Cash and cash equivalents at end of year $ 1,474,305 $ 305,479
-------------------------------
</TABLE>
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 are generally restricted to net profits, as
defined, for the current year plus retained net profits for the previous two
years, (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, 1999, the Bank's retained earnings available for the payment of
dividends without prior regulatory approval was $1,604,000, and funds available
for loans or advances amounted to $2,164,500.
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)
<PAGE>
NOTE 20 - SEGMENT REPORTING
The Corporation has one reportable segments, its mortgage banking
operations. The mortgage banking 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 Corporation does not have other
reportable operating segments.
The accounting policies of the segment are the same as those described in
the summary of significant accounting policies. The chief operating decision
maker of 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 Commercial
Banking and Other
Year Ended December 31, 1999 Operations Banking Total
---------- ------- -------
<S> <C> <C> <C>
Net interest income after provision for
loan losses $ - $ 4,278,660 $ 4,278,660
Noninterest income 5,709,225 1,102,117 6,811,342
Noninterest expense (6,128,122) (6,039,646) (12,167,768)
------------ ------------ ------------
Net loss before income taxes $ (418,897) $ (658,869) $ (1,077,766)
============ ============ ============
Year Ended December 31, 1998
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
============ ============ ============
</TABLE>
(Notes continued on next page)
- 32 -
<PAGE>
NOTE 20 - SEGMENT REPORTING (Continued)
<TABLE>
<CAPTION>
Mortgage
Segment Assets Banking Commercial
Operation Banking Total
------------------- --------------------- ---------------------
<S> <C> <C> <C>
1999 $ 675,597 $ 306,014,088 $ 306,689,685
$ 514,989 $ 232,945,443 $ 233,460,432
$ 775,396 $ 208,554,622 $ 209,330,018
</TABLE>
The Corporation does not have a single external customer from which it
derives 15 percent or more of its revenues.
NOTE 21 - QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-----------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest and dividend income $ 5,911,330 $ 5,651,128 $ 5,118,926 $ 4,699,824
Interest expense (3,556,269) (3,269,340) (2,956,204) (2,653,735)
-----------------------------------------------------------------
Net interest income 2,355,061 2,381,788 2,162,722 2,046,089
Provision for loan losses - (4,667,000) - -
-----------------------------------------------------------------
Net interest income after
provision for loan losses 2,355,061 (2,285,212) 2,162,722 2,046,089
Noninterest income (charges) 1,472,437 1,796,795 1,866,825 1,675,285
Noninterest expenses (2,941,136) (3,581,171) (3,079,428) (2,566,033)
-----------------------------------------------------------------
Income (loss) before income
taxes 886,362 (4,069,588) 950,119 1,155,341
Provision for income taxes (303,021) 1,418,468 (328,741) (399,748)
-----------------------------------------------------------------
Net income (loss) $ 583,341 $(2,651,120) $ 621,378 $ 755,593
=================================================================
Earnings per common share
Basis $ 0.23 $ (1.04) $ 0.24 $ 0.30
=================================================================
Diluted $ 0.23 $ (1.04) $ 0.22 $ 0.27
=================================================================
-33-
</TABLE>
