Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1943 [No Fee Required]
For the fiscal year ended December 31, 1997
Commission file number Not Applicable
RESOURCE BANK
(Name of small business issuer in its charter)
Virginia 54-1414459
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)
3720 Va. Beach Blvd. Va. Beach, VA. 23452
Address of principal executive offices) (Zip Code)
Issuer's telephone number (757) 463-2265
Securities registered under Section 12(b) of the Exchange Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $3.00 per share
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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. _X_ Yes __ No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained herein, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $15,457,814
As of March 5, 1998, the aggregate market value of common stock held by
non-affiliates was $26,951,175. This figure is based on the sales price for a
share of Resource Bank Common Stock which was $37.50 on March 5, 1998. As of
March 5, 1998, the issuer had 1,226,690 shares of common stock, par value $3.00
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders to
be held during the second quarter 1998, are incorporated by reference into this
Form 10-KSB.
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 Bank'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 Bank's profitability, and the
adequacy of the Bank's allowance for future loan losses. Several factors,
including the local and national economy, the demand for residential mortgage
loans, the adequacy of the Bank's Year 2000 compliance, and the Bank's ability
to integrate the operations of Eastern American Bank may adversely affect the
Bank's ability to achieve the expected results. Readers are cautioned not to
place undue reliance on these forward looking statements, which reflect
management's analysis only as of the date of this Report.
Item 1. Description of Business
General
Resource Bank (the "Bank") is a Virginia state-chartered commercial bank
headquartered in Virginia Beach, Virginia. The Bank was organized in April 1987
and commenced operations on September 1, 1988. Since January 1, 1993, when the
current management team began operating the Bank, the Banks assets, deposits and
net income have grown from $24,257,200, $19,882,300 and a 1992 net loss of
$350,700 to $209,330,000, $169,508,300 and a profit of $1,821,200, respectively,
at December 31, 1997.
March 24, 1998, the Bank announced a proposal to form a holding company,
Resource Bankshares Corporation. This proposal will be presented for approval at
the 1998 Annual Meeting of Shareholders.
The Bank operates full service banking offices in Virginia Beach, Reston and
Herndon, Virginia. Prior to December 1997, the Bank operated only one banking
office in Virginia Beach, Virginia. On December 1, 1997, Eastern American Bank
FSB, ("Eastern American") a federal savings bank, was merged into Resource Bank.
As a result of the merger, Resource added two full service branches, one in
Herndon and one in Reston, Virginia, and an administrative office in Herndon,
Virginia. The Reston and Herndon branches are operated as "Eastern American
Bank, a division of Resource Bank".
The Bank's mortgage department originates residential 1 to 4 family unit
mortgage loans and sells them to investors in the national secondary market.
With the continued decline in interest rates during 1997, the mortgage
department's loan demand increased. During 1997, the Bank originated and sold
loans aggregating $296 million. The Bank originates mortgages from its existing
banking offices and two offices in the Richmond, Virginia metropolitan area, one
office in the Colonial Heights, Virginia area, one office in the Northern
Virginia area, one office in the Chesapeake, Virginia area, and one office in
Hilton Head, South Carolina. The Bank also originates loans through- out the
Southwestern United States through its wholesale operations. The Bank operates a
closing and shipping office in Virginia Beach, Virginia.
The Bank services customers throughout the State of Virginia, providing
banking services primarily to individuals and businesses located in the South
Hampton Roads area (which includes the cities of Virginia Beach, Norfolk,
Chesapeake, Portsmouth and Suffolk), with significant concentration in Virginia
Beach, and the market area geographically defined as Fairfax County, Virginia.
Through the Bank's mortgage department, the Bank services residents in these
areas as well as metropolitan Richmond, Colonial Heights, Virginia, Hilton Head,
South Carolina and portions of the Southwestern United States. The South Hampton
Roads economy is generally balanced, with a strong base in tourism, military,
industry, agriculture, construction, real estate, conventions, retail and
wholesale businesses. The work force in Fairfax County is well educated and has
one of the highest per capita incomes in the State of Virginia. The Fairfax
County market has been one of the fastest growing economic areas in the United
States in the past 10 years.
The Bank markets its services to consumers, small to medium-sized businesses
and professional people. The Bank provides a range of services traditionally
associated with independent community banks, with an emphasis on personal
relationship banking. These services include checking and savings accounts,
certificates of deposit and charge cards. The Bank also offers services
typically associated with large banks and bank holding companies. These services
include sweep account capacity, automatic reconcilement, and corporate credit
cards.
The Bank performs a broad range of lending and deposit services to individual
and commercial customers. Loan activity includes commercial and personal loans,
lines of credit, installment loans, home improvement loans, overdraft protection
and construction loans. The Bank offers other related services such as safe
deposit boxes, tax deposits, travelers' checks, wire transfers and savings
bonds.
Management emphasizes service to commercial and corporate accounts. The
marketing and operating strategy targets commercial accounts of firms with net
worth in excess of $250,000, operating profits for the past five years, and
experienced management. The Bank emphasizes its ability and willingness to
extend credit to creditworthy commercial and corporate accounts up to the Bank's
legal lending limit, which was $2,300,000 at December 31, 1997.
Management expanded the Bank's deposit base by encouraging non-borrowing
corporate customers to place deposits in the Bank. In particular, the management
team seeks corporate relationships with those companies having little to no
borrowing needs, but excess cash to invest in short term bank investments to
strengthen the Bank's deposit base. The Bank strives for the lowest deposit
costs at all times. The Bank does not use brokers to develop deposits. The Bank
does receive deposits in the national market, primarily from other financial
institutions, which may require payment of slightly higher interest rates, but
the operating costs of servicing national depositors are significantly lower
than the operating costs of servicing local deposits. The Bank does not
generally accept more than $100,000 from an out-of-area depositor, and attempts
to stagger the maturity of such out-of-area depositors from 90 days to one year
for purposes of matching the maturity of these deposits with the Bank's loan
portfolio.
In addition to its membership in the Federal Reserve System, the Bank is a
member of the Federal Home Loan Bank System. The Federal Home Loan Bank
membership allows the Bank to obtain longer term advances against certain Bank
assets as a more stable source of funds. The Bank also has a working capital
line of credit to finance mortgage loans.
Competition
The banking industry in highly competitive and significant changes continue
to occur. The bank competes actively with national and state banks, savings and
loan associations, securities dealers, mortgage bankers, finance companies and
insurance companies. Additional competition for depositors' funds comes from
issuers and suppliers of U.S. Government securities, private debt obligations
and other investment alternatives for depositors. Many of the Bank's non-bank
competitors are not subject to the same extensive federal and state regulations,
that govern federally insured and state chartered banks. As a result, such
non-bank competitors may have certain advantages over the Bank in providing
certain services. Competition continues to grow as customers select from a
variety of traditional and nontraditional financial institutions. As the
industry consolidates, competition changes as some regional and local
institutions are absorbed, while at the same time creating a growing number of
financial institutions with multi-regional operations.
In South Hampton Roads, the Bank's competition includes 13 commercial banking
organizations, 4 savings banks and 3 major credit unions. In Fairfax County, the
Bank competes with approximately 27 commercial banking organizations, 8 savings
banks and 35 credit unions ranging from the small to the major institutions.
Most of the Bank's competitors have substantially greater resources than the
Bank, which enables the competitors to maintain numerous banking locations and
mount extensive promotional and advertising campaigns. In many instances, these
institutions perform services for the customers, such as trust services, which
the Bank does not offer. Further, these competitors may have greater loan
capacities and, what would be a large loan for the Bank (i.e., $500,000 to
$2,000,000) could be a relatively small loan for many of its competitors.
Competition among financial institutions includes competition with respect to
interest rates offered on deposit accounts, interest rates charged on loans and
other credit and service charges, the quality of services rendered, the
convenience of banking facilities and, in the case of loans to large commercial
borrowers, relative lending limits. There is also significant competition among
lenders with respect to secured versus unsecured or less secured loans. There
will always be competitive pressures on the Bank to meet similar terms and
conditions of its larger competitors.
In addition, the Bank also competes with other financial institutions such as
savings and loan associations, finance companies, credit unions, industrial loan
associations, small loan companies, money market funds, stock brokerage firms,
insurance companies, mortgage companies and others involved in obtaining funds
and making loans. Additional competition for depositor's funds comes from
issuers and suppliers of U.S. Government securities, private debt obligations
and other investment alternatives for depositors. Many of the Bank's non-bank
competitors are not subject to the same extensive federal and state regulations,
which govern federally insured and state chartered banks. As a result, such
non-bank competitors may have certain advantages over the Bank in providing
certain services.
The Bank's market of the South Hampton Roads area, covers the Norfolk-Virginia
Beach-Newport News Metropolitan Statistical Area ("MSA"), with a population of
1.5 million people - enough to rank the region 27th among metropolitan
statistical areas in the United States. This area, which covers both the north
and south sides of the James River at the mouth of the Chesapeake Bay, contains
the two largest Virginia cities in terms of population - Virginia Beach and
Norfolk, with populations in 1996 of 420,000 and 232,000, respectively. In
addition, this area contains the cities of Hampton, Newport News, Chesapeake and
Portsmouth, each with populations over 100,000, and the City of Suffolk with a
population of 58,000 in 1996. The economy of this area is largely influenced by
major United States military installations and extensive port activity. Ship
building and ship repair, a diversified industrial base and tourism also
contribute significantly to the local economy.
The Bank's market of Fairfax County, Virginia, covers an area of
approximately 420 square miles, bordered by the Potomac River on its east and
north sides, and Arlington, Alexandria, Prince William and Loudoun counties to
the south and west, with a population of over 915,000 people (it would rank as
the eleventh largest city in the nation). The County's median annual household
income in 1995 was $70,000, with more than 56 percent of its adult population
holding college degrees. There are more than 425,000 people employed in the
County, with technology and service industries, as well as government workers
comprising a significant percentage of these jobs. Fairfax County is home to
four Fortune 500 companies, with more than 78 million square feet of office
space in total (more than Atlanta, Boston, Dallas, Detroit, or Seattle, among
others). Over 25,000 businesses are located in the County, 75 percent of which
employ 10 or fewer persons.
Employees
The Bank has 119 full-time and 10 part-time employees. Of these employees,
60 are associated with the mortgage department.
Regulatory Matters
Resource Bank is subject to Commonwealth of Virginia and Federal banking
laws and regulations which impose specific requirements or restrictions and
provide for general regulatory oversight with respect to virtually all aspects
of operations, including, but not limited to, maintenance of cash reserves,
loans, mortgages, maintenance of minimum capital, payment of dividends, and
establishment of branch offices.
As a state-chartered bank and a member of the Federal Reserve System, the
Bank is supervised and regularly examined by the Federal Reserve Bank (the
"Federal Reserve") and the Bureau of Financial Institutions of the Commonwealth
of Virginia.
Deposit Insurance
The deposits of the Bank are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to the limits set forth under applicable law. 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 the Savings Association Insurance Funds ("SAIF") of the
FDIC.
Effective January 1, 1997, the FDIC equalized the assessment rates for BIF
and SAIF insured deposits and the semi-annual assessments for FDIC deposits have
a range of .0% to .27% basis points per $100 of insured deposits, depending on
the Bank's capital position and other supervisory factors. The Deposit Insurance
Funds Act of 1996 (the "Funds Act") was enacted September 30, 1996. This
legislation requires that both SAIF and BIF insured deposits pay a pro rata
portion of the interest due on the obligations issued by the Financing
Corporation ("FICO"). The FDIC is currently assessing BIF insured deposits an
additional 1.244 basis points per $100 of deposits and SAIF insured deposits an
additional 6.22 basis points per $100 of deposits.
Regulations
On October 1, 1996, the banking agencies issued new guidelines amending the
Interagency Guidelines Establishing Standards for Safety and Soundness (the
"Guidelines") to include asset quality and earnings standards. The Guidelines
were adopted pursuant to the requirements of Section 39 of the Federal Deposit
Insurance Act. The Guidelines require financial institutions to identify problem
assets and estimate inherent losses. In order to comply with these Guidelines a
financial institution shall: (1) consider the size and potential risks of
material concentrations of credit risk; (2) compare the level of problem assets
to the level of capital and establish reserves sufficient to absorb anticipated
losses on those and other assets; (3) take appropriate corrective action to
resolve problem assets, as appropriate; and (4) provide periodic asset quality
reports to the board of directors to assess the level of asset risk. The
earnings standards specified by the Guidelines require an institution to compare
its earnings trends (relative to equity, assets, and other common benchmarks)
with its historical experience and with the earnings trends of its peers. The
Guidelines, relative to the earnings standards, require the institution to: (1)
evaluate the adequacy of earnings with regard to the institution's relative size
and complexity, and the risk profile of the institution's assets and operations;
(2) assess the source, volatility, and sustainability of earnings; (3) evaluate
the effect of nonrecurring or extraordinary income or expense; (4) take steps to
ensure that earnings are sufficient to maintain adequate capital and reserves
after considering asset quality and the institution's rate of growth; and (5)
provide periodic reports with adequate information for management and the board
of directors to assess earnings performance. The Guidelines note that the
complexity and sophistication of an institution's monitoring, reporting systems,
and corrective actions should be commensurate with the size, nature and scope of
the institution's operations. The Bank does not believe that these Guidelines
will materially affect its operations or financial condition.
On December 20, 1996 the FDIC Board of Directors adopted the FFIEC's updated
statement of policy entitled Uniform Financial Institutions Rating System
("UFIRS"). The updated UFIRS replaces the previous rating system and is
effective January 1, 1997. Under the existing UFIRS, each financial institution
is assigned a composite rating based on an evaluation and rating of five
essential components of an institution's financial condition and operations. The
five component areas are Capital adequacy, Asset quality, Management, Earnings
and Liquidity ("CAMEL"). The updated UFIRS includes the addition of a sixth
component for Sensitivity to market risk ("CAMELS"). The new sixth component
addresses the degree to which changes in interest rates, foreign exchange rates,
commodity prices or equity prices can adversely affect a financial institution's
earnings or capital. The new component focuses on an institution's ability to
monitor and manage its market risk, and will provide an institution's management
with a clearer and more focused indication of supervisory concerns in this area.
The Bank does not believe that this statement of policy will materially affect
its operations.
Item 2. Description of Properties
The Bank leases facilities in which to operate all of its banking and mortgage
origination offices. The leases covering the Bank's banking offices are all long
term leases with extensive renewal provisions assuring the Bank that it may
continue to operate in the facilities for the foreseeable future. In December
1997, the Bank purchased a four acre lot in Herndon, Virginia, for $1.725
million, on which it plans to construct a Northern Virginia regional office. The
building, which is anticipated to be completed in 1999, will contain both the
Bank's administration and branch offices that are currently located in Herndon.
For discussion of the Bank's leases, see Note 12 to the Bank's 1997 financial
statements.
Item 3. Legal Proceedings
The Bank is a party to various lawsuits arising in the ordinary course of
business. Management, however, does not believe that the outcome of these
lawsuits, individually or in the aggregate, will have a material adverse effect
on its business or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of shareholders during the fourth
quarter of 1997.
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters
The Bank's Common Stock is listed on the NASDAQ National Market System
("NASDAQ/NM") under the symbol "RBKV". The high and low closing sales prices of
the Bank's Common Stock on the NASDAQ/NM from April 12, 1996 (the date the stock
was listed on NASDAQ/NM) and December 31, 1997, are set forth in the following
table. From January 1, 1996, through April 11, 1996, the Bank's Common Stock was
quoted on the NNOTC Bulletin Board, sponsored and operated by the National
Association of Securities Dealers, an inter-dealer quotation system for equity
securities not listed on the NASDAQ Stock market. The high and low closing bid
prices during this period are also set forth in the following table. The
quotations reflect interdealer prices, without retail mark up, mark down or
commission, and may not represent actual transactions.
Cash
Closing Sales Price Dividends
HIGH LOW Paid
NASDAQ/NM
1997
Fourth Quarter $45.00 $27.50
Third Quarter 29.00 23.50 $.25
Second Quarter 26.00 18.50
First Quarter 20.50 18.00
1996
Fourth Quarter $18.75 $13.50
Third Quarter 13.50 11.75 $.10
Second Quarter(beginning April 12, 1996) 13.75 12.00
Closing Bid Price
HIGH LOW
NNOTC Bulletin Board
1996
Second Quarter(through April 11, 1996) $12.50 $11.50
First Quarter 12.00 10.13
During 1996, the Bank's Board of Directors sold 124,133 of Common Stock for
$12.50 per share to the Bank's stockholders, depositors and the public.
The Bank's 1,226,690 outstanding shares were held by approximately 950 record
holders as of December 31, 1997.
Prior to the Bank's current management assuming office, the Bank had
accumulated a significant deficit. The Bank was prohibited from paying dividends
under Virginia banking law until it had restored any deficits in its capital
funds as originally paid in. Additionally, Federal Reserve Board regulations
limit the payment of dividends to net profits, as defined, of the current year,
plus retained net profits of the previous two years. Consequently, until 1996
dividends were precluded under these regulations.
In each of January 1996 and April 1997, the Board of Directors approved a
one-time dividend of $.10 and $.25 per share, respectively, contingent upon
approval of the Board of Governors of the Federal Reserve System and the
Commonwealth of Virginia, State Corporation Commission, Bureau of Financial
Institutions. Subsequently, the dividends were approved by the relevant
regulatory authorities, subject to certain provisions of Regulation H of the
Federal Reserve System. These provisions required the Bank to obtain approval of
at least two-thirds of the holders of its Common Stock. Accordingly, the
shareholders approved the $.10 at the 1996 Annual Meeting of Shareholders and
the $.25 dividend and the 1997 Annual Meeting of Shareholders. As a result of
the Bank's improved financial position, such approvals are no longer required as
long as the Bank continues to achieve satisfactory earnings.
On March 16, 1998, the Bank announced a quarterly dividend of $.12 per
share to be paid to shareholders of record on March 31, 1998.
Item 6. Management's Discussion and Analysis or Plan of Operation
In addition to historical information, the following discussion contains
forward looking statements that are subject to risks and uncertainties that
could cause the Bank'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 Bank's profitability, and the
adequacy of the Bank's allowance for future loan losses. Several factors,
including the local and national economy, the demand for residential mortgage
loans, the adequacy of the Bank's Year 2000 compliance, and the Bank's ability
to integrate the operations of Eastern American Bank may adversely affect the
Bank's ability to achieve the expected results. Readers are cautioned not to
place undue reliance on these forward looking statements, which reflect
management's analysis only as of the date of this Report.
On December 1, 1997, the Bank acquired Eastern American Bank, FSB, in a
business combination accounted for under the purchase method of accounting,
whereby the purchase price has been allocated to the underlying assets acquired
and liabilities assumed based on their respective fair values at the time of
acquisition. In an exchange of common shares, the Bank acquired $66,514,000 in
assets (including cash of $12,539,000), $48,082,200 in net loans, and assumed
$52,844,000 in deposit liabilities. Accordingly, these acquired assets and
liabilities contributed to the growth in total assets and liabilities of the
Bank for the year ended December 31, 1997 (See Note 18 to the consolidated
financial statements). The Bank's 1997 results includes results by operations
from Eastern American Bank for the month of December 1997.
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto.
Results of Operations and Financial Condition
The Bank had net income of $1,821,200 and $1,466,200 for 1997 and 1996,
respectively. This constituted net basic earnings per common share of $1.84 for
1997, and $1.58 for 1996. With the diluted effect of common stock equivalents,
earnings per common share were $1.67 for 1997, an increase of 9.9% over the
$1.52 in 1996. The expanded levels of earning assets increased the Bank's net
interest income during 1997. This factor, along with managed expense control,
increased volume in the mortgage banking operation, and expansion of the Bank's
business loan portfolio, provided the basis for increased earnings.
At December 31, 1997, 55.4% of total loans were due in one year or less.
Floating rate loans with maturities of one year or less represented 49.2% of
total loans, and the remainder of loans had fixed rates.
Average loans, net of unearned income, to average deposits were 82.2% and
76.1% in 1997 and 1996, respectively.
Net Interest Income
Net interest income, before provision for loan losses, increased 37.4% to
$4,954,100 in 1997 over 1996. The 1997 increase in net interest income was
proportionate with the increase in average earning assets and interest bearing
liabilities during 1997. During 1997, due to the increased banking activity
precipitated by lower interest rates, average loans increased 35.0% to
$93,839,500. Due to the competitive pricing of the Bank's deposit products,
average deposits increase 25.0% to $114,100,000. As part of its mortgage banking
operations, funds were advanced on behalf of investor banks in settlement of
mortgage loans. Average funds advanced in settlement of such loans increased
96.7% to $13,153,300 in 1997 while average securities decreased 5.6% to
$15,934,900 and average certificates of deposit invested at other banks remained
at $1,000,000.
For an historical analysis of net interest income, see the table entitled
"Summary of Net Interest Income". 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". 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.
Summary of Net Interest Income
The following table sets forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest income of the Bank from
categories of interest-bearing assets and the resultant average yield; (ii) the
total dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest position; (iv) net interest income;
(v) net interest rate spread; (vi) net interest yield on interest-earning
assets; and (vii) the ratio of total interest-earning assets to total
interest-bearing liabilities. For the purposes of this table, non-accrual loans
are considered noninterest earning assets and loan fees are included in interest
income.
Year Ended December 31
-------------------------------------------------------------
1997 1996
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------
Interest-earning assets:
Loans $93,839 $8,316 8.86% $69,488 $6,268 9.02%
Securities held to maturity 226 15 6.64% - - -
Securities available for sale (1) 15,709 1,103 7.02% 16,885 1,185 7.02%
Other interest-earning assets (2) 17,280 1,503 8.70% 11,099 842 7.59%
------- ------ ----- ------- ----- -----
Total interest-earning assets 127,054 10,937 8.61% 97,472 8,295 8.51%
------- ------ ----- ------- ----- -----
Noninterest-earning assets 2,893 3,408
------- -------
Total assets $129,947 $100,880
======= =======
Interest-bearing liabilities
Deposits
Savings/Money Market Accounts (3) $17,730 $378 2.13% $14,366 $284 1.98%
Time deposits 96,370 5,318 5.52% 76,932 4,316 5.61%
Short-term borrowings (4) 4,959 287 5.79% 1,617 89 5.50%
------- ----- ----- ------- ----- -----
Total interest-bearing liabilities 119,059 5,983 5.03% 92,915 4,689 5.05%
------- ----- ----- ------- ----- -----
Noninterest-bearing liabilities 1,090 799
Stockholders' equity 9,798 7,166
------- -------
Total liabilities and stockholder's equity $129,947 $100,880
======= =======
Net interest income/interest rate spread (5) $4,954 3.58% $3,606 3.46%
====== ===== ====== =====
Net interest position (6) / Net yield on
interest-earning assets (7) $7,995 3.90% $4,557 3.70%
====== ===== ====== =====
Ratio of average interest-earning assets to
average interest-bearing liabilities (8) 106.72% 104.90%
====== ======
(1) Represents the average balances of amortized cost for available-for-sale
securities.
(2) Consists of interest-sensitive deposits in other financial institutions,
federal funds sold and funds advanced in settlement of mortgage loans.
(3) Includes noninterest-bearing accounts.
(4) Consists of FHLB advances and federal funds purchased.
(5) Represents the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(6) Equals total interest-earning assets minus total interest-bearing
liabilities.
(7) Equals net interest income divided by average interest-earning assets.
(8) Equals average interest-earning assets divided by average interest-bearing
liabilities.
As can be seen from the historical analysis and the GAP analysis, the Bank
is in an asset-sensitive position. In a period of rising interest rates, the
Bank is positioned to increase future net interest income. Conversely, in a
period of declining interest rates the Bank 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.
Scheduled Maturity or Repricing
The following table summaries the estimated aggregate maturity/repricing of the
Bank's assets and liabilities at December 31, 1997. The table does not
necessarily indicate the impact of general interest rate movement on net income
because the repricing of certain categories of assets and liabilities is
discretionary and is subject to competitive and other pressures. As a result,
certain assets and liabilities indicated as repricing within a stated period,
may, in fact, reprice at different rate levels. Nonperforming loans are included
in interest-sensitive assets.
Scheduled Maturity or Repricing
---------------------------------------------------
3 months 4 months 1 year More
or to to than
less 1 year 5 years 5 years Total
---------------------------------------------------
(Dollars in Thousands)
Interest-sensitive assets:
Loans:
Fixed rate $14,374 $6,599 $15,345 $14,411 $50,729
Adjustable rate 62,449 11,578 21,974 3,860 99,861
------ ------ ------ ------ ------
Total loans 76,823 18,177 37,319 18,271 150,590
Securities available for sale 11,360 1,072 - - 12,432
Securities held to maturity 359 579 1,210 594 2,742
Other interest-sensitive assets (1) 34,343 1,000 - - 35,343
------- ------ ------- ------ -------
Total interest-sensitive assets (2) $122,885 $20,828 $38,529 $18,865 $201,107
======= ====== ======= ====== =======
Interest-sensitive liabilities:
Deposits:
Savings accounts $20,677 - - - $20,677
NOW accounts 2,987 - - - 2,987
Money market accounts 8,568 - - - 8,568
Certificates of deposit 31,352 88,802 5,629 - 125,783
------- ------ ------- ------ ------
Total deposits 63,584 88,802 5,629 - 158,015
FHLB advances 9,650 4,000 7,300 - 20,950
------- ------ ------- ------ -------
Total interest-sensitive liabilities $73,234 $92,802 $12,929 - $178,965
======= ====== ======= ====== =======
Difference between interest-sensitive assets
and interest-sensitive liabilities ("GAP") $49,651 ($71,974) $25,600 $18,865 22,142
======= ====== ======= ====== ======
Cumulative GAP $49,651 ($22,323 $3,277 $22,142
======= ====== ======= ======
Cumulative interest-sensitive assets to
interest-sensitive liabilities 167.80% 86.56% 101.83% 112.37%
====== ===== ====== ======
Cumulative interest-sensitive assets less
interest-sensitive liabilities as a
percentage of total assets 23.72% -10.66% 1.57% 10.58%
===== ===== ==== =====
(1) Consists of interest-sensitive deposits in other financial institutions,
federal funds sold and funds advanced in settlement of mortgage loans.
(2) Total interest-sensitive assets would be $196,709 if nonperforming loans
were excluded.
Allowance for Loan Losses
The ratio of net loans charged off to average loans was .0% in 1997 and .15%
in 1996. The allowance for loan losses as a percentage of year end loans was
1.71% in 1997 and 1.27% in 1996. The level of non-performing loans at year end
was $4,398,000 and $421,000 in 1997 and 1996, or 2.92% and .51%, respectively,
of total loans. Management made a provision for loan losses of $155,000 in 1997
and $290,000 in 1996. The majority of the non-accrual loans were housed in
Eastern American Bank at the time of merger. The Bank has a plan in place to
substantially reduce the level of non-accruing loans during the first half of
1998 and these assets were marked to market at the time of merger. The Bank
anticipates increasing the quality of assets at Eastern American Bank through
the employment of experienced commercial lending officers.
In establishing the allowance for loan losses, management considers a number
of factors, including loan asset quality, related collateral and economic
conditions prevailing during the loan's repayment. In its loan policies,
management has emphasized the borrower's ability to service the debt, the
borrower's general creditworthiness and the quality of collateral.
While the Bank believes it has sufficient allowance for its existing
portfolio, there can be no assurances that an additional allowance for losses on
existing loans may not be necessary in the future, particularly if the economy
worsens.
Potential Problem Loans
At December 31, 1997, the Bank had $3,059,000 in non-accrual loans and
$1,339,000 of loans past due 90 days or more that were still accruing. In
addition to loans on either non-accrual status or loans past due 90 days or more
and still accruing, the Bank had identified $1,842,800 of loans that 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".
Summary of Loan Loss Experience
The following table presents the Bank's loan loss experience and selected loan
loss ratios for the two years ended December 31, 1997 and 1996.
Year ended December 31,
---------------------------------
1997 1996
---- ----
(Dollars in thousands)
Balance of allowance for loan losses
at beginning of year $1,040 $854
Loans charged-off:
Commercial (2) (5)
Installment (2) (1)
Real Estate (56) (109)
Credit Cards and Other Consumer (5) (5)
-------- --------
Total loans charged-off (65) (120)
-------- --------
Recoveries of loans previously charged-off:
Commercial 34 6
Installment 4 7
Real Estate - -
Credit Cards and Other Consumer 5 3
-------- --------
Total recoveries 43 16
-------- --------
Net loans charged-off (22) (104)
Additions to allowance charged
to expense 155 290
Allowance acquired through business combination 1,400 -
-------- ---------
Balance at end of year $2,573 $1,040
======== =========
Average loans $93,839 $69,488
Loans at end of period $150,590 $81,975
Selected Loan Loss Ratios:
Net charge-off during the
period to average loans 0.02% 0.15%
Provision for loan losses
to average loans 0.17% 0.42%
Provision for loan losses
to net charge-offs during
the period 705% 279%
Allowance for loan losses
to loans at end of period 1.71% 1.27%
Non-performing assets at
end of period $4,398 $421
Non-performing assets to
total loans at end of
period 2.92% 0.51%
Allowance for loan losses
to non-performing assets
at end of period 59% 247%
Noninterest Income and Noninterest Expenses
Noninterest income was $4,520,000 in 1997, an increase of 64.1% over 1996.
This increase was primarily from income derived from mortgage banking
operations. The general decline in interest rates, which began in 1995 and
continued through 1997, was a factor in the increase of mortgage banking income
of 69.4% to $4,111,000. Because of the uncertainty of future loan origination
volume and the future level of interest rates, there can be no assurance that
the Bank will realize the same level of mortgage banking income in future
periods. There was a slight increase in other income during 1997 over 1996 which
included a gain on sale of loans of $105,400 realized during 1997. The Bank
realized a gain on sale of loans of $25,900 during 1996.
Total noninterest expense was $6,533,300 in 1997, a 46.8% increase over
1996. All areas of noninterest expenses were affected by the increased volume in
the mortgage banking operations. The largest component of noninterest expense,
salaries and employee benefits, increased 52.0% to $4,035,900 in 1997 over 1996.
This category comprised 61.8% of the total noninterest expense in 1997, and
59.7% in 1996. Occupancy expense increased 46.2% in 1997 over 1996. Depreciation
and equipment maintenance expense increased 29.9% in 1997 over 1996. Outside
computer service increased 87.4% to $242,900. Federal Deposit Insurance
Corporation ("FDIC") premiums increased 522.6% to $12,500 in 1997 over the
$2,000, minimum amount paid in 1996. See "Business - Deposit Insurance".
Income Taxes
Applicable income taxes on 1997 earnings amounted to $964,648, resulting in
an effective tax rate of 34.6% compared to
9.5% in 1996.
The effective rate differed from statutory rates for the year ended
December 31, 1996, due to the Bank's utilization of net operating loss
carryforwards for financial statement purposes during 1996. As a result, the
Bank recorded a deferred tax asset and related income tax benefit of $448,127
for the realization of these loss carryforwards in 1996. All net operating loss
carryforwards are now fully utilized for financial statement and income tax
return purposes.
Liquidity
The Bank'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 2.2% and .10% of total deposits at December 31, 1997 and 1996,
respectively. Federal Home Loan Bank ("FHLB") advances were also utilized as
funding sources by the Bank in 1997 and 1996. The Bank had $20,950,000 in such
advances outstanding at December 31, 1997 and $7,236,500 in such advances
outstanding at December 31, 1996. Pursuant to the terms of the variable rate
line of credit, the Bank may borrow up to $30,000,000. This FHLB advances
arrangement expires November 3, 1998, and can be prepaid at anytime by the Bank.
Additionally, the Bank has a warehouse line of credit collateralized by first
mortgage loans, amounting to $10,000,000 which expires December 2, 1998. As of
December 31, 1997, the Bank had not drawn from this line of credit. The Bank has
no reason to believe these arrangements will not be renewed.
Management seeks to ensure adequate liquidity to fund loans and meet the
Bank's financial requirements and opportunities. To provide liquidity for
current, ongoing and unanticipated needs, the Bank maintains short-term interest
bearing certificates of deposits, federal funds sold, and a portfolio of debt
securities. The Bank also structures and monitors the flow of funds from debt
securities and from maturing loans. As securities are generally purchased to
provide a source of liquidity, most are classified as securities
available-for-sale when purchased. Unrealized holding gains and losses for
available-for-sale securities are excluded from earnings and reported as a net
amount in a separate component of stockholders' equity until realized.
Securities are composed primarily of governmental or quasi-governmental
agencies. Net unrealized appreciation, net of tax effect, on securities
available-for-sale was $296,400 for 1997, and net unrealized depreciation on
securities available-for-sale was $23,100 for 1996. The Bank from time to time
also maintains short-term interest bearing certificates of deposit with other
financial institutions. These certificates of deposit amounted to $1,000,000 at
December 31, 1997 and 1996, respectively. Federal funds sold to correspondent
institutions were $1,920,000, and $170,000 at year end 1997 and 1996.
Recent Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 130, Reporting Comprehensive Income. This pronouncement
establishes standards for reporting and displaying of comprehensive income and
its components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. FASB No. 130 is effective for financial statement
periods beginning after December 15, 1997. As the Bank's only known item of
comprehensive income is the unrealized appreciation or depreciation on
investment securities available for sale, Management does not expect the
application of this pronouncement to have a material impact on the Bank's
financial statements.
FASB Statement No. 131, Disclosures about Segments of an Enterprise,
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 interim financial reports issued to shareholders, and is effective
for financial statements for periods beginning after December 15, 1997, and
requires restatement of all prior periods presented. It also establishes
standards for related disclosures about products and services. geographic areas,
and major customers. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment performance
and deciding how to allocate resources to segments.
This Statement also requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services,) about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, this Statement
does not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable. Management is currently
assessing the impact of this statement on future financial statement
disclosures.
FASB Statement No. 132, Employer's Disclosures about Pension and Other Post
Retirement Benefits, revises disclosures regarding pension and other post
retirement benefits and standardizes certain disclosure requirements regarding
these items. This Statement is effective for fiscal years beginning after
December 15, 1997. Management will assess the impact, if any, of this Statement
on the Bank's future disclosures.
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 Bank's year-end capital-to-asset ratio was relatively flat at 7.45% at
December 31, 1997 as compared to 7.47% at December 31, 1996.
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 Bank's regulatory capital ratios at
December 31, 1997.
Required Ratio Actual Ratio
Tier 1 risk-based 4.00% 9.69%
Total risk-based 8.00% 10.93%
Tier 1 leverage 4.00 to 5.00% 9.67%
The Bank is in full compliance with all relevant regulatory capital
requirements.
Year 2000 Compliance
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organization.
In July 1996, the Bank began the examination and resolution of the Year 2000
issue by appointing a project manager and advising the Board of Directors of the
potential impact on the Bank's ability to do business if the Year 2000 issue is
not resolved. The project manager prepared an action plan, risk analysis and
inventory of Year 2000 related issues in compliance with a directive issued by
the Federal Reserve. The project manager continues to add items to the
inventory. Estimated completion of user testing of all high and moderate risk
items is the first quarter of 1999, with a contingency plan for each item to be
in place. In late 1997, the Bank upgraded or replaced software and hardware in
conjunction with an internally financed change in data processors. The current
data processor is certified to be Year 2000 compliant and user testing will
begin during the third quarter of 1998.
The Board of Directors receives periodic updates, which include the status
and estimated completion dates of each item on the inventory. A failure to
become Year 2000 compliant could disrupt the Bank's operating results and
financial condition; therefore, progress is being closely monitored both
internally by management and the Board of Directors, and externally by the
regulators.
Item 7. Financial Statements
Balance sheets - December 31, 1997 and 1996
Statements of income - Years ended December 31, 1997 and 1996
Statements of stockholders' equity - Years ended December 31, 1997 and
1996
Statements of cash flows - Years ended December 31, 1997 and 1996
Notes to financial statements - December 31, 1997 and 1996
These statements are attached at the end of this report and are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information called for in this section is incorporated by reference to
the Bank's Proxy Statement for the 1998 Annual Meeting.
Item 10. Executive Compensation
Information called for in this section is incorporated by reference to
the Bank's Proxy Statement for the 1998 Annual Meeting.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Information called for in this section is incorporated by reference to the
Bank's Proxy Statement for the 1998 Annual Meeting.
Item 12. Certain Relationships and Related Transactions
Information called for in this section is incorporated by reference to the
Bank's Proxy Statement for the 1998 Annual Meeting.
Item 13. Exhibits and Reports on Form 8-K
(a) Certain documents filed as part of this Form 10-KSB
Exhibits:
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
April 8, 1997 between Resource Bank and Eastern American Bank FSB.
Filed June 24, 1997 as Exhibit A to the Issuer's Proxy Statement
for its 1997 Annual Meeting to Shareholders, and is incorporated
herein by reference.
3.1 Articles of Incorporation. Filed April 28, 1993 as Exhibit 3.1
to the Issuer's Form 10-KSB and is incorporated herein by
reference.
3.2 By-laws. Filed April 28, 1993 as Exhibit 3.2 to the Issuer's
Form 10-KSB and is incorporated herein by reference.
3.3 Amendment to Articles of Incorporation, as amended. Filed March
30, 1995 as Exhibit 3.3 to the Issuer's Form 10-KSB, and is
incorporated herein by reference.
* 3.4 Articles of Merger of Eastern American Bank, FSB with and into
Resource Bank dated December 1, 1997, which contain the amended and
restated Articles of Incorporation of Resource Bank.
10.1 Director's Stock Option Agreement dated June 15, 1989. Filed April
28, 1993 as Exhibit 10.3 to the Issuer's Form 10-KSB, and is
incorporated herein by reference.
10.2 Non-Employee Director Incentive Stock Option Plan dated June 15,
1989. Filed April 28, 1993 as Exhibit 10.4 to the Issuer's Form
10-KSB, and is incorporated herein by reference.
10.3 Resource Bank 1993 Long-Term Incentive Plan. Filed March 22,
1994 as Exhibit 10.6 to the Issuer's Form 10-KSB, and is
incorporated herein by reference.
10.4 Resource Bank 1993 Long-Term Incentive Plan, First Amendment.
Filed March 30, 1995 as Exhibit 10.9 to the Issuer's Form 10-KSB,
and is incorporated herein by reference.
10.5 Resource Bank 1993 Long-Term Incentive Plan, Second Amendment.
Filed March 31, 1997 as Exhibit 10.21 to the Issuer's Form 10-KSB,
and is incorporated herein by reference.
10.6 Resource Bank 1994 Long-Term Incentive Plan. Filed March 30,
1995 as Exhibit 10.10 to the Issuer's Form 10-KSB, and is
incorporated herein by reference.
10.7 Resource Bank 1994 Long-Term Incentive Plan, First Amendment.
Filed March 31, 1997 as Exhibit 10.22 to the Issuer's Form 10-KSB,
and is incorporated herein by reference.
* 10.8 Resource Bank 1996 Long-Term Incentive Plan, Amended and
Restated.
10.9 Resource Bank Retirement Savings Plan. Filed March 20, 1996 as
Exhibit 10.18 to the Issuer's Form 10-KSB, and is incorporated
herein by reference.
10.10 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. Filed April 28, 1993 as Exhibit 10.1 to the
Issuer's Form 10-KSB, and is incorporated herein by reference.
10.11 Lease agreement dated September 22, 1994 by and between Resource
Mortgage and A. R. Marketing, Inc. Filed March 30, 1995 as
Exhibit 10.12 to the Issuer's From 10-KSB, and is incorporated
herein by reference.
10.12 Assignment of Lease dated February 28, 1994 with Resource Mortgage
to Contract Publishing, Inc. Filed March 30, 1995 as Exhibit 10.15
to the Issuer's Form 10-KSB, and is incorporated herein by
reference.
10.13 Lease agreement dated April 1, 1994 by and between Whooping Crane
Limited Partnership and Southern Mortgage Financial Company. Filed
March 20, 1996 as Exhibit 10.16 to the Issuer's Form 10-KSB, and
is incorporated herein by reference.
10.14 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 Forest Professional Center Associates and Resource
Bank. Filed March 20, 1996 as Exhibit 10.17 to the Issuer's Form
10-KSB, and is incorporated herein by reference.
10.15 Lease agreement and Addendum to Lease both dated May 1, 1996 by
and between Birchwood Mall Associates and Resource Bank. Filed
March 31, 1997 as Exhibit 10.19 to the Issuer's Form 10-KSB, and
is incorporated herein by reference.
* 10.16 Lease agreement dated July 22, 1997 by and between Washington
Real Estate Investment Trust and Resource Bank.
* 10.17 Lease agreement dated July 19, 1993 by and between Reston North
Point Village Limited Partnership and Eastern American Bank, FSB.
* 10.18 Lease agreement dated July 18, 1995 by and between The Richmond
Corporation and Eastern American Bank FSB.
* 10.19 Lease agreement dated October 31, 1995 by and between Elden
Investments, L.L.C. and Eastern American Bank, FSB.
* 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.
* 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.
* Filed herein.
(b) Report on Form 8-K
The Bank filed a current report on Form 8-K, dated December 1, 1997,
reporting the acquisition or disposition of assets following the merger between
Resource Bank and Eastern American Bank FSB. Audited Financial Statements,
including Auditor's Reports, for Eastern American Bank FSB's operations for the
Years Ended December 31, 1996 and 1995, Interim Unaudited Financial Statements
for the Three Months Ended March 31, 1997 and 1996, and Pro Forma Financial
Information as if the Merger had been consummated on March 31, 1997, included in
the Joint Proxy Statement were filed on Pages F-1 through F-40 and pages 56-60
of the Joint Proxy Statement.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RESOURCE BANK
By /s/ Lawrence N. Smith Date: 3-19-98
--------------------------------- ------------
Lawrence N. Smith
President & Chief Executive Officer
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 Board of Governors of the
Federal Reserve System, 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.
/s/ John B. Bernhardt Date: 03-19-98
- ---------------------------------------------- ----------
John B. Bernhardt, Chairman of the Board
/s/ Lawrence N. Smith Date: 03-19-98
- ---------------------------------------------- ----------
Lawrence N. Smith, President &
Chief Executive Officer & Director
/s/ Eleanor J. Whitehurst Date: 03-19-98
- ---------------------------------------------- ----------
Eleanor J. Whitehurst, SVP &
Chief Financial Officer
/s/ Alfred E. Abiouness Date: 03-19-98
- ---------------------------------------------- ----------
Alfred E. Abiouness, Director
/s/ Thomas W. Hunt Date: 03-19-98
- ---------------------------------------------- ----------
Thomas W. Hunt, Director
/s/ Louis Ray Jones Date: 03-19-98
- ---------------------------------------------- ----------
Louis Ray Jones, Director
/s/ Arthur Russell Kirk Date: 03-19-98
- ---------------------------------------------- ----------
Arthur Russell Kirk, Director
/s/ Elizabeth A. Twohy Date: 03-19-98
- ---------------------------------------------- ----------
Elizabeth A. Twohy, Director
Financial Statements
Years Ended December 31,
1997 and 1996
[Resource Bank Logo]
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Resource Bank
Virginia Beach, Virginia
We have audited the accompanying balance sheets of Resource Bank (the
"Bank") as of December 31, 1997 and 1996, and the related statements of income,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these 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 financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Resource Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Goodman & Company, L.L.P.
--------------------------
Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
January 30, 1998, except for
Note 19, as to which the
date is March 16, 1998
- 1 -
RESOURCE BANK
BALANCE SHEETS
December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 2,611,891 $ 2,109,357
Interest bearing deposits with banks 9,678,732 1,853,357
Federal funds sold 1,920,000 170,000
Funds advanced in settlement of mortgage loans 23,744,135 11,034,743
Investment securities
Available for sale 12,432,253 16,892,436
Held to maturity 2,742,032 -
Loans, net 148,016,531 80,934,739
Other real estate owned 684,591 50,000
Premises and equipment 3,236,907 610,622
Other assets 2,701,190 1,419,063
Accrued interest 1,561,756 761,994
--------------------------------------------
$ 209,330,018 $ 115,836,311
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits $ 11,493,456 $ 6,595,774
Interest-bearing deposits 158,014,876 92,582,781
--------------------------------------------
** 169,508,332 ** 99,178,555
FHLB advances 20,950,000 7,236,500
Other liabilities 2,661,013 250,045
Accrued interest 608,856 516,150
--------------------------------------------
193,728,201 107,181,250
--------------------------------------------
Stockholders' equity
Common stock, $3 par value - 3,333,333 shares authorized; shares
issued and outstanding:
1997 - 1,226,690; 1996 - 967,874 3,680,070 2,903,622
Additional paid-in capital 10,769,249 6,497,615
Retained earnings (accumulated deficit) 856,122 (723,072)
Net unrealized appreciation (depreciation) on
securities available for sale, net of
income taxes 296,376 (23,104)
--------------------------------------------
15,601,817 8,655,061
--------------------------------------------
$ 209,330,018 $ 115,836,311
============================================
The notes to the financial statements are an integral part of this statement.
- 2 -
RESOURCE BANK
STATEMENTS OF INCOME
Years Ended December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Interest income
Interest and fees on loans $ 8,315,741 $ 6,268,239
----------------------------------------
Interest on investment securities:
Interest on securities available for sale 1,103,257 1,185,350
Interest on securities held to maturity 15,414 -
----------------------------------------
1,118,671 1,185,350
----------------------------------------
Interest on federal funds sold 123,227 136,671
Interest on funds advanced in settlement of
mortgage loans 1,379,856 704,792
----------------------------------------
Total interest income 10,937,495 8,295,052
----------------------------------------
Interest expense
Interest on deposits 5,695,994 4,600,337
Interest on short-term borrowings 287,430 89,421
----------------------------------------
Total interest expense 5,983,424 4,689,758
----------------------------------------
Net interest income 4,954,071 3,605,294
Provision for loan losses (155,254) (290,000)
----------------------------------------
Net interest income after provision for loan losses 4,798,817 3,315,294
----------------------------------------
Noninterest income
Mortgage banking income 4,110,868 2,426,766
Service charges 409,451 328,437
----------------------------------------
4,520,319 2,755,203
----------------------------------------
Noninterest expense
Salaries and employee benefits 4,035,860 2,654,946
Occupancy expenses 571,231 390,602
Depreciation and equipment maintenance 458,126 352,598
Professional fees 120,439 111,264
Outside computer service 242,871 129,607
FDIC insurance 12,452 2,000
Stationery and supplies 295,875 211,319
Marketing and business development 205,073 175,427
Other 591,399 423,275
----------------------------------------
6,533,326 4,451,038
----------------------------------------
Income before income taxes 2,785,810 1,619,459
Income tax expense 964,648 153,274
----------------------------------------
Net income $ 1,821,162 $ 1,466,185
========================================
Basic earnings per common share $ 1.84 $ 1.58
========================================
Diluted earnings per share $ 1.67 $ 1.52
========================================
The notes to the financial statements are an integral part of this statement.
- 3 -
RESOURCE BANK
STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized
Appreciation
(Depreciation)
Common Stock Additional on Securities
--------------------------- Paid-in Accumulated Available for
Shares Amount Capital Deficit Sale Total
--------------------------- ------------ ------------- --------------- --------
Balance, December 31, 1995 844,042 $2,532,126 $5,332,233 $(2,092,470) $ 38,577 $ 5,810,466
Net changes in unrealized depreciation
on securities available for sale, net
of income taxes - - - - (61,681) (61,681)
Proceeds from common stock
issued - net of issuance costs 123,832 371,496 1,165,382 - - 1,536,878
Cash dividends paid
$.10 per share - - - (96,787) - (96,787)
Net income for 1996 - - - 1,466,185 - 1,466,185
-------------------------------------------------------------------------------------
Balance, December 31, 1996 967,874 2,903,622** 6,497,615** (723,072) (23,104)** 8,655,061
Net changes in unrealized appreciation
on securities available for sale, net
of income taxes - - - - 319,480 319,480
Common stock issued as a result
of business combination 258,816 776,448 4,271,634 - - 5,048,082
Cash dividends paid
$.25 per share - - - (241,968) - (241,968)
Net income for 1997 - - - 1,821,162 - 1,821,162
-------------------------------------------------------------------------------------
Balance, December 31, 1997 1,226,690 $ 3,680,070 $10,769,249 $ 856,122 $296,376 $ 15,601,817
=====================================================================================
The notes to the financial statements are an integral part of this statement.
- 4 -
RESOURCE BANK
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Operating activities
Net income $ 1,821,162 $ 1,466,185
Adjustments to reconcile to net cash
used by operating activities:
Provision for losses on loans and other real estate owned 155,254 324,764
Loss on sale of investment securities 45,313 -
Depreciation and amortization 265,047 174,010
Amortization of investment securities
premiums, net of discounts 21,170 26,084
Loss on disposition of premises and equipment 11,198 225
Deferred loan origination fees, net of costs (152,955) 58,425
Changes in:
Funds advanced in settlement of mortgage loans (12,709,392) (5,559,746)
Interest receivable (445,545) (203,470)
Interest payable 92,699 95,777
Other assets (1,003,497) (191,552)
Other liabilities (75,474) 34,227
----------------------------------------
Net cash used by operating activities (11,975,020) (3,775,071)
----------------------------------------
Investing activities
Cash acquired in business combination
Proceeds from sales and maturities of available-for-sale 12,539,233 -
securities 7,972,963 2,887,874
Proceeds from maturities of held-to-maturity securities 28,654 -
Purchases of available-for-sale securities (2,589,000) (9,422,096)
Loan originations, net of principal repayments (18,318,736) (23,673,309)
Purchases of premises and equipment and other assets (2,237,125) (169,723)
----------------------------------------
Net cash used by investing activities (2,604,011) (30,377,254)
----------------------------------------
Financing activities
Proceeds from common stock issued, net of issuance costs - 1,536,878
Cash dividends paid (241,968) (96,787)
Proceeds (repayments) from FHLB advances 7,413,500 7,236,500
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts (2,618,793) 3,315,651
Net increase in certificates of deposit 20,104,201 14,957,405
----------------------------------------
Net cash provided by financing activities 24,656,940 26,949,647
----------------------------------------
Increase (decrease) in cash and cash equivalents 10,077,909 (7,202,678)
Cash and cash equivalents at beginning of year 3,132,714 10,335,392
----------------------------------------
Cash and cash equivalents at end of year $ 13,210,623 $ 3,132,714
========================================
Supplemental schedules and disclosures of cash
flow information
Cash paid for:
Interest on deposits and other borrowings $ 5,674,357 $ 4,593,781
========================================
The notes to the financial statements are an integral part of this statement.
- 5 -
RESOURCE BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BUSINESS
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 area is within Virginia Beach and, to a lesser
extent, in the surrounding cities of the South Hampton Roads area, including
Norfolk, Chesapeake, Portsmouth and Suffolk.
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, Hilton Head, South
Carolina, and the northern Virginia/Washington, D.C. metropolitan area.
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 operates two branches under the name Eastern American
Bank.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest bearing deposits with banks and
federal funds sold. Generally, federal funds are sold for one-day periods.
Interest bearing deposits with maturities extending beyond 90 days are not
considered cash equivalents for cash flow reporting purposes. Such deposits
amounted to $1,000,000 as of both December 31, 1997 and 1996.
(Notes continued on next page)
- 6 -
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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, or that may be sold
in response to changes in interest rates, changes in prepayment risk, to
increase regulatory capital or other similar factors, are classified as
securities available for sale and carried at fair value with any adjustments to
fair value, after tax, reported as a separate component of shareholders' equity.
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
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.
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 of 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.
(Notes continued on next page)
- 7 -
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (continued)
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.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or a portion of a loan is classified as
doubtful, or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility
of the recorded loan balance is doubtful, collections of interest and principal
are generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
(Notes continued on next page)
- 8 -
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate Owned
Other real estate owned is comprised of real estate and other assets
acquired through foreclosure, acceptance of a deed in lieu of foreclosure, or
loans in which the Bank receives physical possession of the debtor's assets.
Other real estate owned is carried at the lower of the recorded investment in
the loan or the fair value less estimated costs to sell. Upon transfer of a loan
to foreclosed status, an appraisal is obtained and any excess of the loan
balance over the fair value less estimated costs to sell is charged against the
provision for credit losses. Revenues and expenses, and subsequent adjustments
to fair value less estimated costs to sell are classified as an expense for
other real estate owned.
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.
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. Prior to demonstrating
performance, the Bank generally classifies impaired restructured loans, if any,
as nonaccrual. The accrual of interest resumes when such loans can demonstrate
performance, generally evidenced by six months of pre- or post-restructuring
payment performance in accordance with the restructured terms, or by the
presence of other significant factors. In addition, at the time of
restructuring, loans are generally classified as impaired. A restructured loan
that is not impaired, based on the restructured terms and that has a stated
interest rate greater than or equal to a market interest rate at the date of the
restructuring, is reclassified as unimpaired in the year immediately following
the year it was disclosed as restructured.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
For financial reporting purposes, assets are depreciated over their estimated
useful lives using the straight-line and accelerated methods. For income tax
purposes, the accelerated cost recovery system and the modified accelerated cost
recovery system are used.
Goodwill
Goodwill related to the purchase of the mortgage company is amortized
over five years using the straight-line method.
(Notes continued on next page)
- 9 -
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
Income taxes are provided for the tax effects of the 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.
Earnings Per Common Share
The Bank 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 No. 128 requires dual presentation of basic and diluted EPS on the face of
the income statement, and it requires a reconciliation of the numerator and
denominator of the basic EPS computation with the numerator and denominator of
the diluted EPS computation. This Statement is effective for financial
statements issued for periods ending after December 15, 1997. 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.
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. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties. While management uses available
information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary based on changes in local economic
conditions and other factors.
(Notes continued on next page)
- 10 -
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform them to the current year's 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
$283,000 for the year ended December 31, 1997. On December 31, 1997, the
required reserve balance was $158,000.
NOTE 4 - SECURITIES
Securities at December 31, 1997 and 1996 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
---------------- ------------- ------------- ----------
Securities available for sale
U.S. Government agencies $ 9,352,448 $ 449,055 $ - $ 9,801,503
Federal Reserve Bank
stock 297,250 - - 297,250
Federal Home Loan Bank
stock 2,233,500 - - 2,233,500
Other 100,000 - - 100,000
----------- ---------- ------- ---------
$ 11,983,198 $ 449,055 $ - $ 12,432,253
============ ========== ======= ============
Securities held to maturity
U.S. Government and agency
securities $ 1,995,739 $ 11,310 $ 36,193 $ 1,970,856
State and municipal securities 746,293 - 1,293 745,000
----------- ------- ------- ---------
$ 2,742,032 $ 11,310 $ 37,486 $ 2,715,856
=========== ======== ======== ===========
December 31, 1996
Securities available for sale
U.S. Government agencies $ 15,834,093 $ 89,591 $ 124,598 $ 15,799,086
Federal Reserve Bank stock 245,750 - - 245,750
Federal Home Loan Bank
stock 747,600 - - 747,600
Other 100,000 - - 100,000
----------- ------- ------- ---------
$ 16,927,443 $ 89,591 $ 124,598 $ 16,892,436
============ ======== ========= ==============
There were no securities deemed to be held to maturity as of December 31, 1996.
(Notes continued on next page)
- 11 -
NOTE 4 - SECURITIES (Continued)
Federal Reserve Bank stock, Federal Home Loan Bank stock and other
securities are restricted securities, carried at cost, and periodically
evaluated for impairment.
At December 31, 1997 and 1996, respectively, approximately $1,671,000
and $150,000, was pledged to secure deposits of the U.S. Government or the
Commonwealth of Virginia.
The amortized cost and fair value of securities by maturity date at
December 31, 1997 are as follows:
Securities held to Maturity Securities Available for Sale
----------------------------------- --------------------------------
Amortizeded Amortizeded
Cost Fair Value Cost Fair Value
---------------- ------------- -------------- ---------------
Due in one year or less $ 937,89 $ 919,296 $ - $ -
Due from one to five years 1,210,149 1,191,990 - -
Due from five to ten years 415,000 415,000 - -
Due after ten years 178,985 189,570 9,352,448 9,801,503
Federal Reserve Bank stock - - 297,250 297,250
Federal Home Loan Bank stock - - 2,233,500 2,233,500
Other - - 100,000 100,000
--------------- --------------- --------------- ---------------
$ 2,742,032 $ 2,715,856 $ 11,983,198 $ 12,432,253
=============== =============== =============== ===============
With respect to securities due after ten years, these securities have
variable rates which change with market conditions.
Gross realized gains and gross realized losses on available-for-sale
securities were:
December 31,
-----------------------
Gross realized gains: 1997 1996
------ ------
U.S. government agencies $ - $ -
=========================
Gross realized losses:
U.S. government agencies $45,313 -
=========================
NOTE 5 - LOANS
Loans consist of the following:
December 31,
---------------------------------
Gross loans: 1997 1996
------ ------
Commercial $ 50,712,937 $ 34,021,264
Real estate - construction 37,626,006 21,588,184
Commercial real estate 9,015,703 8,984,852
Residential real estate 49,415,863 12,622,224
Installment and consumer loans 3,819,368 4,758,462
------------------------------
Total gross loans 150,589,877 81,974,986
Less - allowance for loan losses (2,573,346) (1,040,247)
----------------------------------
Loans, net $ 148,016,531 $ 80,934,739
=================================
(Notes continued on next page)
- 12 -
NOTE 5 - LOANS (Continued)
A summary of the activity in the allowance for loan losses account is as
follows:
Years Ended December 31,
--------------------------------
1997 1996
------------ ----------
Balance, beginning of year $ 1,040,247 $ 854,171
Allowance acquired through business combination 1,400,000 -
Provision charged to operations 155,254 290,000
Loans charged-off (65,051) (119,925)
Recoveries 42,896 16,001
--------------------------------
Balance, end of year $ 2,573,346 $ 1,040,247
================================
Current accounting standards require certain disclosures concerning
restructured loans, regardless of whether or not an impairment loss exists. At
December 31, 1997 and 1996, such loans amounted to $65,000 and $913,000,
respectively. Management does not believe an impairment loss exists with respect
to these loans. These restructured loans, and impaired loans amounting to
$3,048,976 and $32,421 as of December 31, 1997 and 1996, respectively, have a
valuation allowance allocation of $450,183 and $139,950 at those respective
dates. Substantially all of the loans considered impaired at December 31, 1997
were acquired in the business combination with Eastern American Bank in
December, 1997. For the year ended December 31, 1997, the average recorded
investment in these loans and the restructured loans was approximately $754,110.
The Bank recognized $34,570 and $56,814 of interest income on both categories of
loans during the years ended December 31, 1997 and 1996, respectively. None of
the interest income was recognized on the cash basis.
Loans on which the accrual of interest has been discontinued amounted to
$3,048,976 and $50,311 at December 31, 1997 and 1996, respectively. If interest
on those loans had been accrued, such income would have approximated $11,964 and
$1,797 for 1997 and 1996, respectively. No interest was recognized or received
on these loans in 1997 and 1996.
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
December 31,
---------------------------------
1997 1996
---------------------------------
Land $1,725,000 $ -
Leasehold improvements 1,295,293 430,180
Equipment, furniture and fixtures 1,212,476 970,433
----------------------------------
4,232,769 1,400,613
Less - accumulated depreciation (995,862) (789,991)
----------------------------------
$3,236,907 $ 610,622
==================================
Depreciation charged to operating expense for the years ended December 31,
1997 and 1996 was $265,047 and $149,218, respectively.
(Notes continued on next page)
- 13 -
NOTE 7 - DEPOSITS
Interest-bearing deposits consist of the following:
December 31,
------------------------------------------
1997 1996
------------------------------------------
Money Market and NOW account deposits $ 11,554,162 $ 8,584,535
Savings deposits 20,677,173 669,964
Time deposits $100,000 and over 1,228,198 101,000
Other time deposits 124,555,343 83,227,282
------------------------------------------
$158,014,876 $ 92,582,781
==========================================
The scheduled maturities of time deposits were as follows:
December 31,
---------------------------------------
(In thousands)
1997 1996
---------------------------------------
Less than one year $ 120,155 $ 80,176
One to five years 5,629 3,051
Over five years - 101
---------------------------------------
$ 125,784 $ 83,328
======================================
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances consist of the following:
December 31,
------------------------------------
1997 1996
------------------------------------
Variable rate (6.95% at December 31, 1996)
FHLB advance due November 3, 1997 $ - $ 6,750,000
5.28% FHLB advance due January 3, 1997 - 486,500
Variable rate (6.20% at December 31, 1997)
FHLB advance due November 28, 1998 9,650,000 -
7.53% FHLB advance due April 3, 1998 1,000,000 -
5.37% FHLB advance due July 1, 1998 1,000,000 -
5.68% FHLB advance due December 28, 1998 2,000,000 -
5.42% FHLB advance due October 28, 1999 2,000,000 -
5.69% FHLB advance due February 6, 2000 300,000 -
5.88% FHLB advance due September 24, 2002 5,000,000 -
------------------------------------
$ 20,950,000 $ 7,236,500
====================================
Information regarding FHLB advances is summarized below:
Weighed average rate $ 5.79% $ 5.50%
================ =============
Average balance $ 4,959,000 $ 1,617,000
================ ================
Maximum outstanding at month end $ 20,950,000 $ 7,236,500
====================================
(Notes continued on next page)
- 14 -
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
As of December 31, 1997 and 1996, respectively, advances are
collateralized by FHLB stock with a cost of $2,233,500 and $747,600. In
addition, securities amounting to $7,600,000 and $10,300,000 are pledged against
these advances, as of December 31, 1997 and 1996, respectively. First mortgage
loans amounting to $19,000,000 also serve to provide additional collateral for
these advances at December 31, 1997. Pursuant to the terms of the variable rate
line of credit, the Bank may borrow up to $30,000,000. The FHLB advances
arrangement expires November 3, 1998, but can be prepaid at anytime by the Bank.
Additionally, the Bank has a warehouse line of credit collateralized by first
mortgage loans, amounting to $10,000,000 and expiring November 18, 1998. As of
December 31, 1997, the Bank not drawn from this line of credit.
NOTE 9 - STOCKHOLDERS' EQUITY
At December 31, 1997, the Bank is in full compliance with all relevant
regulatory capital requirements. However, under state law, the Bank may not pay
dividends until it has restored any deficits in its capital funds as originally
paid in, or unless permission is obtained from the State Corporation Commission
and approved by stockholders. During April, 1997 and January, 1996,
respectively, the Board of Directors approved $.25 and $.10 per share dividends,
for total dividends of $241,968 and $96,787, which were approved by the State
Corporation Commission and subject to shareholder approval. The cash dividends
were paid to stockholders in October, 1997 and July, 1996, respectively. 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 $.12 per share dividend in the first quarter of 1998.
In December, 1997, the Bank issued 258,816 shares of its common stock in
a share exchange which resulted in the acquisition of Eastern American Bank, FSB
(see Note 18). Costs associated with the acquisition of $218,000 were
capitalized and will be amortized into expense over a fifteen year period on a
straight-line basis.
During 1996, the Bank offered shares of its common stock for sale at a
price of $12.50 per share. In connection with the stock offering, 124,133 shares
were sold. Costs associated with the stock offering of $14,800 were charged
against additional paid-in capital in 1996.
NOTE 10 - STOCK COMPENSATION PLANS
At December 31, 1997, the Bank 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 Bank 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.
(Notes continued on next page)
- 15 -
NOTE 10 - STOCK COMPENSATION PLANS (Continued)
The Bank's 1996 Long-Term Incentive Plan authorized the grant of options
to management personnel and directors of 22,500 and 80,550 shares of the Bank's
common stock in 1997 and 1996, respectively. 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 $25 per share for at least thirty consecutive days.
The 1997 stock options are not exercisable for five years from the date of
grant.
Pro forma information regarding net income and earnings per share is
required by FASB No. 123, and has been determined as if the Bank had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rate of 5.75% and 5.5% in 1997 and 1996,
respectively; no dividend yields; volatility factors of the expected market
price of Bank's common stock of 29% and 42% in 1997 and 1996, respectively, and
a weighted-average expected life of the option of five years in 1997 and one
year in 1996.
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 Bank'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
measurre of the fair value of its employee stock options.
Had compensation cost for the Bank's 1996 Long-Term Incentive Plan been
determined based on the fair value method prescribed by FASB No. 123, the Bank's
net income and earnings per share would have been reduced to the pro-forma
amounts indicated for the year ended December 31:
1997 1996
-------------------------------
Net income As reported $1,821,162 $ 1,466,385
Pro forma $1,774,850 $ 1,331,622
Basic earnings per share As reported $ 1.84 $ 1.58
Pro forma $ 1.79 $ 1.44
Diluted earnings per share As reported $ 1.67 $ 1.52
Pro forma $ 1.62 $ 1.38
(Notes continued on next page)
- 16 -
NOTE 10 - STOCK COMPENSATION PLANS (Continued)
The following is a summary of the Bank's stock option activity, and
related information for the years ended December 31:
1997 1996
------ -----
Weighted - Weighted -
Average Average
Exercise Exercise
Options Price Options Price
---------- ---------- -------- -----------
Outstanding - beginning of year 162,382 $ 9.20 81,832 $ 5.96
Granted 22,500 31.50 80,550 12.50
Exercised - - - -
Forfeited - - - -
--------------------------------------------------------------------
Outstanding - end of year 184,882 11.91 162,382 9.20
--------------------------------------------------------------------
Exercisable - end of year 162,382 $ 9.20 81,832 $ 5.96
--------------------------------------------------------------------
Weighted average fair value of
options granted during the
year $ 11.61 $ 2.53
======== =======
NOTE 11 - INCOME TAXES
The principal components of the income tax expense were as follows:
December 31,
------------------------------------
1997 1996
------------- -----------
Federal - current $ 485,846 $ 35,925
Federal - deferred 478,802 117,349
------------------------------------
$ 964,648 $ 153,274
====================================
The differences between expected federal income taxes at statutory rates
to actual income tax expense are summarized as follows:
December 31,
------------------------------------
1997 1996
Income tax expense computed at federal ------------ ------------
statutory rates $ 947,175 $ 550,616
Tax effects of:
Valuation allowance - (407,698)
Other 17,473 10,356
----------------------------------
$ 964,648 $ 153,274
==================================
(Notes continued on next page)
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NOTE 11 - INCOME TAXES (Continued)
The Bank's deferred tax assets and liabilities and their principal
components are as follows:
December 31,
------------------------------------
1997 1996
---------- ------------
Deferred tax assets:
Intangible assets $ 153,487 $ 21,563
Bad debts 615,448 58,143
Fixed assets 255,814 15,638
Other 19,796 22,061
Alternative minimum tax credit - 27,504
Net operating loss - 448,127
------------------------------------
Total deferred tax asset 1,044,545 593,036
------------------------------------
Deferred tax liabilities:
Loans $ 321,205 $ -
Deposits 637,340 -
Deferred fees 300,937 250,385
FHLB stock 17,821 -
Unrealized gain on securities
available for sale 152,679 -
-------------- -------------
Total deferred tax liability 1,429,982 250,385
-------------- -------------
Net deferred tax asset (liability) $ (385,473) $ 342,651
============== ==============
The Bank had a net operating loss carryforward for income tax purposes of
$1,318,020 as of December 31, 1996. The Bank recorded a deferred tax asset of
$448,127 for the benefit of the loss carryforwards. At December 31, 1997, all
net operating loss carryforwards have been fully utilized for both financial
statement and income tax return purposes.
(Notes continued on next page)
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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 long-term
non-cancelable lease agreements.
Lease
Payments
------------
1998 $ 844,485
1999 837,640
2000 751,285
2001 660,731
2002 613,863
Thereafter 1,898,821
-------------
$ 5,606,825
=============
Total lease expense was $392,222 and $278,656 for 1997 and 1996,
respectively.
The Bank is a defendant in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the financial position of the
Bank.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Bank has loan and deposit transactions with its officers and
directors, and with companies in which the officers and directors have a
significant financial interest. A summary of related party loan activity during
1996 is as follows:
Balance, December 31, 1996 $ 1,745,765
Acquired through business combination 653,705
Originations - 1997 -
Repayments - 1997 (790,089)
-----------------
Balance, December 31, 1997 $ 1,609,381
=================
In the opinion of Management, such loans are made in the ordinary course
of business at normal credit terms, including interest rate and collateral
requirements and do not represent more than normal credit risk.
There were no commitments to extend credit and letters of credit to
related parties at December 31, 1997.
(Notes continued on next page)
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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, 1997. 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.
Variable Rate Fixed Rate
Commitments Commitments
--------------- ---------------
December 31, 1997
Loan Commitments $ 53,810,327 $ 6,820,324
Standby letters of credit and guarantees written $ 2,946,393 $ -
December 31, 1996
Loan Commitments $ 29,373,641 $ 3,572,964
Standby letters of credit and guarantees written $ 864,135 $ -
All of the guarantees outstanding at December 31, 1997 expire at various
dates between 1998 and 2001. Interest rates on fixed-rate commitments range from
7.5% to 12% as of December 31, 1997.
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).
(Notes continued on next page)
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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.
The major concentrations of credit risk for the Bank arise by customer loan type
in relation to loans and credit commitments, as shown in the following table. A
geographic concentration arises because the Bank operates primarily in
southeastern Virginia.
Installment
Residential Commercial Small and
Property Property Business Consumer Total
------------- ------------- -------------- --------------- --------------
Loans and
receivables $ 87,041,869 $ 9,015,703 $ 50,712,937 $ 3,819,368 $ 150,589,877
Credit
commitments 45,386,958 3,289,205 11,479,993 474,495 60,630,651
-------------- ------------- -------------- ------------ ------------
$ 132,427,827 $ 12,304,908 $ 62,192,930 $ 4,293,863 $ 211,220,528
=============== ============== ============== ============ =============
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 Bank is 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 Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, 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 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 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, 1997, the Bank
meets all capital adequacy requirements to which it is subject.
(Notes continued on next page)
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NOTE 15 - REGULATORY MATTERS (Continued)
As of September 30, 1996, the most recent notification from the Federal
Reserve Bank of Richmond categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk- based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------ ----- ------ -----
As of December 31, 1997:
Total Capital
(to Risk-Weighted Assets) $ 17,298,000 10.93% $ 12,657,680 > 8% $ 15,822,100 > 10%
- -
Tier I Capital
(to Risk-Weighted Assets) $ 15,324,000 9.69% $ 6,328,840 > 4% $ 9,493,260 > 6%
- -
Tier I Capital
(to Average Assets) $ 15,324,000 9.61% $ 6,340,520 > 4% $ 7,925,650 > 5%
- -
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------ ----- ------ -----
As of December 31, 1996:
Total Capital
(to Risk-Weighted Assets) $ 9,692,000 11.45% $ 6,770,480 > 8% $ 8,463,100 > 10%
- -
Tier I Capital
(to Risk-Weighted Assets) $ 8,652,000 10.22% $ 3,385,240 > 4% $ 5,077,860 > 6%
- -
Tier I Capital
(to Average Assets) $ 8,652,000 8.11% $ 4,269,800 > 4% $ 5,337,250 > 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, 1997 and 1996. FASB Statement
No. 107, Disclosures about Fair Value of Financial Instruments, defines the fair
value of a financial instruments as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. The carrying amounts in the table are included in
the balance sheet under the indicated captions.
(Notes continued on next page)
- 22 -
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
1997 1996
------------------------------ ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ------------ ---------------- -----------
(Dollars in thousands) (Dollars in thousands)
Financial Assets:
Cash and cash equivalents $ 13,211 $ 13,211 $ 3,133 $ 3,133
Deposits in other banks 1,000 1,000 1,000 1,000
Loans (net) 148,017 151,316 80,934 82,360
Investment securities 15,174 15,148 16,892 16,892
Funds advanced in settlement of
mortgage loans 23,744 23,744 11,035 11,035
Accrued interest receivable 1,562 1,562 762 762
Financial Liabilities:
Deposit liabilities 169,508 169,821 99,178 99,448
Short-term borrowings 13,650 13,650 7,236 7,236
Long-term borrowings 7,300 7,016 - -
Accrued interest payable 609 609 516 516
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 and 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.
(Notes continued on next page)
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NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts of accrued interest receivable and payable, and
certain other assets approximate fair value.
It is not practicable to separately estimate the fair values for
off-balance-sheet credit commitments, including standby letters of credit and
guarantees written, due to the lack of cost effective, reliable measurement
methods for these instruments.
NOTE 17 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations.
1997 1996
----------------------------------
Net income (numerator, basic and diluted) $ 1,821,162 1,466,185
Weighted average shares outstanding (denominator) 989,442 926,825
----------------------------------
Earnings per common share-basic $ 1.84 1.58
==================================
Effect of dilutive securities:
Weighted average shares outstanding 989,442 926,825
Effect of stock options 102,297 40,712
----------------------------------
Diluted average shares outstanding (denominator) 1,092,739 967,537
-----------------------------------
Earnings per common share - assuming dilution $ 1.67 $ 1.52
===================================
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.
(Notes continued on next page)
- 24 -
NOTE 18 - BUSINESS COMBINATION (Continued)
The following unaudited pro forma financial information for the years
ended December 31, 1997 and 1996 is presented for informational purposes only.
This information assumes the business combination was consummated on January 1,
of each year 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
Years Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Total interest income $ 16,904 $ 14,477
Net interest income $ 7,554 $ 5,888
Net income $ 1,607 $ 1,633
Basic earnings per common share $ 1.31 $ 1.38
Diluted earnings per share $ 1.21 $ 1.33
NOTE 19 - SUBSEQUENT EVENT
On March 16, 1998, the Bank declared a quarterly dividend of $.12 per
share to be paid to shareholders of record on March 31, 1998.
* * * * *
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