U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
Commission File Number: 000-24561
RESOURCE BANKSHARES CORPORATION
(Exact name of Registrant as specified in its charter)
Virginia 54-1904386
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3720 Virginia Beach Blvd., Va. Beach, VA.23452
(Address of principal executive offices) (Zip Code)
(757) 463-2265
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No ___
At June 30, 1999, 2,543,190 shares of Resource Bankshares Corporation's common
stock, $1.50 par value, were outstanding.
RESOURCE BANKSHARES CORPORATION
FORM 10-Q
JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 3
Consolidated Statements of Income for the periods ended
June 30, 1999 and 1998 4
Consolidated Statements of Stockholder's Equity for the period
ended June 30, 1999 5
Consolidated Statements of Cash Flows for the periods ended
June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RESOURCE BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30 December 31
1999 1998
(Dollars in Thousands)
ASSETS
Cash and due from banks $4,579 $4,325
Interest bearing deposits 4,415 3,357
Federal funds sold - 800
Funds advanced in settlement of mortgage loans 21,362 21,052
Securities available for sale 7,063 8,619
Securities held to maturity 15,643 1,224
Loans, net of unearned income:
Commercial 77,072 68,569
Real estate - construction 51,532 44,607
Commercial real estate 59,830 42,482
Residential real estate 29,554 28,702
Installment and consumer loans 4,531 4,162
-------- --------
TOTAL LOANS 222,519 188,522
Allowance for loan losses (2,401) (2,500)
-------- --------
NET LOANS 220,118 186,022
Other real estate owned 393 647
Premises and equipment 3,951 3,281
Other assets 3,710 2,531
Accrued interest 1,877 1,602
-------- --------
$283,111 $233,460
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $18,446 $15,783
Interest bearing 220,382 190,436
-------- --------
TOTAL DEPOSITS 238,828 206,219
Federal funds purchased 6,600
-
FHLB advances 7,300 7,300
Other liabilities 1,653 1,500
Accrued interest 933 652
Capital debt securities 9,200
-
-------- --------
TOTAL LIABILITIES 264,514 215,671
STOCKHOLDERS' EQUITY
Common stock, par value $1.50 a share
Shares authorized: 6,666,666
Shares issued and outstanding:
1999 - 2,543,190; 1998 2,477,124 3,815 3,716
Additional paid-in capital 10,749 10,702
Retained earnings 4,184 3,310
Accumulated other comprehensive income (151) 61
-------- --------
18,597 17,789
-------- --------
$283,111 $233,460
======== ========
See notes to consolidated financial statements.
3
RESOURCE BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
(Dollars in Thousands) (Dollars in Thousands)
Interest income:
Interest and fees on loans $4,209 $3,758 $8,216 $7,305
Interest on investment securities 383 299 587 605
Interest on funds advanced 425 1,334 747 2,106
Interest on federal funds sold 102 20 269 26
---------------- --------------- -------------- -------------
Total interest income 5,119 5,411 9,819 10,042
---------------- --------------- -------------- -------------
Interest expense:
Interest on deposits 2,603 2,740 5,103 5,057
Interest on borrowings 138 466 240 729
Interest on capital debt securities 215 - 267 -
---------------- --------------- -------------- -------------
Total interest expense 2,956 3,206 5,610 5,786
---------------- --------------- -------------- -------------
Net interest income 2,163 2,205 4,209 4,256
Provision for loan losses - - - 125
---------------- --------------- -------------- -------------
Net interest income after
provision for loan losses 2,163 2,205 4,209 4,131
---------------- --------------- -------------- -------------
Noninterest income:
Mortgage banking income 1,716 2,193 3,119 4,297
Service charges 297 182 509 340
Gain on sale of loans and other real estate 120 - 272 2
---------------- --------------- -------------- -------------
2,133 2,375 3,900 4,639
---------------- --------------- -------------- -------------
Noninterest expense:
Salaries and employee benefits 1,856 1,945 3,219 3,806
Occupancy expenses 285 257 571 529
Depreciation and equipment maintenance 190 200 354 362
Stationery and supplies 106 90 183 164
Marketing and business development 126 95 202 171
Professional fees 47 43 82 75
Outside computer services 151 155 249 304
Provision for funds advanced - 133 - 259
FDIC insurance (2) 14 27 24
Expenses associated with other real estate 4 3 14 3
Other 583 484 1,102 770
---------------- --------------- -------------- -------------
3,346 3,419 6,003 6,467
---------------- --------------- -------------- -------------
Income before income tax 950 1,161 2,106 2,303
Income tax 329 406 729 806
---------------- --------------- -------------- -------------
Net income $621 $755 $1,377 $1,497
================ =============== ============== =============
Cash dividend declared per common share $0.10 $0.06 $0.10 $0.06
================ =============== ============== =============
Basic earnings per common share (Note 5) $0.24 $0.31 $0.55 $0.61
================ =============== ============== =============
Diluted earnings per common share (Note 5) $0.22 $0.28 $0.50 $0.55
================ =============== ============== =============
See notes to consolidated financial statements.
4
RESOURCE BANKSHARES CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Six Months Ended June 30, 1999 Accumulated
Other
Common Stock Additional Retained Comprehensive
------------------ Paid-in Earnings Income
Shares Amount Capital (Deficit) (Loss) Total
------ ------ ------- --------- ------------- -------
(DOLLARS IN THOUSANDS)
Balance, December 31, 1998 2,477,124 $3,716 $10,702 $3,310 $61 $17,789
Comprehensive income:
Net income - - - 1,377 - 1,377
Changes in unrealized
appreciation (depreciation)
on securities available for
sale, net of reclassification
adjustment and tax effect - - - (212) (212)
------
Total comprehensive income 1,165
Proceeds from exercise of stock
options 27,066 40 103 143
Proceeds from exercise of
warrants 53,823 81 231 312
Reacquisition of common stock (14,823) (22) (287) (309)
Cash dividend declared
$ .10 per share - - - (503) (503)
--------------------------------------------------------------------------------------------
Balance, June 30, 1999 2,543,190 $3,815 $10,749 $4,184 ($151) $18,597
============================================================================================
See notes to consolidated financial statements.
5
RESOURCE BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June 30, 1999 June 30, 1998
(Dollars in thousands)
Operating activities
Net income $1,377 $1,497
Adjustments to reconcile to net cash
used by operating activities:
Provision for losses on loans and other real estate owned - 125
Depreciation and amortization 165 151
Amortization of investment securities premiums, net of discounts (28) 44
Gain on sale of loans or other real estate owned (272) (2)
Loss on premises and equipment - 7
Deferred loan origination fees, net of costs 438 (70)
Changes in:
Funds advanced in settlement of mortgage loans (309) (18,360)
Interest receivable (275) (72)
Interest payable 281 134
Other assets (696) 72
Other liabilities 153 1,104
------- -------
Net cash used operating activities 834 (15,370)
Investing activities:
Proceeds from sale of real estate owned, net of costs 375 -
Proceeds from sales and maturities of available-for-sale securities 2,508 3,358
Proceeds from maturities of held-to-maturity securities 228 705
Purchases of held-to-maturity securities (14,760) -
Purchases of available-for-sale securities (1,043) (1,397)
Loan originations, net of principal repayments (34,383) (20,900)
Purchases of premises, equipment and other assets (910) (238)
------- ------
Net cash used investing activities (47,985) (18,472)
Financing activities:
Proceeds from exercise of stock options 456 -
Payments to reacquire common stock (309) -
Cash dividends declared (504) (294)
Net proceeds (repayments) in FHLB advances 6,600 (5,450)
Net proceeds from issuance of capital debt securities 8,812 -
Net increase in demand deposits,
NOW accounts and savings accounts 4,970 4,352
Net increase in certificates of deposit 27,639 43,105
------- ------
Net cash provided by financing activities 47,664 41,713
Increase in cash and cash equivalents 513 7,871
Cash and cash equivalents at beginning of period 8,481 13,210
------ --------
Cash and cash equivalents at end of period $8,994 $21,081
======= ========
Supplemental schedules and disclosures of cash flow information:
Cash paid for:
Interest on deposits and other borrowings $5,329 $5,653
======= ======
Schedule of noncash investment activities:
Foreclosed real estate ($375) ($509)
======= =======
See notes to consolidated financial statements.
6
RESOURCE BANKSHARES CORPORATION
Notes to Consolidated Financial Statements
June 30, 1999
(UNAUDITED)
(Dollars in thousands, except per share data)
Organization and Summary of Significant Accounting Policies
(1) GENERAL
Resource Bankshares Corporation, a Virginia Corporation (the
"Company"), was incorporated under the laws of the Commonwealth of Virginia on
February 4, 1998, primarily to serve as a holding company for Resource Bank (the
"Bank").
(2) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing deposits with banks, and federal funds
sold.
(3) SECURITIES
Effective April 1, 1999 the Company adopted early election of Financial
Accounting Standards Board Statement No. 133, "Accounting for Derivative
Instruments and Hedging Transactions". Pursuant to the provisions of this
Statement, which allows for a reassessment of intent with respect to the
investment portfolio, management has elected to transfer securities with a fair
value of $11,255 at the time of transfer (original cost - $11,357) from
available-for-sale classification to the held-to-maturity classification as of
April 1, 1999. The amortized costs, gross unrealized gains, gross unrealized
losses, and fair values for securities at June 30, 1999, are shown in the
following table.
Gross Gross
AVAILABLE-FOR-SALE: Amortized Costs Unrealized Gains Unrealized Losses Fair Values
-------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies $5,327 $ -- $56 $5,271
Corporate Securities 427 -- 45 382
Other Securities 1,444 -- 34 1,410
-------------------------------------------------------------------------------------------------------------------
TOTALS $7,198 $-- $135 $7,063
-------------------------------------------------------------------------------------------------------------------
Gross Gross
HELD-TO-MATURITY: Amortized Costs Unrealized Gains Unrealized Losses Fair Values
-------------------------------------------------------------------------------------------------------------------
U.S. Government and agency
securities $244 $6 $1 $249
Municipal securities 746 10 -- 756
Corporate Securities 14,563 9 471 14,191
-------------------------------------------------------------------------------------------------------------------
TOTALS $15,643 $25 $472 $15,196
-------------------------------------------------------------------------------------------------------------------
7
(4) ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
Balance as of January 1, 1999 $2,500
Provision for loan losses --
Loans charged off (101)
Recoveries 2
------
Balance at June 30, 1999 $2,401
======
(5) NET INCOME PER SHARE
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised, converted
into common stock or resulted in the issuance of common stock that then shares
in the earnings of the entity. The average number of basic shares outstanding
for the six months ended June 30, 1999, and 1998 were 2,507,857 and 2,453,380,
respectively. The diluted average number of shares for the six months ended June
30, 1999 and 1998 were 2,729,199 and 2,719,110, respectively.
(6) COMPREHENSIVE INCOME
Comprehensive income for the six months ended June 30, 1999 consists only
of unrealized gains or losses on available for sale securities as illustrated
below:
Accumulated other
comprehensive income
--------------------
Beginning balance $ 61
Current period unrealized loss (212)
-----
Ending balance $ (151)
=======
No reclassification adjustment was necessary as no realized gains or losses
were included in net income for the period.
(7) SEGMENT REPORTING
The Company has one reportable segment, its mortgage banking operations.
This segment originates residential loans and subsequently sells them to
investors. The commercial banking and other banking operations provide a broad
range of lending and deposit services to individual and commercial customers,
including such products as construction loans, and other business financing
arrangements.
The Company's reportable segment is a strategic business unit that offers
difference products and services. It is managed separately because the segment
appeals to different markets and, accordingly, requires different technology and
marketing strategies.
The segment's most significant revenue and expense is non-interest income
and non-interest expense, respectively. The segments are reported below for the
periods ended June 30, 1999 and June 30, 1998.
8
SELECTED FINANCIAL INFORMATION
Commercial Mortgage
Banking Banking
and Other Operations Total
--------- ---------- -----
(Dollars in thousands)
Six Months Ended June 30, 1999
Net interest income after provision
for loan losses $4,209 $ - $4,209
Noninterest income 790 3,110 3,900
Noninterest expense (2,602) (3,401) (6,003)
------- ------- -------
Net income before income taxes $2,397 ($291) $2,106
======= ====== ======
Six Months Ended June 30, 1998
Net interest income after provision
for loan losses $4,131 $ - $4,131
Noninterest income 351 4,288 4,639
Noninterest expense (2,783) (3,684) (6,467)
------- ------- -------
Net income before income taxes $1,699 $604 $2,303
======= ======= ======
SEGMENT ASSETS
Commercial
Banking Mortgage Banking
and Other Operations Total
--------- ---------- -----
(Dollars in thousands)
June 30, 1999 $281,953 $1,158 $283,111
June 30, 1998 $252,084 $1,453 $253,537
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, the following discussion contains
forward looking statements that are subject to risks and uncertainties that
could cause the Company's actual results to differ materially from those
anticipated. These forward looking statements include, but are not limited to,
the effect of increasing interest rates on the Company's profitability and the
adequacy of the Company's allowance for future loan losses. Several factors,
including the local and national economy, the demand for residential mortgage
loans and the adequacy of the Company's Year 2000 compliance, may adversely
affect the Company's ability to achieve the expected results. Readers are
cautioned not to place undue reliance on these forward looking statements, which
reflect management's analysis only as of the date of this report.
Total assets at June 30, 1999 were $283,111, up 21.3% from $233,460 at
December 31, 1998, primarily reflecting growth in loans. The Company's loan
portfolio grew by $33,997 or 18% in the first six months of 1999. The principal
components of the Company's assets at the end of the period were $22,706 in
securities, $8,994 in cash and cash equivalents, $21,362 in funds advanced in
settlement of mortgage loans and $220,118 in net loans. The Company's lending
activities are a principal source of income.
Total liabilities at June 30, 1999 were $264,514, up 22.6% from $215,671 at
December 31, 1998, with the increase almost entirely represented by a $32,609
(15.8%) growth in deposits. Non-interest bearing demand deposits increased
$2,663 or 16.9%, while interest bearing deposits increased by $29,946 or 15.7%.
The Company's deposits are provided by individuals and businesses located within
the communities served as well as the national market. In addition, Federal
funds purchased increased from $0 at December 31, 1998 to $6,600 at June 30,
1999.
The Company raised $9,200 of additional capital in the first quarter of
1999 by issuing 368,000 Trust Preferred Securities at a price of $25.00 per
Security. The Trust Preferred Securities feature a 9.25% coupon. The Company, in
turn, purchased $5,000 of non-cumulative 9.25% Preferred Stock issued by the
Bank. This Preferred Stock qualifies as Tier 1 capital for the Bank for
regulatory purposes. Management believes that this additional Tier 1 capital
provides the Bank with an increased loans to one borrower limitation, and the
ability to continue to grow its balance sheet while maintaining its well
capitalized status. The Preferred Stock 9.25% coupon matches the coupon of the
Trust Preferred Securities.
The funds generated by the Trust Preferred Securities offering were
invested in marketable securities and will also be used by the Company in its
stock repurchase program. The marketable securities are categorized as
held-to-maturity. The Company's stock repurchase program will be used to offset
the otherwise dilutive effects of stock options granted to the Company's
management as employment recruitment and retention perquisites.
Total shareholders' equity at June 30, 1999 was $18,597, compared to
$17,789 at December 31, 1998. The Company had net income of $1,377 for six
months ended June 30, 1999 compared with net income of $1,497 for the comparable
period in 1998, a decline of 8.0%.
On August 4, 1999, the Company declared a significant borrower in
default. While the total loss is not currently determinable, the Company
estimates that it could incur a maximum after tax loss of approximately $2,300
as a result of this default. The Company is not currently able to estimate the
size of the loss due to uncertainties regarding potential insurance claims and
10
the liquidation value of collateral that secures the loans, both of which could
potentially mitigate the loss. There can be no assurance, however, that the
Company will be able to mitigate the loss through insurance claims or the
liquidation of collateral. When determinable, the loss will be a one time charge
to earnings and/or absorbed in the Bank's current allowance for loan losses.
Management believes that this loss, while significant, is isolated to this
particular borrower, and will not negatively impact the Company's ability to
conduct its business on a going forward basis.
Profitability as measured by the Company's return on average assets
(ROA) was 1.1% for the six months ended June 30, 1999, down .1% from the same
period of 1998. A key indicator of performance, the return on average equity
(ROE) was 15.2% and 19.3% for the six month periods ended June 30, 1999 and
1998, respectively.
Net interest income represents a principal source of earnings for the
Company. The first component of the Company's net interest income is its loan
portfolio. Making sound loans that will increase the Company's net interest
margin is the first priority of management. The second component is gathering
core deposits to match and fund the loan production as cost efficiently as
possible. The Company also uses electronic funding of deposits and Federal Home
Loan Bank ("FHLB") advances to fund loan growth either for asset and liability
management purposes or for a less expensive source of funds.
Net interest income, before provision for loan losses, declined
slightly by $47 (1%) to $4,209 for the six months ended June 30, 1999 versus
$4,256 for the same period in 1998.
11
AVERAGE BALANCES, INTEREST INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
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 ncome;
(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. Since quarter-end balances can be distorted by
one-day fluctuations, an analysis of changes in the quarterly averages is
provided to give a better indication of balance sheet trends.
2nd Quarter 1st Quarter 4th Quarter
1999 1999 1998
Average Yield/ Average Yield/ Average
Balance (1) Interest Rate (2) Balance (1) Interest Rate (2) Balance (1)
---------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Securities $ 22,133 $ 383 6.92% $ 15,699 $ 205 5.22% $ 10,385
Loans (3) 206,625 4,209 8.15% 188,686 4,007 8.49% 182,720
Interest bearing deposits 8,117 102 5.03% 12,893 166 5.15% 5,725
Other interest-earning assets (4) 17,929 425 9.48% 14,869 322 8.66% 25,426
-------- ------ ----- --------- ----- ------ --------
Total interest earning assets 254,804 5,119 8.04% 232,147 4,700 8.10% 224,256
Noninterest earning assets:
Cash and due from banks 3,902 3,989 3,880
Premises and equipment 3,773 3,296 3,273
Other assets 4,988 4,946 4,646
Less: Allowance for loan losses (2,407) (2,442) (2,522)
-------- --------- --------
Total noninterest earning assets 10,256 9,789 9,277
-------- --------- --------
Total assets $265,060 $ 241,936 $233,533
======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest bearing deposits:
Demand/Money Market Accounts $ 12,421 $ 97 3.12% $ 13,585 $ 108 3.18% $ 11,463
Savings 23,263 266 4.57% 22,327 243 4.35% 20,245
Certificates of deposit 171,271 2,240 5.23% 160,154 2,149 5.37% 154,151
-------- ------ ------ --------- ------ ------ --------
Total interest bearing deposits 206,955 2,603 5.03% 196,066 2,500 5.10% 185,859
FHLB advances and other
borrowings (5) 10,035 138 5.50% 7,300 102 5.59% 10,978
Capital debt securities 9,200 215 9.35% 2,421 52 8.59% -
-------- ------ ------ --------- ------ ------ --------
Total interest-bearing
liabilities 226,190 2,956 5.23% 205,787 2,654 5.16% 196,837
-------- ------ --------- ------ --------
Noninterest-bearing liabilities:
Demand deposits 18,314 16,154 15,928
Other liabilities 2,099 2,130 3,352
-------- --------- --------
Total noninterest earning
liabilities 20,413 18,284 19,280
-------- --------- --------
Stockholders' equity 18,457 17,865 17,416
-------- --------- --------
Total liabilities and stockholder's
equity $265,060 $241,936 $233,533
======== ========= ========
Net interest income/interest
rate spread (6) $2,163 2.81% $2,046 2.94%
====== ====== ====== ======
Net interest position (7) /
Net yield on interest-earning
assets (8) $28,614 0.85% $ 26,360 0.88% $ 27,419
======== ====== ======== ====== ========
Ratio of average interest-earning assets
to average interest-bearing liabilities (9) 112.65% 112.81%
====== ======
4th Quarter
1998
Yield/
Interest Rate (2)
-------------------
ASSETS
Interest-earning assets:
Securities $ 149 5.74%
Loans (3) 4,084 8.94%
Interest bearing deposits 77 5.38%
Other interest-earning assets (4) 434 6.83%
----- -----
Total interest earning assets 4,744 8.46%
Noninterest earning assets:
Cash and due from banks
Premises and equipment
Other assets
Less: Allowance for loan losses
Total noninterest earning assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest bearing deposits:
Demand/Money Market Accounts $ 97 3.38%
Savings 234 4.62%
Certificates of deposit 2,189 5.68%
------ -----
Total interest bearing deposits 2,520 5.42%
FHLB advances and other
borrowings (5) 156 5.68%
Capital debt securities - -
------ -----
Total interest-bearing
liabilities 2,676 5.44%
------ -----
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Total noninterest earning
liabilities
Stockholders' equity
Total liabilities and stockholder's
equity
Net interest income/interest
rate spread (6) $2,068 3.02%
====== =====
Net interest position (7) /
Net yield on interest-earning
assets (8) 0.92%
=====
Ratio of average interest-earning assets
to average interest-bearing liabilities (9) 113.93%
=======
(1) Average balances are computed on daily balances.
(2) Yield and rate percentages are all computed through the annualization of
interest income and expenses versus the average balances of their
respective accounts.
(3) Non-accrual loans are included in the average loan balances, and income
on such loans is recongized on a cash basis.
(4) Consists of funds advanced in settlement on loans.
(5) Consists of FHLB advances and federal funds purchased.
(6) Represents the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(7) Equals total interest-earning assets minus total interest-bearing
liabilities.
(8) Equals net interest income divided by average interest-earning assets.
(9) Equals average interest-earning assets divided by average interest-bearing
liabilities.
Non-interest income declined from $4,639 for the six months ended June 30,
1998 to $3,900 for the same period in 1999. This decrease was primarily
attributable to reduced loan refinancing activity in the Company's mortgage
banking operations. Due to recent increases in market interest rates, the
Company is likely to continue to experience significant reductions in mortgage
loan refinancings in future periods, which in turn will continue to adversely
impact the Company's noninterest income. These interest rate increases, or any
further increases in the future, will also adversely impact the Company's
ability to generate noninterest income from new mortgage loan originations
because higher interest rates tend to reduce the overall volume of the home
mortgage market. For the six months ended June 30, 1999, mortgage banking income
declined by 27.4% or $1,178 to $3,119 versus the same period of 1998. Mortgage
banking continues to be a key element of the Company's operations. Because of
the uncertainty of future loan origination volume and the future level of
interest rates, the Company may continue to experience declines in the mortgage
banking income in future periods. Other non-interest income, consisting mostly
of service charges, and a gain on sale of loans in early 1999, increased by $439
to $781 for the quarter ending June 30, 1999 compared to the same period in
1998.
For the six months ended June 30, 1999, the Company's non-interest expense
totaled $6,003 or 7.2% lower than the same period in 1998. This decrease in
expenses was also primarily due to reduced mortgage banking activity. The
largest component of non-interest expense, salaries and employee benefits, which
represents 53.6% of total non-interest expense, decreased 15.4% to $587 for the
six months ended June 30, 1999 over the same period in 1998. Occupancy expense
increased by 7.9% to $571, depreciation and equipment maintenance decreased by
2.2% to $354, marketing and business development increased 18.1% to $202, and
outside computer services decreased by 18.1% to $249 for the six months ended
June 30, 1999 over the same period in 1998 (due to one-time expenses incurred in
1998 in connection with a system conversion).
In establishing the allowance for loan losses, management considers a
number of factors, including loan asset quality, related collateral and economic
conditions prevailing during the loan's repayment. In its loan policies,
management emphasizes the borrower's ability to service the debt, the borrower's
general creditworthiness and the quality of collateral. Loans are generally
placed in nonaccrual status when the collection of principal and interest is 90
days or more past due, unless the obligation is both well-secured and in the
process of collection. The allowance for loan losses as a percentage of
quarter-end loans at June 30 was 1.1% and 1.7% for 1999 and 1998, respectively.
The provisions for loan losses were $0 and $125 for the six months ended June
30, 1999 and 1998, respectively.
While the Company believes it has sufficient allowance for its existing
portfolio, there can be no assurances that an additional allowance for losses on
existing loans may not be necessary in the future, particularly if the economy
worsens. The loan losses expected in the third quarter, as previously discussed,
will be reflected in the Company's operating results in the third quarter of
1999.
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NON PERFORMING ASSETS
The following table presents the Company's non performing assets for the periods
set forth below.
June 30 December 31
1999 1998
----- ----
(Dollars in thousands)
Non accrual loans $324 $533
Other real estate 393 647
Loans 90 days or more past due and still
accruing interest 653 412
------- -------
Total non performing assets $1,280 $1,592
======== ========
Total assets $283,111 $233,460
======== ========
Total non performing assets to total assets 0.45% 0.68%
======== ========
14
SUMMARY OF LOAN LOSS EXPERIENCE
The following table presents the Company's loan loss experience and selected
loan loss ratios for the six months ended June 30, 1999 and 1998. In addition to
the historical loan loss experience outlined below, the Company expects to
provide for a significant loan loss in the third quarter of 1999 as discussed
previously.
Six Months Ended June 30,
1999 1998
(Dollars in thousands)
Balance of allowance for loan losses at beginning of year $2,500 $2,573
Loans charged-off:
Commercial (11) -
Installment (2) (5)
Real Estate (84) 141
Credit Cards and Other Consumer (4) (9)
---------- --------
Total loans charged-off (101) (155)
---------- --------
Recoveries of loans previously charged-off:
Commercial 1 -
Installment 1 3
Real Estate - 35
Credit Cards and Other Consumer - 19
---------- ---------
Total recoveries 2 57
---------- ---------
Net loans charged-off (99) (98)
Additions to allowance charged to expense
- 125
---------- -----------
Balance at end of quarter $ 2,401 $ 2,600
========== ===========
Average loans $206,625 $159,689
Loans at end of period $222,519 $171,662
Selected Loan Loss Ratios:
Net charge-off during the period to average loans 0.05% 0.06%
Provision for loan losses to average loans 0.00% 0.08%
Provision for loan losses to net charge-offs during the period 0% 128%
Allowance for loan losses to loans at end of period 1.08% 1.51%
Non-performing assets at end of period $1,280 $2,075
Non-performing assets to total loans at end of period 0.58% 1.21%
Allowance for loan losses to non-performing assets
at end of period 188% 125%
-15-
Interest Rate Sensitivity
Management evaluates interest sensitivity through the use of an
asset/liability management reporting gap model on a quarterly basis and then
formulates strategies regarding asset generation and pricing, funding sources
and pricing, and off-balance sheet commitments in order to decrease sensitivity
risk. These strategies are based on management's outlook regarding interest rate
movements, the state of the regional and national economies and other financial
and business risk factors. In addition, the Company establishes prices for
deposits and loans based on local market conditions and manages its securities
portfolio under policies that take interest risk into account.
Liquidity represents the institution's ability to meet present and future
financial obligations. Liquid assets include cash, interest bearing deposits
with banks, money market accounts, federal funds sold, investments and loans
maturing within one year. The Company's funding requirements are supplied from a
range of traditional sources, including various types of demand deposits, money
market accounts, certificates of deposit and short-term borrowings. Federal Home
Loan Bank ("FHLB") advances are utilized as funding sources by the Company. At
June 30, 1999, there were $7,300 in FHLB advances outstanding. The Company has a
warehouse line of credit collateralized by first mortgage loans amounting to
$50,000, which expires December 2, 1999. The Company has no reason to believe
this arrangement will not be renewed, although no assurance can be given in this
regard. The Company had $0 and $2,200 outstanding warehouse advances at June 30,
1999 and 1998, respectively. At June 30, 1998, $13,300 was outstanding in FHLB
advances outside of the warehouse line.
The Company also had purchased Federal Funds in the amount of $6,600 and $0
at June 30, 1999 and 1998, respectively. The Company has lines of credit with
other correspondent banks of $11,509 and $2,000.
Management seeks to ensure adequate liquidity to fund loans and meet the
Company's financial requirements and opportunities. To provide liquidity for
current, ongoing and unanticipated needs, the Company maintains short-term
interest bearing certificates of deposits, federal funds sold, and a portfolio
of debt securities. The Company also structures and monitors the flow of funds
from debt securities and from maturing loans. As securities are generally
purchased to provide a source of liquidity, most are classified as securities
available-for-sale when purchased. Unrealized holding gains and losses for
available-for-sale securities are excluded from earnings and reported as a net
amount in a separate component of stockholders' equity until realized.
The Company's financial position at June 30, 1999 reflects liquidity and
capital levels that management believes are currently adequate to fund
anticipated future business expansion. Capital ratios are in excess of required
regulatory minimums for a well capitalized institution. The assessment of
capital adequacy depends on a number of factors such as asset quality,
liquidity, earnings performance, and changing competitive conditions and
economic forces. The adequacy of the Company's capital is reviewed by management
on an ongoing basis. Management seeks to maintain a capital structure that will
assure an adequate level of capital to support anticipated asset growth and to
absorb potential losses.
-16-
The following table presents the amounts of the Company's interest
sensitive assets and liabilities that mature or reprice in the periods
indicated.
June 30, 1999
Maturing
--------------------------------------------------------------------------------
Within 4-12 1 - 5 Over Total
3 Months Months Years 5 Years
(Dollars in thousands)
Interest-Earning Assets:
Investment securities $4,818 $700 $1,546 $15,642 $22,706
Loans 124,843 22,723 47,624 27,329 222,519
Interest bearing deposits 4,415 - - - 4,415
Other interest-earning assets 21,362 - - - 21,362
------------- ----------- ------------ ---------- ----------
Total interest-earning assets 155,438 23,423 49,170 42,971 271,002
------------- ----------- ------------ ---------- ----------
Interest-Bearing Liabilities:
Deposits
Demand and savings (1) $34,893 - $ 34,893
Time deposits, $100,000 and over 2,282 8,497 789 - 11,568
Other time deposits 45,852 124,119 3,950 - 173,921
Other interest-bearing liabilities 6,600 2,000 5,300 - 13,900
Capital debt securities - - - 9,200 9,200
------------- ------------ ------------ ---------- ----------
Total interest-earning liabilities 54,734 134,616 44,932 9,200 243,482
------------- ------------ ------------ ---------- ----------
Period Gap $100,704 ($111,193) $4,238 $33,771 $ 27,520
------------- ------------ ------------ ---------- ----------
Cumulative Gap $100,704 ($10,489) ($6,251) $27,520
------------- ------------ ------------ ----------
Ratio cumulative gap total
interest-earning assets 37.16% -3.87% -2.31% 10.15%
(1) Management has determined that interest checking, money market and savings
accounts are not sensitive to changes in related market ratio and, therefore, we
have placed them in the 1-5 years category.
Regulatory capital adequacy standards are based on an established minimum
for Tier 1 Risk-Based Capital, Risk-Based Capital and the Tier 1 Leverage Ratio.
The following table summarizes regulatory capital ratios for the Company and the
Bank at June 30, 1999.
Resource Resource
Required Ratio Bankshares Bank
-------------- ---------- --------
Tier 1 risk-based 4.00% 10.43% 9.69%
Total risk- based 8.00% 12.66% 10.68%
Tier 1 leverage 4.00 to 5.00% 9.42% 8.92%
The Company and the Bank are in full compliance with all relevant
regulatory capital requirements.
The effect of changing prices on financial institutions is typically
different from other industries as the Company's assets and liabilities are
monetary in nature. Interest rates are significantly impacted by inflation, but
-17-
neither the timing nor the magnitude of the changes are directly related to
price level indices. Impacts of inflation on interest rates, loan demand and
deposits are reflected in the Company's financial statements. Management
believes that the mortgage banking operations provide somewhat of a natural
interest rate hedge, in that the Company is interest rate sensitive in the
six-month period. When interest rates decline, the Company's earnings will be
negatively impacted in the six-month period but the mortgage operation's volume
should increase. The reverse should occur in rising interest rate markets.
YEAR 2000 COMPLIANCE
The ability of the Company's computers, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a 2-digit year after 1999 is commonly referred to as the "Year 2000"
issue. The Year 2000 issue is the result of computer programs and equipment
which are dependent on "embedded chip technology" using two digits rather than
four to define the applicable year. Any of the Company's computer programs or
equipment that are date dependent may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, or a temporary inability to
process transactions, or otherwise engage in similar normal business activities.
The Company adopted a five phase plan of action developed by the Federal
Financial Institutions Examination Council ("FFIEC") to address Year 2000 issues
and created an in-house committee to manage the Y2K project. During phase one,
"awareness," the Company developed an overall strategy and timetable for the
completion of all Year 2000 requirements. Phase two, "assessment," involved
analyzing, prioritizing and putting all internal systems, both information
technology (IT) and non-IT systems, on track for Year 2000 compliance according
to the timetable established in the awareness phase. The Company has no
proprietary or in-house developed systems or software, so non-IT systems are
limited to infrastructure and communications. During the third phase,
"renovation," necessary upgrades or replacements were ordered for hardware and
software. In addition, each of the Company's vendors was contacted regarding
their Year 2000 progress.
The fourth phase, "validation,"included the evaluation of vendor testing
and live testing when possible. Since the Company has no legacy systems, most of
the testing was by proxy, where the vendor supplied testing scripts and results
and the Company evaluated both to determine that the testing was adequate and
that the results were as expected and satisfactory. The Company changed data
processors in late 1997 and is served by a Service Bureau which houses and
maintains all hardware, software and backups applicable to updating and
maintaining the Company's customer and financial records. Because this is the
area of greatest risk to the Company with regard to Year 2000 issues, this
arrangement meant the Company must carefully oversee the efforts of the vendor
to ensure Year 2000 compliance was complete and timely. The data processor has
renovated and tested its systems and has supplied a series of test scripts and
results for each application, as well as hardware, software and operating
systems. The Company's in-house committee has reviewed each phase of the data
processor's testing and documented the results, which were then reported to and
ratified by the Company's Board of Directors. The Company will continue testing
and validation throughout the remainder of 1999 to ensure the continuing
reliability of its systems. Phases one through four are complete.
The final phase, "implementation," will occur at the turn of the century
with the readiness to execute contingency plans if necessary. The Company's
Contingency Plan is complete and in the process of being tested by every work
group involved in doing the Company's business. Contingency plans include
alternatives for each critical system, which should allow business to continue
with little or no interruption past the turn of the century. These alternatives
are being subjected to the same process as the Company's primary service
providers. Additionally, the contingency plans include performing tasks manually
if necessary, until the appropriate applications are operational.
In addition to verifying its internal and vendor supplied systems, the
-18-
Company has provided compliance certification questionnaires to its customers in
order to determine their ability to be Year 2000 compliant. Each borrower is
assigned a credit risk rating based on the questionnaire and the Company's
knowledge of the borrower. If a customer does not respond to the questionnaire
or if its response does not provide the Company with adequate assurance that
such customer's failure to be Year 2000 compliant would not have a material
adverse effect on the Company, the Company is entitled to take steps to
terminate its relationship with the customer before December 31, 1999. Year 2000
compliance is a part of the review process for new loans, which maintains the
integrity of the Company's commercial loan portfolio on an ongoing basis. Each
month, the Company's Board of Directors receives a commercial loan portfolio
Year 2000 Credit Risk Analysis.
Costs to date directly attributable to the Year 2000 project have not been
substantial due to the fact that the change in data processors and the
acquisition of a bank in late 1997 required a complete upgrade of all desktop
computer systems and servers. Year 2000 compliance was an important part of all
purchases and management believes that any known issues were corrected. The Year
2000 progress of all data processing companies is being monitored by outside
auditors and regulators and the Company receives regular reports regarding the
progress. Costs to date total $75 thousand; however, testing by outside vendors
may exceed $100 thousand based on best estimates available to date. Management
anticipates that these funds will be financed internally.
Because the Company had a detailed Business Continuation Plan before the
Year 2000 plan began, various potential business interruptions and alternatives
were already documented which would permit a short term continuance as long as
the data processor preserves the ability to update records. Loss of the data
processor is the greatest risk to the Company. The Year 2000 progress of all
data processing companies is being monitored by outside auditors and regulators
and the Company receives regular reports regarding the progress. While a change
of data processors would be time consuming, the Company's contingency plans
include alternatives for each critical system, as well as plans to perform tasks
manually if necessary, until appropriate applications are operational.
The Company's Year 2000 readiness is subject to supervision by the Federal
Reserve System through examination for compliance with the guidance issued by
the FFIEC. Should the Company's readiness be found deficient , it could be
subject to informal enforcement actions such as written notification of
deficiencies to be remediated, to formal enforcement actions such as civil
penalties, temporary cease and desist orders requiring immediate corrective
actions, and the possible public release of any such cease and desist order.
If the Company and its customers, suppliers and vendors were not Year 2000
compliant by January 1, 2000, the most reasonably likely worst case scenario
would be a temporary shutdown of operations. Any such shutdown could have a
material adverse effect on the Company's results of operations, liquidity and
financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which the property of the Company is subject. The Company is party
to certain nonmaterial legal proceedings occurring in the normal course of
business.
-19-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Resource Bankshares Corporation held its 1999 Annual Meeting of
Shareholders on May 27, 1999. At the Annual Meeting, the following matters were
acted upon by shareholders.
1. Election of Directors. The following persons were elected as directors
of the company to serve a one year term, with the votes For and Withheld
indicated below:
DIRECTOR FOR WITHHELD
Alfred E. Abiouness 1,808,059 6,195
John B. Bernhardt 1,808,059 6,195
Thomas W. Hunt 1,808,059 6,195
Louis R. Jones 1,807,523 6,731
A. Russell Kirk 1,807,393 6,861
Lawrence N. Smith 1,808,059 6,195
Elizabeth A. Twohy 1,808,059 6,195
2. Approval of the Company's Amended and Restated 1996 Long-Term Incentive
Plan
FOR AGAINST ABSTAIN BROKER NON-VOTES
1,184,523 66,313 9,603 553,815
3. Ratification of the appointment of Goodman & Company, L.L.P. as the
Company's independent auditors for the year ending December 31, 1999.
FOR AGAINST ABSTAIN BROKER NON-VOTES
1,807,312 1,495 5,447 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The registrant includes herein the following exhibits.
EXHIBIT NO. DESCRIPTION
10.23 Employment Agreement dated January 1, 1999, by and between
Resource Bank and Harvard R.Birdsong, as amended.
10.24 Employment Agreement dated January 1, 1999, by and between
Resource Bank and Debra C.Dyckman, as amended.
-20-
10.25 Employment Agreement dated January 1, 1999, by and between
Resource Bank and Lawrence N.Smith, as amended.
10.26 Employment Agreement dated January 1, 1999, by and between
Resource Bank and Eleanor J. Whitehurst, as amended.
10.27 First Amendment to Employment Agreement dated January 1, 1999,
by and between Resource Bank and T.A. Grell, Jr.
27 Financial Data Schedule
-21-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the under-signed, thereunto
duly authorized.
RESOURCE BANKSHARES CORPORATION
/s/ Lawrence N. Smith
---------------------
Lawrence N. Smith
President & Chief Executive Officer
Date: August 16, 1999
/s/ Eleanor J. Whitehurst
-------------------------
Eleanor J. Whitehurst
Senior Vice President & Chief Financial Officer
Date: August 16, 1999
-22-