Item 1. Business - ------- --------
Resource Bankshares Corporation (the "Company"), a Virginia corporation, was established in 1998 and is headquartered in Virginia Beach, Virginia. The Company was capitalized as the result of a two for one share exchange with Resource Bank (the "Bank"), a Virginia state chartered bank. In the share exchange, the shareholders of the Bank exchanged each of their shares of Bank common stock for two shares of the Company's common stock, and the Bank became a wholly owned subsidiary of the Company. The Company conducts virtually all of its business through the Bank. In this Form 10-K, the term "Company" refers to Resource Bankshares Corporation and Resource Bank collectively, unless the context otherwise requires.
The Bank opened for business September 1, 1988. After four years of initial losses the Bank was recapitalized, and a new management team and new Board of Directors took control January 1, 1993. Headquartered in Virginia Beach, the Bank operates four full service banking offices - one each in Virginia Beach, Chesapeake, Newport News, and Herndon, Virginia. The Bank acquired two branches, Herndon and Reston in December 1997 when Eastern American Bank, FSB (Eastern American) merged with the Bank. The Reston branch was sold during the third quarter of 2000. All bank branches operate under the name Resource Bank. Prior to the acquisition, the Bank operated only one banking office in Virginia Beach. The branch location in Chesapeake, Virginia opened during the second quarter of 1999 and the Newport News, Virginia branch opened during the first quarter of 2000. The Bank also began offering online banking services, providing customers with the ability to conduct banking business via a personal computer or other secure browser-enabled device 24 hours per day through its Internet site, during the first quarter of 2000.
The Bank serves customers throughout Virginia, providing banking services primarily to individuals and businesses located in Hampton Roads in southeast Virginia, Fairfax County in northern Virginia and a loan production office in the greater Richmond metropolitan area. The Bank markets its services to consumers, small to medium sized businesses and professional people and emphasizes personal relationship banking. A full range of services is offered including checking and savings accounts, certificates of deposit and charge cards, as well as services typically associated with larger banks, such as sweep account capacity, automatic reconcilement, and corporate credit cards. The Bank is a Preferred Lender under the Small Business Administration (SBA) program in both the Richmond, Virginia and Washington, DC SBA districts and ranked number three in loan volume (32 loans totaling $5.1 million) in the Richmond district in fiscal year 2000.
The Bank's mortgage division originates residential one to four family unit mortgage loans and sells them to investors in the national secondary market. During 2000, the Bank originated and sold mortgage loans in excess of $326 million. The mortgage division originates loans from the four bank locations as well as from its mortgage offices in Virginia Beach, Richmond, Chesapeake, Newport News, Reston, Virginia and Bowie, MD. Additionally, the Bank originates loans throughout the southwestern United States through its wholesale operations, as well as through its participation in a limited liability company specializing in relocation services. Mortgage closing and shipping operations are conducted at the mortgage division office in Virginia Beach, Virginia.
During June 2000, the Bank purchased CW and Company of Virginia ("CW"), a title abstract and real estate closing agency. CW, which trades under the name "Real Estate Investment Protection Agency," operates as a wholly owned subsidiary of the Bank.
During August 2000, Resource Service Corporation, a wholly owned subsidiary of the Bank, entered into a joint venture with Financial Planners Mortgage Company, Inc. and formed a partnership titled Financial Planners Mortgage, LLP. The partnership participates in residential one to four family mortgage loan production.
The Bank purchased a commercial mortgage company during the first quarter of 2001. Atlantic Mortgage & Investment Company ("Atlantic Mortgage") was purchased from Progress Realty Advisors, Inc., a Pennsylvania corporation, and operates as a division of Resource Bank. Atlantic Mortgage specializes in commercial mortgage originations, placements and servicing primarily along the Atlantic coast, with offices in Richmond and Chesapeake, Virginia and Raleigh, North Carolina.
During the first quarter of 2001 the Bank also purchased First Jefferson Mortgage Corporation ("First Jefferson"), a Virginia based mortgage loan origination company. First Jefferson's business and operations have been integrated into Resource Mortgage, a division of Resource Bank. The purchase of First Jefferson added offices in Fort Lauderdale and Jacksonville, Florida and Roanoke, Virginia, as well as in the Hampton Roads and Richmond areas. First Jefferson closed over $250 million mortgage loans in 2000.
Average Balances, Interest Income and Expenses, and Average Yields and Rates
The following table sets forth average balances of total interest earning assets and total interest bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, stockholders' equity and the related income, expense and corresponding weighted-average yields and costs.
(1) Average balances are computed on daily balances and Management believes such balances are representative of the operations of the Company. (2) Yield and rate percentages are all computed through the annualization of interest income and expenses versus the average balance of their respective accounts. (3) Tax equivalent basis. The tax equivalent adjustment to net interest income was $377 thousand, $0 and $0 for the years ended December 31, 2000, 1999 and 1998, respectively. (4) Non-accrual loans are included in the average loan balances, and income on such loans is recognized on a cash basis. (5) Consists of funds advanced in settlement of loans. (6) Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities. (7) Net interest margin is net interest income, expressed as a percentage of average earning assets.
As the largest component of income, net interest income represents the amount that interest and fees earned on loans and investments exceeds the interest costs of funds used to support these earning assets. Net interest income is determined by the relative levels, rates and mix of earning assets and interest-bearing liabilities.
For the year ended December 31, 2000, net interest income was $9.44 million, an increase of approximately $492 thousand, or 5.5% over $8.95 million for the same period in 1999. Average interest earning assets increased $74.4 million from 1999 to 2000 while average interest bearing liabilities increased $75.3 million. The yield on average interest earning assets for the year ended December 31, 2000 was 8.57% compared with 8.18% for the comparable 1999 period. The 2000 yield on loans was 8.67% compared to 8.31% in 1999. The cost on average interest bearing liabilities increased eighty two basis points during 2000 to 6.09%, compared to 5.27% during 1999.
Net interest income for the year-ended December 31, 1999 increased 6.4%, or $536 thousand over 1998. Average interest earning assets increased $29.0 million from 1998 to 1999 while average interest bearing liabilities increased $28.8 million. The yield on average interest earning assets for the year ended December 31, 1999 was 8.18% compared with 8.49% for the comparable 1998 period. The 1999 yield on loans was 8.31%, compared to 9.12% in 1998. The cost on average interest bearing liabilities decreased twenty basis points during 1999 to 5.27%, compared to 5.47% during 1998.
The Company's net interest margin is sensitive to the loan origination volume of the mortgage banking division. All loans originated by the mortgage banking division are sold, servicing released, in the secondary mortgage market. Each mortgage loan originated is sold when the borrower locks-in the interest rate on the loan. When the volume of mortgage loan originations increases, typically in a declining interest rate environment, "funds advanced in settlement of mortgage loans" increase. This balance sheet item represents funds advanced to close mortgage loans, pending delivery of the loans to the loan purchaser. Until a mortgage loan is transferred to the purchaser, the Company receives interest on the loan at the note rate. Funds advanced in settlement of mortgage loans are financed to a large extent with short term Federal Home Loan Bank borrowings and short term certificates of deposit. While such funds advanced contribute to net interest income, the interest rate spread on this item is not as great as the spread on the commercial loan portfolio, which normally carries a higher interest yield and is financed with lower cost deposits. Thus, as funds advanced in settlement of mortgage loans increase, the interest spread and the net interest margin decrease. The average balance of funds advanced in settlement of mortgage loans was $16.2 million for the year ended December 31, 2000, compared to $16.1 million in the year ended December 31, 1999 and $39.9 million in the year ended December 31, 1998.
Net interest income is affected by changes in both average interest rates and average volumes of interest earning assets and interest bearing liabilities. The following table sets forth the amounts of the total change in interest income that can be attributed to changes in the volume of interest-bearing assets and liabilities and the amount of the change that can be attributed to changes in interest rates. The amount of the change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the relative size of the rate and volume changes.
During the period of June 1999 through March 2000, the Federal Reserve Bank increased interest rates five times, raising short term rates by 125 basis points during this period. During the period of April 2000 through December 2000, the Federal Reserve Bank decreased interest rates one time, lowering short term rates by 50 basis points. The net increase in market rates has resulted in corresponding increases in the prime lending rate, as well as the cost of interest bearing deposits including certificates of deposit. Increases in rates seem to slow economic growth and reduce borrowing activities while decreases in rates seem to promote economic growth and increase borrowing activities.
(1) Loans include funds advanced in settlement of loans.
Interest Rate Sensitivity Analysis
Management evaluates interest sensitivity through the use of an asset/liability management reporting 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.
The following table presents the amounts of the Company's interest sensitive assets and liabilities that mature or re-price in the periods indicated.
(1) Management has determined that interest checking, money market (except those generated by e-banking) and savings accounts are not sensitive to changes in related market rates and, therefore, have been placed in the 1-5 years category.
The December 31, 2000 results of the rate sensitivity analysis show that the Company had $7.8 million more in liabilities than assets subject to repricing within three months or less and was, therefore, in a liability sensitive position.
The cumulative gap at the end of one year was a negative $50.8 million, a liability-sensitive position. Approximately $181.7 million, or 63.0% of the total loan portfolio, matures or re-prices within one year or less. An asset- sensitive institution's net interest margin and net interest income generally will be impacted favorably by rising interest rates, while that of a liability sensitive institution generally will be impacted favorably by declining rates.
Increases and decreases in the Company's mortgage banking income (which consists primarily of gains on sales of mortgage loans) tend to offset decreases and increases in the net interest margin. In a climate of lower or declining
interest rates, the Company's net interest margin will tend to decrease as the yield on interest earning assets decreases faster than the cost of interest bearing liabilities. Mortgage banking income, in contrast, tends to increase in times of lower or declining interest rates, as refinancing activity leads to an increase in mortgage loan originations. In a climate of rising or higher interest rates, the net interest margin will tend to increase, while a decrease in mortgage loan originations leads to a decrease in mortgage banking income.
Investment Portfolio
The following tables present certain information on the Company's investment securities portfolio:
Securities Available for Sale (1) 2000 1999 1998 ---- ---- ---- (Dollars in thousands) U. S. Government Agencies $14,918 $ 4,662 $6,868 Federal Reserve Bank Stock 673 587 434 Federal Home Loan Bank Stock 1,560 915 1,162 Preferred Stock 1,043 351 - Other 123 144 155 ------------------------------------- $18,317 $ 6,659 $8,619 =====================================
(1) Carried at fair value
Securities Held to Maturity (2) 2000 1999 1998 ---- ---- ---- U. S. Government Agencies $28,664 $ 151 $ 478 State and Municipal 15,969 746 746 Corporate Bonds 7,201 7,208 - Preferred Stock 11,970 8,431 - ------------------------------------- $63,804 $16,536 $1,224 =====================================
(2) Carried at cost, adjusted for amortization of premium or accretion of discount using the interest method.
Gross unrealized losses on securities available for sale were $339,100 at December 31, 2000 and $114,500 at December 31, 1999 and gross unrealized gains were $25,300 and $13,200 at December 31, 2000 and 1999, respectively. At December 31, 1998 gross unrealized gains on securities available for sale were $95,300 and gross unrealized losses on securities available for sale were $1,600.
At December 31, 2000 and December 31, 1999 gross unrealized gains on securities held to maturity were $1,517,000 and $4,100, respectively. At December 31, 2000 and 1999, gross unrealized losses on securities held to maturity were $1,296,800 and $2,154,800, respectively. At December 31, 1998 gross unrealized gains and losses on securities held to maturity were $29,600 and $1,500, respectively.
The following table presents information on the maturities and weighted average yields of the Company's investment securities at December 31, 2000. The weighted average yields are calculated on the basis of book value of the investment securities and on the interest income of the investments adjusted for amortization of premium and accretion of discount.
Loan Portfolio
The table below classifies loans, net of unearned income, by major category and percentage distribution at the dates indicated:
Commercial business loans totaled $68.3 million, or 24% of the Bank's loan portfolio at December 31, 2000. These loans are typically made on the basis of the borrower's ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory.
Commercial real estate loans amounted to $171.2 million, or 60% of the loan portfolio at December 31, 2000. These loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers and payment experience is typically dependent on the successful operation of a business or real estate project.
Consumer or installment loans totaled $4.1 million, and accounted for less than 2% of the Bank's loan portfolio at December 31, 2000. Consumer loans include home improvement loans, automobile loans and unsecured lines of credit.
Maturity Schedule of Loans
The table below presents information regarding the maturity of loans at December 31, 2000:
December 31, 2000
Over one One Year through Five Years or less Five Years or more Total (Dollars in thousands)
Commercial $23,900 $30,076 $14,298 $68,274 Real estate - construction 59,208 12,065 1,122 72,395 Commercial real estate 31,599 39,107 28,138 98,844 Residential real estate 3,305 25,333 16,179 44,817 Installment and consumer loans 1,568 2,326 289 4,183 --------------------------------------------- $119,580 $108,907 $60,026 $288,513 =============================================
Nonperforming Assets
Unless well secured and in the process of collection, the Company places loans on non-accrual status after being delinquent greater than ninety days, or earlier in situations in which the loans have developed inherent problems that indicate payment of principal and interest may not be made in full. Whenever the accrual of interest is stopped, previously accrued but uncollected income is reversed. Thereafter, interest is recognized only as cash is received. The loan is reinstated to an accrual basis after it has been brought current as to principal and interest under the contractual terms of the loan. As of December 31, 2000, 1999, and 1998, non-accrual loans amounted to $1,015,000, $473,000, and $533,000, respectively.
Summary of Loan Loss Experience
The allowance for loan losses is increased by the provision for loan losses and reduced by loans charged off, net of recoveries. The allowance for loan losses is established and maintained at a level judged by management to be adequate to cover any anticipated loan losses to be incurred in the collection of outstanding loans. In determining the adequate level of the allowance for loan losses, management considers the following factors: (a) loan loss experience; (b) problem loans, including loans judged to exhibit potential charge-off characteristics, loans on which interest is no longer being accrued, loans which are past due and loans which have been classified in the most recent regulatory examination; and (c) anticipated economic conditions and the potential impact these conditions may have on individual classifications of borrowers.
The provisions for loan loss taken by the Company for the years ended December 31, 2000, 1999 and 1998 were $1,100,000, $4,667,000, and $150,000, respectively. The significant increase in the provision for loan loss in 1999 was the result of the credit problems encountered within the Company's asset based lending program, as discussed in Item 7 of this Form 10-K. Such credit quality problems were exclusively related to this business unit, and the Company has, as a result, exited this program.
The following table presents the Bank's loan loss experience for the periods indicated:
In establishing the allowance for loan losses, in addition to the factors described above, management considers the following risk elements in the loan portfolio.
Construction lending often involves larger loan balances with single borrowers. Construction loans involve risks attributable to the fact that loan funds are advanced upon the security of the home under construction, which is of uncertain value prior to the completion of construction. If there is a default, the corporation may be required to complete and sell the home.
Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. Many real estate loans have personal endorsements as additional security.
Consumer loans entail risks, particularly in the case of consumer loans which are unsecured, such as lines of credit, or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loan such as the Company, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral.
Commercial business loans typically are made on the basis of the borrower's ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral for commercial business loans may depreciate over time and cannot be appraised with as much precision as residential real estate.
Deposits
The table below presents average deposits and average rates paid, by major category, at the dates indicated:
The following table is a summary of time deposits of $100,000 or more by remaining maturities at December 31, 2000:
Amount Percent ------ ------- (Dollars in thousands) Three months or less $3,157 47.22% Three to twelve months 2,639 39.47% Over twelve months 890 13.31% ------ ------- Total $6,686 100.00% ====== =======
Short Term Borrowings
The following table sets forth consolidated short term borrowings. These borrowings represent advances to the Bank by the Federal Home Loan Bank of Atlanta and are secured by Federal Home Loan Bank stock, investment securities and first mortgage loans and federal funds purchased. During 2000, the Bank purchased federal funds on an unsecured basis for up to thirty consecutive days from a correspondent bank.
Years Ended December 31, 2000 1999 1998 --------------------------------------- (Dollars in thousands)
Balance at period end $ 7,546 $13,000 $ 2,000 Average balance during period $ 7,030 $ 7,289 $17,806 Average rate 6.37% 5.60% 5.65% Maximum outstanding during period $23,246 $16,000 $46,420
Return on Equity and Assets
The following table sets forth ratios for the Company considered to be significant indicators of the Company's profitability and financial condition during the periods indicated:
Return in Equity and Assets 2000 1999 1998 ---------------------------------------
Return on average assets 1.21% -0.25% 1.27% Return on average equity 24.13% -3.90% 18.19% Dividend payout ratio 26.92% -160.00% 21.24% Average equity to average asset ratio 5.01% 6.51% 6.95%
Competition
The Bank operates in highly competitive environments, competing for deposits and loans with major regional and national banks, as well as other financial institutions, many of which have greater financial resources than the
Bank. Most maintain numerous banking locations and many perform services, such as trust services, which the Bank does not offer. Many of these competitors have higher lending limits than the Bank. The Bank emphasizes personal relationship banking, service, and local management and decision making in its marketing strategies. In addition, the Bank offers courier services and Internet banking to its clients in an effort to overcome its limited number of physical locations.
The Bank has contracted with a nationally recognized Internet Banking software company to provide a secure, comprehensive Internet package to market its products and service its clientele. This Internet branch (www.resourcebankonline.com) provides customers with the ability to conduct banking business via a personal computer or other secure browser-enabled device 24 hours per day. The Bank offers special deposit accounts through this Internet branch, which features competitive interest rates and ready access to funds on deposit. Online bill payment and a download capability for most personal financial software packages are also included in this program.
Regulation and Supervision of Resource Bank
The Bank operates as a state chartered bank and is subject to supervision and regulation by the Bureau of Financial Institutions ("BFI") of the Virginia State Corporation Commission. As a member of the Federal Reserve System ("FRB"), the Bank is also supervised and regularly examined by the FRB. The state and federal banking laws and regulations govern virtually all areas of the Bank's operations including maintenance of cash reserves, loans, mortgages, maintenance of minimum capital, mergers, payment of dividends, establishment of branches and other aspects of operations.
The deposits of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") which insures that member banks pay depositors to the extent provided by law in the event an insured bank is closed without adequately providing for the claims of depositors. The majority of the Bank's deposits are subject to the deposit assessments of the Bank Insurance Fund ("BIF") of the FDIC. A portion of the deposits of the Bank (those acquired as a result of the merger with Eastern American) are subject to assessments imposed by the Savings Association Insurance Funds ("SAIF") of the FDIC.
The earnings and growth of the banking industry are affected by the general conditions of the economy and by the fiscal and monetary policies of the Federal Government and its agencies, including the FRB. The Board of Governors regulates money and credit conditions and, as a result, has a strong influence on interest rates and on general economic conditions. The effect of such policies in the future on the business and earnings of the Bank cannot be predicted with certainty.
Regulation and Supervision of Resource Bankshares
General. As a bank holding company, Resource Bankshares is subject to state and federal banking and bank holding company laws and regulations which impose specific requirements or restrictions and provide for general regulatory oversight with respect to virtually all aspects of its operations.
The Company is registered under the Bank Holding Company Act ("BHCA") and is subject to regulation by the FRB. The FRB has jurisdiction under the BHCA to approve any bank or non-bank acquisition, merger or consolidation proposed by a bank holding company. The Company is required to file with the FRB periodic and annual reports and other information concerning its own business operations and those of its subsidiaries. In addition, the BHCA requires a bank holding company to obtain FRB approval before it acquires, directly or indirectly, ownership or control of any voting shares of a second or subsequent bank if, after such acquisition, it would own or control more than 5% of such shares, unless it already owns or controls a majority of such voting shares. FRB approval must also be obtained before a bank holding company acquires all or substantially all of the assets of another bank or merges or consolidates with another bank holding company.
Unless it chooses to become a financial holding company, as further described below, a bank holding company is prohibited under the BHCA, with limited exceptions, from acquiring or obtaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank, or from engaging in any activities other than those of banking or of managing or controlling banks or furnishing services to or performing services for its subsidiaries. One of the exceptions to these prohibitions permits a bank holding company to engage in, or acquire an interest in a company which engages in activities which, after due notice and opportunity for hearing, the FRB by regulation or order has determined are so closely related to banking or of managing or controlling banks as to be a proper incident thereto. In making such a determination, the FRB is required to consider whether the performance of such activities can reasonably be expected to produce benefits to the public, such as convenience, increased competition or gains in efficiency, which outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The FRB is also empowered to differentiate between activities commenced de novo and activities commenced by the acquisition, in whole or in part, of a going concern. Some of the activities that the FRB has determined by regulation to be closely related to banking include servicing loans, performing certain data processing services, acting as a fiduciary, investment or financial advisor, and making investments in corporations or projects designed primarily to promote community welfare.
A bank holding company may not, without providing prior notice to the FRB, purchase or redeem its own stock if the gross consideration to be paid, when added to the net consideration paid by the company for all purchases or redemptions by the Company of its equity securities within the preceding 12 months, will equal 10% or more of the Company's consolidated net worth unless it meets the requirements of a well-capitalized and well-managed organization.
The Company is subject to various federal securities laws and is required to make certain periodic filings with the Securities and Exchange Commission ("SEC") as well as file certain reports on the occurrence of certain material events. The Company files quarterly, annual and current reports with the SEC. In addition, directors, officers and certain shareholders and senior management are subject to further reporting requirements including obligations to submit to the SEC reports of beneficial ownership of the Company's securities.
Financial Holding Companies. Effective March 11, 2000, pursuant to authority granted under the Gramm-Leach-Bliley Act, a bank holding company may elect to become a financial holding company and thereby engage in a broader range of financial and other activities than are permissible for traditional bank holding companies. In order to qualify for the election, all of the depository institution subsidiaries of the bank holding company must be well capitalized and well managed, as defined by regulation, and all of its depository institution subsidiaries must have achieved a rating of satisfactory or better with respect to meeting community credit needs.
Pursuant to the Gramm-Leach-Bliley Act, financial holding companies will be permitted to engage in activities that are "financial in nature" or incidental or complementary thereto, as determined by the FRB. The Gramm-Leach-Bliley Act identifies several activities as "financial in nature," including, among others, insurance underwriting and agency, investment advisory services, merchant banking and underwriting, and dealing or making a market in securities. Being designated a financial holding company will allow insurance companies, securities brokers and other types of financial companies to affiliate with and/or acquire depository institutions. At this time, the Company does not intend to become a "financial holding company".
Employees
At December 31, 2000 the Company had 198 full time and 8 part time employees, in its banking and mortgage operations. None of its employees is represented by any collective bargaining unit, and the Company believes relations with its employees are good.
Executive Officers
Lawrence N. Smith, joined the Bank in December 1992 and served as its President and Chief Executive Officer until December 1998. He currently serves as Chief Executive Officer of the Bank, and President and Chief Executive Officer of the Company. Mr. Smith has over 19 years of experience with United
Virginia Bank/Seaboard National and United Virginia Banks - Eastern Region, predecessor of Crestar Bank - Eastern Region ("Crestar"). From 1973 until May 1983, Mr. Smith was President of Crestar and also served on major committees of the holding company, United Virginia Bankshares, Inc., predecessor of Crestar Bankshares, Inc. He retired from Crestar in May 1983. Mr. Smith formed Essex Financial Group, Inc. a financial holding company in May 1983. Mr. Smith serves on the board of directors of Heilig-Meyers Corporation, a national furniture retailer and Empire Machinery and Supply corporation, a Norfolk based supplier of industrial products, and has been active in civic affairs for the past 30 years.
T. A. Grell, Jr., has been President and Chief Operating Officer of the Bank, Executive Vice President of the Company since December 1998, and a director of the Company since October 2000. From 1984 until joining the Company, he was a senior officer at Central Fidelity Bank, which was later acquired by Wachovia Bank. He has 29 years experience in the banking industry and is active in civic affairs.
Harvard R. Birdsong II, has been senior vice president of the Company since December 1998 and senior vice president and chief credit officer of the Bank since January 1997. Prior to joining the Bank, he was a senior credit officer at Essex Savings Bank, where he was employed from 1984 through 1996. He has been employed in the banking industry for 30 years and is active in civic affairs.
Debra C. Dyckman has been senior vice president of operations and secretary of the Bank since 1992 and of the Company since its inception. She has been in banking for 30 years and serves on the Board of Trustees of Cape Henry Collegiate School.
Eleanor J. Whitehurst has been senior vice president and Chief Financial Officer of the Bank since 1992 and of the Company since its inception. She has more than 30 years experience in the banking industry in the Hampton Roads, Virginia area.
Item 2.
Item 2. Properties - ------- ----------
The Company leases its banking and mortgage origination offices. Leases covering the banking operations are long term with renewal provisions designed to assure the Bank that it will be able to operate in the facilities for the foreseeable future. Details of the Bank's leases may be reviewed in Note 12 of the Notes to Consolidated Financial Statements. The Bank purchased a four acre lot in Herndon, Virginia in December 1997 for future construction of a Northern Virginia regional office which will accommodate the Bank's administration and branch offices that are currently located in Herndon. Construction began during 2000 with completion anticipated in 2001. During the third quarter 2000, the Bank sold a portion of this property.
Item 3.
Item 3. Legal Proceedings - ------- -----------------
On November 5, 1999, AGM Development Corporation ("AGM"), Michael Agnew and Barbara M. Agnew (collectively the "Agnews") (AGM and the Agnews collectively the "Plaintiffs") filed a lawsuit against Resource Bank, the Company's wholly owned banking subsidiary ("Bank"), in the Circuit Court for the City of Virginia Beach, Virginia ("Court"). AGM and the Agnews are the borrowers and guarantors under certain loans which the Bank declared in default in August 1999 ("Defaulted Loans"). For a detailed discussion of this loan default, see "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."
The lawsuit alleged that the Bank did not act in a commercially reasonable manner when it seized and liquidated certain collateral that secured the Defaulted Loans. In connection with this allegation, the Plaintiffs sought a declaratory judgment that all obligations of the Plaintiffs to the Bank were satisfied and that the Bank is not entitled to seek deficiency judgments against the Plaintiffs. Based on advice of counsel, management does not believe that the relief sought by the Plaintiffs will be granted by the Court, and to date it has not.
The lawsuit also alleged that the Bank's proposed public auction of the stock of a privately held company was not commercially reasonable. The stock was owned by the Agnews individually, but was pledged by the Agnews to the Bank as collateral for the Defaulted Loans. The lawsuit asked the Court to enjoin
the public auction that was scheduled on November 9, 1999. No injunction was granted. The public auction occurred as scheduled on November 9, 1999 and the Bank bid for and purchased the stock on that date. Based on advice of counsel, management believes that the public auction was conducted in accordance with applicable law.
Thereafter, AGM and the Agnews amended the lawsuit and generally sought a declaration from the Court that certain actions taken by the Bank in pursuing liquidation of its various collateral were done so contrary to the requirements of the Uniform Commercial Code of Virginia such that they were released from any liability on the various indebtednesses they owe the Bank. The amended pleading also requested unspecified monetary damages. The Bank filed a Cross-Bill seeking judgment against AGM and the Agnews in the amount of approximately $3,500,000 under the Notes and the Guaranty as well as for fraud. AGM and the Agnews have denied liability thereunder. No trial date has been set.
The Company and the Bank intend to vigorously defend all allegations made by the Plaintiffs in the lawsuit. The Company does not believe that the lawsuit will have a material adverse effect on the Company's business, financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------- ---------------------------------------------------
No matters were submitted to the Company's shareholders for a vote during the fourth quarter of 2000.
PART II Item 5.
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters - ------- --------------------------------------------------------------------
The Company's common stock is listed on the Nasdaq National Market ("Nasdaq/NM") under the symbol "RBKV". Prior to December 15, 2000, the Company's common stock was listed on the American Stock Exchange ("Amex") under the symbol "RBV". The high and low closing sales prices of the Company's common stock during 2000 and 1999, and information concerning dividends paid on the Company's common stock are set forth in the following table.
Cash Dividend Nasdaq /NM 2000 High Low Paid
Fourth Quarter (December 15 - 31) $11.00 $10.13 -
Amex 2000
Fourth Quarter (October 1 - December 14) 10.94 9.63 $0.12 Third Quarter 10.00 7.88 .10 Second Quarter 10.63 8.63 .10 First Quarter 12.63 8.63 .10
Amex 1999
Fourth Quarter $15.25 $ 8.50 $0.10 Third Quarter 19.38 14.63 .10 Second Quarter 22.13 19.00 .10 First Quarter 22.50 17.25 .06
The Company's 2,615,214 common shares outstanding were held by approximately 800 shareholders of record at February 23, 2001.
On June 14, 2000, the Bank acquired all of the outstanding capital stock of CW and Company of Virginia ("CW and Company") from two individuals. For purposes of the transaction, CW and Company's outstanding stock was valued at $510,000. As part of the transaction, the Company issued to CW and Company's shareholders an aggregate of 56,792 shares of the Company's common stock (collectively the "Shares"). The Shares were issued in a private placement exempt from registration under the Securities Act of 1933 ("Securities Act") promulgated under the Securities Act.
Item 6.
Item 6. Selected Consolidated Financial Data - ------- ------------------------------------
The following consolidated summary sets forth selected financial data for the Company and its subsidiaries for the periods and at the dates indicated. The following summary is qualified in its entirety by the Company's financial statements included as part of this Form 10-K.
___________________ (1) All per share figures have been adjusted to reflect a two-for-one stock split on July 1, 1998. (2) Net income per share is computed using the weighted average outstanding shares. (3) Net interest margin is calculated as tax-equivalent net interest income divided by average earning assets and represents the Company's net yield on its earning assets.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ------- --------------------------------------------------------------- Results of Operations ----------------------
In addition to historical information, the following discussion contains forward looking statements that are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those anticipated. These forward looking statements include, but are not limited to, the effect of interest rates on the Company's profitability, and the adequacy of the Company's allowance for future loan losses. Several factors, including the Virginia and national economies and the demand for residential mortgage loans may adversely affect the Company's ability to achieve expected results. Readers are cautioned not to place undue reliance on these forward looking statements, which reflect management's analysis only as of the date of this Report.
The following discussion should be read in conjunction with the Financial Statements and Notes thereto included as Exhibit 99.1 of this Form 10-K.
Results of Operations and Financial Condition
The Company had net income of $4,232,700 for 2000, a net loss of $690,800 for 1999 and net income of $3,046,800 for 1998. This constituted net basic earnings (loss) per common share of $1.63 for 2000, $(.27) for 1999 and $1.24 for 1998. With the diluted effect of common stock equivalents, earnings (loss) per common share were $1.56 for 2000, $(.27) for 1999 and $1.13 for 1998. The loss for the year ended December 31, 1999 was directly attributable to the $4,667,000 provision for loan losses taken in the third quarter. This provision for loan loss occurred as a result of credit problems with a significant borrower within the Company's asset based lending portfolio, as announced by the Company in August 1999. The Company has exited the asset based lending business, which represented only 5% of the Company's total loan portfolio.
In regard to business segment reporting, the Company's mortgage banking operations resulted in a net gain before taxes of $673,990 for the year ended December 31, 2000 and a net loss before income taxes of $418,897 for the year ended December 31, 1999, as compared to net income before income taxes of $661,187 for the year ended December 31, 1998. The operating loss in 1999 was the result of the reorganization of the mortgage division and decreased loan origination volume, caused by a general increase in interest rates and the reorganization of the mortgage operation in 1999.
At December 31, 2000, 41.5% of total loans were due in one year or less. Floating rate loans with maturities of one year or less represented 37.4% of total loans, and the remainder of loans had fixed rates.
Average loans, net of unearned income, to average deposits were 88.0%, 93.6% and 82.8% in 2000, 1999 and 1998, respectively.
Net Interest Income
Net interest income, before provision for loan losses, increased by 5.5% in 2000 over 1999 to $9,437,497 and 6.4% in 1999 over 1998 to $8,945,660. The 2000 increase in net interest income was closely proportionate with the increase in average earning assets and interest bearing liabilities during 2000. During 2000, due to the continued expansion of commercial lending activities, average loans increased 20.9% to $263,110,093. Due to the competitive pricing of the Company's deposit products, average total deposits increased 28.5% to $299,006,008. Average funds borrowed from the Federal Home Loan Bank and correspondent banks increased by 56.9% to $19,624,634 in 2000. 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 less than 1% to $16,227,150 in 2000. Average securities increased 120.3% to $48,012,392 and average interest bearing deposits in other banks increased 42.1% to $8,487,089 in 2000.
For a historical analysis of net interest income, see the table entitled "Average Balances, Interest Income and Expenses, and Average Yields and Rates" in Part I - Item 1. of this Form 10-K. For an analysis of the potential for a change in interest rates to impact the ability of the Bank to generate future
net interest income, see the table entitled "Maturing or Repricing" in Part I - Item 1. of this Form 10-K. This is frequently referred to as the GAP analysis, which analyzes the difference between interest-sensitive assets and liabilities for the repricing/maturity periods indicated. Refer to Item 7a
Item 7a. Quantitative and Qualitative Disclosures about Market Risk - -------- ----------------------------------------------------------
Management's methodology to measure interest rate sensitivity includes an analysis of the potential gain or loss in future fair values of interest rate sensitive instruments. The Company's analysis assumes a hypothetical 200 basis point instantaneous and parallel shift in the yield curve in interest rates. A present value computation is used in determining the effect of the hypothetical interest rate changes on the fair value of its interest rate sensitive instruments as of December 31, 2000. Computations of prospective effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate certain actions management could undertake in response to changes in interest rates. Certain shortcomings are inherent in this method of analysis. If market conditions vary from assumptions used in the calculation of present value, actual values may differ from amounts disclosed. However, if a hypothetical, parallel and instantaneous 200 basis point increase and decrease were experienced, net fair values of interest sensitive instruments would be decreased by $1,400,000 and decreased by $636,000, respectively.
This fair value analysis, performed for the Company by a third party vendor, tends to overstate interest rate risk within the Company's balance sheet. The analysis assigns the contractual long term maturity to mortgage loans within the funds advanced for settlement account. Such loans are generally held by the Company for less than 60 days, being pre-sold to third party purchasers when the individual borrowers lock in their interest rates. This extension of loan terms within this category of the Company's balance sheet increases interest rate risk sensitivity calculated by the analysis.
The analysis also does not include a forecast of loan and deposit volume changes due to the hypothetical 200 basis point interest rate change. In addition, anticipated increased volume in the Company's mortgage banking operation from a 200 basis point decrease in rates is not included in the analysis. This expected volume increase in mortgage lending as the result of a decline in interest rates would positively impact the Company's earnings.
The standard algebraic formula for calculating present value is utilized. The calculation discounts the future cash flows of the Company's portfolio of interest rate sensitive instruments to present value utilizing techniques designed to approximate current market rates for securities, current offering rates for loans, and the cost of alternative funding for the given maturity of deposits, and then assumes a 200 basis point instantaneous and parallel shift in these rates. The difference between these numbers represents the resulting hypothetical change in the fair value of interest rate sensitive instruments.
Other significant assumptions used in the calculation include: (1) no growth in volume (i.e., replacement of maturities in like instruments, with no change in balance sheet mix); (2) constant market interest rates reflecting the average rate from the last month of the given quarter; and (3) pricing spreads to market rates derived from an historical analysis, or from assumptions by instrument type.
The Company is not engaged in investment strategies involving derivative financial instruments. Asset and liability management is conducted without the use of forward-based contracts, options, swap agreements, or other synthetic financial instruments.
Item 8.
Item 8. Financial Statements and Supplementary Data - ------- -------------------------------------------
The following financial statements are included in Exhibit 99.1 of this Form 10-K.
Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 Notes to Financial Statements - December 31, 2000, 1999 and 1998 Quarterly unaudited financial information is contained in Note 21 of the Notes to Financial Statements.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure -------------------- Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -------- --------------------------------------------------
Item 11.
Item 11. Executive Compensation - -------- ----------------------
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -------- --------------------------------------------------------------
Item 13.
Item 13. Certain Relationships and Related Transactions - -------- ----------------------------------------------
In accordance with General Instruction G(3), the information called for in Part III is incorporated by reference from the Company's Proxy Statement to be filed no later than April 30, 2001 in connection with the Company's 2001 Annual Meeting of Shareholders.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules and Reports of Form 8-K - -------- -----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements of the Company as of December 31, 2000, 1999 and 1998 and for the years then ended, and the auditors' report thereon are included in this Form 10-K as Exhibit 99.1:
Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Income - Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Report of Independent Auditors
2. Financial Statement Schedules - None.
3. The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this Form 10-K and such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K in quarter ended December 31, 2000: None (c) The exhibits on the accompanying Exhibit Index are filed or incorporated by reference as part of this Form 10-K and such Exhibit Index is incorporated herein by reference. (d) Financial Statements excluded from Annual Report pursuant to Rule 14a-3(b)- Not applicable.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the under-signed, thereunto duly authorized.
RESOURCE BANKSHARES CORPORATION
/s/ Lawrence N. Smith President and Chief Executive Officer Date: 3/22/2001
/s/ Eleanor J. Whitehurst Senior Vice President and Chief Financial Officer Date: 3/22/2001
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lawrence N. Smith and Thomas W. Hunt and each of them individually, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Thomas W. Hunt Chairman of the Board Thomas W. Hunt Date: 3/22/2001
/s/ Lawrence N. Smith President Lawrence N. Smith Chief Executive Officer Date: 3/22/2001 (Principal Executive Officer) Director
/s/ Eleanor J. Whitehurst Senior Vice President Eleanor J. Whitehurst, Chief Financial Officer Date: 3/22/2001 (Principal Financial and Accounting Officer)
/s/ Alfred E. Abiouness Director Alfred E. Abiouness Date: 3/22/2001
/s/ T. A. Grell, Jr. Director T.A. Grell, Jr. Date: 3/22/2001
/s/ Louis Ray Jones Director Louis Ray Jones Date: 3/22/2001
/s/ Arthur Russell Kirk Director Arthur Russell Kirk Date: 3/22/2001
/s/ Elizabeth A. Twohy Director Elizabeth A. Twohy Date: 3/22/2001
Exhibit Index Resource Bankshares Corporation
**24.1 Powers of Attorney (included on signature page)
**99.1 Consolidated Financial Statements
* Not filed herewith; incorporated by reference.
** Filed herewith.