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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2001
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 000-24561
RESOURCE BANKSHARES CORPORATION
-------------------------------
(Exact name of Registrant as specified in its charter)
Virginia 54-1904386
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3720 Virginia Beach Blvd., Virginia Beach, Virginia 23452
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 757-463-2265
-------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.50
par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant based on the closing sale price on February 22, 2002 as reported in
The Wall Street Journal, was $47,236,797. For the purpose of the foregoing
- -----------------------
calculation only, directors and executive officers of the registrant have been
deemed affiliates.
The number of shares outstanding of the registrant's common stock as of
February 22, 2002: 3,103,295
Documents Incorporated by Reference
In accordance with General Instruction G(3) of Form 10-K, the information
called for in Part III is incorporated by reference from the Company's Proxy
Statement to be filed no later than April 30, 2002, in connection with the
Company's 2002 Annual Meeting of Shareholders.
1
TABLE OF CONTENTS
PART I....................................................................................................................3
Item 1. Business................................................................................................3
Item 2. Properties.............................................................................................18
Item 3. Legal Proceedings......................................................................................18
Item 4. Submission of Matters to a Vote of Security Holders....................................................19
PART II..................................................................................................................20
Item 5. Market for Registrants Common Stock and Related Stockholder Matters....................................20
Item 6. Selected Consolidated Financial Data...................................................................21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................................22
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.............................................27
Item 8. Financial Statements and Supplementary Data............................................................28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..............................................................28
PART III.................................................................................................................28
Item 10. Directors and Executive Officers of the Registrant.....................................................28
Item 11. Executive Compensation.................................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................28
Item 13. Certain Relationships and Related Transactions.........................................................28
PART IV..................................................................................................................29
Item 14. Exhibits, Financial Statements, Schedules and Reports of Form 8-K......................................29
2
PART I
In addition to historical information, the following discussion
contains forward looking statements that are subject to risks and uncertainties
that could cause the Company's actual results to differ materially from those
anticipated. These forward looking statements include, but are not limited to,
statements regarding the Company's management of credit risk, credit policies
generally, allowances for loan losses, and the affect of interest rates on the
Company's profitability. Several factors, including the local and national
economy and the demand for residential mortgage loans, could have a material
affect on the Company's anticipated results. Readers are cautioned not to place
undue reliance on these forward looking statements, which reflect management's
analysis only as of the date of this document.
ITEM 1. BUSINESS
- -----------------
Resource Bankshares Corporation (the "Company"), a Virginia
corporation, was established in 1998 and is headquartered in Virginia Beach,
Virginia. The Company was capitalized as the result of a two for one share
exchange with Resource Bank (the "Bank"), a Virginia state chartered bank. In
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 five full service banking offices - one each in
Virginia Beach, Chesapeake, Newport News, Herndon and Richmond, 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 Eastern American acquisition, the Bank operated
only one banking office in Virginia Beach. The branch location in Chesapeake,
Virginia opened during the second quarter of 1999, the Newport News, Virginia
branch opened during the first quarter of 2000 and the Richmond branch opened
during the first quarter of 2002. The Bank also began offering online banking
services during the first quarter of 2000, 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.
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 four in loan volume (35 loans totaling $7.0 million) in the
Richmond district in fiscal year 2001.
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 2001, the Bank originated and sold mortgage loans in excess of
$797 million. The mortgage division originates loans from the five bank
locations as well as from its mortgage offices in Virginia Beach, Richmond,
Chesapeake, Newport News, Reston, Oakton and Roanoke, Virginia, Rockville,
Maryland and Jacksonville and Fort Lauderdale in Florida. Additionally, the Bank
originates loans throughout the 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.
3
As part of the expansion of its mortgage operations, 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 mortgage offices in Fort Lauderdale and Jacksonville,
Florida and Roanoke, Virginia, as well as in the Hampton Roads and Richmond
areas.
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.
4
AVERAGE BALANCES, INTEREST INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
The following table sets forth average balances of total interest earning assets
and total interest bearing liabilities for the periods indicated, showing the
average distribution of assets, liabilities, stockholders' equity and the
related income, expense and corresponding weighted-average yields and costs.
Year ended December 31
----------------------
2001 2000 1999
---- ---- ----
--------------------------------------------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance/(1)/ Expense Rate/(2)/ Balance/(1)/ Expense Rate/(2)/ Balance/(1)/ Expense Rate/(2)/
------------ ------- --------- ------------ ------- --------- ------------ ------- ---------
(Dollars in thousands)
Assets
Interest Earning Assets:
Securities /(3)/ $92,626 7,079 7.64% $48,012 3,870 8.06% $21,791 1,468 6.74%
Loans /(4)/ 306,802 22,148 7.22% 263,110 22,821 8.67% 217,598 18,072 8.31%
Interest bearing deposits in
other banks 9,791 366 3.74% 8,487 537 6.33% 5,974 293 4.90%
Other earning assets /(5)/ 45,596 3,523 7.73% 16,227 1,561 9.62% 16,118 1,548 9.60%
------ ----- ----- ------ ----- ----- ------ ----- -----
Total interest earning
assets 454,815 33,116 7.28% 335,836 28,789 8.57% 261,481 21,381 8.18%
Non-interest earning assets:
Cash and due from banks 5,946 5,025 4,280
Premises and equipment 6,943 3,392 3,717
Other assets 12,504 8,828 5,644
Less: Allowance for loan
losses (3,718) (3,083) (2,606)
------- ------- -------
Total non-interest earning
assets 21,675 14,162 11,035
-------- -------- --------
Total Assets $476,490 $349,998 $272,516
======== ======== ========
Liabilities and Stockholders'
Equity
Interest Bearing Liabilities:
Interest bearing deposits:
Demand/MMDA accounts $120,288 5,065 4.21% $67,844 4,053 5.97% $12,362 410 3.32%
Savings 4,465 140 3.14% 14,618 631 4.32% 22,943 1,034 4.51%
Certificates of deposit 243,807 13,299 5.45% 200,137 12,296 6.14% 180,764 9,593 5.31%
------- ------ ----- ------- ------ ----- ------- ----- -----
Total interest bearing
deposits 368,560 18,504 5.02% 282,599 16,980 6.01% 216,069 11,037 5.11%
FHLB advances and other
borrowings 51,904 2,276 4.39% 19,625 1,156 5.89% 12,506 697 5.57%
Capital debt securities 9,666 879 9.09% 9,200 839 9.12% 7,528 702 9.33%
----- ---- ----- ----- ---- ----- ----- ---- -----
Total interest bearing
liabilities 430,130 21,659 5.04% 311,424 18,975 6.09% 236,103 12,436 5.27%
Non-interest bearing
liabilities:
Demand deposits 16,386 16,407 16,541
Other liabilities 5,722 4,623 2,139
----- ----- -----
Total liabilities 22,108 21,030 18,680
Stockholders' equity 24,252 17,544 17,733
------ ------ --------
Total liabilities and
stockholders' equity $476,490 $349,998 $272,516
======== ======== ========
Interest spread /(6)/ 2.24% 2.48% 2.91%
Net interest income/net
interest margin /(7)/ $11,457 2.52% $9,814 2.92% $8,945 3.42%
/(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 $424 thousand, $377 thousand and $0 for the years ended
December 31, 2001, 2000 and 1999, 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.
5
/(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, 2001, net interest income on a tax
equivalent basis was $11.5 million, an increase of approximately $1.7 million,
or 17.3%, over $9.8 million for the same period in 2000. Average interest
earning assets increased $119.0 million from 2000 to 2001 while average interest
bearing liabilities increased $118.7 million. The yield on average interest
earning assets for the year ended December 31, 2001 was 7.28% compared with
8.57% for the comparable 2000 period. The 2001 yield on loans was 7.22% compared
to 8.67% in 2000. The cost on average interest bearing liabilities decreased one
hundred five basis points during 2001 to 5.04%, compared to 6.09% during 2000.
Net interest income for the year-ended December 31, 2000 increased
5.5%, or $492 thousand over 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.
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, depending on the interest rate
curve, 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
could decrease. The average balance of funds advanced in settlement of mortgage
loans was $45.6 million for the year ended December 31, 2001, compared to $16.2
million in the year ended December 31, 2000 and $16.1 million in the year ended
December 31, 1999.
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 May 2000, the Federal Reserve
Bank increased interest rates six times, raising short-term rates by 150 basis
points during this period. During the period of June 2000 through December 2001,
the Federal Reserve Bank decreased interest rates eleven times, lowering
short-term rates by 475 basis points. The record decrease in market rates in
2001 has resulted in corresponding decreases in the prime lending rate, as well
as the cost of interest bearing deposits including certificates of deposit.
Increases in rates tend to slow economic growth and reduce borrowing activities
while decreases in rates generally promote economic growth and increase
borrowing activities.
6
Year Ended December 31
----------------------
2001 compared to 2000 2000 compared to 1999 1999 compared to 1998
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in: Due to Changes in:
------------------------------ ----------------------------- ----------------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- --- ------ ---- ---
(Dollars in thousands)
Interest Income:
Securities $3,420 ($211) $3,209 $2,065 $337 $2,402 $616 $140 $756
Loans /(1)/ 5,727 (4,438) 1,289 3,964 798 4,762 2,069 (860) 1,209
Interest bearing deposit in
other banks 74 (245) (171) 145 99 244 (291) (39) (330)
------------------------------ ----------------------------- ----------------------------------
Total $9,221 ($4,894) $4,327 $6,174 $1,234 $7,408 $2,394 $(759) $1,635
------------------------------ ----------------------------- ----------------------------------
Interest Expense:
Interest bearing deposits $4,618 ($3,094) $1,524 $3,782 $2,161 $5,943 $1,271 $(550) $721
FHLB advances and other
borrowing 1,788 (628) 1,160 608 (12) 596 138 241 379
------------------------------ ----------------------------- ----------------------------------
Total $6,406 ($3,722) $2,684 $4,390 $2,149 $6,539 $1,409 $(309) $1,100
------------------------------ ----------------------------- ----------------------------------
Increase (decrease) in net
interest income $2,815 ($1,172) $1,643 $1,784 ($915) $869 $985 ($450) $535
============================== ============================= ==================================
/(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, as well as an
internal model, which is updated at least monthly. Based upon these analyses and
market situations, management formulates strategies regarding asset generation
and pricing, funding sources and pricing, and off-balance sheet commitments in
order to decrease sensitivity risk. These strategies are based on management's
outlook regarding interest rate movements, the state of the regional and
national economies and other financial and business risk factors. In addition,
the Company establishes prices for deposits and loans based on local market
conditions and manages its securities portfolio under policies that take
interest risk into account.
7
The following table presents the amounts of the Company's interest
sensitive assets and liabilities that mature or re-price in the periods
indicated.
December 31, 2001
Maturing or Repricing
------------------------------------------------------------------------
Within 4-12 1-5 Over
------ ---- --- ----
3 Months Months Years 5 Years Total
-------- ------ ----- ------- -----
(Dollars in thousands)
Interest-Earning Assets:
Investment securities $47,835 $6,521 $10,731 $49,548 $114,635
Loans 185,177 37,192 92,654 29,913 344,936
Interest bearing deposits 1,682 - - - 1,682
Other interest-earning assets 71,971 - - - 71,971
------- ------- -------- ------- -------
Total interest-earning assets 306,665 43,713 103,385 79,461 533,224
------- ------ ------- ------ -------
Interest-Bearing Liabilities:
Deposits
Demand and savings /(1)/ 85,056 990 14,268 - 100,314
Time deposits, $100,000 and over 3,704 6,088 290 - 10,082
Other time deposits 87,468 132,011 65,662 - 285,141
Other interest-bearing liabilities 17,800 19,000 66,000 - 102,800
Capital debt securities - 5,000 - 9,200 14,200
-------- -------- -------- ------ --------
Total interest-bearing liabilities 194,028 163,089 146,220 9,200 512,537
------- ------- ------- ----- -------
Period Gap $112,637 ($119,376) ($42,835) $70,261 $20,687
-------- ---------- --------- ------- -------
Cumulative Gap $112,637 $(6,739) ($49,574) $20,687
-------- -------- --------- -------
Ratio cumulative gap to total
Interest-earning assets 21.12% (1.26%) (9.30%) 3.88%
------ ------- ------- -----
/(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 results of the rate sensitivity analysis for 2001 show that the
Company had $112.6 million more in assets than liabilities subject to repricing
within three months or less and was, therefore, in an asset sensitive position.
The cumulative gap at the end of one year was a negative $6.7 million,
a liability-sensitive position. Approximately $222.4 million, or 64.5% 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.
8
Investment Portfolio
The following tables present certain information on the Company's
investment securities portfolio:
Securities Available for Sale /(1)/
2001 2000 1999
---- ---- ----
(Dollars in thousands)
U. S. Government Agencies $59,505 $14,918 $4,662
State and Municipal 12,888
Federal Reserve Bank Stock 867 673 587
Federal Home Loan Bank 4,240 1,560 915
Stock
Corporate Bonds 2,720
Preferred Stock 33,311 1,043 351
Other 1,104 123 144
-----------------------------------------------
$114,635 $18,317 $6,659
===============================================
/(1)/ Carried at fair value
Securities Held to Maturity /(2)/
2001 2000 1999
---- ---- ----
U. S. Government Agencies $ - $28,664 $151
State and Municipal - 15,969 746
Corporate Bonds - 7,201 7,208
Preferred Stock - 11,970 8,431
-----------------------------------------------
$ - $63,804 $16,536
===============================================
/(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 $1.4
million at December 31, 2001 and $339 thousand at December 31, 2000 and gross
unrealized gains were $1.2 million and $25 thousand at December 31, 2001 and
2000, respectively. At December 31, 1999 gross unrealized gains on securities
available for sale were $13,200 and gross unrealized losses on securities
available for sale were $115 thousand.
At December 31, 2001 there were no securities in the held to maturity
category. At December 31, 2000, gross unrealized gains and losses on securities
held to maturity were $1.5 million and $1.3 million respectively. At December
31, 1999 gross unrealized gains and losses on securities held to maturity were
$4 thousand and $2.2 million, respectively.
9
The following table presents information on the maturities and
weighted average yields of the Company's investment securities at December 31,
2001. 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.
December 31, 2001
Available for Sale
Amortized Weighted
Cost Fair Value Average Yield
-----------------------------------------------
U.S. Government agencies
Within one year $ - $ -
After one year to five years - -
After five years through ten years 31 34
After ten years 59,393 59,471 6.94%
---------------------------
Total 59,424 59,505 6.94%
---------------------------
State and municipals:
Within one year - -
After one year to five years 415 425 4.90%
After five years through ten years - -
After ten years 11,861 12,463 5.86%
--------------------------
Total 12,276 12,888 5.83%
--------------------------
Other securities:
Within one year - -
After one year to five years - -
After five years through ten years - -
After ten years 33,754 33,312
---------------------------
Total 33,754 33,312 7.73%
---------------------------
Total debt securities 105,454 105,705 7.06%
Equity and others 9,424 8,930 7.04%
---------------------------
Total securities $114,878 $114,635 7.06%
===========================
10
Loan Portfolio
The table below classifies loans, net of unearned income, by major
category and percentage distribution at the dates indicated:
December 31,
2001 2000 1999 1998 1997
Description Amount Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
(Dollars in thousands)
Commercial $77,705 22.53% $68,274 23.66% $77,507 30.32% $68,569 36.37% $50,713 33.68%
Real Estate 263,364 76.35 216,056 74.89 173,789 67.97 115,790 61.42 96,058 63.79
Consumer 3,867 1.12 4,183 1.45 4,375 1.71 4,163 2.21 3,819 2.53
----- ------- ----- ------- ----- ------- ----- ------- ----- -------
Total $344,936 100.00% $288,513 100.00% $255,671 100.00% $188,522 100.00% $150,590 100.00%
======== ======== ======== ======= ======== ======= ======== =======
Commercial business loans totaled $77.7 million, or 23% of the Bank's loan
portfolio at December 31, 2001. 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.
Real estate loans (commercial and residential real estate and residential
construction loans) amounted to $263.4 million, or 76% of the loan portfolio at
December 31, 2001. Commercial real estate 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. Residential real estate loans generally carry
lower credit risk and smaller balances and are made on the basis of the
borrowers' ability to make repayment from their personal income. Residential
construction lending often involves larger loan balances with single borrowers,
with repayment typically dependent upon completion and sale of the subject
property(s).
Consumer or installment loans totaled $3.9 million, and accounted for less
than 2% of the Bank's loan portfolio at December 31, 2001. 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, 2001:
Over one
One Year through Five Years
or less Five Years or more Total
(Dollars in thousands)
Commercial $29,404 $28,141 $20,160 $77,705
Real estate - construction 75,740 10,406 137 86,283
Commercial real estate 34,132 60,832 30,229 125,193
Residential real estate 4,622 9,398 37,868 51,888
Installment and consumer loans 2,067 1,785 15 3,867
----------------------------------------------------------------
$145,965 $110,562 $88,409 $344,936
================================================================
11
Non-performing Assets
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, 2001, 2000, and 1999, non-accrual loans amounted to
$536,000, $1,015,000 and $473,000, respectively.
December 31,
----------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accrual loans $536 $1,015 $473 $533 $3,059
Loans contractually past due 90 days or
more and still accruing 1,086 320 270 412 1,339
Troubled debt restructuring - - - - -
--- --- --- --- ---
Total non-performing loans 1,622 1,335 743 945 4,398
Other real estate owned 43 - 31 647 684
---- --- ---- ------ ------
Total non-performing assets $1,665 $1,335 $774 $1,592 $5,082
====== ====== ==== ====== ======
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, 2001, 2000 and 1999 were $195,000, $1,100,000 and $4,667,000,
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, as a
result, the Company exited this program in 1999.
12
The following table presents the Bank's loan loss experience for the
periods indicated:
Year Ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
(Dollars in thousands)
Allowance for loan losses at
beginning of period $3,521 $2,686 $2,500 $2,573 $1,040
Loans charged off:
Commercial 203 228 4,436 126 2
Real Estate 109 156 84 141 56
Consumer 44 11 6 20 7
-- -- - -- -
Total 356 395 4,526 287 65
Recoveries of loans previously charged off:
Commercial 202 124 35 1 34
Real Estate 134 5 7 40 -
Consumer 1 1 3 23 9
- - - -- -
Total 337 130 45 64 43
--- --- -- -- --
Net loans charged off 19 265 4,481 223 22
Provision for loan losses 195 1,100 4,667 150 155
--- ----- ----- --- ---
Allowance acquired through business
combination - - - - 1,400
------- ------- ------- ------ -----
Allowance for loan losses end of period
$3,697 $3,521 $2,686 $2,500 $2,573
====== ====== ====== ====== ======
Average total loans (net of unearned
income) $306,802 $263,110 $217,598 $168,271 $93,839
Total loans (net of unearned income) at
period-end $344,936 $288,513 $255,671 $188,522 $150,590
Ratio of net charge-offs to average
loans .01% .10% 2.06% 0.13% 0.02%
Ratio of provision for loan losses to
average loans .06% .42% 2.14% 0.09% 0.17%
Ratio of provision for loan losses to net
charge-offs 1,026.32% 415.09% 104.15% 67.26% 704.55%
Allowance for loan losses to period-end
loans 1.07% 1.22% 1.05% 1.33% 1.71%
Non-performing assets to period-end
total loans and other real estate 0.48% 0.46% 0.30% 0.84% 3.36%
The Company makes various types of real estate loans in its local
markets, including commercial and residential real estate loans and residential
construction loans. In establishing the allowance for loan losses, in addition
to the factors described above, management considers the following risk
elements in the loan portfolio.
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. Many commercial business loans have
personal endorsements as additional security.
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.
Construction lending often involves larger loan balances with single
borrowers. Construction loans involve
13
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.
Residential real estate loans generally carry lower credit risk and
smaller balances and are made on the basis of the borrowers' ability to make
repayment from their personal income.
Consumer loans entail risks, particularly in the case of consumer loans
that 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 that 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 that it has against the seller of the underlying collateral.
Deposits
The table below presents average deposits and average rates paid, by
major category, at the dates indicated:
2001 2000 1999
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------------------------------------------------------------------------------
(Dollars in thousands)
Interest-bearing deposits
Demand/MMDA accounts $120,288 4.21% $67,844 5.97% $12,362 3.32%
Savings 4,465 3.14% 14,618 4.32% 22,943 4.51%
Certificates of deposit 243,807 5.45% 200,137 6.14% 180,764 5.31%
-------------- ----------------- ------------
Total interest bearing deposits 368,560 5.02% 282,599 6.01% 216,069 5.11%
Non interest bearing deposits 16,386 - 16,407 - 16,541 -
Total average deposits $384,946 4.81% $299,006 5.68% $232,610 4.74%
============== ================= ============
The following table is a summary of time deposits of $100,000 or more by
remaining maturities at December 31, 2001:
Amount Percent
------ -------
(Dollars in thousands)
Three months or less $3,704 36.74%
Three to twelve months 6,088 60.38%
Over twelve months 290 2.88%
------------ ---------------
Total $10,082 100.00%
============ ===============
Short Term Borrowings
The following table sets forth consolidated short-term borrowings.
These borrowings represent advances to
14
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 and securities sold under agreements to repurchase.
During 2001, the Bank purchased federal funds on an unsecured basis for up to
thirty consecutive days from a correspondent bank.
Years Ended December 31,
2001 2000 1999
------------------------------------------------
(Dollars in thousands)
Balance at period end $36,500 $7,546 $13,000
Average balance during period $16,871 $7,030 $7,289
Average rate 3.35% 6.37% 5.60%
Maximum outstanding during period $57,433 $23,246 $16,000
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
2001 2000 1999
--------------------------------------------
Return on average assets 0.95% 1.21% -0.25%
Return on average equity 18.73% 24.13% -3.90%
Dividend payout ratio 32.21% 26.92% -160.00%
Average equity to average asset ratio 5.09% 5.01% 6.51%
Tier I leverage ratio 6.88% 6.69% 7.19%
Tier I risk-based 9.49% 8.74% 8.20%
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
service 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.
15
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. Portions 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 that
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
16
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 are
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. During the first quarter of 2002, the
Company filed an application to become a "financial holding company" and its
application was accepted. The Company has not yet determined whether or when it
will engage in any particular financial activities that are permissible for
financial holding companies.
Employees
At December 31, 2001 the Company had 277 full time and 18 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 both the Bank and 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
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, since December 1998, and a director of the Company since October 2000. He
served as Executive Vice President of the Company from December 1998 until
November 2001 and was named President of the Company in November 2001. From
1984 until joining the Company, he was a senior officer at Central Fidelity
Bank, which was later acquired by Wachovia Bank. He has 30 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. He was named Executive Vice President of the Bank in
June 2001 and of the Company in October 2001. 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 served as Senior Vice President of operations and
secretary of the Bank since 1992
17
and of the Company since its inception. She was named Executive Vice President
of the Bank in June 2001 and of the Company in October 2001. She has been in
banking over 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.
James M. Miller was named Executive Vice President of the Bank in June
2001. He served as President of the Bank's Northern Virginia region from
December 1997 until August 2001, when he assumed his duties as Executive Vice
President. He served as Senior Vice President of the Company since December
1998, and was named Executive Vice President in October 2001. Mr. Miller was
President of Eastern American Bank (FSB) prior to its merger with Resource Bank
in December 1997. He is active in civic affairs and has 20 years experience in
banking and finance.
ITEM 2. PROPERTIES
- ------- ----------
The Company leases most of 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
owns a three story office building in Herndon, Virginia from which its Northern
Virginia operations are conducted. During the third quarter 2000, the Bank sold
an excess portion of this land retaining only the Bank building property.
Construction of this building was completed in 2001.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
On November 5, 1999, AGM Development Corporation ("AGM"), Michael Agnew
and Barbara M. Agnew (collectively the "Agnews") (AGM and the Agnews
collectively the "Plaintiffs") filed a lawsuit against Resource Bank, the
Company's wholly owned banking subsidiary ("Bank"), in the Circuit Court for the
City of Virginia 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.
18
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.
On May 1, 2001, United Leasing Corporation, a Mechanicsville, Virginia
business, filed a motion for judgment against the Bank. The action centers on
certain financing arrangements made by Resource Bank for United Leasing in June
of 1999 in order for United Leasing to provide funding to AGM Development. As
noted above, the bank declared AGM Development's loans in default in August of
1999. In October of 1999, United Leasing and the bank entered into a liquidation
and loan modification agreement, the purpose of which was to resolve any claims
United Leasing and the bank might have against one another.
The United leasing lawsuit alleged that the liquidation and loan
modification agreement was not enforceable and sought monetary damages for
losses United Leasing incurred as a result of its financing arrangements with
the bank. Among other claims, the lawsuit alleged that the bank made fraudulent
misrepresentations regarding its lending relationship with AGM Development.
Resource Bank believed the allegations in the lawsuit were untrue and presented
valid defenses to each of the claims asserted by United Leasing.
On February 22, 2002, the court granted the Bank's Motion for Summary
Judgment and dismissed United Leasing's case with prejudice ruling that the
liquidation and loan agreement was enforceable and precluded United Leasing's
claims. The Bank has filed a counterclaim to recover its attorney's fees
incurred in defense of the suit.
On March 8, 2002, Cohen & Malad, LLP, an Indianapolis, Indiana law firm
acting as plaintiff, filed a class action complaint in the Circuit/Superior
Court of Marion County, Indiana against the Company and the Bank. The suit
alleges that the mortgage division of the Bank violated the Telephone Consumer
Protection Act by sending unsolicited advertisements by facsimile without
obtaining prior express invitation or permission to send the facsimiles. The
suit seeks certification of a class action to pursue common claims amongst
recipients of unsolicited facsimiles and seeks monetary damages. The Company and
Bank believe that the facsimile allegedly received by the plaintiff was
transmitted by a third party fax service retained by the Bank.
As the lawsuit was just received, the Company and the Bank are still in
the process of factually investigating the claims. The Company and the Bank
intend to defend the suit vigorously. In particular, the Company and the Bank
intend to vigorously contest class certification on the grounds that individual
issues surrounding each facsimile precludes class certification. If appropriate,
the Company and the Bank will also vigorously explore possible causes of action
against the fax service provider that transmitted the facsimile allegedly
received by the plaintiff in the lawsuit.
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 2001.
19
PART II
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 2001 and 2000, and information concerning dividends paid on the Company's
common stock are set forth in the following table.
Cash Dividend
Nasdaq/NM 2001 High Low Paid
Fourth Quarter $18.18 $14.50 $0.12
Third Quarter 17.99 14.00 .12
Second Quarter 16.00 14.00 .12
First Quarter 16.50 10.13 .12
Nasdaq /NM 2000
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
The Company's 3,103,295 common shares outstanding were held by
approximately 800 shareholders of record at February 22, 2002.
20
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.
Years Ended December 31
2001 2000 1999 1998 1997
Income Statement Data: (Dollars in thousands, except per share data)
Gross interest income $32,692 $28,413 $21,381 $19,746 $10,937
Gross interest expense 21,659 18,975 12,435 11,336 5,983
Net interest income 11,033 9,437 8,946 8,410 4,954
Provision for loan losses 195 1,100 4,667 150 155
Net interest income after provision for
loan losses 10,838 8,337 4,279 8,260 4,799
Non-interest income 20,144 11,890 6,811 7,943 4,520
Non-interest expense 24,521 14,109 12,168 11,565 6,533
Income before income taxes 6,461 6,118 (1,078) 4,638 2,786
Income taxes (benefit) 1,918 1,886 (387) 1,591 965
Net income (loss) 4,543 4,233 (691) 3,047 1,821
Per Share Data /(1)/:
Net income /(2)/ $1.57 $1.63 $(.27) $1.24 $ 0.92
Cash dividends paid .48 .42 .40 .24 0.125
Book value at period end 9.27 7.50 6.25 7.18 6.36
Tangible book value at period end 9.03 7.47 6.25 7.18 6.36
Period-End Balance Sheet Data:
Total assets $564,850 $404,494 $306,690 $233,460 $209,330
Total loans (net of unearned income) 344,636 288,513 255,671 188,522 150,590
Total deposits 411,504 330,645 260,469 206,219 169,508
Long-term debt 66,000 30,300 14,500 5,300 7,300
Stockholders' equity 28,779 19,672 15,870 17,789 15,602
Performance Ratios
Return (loss) on average assets 0.95% 1.21% (.25)% 1.27% 1.40%
Return (loss) on average stockholders' equity 18.73% 24.13% (3.90)% 18.19% 18.59%
Average stockholders' equity to average
total assets 5.09% 5.01% 6.51% 6.96% 7.54%
Net interest margin /(3)/ 2.52% 2.92% 3.42% 3.62% 3.90%
Earnings to fixed charges
Excluding interest expense 3.03x 4.03x .24x 5.55x 10.32x
Including interest expense 1.30x 1.32x .91x 1.41x 1.46x
Asset Quality Ratios
Net charge-offs to average loans .01% .10% 2.06% .13% .02%
Allowance to period-end loans 1.07% 1.22% 1.04% 1.33% 1.71%
Allowance to non-performing loans 227.93% 263.75% 361.51% 264.55% 58.50%
Non-accrual loans to loans 0.16% 0.35% 0.19% 0.28% 2.03%
Non-performing assets to loans and
foreclosed properties 0.48% 0.46% 0.30% 0.84% 3.36%
Risk-based capital ratios
Tier 1 capital 9.49% 8.74% 8.20% 9.23% 9.69%
Total capital 10 .44% 10 .75% 9.24% 10 .48% 10 .93%
Leverage capital ratio 6.88% 6.69% 7.19% 7.52% 9.67%
Total equity to total assets 5.09% 4.86% 5.17% 7.62% 7.45%
- -------------------
/(1)/ All per share figures have been adjusted to reflect a two-for-one stock
split on July 1, 1998.
/(2)/ Net income per share is computed using the weighted average outstanding
shares.
/(3)/ Net interest margin is calculated as tax-equivalent net interest income
divided by average earning assets and represents the Company's net yield on its
earning assets.
21
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 $4,542,621 for 2001, $4,232,730 for 2000 and
a net loss of $690,808 for 1999. This constituted net basic earnings (loss) per
common share of $1.57 for 2001, $1.63 for 2000 and $(.27) for 1999. With the
dilutive effect of common stock equivalents, earnings (loss) per common share
were $1.49 for 2001, $1.56 for 2000 and $(.27) for 1999. 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 exited the asset based lending business in 1999, which, at
that time, represented only 5% of the Company's total loan portfolio.
In regard to business segment reporting, the Company's mortgage banking
operations resulted in net income before taxes of $2,330,003 for 2001, $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. 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.
At December 31, 2001, 42.3% of total loans were due in one year or less.
Floating rate loans with maturities of one year or less represented 35.5% of
total loans, and the remainder of loans had fixed rates.
Average loans, net of unearned income, to average deposits were 79.7%,
88.0% and 93.6% in 2001, 2000 and 1999, respectively.
Net Interest Income
Net interest income, before provision for loan losses, increased by 16.9%
in 2001 over 2000 to $11,032,769 and 5.5% in 2000 over 1999 to $9,437,497. The
2001 increase in net interest income was closely proportionate with the
increase in average earning assets and interest bearing liabilities during
2001. During 2001, due to the continued expansion of the Bank's commercial
lending activities, average loans increased 16.6% to $306,801,914. Due to the
competitive pricing of the Company's deposit products, average total deposits
increased 28.7% to $384,946,298. Average funds borrowed from the Federal Home
Loan Bank and correspondent banks increased by 164.5% to $51,903,612 in 2001.
As part of its mortgage banking operations, funds advanced on behalf of
investor banks in settlement of mortgage loans increased 181.0% to $45,595,815
in 2001. Average securities increased 92.9% to $92,625,643 and average
interest bearing deposits in other banks increased 15.4% to $9,791,557 in 2001.
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. See also Item 7a of this 10-K for
a discussion of interest rate sensitivity and market risk.
22
As can be seen from the historical analysis and the GAP analysis, the
Company is in an asset-sensitive position in the short term, which is
effectively balanced within one year. In a period of rising interest rates, the
Company is positioned to increase future net interest income. Conversely, in a
period of declining interest rates the Company will be in a position to have a
decrease in future interest income. This managed GAP does not include the
impact of mortgage banking loan volume that provides a natural hedge against
this GAP position. Mortgage banking income tends to increase in times of lower
or declining interest rates, as refinancing leads to an increase in mortgage
loan originations. In a climate of higher or rising interest rates, mortgage
loan originations, particularly refinancing, decrease and mortgage banking
income therefore decreases.
In a declining interest rate environment in 2001, the Company's net
interest margin was negatively impacted by frequently reoccurring cuts in
market rates, particularly the prime lending rate. The Company's prime based
loan portfolio repeatedly repriced downward more quickly than the cost of
liabilities funding these loans. However, the Company's mortgage operations
benefited from these same rate cuts, more than compensating for the lost
interest spread with mortgage fee income.
Allowance for Loan Losses
The ratio of net loans charged off to average loans outstanding was .01%
in 2001, .10% in 2000 and 2.06% in 1999. The allowance for loan losses as a
percentage of loans at year end was 1.07%, 1.22%, and 1.05% at December 31,
2001, 2000 and 1999, respectively. The level of non-performing loans at year
end was $1,622,000, $1,335,000 and $743,000 at December 31, 2001, 2000 and
1999, or 0.48%, 0.46 and 0.29% of total loans, respectively.
Management made a provision for loan loss of $195,000 in 2001, $1,100,000
in 2000 and $4,667,000 in 1999. The significant increase in the provision for
loan loss in 1999 over previous years was the result of the previously noted
credit problems encountered within the Company's asset based lending program.
Such credit quality problems were exclusively related to this business unit,
and the Company exited this program in 1999.
In establishing the allowance for loan losses, management considers a
number of factors, including loan asset quality, related collateral and
economic conditions prevailing during the loan's repayment. In its loan
policies, management has emphasized the borrower's ability to service the debt,
the borrower's general creditworthiness and the quality of collateral.
While management believes that the allowance is sufficient for the
existing loan portfolio, there can be no assurances that an additional
allowance for losses on existing loans may not be necessary in the future,
particularly if economic conditions within the Company's market areas were to
deteriorate.
Potential Problem Loans
At December 31, 2001, the Company had $536,000 in non-accrual loans, a
decrease of 47.2% from December 31, 2000. Non-accrual loans consisted of seven
individual credits and the total was less than one half of one percent of total
loans. The Company had $1,086,000 in loans past due 90 days or more that were
still accruing at December 31, 2001. Management believes that the loans past
due 90 days or more and still accruing are well secured and in the process of
collection. In addition to loans on either non-accrual status or loans past due
90 days or more and still accruing, management had identified $2,671,000 of
loans that have been internally classified. These loans require more than
normal attention and are potentially problem loans.
For the historical analysis of the Bank's loan loss experience, see the
table entitled "Loan Loss Experience" in Part I - Item 1. of this Form 10-K.
Non-interest Income and Non-interest Expenses
Non-interest income in 2001 was $20,143,861, up 69.4% from $11,890,068 in
2000 due to the increased income derived from the residential mortgage banking
operations and placement fees from the commercial mortgage operations.
Non-interest income in 2000 was up 74.6% from $6,811,342 in 1999. During the
third quarter of 2000,
23
the Company sold a banking branch in Reston, Virginia, for a gain of
$2,532,260, as well as the furniture and equipment associated with the branch,
for a gain of $529,938. Also during the same quarter, the Company sold a parcel
of real estate acquired with the property on which the Bank built its Northern
Virginia headquarters, for a gain of $619,755. Excluding nonrecurring
transactions, non-interest income in 2000 would have been $8,208,015, up 20.5%
over 1999. Decreases in market interest rates in 2001 caused an increase of
144.5% in the residential mortgage market volume and a resultant increase of
the Company's mortgage banking income of 154.5% to $17,604,747. Increases in
market interest rates during 1999 and the first half of 2000 resulted in a
modest increase of 14.1% in the 2000 residential mortgage market volume and a
resultant increase of the Company's mortgage banking income of 21.2% to
$6,916,584. Because of the uncertainty of future loan origination volume and
the future level of interest rates, the Company may experience reductions in
mortgage banking income in future periods. Service charge income decreased
11.3% to $648,809 and decreased 3.8% to $731,473 in 2001 and 2000, respectively
and decreased 0.2% to $759,289 in 1999.
Total non-interest expense was $24,520,801, an increase of 73.8% from
$14,109,146 in 2000 and an increase of 16.0% from $12,167,768 in 1999.
Non-interest expense increased in 2001 over 2000 as a result of the
acquisitions of First Jefferson and Atlantic Mortgage during the first quarter
of 2001 and the related costs associated with the additional loan production
offices that could not be integrated into existing offices. The increase in
2000 over 1999 was a result of adding a full service banking operation in
Newport News during the first quarter of 2000 and establishing loan production
offices in Newport News and Richmond, as well as absorbing expenses associated
with the offering of online banking services. Non-interest expense increased in
1999 over 1998 as the result of adding a full service banking operation in
Chesapeake and a loan office in Newport News, Virginia, as well as incurring
expenses specifically related to the previously noted disposition of the credit
problems encountered in the asset based lending program. The largest component
of non-interest expense, salaries and employee benefits, increased 101.8% in
2001 to $16,289,407, increased 19.8% in 2000 to $8,071,927, and increased
slightly (0.7%) in 1999 to $6,735,896. This category comprised 66.4% of the
Company's total non-interest expense in 2001, 57.2% in 2000 and 55.4% in 1999.
Occupancy expense increased to $1,585,141 in 2001 (up 30.8%) over 2000 and
increased to $1,211,649 in 2000 (up 2.2%) over 1999 and increased to $1,185,861
in 1999 (up 8.9%). Depreciation and equipment maintenance expense increased by
81.1% in 2001 to $1,768,822, increased by 5.4% in 2000 to $976,982 and
increased by 22.0% in 1999 to $926,702. The 2001 depreciation and equipment
maintenance expense increased as a result of the acquisitions of First
Jefferson and Atlantic Mortgage while the 2000 depreciation and equipment
maintenance expense increased as a result of the opening of the Newport News
banking branch and establishing loan production offices in Newport News and
Richmond. Outside computer service expense increased by 56.6% in 2001 to
$812,684, and increased by 6.9% in 2000 to $518,982. In 1999 outside computer
service expense decreased 11.3% to $485,458 due to the result of the merger
with Eastern American Bank and the systems conversions that happened in late
1997 and 1998. Professional fees increased 46.6% in 2001, decreased 16.1% in
2000 and increased significantly (110%) in 1999 to $340,821, as the result of
the previously discussed credit problems in the asset based lending program.
Federal Deposit Insurance Corporation ("FDIC") premiums decreased 32.3% in
2001, increased 68.7% in 2000 to $98,062 and increased 10.6% to $58,125 in
1999. The decrease in 2001 was a result of the risk classification and related
assessment rates. As the result of the Eastern American Bank merger, FDIC
insurance premiums are assessed on the Bank's deposit base on a pro rata basis
whereby approximately 68 percent of the Bank's deposits are subject to Bank
Insurance Fund ("BIF") rates, and approximately 32 percent of deposits are
subject to Savings Association Insurance Fund ("SAIF") rates. This ratio of BIF
and SAIF assessment rates was established at the time of merger, based on the
relative sizes of the Bank and Eastern American Bank deposit bases at December
1, 1997.
Stationery and supplies expense increased by 65.2% in 2001 to $681,761,
decreased by 16.9% in 2000 to $412,683 and decreased 5.6% in 1999 to $496,814.
Marketing and business development increased by 12.8% to $536,850 in 2001,
increased by 18.7% to $475,778 in 2000 and increased 16.8% in 1999 to $400,938.
Other non-interest expenses increased by 13.1% in 2001 to $2,272,287,
increased by 34.8% in 2000 to $2,009,363 and increased 5.3% in 1999 to
$1,490,664. The increase in 2001 included a write down of $55,000 in the value
of an other asset held by the Company and a similar write down of $500,000 in
2000.
Income Taxes
24
Applicable income taxes on 2001 earnings amounted to $1,918,208, resulting
in an effective tax rate of 29.7% and income taxes on 2000 earnings amounted to
$1,885,689, resulting in an effective tax rate of 30.8%. These rates are lower
as a result of the increase in tax-free municipals in the Bank's security
portfolio. The income tax benefit from the Company's 1999 loss was $386,958,
resulting in an effective tax rate of 35.9%.
Liquidity
The Company's funding requirements are supplied from a range of traditional
sources, including various types of demand deposits, money market accounts,
certificates of deposit and short-term borrowings. Large certificates of
deposit accounted for 2.5% and 2.0% of total deposits at December 31, 2001 and
2000, respectively. Federal Home Loan Bank of Atlanta ("FHLB") advances were
also utilized as funding sources, with $83,800,000 and $30,300,000 in such
advances outstanding at December 31, 2001 and December 31, 2000, respectively.
Pursuant to the terms of a variable rate line of credit with the FHLB, the Bank
may borrow up to 25% of the Bank's assets. This FHLB credit facility has no
expiration date, but is re-evaluated periodically to determine the Bank's
credit worthiness. Additionally, the Bank has a warehouse line of credit
collateralized by first mortgage loans, amounting to $75,000,000 and is
renewable annually. As of December 31, 2001, there was no balance drawn from
this line of credit. Management has no reason to believe these arrangements
will not be renewed.
Management seeks to ensure adequate liquidity to fund loans and meet the
Company's financial requirements and opportunities. To provide liquidity for
current, ongoing and unanticipated needs, the Company maintains federal funds
sold, money market accounts and a portfolio of debt securities. The Company
also structures and monitors the flow of funds from debt securities and from
maturing loans. Securities are generally purchased to provide a source of
liquidity. At December 31, 2001, the Company had $114,634,519, fair market
value, in securities available-for-sale and no securities in held-to-maturity.
Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported as a net amount in a separate component of
stockholders' equity until realized. Securities are composed of governmental or
quasi-governmental agencies, and investment grade preferred stocks and bonds of
corporations. Net unrealized depreciation, net of tax effect, on securities
available-for-sale was ($160,570) and ($258,222) at December 31, 2001 and 2000,
respectively. There were no federal funds sold to correspondent institutions at
December 31, 2001 and 2000, respectively.
The Company raised approximately $5,000,000 of additional capital in the
fourth quarter of 2001 by offering 5,000 Trust Preferred Securities at a price
of $1,000.00 per Security. These securities bear a variable distribution rate
per annum, reset semi-annually, equal to LIBOR plus 3.75%, provided that the
applicable interest rate may not exceed 11.0% through the interest payment date
in December 2006. These securities have a mandatory redemption date of December
8, 2031, and are subject to varying call provisions at the option of the
Company beginning December 8, 2006.
In the second quarter of 2001, the Company raised net proceeds of
$6,444,036 by issuing 500,000 shares of Common Stock at a public offering price
of $14.00 per share before underwriting discounts. On July 9, 2001, the Company
raised an additional $898,175 of net proceeds through the sale of 72,500
additional shares as part of the same offering. The Company invested $4,950,000
of the offering proceeds in the Bank in the form of capital. This capital
contribution qualifies as Tier 1 Capital for regulatory purposes. The
additional Tier 1 Capital provides the Bank an increased loan to one borrower
limitation, and the ability to continue to grow its balance sheet while
maintaining well-capitalized status.
The Company raised approximately $9,200,000 of additional capital in the
first quarter of 1999 by offering 368,000 Trust Preferred Securities at a price
of $25.00 per Security. The Securities feature a 9.25% coupon. The Company, in
turn, purchased $7,350,000 of non-cumulative 9.25% Preferred Stock issued by
the Bank during the course of 1999. This Preferred Stock qualifies as Tier 1
capital for the Bank for regulatory purposes. This additional Tier 1 capital
provided the Bank with an increased loan to one borrower limitation, and the
ability to continue to grow its balance sheet while maintaining its
well-capitalized status. The Preferred Stock 9.25% coupon matches the coupon of
the Trust Preferred Securities. The remainder of funds generated by the Trust
Preferred Securities offering, estimated at $1,550,000 after offering expenses,
was invested in marketable securities and used by the Company in its stock
repurchase program. These marketable securities are held as available-for-sale
to meet liquidity needs. The
25
Company's stock repurchase program was implemented in part to help offset the
potential dilutive effect of stock options granted to the Company's management
as employment recruitment and retention perquisites. During 2001 and 2000, the
Company repurchased 92,866 and 7,176 shares, respectively.
Recent Accounting Pronouncements
In June 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No.
141 prospectively prohibits the pooling of interest method of accounting for
business combinations initiated after June 30, 2001. Statement No. 142 requires
companies to cease amortizing goodwill that existed at June 30, 2001. The
amortization of existing goodwill will cease on December 31, 2001. Any goodwill
resulting from acquisitions completed after June 30, 2001 will not be
amortized. Statement No. 142 also establishes a new method of testing goodwill
for impairment on an annual basis, or on an interim basis, if an event occurs
or circumstances change that would reduce the fair value of a reporting unit
below is carrying value. The Company is in the process of evaluating the
financial statement impact of adopting Statements No. 142, which will be
effective for fiscal years beginning after December 15, 2001.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." It requires an entity to recognize the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred, if a reasonable estimate of fair value can be made. If a reasonable
estimate of fair value cannot be made in the period the asset retirement
obligation is incurred, the liability shall be recognized when a reasonable
estimate of fair value can be made. The Company is in the process of evaluating
the financial statement impact of adopting Statement No. 143, which will be
effective for financial statements issued after June 15, 2002.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The Company is in the process of evaluating the
financial statement impact of adopting Statement No. 143, which will be
effective for fiscal years beginning after December 15, 2001.
On December 26, 2001, the Accounting Standards Executive Committee (AcSEC)
of the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 01-6, Accounting by Certain Entities (Including
Entities With Trade Receivables) That Lend to or Finance the Activities of
Others. The SOP is effective for financial statements issued for fiscal years
beginning after December 15, 2001. Earlier application is encouraged. With
limited exceptions, this SOP applies to any entity that lends to or finances
the activities of others. For example, an entity may have a financing
arrangement that involves extending credit to trade customers resulting in
trade receivables, a secured mortgage loan, or an unsecured commercial loan.
Those arrangements were included in the scope of the AICPA Audit and Accounting
Guide, Audits of Finance Companies (FC Guide) and, accordingly, also are
included in the scope of this SOP. The FC Guide, portions of which have been
superseded because of the issuance of this SOP, covered all financing
activities of business enterprises. This included financings of different type
and duration, from shorter-term trade financings to extended term arrangements,
both for an entity's own products and services as well as for products and
services sold by unaffiliated businesses. This SOP also provides specialized
guidance for certain transactions specific to certain financial institutions.
Divergence in accounting practices among certain elements of the financial
services industry for similar transactions has resulted in the need for a
reconciliation of existing guidance. This SOP reconciles and conforms, as
appropriate, the accounting and financial reporting provisions established by
the AICPA's Audit and Accounting Guides, Banks and Savings Institutions, Audits
of Credit Unions, and the FC Guide. The Company is assessing the effect of this
SOP on financial condition and results of operations, but does not currently
expect the SOP to have a material effect on its financial statements.
Capital Resources and Adequacy
The Federal Reserve Board, the FDIC and the Office of Thrift Supervision
have issued substantially similar risk-based and leverage capital guidelines
applicable to banking organizations they supervise. Due to the Bank's
capitalization, it is classified as "well capitalized".
The Company's year-end capital-to-asset ratio was 5.09% at December 31,
2001 as compared to 4.86% at December 31, 2000. The Company is also classified
as "well-capitalized".
26
The capital adequacy standards are based on an established minimum for
Risk-Based Capital, Tier 1 Risk-Based Capital and the Tier 1 Leverage Ratio.
The following table summarizes the Company's regulatory capital ratios at
December 31, 2001.
Resource Resource
Required Ratio Bankshares Bank
Tier 1 risk-based 4.00% 9.49% 9.05%
Total risk-based 8.00% 10.44% 10.00%
Tier 1 leverage 4.00 to 5.00% 6.88% 6.58%
The Company is in full compliance with all relevant regulatory capital
requirements.
Availability of Budgets and Related Financial Information
On an ongoing basis, the Company's management prepares and updates one year
and five year forward looking budgets and financial plans. This information is
prepared by management for the purpose of assessing current business, economic
and monetary conditions and the likely impact of those conditions on the
Company's future business, results of operations and financial condition. These
budgets and financial plans are used by management to assist with decisions
related to, among other matters, asset and liability management, capital
resource allocation and loan loss projections. Upon prior request, this
budgetary and financial information is available for review by any current or
potential shareholder.
Any current or potential shareholder that obtains this information from the
Company should be aware that the budgetary and financial data necessarily
includes certain projections with respect to the potential future financial
performance of the Company. The assumptions and estimates underlying the
projections are inherently uncertain and, though considered reasonable by the
Company, are subject to significant business, economic and competitive
uncertainties and contingencies, all of which are difficult to predict and many
of which are beyond the control of the Company. Accordingly, there can be no
assurance that the projected results will be realized. The Company's actual
results in the future will vary from the projected results, and those variations
may be material. In addition, management is not under any obligation to update
its budgets and financial plans, even in the event the assumptions or estimates
underlying the information are shown to be in error.
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, 2001. 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 $8,500,000 and decreased by $911,000,
respectively. In addition, for the same parallel and instantaneous rate shocks,
annualized net interest income would increase by $308,000 and decrease by
$445,000 as the result of a respective 200 basis point increase and decrease in
rates.
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. The Company generally
holds such loans for less than 60 days, because the loans are 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
27
historical analysis, or from assumptions by instrument type.
The Company is not engaged in investment strategies involving derivative
financial instruments. Asset and liability management is conducted without the
use of forward-based contracts, options, swap agreements, or other synthetic
financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The following financial statements are included in Exhibit 99.1 of this
Form 10-K.
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Income - Years ended December 31, 2001, 2000 and
1999
Consolidated Statements of Stockholders' Equity - Years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000
and 1999
Notes to Financial Statements - December 31, 2001, 2000 and 1999
Quarterly unaudited financial information is contained in Note 21 of the
Notes to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
In accordance with General Instruction G(3), the information called for in
Part III is incorporated by reference from the Company's Proxy Statement to be
filed no later than April 30, 2002 in connection with the Company's 2002 Annual
Meeting of Shareholders
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS OF FORM 8-K
- -------- -----------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. The following consolidated financial statements of the Company as
of December 31, 2001, 2000 and 1999 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, 2001 and 2000
Consolidated Statements of Income -- Years Ended December 31, 2001, 2000 and
1999
Consolidated Statements of Stockholders' Equity -- Years Ended December
31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows -- Years Ended December 31, 2001, 2000
and 1999 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
28
this Form 10-K and such Exhibit Index is incorporated herein
by reference.
(b) Reports on Form 8-K in quarter ended December 31, 2001: 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.
29
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
Chief Executive Officer
Date: 3/25/2002
/s/ Eleanor J. Whitehurst
Senior Vice President and Chief Financial Officer
Date: 3/25/2002
30
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
Thomas W. Hunt Chairman of the Board Date: 3/25/2002
/s/ Lawrence N. Smith
Lawrence N. Smith Chief Executive Officer Date: 3/25/2002
(Principal Executive Officer)
Director
/s/ Eleanor J. Whitehurst Senior Vice President
Eleanor J. Whitehurst Chief Financial Officer Date: 3/25/2002
(Principal Financial and
Accounting Officer)
/s/ Alfred E. Abiouness
Alfred E. Abiouness Director Date: 3/25/2002
/s/ T. A. Grell, Jr. President
T.A. Grell, Jr. Director Date: 3/25/2002
/s/ Louis Ray Jones
Louis Ray Jones Director Date: 3/25/2002
/s/ Arthur Russell Kirk
Arthur Russell Kirk Director Date: 3/25/2002
/s/ Elizabeth A. Twohy
Elizabeth A. Twohy Director Date: 3/25/2002
31
EXHIBIT INDEX
RESOURCE BANKSHARES CORPORATION
EXHIBIT
NO. DESCRIPTION
2.1 Amended and Restated Agreement and Plan of Merger, dated as of April 8, 1997 *
between Resource Bank and Eastern American Bank FSB. (Incorporated by
reference to Resource Bank's Proxy Statement previously filed with the Federal
Reserve on June 24, 1997.)
3.1 Amended and Restated Articles of Incorporation of Resource Bankshares *
Corporation. (Incorporated by reference to Registrant's Form 10-Q previously
filed with the Commission on August 11, 2000.)
3.2 Bylaws of Resource Bankshares Corporation. (Incorporated by reference to *
Registrant's Form 8-K previously filed with the Commission on July 1, 1998.)
4.1 Certificate of Trust of Resource Capital Trust I. (Incorporated by reference *
to the Registrant's Registration Statement on Form S-2, Commission File No.
333-70361, previously filed with the Commission on January 8, 1999.)
4.2 Trust Agreement dated December 23, 1998 between Resource Bankshares *
Corporation and Wilmington Trust Company. (Incorporated by reference to the
Registrant's Registration Statement on Form S-2, Commission File No.
333-70361, previously filed with the Commission on January 8, 1999.)
4.3 Form of Amended and Restated Declaration of Trust for Resource Capital Trust *
I. (Incorporated by reference to the Registrant's Registration Statement on
Form S-2, Commission File No. 333-70361, previously filed with the Commission
on January 8, 1999.)
4.4 Form of Junior Subordinated Indenture between Resource Bankshares Corporation *
and Wilmington Trust Company, as Trustee. (Incorporated by reference to the
Registrant's Registration Statement on Form S-2, Commission File No.
333-70361, previously filed with the Commission on January 8, 1999.)
4.5 Form of Capital Security (included in Exhibit 4.3 above). (Incorporated by *
reference to the Registrant's Registration Statement on Form S-2, Commission
File No. 333-70361, previously filed with the Commission on January 8, 1999.)
4.6 Form of Junior Subordinated Debt Security (included in Exhibit 4.4 above). *
(Incorporated by reference to the Registrant's Registration Statement on Form
S-2, Commission File No. 333-70361, previously filed with the Commission on
January 8, 1999.)
4.7 Form of Guarantee Agreement with respect to Trust Securities issued by *
Resource Capital Trust I. (Incorporated by reference to the Registrant's
Registration Statement on Form S-2, Commission File No. 333-70361,
32
previously filed with the Commission on January 8, 1999.)
4.8 Form of Escrow Agreement among McKinnon & Company, Inc., Resource Capital *
Trust I, Resource Bankshares Corporation and Wilmington Trust Company.
(Incorporated by reference to the Registrant's Registration Statement on Form
S-2, Commission File No. 333-70361, previously filed with the Commission on
January 8, 1999.)
4.9 Form of Capital Securities Subscription Agreement among Resource Capital Trust **
II, Resource Bankshares Corporation and MM Community Funding II, LTD, dated
November 14, 2001
4.10 Form of Resource Capital Trust II Placement Agreement, among Resource Capital **
Trust II, Resource Bankshares Corporation and Sandler O'Neill & Partners, L.P.
, dated November 14, 2001
4.11 Form of Declaration of Trust of Resource Capital Trust II between Resource **
Bankshares Corporation and Wilmington Trust Company, dated November 7, 2001
4.12 Form of Amended and Restated Declaration of Trust - Resource Capital Trust II, **
dated November 28, 2001
4.13 Form of Guarantee Agreement dated November 28, 2001, with respect to the **
Capital Securities issued by Resource Capital Trust II
4.14 Form of Capital Security Certificate **
4.15 Form of Common Securities Subscription Agreement, dated November 28, 2001, **
between Resource Capital Trust II and Resource Bankshares Corporation
4.16 Form of Common Security Certificate **
4.17 Form of Indenture dated November 28, 2001 between Resource Bankshares **
Corporation and Wilmington Trust Company
4.18 Form of Debenture Subscription Agreement, dated November 28, 2001, between **
Resource Bankshares Corporation and Resource Capital Trust II
4.19 Form of Junior Subordinated Debt Security **
10.1 Director's Stock Option Agreement dated June 15, 1989. (Incorporated by *
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on April 28, 1993.)
10.2 Non-Employee Director Incentive Stock Option Plan dated June 15, 1989. *
(Incorporated by reference to Registrant's Form 10-KSB previously filed with
the Federal Reserve on April 28, 1993.)
10.3 Lease Agreement dated November 1, 1990 by and between Birchwood Mall *
Associates and Resource Bank and letter dated November 12, 1992 from Resource
Bank to Fleder, Caplan, Jaffee Associates to amend the
33
lease.(Incorporated by reference to Registrant's Form 10-KSB previously filed with
the Federal Reserve on April 28, 1993.)
10.4 Resource Bank 1993 Long-Term Incentive Plan. (Incorporated by reference to *
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
22, 1994.)
10.5 Resource Bank 1993 Long-Term Incentive Plan, First Amendment. (Incorporated by *
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 30, 1995.)
10.6 Lease Agreement dated September 22, 1994 by and between Resource Mortgage and *
A.R. Marketing, Inc. (Incorporated by reference to Registrant's Form 10-KSB
previously filed with the Federal Reserve on March 30, 1995.)
10.7 Assignment of Lease dated February 28, 1994 with Resource Mortgage to Contract *
Publishing, Inc. (Incorporated by reference to Registrant's Form 10-KSB
previously filed with the Federal Reserve on March 30, 1995.)
10.8 Resource Bank 1994 Long-Term Incentive Plan. (Incorporated by reference to *
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
30, 1995.)
10.9 Lease Agreement and Addendum to Lease both dated April 20, 1995, and First *
Lease Amendment dated December 13, 1995 to Lease by and between Glen Forst
Professional Center Associates and Resource Bank. (Incorporated by reference
to Registrant's Form 10-KSB previously filed with the Federal Reserve on March
20, 1996.)
10.10 Lease Agreement dated April 1, 1994 by and between Whooping Crane Limited *
Partnership and Southern Mortgage Financial Company.(Incorporated by
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 20, 1996.)
10.11 Resource Bank Retirement Savings Plan. (Incorporated by reference to *
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
20, 1996.)
10.12 Resource Bank 1993 Long-Term Incentive Plan, Second Amendment. (Incorporated *
by reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 31, 1997.)
10.13 Lease Agreement and Addendum to Lease both dated May 1, 1996 by and between *
Birchwood Mall Associates and Resource Bank. (Incorporated by reference to
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
31, 1997.)
10.14 Resource Bank 1994 Long-Term Incentive Plan, First Amendment. (Incorporated by *
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 31, 1997.)
10.15 Resource Bank 1996 Long-Term Incentive Plan, Amended and Restated.
34
(Incorporated by reference to Registrant's Form 10-KSB previously filed with
the Federal Reserve on March 31, 1998.)
10.16 Lease Agreement dated July 22, 1997 by and between Washington Real Estate *
Investment Trust and Resource Bank. (Incorporated by reference to
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
31, 1998.)
10.17 Lease Agreement dated July 19, 1993 by and between Reston North Point Village *
Limited Partnership and Eastern American Bank, FSB. (Incorporated by
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 31, 1998.)
10.18 Lease Agreement dated July 18, 1995 by and between The Richmond Corporation *
and Eastern American Bank, FSB. (Incorporated by reference to Registrant's
Form 10-KSB previously filed with the Federal Reserve on March 31, 1998.)
10.19 Lease Agreement dated October 31, 1995 by and between Elden Investments, *
L.L.C. and Eastern American Bank, FSB. (Incorporated by reference to
Registrant's Form 10-KSB previously filed with the Federal Reserve on March
31, 1998)
10.20 Lease Agreement dated October 24, 1994 by and between Greenbrier Point *
Partners, L.P. and CitizensBanc Mortgage Company and Assignment, Assumption
and Release Agreement dated January 7, 1997 among Citizens Mortgage Company,
Resource Bank and Greenbrier Point Partners, L.P. (Incorporated by reference
to Registrant's Form 10-KSB previously filed with the Federal Reserve on March
31, 1998.)
10.21 Lease Agreement dated December 5, 1996 and Amendment dated August 5, 1997 by *
and between The Bon Air Green Company and Resource Bank. (Incorporated by
reference to Registrant's Form 10-KSB previously filed with the Federal
Reserve on March 31, 1998.)
10.22 Employment Agreement dated January 1 , 1999 by and between Resource Bank and *
T. A. Grell, Jr. (Incorporated by reference to Registrant's Form 10-K
previously filed with the Securities & Exchange Commission on March 31, 1999)
10.23 Employment Agreement dated January 1, 1999, by and between Resource Bank and *
Harvard R. Birdsong, as amended. (Incorporated by reference to Registrant's
Form 10-Q previously filed with the Securities & Exchange Commission on August
16, 1999)
10.24 Employment Agreement dated January 1, 1999, by and between Resource Bank and *
Debra C. Dyckman, as amended. (Incorporated by reference to Registrant's Form
10-Q previously filed with the Securities & Exchange Commission on August 16,
1999)
35
10.25 Employment Agreement dated January 1, 1999, by and between Resource Bank and *
Lawrence N. Smith, as amended. (Incorporated by reference to Registrant's Form
10-Q previously filed with the Securities & Exchange Commission on August 16,
1999)
10.26 Employment Agreement dated January 1, 1999, by and between Resource Bank and *
Eleanor J. Whitehurst, as amended. (Incorporated by reference to Registrant's
Form 10-Q previously filed with the Securities & Exchange Commission on August
16, 1999)
10.27 First Amendment to Employment Agreement dated January 1, 1999, by and between *
Resource Bank and T.A. Grell, Jr. (Incorporated by reference to Registrant's
Form 10-Q previously filed with the Securities & Exchange Commission on August
16, 1999)
**21.1 Subsidiaries of Registrant.
**23.1 Consent of Goodman & Company, L.L.P.
**24.1 Powers of Attorney (included on signature page)
**99.1 Consolidated Financial Statements
- -----------------------------------------------
* Not filed herewith; incorporated by reference.
** Filed herewith.
36