SCHEDULE 14A
(Rule 14a-101)
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<CAPTION>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-
11(c) or Rule 14a-12
</TABLE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, $5.00 par value, of Mid-Atlantic Community
BankGroup, Inc.
..................................................................
(2) Aggregate number of securities to which transaction applies:
2,000,442 of Common Stock of Mid-Atlantic Community BankGroup,
Inc.
..................................................................
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$18.6875, representing the average of the high ($18.875) and low
($18.50) prices of the common stock of Mid-Atlantic Community
BankGroup, Inc. as reported on The Nasdaq SmallCap Market on
September 17, 1998.
..................................................................
(4) Proposed maximum aggregate value of transaction:
$37,383,260
..................................................................
(5) Total fee paid:
$7,477
..................................................................
<PAGE>
[X] Fee paid previously with preliminary materials.
$1,023
.........................................................................
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
$6,454
..................................................................
(2) Form, Schedule or Registration Statement no.:
Registration Statement No. 333-62997
..................................................................
(3) Filing Party:
Mid-Atlantic Community BankGroup, Inc.
..................................................................
(4) Date Filed:
September 4, 1998
..................................................................
<PAGE>
[LOGO]
United Community Bankshares, Inc.
October 15, 1998
Dear Fellow Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of United Community Bankshares, Inc. ("UCB") to be held at the Virginia Diner,
Highway 460, Wakefield, Virginia on November 19, 1998 at 9:30 a.m.
At the meeting shareholders will consider and vote on the Agreement and
Plan of Reorganization, dated July 8, 1998 (the "Agreement"), between UCB and
Mid-Atlantic Community BankGroup, Inc. ("MACB") pursuant to which, among other
things, UCB will merge with and into MACB (the "Reorganization"). MACB, a bank
holding company headquartered in Gloucester, Virginia, owns and operates
Peninsula Trust Bank, Incorporated. Under the terms of the Agreement, each share
of common stock of UCB outstanding immediately prior to consummation of the
Reorganization will be exchanged for 1.075 shares of MACB Common Stock, with
cash being paid in lieu of issuing fractional shares. At the effective time of
the Reorganization, MACB's name will be changed to Atlantic Financial Corp.; its
headquarters will move to Newport News, Virginia; and its Board of Directors
will consist of 15 individuals, seven of whom are directors of MACB and seven of
whom are directors of UCB or its bank subsidiaries.
The exchange of shares (other than for cash in lieu of any fractional
shares) will be a tax-free transaction for federal income tax purposes. Details
of the proposed Reorganization are set forth in the accompanying Joint Proxy
Statement, which you are urged to read carefully in its entirety. Approval of
the Reorganization requires the affirmative vote of holders of a majority of the
outstanding shares of UCB common stock.
Your Board of Directors has approved the Reorganization and believes
that it is in the best interests of UCB and its shareholders. Accordingly, the
Board unanimously recommends that you VOTE FOR the Reorganization.
We hope you can attend the Meeting. Whether or not you plan to attend,
please complete, sign and date the enclosed proxy card and return it promptly in
the enclosed envelope. Your vote is important regardless of the number of shares
you own. We look forward to seeing you at the Meeting.
Sincerely,
/s/ Wenifred O. Pearce
Wenifred O. Pearce
President and Chief Executive Officer
100 East Fourth Avenue, Franklin, Virginia 23851
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on November 19, 1998 at 9:30 a.m.
A Special Meeting of Shareholders of United Community Bankshares, Inc.
("UCB") will be held on November 19, 1998 at 9:30 a.m., at the Virginia Diner,
Highway 460, Wakefield, Virginia for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated July
8, 1998, between UCB and Mid-Atlantic Community BankGroup, Inc. ("MACB") and a
related Plan of Merger (collectively, the "Reorganization Agreement"), providing
for a Merger between UCB and MACB (the "Reorganization") upon the terms and
conditions therein, including among other things that each issued and
outstanding share of UCB common stock will be exchanged for 1.075 shares of MACB
Common Stock, with cash being paid in lieu of issuing fractional shares. The
Reorganization Agreement is enclosed with the accompanying Joint Proxy Statement
as Appendix A. Shareholders are entitled to assert dissenters' rights under
Article 15 of the Virginia Stock Corporation Act, a copy of which is attached to
the Joint Proxy Statement as Appendix B.
2. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed October 9, 1998 as the record date for
the Meeting, and only holders of record of UCB Common Stock at the close of
business on that date are entitled to receive notice of and to vote at the
Meeting or any adjournments or postponements thereof.
By Order of the Board of Directors
/s/ Wenifred O. Pearce
Wenifred O. Pearce
President and Chief Executive Officer
October 15, 1998
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING.
THE BOARD OF DIRECTORS OF UNITED COMMUNITY BANKSHARES, INC.
RECOMMENDS THAT THE
SHAREHOLDERS VOTE TO APPROVE THE REORGANIZATION AGREEMENT.
<PAGE>
United Community Bankshares, Inc.
and
Mid-Atlantic Community BankGroup, Inc.
JOINT PROXY STATEMENT
PROSPECTUS
of
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
INTRODUCTION
This Joint Proxy Statement is being furnished to shareholders of
Mid-Atlantic Community BankGroup, Inc. ("MACB") and shareholders and option
holders of United Community Bankshares, Inc. ("UCB") in connection with the
solicitation of proxies by the Board of Directors of MACB for use at a Special
Meeting of Shareholders (the "MACB Meeting") and by the Board of Directors of
UCB for use at a Special Meeting of Shareholders (the "UCB Meeting"), and any
postponements or adjournments of either meeting.
MACB. At the MACB Meeting, shareholders of MACB will be asked to
approve an Agreement and Plan of Reorganization, dated as of July 8, 1998
between MACB and UCB and a related Plan of Merger (collectively, the
"Reorganization Agreement") providing for the exchange of common stock of UCB
("UCB Common Stock") for MACB Common Stock (the "Reorganization"). Upon
consummation of the Reorganization, each outstanding share of UCB Common Stock,
other than shares as to which dissenters' rights have been duly exercised, will
be exchanged for 1.075 shares of MACB Common Stock and cash in lieu of
fractional shares (the "Exchange Ratio"). All rights to acquire UCB Common Stock
pursuant to stock options granted by UCB under any UCB stock option plans shall,
at the effective time of the Reorganization, be converted into options for MACB
Common Stock, and MACB shall assume each such option in accordance with the
terms of the stock option plan under which it was issued. The number of MACB
option shares shall be rounded up or down to the nearest number of whole shares,
and the exercise price of the UCB stock options shall be adjusted to reflect the
Exchange Ratio. See "The Reorganization" for a more complete description of the
transaction. A copy of the Reorganization Agreement is enclosed as Appendix A.
Shareholders of MACB will have the right to dissent with respect to the
Reorganization. In order for a shareholder of MACB to perfect dissenters'
rights, a notice must be sent to MACB before the vote is taken on the
Reorganization Agreement at the MACB Meeting, and the shareholder must not vote
in favor of the Reorganization by proxy or otherwise. See "Summary - The
Reorganization - Rights of Dissent and Appraisal."
UCB. At the UCB Meeting, shareholders of UCB will be asked to approve
the Reorganization Agreement. Upon consummation of the Reorganization, each
outstanding share of UCB Common Stock, other than shares as to which dissenters'
rights have been duly exercised, will be exchanged for 1.075 shares of MACB
Common Stock, with cash being paid in lieu of issuing fractional shares. All
rights to acquire to UCB Common Stock pursuant to stock options granted by UCB
under a UCB stock option plan shall, at the effective time of the
Reorganization, be converted into options for MACB Common Stock, and MACB shall
assume each such option in accordance with the terms of the stock option plan
under which it was issued, and the number of MACB option shares and the exercise
price of the UCB stock options shall be adjusted to reflect the Exchange Ratio,
with the number of option shares rounded up or down to the nearest number of
whole shares. On October 9, 1998, MACB Common Stock closed at $18.50 per share.
See "The Reorganization" for a more complete description of the Reorganization.
A copy of the Reorganization Agreement is enclosed as Appendix A. Shareholders
of UCB will have the right to dissent with respect to the Reorganization. In
order for a shareholder of UCB to perfect dissenters' rights, a notice must be
sent to UCB before the vote is taken on the Reorganization Agreement at the UCB
Meeting, and the shareholder must not vote in favor of the Reorganization by
proxy or otherwise. See "Summary - the Reorganization - Rights of Dissent and
Appraisal."
<PAGE>
This Joint Proxy Statement also serves as the prospectus of MACB
relating to approximately 1,966,400 shares of MACB Common Stock issuable to the
shareholders of UCB upon consummation of the Reorganization, and approximately
34,042 shares of MACB Common Stock issuable to holders of UCB options upon
exercise.
This Joint Proxy Statement is first being mailed to shareholders of
MACB and UCB on or about October 15, 1998.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF MACB COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY.
The date of this Joint Proxy Statement is October 15, 1998.
-2-
<PAGE>
AVAILABLE INFORMATION
Both MACB and UCB are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith file
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information filed by MACB and UCB can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004, and at the following
Regional Offices of the Commission: New York Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048 and Chicago Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549-1004, at prescribed rates. The Commission maintains an Internet address
(http: //www.sec.gov) that contains reports, proxy statements and other
information regarding registrants, such as MACB and UCB, that file
electronically with the Commission.
MACB has filed with the Commission a Registration Statement, as
amended, on Form S-4 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of MACB Common Stock issuable in
the Reorganization (the "Registration Statement"). This Joint Proxy
Statement/Prospectus does not contain all of the information set forth in the
Registration Statement, certain items of which have been omitted in accordance
with the rules and regulations of the Commission. For further information
pertaining to MACB and the shares of MACB Common Stock issuable in the
Reorganization, reference is made to the Registration Statement and amendments
and exhibits thereto, which may be inspected and copied as described above.
____________________________
No person is authorized to give any information or to make any
representation not contained or incorporated by reference in this Joint Proxy
Statement, and, if given or made, such information or representation should not
be relied upon as having been authorized. This Joint Proxy Statement does not
constitute an offer to sell, or a solicitation of an offer to purchase, the
securities offered by this Joint Proxy Statement in any jurisdiction to or from
any person to whom it is unlawful to make such an offer or solicitation in such
jurisdiction. Neither the delivery of this Joint Proxy Statement nor any
distribution of the securities being offered pursuant to this Joint Proxy
Statement shall, under any circumstances, create an implication that there has
been no change in the affairs of MACB or UCB or the information set forth herein
since the date of this Joint Proxy Statement.
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement contains certain forward-looking statements
with respect to the financial condition, results of operations and business of
both MACB and UCB. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (1) competitive pressure in the banking industry
increases significantly; (2) changes in the interest rate environment reduce
margins; (3) general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a deterioration
in credit quality; (4) changes occur in the regulatory environment; (5) changes
occur in business conditions and inflation; and (6) changes occur in the
securities markets.
-3-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Introduction.............................................................................................. 1
Available Information..................................................................................... 3
Forward-Looking Statements................................................................................ 3
Summary................................................................................................... 5
The Companies........................................................................................ 5
The Shareholder Meetings............................................................................. 5
The Reorganization................................................................................... 5
Comparative Per Share Information......................................................................... 13
Selected Financial Information............................................................................ 14
MACB Selected Historical Financial Information....................................................... 15
UCB Selected Historical Financial Information........................................................ 16
MACB and UCB Selected Pro Forma Combined Financial Information....................................... 17
The Shareholder Meetings.................................................................................. 18
The Reorganization........................................................................................ 21
Investment Advisor Opinions............................................................................... 38
United Community Bankshares, Inc.......................................................................... 45
United Community Bankshares, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................ 48
Shareholder Proposals..................................................................................... 65
Mid-Atlantic Community BankGroup, Inc..................................................................... 66
Mid-Atlantic Community BankGroup, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................................ 70
Shareholder Proposals..................................................................................... 87
Management Following the Reorganization................................................................... 88
Description of Capital Stock.............................................................................. 95
Comparative Rights of Security Holders.................................................................... 96
Supervision and Regulation................................................................................ 104
Experts................................................................................................... 108
Legal Opinion............................................................................................. 108
Pro Forma Combined Financial Information (Unaudited)...................................................... 108
Pro Forma Combined Balance Sheets (Unaudited)........................................................ 108
Pro Forma Combined Statements of Income (Unaudited).................................................. 110
Notes to Pro Forma Combined Financial Information (Unaudited)........................................ 115
Appendices
General
A Agreement and Plan of Reorganization................................................................. A-1
B Excerpts from the Virginia Stock Corporation Act Relating
to Dissenting Shareholders........................................................................... B-1
United Community Bankshares, Inc.
C United Community Bankshares, Inc. Financial Statements (including the
audited December 31, 1997 Financial Statements and the unaudited
June 30, 1998 Financial Statements).................................................................. C-1
D Opinion of Scott & Stringfellow, Inc................................................................. D-1
Mid-Atlantic Community BankGroup, Inc.
E Mid-Atlantic Community BankGroup, Inc. Financial Statements (including the
audited December 31, 1997 Financial Statements and the unaudited
June 30, 1998 Financial Statements).................................................................. E-1
F Opinion of Davenport & Company LLC................................................................... F-1
</TABLE>
-4-
<PAGE>
SUMMARY
The following summary is not intended to be complete and is qualified
in its entirety by the more detailed information and financial statements
contained elsewhere in this Joint Proxy Statement, including the Appendices
hereto and the documents incorporated herein by reference.
THE COMPANIES
MACB. MACB is a bank holding company headquartered in Gloucester,
Virginia. MACB has one subsidiary bank, Peninsula Trust Bank, Incorporated
("PTB"), a Virginia-chartered bank that operates seven banking offices which
offer a full range of banking services principally to individuals and to small
and medium sized businesses in its market areas in Virginia. MACB was
incorporated on February 22, 1996 to serve as the parent holding company for
PTB, which commenced operations on July 20, 1989 as a Virginia-chartered bank.
At June 30, 1998, MACB had total assets of $181.3 million, deposits of $159.6
million, and total stockholders' equity of $20.6 million. MACB's principal
executive offices are located at 7171 George Washington Memorial Highway, P.O.
Box 1310, Gloucester, Virginia 23061-1310 and its telephone number is (804)
693-0628. See "Mid-Atlantic Community BankGroup, Inc.," "Pro Forma Combined
Financial Information" and the documents relating to MACB accompanying this
Joint Proxy Statement.
UCB. UCB is a bank holding company headquartered in Franklin, Virginia.
UCB has two subsidiary banks, The Bank of Franklin ("BOF") and The Bank of
Sussex and Surry ("BSS"), each of which is a Virginia chartered bank which
offers a full range of banking services, principally to individuals and small to
medium size businesses in their respective market areas. BOF operates five
banking offices and BSS operates three banking offices. At June 30, 1998, UCB
had total assets of $155.0 million, deposits of $131.1 million, and
stockholders' equity of $21.9 million. The principal executive offices of UCB
are located at 100 East Fourth Avenue, Franklin, Virginia 23851, and its
telephone number is (757) 562-5184. See "United Community Bankshares, Inc." and
"United Community Bankshares, Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
THE SHAREHOLDER MEETINGS
MACB. The MACB Meeting will be held at the Abingdon Ruritan Club on
Guinea Road, Bena, Virginia, on November 19, 1998 at 7:00, p.m. Only holders of
record of MACB Common Stock at the close of business on October 7, 1998, will be
entitled to vote at the MACB Meeting. See "The Shareholder Meetings - The MACB
Meeting."
UCB. The UCB Meeting will be held at the Virginia Diner, Highway 460,
Wakefield, Virginia on November 19, 1998 at 9:30 a.m. Only holders of record of
UCB Common Stock at the close of business on October 9, 1998, will be entitled
to vote at the UCB Meeting. See "The Shareholder Meetings - The UCB Meeting."
THE REORGANIZATION
The Reorganization provides for the exchange of each outstanding share
of UCB Common Stock for 1.075 shares MACB Common Stock. MACB will then serve as
the parent bank holding company for PTB, BOF and BSS. At the effective time of
the Reorganization, MACB's name will be changed to Atlantic Financial Corp.; its
headquarters will move to Newport News, Virginia; and its Board of Directors
will consist of 14 individuals, seven of whom are directors of MACB, and seven
of whom are directors of UCB or its bank subsidiaries.
At the effective date of the Reorganization, each outstanding share of
UCB Common Stock, except for shares as to which dissenters' rights have been
duly exercised, shall be exchanged for 1.075 shares of MACB Common Stock and
cash in lieu of any fractional share (the "Exchange Ratio"). Thus, the lower
-5-
<PAGE>
the price of MACB Common Stock at the effective date of the Reorganization, the
lower the dollar value of MACB Common Stock UCB shareholders will receive as a
result of the Reorganization. Conversely, the higher the price of MACB Common
Stock at the effective date of the Reorganization, the higher the dollar value
of MACB Common Stock UCB shareholders will receive as a result of the
Reorganization.
As of October 9, 1998, MACB's closing price on the Nasdaq SmallCap
Market was $18.50, which calculates to a price for UCB Shareholders of $19.89
per share of UCB Common Stock. See "The Reorganization - Terms of the
Reorganization - UCB Common Stock."
All rights with respect to UCB Common Stock pursuant to stock options
granted by UCB under a UCB stock option plan ("UCB Options") shall, at the
effective time of the Reorganization, be converted into options for MACB Common
Stock, and MACB shall assume each UCB Option in accordance with the terms of the
stock option plan under which it was issued and the stock option agreement by
which it is evidenced. After the consummation of the Reorganization, (i) each
UCB Option assumed by MACB may be exercised solely for shares of MACB Common
Stock, (ii) the number of shares of MACB Common Stock subject to each UCB Option
shall be equal to the number of shares of UCB Common Stock subject to each
option immediately prior to the Reorganization multiplied by the Exchange Ratio
and (iii) the per share exercise price under each such UCB Option shall be
adjusted by dividing the per share exercise price under each such option by the
Exchange Ratio and rounding down to the nearest cent. The number of shares of
MACB Common Stock available pursuant to each UCB option shall be adjusted up or
down to the nearest whole share. The exercise prices of the UCB Options are
$10.33 per share. The exercise prices of the UCB Options after the
Reorganization in terms of MACB shares, adjusted to reflect the Exchange Ratio,
will be $9.61 per share of MACB Common Stock. Based on the price of MACB Common
Stock as of October 9, 1998 set forth in the preceding paragraph, the UCB
Options to be converted would have been in the money on such date. See "The
Reorganization - Terms of the Reorganization - UCB Options."
Recommendation of the Board of Directors
UCB. The Board of Directors of UCB has approved the Reorganization,
including the Reorganization Agreement. The Board of Directors believes that the
Reorganization is fair to and in the best interests of shareholders of UCB and
recommends a VOTE FOR the Reorganization.
MACB. The Board of Directors of MACB has approved the Reorganization,
including the Reorganization Agreement. The Board of Directors believes that the
Reorganization is fair to and in the best interests of shareholders of MACB and
recommends a VOTE FOR the Reorganization. See "The Reorganization."
Interests of Certain Directors and Officers
Ownership of MACB Common Stock. Holders of voting stock of UCB should
be aware that certain members of UCB's Board of Directors and senior management
have certain interests in the Reorganization that are in addition to the
interests of shareholders of UCB generally. The Board of Directors of UCB was
aware of these interests and considered them, among other factors, in approving
the Reorganization. See "The Reorganization - Interest of Certain Persons in the
Reorganization." Based on the number of shares of UCB Common Stock held by UCB
directors and executive officers, the potential number of shares of MACB Common
Stock that the UCB directors and executive officers may receive in exchange for
their shares of UCB Common Stock pursuant to the Reorganization, assuming the
immediate exercise of all UCB Options, is 410,918 shares, which would have had a
value of approximately $7.6 million as of October 9, 1998. All options to
purchase UCB Common Stock held by directors and executive officers of UCB will
be converted at the Effective Date into options to purchase MACB Common Stock.
Appointment to MACB Board of Directors. In addition, the Board of
Directors of MACB after the Effective Date will include seven current members of
the Board of Directors of UCB or its subsidiaries. Following the Effective Date,
J. Russell West, Wenifred O. Pearce, J. Philip Bain, Jr., Harvey G. Pope, J.
-6-
<PAGE>
D. Spivey, F. Bruce Stewart and William Savedge are expected to serve as
directors of MACB. See " - Management and Operations After the Reorganization."
Employment Agreements. As a condition to the obligations of MACB and
UCB under the Reorganization Agreement, William J. Farinholt, President and
Chief Executive Officer of MACB, Wenifred O. Pearce, President and Chief
Executive Officer of UCB, Kenneth E. Smith, Executive Vice President and Chief
Financial Officer of MACB and D. Eugene Brittle, President and Chief Executive
Officer of BSS each must enter into a five year Employment Agreement with MACB
which will begin on the Effective Date. Such Employment Agreements will
supercede the existing employment agreements between UCB and Messrs. Pearce and
Brittle, as well as the agreements between PTB and each of Messrs. Farinholt and
Smith, which provide for certain benefits in the event of a change of control of
PTB.
The Boards of Directors of MACB and UCB determined that for the
Reorganization to be successful, it would be important for the senior executive
officers of MACB and UCB to work effectively as a team after the Effective Date;
for each to be willing to accept some changes in responsibilities; and to
discourage such executive officers from possibly accepting change of control
benefits that would otherwise be triggered by the Reorganization and seeking
employment with other banking organizations. The respective Boards of MACB and
UCB concluded that an effective way to address those concerns was to provide
each executive officer an employment contract that delineated his prospective
responsibilities and provided reasonable assurance of continued employment at
salary levels consistent with those of senior officers of Virginia banking
organizations of similar size.
Mr. Farinholt's Employment Agreement provides that he will serve as the
President and Chief Executive Officer of MACB at an annual base salary of
$160,000. Base salary increases and bonuses will be in the discretion of the
Board of Directors. The Employment Agreement also provides that MACB will
provide Mr. Farinholt an appropriate automobile, as determined by the Board of
Directors. Under the Employment Agreement, Mr. Farinholt will be entitled to
participate in employee benefit plans, including MACB's stock option plans, on
the same basis as other employees of senior executive status. If MACB terminates
Mr. Farinholt's employment without cause, or if Mr. Farinholt resigns for "good
reason" during the contract term, he will be entitled to salary and benefits for
the remainder of the contract term, or one year, whichever is greater, subject
to his agreement not to compete with MACB for a period of one year following the
termination of his employment. Under the Employment Agreement, "good reason"
entitling to Mr. Farinholt to resign includes a change or reduction in Mr.
Farinholt's authority; a reduction in base salary, as the same may have been
increased from time to time; the failure of MACB to provide him with
substantially the same fringe benefits that have been provided heretofore; a
relocation of his primary place of employment, which would require him to move
his personal residence; the failure of a successor corporation to assume MACB's
obligations under the Employment Agreement; a failure of the shareholders to
elect him a Director of MACB; or a material breach of the Employment Agreement
by MACB.
Under the Employment Agreement, Mr. Farinholt would not be entitled to
any further compensation or benefits if MACB terminated the Agreement for cause.
Cause includes personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses that have no material detrimental effect on MACB)
or final cease and desist order, or a material breach of any provision of the
Employment Agreement.
If Mr. Farinholt is terminated or if he resigns for good reason
following a change of control, he would be entitled to the same severance
benefits described above. If Mr. Farinholt resigned following a change of
control without good reason, he would be entitled to a $200,000.00 severance
benefit and immediate vesting of stock options.
The Employment Agreements of Messrs. Pearce, Smith and Brittle are in
substantially the same form as Mr. Farinholt's Employment Agreement and provide
for annual base salaries of $150,000, $125,000 and $115,000, respectively. The
Employment Agreements of Messrs. Pearce and Brittle, however, provide
additionally that each will be granted an option to purchase MACB common stock
with a fair market value equal to 167% of his annual base salary at the time of
grant at a price per share equal to
-7-
<PAGE>
the fair market value of MACB Common Stock on the date of grant. Such options
are contingent on continued employment and are not required to be granted before
August 1, 2001. Such option grants will be incentive stock options and will vest
as rapidly as is consistent with incentive stock option treatment. The reasons
that the Employment Agreements of Messrs. Pearce and Brittle provide for stock
options, while those of Messrs. Farinholt and Smith do not, are that Messrs.
Pearce and Brittle each would have received similar option grants from UCB if
UCB had remained independent. Mr. Pearce's Employment Agreement provides that
the Salary Continuation Plan Agreement provided to him by BOF will be kept in
force.
Opinion of Financial Advisor
UCB. Scott & Stringfellow, Inc. has served as financial advisor to UCB
in connection with the Reorganization and has rendered its opinion to the Board
of Directors of UCB that, as of the date of this Joint Proxy Statement and on
the basis of the matters referred to herein, the consideration to be received
pursuant to the Reorganization Agreement is fair, from a financial point of
view, to the UCB shareholders. A copy of the opinion of Scott & Stringfellow,
Inc. is attached as Appendix D to this Joint Proxy Statement and should be read
in its entirety for information with respect to the assumptions made and other
matters considered by Scott & Stringfellow, Inc. in rendering its opinion. See
"Investment Advisor Opinions - UCB - Opinion of Financial Advisor."
MACB. Davenport & Company LLC has served as financial advisor to MACB
in connection with the Reorganization and has rendered its opinion to the Board
of Directors of MACB that, as of the date of this Joint Proxy Statement and on
the basis of the matters referred to herein, the consideration to be received
pursuant to the Reorganization Agreement is fair, from a financial point of
view, to the MACB shareholders. A copy of the opinion of Davenport & Company LLC
is attached as Appendix F to this Joint Proxy Statement and should be read in
its entirety for information with respect to the assumptions made and other
matters considered by Davenport & Company LLC in rendering its opinion. See
"Investment Advisor Opinions - MACB - Opinion of Financial Advisor."
Vote Required
UCB. Approval of the Reorganization requires the affirmative vote of
the holders of a majority of the outstanding shares of UCB Common Stock. As of
the record date for the UCB Meeting, directors and executive officers of UCB and
their affiliates owned beneficially an aggregate of 379,720 shares of UCB Common
Stock, or approximately 20.8% of the shares of UCB Common Stock outstanding on
such date. The directors and executive officers of UCB have indicated their
intention to vote their shares of UCB Common Stock in favor of the
Reorganization. See "The Shareholder Meetings - The UCB Meeting - Vote
Required."
MACB. Approval of the Reorganization requires the affirmative vote of
the holders of a majority of the outstanding shares of MACB Common Stock present
in person or represented by proxy at the meeting. As of the record date for the
MACB Meeting, directors and executive officers of MACB and their affiliates
owned beneficially an aggregate of 465,486 shares of MACB Common Stock, or
approximately 21.2% of the shares of MACB Common Stock outstanding on such date.
The directors and executive officers of MACB have indicated their intention to
vote their shares of MACB Common Stock in favor of the Reorganization. See "The
Shareholder Meetings - The MACB Meeting - Vote Required."
Management and Operations After the Reorganization
On the Effective Date, UCB will merge with and into MACB and, after the
Effective Date, BOF, BSS and PTB will operate as bank subsidiaries of MACB. The
Board of Directors of UCB has decided that after the Effective Date BOF and BSS
will merge to form United Community Bank. See " - Merger of BOF and BSS." MACB's
name will change to "Atlantic Financial Corp." on the Effective Date and its
corporate headquarters will move to Newport News, Virginia. See "The
Reorganization."
-8-
<PAGE>
The Reorganization Agreement provides that on the Effective Date, the
Board of Directors of MACB will consist of 14 individuals, seven of whom are
Directors of MACB and seven of whom are Directors of UCB. The Reorganization
Agreement will amend the MACB Articles of Incorporation in several respects on
the Effective Date, including dividing the Board of Directors into three
classes. The following table identifies the individuals who will serve as
Directors of MACB after the Effective Date, each Director's affiliation and the
year in which his term on the Board of MACB will expire.
Name Affiliation Term Expires
---- ----------- ------------
J. Philip Bain, Jr. UCB 2001
Charles F. Dawson MACB 1999
William J. Farinholt MACB 1999
Robert D. Foster MACB 2001
Harry M. Healy MACB 2000
Joseph A. Lombard, Jr., DDS MACB 2001
Hersey M. Mason, Jr. MACB 2000
Wenifred O. Pearce UCB 2001
Harvey G. Pope UCB 1999
William B. Savedge UCB 2000
J. D. Spivey UCB 2000
F. Bruce Stewart UCB 2000
J. Russell West UCB 1999
Thomas Z. Wilke MACB 1999
After the Effective Date, the principal executive officers of MACB will
be William J. Farinholt, President and Chief Executive Officer, Wenifred O.
Pearce, Vice Chairman and Chief Operating Officer, Kenneth E. Smith, Executive
Vice President, Chief Financial Officer and Secretary, and D. Eugene Brittle,
Executive Vice President. Joseph A. Lombard, Jr. will continue to serve as
Chairman of the Board of MACB, and J. Russell West will serve as Vice Chairman
of the Board.
Under the Reorganization Agreement, as of the Effective Date, the
Bylaws of MACB will be amended to include several provisions that are intended
to preserve for up to five years the number of current Directors of each of UCB
and MACB who serve on the Board of Directors of MACB. Under the Bylaws, as
amended, the term "UCB Nominees" refers to the individuals listed above who are
affiliated with UCB, while the term "MACB Nominees" refers to the individuals
listed above who are affiliated with MACB. The MACB Bylaws, as amended, will
provide that (unless 75% of the full Board of Directors votes otherwise) in the
first five annual elections of Directors of MACB, beginning in 1999, if a
Director whose term expires at the annual meeting is an MACB Nominee and he is
not nominated for re-election, the Directors who are MACB Nominees will
designate a successor who will be nominated for election by the Board. The same
rule (which also may be varied by the affirmative vote of 75% of the full Board
of Directors) applies if a UCB Nominee is not nominated for re-election, except
that his successor shall be designated for nomination by the UCB Nominees. The
MACB Bylaws, as amended, do not preclude shareholder nominations.
Consistent with the foregoing provision, unless 75% of the full Board
of Directors votes otherwise, if a vacancy on the Board of Directors of MACB
arises for any reason before the Annual Meeting of Shareholders in 2004, the
vacancy shall be filled by an individual designated by the MACB Nominees if the
vacant seat was held by an MACB Nominee or an individual designated by the UCB
Nominees, if the vacant seat was held by an UCB Nominee.
The Bylaws of MACB also provide that the affirmative vote of at least
60% of the entire Board of Directors will be required to (i) amend the Bylaws of
MACB, (ii) submit to the shareholders of MACB any plan of merger or share
exchange or any proposal to dissolve MACB or to sell, lease, exchange or
otherwise dispose of all or substantially all of MACB's property, other than in
the usual and regular course of business; (iii) submit to the shareholders any
proposal to change the name of MACB; (iv) cause PTB, BOF or BSS to change its
name or amend its Articles of Incorporation or Bylaws; (v) cause PTB, BOF or BSS
to appoint, remove or transfer its Chief Executive Officer; (vi) dispose of any
of the stock of PTB,
-9-
<PAGE>
BOF, or BSS or cause any of such banks to dissolve or enter into a plan of
merger or share exchange or to sell, lease, exchange or otherwise dispose of all
or substantially all of its property, other than in the usual and regular course
of business; or (vii) appoint, remove or transfer the Chief Executive Officer,
Chief Operating Officer, or any Executive Vice President of MACB.
The Bylaws of MACB also provide that the Directors of each of PTB, BOF
and BSS shall nominate individuals for election to their respective Boards each
year. The Bylaws of MACB provide that it will not remove any Director of PTB,
BOF and BSS or refuse to vote its shares of any of such banks' common stock in
favor of the election of those nominated unless a Director of either of such
banks violates a code of conduct that is generally applicable to the Directors
of MACB and its subsidiaries; MACB's Board of Directors determines that any such
bank is experiencing business, financial or regulatory difficulties and, as a
result, MACB determines that a change in the Board of Directors of such bank is
necessary or advisable in order to protect MACB and its investment in such bank;
or a Director of any of such banks acts in a manner inconsistent with his
fiduciary duty to such bank.
Merger of BOF and BSS
The Reorganization Agreement does not require any mergers of PTB, BOF
or BSS after the Effective Date. However, the Board of Directors of UCB has been
evaluating the possible benefits of merging BOF and BSS and has discussed such a
merger with MACB. As a result of its analysis and discussions with MACB, the
Board of UCB, with the concurrence of MACB, has decided that BOF and BSS are in
close enough proximity to lend themselves to common management and that the two
banks should merge. Current plans call for such merger to occur as soon as
practicable after the Effective Date of the Reorganization, although the UCB
Board of Directors has decided that BOF and BSS will merge even if the
Reorganization does not occur. The merger of BOF and BSS is not expected to
result in any branch office closings, personnel changes or any reduction in the
level of service to customers. The resulting bank would operate under a Board of
Directors comprised of current directors of BOF and BSS.
Several reasons underlie the merger of BOF and BSS. Current plans call
for the expansion of such banks into contiguous markets. UCB believes, and MACB
concurs, that while the "Franklin" and "Sussex and Surry" names have appeal in
their current markets, they each connote a relatively narrow geographic focus
that may be inconsistent with expansion. Following the merger of BOF and BSS,
the resulting bank would operate under the name "United Community Bank."
Secondly, UCB and MACB anticipate that after the Effective Date, Mr. Pearce, the
Chief Executive Officer of BOF will devote substantially all of his time to his
duties as Chief Operating Officer of MACB. Such duties, among others, will
include primary responsibility for increasing MACB's noninterest income and
efforts to expand MACB through acquisitions and branching. After BOF and BSS are
merged, it is anticipated that Mr. Brittle will serve as the Chief Executive
Officer of the resulting bank, which will enable Mr. Pearce to devote
substantially all of his time to his duties at the holding company level. In
addition to the foregoing reasons for merging BOF and BSS, the parties expect
that such a merger would result in annual expense savings in the range of
$150,000.
Effective Date
If the Reorganization is approved by the requisite vote of the
shareholders of UCB and MACB, and the applications of MACB to merge with UCB
pursuant to the Reorganization are approved by the Board of Governors of the
Federal Reserve System (the "Federal Reserve") and the Virginia State
Corporation Commission (the "SCC"), and other conditions to the Reorganization
are satisfied (or waived to the extent permitted by applicable law), the
Reorganization will be consummated and effected after a certificate of merger is
issued by the SCC pursuant to the Virginia Stock Corporation Act (the "Effective
Date"). If the Reorganization is approved by the shareholders, the Federal
Reserve and the SCC, it is anticipated that the Effective Date will be on or
about December 1, 1998, or as soon thereafter as practicable. Under the
Reorganization Agreement, either party may terminate the Reorganization
Agreement if the transaction is not consummated by February 28, 1999.
-10-
<PAGE>
Distribution of Stock Certificates and Payment for Fractional Shares
As soon as practicable after the Effective Date, PTB, as the exchange
agent, will mail to each UCB shareholder (other than dissenting shareholders) a
letter of transmittal and instructions for use in order to surrender the
certificates which immediately prior to the Effective Date represented shares of
UCB Common Stock in exchange for certificates representing shares of MACB Common
Stock. Cash (without interest) will be paid to UCB shareholders in lieu of the
issuance of any fractional shares in an amount equal to the fraction of a share
of MACB Common Stock to which such shareholder would otherwise be entitled
multiplied by the average of the closing prices of MACB Common Stock as reported
on the Nasdaq SmallCap Market during the 10 trading days immediately preceding
the Effective Date. See "The Reorganization - Surrender of Stock Certificates."
Certain Federal Income Tax Consequences
Williams, Mullen, Christian & Dobbins, counsel for MACB, will deliver
an opinion that, among other things, (i) no gain or loss will be recognized by
UCB shareholders who receive solely shares of MACB Common Stock pursuant to the
Reorganization, (ii) the aggregate tax basis of MACB Common Stock received by a
UCB shareholder will equal the aggregate tax basis of the UCB Common Stock
surrendered in exchange therefor by such shareholder (reduced by any amount
allocable to fractional share interests for which cash is received), and (iii)
the holding period of the MACB Common Stock received will generally include the
holding period of the UCB stock surrendered if the UCB Common Stock is held as a
capital asset at the Effective Date. For a more complete description of the
federal income tax consequences of the Reorganization, see "The Reorganization -
Federal Income Tax Matters." Due to the individual nature of the tax
consequences of the Reorganization, it is recommended that each UCB shareholder
consult his or her own tax advisor concerning the tax consequences of the
Reorganization.
No gain or loss will be recognized by the holders of options to
purchase UCB Common Stock solely as a result of the conversion of such options
into options to acquire MACB Common Stock.
Conditions to Consummation of the Reorganization
Consummation of the Reorganization is subject to various conditions,
including among other matters: (i) receipt of the approval of the shareholders
of UCB and MACB solicited hereby; (ii) receipt of an opinion of counsel as to
the tax-free nature of the Reorganization for shareholders (except for cash
received in lieu of fractional shares or upon the exercise of dissenters'
rights); and (iii) approval of the Federal Reserve under the Bank Holding
Company Act of 1956, as amended ("BHC Act"), and the SCC. Substantially all of
the conditions to consummation of the Reorganization may be waived, in whole or
in part, to the extent permissible under applicable law by the party for whose
benefit the condition has been imposed, without the approval of the shareholders
of that party. Shareholder and regulatory approvals, however, may not be waived.
See "The Reorganization - Representations and Warranties; Conditions to the
Reorganization" and "The Reorganization - Regulatory Approvals."
The Reorganization Agreement may be terminated and the Reorganization
abandoned notwithstanding shareholder approval (i) by mutual agreement of the
Boards of Directors of MACB and UCB or (ii) by either MACB or UCB if the
Effective Date has not occurred by February 28, 1999 or if certain specified
events occur. See "The Reorganization - Waivers, Amendment and Termination."
Effects of the Reorganization on the Rights of UCB and MACB Shareholders
Upon consummation of the Reorganization, UCB shareholders shall become
shareholders of MACB. The rights of the former shareholders of UCB, now governed
by the Virginia Stock Corporation Act (the "Virginia SCA"), will continue to be
governed by the Virginia SCA after the Effective Date and the rights of UCB
shareholders will also be as provided for under the Articles of Incorporation
and Bylaws of MACB. Because the Reorganization Agreement provides for various
amendments to the Articles of Incorporation and Bylaws of MACB, at and after the
Effective Date, such Articles of Incorporation and Bylaws will differ in certain
material respects from the Articles of Incorporation and Bylaws of UCB and
-11-
<PAGE>
those of MACB in their current form. Consequently, the Reorganization not only
will affect the rights of UCB shareholders, but also will affect the rights of
MACB shareholders. See "Comparative Rights of Shareholders."
Accounting Treatment
It is intended that the Reorganization will be accounted for as a
pooling of interests. It is intended that MACB and UCB will receive an opinion
from MACB's independent accountants that the Reorganization will be accounted
for as a pooling of interests, which is a condition to the consummation of that
transaction. Although pooling of interests accounting, like other terms in the
Agreement, can be waived, MACB and UCB each has indicated that it is unlikely to
waive that requirement. If independent accountants determine that pooling of
interests accounting treatment is not available and both parties agree to waive
that term, the Reorganization would have to be resubmitted to shareholders of
MACB and UCB for their approval. See "The Reorganization - Accounting
Treatment."
Rights of Dissent and Appraisal
Each holder of UCB shares and MACB shares may dissent from the
Reorganization and is entitled to the rights and remedies of dissenting
shareholders provided in Article 15 of the Virginia SCA, subject to compliance
with the procedures set forth therein, including the right to appraisal of his
or her stock. A copy of Article 15 is attached as Appendix B to this Joint Proxy
Statement and a summary thereof is included under "The Reorganization - Rights
of Dissenting Shareholders."
Markets and Market Prices
MACB Common Stock is traded in the over-the-counter market and quoted
on the Nasdaq SmallCap Market under the symbol "MABG." UCB common stock is
traded in the over-the-counter market and quoted on the OTC Bulletin Board under
the symbol "UCMB."
The information below provides the price per share of MACB Common Stock
and UCB Common Stock prior to the public announcement of the Reorganization on
May 27, 1998 and as of a recent date. The historical price of MACB Common Stock,
$20.00, is based on the reported closing price on May 26, 1998, the last trading
day preceding the announcement of the Reorganization, as reported on the Nasdaq
SmallCap Market. The historical price of UCB Common Stock, $19.98, is based on a
sale of 300 shares on May 15, 1998, the last trade preceding the announcement of
the Reorganization, as reported on the OTC Bulletin Board.
==================== ================== =================== ====================
Trading Price MACB UCB Equivalent
Per Share at Common Stock Common Stock Per Share Price*
- -------------------- ------------------ ------------------- --------------------
May 26, 1998 $20.00 $19.98 $21.50
- -------------------- ------------------ ------------------- --------------------
October 9, 1998 $18.50 $18.75 $19.89
==================== ================== =================== ====================
- -------------------------
* UCB Shareholders will receive 1.075 shares of MACB Common Stock for
each share of UCB Common Stock outstanding. This table merely indicates
the historical value of the exchange projected back to the last trading
date before the Reorganization Agreement was announced and on a recent
trading date for MACB Common Stock. The last trade of UCB Common Stock
occurred on September 15, 1998.
Shareholders are advised to obtain current market quotations for MACB
Common Stock. No assurance can be given as to the market price of MACB Common
Stock at or after the Effective Date.
-12-
<PAGE>
COMPARATIVE PER SHARE INFORMATION
The following unaudited consolidated financial information reflects
certain comparative per share data relating to the Reorganization. The
information shown below should be read in conjunction with the historical
financial statements of MACB and UCB, including the respective notes thereto,
which are included elsewhere in this Joint Proxy Statement or in documents
delivered herewith, and in conjunction with the unaudited pro forma consolidated
financial information appearing elsewhere in this Joint Proxy Statement. See
"Pro Forma Combined Financial Information."
The following information is not necessarily indicative of the results
of operations or combined financial position that would have resulted had the
Reorganization been consummated at the beginning of the periods indicated, nor
is it necessarily indicative of the results of operations in future periods.
The following table presents selected comparative consolidated
unaudited per share information (i) for MACB on a historical basis and on a pro
forma combined basis assuming the Reorganization had been effective during the
periods presented and accounted for as a pooling of interests and (ii) for UCB
on a historical basis and on a pro forma equivalent basis.
MACB AND UCB
<TABLE>
<CAPTION>
For the
Six Months
Ended June 30, For the Year Ended December 31,
-------------- -------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per Common Share:
Net Income:
MACB-historical, basic (1)......... $ .46 $ .91 $ .81 $ .66
UCB-historical, basic.............. .58 1.22 1.05 .94
Pro forma combined................. .50 1.02 .90 .78
UCB pro forma equivalent (2)....... .54 1.10 .97 .84
MACB-historical, diluted (1)....... .44 .88 .79 .65
UCB-historical, diluted............ .58 1.22 1.05 .94
Pro forma combined................. .49 1.00 .88 .77
UCB pro forma equivalent (2)....... .53 1.08 .95 .83
Cash Dividends Declared:
MACB-historical (1)................ $ .00 $ .25 $ .13 $ .06
UCB-historical..................... .17 .31 .31 .23
Pro forma combined (3)............. .00 .25 .13 .06
UCB pro forma equivalent (2)(3).... .00 .27 .14 .06
</TABLE>
At June 30, 1998 At December 31,
Book Value: 1998 1997
---- ----
MACB-historical (1)................ $ 9.36 $ 8.81
UCB-historical..................... 11.96 11.50
Pro forma combined................. 10.20 9.70
UCB pro forma equivalent (2)....... 10.97 10.43
- ------------------------
(1) Amounts have been restated to reflect a two-for-one stock split of MACB
Common Stock in March 1998.
(2) UCB pro forma equivalent amounts represent pro forma combined
information multiplied by the Exchange Ratio of 1.075 shares of MACB
Common Stock for each share of UCB Common Stock.
(3) Pro forma combined cash dividends declared represent historical cash
dividends declared by MACB. See "Reorganization - MACB and UCB Market
Prices and Dividends" for additional information.
-13-
<PAGE>
SELECTED FINANCIAL INFORMATION
The following tables set forth certain selected historical financial
information for MACB and UCB and certain unaudited combined pro forma financial
information giving effect to the Reorganization using the pooling of interests
method of accounting. See "The Reorganization - Accounting Treatment." The
selected historical financial information is based on, derived from and should
be read in conjunction with the historical consolidated financial statements of
MACB and the historical consolidated financial statements of UCB and the
respective notes thereto included elsewhere in this Joint Proxy Statement. See
"Available Information." All of the following selected financial information
should be read in conjunction with the unaudited pro forma combined financial
information, including the notes thereto, appearing elsewhere in this Joint
Proxy Statement. See "Pro Forma Combined Financial Information." The pro forma
financial information is not necessarily indicative of the results that actually
would have occurred had the Reorganization been consummated on the dates
indicated or that may be obtained in the future.
-14-
<PAGE>
Mid-Atlantic Community BankGroup, Inc.
Selected Historical Financial Information
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
---------------------------- ------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited) (unaudited)
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income....................... $7,221 $6,081 $12,869 $10,653 $8,224
Interest expense...................... 3,033 2,501 5,317 4,359 3,469
----- ----- ----- ----- -----
Net interest income................... 4,188 3,580 7,552 6,294 4,755
Provision for loan losses............. 233 210 347 380 288
Noninterest income.................... 529 393 852 624 477
Noninterest expense................... 3,003 2,679 5,561 4,191 3,496
----- ----- ----- ----- -----
Income before income taxes............ 1,481 1,084 2,496 2,347 1,448
Income taxes.......................... 474 319 666 813 425
--- --- --- --- ---
Net income............................ $1,007 $765 $1,830 $1,534 $1,023
====== ==== ====== ====== ======
Per Share Data (1):
Net income, basic..................... $0.46 $0.40 $0.91 $0.81 $0.66
Net income, diluted................... 0.44 0.39 0.88 0.79 0.65
Cash dividends (2).................... 0.00 0.00 0.25 0.13 0.06
Basic weighted average shares
outstanding........................... 2,193,376 1,888,666 2,013,286 1,888,666 1,548,642
Diluted weighted average shares
outstanding........................... 2,291,996 1,957,280 2,080,902 1,950,972 1,588,752
Book value at period end.............. 9.36 8.09 8.81 7.64 7.06
Balance Sheet Data:
Total assets.......................... $181,341 $147,971 $159,305 $136,434 $108,314
Loans, net............................ 113,704 96,733 104,240 90,978 69,556
Investment securities................. 36,579 28,374 31,394 27,297 24,793
Deposits.............................. 159,551 131,606 138,423 120,485 94,115
Long-term debt........................ 24 37 31 43 55
Stockholders' equity.................. 20,588 15,279 19,277 14,432 13,335
Performance Ratios:
Net interest margin (3)............... 5.46% 5.67% 5.62% 5.83% 5.55%
Return on average assets (4).......... 1.21% 1.11% 1.26% 1.30% 1.11%
Return on average equity (4).......... 10.08% 10.32% 11.34% 10.91% 10.38%
Efficiency ratio (5).................. 62.93% 66.72% 65.68% 59.52% 66.27%
Asset Quality Ratios:
Allowance for loan losses to period
end loans........................... 1.27% 1.31% 1.25% 1.21% 1.23%
Allowance for loan losses to
nonperforming assets................ 1.89x 2.34x 2.26x 4.00x 4.16x
Nonperforming assets to period end
loans and foreclosed property....... 0.67% 0.56% 0.56% 0.30% 0.30%
Net charge-offs to average loans...... 0.08% 0.03% 0.14% 0.16% 0.22%
Capital and Liquidity Ratios:
Leverage.............................. 11.94% 10.94% 12.29% 11.42% 12.79%
Risk Based Capital Ratios:
Tier 1 Capital...................... 16.39% 14.84% 17.33% 14.99% 18.28%
Total Capital....................... 17.56% 16.09% 18.52% 16.14% 19.47%
Average loans to average deposits..... 75.67% 78.75% 77.39% 79.10% 76.13%
- --------------------
</TABLE>
(1) Amounts have been restated to reflect a two-for-one stock split of MACB
Common Stock in March 1998.
(2) On December 9, 1997, MACB declared an annual dividend for 1997 of $.25
per share, which was paid on January 5, 1998 to shareholders of record
on December 9, 1997. On December 10, 1996, MACB declared an annual
dividend for 1996 of $.13 per share, which was paid on January 6, 1997
to shareholders of record on December 10, 1996. On November 14, 1995,
PTB declared an annual dividend for 1995 of $.06 per share, which was
paid on January 5, 1996 to shareholders of record on December 26, 1995.
(3) Net interest margin is calculated as fully taxable equivalent net
interest income divided by average earning assets and represents the
MACB's net yield on its earning assets.
(4) Ratios have been annualized for the six months ended June 30, 1998 and
1997.
(5) Efficiency ratio is computed by dividing non-interest expense less
foreclosed property expense by the sum of fully taxable equivalent net
interest income and non-interest income, net of securities gains or
losses.
-15-
<PAGE>
United Community Bankshares, Inc.
Selected Historical Financial Information
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
---------------------------- ------------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited) (unaudited)
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income........................ $5,511 $5,330 $10,869 $10,418 $9,460
Interest expense....................... 2,461 2,352 4,808 4,749 4,161
----- ----- ----- ----- -----
Net interest income.................... 3,050 2,978 6,061 5,669 5,299
Provision for loan losses.............. 53 51 129 101 183
Noninterest income..................... 473 390 864 877 743
Noninterest expense.................... 2,055 1,952 3,872 3,926 3,579
----- ----- ----- ----- -----
Income before income taxes............. 1,415 1,365 2,924 2,519 2,280
Income taxes........................... 348 326 694 596 565
--- --- --- --- ---
Net income............................. $1,067 $1,039 $2,230 $1,923 $1,715
====== ====== ====== ====== ======
Per Share Data:
Net income, basic...................... $0.58 $0.57 $1.22 $1.05 $0.94
Net income, diluted.................... 0.58 0.57 1.22 1.05 0.94
Cash dividends......................... 0.17 0.15 0.31 0.31 0.23
Basic weighted average shares
outstanding............................ 1,829,209 1,829,209 1,829,209 1,829,209 1,829,209
Diluted weighted average shares
outstanding............................ 1,843,124 1,829,209 1,833,616 1,829,209 1,829,209
Book value at period end............... 11.96 10.82 11.50 10.38 9.71
Balance Sheet Data:
Total assets........................... $154,997 $149,477 $155,952 $149,878 $143,277
Loans, net............................. 86,253 83,614 81,449 76,954 66,181
Investment securities.................. 54,685 53,539 51,564 56,390 57,865
Deposits............................... 131,148 125,357 133,504 129,826 124,214
Long-term debt......................... 0 0 0 0 0
Stockholders' equity................... 21,885 19,790 21,032 18,979 17,753
Performance Ratios:
Net interest margin (1)................ 4.57% 4.62% 4.67% 4.54% 4.67%
Return on average assets (2)........... 1.38% 1.40% 1.49% 1.33% 1.34%
Return on average equity (2)........... 9.98% 10.86% 11.31% 10.68% 10.11%
Efficiency ratio (3)................... 54.47% 54.21% 52.35% 55.89% 55.84%
Asset Quality Ratios:
Allowance for loan losses to period
end loans............................ 1.33% 1.38% 1.34% 1.55% 1.85%
Allowance for loan losses to
nonperforming assets................. 5.12x 2.81x 3.16x 3.48x 2.69x
Nonperforming assets to period end
loans and foreclosed property........ 0.25% 0.49% 0.42% 0.44% 0.69%
Net charge-offs to average loans....... 0.07% 0.12% 0.29% 0.19% 0.16%
Capital and Liquidity Ratios:
Leverage............................... 13.10% 12.54% 12.69% 12.08% 11.89%
Risk Based Capital Ratios:
Tier 1 Capital....................... 19.97% 19.13% 19.97% 18.27% 19.89%
Total Capital........................ 21.06% 20.28% 21.11% 19.48% 21.24%
Average loans to average deposits...... 62.87% 62.41% 63.73% 59.20% 60.24%
- ----------------------
</TABLE>
(1) Net interest margin is calculated as fully taxable equivalent net
interest income divided by average earning assets and represents UCB's
net yield on its earning assets.
(2) Ratios have been annualized for the six months ended June 30, 1998 and
1997.
(3) Efficiency ratio is computed by dividing non-interest expense less
foreclosed property expense by the sum of fully taxable equivalent net
interest income and non-interest income, net of securities gains or
losses.
-16-
<PAGE>
Mid-Atlantic Community BankGroup, Inc.
and United Community Bankshares, Inc.
Selected Pro Forma Combined Financial Information
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
---------------------------- ------------------------------------------
1998 1997 1997 1996 1995
(In thousands, except ratios and share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income........................ $12,732 $11,411 $23,738 $21,071 $17,684
Interest expense....................... 5,494 4,853 10,125 9,108 7,630
----- ----- ------ ----- -----
Net interest income.................... 7,238 6,558 13,613 11,963 10,054
Provision for loan losses.............. 286 261 476 481 471
Noninterest income..................... 1,002 783 1,716 1,501 1,220
Noninterest expense.................... 5,058 4,631 9,433 8,117 7,075
----- ----- ----- ----- -----
Income before income taxes............. 2,896 2,449 5,420 4,866 3,728
Income taxes........................... 822 645 1,360 1,409 990
--- --- ----- ----- ---
Net income............................. $2,074 $1,804 $4,060 $3,457 $2,738
====== ====== ====== ====== ======
Per Share Data (1)(2):
Net income, basic...................... $0.50 $0.47 $1.02 $0.90 $0.78
Net income, diluted.................... 0.49 0.46 1.00 0.88 0.77
Cash dividends......................... 0.00 0.00 0.25 0.13 0.06
Basic weighted average shares
outstanding.......................... 4,159,776 3,855,066 3,979,686 3,855,066 3,515,042
Diluted weighted average shares
outstanding.......................... 4,273,354 3,921,654 4,052,039 3,917,372 3,555,152
Book value at period end............... 10.20 9.10 9.70 8.67 8.06
Balance Sheet Data:
Total assets........................... $336,338 $297,448 $315,257 $286,312 $251,591
Loans, net............................. 199,957 180,347 185,689 167,932 135,737
Investment securities.................. 91,264 81,913 82,958 83,687 82,658
Deposits............................... 290,699 256,963 271,927 250,311 218,329
Long-term debt......................... 24 37 31 43 55
Stockholders' equity................... 42,473 35,069 40,309 33,411 31,088
Performance Ratios:
Net interest margin (3)................ 5.03% 5.12% 5.14% 5.12% 5.04%
Return on average assets (4)........... 1.29% 1.26% 1.37% 1.32% 1.24%
Return on average equity (4)........... 10.00% 10.62% 11.32% 10.85% 10.20%
Efficiency ratio (5)................... 58.45% 60.09% 59.46% 57.71% 60.55%
Asset Quality Ratios:
Allowance for loan losses to period
end loans............................ 1.27% 1.34% 1.29% 1.36% 1.53%
Allowance for loan losses to
nonperforming assets................. 2.76x 2.53x 2.83x 4.32x 3.52x
Nonperforming assets to period end
loans and foreclosed property........ 0.46% 0.53% 0.45% 0.31% 0.43%
Net charge-offs to average loans....... 0.08% 0.07% 0.20% 0.18% 0.19%
Capital and Liquidity Ratios:
Leverage............................... 12.63% 11.87% 12.49% 11.77% 12.28%
Risk Based Capital Ratios:
Tier 1 Capital....................... 18.00% 16.92% 18.56% 16.64% 19.14%
Total Capital........................ 19.13% 18.12% 19.73% 17.81% 20.41%
Average loans to average deposits...... 69.62% 70.39% 70.53% 68.17% 66.97%
</TABLE>
- --------------------
(1) It is assumed that the Reorganization will be accounted for on a
pooling of interests accounting basis and, accordingly, the related pro
forma adjustments have been calculated using the exchange ratio,
whereby MACB will issue 1.075 shares of MACB Common Stock for each
share of UCB Common Stock.
(2) Amounts have been restated to reflect a two-for-one stock split of MACB
Common Stock in March 1998.
(3) Net interest margin is calculated as fully taxable equivalent net
interest income divided by average earning assets and represents the
net yield on earning assets.
(4) Ratios have been annualized for the six months ended June 30, 1998 and
1997.
(5) Efficiency ratio is computed by dividing non-interest expense less
foreclosed property expense by the sum of fully taxable equivalent net
interest income and non-interest income, net of securities gains or
losses.
-17-
<PAGE>
THE SHAREHOLDER MEETINGS
The UCB Meeting
Date, Place and Time. The UCB Meeting will be held at the Virginia
Diner, Highway 460, Wakefield, Virginia on November 19, 1998 at 9:30 a.m.
Record Date. The Board of Directors of UCB has fixed the close of
business on October 9, 1998 as the record date (the "UCB Record Date") for the
determination of the holders of UCB Common Stock entitled to receive notice of
and to vote at the UCB Meeting. At the close of business on the UCB Record Date,
there were 1,829,209 shares of UCB Common Stock outstanding held by 966
shareholders of record.
Vote Required. Each share of UCB Common Stock outstanding on the UCB
Record Date entitles the holder to cast one vote upon each matter properly
submitted at the UCB Meeting. The affirmative vote of the holders of a majority
of the shares of UCB Common Stock outstanding, as of the UCB Record Date, in
person or by proxy, is required to approve the Reorganization Agreement.
As of the UCB Record Date, directors and executive officers of UCB and
their affiliates, persons and entities as a group, owned of record and
beneficially a total of 379,720 shares of UCB Common Stock, or approximately
20.8% of the shares of UCB Common Stock outstanding on such date. Directors and
executive officers of UCB have indicated an intention to vote their shares of
UCB Common Stock FOR the Reorganization.
A failure to vote, either by not returning the enclosed proxy or by
checking the "Abstain" box thereon, will have the same effect as a vote against
approval of the Reorganization Agreement.
A shareholder may abstain with respect to the Reorganization Agreement.
Abstentions will be counted for purposes of determining the existence of a
quorum. Abstentions will be counted as not voting in favor of the Reorganization
Agreement. Since approval of the Reorganization Agreement requires an
affirmative vote of a specified number of shares outstanding, abstentions will
have the effect of a negative vote with respect thereto.
A broker who holds shares in street name has the authority to vote on
certain items when he has not received instructions from the beneficial owner.
Except for certain items for which brokers are prohibited from exercising their
discretion, a broker is entitled to vote on matters put to shareholders without
instructions from the beneficial owner. Where brokers do not have or do not
exercise such discretion, the inability or failure to vote is referred to as a
broker nonvote. Under the circumstances where the broker is not permitted to or
does not exercise its discretion, assuming proper disclosure to UCB of such
inability to vote, broker nonvotes will be counted for purposes of determining
the existence of a quorum, but also will be counted as not voting in favor of
the particular matter. Since the approval of the Reorganization Agreement
requires the affirmative vote of the holders of a specified number of shares
outstanding, broker nonvotes, if any, will have the effect of a negative vote
with respect thereto.
Voting and Revocation of Proxies. Shareholders of UCB are requested to
complete, date and sign the accompanying form of proxy and return it promptly to
UCB in the enclosed envelope. If a proxy is properly executed and returned in
time for voting, it will be voted as indicated thereon. If no voting
instructions are given, proxies received by UCB will be voted for approval of
the Reorganization Agreement.
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to UCB by executing and delivering a substitute proxy to
UCB or by attending the UCB Meeting and voting in person. If a UCB shareholder
desires to revoke a proxy by written notice, such notice should be mailed or
delivered on or prior to the meeting date to Wenifred O. Pearce, President and
Chief Executive Officer, United Community Bankshares, Inc., 100 East Fourth
Avenue, Franklin, Virginia 23851. If a proxy is
-18-
<PAGE>
signed and returned without indicating any voting instructions, shares of UCB
Common Stock represented by the proxy will be voted FOR the Reorganization
Agreement.
If a sufficient number of signed proxies enabling the persons named as
proxies to vote in favor of the Reorganization are not received by UCB by the
time scheduled for the UCB Meeting, the persons named as proxies may propose one
or more adjournments of the meeting to permit continued solicitation of proxies
with respect to such approval. If an adjournment is proposed, the persons named
as proxies will vote in favor of such adjournment those proxies which are
entitled to be voted in favor of the Reorganization Agreement and against such
adjournment those proxies containing instructions to vote against approval of
the Reorganization Agreement. Abstentions with respect to approval of the
Reorganization Agreement will be voted against such adjournment. Adjournment of
the UCB Meeting will be proposed only if the Board of Directors of UCB believes
that additional time to solicit proxies might permit the receipt of sufficient
votes to approve the Reorganization Agreement, or at the request of MACB. It is
anticipated that any such adjournment would be for a relatively short period of
time, but in no event for more than 120 days. Any shareholder may revoke such
shareholder's proxy during any period of adjournment in the manner described
above.
Solicitation of Proxies. UCB will bear the costs of its solicitation of
proxies. Solicitations may be made by mail, facsimile, telephone, telegraph or
personally by directors, officers and employees at UCB, none of whom will
receive additional compensation for performing such services. MACB and UCB each
shall pay half of the expenses of printing and mailing the Joint Proxy
Statement.
The MACB Meeting
Date, Place and Time. The MACB Meeting will be held at the Abingdon
Ruritan Club on Guinea Road, Bena, Virginia on November 19, 1998 at 7:00 p.m.
Record Date. Only shareholders of record at the close of business on
October 7, 1998, (the "MACB Record Date") are entitled to receive notice of and
to vote at the MACB Meeting or any adjournment thereof. At the close of business
on the MACB Record Date, there were 2,198,900 shares of MACB Common Stock
outstanding held by 924 shareholders of record.
Vote Required. Each share of MACB Common Stock outstanding on the MACB
Record Date entitles the holder to cast one vote upon each matter properly
submitted at the MACB Meeting. The affirmative vote of a majority of the shares
of MACB Common Stock outstanding, as of the MACB Record Date, in person or by
proxy, is required to approve the Reorganization Agreement.
As of the MACB Record Date, directors and executive officers of MACB
and their affiliates, persons and entities as a group owned of record and
beneficially a total of 465,486 shares of MACB Common Stock, or approximately
21.2% of the shares of MACB Common Stock outstanding on such date. Directors and
executive officers of MACB have indicated an intention to vote their shares of
MACB Common Stock FOR the Reorganization.
A failure to vote, either by not returning the enclosed proxy or by
checking the "Abstain" box thereon, will have the same effect as a vote against
approval of the Reorganization Agreement.
A shareholder may abstain with respect to the Reorganization Agreement.
Abstentions will be counted for purposes of determining the existence of a
quorum. Abstentions will be counted as not voting in favor of the Reorganization
Agreement. Since approval of the Reorganization Agreement requires an
affirmative vote of a specified number of shares outstanding, abstentions will
have the effect of a negative vote with respect thereto.
A broker who holds shares in street name has the authority to vote on
certain items when he has not received instructions from the beneficial owner.
Except for certain items for which brokers are prohibited from exercising their
discretion, a broker is entitled to vote on matters put to shareholders without
-19-
<PAGE>
instructions from the beneficial owner. Where brokers do not have or do not
exercise such discretion, the inability or failure to vote is referred to as a
broker nonvote. Under the circumstances where the broker is not permitted to or
does not exercise its discretion, assuming proper disclosure to MACB of such
inability to vote, broker nonvotes will be counted for purposes of determining
the existence of a quorum, but also will be counted as not voting in favor of
the particular matter. Since the approval of the Reorganization Agreement
requires the affirmative vote of the holders of a specified number of shares
outstanding, broker nonvotes, if any, will have the effect of a negative vote
with respect thereto.
Voting and Revocation of Proxies. Shareholders of MACB are requested to
complete, date and sign the accompanying form of proxy and return it promptly to
MACB in the enclosed envelope. If a proxy is properly executed and returned in
time for voting, it will be voted as indicated thereon. If no voting
instructions are given, proxies received by MACB will be voted for approval of
the Reorganization Agreement.
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to MACB, by executing and delivering a substitute proxy to
MACB or by attending the MACB Meeting and voting in person. If a MACB
shareholder desires to revoke a proxy by written notice, such notice should be
mailed or delivered on or prior to the meeting date to Kathleen C. Healy,
Secretary, Mid-Atlantic Community BankGroup, Inc., 7171 George Washington
Memorial Highway, P.O. Box 1310, Gloucester, Virginia 23061-1310. If a proxy is
signed and returned without indicating any voting instructions, shares of MACB
Common Stock represented by the proxy will be voted FOR the Reorganization
Agreement.
If a sufficient number of signed proxies enabling the persons named as
proxies to vote in favor of the Reorganization are not received by MACB by the
time scheduled for the MACB Meeting, the persons named as proxies may propose
one or more adjournments of the meeting to permit continued solicitation of
proxies with respect to such approval. If an adjournment is proposed, the
persons named as proxies will vote in favor of such adjournment those proxies
which are entitled to be voted in favor of the Reorganization Agreement and
against such adjournment those proxies containing instructions to vote against
approval of the Reorganization Agreement. Abstentions with respect to approval
of the Reorganization Agreement will be voted against such adjournment.
Adjournment of the MACB Meeting will be proposed only if the Board of Directors
of MACB believes that additional time to solicit proxies might permit the
receipt of sufficient votes to approve the Reorganization Agreement, or at the
request of UCB. It is anticipated that any such adjournment would be for a
relatively short period of time, but in no event for more than 120 days. Any
shareholder may revoke such shareholder's proxy during any period of adjournment
in the manner described above.
Solicitation of Proxies. MACB will bear the costs of its solicitation
of proxies. Solicitations may be made by mail, facsimile, telephone, telegraph
or personally by directors, officers and employees at MACB, none of whom will
receive additional compensation for performing such services. MACB and UCB each
shall pay half all of the expenses of printing and mailing the Joint Proxy
Statement.
-20-
<PAGE>
THE REORGANIZATION
The following is a summary description of the material terms of the
Reorganization, and is qualified in its entirety by reference to the
Reorganization Agreement which is attached as Appendix A hereto. All holders of
UCB or MACB Common Stock are urged to read the Reorganization Agreement in its
entirety.
Background
General. UCB and MACB operate community banks in geographically close,
but separate markets in southeastern Virginia. UCB's bank subsidiaries, BOF and
BSS operate a total of eight banking offices that serve predominantly rural
markets south of the James River, while PTB, the bank subsidiary of MACB
operates seven banking offices that serve predominantly urban and suburban
markets north of the James River. There are no overlapping branch facilities.
UCB offers MACB a stable core business; a cost of funds lower than MACB's; and
the capital to diversify and serve customers with higher borrowing needs. MACB
offers UCB technological and operational support and access to faster growing
markets with greater loan demand. Each of UCB and MACB offer to the other
greater diversification of assets and deposits, greater depth of management and
the opportunity to enhance revenue and enjoy economies of scale.
In October 1997 Messrs. Farinholt and Smith from MACB met with Mr.
Pearce from UCB to discuss the concept of a merger of equals. The October 1997
discussions were informal and preliminary and touched on each company's desire
to remain independent. Discussions also included the practical difficulties of
remaining independent and continuing to be able to compete with large statewide
and regional bank holding companies, including challenges presented by
increasing technology costs and costs associated with offering non-deposit
products and services. MACB and UCB, together, engaged Davenport & Company LLC
("Davenport") to prepare a financial analysis of possible combination. In
November 1997 Messrs. Farinholt, Pearce and Smith continued discussions that
included possible Board of Directors composition, management structure, computer
systems and future growth plans. On November 14, 1997 the Boards of MACB and UCB
held a joint meeting in Williamsburg, Virginia so that each group could become
acquainted with the other and share their respective philosophies and goals. A
representative of Davenport attended the meeting and presented a financial
analysis of UCB and MACB, as combined. Such analysis did not include any
recommended exchange ratio. The November 14, 1997 meeting was not a negotiation
and no decisions were made on transaction structure or terms. In subsequent
discussions Mr. Pearce advised Messrs. Farinholt and Smith that both BOF and BSS
were relying on core data processing systems that were not year 2000 compliant
and that UCB needed to proceed to acquire a new operating system either
independently or through an affiliation with a company with year 2000 compliant
data processing systems. Although discussions continued into December of 1997,
talks subsequently were suspended as it appeared that although MACB's data
processing systems would be year 2000 compliant without material additional
expense, MACB lacked the capacity to also perform data processing services for
BOF and BSS and that it was unlikely that the parties would be able to agree on
the terms of an affiliation in a time frame consistent with UCB's need for a
decision on data processing issues.
In February 1998, MACB decided to expand its data processing capacity
and concluded that this would enable it to provide data processing services to
BOF and BSS. In March 1998 Messrs. Farinholt and Pearce revived their previous
discussions and began to seriously discuss the structure of a possible merger of
equals. By late March MACB, represented by Messrs. Farinholt, Smith and Lombard,
and UCB, represented by Messrs. Pearce, West and Brittle, had reached agreement,
subject to their respective boards' approval, on the structure of the
Reorganization and on all key issues involving management and Board
representation. The parties requested Davenport to derive a suggested exchange
ratio, which it delivered on March 23, 1998. As the parties decided to proceed
with negotiations, Davenport resigned its joint engagement by MACB and UCB.
Scott & Stringfellow, Inc. ("Scott & Stringfellow") was engaged to advise UCB
and Davenport was engaged to advise MACB.
-21-
<PAGE>
MACB
Between December 1997 and March 1998, the MACB Board considered various
growth alternatives, including de novo branch expansion and the possible
acquisition of bank branches from statewide banks that were acquired by
out-of-state bank holding companies in late 1997. The Board also analyzed the
possibility of selling MACB and held discussions with three larger banking
organizations. Based on those discussions it was apparent that MACB could sell
to a larger banking organization at a premium over the current market price.
However, the MACB Board ultimately decided not to pursue such a transaction,
primarily because it concluded, that while a sale of control might maximize
short term shareholder value, it was likely that MACB would be able to sustain
its historical growth rate for the next several years, which could lead to
greater benefits and shareholder value over the longer term. At meetings of its
Board of Directors in April and May, the MACB Board reviewed the possible
financial impact of the Reorganization, based on data compiled by Davenport, and
at its May 1998 Board of Directors meeting, the MACB Board authorized the
execution and delivery of a Letter of Intent that embodied the essential terms
of the Reorganization. The Letter of Intent was executed on May 26, 1998 and
announced on May 27, 1998. Following the execution of the Letter of Intent, work
proceeded on the Reorganization Agreement and each party completed its due
diligence investigation of the other. At its June 16, 1998 Board of Directors
meeting, representatives of Davenport presented a financial analysis of the
Reorganization and rendered an oral opinion to MACB that the Reorganization is
fair from a financial point of view. Counsel also was present at the June 16,
1998 meeting and reviewed the Reorganization Agreement with the Board of
Directors. The Board of Directors approved the Reorganization. The
Reorganization Agreement was executed and delivered on July 8, 1998.
UCB
Since its formation on August 1, 1996, the Board of Directors of UCB
has believed that the best opportunity for improving the value of the franchise
was through expansion into the greater Hampton Roads market which will likely
continue to experience a more rapid rate of growth than the markets served by
existing UCB offices. UCB believed that expansion into those markets would add
diversity to the loan portfolio, provide a larger asset base and generally
enhance the long term prospects for UCB.
From September 1996 until August 1997, informal discussions about
affiliation were held with two other institutions, but it was concluded that
consolidation with either of those institutions was not in the best overall
interest of UCB at the time.
After discussions with MACB were suspended in December, 1997, the Board
focused its attention on the market value of UCB Common Stock, which it believed
was undervalued, compared to similar institutions. The Board concluded both the
value and liquidity might be improved through a stock repurchase program.
At its meeting on January 14, 1998, a representative of Scott &
Stringfellow, Inc. made a presentation to the Board of UCB on options available
to create additional liquidity for UCB Common Stock and to raise the market
value of UCB Common Stock. As a result of the presentation, the Board decided to
adopt a self-tender dutch auction stock repurchase plan. Board also approved
developing criteria and selecting a vendor for a new data processing system.
A second presentation by Scott & Stringfellow representatives was made
to the Board at its meeting on January 24, 1998, and a modified stock repurchase
plan was approved. At that same meeting, the Board concluded that merger
discussions with MACB had effectively been discontinued and elected to go
forward with implementation of a new data processing system.
In March 1998, merger discussions were revived with MACB. At that time,
plans for a stock repurchase program were placed on hold. At its April meeting,
the UCB Board of Directors approved canceling plans to implement a new data
processing system, since data processing services would be provided by MACB or
PTB. BSS converted to MACB's data processing system on August 13, 1998 and BOF
is expected to convert in November 1998. If the Reorganization is not
consummated, BOF and BSS
-22-
<PAGE>
will continue to receive data processing services from MACB or PTB under a
contractual arrangement and UCB will not have the need to acquire or implement a
new data processing system.
At a meeting held on May 26, 1998, a representative of Scott &
Stringfellow presented a financial analysis of the proposed Reorganization and
rendered an oral opinion to UCB that the proposed Reorganization was fair from a
financial point of view. Counsel was also present at the meeting and reviewed
the terms of the proposed Letter of Intent and the proposed Reorganization
Agreement with the Board of Directors. The Board of Directors approved the
Letter of Intent to enter into a merger of equals with MACB. The Letter of
Intent was executed on May 26, 1998 and announced on May 27, 1998, and work
continued on finalizing the Reorganization Agreement, which was approved by the
Board of Directors and executed on July 8, 1998.
Reasons for the Reorganization - UCB
In deciding to enter into the Reorganization Agreement, the UCB Board
considered a number of factors. The UCB Board did not assign any relative or
specific weights to the factors considered. The principal factors that led the
UCB Board to approve the Reorganization were:
Asset Growth and Loan Demand. Although the Reorganization is dilutive
to UCB shareholders with respect to historical per share earnings and book
value, MACB has experienced significantly greater growth, which UCB believes
will continue. From December 31, 1995 to June 30, 1998, MACB's total assets
increased from $108.3 million to $181.3 million (67.4%); deposits increased from
$94.1 million to $159.6 million (69.5%); and net loans increased from $69.6
million to $113.7 million (63.5%). In the same period, UCB's total assets and
deposits increased by 8.2% and 5.6%, respectively, while net loans increased by
30.3%.
UCB's ratio of loans to deposits (65.8% at June 30, 1998) is lower than
the MACB loan to deposit ratio, which was 71.3% at June 30, 1998. Additionally,
UCB's average yield on loans (9.26% for the six months ended June 30, 1998) is
lower than MACB's average yield on loans (10.46% for the same period). To the
extent bank deposits are not invested in loans, they are invested in debt
securities, which generally carry lower interest yields. UCB has found it
difficult to increase its loans in its own market areas, while still maintaining
a prudent level of diversification among industries. By gaining access to MACB's
markets, which are larger, more diverse and faster growing, UCB believes that a
higher percentage of its deposits can be invested in higher yielding loans,
which should increase net interest income on a consolidated basis. UCB believes
that the potential benefits of MACB's higher growth rate and higher loan yield
(higher net income in future periods) outweigh any short-term disadvantage from
dilution in per share earnings and book value. Additionally, as a result of the
Reorganization, the net worth of MACB will approximately double, which will
permit MACB to serve business customers larger than those customers that either
MACB or UCB can serve alone.
Equal Board Representation. After the Effective Date, half of the MACB
directors will be individuals who are either directors of UCB or a UCB bank
subsidiary.
Improved Stock Liquidity. MACB Common Stock is listed on the Nasdaq
SmallCap Market and has had significantly higher trading volume than UCB. For
example, in the six months ended June 30, 1998, trading volume in MACB Common
Stock was 340,800 shares, while UCB trading volume was 16,200 shares. UCB
believes that a more liquid trading market benefits all shareholders because a
thin market can discourage investors from purchasing.
Operating Efficiencies. UCB had outgrown its operating system and,
after a lengthy evaluation had decided to install a new computer system with
essentially the same features as the MACB system. To expand the MACB system to
accommodate BOF and BSS is significantly less expensive than installing a
completely new UCB system.
-23-
<PAGE>
Local Autonomy. Although plans call for merging BOF and BSS after the
Effective Date, the resulting bank will continue to operate with a large degree
of autonomy, under a Board of Directors comprised of current directors of BOF
and BSS and Mr. Brittle as the Chief Executive Officer.
Depth of Management. As a result of the Reorganization, the senior
executive officers' duties will change in ways that are intended to expand
MACB's business. In particular, it is expected that Mr. Brittle will head United
Community Bank, the bank that results from merging BOF and BSS, which will free
Mr. Pearce to concentrate substantially all his time on increasing consolidated
non-interest income and seeking other expansion opportunities. In their current
structures, neither MACB nor UCB has a senior executive officer with primary
responsibility in those areas.
Other material factors considered were: the exchange ratio offered for
UCB Common Stock; the market value of MACB Common Stock; the dividend paid on
the MACB Common Stock; the financial condition and history of performance of
MACB; diversification of risk associated with ownership of an institution with a
broader geographic market area; the well capitalized position and earnings of
MACB; the tax free nature of the Reorganization; and the compatibility of the
managements of the two organizations. The UCB Board believes that the addition
of the resources it will provide to MACB will enable MACB and its subsidiary
banks to provide a wider and improved array of financial services to consumers
and businesses and to achieve added flexibility in dealing with the changing
competitive environment in their market areas.
The UCB Board has concluded that the terms of the Reorganization
Agreement, which were determined on the basis of arms-length negotiations, are
fair to UCB shareholders. As explained below, this conclusion is supported by
the opinion of an independent financial advisor. In establishing the Exchange
Ratio, the UCB Board also considered the Exchange Ratio in relation to the
market value and earnings per share of UCB Common Stock and MACB Common Stock;
information concerning the financial condition, results of operations and the
prospects of UCB and MACB; and the tax-free nature of the Reorganization to the
shareholders of UCB to the extent they receive MACB Common Stock in exchange for
their shares of UCB Common Stock.
Following the Effective Date, Messrs. West, Pearce, Bain, Pope, Spivey,
Stewart and Savedge are expected to serve as directors of MACB.
The Board of Directors of UCB believes that the Reorganization is in
the best interests of UCB and its shareholders. The UCB directors have all
committed to vote shares under their control in favor of the Reorganization to
the extent of their fiduciary ability. The UCB directors unanimously recommend
that UCB shareholders vote FOR the approval of the Reorganization Agreement.
Reasons for the Reorganization - MACB
In deciding to enter into the Reorganization Agreement, the MACB Board
considered a number of factors. The MACB Board did not assign any relative or
specific weights to the factors considered. The principal factors that led the
MACB Board to approve the Reorganization were:
Transaction Accretive. Based on the book value per share of MACB Common
Stock and UCB Common Stock at June 30, 1998, the Reorganization would result in
an increase in the per share book value of MACB Common Stock from $9.36 to
$10.20 on a pro forma basis. Similarly, based on the diluted earnings per share
of MACB and UCB for the twelve month and six month periods ended December 31,
1997 and June 30, 1998, the Reorganization, on a pro forma basis, would have
resulted in increases in MACB's diluted earnings per share of $.12 (13.6%) and
$.05 (11.4%), respectively.
Local Autonomy. PTB will continue to operate as a separate bank under
its current Board of Directors after the Effective Date.
-24-
<PAGE>
Deposit Costs and Loan Demand. UCB's deposit costs are lower than
MACB's. For the year ended December 31, 1997 and the six months ended June 30,
1998, UCB had average costs of interest bearing and non-interest bearing
deposits of 3.65% and 3.75%, respectively. For the same periods, the average
cost of MACB's interest bearing and non-interest bearing deposits was 4.15%.
Additionally, MACB has a higher ratio of loans to deposits and a higher yield on
loans than UCB. At June 30, 1998, UCB's ratio of loans to deposits was 65.8%,
compared to 71.3% for MACB. For the year ended December 31, 1997 and the six
months ended June 30, 1998, MACB's yield on loans was 10.49% and 10.46%,
respectively, compared to 9.27% and 9.26% for UCB. MACB believes that its net
interest income can be increased by deploying part of UCB's liquid assets in
higher yielding loans in MACB's market areas without sacrificing service to
borrowers in UCB's market areas. However, this process is expected to take
several years and any resulting increase in net interest income is expected to
be gradual.
Operating Efficiencies. MACB has made a practice, since its inception,
of evaluating the needs associated with growth on the basis of whether meeting
those needs would require additional human resources or more advanced technology
and automation. As it explored growth opportunities associated with opening de
novo branches or acquiring existing branches, it determined that its primary
host computer needed not only enhanced storage capacity but also enhanced
processing speed. The cost of such an upgrade was significant relative to the
size of MACB. However, the additional cost of upsizing the computer system to
accommodate both MACB and UCB proved not to be substantially greater than for
MACB, alone. Thus, the Reorganization will permit MACB to spread these costs
over a larger asset and revenue base. MACB also had researched several software
alternatives to enable it to compete with larger banks through the offering of
financial products, such as Internet banking and cash management services for
business customers, that it has been unable to offer. These software
alternatives were priced in such a way that the cost to MACB would be
prohibitive, but the additional cost for a multi-bank environment was not
significantly greater. MACB concluded not only that the cost of providing such
services would be affordable if spread over a larger asset base, but also that
the revenue potential would be greater if such services could be marketed to
customers of both MACB and UCB.
Larger Size. Based on June 30, 1998 data, the Reorganization would
increase MACB's total assets, deposits and stockholders' equity on a pro forma
basis by 85.5%, 82.2% and 106.3%, respectively. Although, MACB does not believe
that increased size, in and of itself, necessarily increases shareholder value,
it does believe that certain benefits are achievable, including operating
efficiencies, greater management depth and the ability to serve larger business
customers as the result of a larger capital base. MACB also believes that, if
management successfully integrates the UCB and MACB organizations, the potential
synergies from an increase in its asset size and geographic scope will lead to
increased earnings and shareholder value and could make MACB a more attractive
acquisition candidate to certain large banking organizations that would not be
interested in MACB at its current size. MACB has no present intention to seek an
acquiror and there is no assurance that the Reorganization will increase the
price that any potential acquiror would be willing to pay.
Depth of Management. MACB believes that important components of
continued growth and success will be to increase non-interest income and
identify opportunities to expand through branching or acquisitions of other
banks. To effectively pursue those goals will require additional executive
personnel and a division of duties among executive officers. After the Effective
Date, it is anticipated that although Mr. Farinholt will remain the Chief
Executive Officer of PTB, his duties will focus primarily on the overall
operations of MACB, and that Kathleen C. Healy, the Chief Operating Officer of
PTB will be primarily responsible for its day-to-day operations. It is expected
that Mr. Brittle will serve as the Chief Executive Officer of the bank that
results from the merger of BOF and BSS, which will free Mr. Pearce to focus on
increasing consolidated non-interest income and acquisitions and other growth
opportunities at the holding company level. Mr. Pearce's experience includes 10
years with the Virginia Bankers' Association (the "VBA"), with primary
responsibility for bank products and services. As a result of his association
with the VBA, Mr. Pearce developed broad contacts in Virginia banking circles,
which MACB believes will be valuable in identifying and evaluating possible
expansion and growth opportunities. Before becoming the Chief Executive Officer
of BOF in 1994, Mr. Pearce was employed by First American Bank of Virginia for
ten years. In his capacity as President, Hampton Roads Region, Mr. Pearce
oversaw a banking network of
-25-
<PAGE>
29 branches, approximately 350 employees, a variety of non-credit services
including data processing, trust, cash management, merchant card services and a
loan and deposit base in excess of $500 million.
Other material factors considered were: the financial condition and
history of performance of UCB; diversification of risk associated with ownership
of an institution with a broader geographic market area; the well capitalized
position and earnings of UCB; and the compatibility of the managements of the
two organizations. The MACB Board believes that the addition of the resources
that UCB will provide to MACB will enable MACB and its subsidiary banks to
provide a wider and improved array of financial services to consumers and
businesses and to achieve added flexibility in dealing with the changing
competitive environment in their market areas.
The MACB Board has concluded that the terms of the Reorganization
Agreement, which were determined on the basis of arms-length negotiations, are
fair to MACB shareholders. As explained below, this conclusion is supported by
the opinion of an independent financial advisor. In establishing the Exchange
Ratio, the MACB Board also considered the Exchange Ratio in relation to the
market value and earnings per share of UCB Common Stock and MACB Common Stock;
and information concerning the financial condition, results of operations and
the prospects of UCB and MACB.
The Board of Directors of MACB believes that the Reorganization is in
the best interests of MACB and its shareholders. The MACB directors have all
committed to vote shares under their control in favor of the Reorganization to
the extent of their fiduciary ability. The MACB directors unanimously recommend
that MACB shareholders vote FOR the approval of the Reorganization Agreement.
Terms of the Reorganization
UCB Common Stock. At the Effective Date, each outstanding share of UCB
Common Stock (other than shares held by shareholders who perfect their
dissenters' rights) will be exchanged for 1.075 shares of MACB Common Stock and
cash in lieu of any fractional shares. UCB shareholders will thereby become
shareholders of MACB. The amount of cash which may be paid to a UCB shareholder
in lieu of issuing any fractional shares will be equal to the fraction of a
share of MACB Common Stock to which such shareholder would otherwise be entitled
multiplied by the average of the closing prices of MACB Common Stock as reported
on the Nasdaq SmallCap Market during the 10 trading days immediately preceding
the Effective Date.
UCB Options. All UCB Options shall, at the effective time of the
Reorganization, be converted into options for MACB Common Stock, and MACB shall
assume each UCB Option in accordance with the terms of the stock option plan
under which it was issued and the stock option agreement by which it is
evidenced. After the consummation of the Reorganization, (i) each UCB Option
assumed by MACB may be exercised solely for shares of MACB Common Stock, (ii)
the number of shares of MACB Common Stock subject to each UCB Option shall be
equal to the number of shares of UCB Common Stock subject to each option
immediately prior to the Shares Exchange multiplied by the Exchange Ratio and
rounded up or down to the nearest whole share of MACB Common Stock, and (iii)
the per share exercise price under each such UCB Option shall be adjusted by
dividing the per share exercise price under each such option by the Exchange
Ratio and rounding down to the nearest cent. The exercise price of the UCB
Options is $10.33 per share. The exercise prices of the UCB Options after the
Reorganization in terms of MACB shares, adjusted to reflect the Exchange Ratio,
will be $9.61 per share of MACB Common Stock. On the UCB Record Date there were
31,667 UCB Options outstanding representing the right to purchase 31,667 shares
of UCB Common Stock.
Shareholders of UCB and MACB are entitled to exercise their dissenters'
rights with respect to the Reorganization. See " - Rights of Dissenting
Shareholders."
Lock-Up Option
In addition to the Reorganization Agreement, MACB and UCB each entered
into agreements on May 26, 1998 (the date the Letter of Intent was executed)
providing for each of MACB and UCB to have
-26-
<PAGE>
an option to purchase common stock in the other under certain conditions (the
"Lock-Up Options"). Specifically, the Lock-Up Options provide that MACB shall
have an option to purchase 181,091 shares of UCB Common Stock at a price of
$20.00 per share, and UCB shall have an option to purchase 217,691 shares of
MACB Common Stock at a price of $21.00 per share. Both the number of options
available and the price will be proportionately adjusted automatically in the
event either party increases (or decreases) the number of shares of common stock
outstanding. The options are exercisable only under limited circumstances.
The Lock-Up Options provide that one party (the "Grantee") has an
option to purchase stock in the other party (the "Grantor") only upon the
occurrence of the following events: (i) the Grantor enters into an agreement
with a third person to engage in a merger, consolidation, sale of substantially
all the assets of the Grantor, or sale of securities representing more than 9.9%
of the voting power of the Grantor; or (ii) a third person acquires 9.9% or more
of the outstanding common stock of the Grantor.
The exercise prices represent the estimate of market price or fair
value at the time the Lock-Up Options were executed, and the number of options
provided are proportional to the relative sizes of MACB and UCB. Both MACB and
UCB felt that these Lock-Up Options would create an added deterrent to the
parties breaching the Reorganization Agreement and would provide a reasonable
compensation in the event that the other party breached the Reorganization
Agreement to enter into a sale of that party to a third person.
Effective Date
If the Reorganization is approved by the requisite vote of the
shareholders of UCB and MACB and by the Federal Reserve and the SCC (See "The
Reorganization - Regulatory Approvals") and other conditions to the
Reorganization are satisfied (or waived to the extent permitted by the
Reorganization Agreement and applicable law), the Reorganization will be
consummated and effected at the time a certificate of merger is issued by the
SCC pursuant to the Virginia SCA. See "The Reorganization - Representations and
Warranties; Conditions to the Reorganization."
It is anticipated that the Effective Date will be on or about December
1, 1998, but there can be no assurance as to whether or when the Reorganization
will occur.
Surrender of Stock Certificates
Promptly after the Effective Date PTB, as the exchange agent, will mail
to the former holders of UCB Common Stock a letter of transmittal and
instructions relating to the exchange of their UCB share certificates for share
certificates representing the number of shares of MACB Common Stock to which
they are entitled as a result of the Reorganization. Because MACB's corporate
name will change to "Atlantic Financial Corp." on the Effective Date, stock
certificates issued to UCB shareholders will bear the Atlantic Financial Corp.
name.
UCB SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY
RECEIVE SUCH INSTRUCTIONS.
Promptly after surrender of one or more certificates for UCB Common
Stock, together with a properly completed letter of transmittal, the holder of
such certificates will receive a certificate or certificates representing the
number of shares of MACB Common Stock to which he or she is entitled and, where
applicable, a check for the amount payable in cash in lieu of issuing a
fractional share. Lost, stolen, mutilated or destroyed certificates will be
treated in accordance with the existing procedures of MACB.
All MACB Common Stock issued as a result of the conversion of UCB Stock
pursuant to the Reorganization will be deemed issued as of the Effective Date.
After the Effective Date, UCB shareholders will be entitled to vote the number
of shares of MACB Common Stock for which their UCB Common Stock has been
exchanged, regardless of whether they have surrendered their UCB certificates.
The Reorganization Agreement provides, however, that no dividend or distribution
payable to the holders of
-27-
<PAGE>
record of MACB Common Stock at or as of any time after the Effective Date will
be paid to the holder of any UCB certificate until such holder physically
surrenders such certificate, promptly after which time all such dividends or
distributions will be paid (without interest).
Representations and Warranties; Conditions to the Reorganization
The Reorganization Agreement contains representations and warranties by
MACB and UCB regarding, among other things, their respective organizations,
authorizations to enter into the Reorganization Agreement, capitalization,
financial statements and pending and threatened litigation. These
representations and warranties (except as otherwise provided in the
Reorganization Agreement) will not survive the Effective Date.
The obligations of MACB and UCB to consummate the Reorganization are
subject to the following conditions, among others: approval and adoption of the
Reorganization Agreement and Plan of Merger by the requisite shareholder votes;
receipt of all regulatory approvals necessary to consummate the Reorganization,
not conditioned or restricted in a manner that, in the judgment of the Boards of
Directors of MACB and UCB, materially adversely affects the economic or business
benefits of the Reorganization so as to render inadvisable consummation thereof;
the absence of certain actual or threatened proceedings before a court or other
governmental body relating to the Reorganization; receipt of current fairness
opinions from the investment advisors for MACB and UCB; the receipt of an
opinion of counsel as to certain Federal income tax consequences of the
Reorganization; and the qualification of the Reorganization for pooling of
interests accounting treatment. Also, under the terms of the Reorganization
Agreement, MACB agreed that, following the Effective Date, it will indemnify
those persons associated with UCB and its subsidiaries who are entitled to
indemnification as of the Effective Date of the Reorganization.
In addition, each party's obligation to effect the Reorganization,
unless waived, is subject to performance by the other party of its obligations
under the Reorganization Agreement, the accuracy, in all material respects, of
the representations and warranties of the other party contained therein, and the
receipt of certain opinions and certificates from the other party.
Employment Agreements
As a condition to the obligations of MACB and UCB under the
Reorganization Agreement, Messrs. Farinholt, Pearce, Smith and Brittle each must
enter into a five year Employment Agreement with MACB which will begin on the
Effective Date. Such Employment Agreements will supercede the existing
employment agreements between UCB and Messrs. Pearce and Brittle, as well as the
agreements between MACB and each of Messrs. Farinholt and Smith, which provide
for certain benefits in the event of a change of control of MACB.
The Boards of Directors of MACB and UCB determined that for the
Reorganization to be successful, it would be important for the senior executive
officers of MACB and UCB to work effectively as a team after the Effective Date;
for each to be willing to accept some changes in responsibilities; and to
discourage such executive officers from possibly accepting change of control
benefits that would otherwise be triggered by the Reorganization and seeking
employment with other banking organizations. The respective Boards of MACB and
UCB concluded that an effective way to address those concerns was to provide
each executive officer an employment contract that delineated his prospective
responsibilities and provided reasonable assurance of continued employment at
salary levels consistent with those of senior officers of Virginia banking
organizations of similar size.
Mr. Farinholt's Employment Agreement provides that he will serve as the
President and Chief Executive Officer of MACB at an annual base salary of
$160,000. Base salary increases and bonuses will be in the discretion of the
Board of Directors. The Employment Agreement also provides that MACB will
provide Mr. Farinholt an appropriate automobile, as determined by the Board of
Directors. Under the Employment Agreement, Mr. Farinholt will be entitled to
participate in employee benefit plans, including MACB's stock option plans, on
the same basis as other employees of senior executive status. If MACB terminates
Mr. Farinholt's employment without cause, or if Mr. Farinholt resigns for "good
reason" during
-28-
<PAGE>
the contract term, he will be entitled to salary and benefits for the remainder
of the contract term, or one year, whichever is greater, subject to his
agreement not to compete with MACB for a period of one year following the
termination of his employment. Under the Employment Agreement, "good reason"
entitling to Mr. Farinholt to resign includes a change or reduction in Mr.
Farinholt's authority; a reduction in base salary, as the same may have been
increased from time to time; the failure of MACB to provide him with
substantially the same fringe benefits that have been provided heretofore; a
relocation of his primary place of employment, which would require him to move
his personal residence; the failure of a successor corporation to assume MACB's
obligations under the Employment Agreement; a failure of the shareholders to
elect him a Director of MACB; or a material breach of the Employment Agreement
by MACB.
Under the Employment Agreement, Mr. Farinholt would not be entitled to
any further compensation or benefits if MACB terminated the Agreement for cause.
Cause includes personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses that have no material detrimental effect on MACB)
or final cease and desist order, or a material breach of any provision of the
Agreement.
If Mr. Farinholt is terminated or if he resigns for good reason
following a change of control, he would be entitled to the same severance
benefits described above. If Mr. Farinholt resigned following a change of
control without good reason, he would be entitled to a $200,000.00 severance
benefit and immediate vesting of stock options.
The Employment Agreements of Messrs. Pearce, Smith and Brittle are in
substantially the same form as Mr. Farinholt's Employment Agreement and provide
for annual base salaries of $150,000, $125,000 and $115,000, respectively. The
Employment Agreements of Messrs. Pearce and Brittle, however, provide
additionally that each will be granted an option to purchase MACB common stock
with a fair market value equal to 167% of his annual base salary at the time of
grant at a price per share equal to the fair market value of MACB Common Stock
on the date of grant. Such options are contingent on continued employment and
are not required to be granted before August 1, 2001. Such option grants will be
incentive stock options and will vest as rapidly as is consistent with incentive
stock option treatment. The reasons that the Employment Agreements of Messrs.
Pearce and Brittle provide for stock options, while those of Messrs. Farinholt
and Smith do not are that Messrs. Pearce and Brittle each would have received
similar option grants from UCB if UCB had remained independent. Mr. Pearce's
Employment Agreement provides that the Salary Continuation Plan Agreement
provided to him by BOF will be kept in force.
Regulatory Approvals
MACB's acquisition of UCB pursuant to the Reorganization is subject to
approval by the Federal Reserve under the BHC Act, which requires that the
Federal Reserve take into consideration the financial and managerial resources
and future prospects of the existing and proposed institutions and the
convenience and needs of the communities to be served. The BHC Act prohibits the
Federal Reserve from approving the Reorganization if it would result in a
monopoly or if it would be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any part of
the United States, or if its effect may be substantially to lessen competition
or to tend to create a monopoly, or if it would be in any other manner a
restraint of trade, unless the Federal Reserve finds that the anti-competitive
effects of the Reorganization are clearly outweighed in the public interest by
the probable effect of the transaction in meeting the convenience and needs of
the communities to be served. The Reorganization may not be consummated for 15
days after such approval, pursuant to federal law, in order to provide a period
for the Reorganization to be challenged under the antitrust laws.
The BHC Act provides for the publication of notice and the opportunity
for administrative hearings relating to the applications, and it authorizes the
regulatory agency to permit interested parties to intervene in the proceedings.
If an interested party is permitted to intervene, such intervention could
substantially delay the regulatory approvals required for consummation of the
Reorganization.
-29-
<PAGE>
The Reorganization is further subject to the approval of the SCC. To
obtain such approval, the SCC must conclude that the Reorganization will not
affect detrimentally the safety or soundness of a Virginia bank.
Applications for approval of the Reorganization have been filed with
the Federal Reserve and the SCC. None of the agencies has yet approved the
applications. MACB and UCB are not aware of any other governmental approvals or
actions that are required for consummation of the Reorganization, except as
described above. Should any such approval or action be required, it is currently
contemplated that such approval or action would be sought. There can be no
assurance that any such approval or action, if needed, could be obtained.
Business Pending the Reorganization
Until consummation of the Reorganization (or termination of the
Reorganization Agreement), each of UCB and MACB is obligated to operate its
businesses only in the ordinary and usual course, consistent with past practice,
and to use its best efforts to maintain its business organization, employees and
business relationships and to retain the services of its officers and key
employees. Until consummation of the Reorganization (or termination of the
Reorganization Agreement) UCB may not, without the consent of MACB, and MACB may
not, without the consent of UCB, among other things: (a) declare or pay
dividends on its capital stock, except in the regular course of business
consistent with past practice; (b) enter into any merger, consolidation or
business combination (other than the Reorganization) or any acquisition or
disposition of a material amount of assets or securities or solicit proposals in
respect thereof; (c) amend its charter or bylaws (except as may be required by
the Reorganization Agreement); (d) issue any capital stock, except upon exercise
of rights, warrants or options issued pursuant to existing employee benefits
plans, programs or arrangements or effect any stock split or otherwise change
its capitalization; or (e) purchase or redeem any of its capital stock.
Waiver, Amendment and Termination
At any time on or prior to the Effective Date, any term or condition of
the Reorganization may be waived by the party which is entitled to the benefits
thereof, without shareholder approval, to the extent permitted under applicable
law. The Reorganization Agreement may be amended at any time prior to the
Effective Date by agreement of the parties whether before or after the UCB and
MACB Meetings (except that the Exchange Ratio shall not be changed after
approval of the Reorganization Agreement by the UCB and MACB shareholders). Any
material change in a material term of the Reorganization Agreement after this
Joint Proxy Statement is mailed to shareholders of UCB and MACB would require a
resolicitation of UCB's and MACB's shareholders. Such a material change would
include, but not be limited to, a change in the tax consequences to UCB's
shareholders.
The Reorganization Agreement may be terminated by MACB or UCB, whether
before or after the approval of the Reorganization Agreement by the
shareholders: (a) if the other party materially breaches any representation,
warranty or agreement which is not properly cured by such breaching party; (b)
if the Reorganization is not consummated by February 28, 1999; or (c) if the
Federal Reserve or the SCC have denied approval of the Reorganization. The
Reorganization Agreement also may be terminated at any time by the mutual
consent of MACB and UCB. In the event of termination, the Reorganization
Agreement shall become null and void, except that certain provisions thereof
relating to expenses and confidentiality of information exchanged between the
parties shall survive any such termination.
Resales of MACB Common Stock
All shares of MACB Common Stock received by UCB shareholders in
connection with the Reorganization will be freely transferable, except that MACB
Common Stock received by persons who are deemed to be "affiliates" (as such term
is defined in Rule 144 under the Securities Act) of UCB may be resold by them
only in transactions permitted by the resale provisions of Rule 145 under the
Securities Act. For purposes of Rule 144 as applied to UCB, the directors and
executive officers of UCB are the only affiliates who will be subject to the
resale limitations.
-30-
<PAGE>
Interest of Certain Persons in the Reorganization
In considering the recommendations of the Board of Directors of UCB
with respect to the Reorganization, holders of voting stock should be aware that
certain members of UCB's Board of Directors and senior management have certain
interests in the Reorganization that are in addition to the interest of
shareholders of UCB generally. The Board of Directors of UCB was aware of these
interests and considered them, among other factors, in approving the
Reorganization. These interests are as follows:
Board of Directors. The Board of Directors of MACB after the Effective
Date will include seven current members of the Board of Directors of UCB or its
subsidiaries. Following the Effective Date, Messrs. West, Pearce, Bain, Pope,
Spivey, Stewart and Savedge are expected to serve as directors of MACB. See
" - Reasons for the Reorganization - UCB."
Employment Agreements. As a condition to the obligations of MACB and
UCB under the Reorganization Agreement, Messrs. Farinholt, Pearce, Smith and
Brittle each must enter into a five-year employment agreement with MACB that
will begin on the Effective Date. For additional information regarding the terms
of these employment agreements, see " - Employment Agreements."
Options. Certain officers of UCB hold options to acquire UCB Common
Stock.
On the Effective Date, all rights with respect to UCB Common Stock
pursuant to stock options ("UCB Options") granted by UCB under a UCB stock
option plan which are outstanding on the Effective Date, whether or not then
exercisable, shall be converted into and become rights with respect to MACB
Common Stock, and MACB shall assume each UCB Option in accordance with the terms
of the stock option plan under which it was issued and the stock option
agreement by which it is evidenced. See " - Terms of the Reorganization."
Projected MACB Common Stock Ownership. The table below sets forth (i)
the beneficial ownership of UCB Common Stock by all UCB Directors and Executive
Officers, (ii) the projected holdings of MACB Common Stock by all UCB Directors
and executive officers, both individually and in the aggregate, upon the
Reorganization and assuming the immediate exercise of all options and warrants;
(iii) the percentage of ownership in MACB that such shares would represent; and
(iv) the estimated value of such shares.
<TABLE>
<CAPTION>
Projected
No. of No. of Post-Merger
UCB MACB Percent of MACB
Shares Shares(1) Common Stock(2) Value($)(3)
------ --------- --------------- -----------
<S> <C> <C> <C> <C>
Jack P. Bain 198,435 214,317 5.32 3,964,865
J. Philip Bain, Jr. 68,025 73,926 1.84 1,367,631
D. Eugene Brittle 6,260 6,729 0.17 124,487
Hunter Darden, Jr. 4,806 5,166 0.13 95,571
Gregor O. Huber 13,920 15,164 0.38 280,534
Wenifred O. Pearce 4,624 4,970 0.12 91,945
Harvey G. Pope 8,881 9,547 0.24 176,620
J. D. Spivey 5,122 5,506 0.14 101,861
F. Bruce Stewart 8,486 9,202 0.23 170,237
J. Russell West 63,694 69,471 1.72 1,285,214
All present executive officers and
directors as a group (10 persons)
382,253 413,998 10.27 7,658,963
</TABLE>
- -------------------------
-31-
<PAGE>
(1) Amounts include shares of MACB Common Stock currently owned by UCB
Directors and Executive Officers.
(2) Based on 1,829,209 shares of UCB Common Stock outstanding on the UCB
Record Date and 2,198,900 shares of MACB Common Stock outstanding on
the MACB Record Date.
(3) Based on the closing price of $18.50 per share of MACB Common Stock on
the Nasdaq SmallCap Market on October 9, 1998, without adjustment for
either the costs of exercising options or any holder's investment basis
in UCB Common Stock.
Accounting Treatment
It is anticipated that the Reorganization will be accounted for as a
pooling of interests for accounting and financial reporting purposes. Under this
method of accounting, recorded assets and liabilities of MACB and UCB are
carried forward at their previously recorded amounts; income of the combined
corporations will include income of MACB and UCB for the entire fiscal year in
which the Reorganization occurs; and the reported income of the separate
corporations for prior periods will be combined. No recognition of goodwill in
the combination is required of any party to the Reorganization.
For the Reorganization to qualify as a pooling of interests, it must
satisfy certain conditions, including the condition that the total cash paid by
MACB pursuant to the Reorganization Agreement for (a) fractional shares and (b)
all the UCB Common Stock and MACB Common Stock held by dissenting shareholders,
may not exceed 10% of the value of the UCB Common Stock at the Effective Date.
Affiliates of UCB have agreed that, among other things, they will not sell any
MACB Common Stock or UCB Common Stock within 30 days prior to the Effective
Date, nor sell any MACB Common Stock until such time as MACB has published
financial results covering at least 30 days of the combined operations of MACB
and UCB after the Reorganization. Although pooling of interests accounting, like
other terms in the Agreement, is waivable, MACB and UCB each has indicated that
it is unlikely to waive that requirement. If outside auditors determine that
pooling of interest accounting treatment is not available and both parties agree
to waive that term, the Reorganization would have to be resubmitted to
shareholders of MACB and UCB for their approval. See "Summary" and "Pro Forma
Combined Financial Information."
Federal Income Tax Matters
Set forth below is a discussion of all material federal income tax
consequences under the Internal Revenue Code of 1986, as amended (the "Code") to
UCB shareholders who receive MACB Common Stock solely in exchange for UCB Common
Stock as a result of the Reorganization and UCB shareholders who receive cash in
lieu of fractional shares or who receive cash for their shares upon exercise of
dissenters' rights. The discussion does not deal with all aspects of federal
taxation that may be relevant to particular UCB shareholders. In view of the
individual nature of tax consequences, UCB shareholders are urged to consult
their own tax advisors as to the specific tax consequences to them of the
Reorganization, including the applicability of federal, state, local and foreign
tax laws.
Neither MACB nor UCB has requested a ruling from the Internal Revenue
Service ("IRS") in connection with the Reorganization. To meet a condition to
consummation of the Reorganization, MACB and UCB will receive from Williams,
Mullen, Christian & Dobbins, counsel to MACB, an opinion as to certain of the
federal income tax consequences of the Reorganization. Such opinion is neither
binding on the IRS nor precludes it from adopting a contrary position.
In the opinion of counsel, the Reorganization will constitute a
tax-free reorganization under Section 368 of the Code if consummated in the
manner set forth in the Reorganization Agreement. Accordingly, among other
things, in the opinion of such counsel:
1. No gain or loss will be recognized by MACB or UCB as a result of
the Reorganization;
2. No gain or loss will be recognized by the UCB shareholders who
receive solely shares of MACB Common Stock pursuant to the Reorganization;
-32-
<PAGE>
3. The aggregate basis of the MACB Common Stock received by each
UCB shareholder will be the same as the aggregate basis of the UCB stock
surrendered in exchange therefor (reduced by any amount allocable to fractional
share interests for which a shareholder receives cash); and
4. The holding period for each share of MACB Common Stock received
by each UCB shareholder in exchange for UCB Common Stock will generally include
the period for which such shareholder held the UCB Common Stock exchanged
therefor, provided such UCB Common Stock is a capital asset in the hands of such
holder at the Effective Date.
Any cash received by MACB or UCB shareholders, as a result of an
exercise of their dissenters' rights or (in the case of UCB shareholders) in
lieu of the issuance of fractional shares, could result in taxable income to the
shareholders. The receipt of such cash generally will be treated as a sale or
exchange of the stock resulting in capital gain or loss measured by the
difference between the cash received and an allocable portion of the basis of
the stock relinquished. The receipt of such cash may be treated as a dividend
and taxed as ordinary income in certain limited situations. In the case of cash
payments in lieu of fractional shares, however, such payments will be small in
amount and not a material concern to UCB shareholders. Shareholders should
consult their own tax advisors concerning proper treatment of such cash amounts.
No gain or loss will be recognized by the holders of nonstatutory
options to purchase UCB Common Stock solely as a result of the conversion of
such options into options to acquire MACB Common Stock.
Rights of Dissenting Shareholders
Any shareholder of MACB Common Stock or UCB Common Stock who objects to
the Reorganization (a "Dissenting Shareholder") and who complies with provisions
of Article 15 of Title 13.1 of the Virginia SCA ("Article 15") may demand the
right to receive a cash payment, if the Reorganization is consummated, for the
fair value of his or her stock immediately before the Reorganization Effective
Date, exclusive of any appreciation or depreciation in anticipation of the
Reorganization unless such exclusion would be inequitable. In order to receive
payment, a Dissenting Shareholder must deliver to MACB or UCB, as the case may
be (referred to in this subsection as the "Company"), prior to the MACB Meeting
or the UCB Meeting, as the case may be, a written notice of intent to demand
payment for his or her shares if the Reorganization is consummated (an "Intent
to Demand Payment") and must not vote his or her shares in favor of the
Reorganization. With respect to shareholders of MACB Common Stock, the Intent to
Demand Payment should be addressed to Kathleen C. Healy, Secretary, Mid-Atlantic
Community BankGroup, Inc., P. O. Box 1310, Gloucester, Virginia 230601-1310.
With respect to shareholders of UCB Common Stock, the Intent to Demand Payment
should be addressed to Wenifred O. Pearce, President and Chief Executive
Officer, United Community Bankshares, Inc., 100 East Fourth Avenue, Franklin,
Virginia 23851. A VOTE AGAINST THE REORGANIZATION WILL NOT ITSELF CONSTITUTE
SUCH WRITTEN NOTICE AND A FAILURE TO VOTE WILL NOT CONSTITUTE A TIMELY WRITTEN
NOTICE OF INTENT TO DEMAND PAYMENT.
A shareholder of record of MACB Common Stock or UCB Common Stock may
assert dissenters' rights as to fewer than all the shares registered in his or
her name only if the shareholder dissents with respect to all shares
beneficially owned by any one person and notifies the Company in writing of the
name and address of each person on whose behalf he asserts dissenters' rights.
The rights of such a partial dissenter are determined as if the shares to which
he dissents and his other shares were registered in the names of different
shareholders. A beneficial shareholder of MACB Common Stock or UCB Common Stock
may assert dissenters' rights as to shares held on his behalf by a shareholder
of record only if (i) he submits to the Company the record shareholder's written
consent to the dissent not later than the time when the beneficial shareholder
asserts dissenters' rights, and (ii) he dissents with respect to all shares of
which he is the beneficial shareholder or over which he has power to direct the
vote.
-33-
<PAGE>
Within 10 days after the Effective Date, the Company is required to
deliver a notice in writing (a "Dissenter's Notice") to each Dissenting
Shareholder who has filed an Intent to Demand Payment and who has not voted such
shares in favor of the Reorganization. The Dissenter's Notice shall (i) state
where the demand for payment (the "Payment Demand") shall be sent and where and
when stock certificates shall be deposited; (ii) supply a form for demanding
payment; (iii) set a date by which the Company must receive the Payment Demand;
and (iv) be accompanied by a copy of Article 15. A Dissenting Shareholder who is
sent a Dissenter's Notice must submit the Payment Demand and deposit his or her
stock certificates in accordance with the terms of, and within the time frames
set forth in, the Dissenter's Notice. As a part of the Payment Demand, the
Dissenting Shareholder must certify whether he or she acquired beneficial
ownership of the shares before or after the date of the first public
announcement of the terms of the proposed Reorganization (the "Announcement
Date"), which was May 27, 1998. The Company will specify the Announcement Date
in the Dissenter's Notice.
Except with respect to shares acquired after the Announcement Date, the
Company shall pay a Dissenting Shareholder the amount the Company estimates to
be the fair value of his or her shares, plus accrued interest. Such payment
shall be made within 30 days of receipt of the Dissenting Shareholder's Payment
Demand. As to shares acquired after the Announcement Date, the Company is only
obligated to estimate the fair value of the shares, plus accrued interest, and
to offer to pay this amount to the Dissenting Shareholder conditioned upon the
Dissenting Shareholder's agreement to accept it in full satisfaction of his or
her claim.
If a Dissenting Shareholder believes that the amount paid or offered by
the Company is less than the fair value of his or her shares, or that the
interest due is incorrectly calculated, that Dissenting Shareholder may notify
the Company of his or her own estimate of the fair value of his shares and
amount of interest due and demand payment of such estimate (less any amount
already received by the Dissenting Shareholder) (the "Estimate and Demand"). The
Dissenting Shareholder must notify the Company of the Estimate and Demand within
30 days after the date the Company makes or offers to make payment to the
Dissenting Shareholder.
Within 60 days after receiving the Estimate and Demand, the Company
must either commence a proceeding in the appropriate circuit court to determine
the fair value of the Dissenting Shareholder's shares and accrued interest, or
the Company must pay each Dissenting Shareholder whose demand remains unsettled
the amount demanded. If a proceeding is commenced, the court must determine all
costs of the proceeding and must assess those costs against the Company, except
that the court may assess costs against all or some of the Dissenting
Shareholders to the extent the court finds that the Dissenting Shareholders did
not act in good faith in demanding payment of the Dissenting Shareholder's
Estimates.
The foregoing discussion is a summary of the material provisions of
Article 15. Shareholders are strongly encouraged to review carefully the full
text of Article 15, which is included as Appendix B to this Joint Proxy
Statement. The provisions of Article 15 are technical and complex, and a
shareholder failing to comply strictly with them may forfeit his Dissenting
Shareholder's rights. Any shareholder who intends to dissent from the
Reorganization should review the text of those provisions carefully and also
should consult with his attorney. No further notice of the events giving rise to
dissenters' rights or any steps associated therewith will be furnished MACB
shareholders and UCB shareholders, except as indicated above or otherwise
required by law.
Any Dissenting Shareholder who perfects his right to be paid the fair
value of his shares will recognize gain or loss, if any, for federal income tax
purposes upon the receipt of cash for his shares. The amount of gain or loss and
its character as ordinary or capital gain or loss will be determined in
accordance with applicable provisions of the Internal Revenue Code. See " -
Federal Income Tax Matters."
Certain Differences in Rights of Security Holders
MACB is a corporation subject to the provisions of the Virginia SCA,
and UCB also is a corporation subject to the provisions of the Virginia SCA.
Shareholders of UCB, whose rights are governed by UCB's Articles of
Incorporation and Bylaws, will, upon consummation of the Reorganization,
-34-
<PAGE>
become shareholders of MACB. The rights of the former UCB shareholders will then
be governed by the Articles of Incorporation and Bylaws of MACB and the Virginia
SCA. The Reorganization Agreement provides for certain material amendments to
the Articles of Incorporation and Bylaws of MACB on the effective date.
Consequently, the Reorganization not only will affect the rights of UCB
shareholders, but also will affect the rights of MACB shareholders.
There are no material differences between the rights of a UCB or MACB
shareholder under the respective Articles of Incorporation and Bylaws of UCB and
MACB and the Virginia SCA, on the one hand, and the rights of such shareholders
under the Articles of Incorporation and Bylaws of MACB, as amended under the
Reorganization Agreement, and the Virginia SCA, on the other hand, except as
disclosed in the section "Comparative Rights of Shareholders."
Expenses of the Reorganization
Whether or not the Reorganization is consummated, UCB and MACB will pay
their own expenses incident to preparing, entering into and carrying out the
Reorganization Agreement, preparing and filing the Registration Statement of
which this Joint Proxy Statement is a part, except under circumstances involving
willful breaches of certain provisions of the Reorganization Agreement. In
general, the Reorganization Agreement provides for each party to pay its own
expenses in this regard.
If, however, either party materially breaches the Reorganization
Agreement, that party must pay the costs associated with this transaction
incurred by the non-breaching party. If the Reorganization Agreement is
terminated by MACB in the event that UCB receives a subsequent acquisition offer
and the Board of Directors at UCB does not confirm its unanimous support of the
Reorganization, UCB must pay MACB's costs. If the Reorganization is not
consummated, and UCB is not liable to MACB for expenses, in most cases MACB must
pay one half of UCB's outside legal, accounting and financial advisory fees. In
addition, if the Reorganization is not approved by either party's shareholders,
that party must pay 50% of the other party's costs in this transaction. In no
event, however, can the liability for such costs incurred by either party exceed
a total of $100,000.
UCB and MACB have incurred and will continue to incur expenses related
to the Reorganization, which expenses include, among other things, legal fees,
filing fees, accounting fees, investment banking fees, printing charges and
costs of mailing.
MACB and UCB Market Prices and Dividends
UCB. Since December 17, 1996, UCB Common Stock has been traded on the
OTC Bulletin Board under the symbol of "UCMB." On May 15, 1998, the last day on
which UCB Common Stock traded prior to the announcement of the Reorganization,
the closing price for UCB Common Stock was $19.98 per share.
-35-
<PAGE>
The following table sets forth, for the quarters indicated, the high
and low sales prices for UCB Common Stock and per share dividends paid during
the respective periods, since its organization on August 1, 1996.
UCB Market Price and Dividends
<TABLE>
<CAPTION>
Sales Price ($) Dividends ($)
--------------- -------------
High Low
1996: ---- ---
<S> <C> <C> <C>
3rd quarter (1)
(August 1 through September 30) no trades no trades 0.14
4th quarter (1) 12.00 10.00
1997:
1st quarter 12.50 10.25 0.15
2nd quarter 13.00 11.50
3rd quarter 13.38 12.00 0.16
4th quarter 14.00 12.50
1998:
1st quarter 16.38 13.75 0.17
2nd quarter 22.00 18.00
3rd quarter 22.00 17.50 0.18
4th quarter no trades no trades
(through October 9, 1998)
</TABLE>
- -------------------------
(1) From August 1, 1996 to December 16, 1996, prior to being traded on the
OTC Bulletin Board, UCB Common Stock was sold in a limited number of
privately negotiated transactions. The high and low sales prices
disclosed in the table reflects those trades known to UCB during that
time. From December 17, 1996 to December 31, 1996, the high and low
closing sales prices of UCB Common Stock on the OTC Bulletin Board were
$11.00 and $10.00, respectively.
The future payment of dividends is solely in the discretion of the
Board of Directors of UCB and is dependent upon certain legal and regulatory
considerations and upon the earnings and financial condition of UCB and such
other factors as UCB's Board of Directors may, from time to time, deem relevant.
UCB is subject to certain regulatory restrictions on the amount of
dividends it is permitted to pay shareholders, and will be subject to the same
restrictions upon consummation of the Reorganization. Dividends are generally
restricted to net profits, as defined by Federal Reserve regulations, for the
current year plus retained net profits for the preceding two years. At June 30,
1998, dividends were so limited to approximately $4.8 million.
As of October 9, 1998, there were 966 shareholders of record of UCB
Common Stock.
MACB. MACB Common Stock is traded on the Nasdaq SmallCap Market under
the symbol of "MABG." On May 26, 1998, the last day on which MACB Common Stock
traded prior to the announcement of the Reorganization, the closing price for
MACB Common Stock was $20.00 per share.
-36-
<PAGE>
The following table sets forth, for the quarters indicated, the high
and low closing prices for MACB Common Stock on the Nasdaq SmallCap Market and
per share dividends paid during the respective periods. The actual stock value
and dividend payout to UCB shareholders over time as a result of the
Reorganization could vary depending on fluctuations of the market price of MACB
Common Stock and changes in MACB's dividend payment practice.
MACB Market Price and Dividends
<TABLE>
<CAPTION>
Sales Price ($) Dividends ($)
--------------- -------------
High Low
---- ---
<S> <C> <C> <C>
1996:
1st quarter 11.75 9.25
2nd quarter 12.50 11.00
3rd quarter 12.44 11.19
4th quarter 13.00 11.75 0.125
1997:
1st quarter 13.00 11.50
2nd quarter 13.00 11.50
3rd quarter 12.75 11.50
4th quarter 16.00 12.00 0.25
1998:
1st quarter 23.00 16.25
2nd quarter 24.00 20.00
3rd quarter 21.50 18.00
4th quarter 18.50 17.88
(through October 9, 1998)
</TABLE>
- -------------------
(a) All prices and dividends are adjusted to reflect a two-for-one stock
split in March 1998.
On October 9, 1998, the closing price of MACB Common Stock on the
Nasdaq SmallCap Market was $18.50. As of October 9, 1998, there were 924
shareholders of record of MACB Common Stock.
MACB historically has paid cash dividends on an annual basis. The final
determination of the timing, amount and payment of dividends on MACB Common
Stock is at the discretion of MACB's Board of Directors and will depend upon the
earnings of MACB and its subsidiaries, principally, its subsidiary banks, the
financial condition of MACB and other factors, including general economic
conditions and applicable governmental regulations and policies.
MACB is a legal entity separate and distinct from its subsidiary, and
its revenues depend primarily on the payment of dividends from its subsidiary
bank. PTB is subject to certain legal restrictions on the amount of dividends it
is permitted to pay to MACB. At June 30, 1998, PTB had available for
distribution as dividends to MACB approximately $3.6 million.
-37-
<PAGE>
INVESTMENT ADVISOR OPINIONS
Both MACB and UCB management relied upon the advice of qualified
investment advisors in analyzing the Reorganization and recommending it to
MACB's and UCB's respective shareholders. UCB relied on the advice of Scott &
Stringfellow, Inc., an investment banking firm headquartered in Richmond,
Virginia. Scott & Stringfellow, Inc. determined that the Reorganization is fair
to UCB shareholders, from a financial point of view. MACB relied on the advice
of Davenport & Company, LLC, an investment banking firm headquartered in
Richmond, Virginia. Davenport & Company, LLC determined that the Reorganization
is fair to MACB shareholders, from a financial point of view. A more detailed
analysis of the Reorganization, from the point of view of UCB's and MACB's
financial advisors, follows.
UCB - Opinion of Financial Advisor
UCB retained the investment banking firm of Scott & Stringfellow to
evaluate the terms of the Merger Agreement, and Scott & Stringfellow has
rendered its opinion to the Board of Directors of UCB that the Exchange Ratio is
fair to the UCB shareholders from a financial point of view. In developing its
opinion, Scott & Stringfellow reviewed and analyzed: (1) the Reorganization
Agreement and exhibits thereto; (2) this Joint Proxy Statement; (3) UCB's
financial statements for the three years ended December 31, 1997; (4) UCB's
unaudited financial statements for the six months ended June 30, 1997 and 1998,
and other internal information relating to UCB prepared by UCB's management; (5)
information regarding the trading market for the Common Stocks of UCB and MACB
and the price ranges within which the respective stocks have traded; (6) MACB's
annual reports to shareholders and its financial statements for the three years
ended December 31, 1997; and (7) MACB's unaudited financial statements for the
six months ended June 30, 1997 and 1998, and other internal information relating
to MACB prepared by MACB's management. Scott & Stringfellow discussed with
members of management of UCB and MACB the background of the Reorganization, the
reasons and basis for the Reorganization, and the business and future prospects
of UCB and MACB individually and as a combined entity. No instructions or
limitations were given or imposed by UCB in connection with the scope of or the
examination or investigation made by Scott & Stringfellow in arriving at its
findings. Finally, Scott & Stringfellow has conducted such other studies,
analysis and investigations, particularly of the banking industry, and
considered such other information as it deemed appropriate, the material portion
of which is described below. A copy of that opinion, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached as Appendix D hereto and should be read in its entirety.
Scott & Stringfellow used the information gathered to evaluate the
financial terms of the transaction using standard valuation methods, including
the following methods:
Price to Earnings Ratio - Market Comparables. Using publicly available
information, Scott & Stringfellow calculated multiples of the last 12 months
core earnings excluding extraordinary items ("core earnings") used to value
certain other Virginia bank and bank holding companies which, in Scott &
Stringfellow's judgment, were comparable to UCB for the purpose of this
analysis. The Virginia financial institutions included in this analysis, all of
which have publicly traded securities, were Bank of Essex, C&F Financial Corp.,
Central Virginia Bankshares, Inc., Community Bankshares Incorporated, James
River Bankshares, Inc., MainStreet Financial Corp., Marathon Financial Corp.,
Resource Bank, Security Bank Corp., Second National Financial Corp., and Union
Bankshares Corp. The ratio of market price to core earnings of the above group
of institutions ranged from 14.79x to 24.04x earnings, with an average multiple
of 18.89x. Applying this average price to earnings ratio, the value derived from
this analysis was $23.04 per share for UCB Common Stock. This represented an
increase of 15.2% over the closing price of UCB's Common Stock of $20.00 one day
prior to the announcement of the transaction, 15.3% over UCB's closing price of
$19.984 one week prior to announcement, and 40.7% over UCB's closing price of
$16.375 one month prior to announcement.
Using the same 11 market comparable companies, Scott & Stringfellow
applied the average price to earnings ratio to the earnings of UCB and MACB as a
combined entity. The value derived from this analysis (based on the Exchange
Ratio) to holders of UCB Common Stock was $23.91 per share.
-38-
<PAGE>
Price to Book Value Ratio - Market Comparables. Using publicly
available information, Scott & Stringfellow calculated multiples of book values
used to value certain other Virginia bank and bank holding companies which, in
Scott & Stringfellow's judgment, were comparable to UCB for the purpose of this
analysis. The same group of 11 institutions identified above were used for this
analysis. The ratio of market price to book value of the above group of
institutions ranged from 1.56x to 3.14x book value, with an average multiple of
2.22x. Applying this average price to book value ratio, the value derived from
this analysis was $25.53 per share for UCB Common Stock. This represented an
increase of 27.6% over the closing price of UCB's Common Stock of $20.00 one day
prior to the announcement of the transaction, 27.7% over UCB's closing price of
$19.984 one week prior to announcement, and 55.9% over UCB's closing price of
$16.375 one month prior to announcement.
Using the same 11 market comparable companies, Scott & Stringfellow
applied the average price to book value ratio to the book value of UCB and MACB
as a combined entity. The value derived from this analysis (based on the
Exchange Ratio) to holders of UCB Common Stock was $23.15 per share.
Contribution Analysis. Scott & Stringfellow analyzed certain historical
balance sheet and income statement data for UCB and MACB for the six months
ended June 30, 1998 and for the three fiscal years ended December 31, 1997 in
addition to certain projected net income data prepared by management of UCB and
MACB. The analysis showed, among other things, that for the last twelve months
ended June 30, 1998, UCB would have contributed approximately 52.1% of pro forma
combined net income, 46.1% of pro forma total assets and 51.5% of pro forma
total stockholders' equity. At the Exchange Ratio, the holders of UCB Common
Stock will own approximately 47.3% of the Holding Company.
Dilution Analysis. Based upon publicly available financial information
on UCB and MACB, Scott & Stringfellow considered the effect of the transaction
on the book value, earnings, and market value of UCB and MACB. The immediate
effect on UCB was to decrease earnings by $0.06 per share or 4.37%, and decrease
book value by $1.00 or 8.38%. The effect on MACB under the same assumption is to
increase earnings by $0.05 per share or 4.28%, and to increase book value by
$0.83 per share or 8.91%. This dilution analysis does not take into account the
longer term benefits for the combined companies resulting from the combination.
Discounted Cash Flow Analysis. Scott & Stringfellow performed a
discounted cash flow analysis under various projections to estimate the fair
market value of UCB's Common Stock. Among other things, Scott & Stringfellow
considered asset and earnings growth of 5% and a required equity capital level
of 8.0% of assets. A range of discount rates from 10.71% to 12.71% was applied
to cash flows resulting from the projections during the first five years and the
residual values. The residual values were estimated by capitalizing the
projected final year earnings by the discount rates, less the projected
long-term growth rate of UCB's earnings. The discount rates, growth rates and
capital levels were chosen based on what Scott & Stringfellow, in its judgment,
considered to be appropriate taking into account, among other things, UCB's past
and current financial performance and conditions, the general level of
inflation, rates of return for fixed income and equity securities in the
marketplace generally and particularly in the banking industry. Based upon these
analyses, Scott & Stringfellow developed, for purposes of its opinion, a
reference range for the value of UCB Common Stock of $16.44 to $19.83 per share.
Using similar assumptions, Scott & Stringfellow performed a discounted
cash flow analysis of UCB and MACB as a combined entity. The discounted cash
flow analysis showed a range of present values that would imply (based on the
Exchange Ratio) a range of present values for holders of UCB common stock of
$16.82 to $20.94 per share. Scott & Stringfellow utilized the discounted cash
flow analysis because it is a widely used valuation methodology, but noted that
it relies on numerous assumptions regarding future performance.
In connection with its opinion dated as of the date of this Proxy
Statement, Scott & Stringfellow performed procedures to update, as necessary,
certain of the analyses described above and reviewed the assumptions on which
such analyses described above were based and the factors considered in
connection therewith.
-39-
<PAGE>
The summary set forth above includes all material factors considered,
but does not purport to be a complete description of the presentation by Scott &
Stringfellow to the Board of Directors of UCB of the analyses performed by Scott
& Stringfellow. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of these methods to the particular circumstances
and, therfor, such an opinion is not readily susceptible to summary description.
Scott & Stringfellow believes that its analyses must be considered as a whole
and that selecting portions of its analyses and the factors considered by it,
without considering all analyses and factors, would create an incomplete view of
the process underlying the preparation of its opinion. The analyses performed by
Scott & Stringfellow are not necessarily indicative of actual values, which may
be significantly more or less favorable than suggested by such analyses.
Additionally, the analyses do not purport to be appraisals or to reflect the
prices at which a company actually may be sold or the prices at which any
securities may trade at the present time or at any time in the future.
Scott & Stringfellow is a full service investment banking and brokerage
firm headquartered in Richmond, Virginia, that provides a broad array of
services to corporations, financial institutions and state and local
governments. The Financial Institutions Group of Scott & Stringfellow actively
works with community banks in Virginia, North Carolina, Maryland, and West
Virginia on these and other matters. As part of its investment banking business,
it is continually engaged in the valuation of banks and bank holding companies
and their securities in connection with mergers and acquisitions, negotiated
underwriting, and secondary distribution of listed and unlisted securities.
Scott & Stringfellow was selected by the Board of Directors of UCB based upon
its expertise and reputation in providing valuation and merger and acquisition
advisory services to banks and bank holding companies.
UCB has agreed to pay Scott & Stringfellow a fee of $18,000 for due
diligence and financial advisory services which is not contingent upon a
successful completion of the Reorganization.
MACB - Opinion of Financial Advisor
MACB retained Davenport & Company LLC ("Davenport") to act as its
financial adviser in connection with the Reorganization.
In connection with Davenport's engagement, MACB requested that
Davenport evaluate the fairness of the Exchange Ratio from a financial point of
view. On June 16, 1998, the date on which the Reorganization Agreement was
approved by the MACB Board, Davenport rendered to the MACB Board an oral opinion
(the "Davenport Opinion") to the effect that, as of such date and based upon and
subject to certain matters stated in such opinion, the Exchange Ratio was fair
to the holders of MACB Common Stock from a financial point of view. Davenport
has confirmed its opinion as of June 16, 1998 by delivery of a written opinion
dated the date of this Joint Proxy Statement. In connection with its opinion
dated the date of this Joint Proxy Statement, Davenport updated certain of the
analyses performed in connection with its opinion delivered on June 16, 1998 and
reviewed the assumptions on which such analyses were based and the factors
considered in connection therewith.
THE FULL TEXT OF DAVENPORT'S WRITTEN OPINION TO THE MACB BOARD DATED
THE DATE OF THIS JOINT PROXY STATEMENT, WHICH SETS FORTH THE PROCEDURES
FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS APPENDIX F TO THIS JOINT PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF MACB ARE URGED TO READ THIS
OPINION CAREFULLY IN ITS ENTIRETY. DAVENPORT'S OPINION IS DIRECTED TO THE MACB
BOARD AND RELATES ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL
POINT OF VIEW, DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED REORGANIZATION
OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE MACB MEETING. THE
SUMMARY OF THE OPINION OF
-40-
<PAGE>
DAVENPORT SET FORTH IN THIS JOINT PROXY STATEMENT-PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
The summary set forth below does not purport to be a complete
description of the analyses performed by Davenport underlying the Davenport
Opinion or the presentation furnished by Davenport to the MACB Board. Such
summary does constitute a complete summary, in all material respects, of the
material financial analyses furnished by Davenport to the MACB Board on June 16,
1998 in connection with the Davenport Opinion. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to a partial analysis or summary description. Accordingly,
notwithstanding the separate factors summarized below, Davenport believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and factors considered by it, without considering all analyses and
factors, or attempting to ascribe relative weights to some or all such analyses
and factors, could create an incomplete view of the evaluation process
underlying the Davenport Opinion.
In performing its analyses, Davenport made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of MACB, UCB and Davenport.
The analyses performed by Davenport are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than the values or results suggested by such analyses. With respect to
the selected comparable companies analysis and the selected comparable
transactions analysis summarized below, no public company utilized as a
comparison is identical to MACB or UCB. Accordingly, an analysis of publicly
traded comparable companies and comparable business combinations is not
mathematical; rather it involves complex considerations and judgments concerning
the differences in financial and operating characteristics of the companies and
other factors that could affect the public trading values of the companies
concerned. The analyses do not purport to be appraisals or to reflect the prices
at which MACB or UCB might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future. Davenport
was not asked to consider, and the Davenport Opinion does not in any manner
address, the price at which shares of MACB Common Stock will actually trade
following consummation of the Reorganization. In addition, as described above,
the Davenport Opinion and Davenport's presentation to the MACB Board were among
many factors taken into consideration by the MACB Board in making its
determination to approve the Reorganization Agreement. Consequently, the
Davenport analyses described below should not be viewed as determinative of the
decision of the MACB Board or MACB's management with respect to the
Reorganization.
In arriving at its opinion, Davenport, among other things, reviewed
certain publicly available business and financial information relating to MACB
and UCB, as well as the Reorganization Agreement. Davenport also reviewed
certain other information provided to it by MACB regarding cost savings and
related expenses and revenue enhancements expected to result from the
Reorganization, and met with members of senior management of MACB to discuss the
businesses and prospects of MACB and UCB, before and after giving effect to the
Reorganization.
Davenport reviewed certain financial and stock market data for MACB and
UCB and compared that data with similar data for other publicly held companies
that Davenport deemed to be relevant. In addition, Davenport considered the
financial terms of certain other transactions which Davenport deemed relevant.
Davenport also considered the pro forma impact of the Reorganization. Davenport
reviewed such other financial studies and analyses and performed such other
investigations and took into account such other matters as it deemed necessary,
including its assessment of general economic, market and monetary conditions.
In preparing its opinion, Davenport relied on the accuracy and
completeness of all information supplied or otherwise made available to
Davenport, discussed with or reviewed by or for Davenport, or publicly
available. Davenport has not assumed responsibility for independently verifying
such information, has not undertaken an independent evaluation or appraisal of
the assets or liabilities, contingent or otherwise, of MACB or UCB or any of
their subsidiaries and was not furnished with any such evaluation
-41-
<PAGE>
or appraisal. Davenport is not expert in the evaluation of allowances for loan
losses and has not made an independent evaluation of the adequacy of the
allowances for loan losses for each of MACB or UCB, nor has Davenport reviewed
any individual credit files relating to MACB or UCB and Davenport has assumed
that the aggregate allowance for loan losses for each of MACB and UCB is
adequate to cover such losses and will be adequate on a pro forma basis for the
combined entity. In addition, Davenport has not conducted a physical inspection
of the properties or facilities of MACB or UCB. With respect to the financial
forecast information, including, without limitation, financial forecasts,
evaluations of contingencies and projections regarding under-performing and
non-performing assets, net charge-offs, adequacy of reserves and future economic
conditions, and the expected cost savings or revenue enhancements furnished to
or discussed with Davenport by MACB, Davenport assumed that they were reasonably
prepared and reflected the best currently available estimates, allocations and
judgment of MACB's management as to the expected future financial performance of
MACB or UCB, as the case may be. Davenport expressed no opinion as to such
financial forecast information or the assumptions on which they were based. In
addition, Davenport assumed that the Reorganization will be accounted for as a
pooling-of-interests under generally accepted accounting principles and that it
will qualify as a tax-free reorganization for United States federal income tax
purposes.
The Davenport Opinion is necessarily based upon market, economic and
other conditions as they existed on, and could be evaluated as of, the date of
such opinion. For purposes of rendering its opinion Davenport assumed, in all
respects material to its analysis, that the representations and warranties of
each party to the Reorganization Agreement and all related documents and
instruments (collectively, the "Documents") contained therein are true and
correct, that each party to the Documents will perform all of the covenants and
agreements required to be performed by such party under such Documents and that
all conditions to the consummation of the Reorganization will be satisfied
without waiver thereof. Davenport also assumed that in the course of obtaining
the necessary regulatory or other consents or approvals (contractual or
otherwise) for the Reorganization, no restrictions, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the Reorganization.
Information furnished to Davenport and used by it in certain of its
analyses was prepared by the senior management of MACB in connection with the
Reorganization and were not prepared with a view towards public disclosure. Such
information was based on numerous variables and assumptions which are inherently
uncertain, including, without limitation, factors related to general economic
and competitive conditions, and accordingly, actual results could vary
significantly from those set forth therein. See "Forward-Looking Statements."
The following is a summary of the material analyses furnished by
Davenport to the MACB Board on June 16, 1998, in connection with its fairness
opinion.
SUMMARY OF PROPOSAL. Davenport reviewed the terms of the proposed
transaction, including the Exchange Ratio and the implied aggregate transaction
value. Based on MACB's closing stock price of $20.00 on May 26, 1998 (the last
day prior to the announcement of the execution of the Letter of Intent),
Davenport calculated an implied transaction value per share of UCB of $21.50,
and an implied total transaction value of approximately $39.3 million. Davenport
also calculated the price to market, price to book and price to earnings
multiples for UCB in the Reorganization based on such implied total transaction
value. This analysis yielded a price to market multiple of 1.08x, a price to
March 31, 1998 book value multiple of 1.84x and a price to 1997 earnings
multiple of 17.6x.
PRO FORMA REORGANIZATION ANALYSIS. Davenport estimated the impact of
the proposed Reorganization on MACB's book value per share and earnings per
share through calendar year 2002, exclusive of nonrecurring Reorganization
costs. In connection with this analysis and as previously discussed, management
of MACB and UCB provided Davenport with information with regard to future
projected earnings, including certain synergies. This analysis indicated that
the transaction would be accretive to projected book value and earnings per
share of MACB Common Stock in 1998 and thereafter. The actual results achieved
by the combined company will vary from the projected results, and such
variations may be material.
-42-
<PAGE>
CONTRIBUTION ANALYSIS. Davenport reviewed the relative contributions in
terms of various balance sheet items, last twelve months' net income and 1998
estimated net income to be made by MACB and UCB to the combined institution
based on data at March 31, 1998. Davenport analyzed total assets, total loans
(net), total deposits, common equity, latest twelve months' net income and 1998
estimated net income of the combined institution. This analysis showed that,
while MACB Shareholders would own approximately 52.8% of the outstanding shares
of the combined institution based upon the Exchange Ratio, MACB's implied
contribution was 53.0% of total assets, 57.7% of total loans (net), 53.9% of
total deposits, 48.5% of common equity, 46.0% of latest twelve months' net
income and 48.1% of 1998 estimated net income. Davenport also observed that
MACB's growth in assets, loans, deposits, common equity and net income since
1994 were greater than those of UCB.
HISTORICAL TRADING VALUATION. Davenport analyzed the volume and trading
price history for MACB and UCB. Davenport observed that the reported trading
volume of the common shares of MACB and UCB from January 1, 1998 through May 26,
1998 was approximately 325,000 shares and 13,500 shares, respectively. Davenport
calculated an implied value per share for UCB based upon the closing price of
MACB Common Stock as of May 26, 1998 and based upon the weighted average price
by month for each month of 1998. Davenport derived a summary reference range of
implied values per share for UCB ranging from $19.62 to $24.73 corresponding to
the weighted average monthly prices for MACB for January 1998 (lowest price) and
March 1998 (highest price), respectively.
DISCOUNTED DIVIDEND ANALYSIS. Using a discounted dividend analysis,
Davenport estimated the present value of the future cash flows that would accrue
to a holder of a common share of MACB under two scenarios: (i) that MACB
continues to operate as a standalone entity and (ii) that the proposed
Reorganization with UCB is consummated. The analysis was based on several
assumptions, including a 30% dividend payout ratio, a 5-year holding period and
projected earnings consistent with MACB's forecast. Terminal values were
calculated at the end of the fifth year by using price to earnings multiples of
16.0x to 24.0x trailing earnings. Using discount rates ranging from 12% to 14%,
chosen to reflect different assumptions regarding required rates of return of
holders or prospective buyers of MACB Common Stock, Davenport calculated a
present value of MACB Common Stock, on a standalone basis, ranging from $16.66
to $27.30 per share. Applying the same analysis to the projected future cash
flows of the combined company, Davenport calculated a present value of MACB
common stock, on a pro forma basis, ranging from $17.12 to $28.06 per share.
This analysis is not necessarily indicative of actual values or actual future
results and does not purport to reflect the prices at which any securities may
trade at the present time or at any time in the future. Discounted dividend
analysis is a widely used valuation methodology, but the results of such
methodology are highly dependent upon the numerous assumptions that must be
made, including projected earnings, dividend payout rates, terminal values and
discount rates.
ANALYSIS OF SELECTED MERGER TRANSACTIONS. Davenport reviewed publicly
available information regarding four bank merger of equals transactions with a
value less than $100 million which had occurred or had been announced in
Virginia since January 1, 1994 (the "Comparable Transactions"). The Comparable
Transactions and the month in which they were announced are: Bank of Waverly and
Bank of Suffolk (August 1994); Bank of Sussex and Surry and Bank of Franklin
(January 1996); Bank of Northumberland and Southside Bank (August 1997); Second
National Financial Corporation and Virginia Heartland Bank (April 1998). For
each transaction, Davenport compared pro forma relative ownership percentages
with the implied contribution from each merger partner to (i) pro forma combined
net income for the trailing four quarters, (ii) pro forma common equity for the
most recent quarter and (iii) pro forma market value as of the date prior to the
announcement of the transaction.
This analysis indicated that, the larger merger partner (based on
pre-announcement market value) received ownership in the combined company
ranging from (i) 93% to 118% of its net income contribution (trailing four
quarters) versus 115% for MACB, (ii) 92% to 123% of its common equity
contribution (most recent quarter-end) versus 109% for MACB and (iii) 91% to
105% of its pre-announcement market value contribution versus 97% for MACB.
-43-
<PAGE>
No company or transaction used in the above analysis as a comparison is
identical to MACB or the Reorganization, respectively. Accordingly, an analysis
of the results of the foregoing necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
MACB and the companies to which it is being compared.
COMPARISON OF SELECTED COMPARABLE COMPANIES. Davenport compared
selected operating and stock market results of MACB and UCB to the publicly
available corresponding data of certain other Virginia community banks which
Davenport deemed to be relevant, including American National Bankshares, Inc.,
Benchmark Bankshares, Inc., C&F Financial Corporation, Chesapeake Financial
Shares, Inc., Community Bankshares Incorporated, Eastern Virginia Bankshares,
Inc., Independent Community Bankshares, Inc., James River Bankshares, Inc.,
Salem Bank and Trust, N.A., Second National Financial Corporation and Union
Bankshares Corporation (collectively the "Peer Group"). This comparison showed,
among other things, that for the quarter ended March 31, 1998, (i) MACB's net
interest margin was 5.43%, compared with 4.51% for UCB and a median of 4.69% for
the Peer Group, (ii) MACB's efficiency ratio (defined as noninterest expenses
divided by the sum of noninterest income and net interest income before
provision for loan losses) was 62.5%, compared with 51.4% for UCB and a median
of 56.4% for the Peer Group, (iii) MACB's return on average assets was 1.25%
compared with 1.38% for UCB and a median of 1.55% for the Peer Group and (iv)
MACB's return on average equity was 10.30% compared with 9.95% for UCB and a
median of 13.4% for the Peer Group. This comparison also indicated that at March
31, 1998, (v) MACB's equity to asset ratio was 11.5% compared with 13.8% for UCB
and a median of 11.0% for the Peer Group, (vi) MACB's ratio of nonperforming
assets to total assets was 0.75% compared with 0.76% for UCB and a median of
0.36% for the Peer Group and (vii) MACB's ratio of loan loss reserves to loans
was 1.26% compared with 1.38% for UCB and a median of 1.14% for the Peer Group.
This comparison also indicated that as of June 12, 1998, (viii) the ratio of
MACB's market price to earnings for the twelve month-period ended March 31, 1998
was 23.9x compared with 18.6x for UCB and a median of 18.6x for the Peer Group
and (ix) the ratio of MACB's market price to book value per share at March 31,
1998 was 2.33x compared with 1.96x for UCB and a median of 2.29x for the Peer
Group.
In connection with its opinion dated as of the date of this Joint Proxy
Statement, Davenport performed procedures to update, as necessary, certain of
the analyses described above and reviewed the assumptions on which such analyses
described above were based and the factors considered in connection therewith.
Davenport did not perform any analyses in addition to those described above in
updating its June 16, 1998 opinion.
MACB retained Davenport based upon Davenport's experience and expertise
in providing valuation and merger and acquisition advisory services to banks and
bank holding companies. Davenport, as part of its investment banking business,
is continuously engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes. Davenport has, in
the past, provided financial advisory and financing services to MACB and UCB and
may provide such services in the future and has received, and may receive, fees
for the rendering of such services. In the ordinary course of its business,
Davenport and its affiliates may actively trade the equity securities of MACB
and UCB for their own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
MACB and Davenport have entered into a letter agreement dated March 23,
1998 relating to the services to be provided by Davenport in connection with the
Reorganization. MACB has agreed to pay Davenport for its services on an hourly
basis, subject to a maximum fee of $35,000. As of the date hereof, Davenport has
billed MACB the maximum agreed-upon fee of $35,000. In such letter, MACB also
agreed to reimburse Davenport for its reasonable out-of-pocket expenses incurred
in connection with its advisory work, including the reasonable fees and
disbursements of its legal counsel, and to indemnify Davenport against certain
liabilities relating to or arising out of the Reorganization, including
liabilities under the federal securities laws.
-44-
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
Organization and Business
UCB is a Virginia corporation organized on August 1, 1996, as a bank
holding company under Virginia law to serve as the parent company of BOF and
BSS. UCB transacts all material business through these bank subsidiaries.
Federal law also requires that it also serve as a source of financial and
managerial strength to its subsidiary banks and that it conduct its operations
in a safe and sound manner. The principal office of UCB is located at 100 East
Fourth Avenue, Franklin, Virginia 23851.
BOF was organized and chartered under the laws of the Commonwealth of
Virginia on July 8, 1970 and commenced operations on February 4, 1971. BOF is a
State nonmember bank. Its deposits are FDIC insured, and the bank is subject to
supervision, examination, and regulation of the FDIC and the Virginia Bureau of
Financial Institutions. BOF provides a wide range of financial services,
principally to individuals and to small and medium-sized businesses, including
individual and commercial demand, savings, and time deposit accounts,
commercial, agricultural and consumer loans, credit cards, traveler checks, safe
deposit facilities, ATM services, sales of United States Savings Bonds,
collection items and official checks.
As of June 30, 1998, BOF had the equivalent of 50 full-time employees.
None of its employees are represented by any collective bargaining unit. BOF
considers relations with its employees to be good.
BSS was organized and chartered under the laws of the Commonwealth of
Virginia on April 12, 1902 and commenced operations on July 31, 1902. BSS is a
state non-member bank. Its deposits are FDIC insured, and the bank is subject to
supervision, examination, and regulation of the FDIC and the Virginia Bureau of
Financial Institutions. BSS provides a wide range of financial services,
principally to individuals and to small and medium-sized businesses, including
individual and commercial demand, savings, and time deposit accounts,
commercial, agricultural and consumer loans, credit cards, travelers checks,
safe deposit facilities, ATM services, sales of United States Savings Bonds,
collection items and official checks. BSS also offers a wide array of real
estate mortgage products including a long term fixed-rate mortgage product which
is sold in a secondary market. BSS is authorized to provide trust services, but
does not currently do so.
As of June 30, 1998, BSS had the equivalent of 26 full-time employees.
None of its employees are represented by any collective bargaining unit. BSS
considers relations with its employees to be good.
Market Areas
UCB is the sole shareholder of BOF and BSS. BOF is headquartered in the
City of Franklin and has two offices there as well as two in Southampton County
and one in the City of Suffolk. BSS is headquartered in Wakefield and has an
office in Southampton County and one in Surry County. The economy of the primary
market area is diverse and driven by agricultural enterprises and light
manufacturing and retail. Some of the larger employers include Union Camp
Corporation, Georgia Pacific and Smithfield Foods, Inc. The area also has Paul
D. Camp Community College which supplements the work force and adds to the
technical base. Southampton Memorial Hospital, Lakeview Medical Center and
associated medical practices add diversity to the economy and provide a needed
service. A new maximum security prison has been constructed in northeastern
Sussex County and is currently receiving inmates and will bring additional
employment opportunities to the area. A second prison is also under construction
in the same area. Water and sewer facilities constructed by the county to serve
the prisons have been taken over by a regional service authority which intends
to extend sewer infrastructure along the highway 460 corridor east to Wakefield.
This will enhance prospects for economic development in the area.
-45-
<PAGE>
Properties
BOF operates five full service banking offices, two in the City of
Franklin, one each in the City of Suffolk (Holland) and Towns of Courtland and
Newsoms. BOF also has an ATM facility located at the College Drive Office,
located on College Drive in the City of Franklin.
BOF's main office is located at 100 East Fourth Avenue in Franklin,
Virginia. The College Drive branch office is located at 201 North College Drive,
Franklin, Virginia; the Courtland branch is located at Shands Shopping Center,
Courtland, Virginia; the Newsoms branch at 22334 General Thomas Highway,
Newsoms, Virginia; and the Holland branch at 6617 Holland Road, Suffolk,
Virginia.
BSS's main office is located at 205 Railroad Avenue in Wakefield,
Virginia. The Ivor branch office is located at 8314 Main Street, Ivor, Virginia
and the Surry branch office is located at 207 Colonial Trail East, Surry,
Virginia. BSS also owns property located on 535 County Drive (Highway 460) in
the Town of Wakefield on which it has a remote stand-alone ATM facility. This
property is also owned for possible future expansion purposes.
Competition
BOF and BSS face competition for loans from commercial banks, savings
and loan associations and savings banks, mortgage banking subsidiaries of
regional commercial banks, subsidiaries of national mortgage bankers, insurance
companies, farm credit banks, credit unions, and other institutional lenders.
The most direct competition for deposits has historically come from savings and
loan associations and savings banks, farm credit banks, commercial banks, credit
unions and other financial institutions. Based upon total assets at June 30,
1998, BOF was the largest community-based bank or thrift institution
headquartered in Franklin, Virginia or Southampton County.
The banking industry is competitive in BOF's market area. There are
approximately five banking institutions engaged in business in the general area
in which BOF operates, including two community banks, one credit union, and
three state-wide banking organizations. Also in this general market area, is a
Farm Credit Bank, which is highly competitive in the agricultural loan market.
BOF encounters competition for despots and loans from the aforementioned
competitors in the area in which it operates as well as credit unions and
finance companies. In addition, BOF must compete for deposits with Money Market
mutual funds which are marketed nationally, insurance brokers and local offices
of stock brokerage firms.
BOF is not dependent upon an individual customer, or segment of
customers, the loss of which would have a material adverse impact on its
operations.
Both banks may face an increase in competition as a result of the
continuing reduction in the restrictions on interstate operations of financial
institutions. They also face competition for deposits from short-term money
market mutual funds and other corporate and government securities funds.
The banking industry is highly competitive in BSS market area. There
are approximately five banks engaged in business in the general area in which
BSS operates, including three community banks, and one state-wide banking
organizations. Also in this general market area, is a Farm Credit Bank, which is
highly competitive in the agricultural loan market. BSS encounters competition
for deposits and loans from the aforementioned competitors in the area in which
it operates as well as credit unions and finance companies. In addition, BSS
must compete for deposits with the Money Market mutual funds which are marketed
nationally.
BSS is not dependant upon a single customer, or a few customers, the
loss of one or more of which would have a material adverse effect on its
operations.
-46-
<PAGE>
Lending Activities
BOF's lending activities consist of crop production lines of credit and
term loans to farmers, loans to smaller businesses, a variety of consumer loans,
residential construction loans and participation loans with other banks. As of
June 30, 1998, loans secured by residential and commercial mortgages accounted
for 34% of the total loan portfolio and time and demand loans accounted for 31%.
Installment loans to consumers accounted for 17% and participation loans with
other banks accounted for 12% of all loans outstanding.
BOF's lending activities are governed by its Credit Policy and
Procedures Manual. Individual loan officers are given individual lending
authority by the Board of Directors based upon their individual qualifications
and experience. Officers can approve loans up to their assigned lending level
and all other loans are approved by the Loan Committee of the Board which meets
twice weekly. Loans approved under individual authority are reported to the Loan
Committee at its next meeting following such approval. Additionally, the full
Board of Directors is provided with monthly reports showing data essential for
the Board to monitor BOF's loan portfolio including compliance with bank and
regulatory policies.
BSS's lending activities are primarily making loans to small
businesses, farmers and agricultural related industry and consumers in its local
market area. Business and consumer loans secured by real estate represent the
largest segment of the bank's loan portfolio. As of June 30, 1998, 60.1% of the
loan portfolio was secured by real estate. BSS also provides a wide range of
business and consumer loans that are not secured by real estate. BSS's lending
activities are principally directed to its defined market area of portions of
Sussex and Southampton Counties, Surry County and adjacent areas. BSS does make
loans out of its defined market and has participation loans with or through
other Virginia - based community banks. Most lending activity however, is within
its defined primary market area.
Commercial Business Lending. BSS's commercial loans are primarily made
to local service and retail businesses, farmers, and timber related businesses.
These loans serve a variety of purposes, including revolving lines of credit,
working capital loans, equipment loans, letters of credit, construction loans
and the financing of commercial real estate. Loans secured by commercial real
estate are generally financed over a fifteen or twenty year amortization period
that matures with a balloon payment on the second or third anniversary of the
loan.
As of June 30, 1998, loans secured by commercial real estate comprised
21.3% of total loans and loans secured by agricultural real estate comprised
5.5% of total loans. Other loans to commercial and industrial businesses and to
the agricultural sector comprised 14.6% and 11.4% of total loans, respectively.
Loans secured by non-residential real estate are generally limited to loan
amounts equal to 75% to 80% of the property's appraised value.
Real Estate Construction Lending. At June 30, 1998, real estate
construction loans comprised $386,000 or 1.1% of total loans. To minimize the
risk associated with construction lending, BSS normally limits loan amounts to
80% of the project's appraised value. BSS also obtains a first lien on a secured
property as collateral for its construction loans.
Residential Mortgage Lending. BSS attempts to reduce its exposure to
the risk of the local real estate market by making loans secured by real estate
primarily on owner-occupied properties. As of June 30, 1998, approximately 30.5%
of the loan portfolio was comprised of loans secured by predominantly single
family residential properties. The residential mortgage portfolio consists
primarily of loans with fifteen to twenty year amortization schedules that
mature with a balloon payment on the third anniversary of the loan.
Consumer Lending. BSS currently offers most types of consumer and
installment loans including automobile loans and home equity lines of credit.
BSS also extends consumer credit through its Visa credit card program. As of
June 30, 1998, BSS's consumer loan portfolio comprised 15.6% of total loans. The
-47-
<PAGE>
performance of the consumer loan portfolio is directly tied and dependent upon
the general economic conditions in BSS's market area.
Credit Policies and Administration. BSS has adopted comprehensive
lending policies with detailed underwriting standards for all types of loans and
pricing guidelines. Although the bank's Chief Executive Officer has loan
authority of $100,000, most loans receive approval prior to funding by the
bank's loan committee which is comprised of loan officers and four members of
the Board of Directors.
UNITED COMMUNITY BANKSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major
components of the results of operations, and financial condition, liquidity and
capital resources of UCB and its wholly owned subsidiaries, BOF and BSS. This
discussion and analysis should be read in conjunction with the Consolidated
Financial Statements and Notes to the Consolidated Financial Statements.
Overview
UCB reported net income of $1.067 million for the six month period
ending June 30, 1998, compared to $1.039 million for the same period in 1997,
which represents a $28,000 increase or 2.7%. Net interest income, UCB's primary
source of earnings, increased $72,000 during the six-month period ended June 30,
1998, compared to 1997. Non-interest income increased $83,000 or 21.3% and
non-interest expenses increased $103,000, or 5.3%. Basic and diluted earnings
per share of common stock increased to $0.58 for the first six months of 1998,
up by $0.01 per share when compared to $0.57 for the first six months of 1997.
UCB reported net income of $2.2 million in 1997, compared to $1.9
million in 1996, representing an increase of 16.0%. Basic earnings per share
increased to $1.22 per share in 1997 compared to $1.05 per share in 1996. The
increased earnings during this period were primarily due to higher levels of net
interest income and a decrease in noninterest expenses, which were partially
offset by increases in provision for loan losses and income tax expense. UCB
incurred one-time merger related expenses of $189,758 in 1996.
Profitability as measured by UCB's annualized return on average assets
(ROA) decreased to 1.38% for the six months ended June 30, 1998, down from 1.40%
for the same period in 1997. Another measure of UCB's profitability, the
annualized return on average equity (ROE) decreased to 9.98% for the first six
months of 1998 compared to 10.86% for the same period in 1997.
UCB's ROE increased to 11.31% in 1997, up from 10.68% in 1996. UCB's
ROA for 1997 was 1.49%, an increase from 1.33% in 1996. Without the one-time
merger related expenses, ROE and ROA in 1996 would have been 11.73% and 1.46%,
respectively.
For the year 1997, UCB had a dividend payout ratio of 25.4%, which
compared to a 29.8% ratio for the year 1996. The average equity to average asset
ratio increased from 12.43% for 1996 to 13.15% for 1997. Average assets grew by
3.5% while average equity increased 9.6% from 1996 to 1997.
UCB's total assets as of June 30, 1998, were $155.0 million, down
slightly by $1.0 million, or 0.6% from $156.0 million at year-end 1997. Net
loans as of June 30, 1998 were $86.3 million, an increase of $4.8 million or
5.9% from $81.4 million at year-end 1997. Investment securities increased $3.1
million to $54.7 million from $51.6 million as of June 30, 1998 and December 31,
1997, respectively. Cash and cash equivalents totaled $7.8 million at June 30,
1998 and $17.2 million at December 31, 1997, a decrease of $9.4 million.
Deposits totaled $131.1 million at June 30, 1998, and $133.5 million at December
31, 1997.
-48-
<PAGE>
UCB's assets at year-end 1997 were $155.9 million, up by 4.0%, over
year-end 1996 of $149.9 million. Net loans outstanding at year-end 1997 were
$81.4 million, up from the year-end level for 1996 of $77.0 million, posting a
$4.4 million increase or 5.8%. Total deposits at year-end were $133.4 million
and $129.8 million at year-end 1997 and 1996, respectively, an increase of $3.6
million or 2.8%.
RESULTS OF OPERATIONS
Net Interest Income
The principal source of earnings for UCB is net interest income. Net
interest income equals the amount by which interest income exceeds interest
expense. Changes in volume and mix of interest-earning assets and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.
Net interest income for the first six months of 1998 was $3.050
million, up from $2.978 million for the same period in 1997, increasing by
$72,000 or 2.4%. This increase is attributable to the transition of assets from
noninterest-earning cash and federal funds sold to higher yielding loans. For
the second quarter of 1998, net interest income was $1.555 million, up $30,000
or 2.0% from $1.525 million during the second quarter of 1997.
For the six months ended June 30, 1998, total interest and fees on
loans increased by $174,000 or 4.8% and interest on federal funds increased
$148,000 or 155.8%, from the six month period ended June 30, 1997. A decrease in
interest on investments of $141,000 or 8.8% partially offset these increases.
Interest expense on deposits and short-term borrowings increased by $109,000 or
4.6% for the same period.
Total interest and fees on loans increased by $67,000 or 3.5% and
interest on federal funds sold increased $75,000 or 312.5%, from the second
quarter of 1997 to the second quarter of 1998. During this same period, interest
on investments decreased $59,000 or 7.4%, and interest expense on deposits and
short-term borrowings increased $53,000 or 4.5%.
During 1997, on a tax equivalent basis, net interest income increased
6.2% to $6.5 million from $6.2 million in 1996. This was a result of a $439,000
increase in interest income which exceeded a $57,000 increase in interest
expense. The increase in interest income was largely due to: a) increased loan
volume, which on an average net loan basis increased 10.2% to $81.7 million from
$74.1 million in 1996; b) increases in sales of average federal funds, which
increased 4.2% to $3.9 million from $3.7 million in 1997 and 1996, respectively;
and c) decreases in average investment securities of $3.3 million to $54.6
million from $57.9 million in 1997 and 1996, respectively. The increase in
average earning assets was funded by the growth in deposits. Average
interest-bearing deposits increased 2.1% to $109.9 million from $107.6 million
in 1997 and 1996, respectively. The yield on interest earning assets increased
to 8.10% in 1997 compared to 8.04% in 1996. Funding costs on interest bearing
deposits and short-term borrowings decreased to 4.33% in 1997 from 4.38% in
1996. The net interest margin increased to 4.67% in 1997 from 4.54% in 1996.
-49-
<PAGE>
The following tables depict interest income on average earning assets
and related yields, as well as interest expense on average interest-bearing
liabilities and related rates paid for the periods indicated.
AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------------------------
1998 1997
----------------------------------------- ----------------------------------------
Average Income/ Yield Average Income/ Yield
Balance Expense Rate Balance Expense Rate
----------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities:
Taxable $ 33,283 $ 972 5.84% $ 37,518 $ 1,139 6.07%
Tax-exempt (1) 19,976 736 7.37% 18,948 702 7.41%
----------- ----------- ----------- -----------
Total Securities 53,259 1,708 6.41% 56,466 1,841 6.52%
Loans (2) 82,257 3,807 9.26% 79,279 3,633 9.17%
Federal funds sold 8,832 243 5.50% 3,556 95 5.34%
Interest-bearing deposits in other banks 99 3 6.06% - - -
----------- ----------- ----------- -----------
Total earning assets 144,447 $ 5,761 7.98% 139,301 $ 5,569 8.00%
Less: Allowance for loan losses (1,107) (1,192)
Total nonearning assets 11,124 10,541
----------- -----------
Total assets $ 154,464 $ 148,650
=========== ===========
LIABILITIES and STOCKHOLDERS' EQUITY:
Interest-bearing deposits:
Checking $ 17,572 $ 232 2.64% $ 16,641 $ 224 2.69%
Regular savings and club accounts 12,000 179 2.98% 11,946 180 3.01%
Money market savings 19,078 331 3.47% 19,889 343 3.45%
Certificates of deposit
Over $100,000 12,298 358 5.82% 10,928 293 5.36%
$100,000 and under 52,129 1,352 5.19% 50,079 1,288 5.14%
----------- ----------- ------------ -----------
Total interest-bearing deposits 113,077 2,452 4.34% 109,483 2,328 4.25%
Short-term borrowings 450 9 4.00% 1,246 24 3.85%
----------- ----------- ------------ -----------
Total interest-bearing liabilities 113,527 $ 2,461 4.34% 110,729 $ 2,352 4.25%
=========== ===========
Noninterest-bearing liabilities
Demand deposits 17,758 17,543
Other noninterest-bearing liabilities 1,656 1,243
----------- ------------
Total liabilities 132,941 129,515
Shareholders' equity 21,523 19,135
----------- ------------
Total liabilities and stockholders' equity $ 154,464 $ 148,650
=========== ============
Net interest income $ 3,300 $ 3,217
=========== ===========
Interest rate spread (3) 3.64% 3.75%
Net interest margin (4) 4.57% 4.62%
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
-------------------------------------------------------------------------------------
1997 1996
----------------------------------------- ----------------------------------------
Average Income/ Yield Average Income/ Yield
Balance Expense Rate Balance Expense Rate
----------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Securities:
Taxable $ 35,589 $ 2,160 6.07% $ 38,469 $ 2,332 6.06%
Tax-exempt (1) 19,019 1,402 7.37% 19,408 1,446 7.45%
----------- ----------- ----------- -----------
Total Securities 54,608 3,562 6.52% 57,877 3,778 6.53%
Loans (2) 81,666 7,573 9.27% 74,128 6,925 9.34%
Federal funds sold 3,858 212 5.50% 3,702 205 5.54%
----------- ----------- ----------- -----------
Total earning assets 140,132 $ 11,347 8.10% 135,707 $ 10,908 8.04%
Less: Allowance for loan losses (1,187) (1,250)
Total nonearning assets 11,018 10,462
----------- -----------
Total assets $ 149,963 $ 144,919
=========== ===========
LIABILITIES and STOCKHOLDERS' EQUITY:
Interest-bearing deposits:
Checking $ 16,702 $ 458 2.74% $ 16,469 $ 472 2.87%
Regular savings and club accounts 11,940 362 3.03% 11,725 358 3.05%
Money market savings 19,470 677 3.48% 20,213 711 3.52%
Certificates of deposit
Over $100,000 10,770 575 5.34% 10,040 529 5.27%
$100,000 and under 51,039 2,678 5.25% 49,181 2,639 5.37%
----------- ----------- ------------ -----------
Total interest-bearing deposits 109,921 4,750 4.32% 107,628 4,709 4.38%
Short-term borrowings 1,095 58 5.30% 857 42 4.90%
----------- ----------- ------------ -----------
Total interest-bearing liabilities 111,016 $ 4,808 4.33% 108,485 $ 4,751 4.38%
=========== ===========
Noninterest-bearing liabilities
Demand deposits 18,215 17,584
Other noninterest-bearing liabilities 1,003 842
----------- ------------
Total liabilities 130,234 126,911
Shareholders' equity 19,729 18,008
----------- ------------
Total liabilities and stockholders' equity $ 149,963 $ 144,919
=========== ============
Net interest income $ 6,539 $ 6,157
=========== ===========
Interest rate spread (3) 3.77% 3.66%
Net interest margin (4) 4.67% 4.54%
</TABLE>
- -------------------------
(1) Includes Investment Securities and Investments Held for Sale. See "-
Securities."
(2) Nonaacrual loans are included in the average balance.
(3) Interest spread is the average yield earned on earning assets less the
average rate incurred on interest-bearing liabilities.
(4) Net interest margin is fully taxable equivalent net interest income
expressed as a percentage of average earning assets.
-51-
<PAGE>
Interest income and expenses are affected by fluctuations in interest
rates, by changes in the volumes of earning assets and interest-bearing
liabilities, and by the interaction of rate and volume factors. The following
table analyzes the direct causes of the year-to-year changes in net interest
earnings on a taxable equivalent basis. Rate/volume variance, the third element
in the calculation, along with rate and volume variances, are not shown
separately, but are allocated to the rate and volume variances in proportion to
the relationship of the absolute dollar amounts of the change in each.
Nonaccruing loans are included in average loans outstanding.
VOLUME AND RATE ANALYSIS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
1998 compared to 1997 1997 compared to 1996 1996 compared to 1995
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in: Due to Changes in:
---------------------------- ---------------------------- ----------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Securities:
Taxable ($125) ($42) ($167) ($175) $3 ($172) $ 327 $ (58) $ 269
Tax-exempt 38 (3) 35 (29) (15) (44) 301 71 372
Loans (net) 137 36 173 699 (51) 648 720 (121) 599
Federal funds sold 145 3 148 9 (2) 7 (144) (13) (157)
Interest-bearing deposits
in other banks 3 - 3 - - - - - -
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total earning assets 198 (6) 192 504 (65) 439 1,204 (121) 1,083
-------- -------- -------- -------- -------- -------- -------- -------- --------
Interest-bearing deposits:
Checking 12 (4) 8 7 (21) (14) 99 (12) 87
Regular savings & club accounts 1 (2) (1) 7 (3) 4 22 (13) 9
Money market savings (14) 2 (12) (26) (8) (34) 35 (17) 18
Certificate of deposit:
Over $100,000 38 26 64 39 7 46 2 20 22
$100,000 and under 52 13 65 98 (59) 39 387 26 413
Short-term borrowings (16) 1 (15) 12 4 16 39 1 40
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 73 36 109 137 (80) 57 584 5 589
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net interest income $125 ($42) $83 $367 $15 $382 $620 ($126) $494
======== ======== ======== ======== ======== ======== -------- -------- --------
</TABLE>
Interest Sensitivity
Paramount to earnings performance and the maintenance of sufficient
liquidity is the effective management of interest rate risk, commonly referred
to as asset/liability management. The interest sensitivity position ("gap") is
the difference between interest sensitive assets and interest sensitive
liabilities in a specific time interval. The gap can be managed by repricing
assets or liabilities, affected by selling securities available for sale, by
replacing an asset or liability at maturity, or by adjusting the interest rate
or the life of an asset or liability. Matching of assets and liabilities
repricing in the same interval help to hedge the risk and minimize the impact on
interest income in periods of rising and falling interest rates.
BOF and BSS evaluate interest sensitivity risk in accordance with their
asset liability policies, and then formulate strategy regarding asset
originations, pricing, funding sources, and off-balance sheet commitments in
order to decrease sensitivity risk. These strategies are based on management's
outlook regarding future interest rate movements, the state of the regional and
national economy, and other financial and business risk factors. BOF and BSS
establish prices for deposits and loans based primarily on local market
conditions.
At June 30, 1998, UCB had $17.5 million more in liabilities than assets
repricing within one year or less and was, therefore, in a liability sensitive
position for that period with negative 12.19% cumulative static gaps.
-52-
<PAGE>
Generally, positive gaps affect net interest margins and earnings
negatively in periods of falling rates, and conversely, higher negative gaps
adversely impact net interest margin and earnings in periods of rising rates as
a higher volume of liabilities will reprice quicker than assets over the period
for which the gap is computed. To soften the potential impact of changes in
interest rates, $41.2 million of total loans at June 30, 1998 were either
accruing at a variable interest rate or maturing within one year. In addition,
at June 30, 1998, federal funds sold, which are repriceable daily, were $1.5
million, and investment securities maturing or repricing within one year totaled
$15.6 million, which could be sold quickly to meet special funding needs or to
adjust UCB's interest rate sensitivity position.
The following table presents UCB's interest sensitivity position at
June 30, 1998. This is a one-day position that is continually changing and is
not necessarily indicative of UCB's position at any other time.
INTEREST SENSITIVITY ANALYSIS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, 1998 (1)
---------------------------------------------------------------------------
Within 90-365 1 to 5 Over
90 Days Days Years 5 Years Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net (2) $ 29,061 $ 12,131 $ 38,369 $ 7,729 $ 87,290
Securities (3) 7,872 7,768 25,711 13,475 54,826
Federal funds sold and other 1,503 - - - 1,503
----------- ----------- ----------- ----------- -----------
Total earning assets $ 38,436 $ 19,899 $ 64,080 $ 21,204 $ 143,619
=========== =========== =========== =========== ===========
Interest-bearing liabilities:
Deposits:
Interest checking (4) $ 1,446 $ 4,338 $ 11,567 $ - $ 17,351
Regular and Christmas Club savings (4) 1,592 2,935 5,395 2,098 12,020
Money market savings 20,087 - - - 20,087
Certificates of deposit:
$100,000 and over 4,536 6,403 2,719 - 13,658
Less than $100,000 8,208 25,650 15,666 6 49,530
Short-term borrowings 650 - - - 650
----------- ----------- ----------- ----------- -----------
Total interest- bearing liabilities $ 36,519 $ 39,326 $ 35,347 $ 2,104 $ 113,296
=========== =========== =========== =========== ===========
Period gap $ 1,917 $(19,427) $ 28,733 $ 19,100 $ 30,323
Cumulative gap $ 1,917 $(17,510) $ 11,223 $ 30,323
Ratio of cumulative gap to total
earning assets 1.33% -12.19% 7.81% 21.11%
</TABLE>
- --------------------------------------
(1) The repricing dates may differ from maturity dates for certain assets
due to prepayment assumptions.
(2) Excludes nonaccrual loans.
(3) Securities classified "available for sale" are carried at estimated
fair value. Securities classified "held to maturity" are carried at
amortized cost.
(4) The Company has found that its regular savings and interest checking
historically represent core deposits and are not sensitive to changes
in related market rates and, therefore, have been spread across the
columns.
-53-
<PAGE>
Noninterest Income
During the six-month period ended June 30, 1998, total noninterest
income increased by $83,000, or 21.3% to $473,000 from a level of $390,000 for
the same period of 1997. The largest component of this increase is an increase
in service charges of $75,000 from the first six months of 1998 to the first six
months of 1997. Miscellaneous noninterest income increased $14,000; the largest
component was an $18,000 increase in income from OREO. Also, during the six
months ended June 30, 1998, net gains on the sale of investment securities
decreased $6,000 compared to the same period in 1997.
Non-interest income slightly decreased 1.5% to $864,409 in 1997 from
$877,395 in 1996. Service charges on deposit accounts and overdraft charges
increased by approximately $25,000. This increase was offset by reductions in
gains on sales of investment securities of approximately $9,000 and
miscellaneous income of approximately $24,000.
Noninterest Income
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- -------------------------
1998 1997 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Overdraft charges on deposit accounts $ 241 $ 202 $ 494 $ 465
Other service charges on deposit accounts 123 104 191 195
Fees for other customer services 66 49 125 130
Securities gains, net - 6 4 13
Other operating income 43 29 50 74
-------- -------- -------- --------
Total noninterest income $ 473 $ 390 $ 864 $ 877
======== ======== ======== ========
</TABLE>
Noninterest Expense
Total noninterest expenses for the six-month period ended June 30,
1998, increased $103,000 or 5.3% to $2.055 million from $1.952 million for the
same period in 1997. This increase is attributable to the following factors: 1)
a $56,000 increase in professional fees, to $111,000 in 1998 from $55,000 in
1997, due to nonrecurring legal fees and timing differences in the rendering of
audit services; 2) an increase in equipment costs of $30,000, or 23.1%, to
$160,000 in 1998 from $130,000 in 1997, arising from increases in software
licensing costs and depreciation and purchase of furniture and equipment; and 3)
an increase in other miscellaneous expenses of $41,000 or 10.2%, from $403,000
during the six month period ended June 30, 1997, to $444,000 for the same period
during 1998. These increases were partially offset by a decrease in occupancy
costs of $24,000 to $118,000 in 1998 from $142,000 in 1997.
Non-interest expenses for 1997 were $3.873 million, down from $3.926
million for 1996, representing a 1.4% decrease. One-time merger related expenses
totaled approximately $190,000 in 1996. As previously mentioned, the holding
company was formed in 1996. Miscellaneous expenses also decreased $46,000 from
1996 to 1997. These decreases were partially offset by the following increases:
1) an increase in salaries and employee benefits of $82,000, arising from
general pay increases and increased staffing levels due to the continued growth
of UCB; 2) an increase in professional fees of $83,000, resulting from the
consolidation of the employee benefit program and the establishment of a stock
option program for key employees; 3) a $20,000 increase in occupancy costs; and
4) an $11,000 increase in FDIC Insurance premiums. Premiums for FDIC Insurance
increased due to increased rates for banks insured by the Bank Insurance Fund.
-54-
<PAGE>
Noninterest Expenses
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- -------------------------
1998 1997 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 1,086 $ 1,093 $ 2,165 $ 2,083
Occupancy expenses 118 142 284 264
Depreciation and equipment maintenance 160 130 269 240
FDIC assessment 9 7 15 4
Postage 57 59 99 103
Professional fees 111 55 210 128
Franchise, state and local taxes 70 63 127 164
Merger related expenses - - - 190
Other operating expenses 444 403 704 750
-------- -------- -------- --------
Total noninterest expenses $ 2,055 $ 1,952 $ 3,873 $ 3,926
-------- -------- -------- --------
</TABLE>
Income Taxes
Applicable income taxes on earnings for the first six months of 1998
amounted to $348,000, resulting in an effective tax rate of 24.6% compared to
$694,000, or 23.7%, in 1997 and $596,000, or 23.7%, in 1996.
ASSET QUALITY
Allowance for Loan Losses
The allowance for loan losses provides for potential losses inherent in
the loan portfolio. Among other factors, management considers UCB's historical
loss experience, the size and composition of the loan portfolio, the value and
adequacy of collateral and guarantors, nonperforming credits and current and
anticipated economic conditions. There are additional risks of future loan
losses which cannot be precisely quantified or attributed to particular loans or
classes of loans. Since those risks include general economic trends, as well as
conditions affecting individual borrowers, the allowance for loan losses is an
estimate. The allowance is also subject to regulatory examinations and
determination as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance, and the size of the allowance in
comparison to peer banks identified by regulatory agencies.
During the first six months of 1998, UCB had $53,000 in provision
expense compared to $51,000 in the first six months of 1997. Loans charged off,
which are charged directly to the allowance when they occur, during the first
six months of 1998 amounted to $84,000 compared to $145,000 for the same period
in 1997. Recoveries during the first six months of 1998 and 1997 amounted to
$30,000 and $52,000, respectively. The ratio of net charge-offs to average
outstanding loans was 0.07% in 1998 and 0.12% in 1997. Management feels that the
reserve is adequate to absorb any losses on existing loans that may become
uncollectible.
In 1997, UCB had $128,750 in provision expense compared to $101,000 in
1996. Loans charged off, which are charged directly to the allowance when they
occur, during 1997 amounted to $333,000 compared to $254,000 in 1996. Recoveries
amounted to $101,000 and $112,000 during 1997 and 1996, respectively. The ratio
of net charge-offs to average outstanding loans was 0.29% in 1997 and 0.19% in
1996. Management feels that the reserve is adequate to absorb any losses on
existing loans that may become uncollectible.
-55-
<PAGE>
The following table presents UCB's loan loss and recovery experience
for the first six months of the past two years and the years ended December 31,
1997 and 1996.
ALLOWANCE FOR LOAN LOSSES
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- -------------------------
1998 1997 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 1,106 $ 1,209 $ 1,209 $ 1,250
Charge-offs:
Commercial 15 2 124 7
Real-estate 10 - 8 75
Installment and consumer loans 59 143 201 172
-------- -------- -------- --------
Total charge-offs 84 145 333 254
-------- -------- -------- --------
Recoveries:
Commercial 1 4 5 18
Real-estate - 13 32 6
Installment and consumer loans 29 35 64 88
-------- -------- -------- --------
Total recoveries 30 52 101 112
-------- -------- -------- --------
Net charge-offs 54 93 232 142
Provision for loan losses 53 51 129 101
-------- -------- -------- --------
Balance, end of period $ 1,105 $ 1,167 $ 1,106 $ 1,209
======== ======== ======== ========
Net charge-offs to average loans
outstanding during period 0.07% 0.12% 0.29% 0.19%
Ratio of allowance of loan losses to total
loans outstanding at period-end 1.33% 1.38% 1.34% 1.55%
</TABLE>
The breakdown of the allowance for loan losses is based primarily upon
those factors discussed above in computing the allowance as a whole. Because all
of these factors are subject to change, the breakdown is not necessarily
indicative of the category for determining future loan losses. The following
table contains a column summarizing the loan portfolio composition for reference
purposes.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months Ended Year Ended Year Ended
June 30, 1998 December 31, 1997 December 31, 1996
------------------------------ ------------------------------ ------------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 373 28.28% $ 434 28.21% $ 536 26.48%
Real estate 511 57.00% 484 54.64% 464 54.15%
Installment and consumer 221 14.72% 188 17.15% 209 19.38%
=========== ============= =========== ============= =========== =============
$ 1,105 100.00% $ 1,106 100.00% $ 1,209 100.00%
=========== ============= =========== ============= =========== =============
</TABLE>
-56-
<PAGE>
Nonperforming Assets
Total nonperforming assets decreased $134,000 or 38.3% from $350,000 at
year-end 1997 to $216,000 at June 30, 1998. Loans past due 90 days or more and
still accruing interest increased $235,000 to $354,000 as of June 30, 1998, from
$119,000 at December 31, 1997.
Total nonperforming assets, which consist of nonaccrual loans and
foreclosed properties, were $350,000 at December 31, 1997, a slight increase of
$3,000 or 0.9% from a level of $347,000 at December 31, 1996. Total
nonperforming assets and loans over 90 days past due and accruing interest were
0.57% of period-end loans and foreclosed property as of December 31, 1997 as
compared to 1.08% at December 31, 1996. At December 31, 1997, in addition to
loan on either nonaccrual status or loans past due 90 days or more and still
accruing interest, UCB had approximately $4,324,947 of loans that had been
internally classified. These loans require more than usual attention and are
potential problems. UCB considered these loans in establishing the level of the
allowance for loan losses.
The following table summarizes nonperforming assets and loans past due
90 days or more and still accruing interest as of June 30, 1998, and years end
1997 and 1996.
NONPERFORMING ASSETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
-------- ----------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Nonaccrual loans $ 68 $ 180 $ 182
Restructured loans - - -
Other real estate owned 148 170 165
-------- -------- --------
Total nonperforming assets $ 216 $ 350 $ 347
======== ======== ========
Loans past due 90 days or more and still accruing $ 354 $ 119 $ 499
Allowance for loan losses $ 1,105 $ 1,106 $ 1,209
Allowance for possible loan loss to nonperforming loans 1625.00% 614.44% 664.29%
Allowance for possible loan loss to nonperforming assets 511.57% 316.00% 348.41%
Nonperforming asssets and loan past due 90 days accruing
interest to period-end loans and foreclosed property 0.65% 0.57% 1.08%
</TABLE>
UCB places a loan on nonaccrual status when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of both principal and
interest is doubtful. UCB's policy is to place loans on nonaccrual status if
principal or interest is past due for 90 days or more unless the debt is both
well secured and in the process of being collected. For 1997 and 1996, $13,553
and $19,375, respectively, in gross interest income would have been recorded if
nonaccrual loans had been current throughout the period outstanding. For the six
months ended June 30, 1998 and the years ended December 31, 1997 and 1996,
interest income received on nonaccrual loans was negligible. Impaired loans at
June 30, 1998, December 31, 1997 and 1996 were not significant.
-57-
<PAGE>
FINANCIAL CONDITION
Loan Portfolio
Loans, net of unearned income and the allowance for loan losses, were
$86.2 million at June 30, 1998, an increase from $81.4 million at December 31,
1997, a $4.8 million or 5.9% increase. This is consistent with management's
efforts to increase the level of loans.
Loans, net of unearned income and the allowance for loan losses, were
$81.4 million at December 31, 1997, an increase from $77.0 million at December
31, 1996, a $4.4 million or 5.8% increase.
Loans secured by real estate comprise 57.0% of the total loan portfolio
as of June 30, 1998, and include a diverse portfolio of which single family
residential loans comprise 24.0% of the loan portfolio. Loans secured by
commercial real estate comprised 24.2%, while traditional commercial loans
comprised 18.5% of total loans. The commercial category also includes loans
secured by other forms of collateral as well as some unsecured debt. Loans
secured by agricultural real estate and other loans to the agricultural sector
comprised 3.6% and 9.8%, respectively, of the loan portfolio as of June 30,
1998. Other loans to the agricultural sector include unsecured loans and loans
secured by farm equipment, crops and other collateral. UCB's consumer portfolio
comprised 14.7% of total loans as of June 30, 1998. Real estate construction
loans accounted for 2.6% of total loans outstanding as of June 30, 1998. UCB has
no loans outstanding to foreign countries.
Loans secured by real estate comprise 54.6% of the total loan portfolio
as of December 31, 1997, and include a diverse portfolio of which single family
residential loans comprise 25.1% of the loan portfolio. Loans secured by
commercial real estate comprised 20.7%, while traditional commercial loans
comprised 19.7% of total loans. The commercial category also includes loans
secured by other forms of collateral as well as some unsecured debt. Loans
secured by agricultural real estate and other loans to the agricultural sector
comprised 3.0% and 8.5%, respectively, of the loan portfolio as of December 31,
1997. Other loans to the agricultural sector include unsecured loans and loans
secured by farm equipment, crops and other collateral. UCB's consumer portfolio
comprised 17.1% of total loans as of December 31, 1997. Real estate construction
loans accounted for 3.1% of total loans outstanding as of December 31, 1997. UCB
has no loans outstanding to foreign countries.
-58-
<PAGE>
The following table provides a schedule of loans by type and other
information.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
June 30, December 31,
---------- --------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Commercial $ 16,131 $ 16,257 $ 14,273
Agricultural 8,593 7,045 6,437
Real estate construction 2,257 2,537 2,304
Real estate mortgage:
Residential (1-4 family) 20,988 20,758 20,868
Home equity lines 2,258 2,260 2,117
Multifamily - - -
Commercial 21,182 17,098 14,164
Agricultural 3,137 2,485 2,894
---------- --------- ----------
Real estate subtotal 49,822 45,138 42,347
---------- --------- ----------
Loans to individuals:
Consumer and installment loans 12,557 13,842 14,881
Credit card and related plans 311 329 277
---------- --------- ----------
Loans to individuals subtotal 12,868 14,171 15,158
---------- --------- ----------
Total gross loans 87,414 82,611 78,215
Less:
Allowance for loan losses 1,105 1,106 1,209
Deferred loan fees 56 56 52
---------- --------- ----------
Total net loans $ 86,253 $ 81,449 $ 76,954
---------- --------- ----------
</TABLE>
MATURITY SCHEDULE OF SELECTED LOANS
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------------
1 Year 1 to 5 After
or Less Years 5 Years Total
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Commercial and agricultural $ 17,491 $ 6,685 $ 548 $ 24,724
Real estate - construction 2,224 33 - 2,257
=========== ============ =========== ===========
Total $ 19,715 $ 6,718 $ 548 $ 26,981
=========== ============ =========== ===========
Loans maturing after one year
with predetermined rates 6,197 526 $ 6,723
Loans maturing after one year
with variable rate 521 22 543
============ =========== ===========
Total $ 6,718 $ 548 $ 7,266
============ =========== ===========
</TABLE>
- ------------------------------------------------
(1) Includes loans in nonaccrual status.
-59-
<PAGE>
During the normal course of business, UCB makes various commitments and
incurs certain contingent liabilities that are disclosed but not reflected in
its financial statements. These commitments and contingent liabilities include
commitments to extend credit and financial standby letters of credit. At June
30, 1998, commitments for standby letters of credit and guarantees written were
$1.2 million and commitments to extend credit were $11.8 million. At December
31, 1997 and 1996, commitments for standby letters of credit and guarantees
written were $883,000 and $1.1 million, respectively, and commitments to extend
credit were $12.1 million and $13.8 million, respectively.
Interest income on installment, agricultural, commercial, and real
estate mortgage loans was computed on the principal balance outstanding. Most
variable rate loans carry an interest rate tied to BOF's and BSS's base lending
rates, which are set by BOF and BSS, respectively, or to Money Center Prime, as
published in the Wall Street Journal.
Investment Securities
The investment securities portfolio plays a primary role in the
management of interest rate sensitivity of UCB and generates substantial
interest income. In addition, the portfolio serves as a source of liquidity for
depositor and loan demands and is used as needed to meet collateral
requirements.
The securities portfolio consists of two components, investment
securities held to maturity and securities available for sale, as prescribed by
FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("FASB 115"). Securities are classified as securities held to
maturity based on management's intent and UCB's ability, at the time of
purchase, to hold such securities to maturity. These securities are carried at
amortized cost. Securities which may be sold in response to changes in market
interest rates, changes in the securities' prepayment risk, increases in loan
demand, general liquidity needs and other similar factors are classified as
available for sale and are carried at estimated fair value.
At June 30, 1998, total investment securities were $54.7 million, up
from $51.6 million at year-end 1997. The increase in the securities portfolio is
primarily due to the investment of nonearning cash and federal funds in higher
yielding investment securities. Excluding U.S. Treasuries and securities of U.S.
agencies, neither the aggregate book value nor the aggregate market value of the
securities of any issuer exceeded ten percent of UCB's stockholders' equity.
At year-end 1997, total investment securities were $51.6 million, down
from $56.4 million at year-end 1996. The decline in the securities portfolio was
primarily due to the investment of proceeds from the sales and maturities of
securities in loans rather than new securities. Excluding U.S. Treasuries and
securities of U.S. agencies, neither the aggregate book value nor the aggregate
market value of the securities of any issuer exceeded ten percent of UCB's
stockholders' equity.
-60-
<PAGE>
The following tables present information pertaining to the composition
of the investment securities portfolio.
INVESTMENT SECURITIES PORTFOLIO
(Dollars in Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
-------- ----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. Government and federal agencies $ 21,405 $ 21,931 $ 28,008
State and local governments 24,203 22,436 21,876
Corporate debt securities 3,481 3,780 4,128
Mortgage-backed securities 2,493 2,035 1,634
Collateralized mortgage obligations 36 57 116
Equity securities 1,604 10 110
Other 209 209 -
-------- -------- --------
Total amortized cost 53,431 50,458 55,872
Net unrealized gain on securities available for sale 1,254 1,106 518
-------- -------- --------
Total securities $ 54,685 $ 51,564 $ 56,390
-------- -------- --------
</TABLE>
MATURITIES OF SECURITIES HELD AS OF JUNE 30, 1998
(Dollars In thousands)
<TABLE>
<CAPTION>
Over 10
Years &
1 Year 1 to 5 5 to 10 Equity
or Less Years Years Securities Total
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
US Agency securities:
Amortized cost $ 2,753 $ 14,110 $ 4,770 $ 1,204 $ 22,837
Fair value 2,749 14,122 4,791 1,205 22,867
Weighted average yield 5.88% 5.94% 6.41% 5.92% 6.03%
US Treasury securities:
Amortized cost $ 800 $ - $ 260 $ - $ 1,060
Fair value 800 - 261 - 1,061
Weighted average yield 5.17% 0.00% 7.06% 0.00% 5.63%
State and Political Subdivisions:
Amortized cost $ 900 $ 9,298 $ 13,135 $ 871 $ 24,204
Fair value 907 9,441 13,334 898 24,580
Weighted average yield 8.29% 7.27% 7.20% 7.42% 7.28%
Other Securities:
Amortized cost $ 700 $ 2,235 $ 287 $ 2,108 $ 5,330
Fair value 700 2,256 295 3,006 6,257
Weighted average yield 6.05% 6.89% 6.72% 4.27% 5.74%
Total Securities (1):
Amortized cost $ 5,153 $ 25,643 $ 18,452 $ 4,183 $ 53,431
Fair value 5,156 25,819 18,681 5,109 54,765
Weighted average yield 6.21% 6.50% 6.99% 5.40% 6.56%
</TABLE>
- -----------------------------
(1) Yields on tax-exempt securities are computed on a taxable-equivalent
basis.
-61-
<PAGE>
Deposits
Deposits provide funding for BOF's and BSS's investment in loans and
securities. A primary objective is to increase core deposits as a means to fund
asset growth at less cost. It is anticipated that competition for deposits will
increase within the BOF's and BSS's primary market areas. At the same time,
interest paid for deposits must be managed carefully to control the level of
interest expense. Total deposits decreased by $2.4 million or 1.8% from $133.5
million at December 31, 1997 to $131.1 million at June 30, 1998. Noninterest
bearing deposits decreased by $2.3 million or 11.1% from $20.8 million at the
end of 1997 to $18.5 million at June 30, 1998. Interest bearing deposits were
relatively unchanged from December 31, 1997 to June 30, 1998 at $112.6 million.
Certificates of deposits decreased by $317,000 from $63.8 million at December
31, 1997 to $63.4 million at June 30, 1998. During the same period, money market
accounts increased $722,000 from $19.4 million to $20.0 million. Noninterest
bearing deposits were 13.9% of total deposits at June 30, 1998. As discussed
below, the decline in noninterest bearing deposits is primarily due to the
seasonality of the agricultural industry in BOF's and BSS's market areas.
Total deposits grew by $3.7 million or 2.8% from $129.8 million at
December 31, 1996 to $133.5 million at December 31, 1997. Noninterest bearing
deposits increased by $536,000 or 2.6% from $20.3 million at the end of 1996 to
$20.8 million at the end of 1997. Interest bearing deposits were $112.7 million
as of December 31, 1997, increasing by $3.2 million or 2.9%, from year-end 1996
of $109.5 million. From 1996 to 1997, certificates of deposits increased by $3.8
million and money market account decreased by $1.2 million. Noninterest bearing
deposits were 15.6% of total deposits at both December 31, 1997 and 1996.
BOF and BSS offer individuals and small-to-medium sized businesses a
variety of deposit accounts, including checking, savings, money market, and
certificate of deposits. Certificates of deposit are obtained primarily from the
communities that BOF and BSS serve. BOF and BSS also carry interest-bearing
deposits with state and local municipal governments. The following table
summarizes the average deposits and rates paid during 1998, 1997 and 1996.
AVERAGE DEPOSITS AND RATES PAID
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------
June 30, 1998 1997 1996
------------------------ ------------------------ ------------------------
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing accounts $ 17,758 - $ 18,215 - $ 17,584 -
---------- ---------- ----------
Interest-bearing accounts
Interest checking 17,572 2.64% 16,702 2.74% 16,469 2.87%
Money market 19,078 3.47% 19,470 3.48% 20,213 3.52%
Regular savings 12,000 2.98% 11,940 3.03% 11,725 3.05%
Time deposits
Less than $100,000 52,129 5.19% 51,039 5.23% 49,181 5.36%
$100,000 and over 12,298 5.82% 10,770 5.37% 10,040 5.27%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing 113,077 4.34% 109,921 4.33% 107,628 4.38%
---------- ========== ---------- ========== ---------- =========
Total deposits $ 130,835 $ 128,136 $ 125,212
---------- ---------- ----------
</TABLE>
-62-
<PAGE>
The following table summarizes the maturities of certificates of
$100,000 and over at June 30, 1998.
MATURITIES OF CD'S OF $100,000 AND OVER
(Dollars in Thousands)
<TABLE>
<CAPTION>
Within Three Six to Over
Three to Six Twelve Twelve
Months Months Months Months Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
At June 30, 1998 $ 4,536 $ 2,495 $ 3,907 $ 2,720 $ 13,658
</TABLE>
Short-term Borrowings
In the course of operations, due to fluctuations in loan and deposit
levels, BOF and BSS occasionally find it necessary to purchase federal funds on
a short-term basis. BOF and BSS maintain federal funds line arrangements with
several regional banks, whereby they may collectively purchase funds totaling
$15,277,000. UCB has been, and continues to be, a net provider of funds in the
market place. Based on certain criteria and acceptable collateral, BOF and BSS
may each borrow $6.5 million from the Federal Home Loan Bank. As of June 30,
1998, BOF and BSS had no outstanding borrowings on these lines.
BOF offers overnight repurchase agreements to a commercial customer,
which amounted to $650,000 at June 30, 1998, $309,000 at year-end 1997 and
$229,000 at year-end 1996.
Capital Resources
The adequacy of BOF's and BSS's capital is reviewed by management on an
ongoing basis with reference to the size, composition, and quality of BOF's and
BSS's resources and consistent with regulatory requirement and industry
standards. Management seeks to maintain a capital structure that will assure an
adequate level of capital to support anticipated asset growth and absorb
potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, have adopted new capital guidelines to
supplement the existing definitions of capital for regulatory purposes and to
establish minimum capital standards. Specifically, the guidelines categorize
assets and off-balance sheet items into four risk-weighted categories. At June
30, 1998 and December 31, 1997 and 1996, the required minimum ratio of
qualifying total capital to risk-weighted assets was 8%, of which 4% must be
tier-one capital. Tier-one capital includes stockholders' equity, retained
earnings and a limited amount of perpetual preferred stock, less certain
goodwill items. At June 30, 1998, on a consolidated basis, UCB's total
risk-based capital ratio was 21.06%, BOF's was 16.30% and BSS's was 27.92%, all
of which were well above the regulatory minimum of 8.0%. At December 31, 1997,
on a consolidated basis UCB's total risk-based capital ratio was 21.11%, BOF's
was 16.71% and BSS's was 27.80%. As of December 31, 1996, the total risk-based
capital ratio for UCB, BOF and BSS were 19.48%, 15.58% and 24.83%, respectively.
-63-
<PAGE>
Further information on capital adequacy for BOF and BSS may be found in
the table below.
CAPITAL RATIOS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997 December 31, 1996
Regulatory --------------------- --------------------- ---------------------
Minimum BOF BSS UCB BOF BSS UCB BOF BSS UCB
------- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Risk based capital
Tier 1 4.00% 15.17% 26.88% 19.97% 15.54% 26.69% 19.97% 14.40% 23.58% 18.27%
Total 8.00% 16.30% 27.92% 21.06% 16.71% 27.80% 21.11% 15.58% 24.83% 19.48%
Leverage 4.00% 10.58% 16.04% 13.10% 10.35% 15.84% 12.69% 9.58% 15.45% 12.08%
</TABLE>
Liquidity
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale of existing assets or the
acquisition of additional funds through short-term borrowings. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold and
investments and loans maturing within one year. As a result of UCB's management
of liquid assets, and the ability to generate liquidity through liability
fundings, management believes that UCB maintains overall liquidity sufficient to
satisfy its depositors' requirements and to meet customers' credit needs.
Cash and cash equivalents totaled $7.8 million at June 30, 1998, $17.2
million at December 31, 1997 and $11.2 million at December 31, 1996. At June 30,
1998, cash and due from banks, federal funds sold and securities classified as
available for sale were $54.9 million, 36.9% of total earning assets, compared
to $59.0 million and $57.2 million, 39.3% and 41.7% of total earning assets at
December 31, 1997 and 1996, respectively. Asset liquidity is also provided by
managing both loan and securities maturities.
Additional sources of liquidity available to UCB include BOF's and
BSS's capacity to borrow additional funds through several established federal
funds arrangements and the Federal Home Loan Bank. UCB has no long-term debt.
Effects of Inflation and Changing Prices in Seasonality
The financial statements and related data presented herein were
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power of
money over time due to inflation.
The effect of changing prices on financial institutions is typically
different from other industries, as UCB's assets and liabilities are monetary in
nature. Interest rates are significantly impacted by inflation, but neither the
timing nor the magnitude of the changes are directly related to price level
indices.
Because of the seasonality of the agricultural industry, the volume of
loans and deposits typically fluctuate during the year. Loans are typically
heaviest from April to November and deposits are typically their lowest during
the same period as farmers either use their deposits or borrow to pay expenses.
At the end of the year and the beginning of the following year, loans decrease
as they are repaid and deposits increase as a result of the sale of the fall
harvest.
Year 2000 Project
The Year 2000 technology problem presents risks to all corporations due
to the potential failure of date related systems. UCB and its subsidiaries have
undertaken a variety of measures to ensure that hardware and software systems
will be century date compliant. BOF and BSS have established project
-64-
<PAGE>
plans, completed hardware and software inventories and developed preliminary
impact assessments. BOF's and BSS's have initiated contacts with vendors for
specific project compliance confirmation.
UCB has executed a contract to outsource its data processing with MACB.
In August 1998, BSS converted to MACB's systems, and BOF has planned a similar
conversion for November 1998.
Testing of primary software applications will be conducted in
conjunction with regularly scheduled testing and is not expect to result in
material additional costs. The testing phase is expected to be completed by
early 1999. In addition to efforts to ensure readiness of internal systems, BOF
and BSS have informed many retail and commercial customers of the need to
address the Year 2000 issue. Based upon the results of the preliminary impact
assessment and information provided by vendors, management believes that its
plan for determining century date compliance is adequate and that UCB will not
incur significant incremental costs to achieve compliance.
Recent Accounting Pronouncements
Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognizes all derivatives as either assets or
liabilities in the statements of financial position and measures those
instruments at fair value. This Statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Although management is currently
studying this Statement, UCB does not expect this Statement to materially affect
its financial condition or results of operations.
The American Institute of Certified Public Accountants issued Statement
of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities, in April
1998. This SOP requires such costs to be expensed as incurred instead of being
capitalized and amortized. It applies to start-up activities and costs of
organization of both development stage and established operating entities, and
it changes existing practice for some industries. The SOP broadly defines
start-up activities as those one-time activities that relate to the opening of a
new facility, introduction of a new product or service, doing business in a new
territory, initiating a new process in an existing facility, doing business with
a new class of customer or beneficiary, or commencing some new operation. The
SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. Consistent with banking industry practice, it is UCB's policy
to expense such costs. Therefore, this SOP is not expected to materially effect
UCB's financial condition or results of operations.
SHAREHOLDER PROPOSALS
If the Reorganization is not consummated, proposals of UCB shareholders
intended to be presented at the next annual meeting of UCB, which would be held
on or about May 27, 1999, must be received in writing by the Secretary of
UCB no later than February 26, 1999, in order to be included in the proxy
materials relating to the next annual meeting.
-65-
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
MACB is chartered under the laws of the Commonwealth of Virginia and
headquartered in Gloucester, Virginia. MACB is the holding company for PTB,
which operates seven full-service banking offices in Gloucester, Charles City
County, Williamsburg, Newport News, Glenns (northern Gloucester County) and
Mattaponi. PTB opened for business in 1989 and at June 30, 1998, MACB had grown
to $181.3 million in assets, $159.6 million in deposits and $20.6 million in
stockholders' equity.
Incorporated in Virginia in 1988, PTB is organized under the Virginia
Banking Act, as amended, and commenced business as a commercial bank on July 20,
1989.
PTB is a community-oriented bank that provides a broad range of banking
services to small and medium sized businesses and individuals located within its
market area. These services include free consumer checking accounts, commercial
checking accounts, savings programs, money market accounts, certificates of
deposit, safe deposit facilities and automated teller facilities. Lending
services include a variety of commercial, real estate, term and installment
loans and consumer loan programs. Business lending emphasizes local companies
seeking credit for working capital and the purchase of equipment, and on a term
basis for physical facilities. Real estate lending emphasizes single family
residential activity and includes home improvement loans, construction lending,
and home equity lines of credit. PTB also offers credit cards and related
services to both individual and merchant accounts.
PTB offers a wide range of deposit accounts, including individual and
commercial demand accounts, statement savings, interest checking and money
market savings accounts, and fixed rate, fixed term certificates. Each of PTB's
offices offer extended lobby and drive-in hours and a 24 hour ATM. PTB also
offers traveler's checks, cashier's checks and money orders, U.S. savings bonds
and withholding tax depository services.
PTB strives to provide its customers with the breadth of products and
services comparable to a regional bank, while maintaining the quick response and
high level of service of a community bank. To implement this strategy, MACB
maintains an experienced, highly-trained professional staff. Senior management
has an average of 27 years of banking experience.
MACB intends to strengthen PTB's position as a leading community bank
in the Peninsula Region of Virginia by building a strong local ownership base
and by further developing a community-based branch banking network. PTB's
identity as a community-oriented bank also defines its strategy for growth.
Management believes that the general trend toward consolidation of the banking
industry in PTB's market area has created a niche for community-based lenders
emphasizing smaller loans. To exploit this niche, management intends to continue
to develop its community-based branch banking network in the Peninsula Region.
On March 31, 1998, MACB acquired a 50% membership interest in Johnson
Mortgage Company L.L.C. ("JMC"). JMC originates long-term fixed-rate mortgage
loans and sells them in the secondary mortgage market. JMC has offices at MACB's
headquarters in Gloucester, in PTB's branch office in Williamsburg and in
Newport News and Portsmouth. J. Morris Johnson and R. Allen Barber, III, the
former owners of JMC's predecessor, Johnson Mortgage Company of Newport News,
hold the remaining 50% membership interests in JMC.
Market Area
MACB's market area is in the Peninsula Region of Virginia, which lies
east of Richmond, north of the James River and south of the Rappahannock River.
The principal office of MACB and PTB is in Gloucester, Virginia, while PTB has
branch offices in Glenns (northern Gloucester County), Charles City County, King
and Queen County and the cities of Newport News and Williamsburg.
-66-
<PAGE>
Gloucester County is primarily a residential area with a work force
commuting to other cities and counties. Seafood and farming are the primary
local industries. MACB's offices in Gloucester County also draw customers from
the adjacent counties of Mathews, Middlesex and King & Queen.
The market area served by PTB's Williamsburg branch office has been
identified as primarily the City of Williamsburg and James City and York
Counties. The City of Williamsburg is comprised of approximately nine square
miles and is bordered by York County to the north and east and James City County
to the south and west.
PTB's Charles City County branch office primarily serves that county.
In addition, this branch attracts business from the New Kent County market. Both
of these communities are rural in nature. PTB is the only depository institution
operating in Charles City County.
The Newport News office opened in 1995. Newport News, which lies to the
southeast of Williamsburg, has a population of approximately 175,000 and is
dominated by the ship building, technology and manufacturing industries.
Lending Activities
PTB's lending efforts are directed primarily to making loans to
individuals and businesses in its market area. Consistent with its focus on
providing community banking services, PTB has not attempted to diversify its
loan portfolio geographically by making significant amounts of loans to
borrowers outside its primary market area. PTB's legal lending limit was
approximately $2.6 million at June 30, 1998. PTB had approximately $26.0 million
in loan commitments and performance stand by letters of credit outstanding at
June 30, 1998.
Commercial Business Lending. PTB's commercial loans are made primarily
to service, retail and wholesale businesses for a variety of purposes, including
short-term working capital loans, term loans and equipment financing loans.
Pricing of commercial business loans is tied to the prevailing prime interest
rate, at a factor over prime. Pricing decisions in individual cases are based on
perceived credit risk and anticipated administrative costs. To the extent
permissible, pricing on commercial loans also takes into account any depository
relationship between the borrower and PTB which, in many cases, can provide for
a stable lending and depository relationship. Commercial loans were $14.0
million, or 12.1% of total loans at June 30, 1998.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but also offer commensurately higher yields.
Although PTB typically looks to the borrower's cash flow as the principal source
of repayment for such loans, the large majority of MACB's commercial loans are
secured by assets, such as real estate, accounts receivable, inventory, and
other forms of collateral. Real estate is the predominant type of collateral for
PTB's business loans. In addition, PTB's commercial loans are generally
personally guaranteed by the principals of the business.
Commercial Mortgage and Construction Lending. Commercial mortgage loans
were $24.0 million, or 20.8% of total loans at June 30, 1998. In recent years
larger banks in MACB's market area have demonstrated less interest in commercial
mortgage lending, which has led to increased opportunities for MACB to originate
loans of this type. PTB operates under strict guidelines associated with
commercial mortgages. Loans of $250,000 or greater require full certified
commercial appraisals, complete with environmental impact studies. Loans must
not exceed 75% of appraised value. MACB's commercial mortgage loans are
predominantly owner-occupied properties and are not for speculative purposes. In
general, PTB does not originate permanent mortgage loans or construction loans
on income producing properties such as apartments, shopping centers, hotels or
office buildings that are not owner-occupied.
At June 30, 1998, real estate construction loans comprised $7.6
million, or 6.6%, of total loans. The majority of construction loans are for
one-family residences that are either pre-sold or contract homes
-67-
<PAGE>
with permanent financing pre-arranged. PTB's construction loans for residential
purposes are limited to situations where the borrower has a pre-approved
take-out commitment for permanent financing. PTB also obtains a first lien on
the security property as collateral for its construction loans. PTB primarily
limits its lending activities to borrowers with demonstrated financial strength
and makes speculative construction loans only on a limited basis to local
builders. As a result of PTB's strict underwriting standards, MACB has
experienced modest losses involving its construction loan portfolio.
Commercial mortgage and construction lending entail significant
additional risk as compared with residential mortgage lending. Commercial
mortgage and construction loans can involve larger loan balances concentrated
with single borrowers or groups of related borrowers. Construction loans involve
additional 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. Thus, it is more difficult to evaluate
accurately the total loan funds required to complete a project and related
loan-to-value ratios. To minimize risks associated with construction lending,
PTB limits loan amounts to 80% of appraised value on pre-sold homes in addition
to its usual credit analysis of its borrowers. PTB also obtains a first lien on
the property as security for its construction loans. In addition, the payment
experience on loans secured by income producing properties is typically
dependent on the successful operation of the related real estate project and
thus may be subject, to a greater extent, to adverse conditions in the real
estate market or the economy generally.
Residential Mortgage Lending. MACB's residential real estate loan
portfolio, which includes home equity lines, comprised approximately $43.8
million, or 37.9%, of total loans at June 30, 1998. The residential mortgage
loans made by PTB have a fixed interest rate for no more than 36 months and are
limited to single family, owner-occupied residences within PTB's market area.
Additionally, residential mortgage loans are not made for principal amounts
exceeding 80% of the appraised value of the underlying real estate.
Consumer Lending. PTB currently offers most types of consumer time and
installment loans, including automobile loans and consumer credit through its
Visa and MasterCard programs and its overdraft protection program. At June 30,
1998, MACB's installment loans comprised approximately $26.3 million, or 22.7%,
of the total loan portfolio. The performance of the consumer loan portfolio is
directly tied to and dependent upon the general economic conditions in MACB's
market area.
Credit Policies and Loan Administration. PTB has adopted a
comprehensive lending policy which includes underwriting standards for all types
of loans and pricing guidelines. PTB's policy specifies "permitted" loans, as
well as "undesirable and prohibited" loans. Collateral requirements and maturity
limits also are addressed. In an effort to manage risk, all credit decisions are
made according to prescribed lending authorities for each loan officer and the
Loan Committee of the Board of Directors. These lending authorities are approved
by the full Board.
PTB's loan approval policies provide for various levels of officer
lending authority. When the aggregate outstanding loans to a single borrower
exceed an individual officer's lending authority the loan request must be
approved by an officer with a higher lending limit or by the Loan Committee of
the Board. PTB has assigned a lending limit for the Loan Committee. Loans which
would exceed the Loan Committee's assigned limit also must be approved by the
Board of Directors.
The Loan Committee of the Board of Directors meets monthly unless more
frequent meetings are necessary. Mr. Farinholt, who also serves as PTB's Senior
Lending Officer, is not a member of the Loan Committee. Mr. Smith, whose primary
responsibilities do not include loan origination, is a member of the Loan
Committee.
To promote MACB's business, PTB has local boards associated with its
branch offices in Williamsburg, Newport News and Charles City County. Each local
board has a local loan committee. The Williamsburg, Newport News and Charles
City local loan committees have the authority to approve real estate loans up to
$350,000, $500,000 and $250,000, respectively. Lesser lending limits apply to
loans
-68-
<PAGE>
that are unsecured or secured by collateral other than real estate. Either Mr.
Farinholt or Mr. Smith attends each local board meeting at which local loan
committee actions are reviewed, but neither is a member of any local loan
committee. Loans approved by the local loan committees, within their respective
lending limits, are reviewed, but are not normally re-approved by the Loan
Committee of the Board of Directors.
All loans to a particular borrower are reviewed each time the borrower
requests a renewal or extension of any loan or requests an additional loan. All
lines of credit are reviewed prior to renewal.
Competition
In its market area, MACB is subject to intense competition from a
number of local, regional and superregional banking organizations, along with
other financial institutions and companies that offer financial services, such
as savings and loan associations, credit unions, industrial loan associations,
securities firms, insurance companies, small loan companies, finance companies,
mortgage companies and other financial service enterprises. Competition among
financial institutions is based upon interest rates offered on deposit accounts,
interest rates charged on loans and other credit and service charges, the
quality of services rendered, the convenience of banking facilities and, in the
case of loans to larger borrowers, relative lending limits. Many of the
financial organizations in competition with MACB have much greater financial
resources and larger branch networks than MACB. Certain of these institutions
have significantly higher lending limits than PTB and may provide various
services for their customers, such as trust services, which PTB does not
presently offer to customers. In addition, there can be no assurance that
additional financial institutions, with substantially greater resources than
MACB, will not establish operations in PTB's service area.
MACB is one of 15 banking institutions with offices in Gloucester
County, Williamsburg or Newport News. It is the only depository institution with
a branch office in Charles City County. At June 30, 1997, the most recent date
for which such records are available, PTB held approximately 27.0% of the total
bank deposits in Gloucester County, 100% in Charles City County and
approximately 8.1% and 1.8%, respectively, in the cities of Williamsburg and
Newport News. In addition, PTB's Mattaponi branch office, which PTB purchased in
July 1998, accounted for 100.0% of the total bank deposits in King and Queen
County at June 30, 1997.
PTB has enjoyed an excellent response from the communities in which it
has opened offices. Management feels this success is due to many factors,
including modern and well located branch offices, extended lobby hours, Saturday
lobby hours, and ATMs which are actively utilized by both customers and
non-customers of PTB. PTB pays competitive interest rates on its deposits.
Employees
As of June 30, 1998, MACB employed a total of 96 individuals on a
full-time basis and 13 individuals on a part-time basis. None of MACB's
employees is represented by a union or covered by a collective bargaining
agreement. Management considers employee relations to be good.
Properties
MACB's headquarters is located at 7171 George Washington Memorial
Highway. The property was purchased by MACB at a cost of $255,000. The total
capitalized cost of the building and land improvements is $752,000.
The Williamsburg branch office is located at 1031 Richmond Road. The
total capitalized cost of the building and land improvements is approximately
$396,000. A second Williamsburg branch at 100 McLaws Circle opened in September
1998. The branch building and land were acquired from Wachovia Corporation at a
cost of $443,000 and formerly housed a branch office of Jefferson National Bank.
-69-
<PAGE>
The Charles City County branch office is located at 10000 Courthouse
Road on approximately 1.7 acres in Charles City County. The property was
purchased by MACB at a cost of $27,000. The total capitalized cost of the
building and land improvements is approximately $631,000.
The Newport News branch office is located at the corner of Thimble
Shoals Boulevard and J. Clyde Morris Boulevard near the entrance to the Oyster
Point Industrial Park. MACB acquired the land for its permanent Newport News
branch site in 1996 at a cost of approximately $620,000. The total capitalized
cost of the building and land improvements is approximately $879,000.
The Glenn's branch office is located at 14833 George Washington
Memorial Highway in Glenns (northern Gloucester County). The office is on a 43
acre site that PTB acquired in 1996 at a cost of $312,000. Building improvements
for the Glenns branch office totaled approximately $1.2 million. The 43 acre
site has been subdivided and MACB intends to market the portion of the property
that is not used for PTB's branch operations.
In July 1998, MACB opened a branch office in Mattaponi (King and Queen
County). PTB purchased the branch office and certain deposits from First
Virginia Bank - Commonwealth at a cost of $600,000.
Legal Proceedings
MACB is a party to various legal proceedings from time to time in the
ordinary course of business. Based upon information currently available,
management believes that such legal proceedings, if determined adversely to
MACB, would not have a material adverse effect on MACB's business, financial
position or results of operations.
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the
consolidated financial condition and results of operations of MACB as of the
dates and for the periods indicated. This discussion should be read in
conjunction with the Selected Financial Data, MACB's Consolidated Financial
Statements and the Notes thereto, and other financial data appearing elsewhere
in this Joint Proxy Statement.
Overview
After organizing in 1988 and opening in July 1989, PTB has posted
consistent increases in assets, deposits, and net income. Earnings of $1.8
million reported by MACB for 1997 represented the eighth consecutive year of
increased income. Asset growth also depicted a year of dynamic performance.
Net income for the six months ended June 30, 1998 totaled $1.0 million.
This amount represents a 31.6% increase over net income of $765,000 for the same
period in 1997. The increase reflects both the initial cost of implementing
check imaging in the second quarter of 1998 and increases in net interest income
and non-interest income. The check imaging process required the purchase of
computer hardware and software approximating $500,000, resulting in increased
depreciation expense. However, the new technology will greatly enhance employee
efficiency in rendering customer statements and performing account research.
This technology will allow for better customer service while also controlling
future personnel and overhead costs and was, therefore, considered an investment
in improving earnings over time.
Net income for the year ended December 31, 1997 totaled $1.8 million, a
19.3% increase over net income of $1.5 million for the year ended December 31,
1996.
-70-
<PAGE>
A meaningful measure of earnings efficiency is Return on Average Total
Assets ("ROA"). An industry benchmark for this ratio is 1.00%, which indicates
satisfactory employment of resources to support operations, payment of
dividends, and internal generation of capital to fund future growth. Typically,
this level of profitability is common (even expected) in banks with slow to
moderate asset growth. However, earnings are sometimes compromised for rapid
asset growth. PTB's asset growth has exceeded 16% in each of its eight full
years of operation, representing a challenge to earnings performance. The ROA
for the year ended December 31, 1997 was 1.26%, which compares favorably with
the industry benchmark and with the ROA for the year ended December 31, 1996 of
1.30%.
MACB operates by attracting deposits from the general public and
employing such deposit funds in the purchase of investment securities and the
making of commercial, consumer, and residential construction and permanent
mortgage real estate loans. Revenues are derived principally from interest on
loans and investments. MACB's major expense is interest paid on deposits.
Results of operations depend primarily on the level of net interest income,
which is the interest and fees earned on loans plus investment interest minus
interest paid on deposits and short-term borrowings. Thus, net interest income
is reflective of yields received in interest-earning assets and the rates paid
on interest-bearing liabilities.
MACB enjoyed strong balance sheet expansion during the six months ended
June 30, 1998, with total assets increasing $22.0 million, or 13.8% over
December 31, 1997. Growth was funded almost entirely from new deposits, which
increased by $21.1 million for the six months ended June 30, 1998. Loan demand
maintained strong growth during the six months ended June 30, 1998, as net loans
at June 30, 1998 increased $9.5 million, or 9.1 %, over net loans at December
31, 1997.
Total assets at December 31, 1997 were $159.3 million, a increase of
$22.9 million, or 16.8%, over total assets at December 31, 1996. The primary
source of this growth was an increase in total deposits of $17.9 million
(14.9%). Employment of these new resources was accomplished through increases in
the loan portfolio and investment securities account of $13.2 million (14.5%)
and $4.1 million (15.0%), respectively. Other time deposits at December 31, 1997
were $64.7 million, a 43.7% increase over other time deposits at December 31,
1996. Deposits represented 98.9% of MACB's total liabilities at December 31,
1997.
Net Interest Income
Net interest income represents the principal source of earnings for
MACB. Net interest income equals the amount by which interest income exceeds
interest expense. Earning assets consist primarily of loans and securities,
while deposits represent the major portion of interest-bearing liabilities.
Changes in the volume and mix of interest-earning assets and interest-bearing
liabilities, as well as their respective yields and rates, have a significant
impact on the level of net interest income. Net interest margin is calculated as
tax-equivalent net interest income divided by average earning assets and
represents MACB's net yield on its earning assets.
The following tables present the 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. The average balances used for the purposes of
these tables and other statistical disclosures were calculated by using the
daily average balances.
-71-
<PAGE>
Average Balances, Interest Income and Expenses, Average Yields and Rates
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets:
Federal funds sold $ 9,231 $ 253 5.48% $ 3,702 $ 100 5.40%
Securities (1):
Obligations of
U.S. Treasury 630 18 5.71% 619 22 7.11%
U.S. government agencies and
corp. 27,294 957 7.01% 20,133 749 7.44%
Other securities 7,229 262 7.25% 7,761 292 7.52%
----- --- ----- ---
Total securities 35,153 1,237 7.04% 28,513 1,063 7.46%
Loans (2) 110,390 5,772 10.46% 95,503 4,960 10.39%
------- ----- ------ -----
Total interest-earning assets 154,774 $7,262 9.38% 127,718 $6,123 9.59%
====== ======
Non-interest-earning assets:
Cash and due from banks 4,260 4,032
Other assets 9,696 7,504
Gross unrealized gain (loss) on
available for sale securities 118 (313)
Less: allowance for loan losses (1,370) (1,194)
Deferred loan fees (535) (495)
----- -----
Total non-interest-earning assets 12,169 9,534
------ -----
Total assets $166,943 $137,252
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 28,698 $ 461 3.21% $ 24,248 $ 384 3.17%
Savings 16,153 233 2.88% 12,992 215 3.31%
Other time 83,252 2,333 5.60% 68,686 1,896 5.52%
------ ----- ------ -----
Total interest bearing deposits 128,103 3,027 4.73% 105,926 2,495 4.71%
Short-term borrowings 213 5 4.69% 247 5 4.05%
Long-term debt 28 1 7.14% 40 1 5.00%
-- - -- -
Total interest-bearing liabilities 128,344 $3,033 4.73% 106,213 $2,501 4.71%
====== ======
Non-interest-bearing liabilities:
Demand deposits 17,787 15,349
Other liabilities 840 871
--- ---
Total non-interest-bearing
liabilities 18,627 16,220
------ ------
Total liabilities 146,971 122,433
Stockholders' equity 19,972 14,819
------ ------
Total liabilities and stockholders'
equity $166,943 $137,252
======== ========
Net interest income $4,229 $3,622
====== ======
Interest rate spread (3) 4.65% 4.88%
Net interest margin (4) 5.46% 5.67%
</TABLE>
-72-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets:
Federal funds sold $ 8,073 $ 454 5.62% $ 4,153 $ 231 5.56%
Securities (1):
Obligations of
U.S. Treasury 626 44 7.03% 61 5 8.20%
U.S. government agencies and
corp. 20,370 1,501 7.37% 17,930 1,291 7.20%
Other securities 7,771 579 7.45% 6,562 559 8.52%
----- --- ----- ---
Total securities 28,767 2,124 7.38% 24,553 1,855 7.56%
Loans (2) 98,853 10,368 10.49% 81,323 8,689 10.68%
------ ------ ------ -----
Total interest-earning assets 135,693 $12,946 9.54% 110,029 $10,775 9.79%
======= =======
Non-interest-earning assets:
Cash and due from banks 4,133 3,797
Other assets 7,746 5,631
Gross unrealized gain (loss) on
available for sale securities (163) (309)
Less: allowance for loan losses (1,263) (985)
Deferred loan fees (508) (431)
----- -----
Total non-interest-earning assets 9,945 7,703
----- -----
Total assets $145,638 $117,732
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 22,469 $ 787 3.50% $ 21,471 $ 690 3.21%
Savings 15,469 440 2.84% 10,710 357 3.33%
Other time 73,072 4,078 5.58% 57,115 3,301 5.78%
------ ----- ------ -----
Total interest bearing deposits 111,010 5,305 4.78% 89,296 4,348 4.87%
Short-term borrowings 250 10 4.00% 233 9 3.86%
Long-term debt 37 2 5.41% 50 3 6.00%
-- - -- -
Total interest-bearing liabilities 111,297 $5,317 4.78% 89,579 $4,360 4.87%
====== ======
Non-interest-bearing liabilities:
Demand deposits 16,725 13,514
Other liabilities 1,484 785
----- ---
Total non-interest-bearing
liabilities 18,209 14,299
------ ------
Total liabilities 129,506 103,878
Stockholders' equity 16,132 13,854
------ ------
Total liabilities and stockholders'
equity $145,638 $117,732
======== ========
Net interest income $7,629 $6,415
====== ======
Interest rate spread (3) 4.76% 4.92%
Net interest margin (4) 5.62% 5.83%
</TABLE>
- --------------------
-73-
<PAGE>
(1) Includes Investment Securities and Investments Held for Sale. See
" - Securities."
(2) Nonaacrual loans are included in the average balance.
(3) Interest spread is the average yield earned on earning assets less the
average rate incurred on interest-bearing liabilities.
(4) Net interest margin is fully taxable equivalent net interest income
expressed as a percentage of average earning assets.
Total interest and fee income from loans and investments for the six
months ended June 30, 1998 was $7.2 million, an 18.7% increase over total
interest income of $6.1 million for the same period in 1997. Total interest
income for the year ended December 31, 1997 was $12.9 million, a 20.8% increase
over total interest income of $10.7 million for the same period in 1996. This
increase was accomplished through an increase in total average earning assets
from $110.0 million for 1996 to $135.7 million for 1997. As a percentage of
average total assets, the earning assets component was relatively constant,
declining slightly from 93.5% in 1996 to 93.2% in 1997. Total interest expense
increased $958,000 (22.0%) in 1997 to a total of $5.3 million.
Net interest income for the six months ended June 30, 1998 totaled $4.2
million, an 17.0% increase over net interest income of $3.6 million for the same
period in 1997. The net interest margin experienced modest contraction as
renewing deposits among consumer CDs reflected an upward trend in renewal rates.
This trend occurred during the second quarter of 1998 when the average yield on
the securities portfolio declined by 42 basis points. As a result, the 18.7%
increase in interest income for the six months ended June 30, 1998 compared to
the same period in 1997 was offset by a 21.3% increase in interest expense for
the same period. The net interest margin remains above management's target of
5.25%.
Net interest income for the year ended December 31, 1997 increased $1.3
million, or 20.0%, over net interest income for the year ended December 31,
1996. The net interest margin declined from 5.83% in 1996 to 5.62% in 1997. The
banking industry, as a whole, is forecasting tighter or shrinking interest
margins. This view is due to steadily rising competition for sources of funds
from such nonbank competition as credit unions and mutual funds. Competition for
consumer loans, particularly vehicle and mortgage related (equity line) products
continues to be impacted by nonbank players also.
Competition between banks and credit unions is being conducted on an
uneven playing field in that banks and credit unions have dissimilar income tax
liabilities. Banks bear substantially greater tax burdens than do credit unions.
This situation has resulted in intense pressure on competitive interest rates. A
challenge for MACB, therefore, is to expand its search for non-interest income
and other efficiencies in its operations.
-74-
<PAGE>
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 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.
<TABLE>
<CAPTION>
Volume and Rate Analysis
Six Months Ended June 30, Year Ended December 31,
1998 compared to 1997 1997 compared to 1996 1996 compared to 1995
--------------------- --------------------- ---------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold $151 $2 $153 $218 $5 $223 $(134) $(13) $(147)
Securities:
Treasury Obligations -- (4) (4) 46 (7) 39 5 -- 5
Obligations of U.S.
government agencies and
corporations 248 (40) 208 176 34 210 281 116 397
Other (20) (10) (30) 103 (83) 20 150 69 219
---- ---- ---- --- ---- -- --- -- ---
Total securities 228 (54) 174 325 (56) 269 436 185 621
--- ---- --- --- ---- --- --- --- ---
Loans 778 34 812 1,873 (194) 1,679 2,115 (79) 2,036
--- -- --- ----- ----- ----- ----- ---- -----
Total $1,157 $(18) $1,139 $2,416 $(245) $2,171 $2,417 $93 $2,510
------ ----- ------ ------ ------ ------ ------ --- ------
Interest Expense:
Deposits:
Interest bearing demand $72 $5 $77 $32 $65 $97 $153 $14 $167
Savings 39 (21) 18 159 (76) 83 57 (3) 54
Other time 409 28 437 922 (145) 777 686 (17) 669
--- -- --- --- ----- --- --- ---- ---
Total deposits $520 $12 $532 $1,113 $(156) $957 $896 $(6) $890
Short-term borrowing -- -- -- 1 -- 1 -- 1 1
Long-term debt -- -- -- (1) -- (1) -- -- --
-- -- -- --- -- --- -- -- --
Total $520 $12 $532 $1,113 $(156) $957 $896 $(5) $891
---- --- ---- ------ ------ ---- ---- ---- ----
Increase (decrease) in net
interest income $637 $(30) $607 $1,303 $(89) $1,214 $1,521 $98 $1,619
==== ===== ==== ====== ===== ====== ====== === ======
</TABLE>
Interest Sensitivity
An important element of both earnings performance and the maintenance
of sufficient liquidity is management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities that mature or reprice in a specific time
interval. The gap can be managed by repricing assets or liabilities, by selling
securities or loans held for sale, by replacing an asset or liability at
maturity or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities repricing in the same
time interval helps to mitigate the impact on net interest income of rapid
changes in market interest rates.
MACB evaluates interest sensitivity risk and then formulates plans
regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease interest sensitivity risk.
These guidelines are based on management's outlook regarding future interest
rate movements, the state of the regional and national economy, and other
financial and business risk factors.
-75-
<PAGE>
The following tables illustrate the interest sensitivity gap position
of MACB at June 30, 1998 and at December 31, 1997. They summarize the
contractual repayment terms or nearest repricing dates of MACB's
interest-earning assets and interest-bearing liabilities. These tables present
the position that existed on a particular day. This position changes continually
and is not necessarily indicative of MACB's position at any other time.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
At June 30, 1998
----------------------------------------------------------------------
Maturing or Repricing In:
--------------------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
------- ---- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal funds sold $9,604 $-- $-- $-- $9,604
Investment securities (1) 175 682 6,972 28,588 36,417
Loans (2)(3) 30,855 12,064 39,374 33,082 115,375
------ ------ ------ ------ -------
Total interest-earning assets $40,634 $12,746 $46,346 $61,670 $161,396
Interest Bearing Liabilities:
Deposits:
Interest bearing demand 7,825 -- 8,483 -- 16,308
MMDAs and other savings 16,244 -- 12,373 -- 28,617
Time deposits $100,000 and over 4,054 8,744 4,254 -- 17,052
Other time deposits 12,232 34,276 24,735 -- 71,243
Other borrowed money` 266 14 11 -- 291
--- -- -- -- ---
Total interest-bearing liabilities $40,621 $43,034 $49,856 $-- $133,511
Period gap $13 $(30,288) $(3,510) $61,670 $27,885
Cumulative gap $13 $(30,275) $(33,785) $27,885
Cumulative gap as a percent
of total earning assets .01% (18.76%) (20.93%) 17.28%
</TABLE>
- ----------------
(1) The amounts shown for securities do not reflect the unrealized gain on
available for sale securities, which was approximately $162,000 at June
30, 1998.
(2) The amounts shown for loans have not been reduced by the allowance for
loan losses or unearned income, which were approximately $1,464,000 and
$546,000, respectively, at June 30, 1998.
(3) Nonaccrual loans have been excluded.
-76-
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------------------------------------------------
Maturing or Repricing In:
--------------------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
------- ---- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal funds sold $8,414 $ -- $ -- $ -- $8,414
Investment securities (1) 70 505 6,841 23,897 31,313
Loans (2)(3) 30,647 9,397 36,994 28,766 105,804
------ ----- ------ ------ -------
Total interest-earning assets $39,131 $9,902 $43,835 $52,663 $145,531
Interest Bearing Liabilities:
Deposits:
Interest bearing demand 9,999 -- 4,408 -- 14,407
MMDAs and other savings 17,324 -- 9,701 -- 27,025
Time deposits $100,000 and over 3,002 7,563 2,963 -- 13,528
Other time deposits 12,016 32,857 19,800 -- 64,673
Other borrowed money 292 13 18 -- 323
--- -- -- -- ---
Total interest-bearing liabilities $42,633 $40,433 $36,890 $-- $119,956
Period gap $(3,502) $(30,531) $6,945 $52,663 $25,575
Cumulative gap $(3,502) $(34,033) $(27,088) $25,575
Cumulative gap as a percent
of total earning assets (2.41%) (23.39%) (18.61%) 7.57%
</TABLE>
- -----------------------
(1) The amounts shown for securities do not reflect the unrealized gain on
available for sale securities, which was approximately $80,000 at
December 31, 1997.
(2) The amounts shown for loans have not been reduced by the allowance for
loan losses or unearned income, which were approximately $1,324,000 and
$542,000, respectively, at December 31, 1997.
(3) Nonaccrual loans have been excluded.
At June 30, 1998, PTB had $30.3 million more in liabilities than assets
that will reprice within one year based on contractual maturities. However, PTB
projects cash flows based on various factors in the investment portfolio. These
include, in addition to contractual maturities, expected calls of bonds and
principal paydowns of amortizing bonds. Projected cash flows represent repricing
opportunities not reflected in the table above and total approximately $5.0
million in additional repricing in the 0 to 365 days time interval. This results
in approximately $25 million more in liabilities than assets which reprice
within one year, a negative gap under 16% of earning assets. Management's target
for this ratio in 1998 is between 16% and 19%. Positive gaps can affect earnings
adversely in a period of declining rates, while negative gaps can adversely
impact earnings in a period of rising rates. Management manages the interest
rate risks by monitoring the balances, rates, call features and maturities of
rate sensitive assets and liabilities.
Securities
PTB's securities portfolio serves several purposes. Portions of the
portfolio are held as investments, while the remaining portions are used to
assist PTB in liquidity and asset liability management.
In June 1993, the Financial Accounting Standards Board adopted FASB
115, which changes the manner in which financial institutions classify and
account for their investment securities for fiscal years beginning after
December 15, 1993. In response to this rule change, as of January 1, 1994, PTB
revised its investment securities policy and divided its investment securities
portfolio into two components, (i) securities held to maturity and (ii)
securities available for sale. The new investment securities policy resulted in
a classification at December 31, 1994 of $8.7 million of investment securities
to securities
-77-
<PAGE>
available for sale. The remaining $4.3 million of investment securities were
classified as held to maturity. This classification had no material effect on
PTB's financial condition or results of operations in the year ended December
31, 1994. Management elected in December 1995 to classify the entire portfolio
as available for sale. In July 1997, management performed an extensive earnings
and liquidity review of the investment portfolio. This analysis resulted in a
reclassification of previously available for sale bonds totaling $5.9 million as
held to maturity, none of which reflected any unrealized loss at the time of
transfer.
Securities are classified as securities held to maturity when
management has the intent and PTB has the ability at the time of purchase to
hold the securities to maturity. Securities held to maturity are carried at cost
adjusted for amortization of premiums and accretion of discounts. Securities to
be held for indefinite periods of time are classified as securities available
for sale. Unrealized gains and losses on securities available for sale are
recognized as direct increases or decreases in stockholders' equity. Securities
available for sale include securities that may be sold in response to changes in
market interest rates, changes in the security's prepayment risk, increases in
loan demand, general liquidity needs and other similar factors. PTB's recent
purchases of investment securities have generally been limited to securities of
high credit quality with short to medium term maturities.
Amortized cost and carrying amount (estimated fair value) of securities
available for sale at June 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Treasury Securities 626 -- 2 624
US Government Agencies & Corporations 7,360 59 4 7,415
Obligations of States & Political Subdivisions 5,544 92 16 5,620
Mortgage-backed Securities 10,756 62 29 10,789
Federal Reserve Bank Stock 343 -- -- 343
Other Equity Securities 545 -- -- 545
---------- -------- -------- ---------
$ 25,174 $ 213 $ 51 $ 25,336
========== ======== ======== =========
</TABLE>
Amortized cost and carrying amount (estimated fair value) of securities
held to maturity at June 30, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Government Agencies & Corporations 6,064 22 1 6,085
Obligations of States & Political Subdivisions 1,911 55 13 1,953
Mortgage-backed Securities 3,268 22 -- 3,290
---------- -------- ------- ----------
$ 11,243 $ 99 $ 14 $ 11,328
========== ======== ======= ==========
</TABLE>
-79-
<PAGE>
Securities available for sale at December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Treasury Securities 632 -- 3 629
US Government Agencies & Corporations 10,301 84 4 10,381
Obligations of States & Political Subdivisions 4,946 90 80 4,956
Mortgage-backed Securities 7,743 40 46 7,737
Federal Reserve Bank Stock 343 -- -- 343
Other Equity Securities 57 -- -- 57
--------- ------ ------- --------
$ 24,024 $ 215 $ 135 $ 24,104
========= ====== ======= ========
</TABLE>
Securities held to maturity at December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Government Agencies & Corporations 3,035 23 -- 3,058
Obligations of States & Political Subdivisions 1,682 52 -- 1,734
Mortgage-backed Securities 2,573 16 -- 2,589
-------- ------ ------- --------
$ 7,290 $ 91 $ -- $ 7,381
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
(In Thousands of Dollars)
<S> <C> <C>
Gross proceeds from sales of securities 200 1,593
Gross Gains on Sale of Securities 1 2
Gross Losses on Sale of Securities -- --
---------- ----------
Net Securities Gains (Losses) 1 2
========== ==========
</TABLE>
The book value and weighted average yield of PTB's investment
securities at June 30, 1998, by contractual maturity, are reflected in the
following table. Actual maturities will differ from contractual maturities
because certain borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
-79-
<PAGE>
Amount and Average Yield of Investment Securities
<TABLE>
<CAPTION>
At June 30, 1998
Amount (1) Average Yield
(Dollars in Thousands)
<S> <C> <C>
Due in one year or less $855 5.83%
Due after one year through five years 2,122 5.73
Due after five years through ten years 10,285 6.79
Due after ten years 22,267 6.90
Federal Reserve Bank stock 343 6.00
Other equity securities 545 4.69
---
Total securities $36,417 6.75%
=======
----------------------
</TABLE>
(1) Amounts are stated at amortized cost. PTB does not separately
record the carrying cost of its investment securities based on
contractual maturity.
Loan Portfolio
MACB is an active lender with a loan portfolio that includes commercial
and residential mortgages, commercial loans, consumer installment loans, real
estate construction loans and home equity loans. See "Mid-Atlantic Community
BankGroup, Inc. - Lending Activities." MACB's lending activity extends to
individuals and small and medium-sized businesses within its primary service
area. Consistent with its focus on providing community-based financial services,
MACB does not attempt to diversify its loan portfolio geographically by making
significant amounts of loans to borrowers outside of its primary service area.
The following table summarizes PTB's loan portfolio for the periods
indicated.
Loan Portfolio
<TABLE>
<CAPTION>
At June 30, At December 31,
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Commercial mortgage $24,022 $23,135 $19,622
Residential mortgage 31,243 28,987 25,056
Home equity 12,574 10,905 9,318
Construction 7,640 6,059 6,915
Commercial 13,951 12,477 10,292
Installment 25,680 23,926 20,848
All other 604 617 522
--- --- ---
Total loans 115,714 106,106 92,573
Less: unearned income (546) (542) (483)
Less: allowance for loan losses (1,464) 1,324 1,112
------- ----- -----
Loans, net $113,704 $104,240 $90,978
======== ======== =======
</TABLE>
-80-
<PAGE>
Remaining Maturities of Selected Loans
At June 30, 1998
Commercial, Financial Real Estate -
and Agricultural Construction
---------------- -------------
(Dollars in Thousands)
Within 1 year $5,635 $5,448
Variable Rate:
1 to 5 years 727 1,418
After 5 years 457 50
--- --
Total $6,819 $6,916
------ ------
Fixed Rate:
1 to 5 years $6,257 $502
After 5 years 875 222
--- ---
Total $7,132 $724
------ ----
Total Maturities $13,951 $7,640
======= ======
Provision/Allowance for Loan Losses & Asset Quality
Asset quality continues to be satisfactory to MACB. Total loans past
due 30 days or more at June 30, 1998 were $2.9 million (2.51% of total
outstandings). Included in the 30-day total are $280,000 in loans that are 90
days or more past due and still accruing interest. Non-accrual loans totaled
$339,000 at June 30, 1998, which represented 0.29% of total outstanding loans
and 23.2% of the loan loss reserve. Foreclosed properties totaled $437,000 at
June 30, 1998. The provision for loan losses was $233,000 in the first half of
1998. Gross charge-offs for the first six months of 1998 were $114,000, while
total recoveries were $21,000.
The following table summarizes non-performing assets for the periods
indicated.
Non-Performing Assets
<TABLE>
<CAPTION>
At June 30, At December 31,
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis $339 $302 $190
Loans contractually past due 90 days or more as to interest
or principal payments (not included in non-accrual loans
above) 280 77 88
Loans restructured and in compliance with modified terms
(not included in non-accrual loans or loans contractually
past due 90 days or more above) -- -- --
-- -- --
Total nonperforming loans $619 $379 $278
Other real estate owned 437 208 --
--- --- --
Total $1,056 $587 $278
====== ==== ====
Nonperforming assets to period end total loans and other
real estate .67% .56% .30%
</TABLE>
As to the nonaccrual loans at December 31, 1997 referred to above,
approximately $38,155 of interest income would have been recorded during such
period if the loan had been current and the interest thereon had been accrued.
-81-
<PAGE>
For the six months ended June 30, 1998, MACB provided $233,000 to the
reserve for loan losses. For the year ended December 31, 1997, MACB provided
$347,000 to the reserve for loan losses, representing a decrease of $33,000 from
the same period in 1996. At June 30, 1998 and December 31, 1997, the reserve
equaled $1.5 million and $1.3 million, respectively. Non-performing assets at
June 30, 1998 and December 31, 1997 totaled $1.1 million and $587,000,
respectively. Net charge-offs for the six months ended June 30, 1998 were
$93,000. Net charge-offs for 1997 were $135,000, up $1,000 from 1996. Credit
decisions continue to be based on the borrower's cash flow, the value of
underlying collateral, and the integrity of the borrower. The economy, both
nationally and locally, has enjoyed an extended recovery/growth cycle. Yet
personal and small business bankruptcies have reflected a disturbing growth
trend. Although PTB has not been materially victimized by this bankruptcy trend,
management is attentive to underwriting standards and the importance of a
meaningful loss reserve.
The provision for loan losses totaled $347,000 and $380,000 for the
years ended December 31, 1997 and 1996, respectively. In the opinion of
management, the provision charged to operations has been sufficient to absorb
the current year's potential net loan losses while continuing to increase the
allowance for loan losses as PTB's loan portfolio increases.
The following table summarizes changes in the allowance for loan
losses.
Allowance for Loan Losses
<TABLE>
<CAPTION>
At June 30, At December 31,
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $1,324 $1,112 $866
Charge-offs:
Commercial mortgage -- -- --
Residential mortgage 5 -- 9
Real estate construction -- -- --
Home equity -- -- --
Commercial 11 78 134
Installment and all other consumer loans 98 112 18
Total charge-offs 114 190 161
Recoveries on previous loan losses:
Commercial mortgage -- -- --
Residential mortgage -- -- 9
Real estate construction -- -- --
Home equity -- -- --
Commercial -- 20 134
Installment and all other consumer loans 21 35 18
Total recoveries 21 55 27
-- -- --
Net charge-offs 93 135 134
Provision charged to operations 233 347 380
--- --- ---
Balance at end of period $1,464 $1,324 $1,112
====== ====== ======
Net charge-offs as a percent of average loans .08% .14% .16%
Total allowance as a percent of loans outstanding at
period end 1.27% 1.25% 1.21%
</TABLE>
For each period presented, the provision for loan losses charged to
operations is based on management's judgment after taking into consideration all
factors connected with the collectibility of the existing portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and value of the portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operations include internally generated loan review
-82-
<PAGE>
reports, previous loan loss experience with the borrower, the status of past due
interest and principal payments on the loan, the quality of financial
information supplied by the borrower and the general financial condition of the
borrower.
Allocation of the Allowance for Loan Losses
A breakdown of the allowance for loan losses is provided in the
following table. However, management does not believe that the allowance can be
fragmented by category with a degree of precision that would be useful to
investors. Due to the relatively small amounts of net loan losses over the past
three years, the breakdown of the allowance for loan losses is based primarily
upon those factors discussed above in computing the allowance for loan losses as
a whole. Because all of these factors are subject to change, the breakdown is
not necessarily indicative of the character of future loan losses. The entire
amount of the allowance is available to absorb losses in any category.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------- -----------------------
1998 1997 1996
---- ---- ----
Percentage Percentage Percentage
of Total of Total of Total
Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial mortgage $302 20.6% $146 22% $133 21%
Residential mortgage 395 27.0 13 27 13 27
Real estate construction 97 6.6 53 6 56 8
Home equity 159 10.9 40 10 20 10
Commercial 177 12.1 596 12 500 11
Installment and all other
consumer loans 334 22.8 47 23 390 23
--- -- ---
Total $1,464 100.0% $1,324 100% $1,112 100%
====== ====== ====== ==== ====== ====
</TABLE>
Non-interest Income
Non-interest income for the six months ended June 30, 1998 totaled
$529,000, a 34.6% increase over non-interest income of $393,000 for the same
period in 1997. The primary sources of non-interest income are service charges
and fees related to deposit accounts. Primary contributors of the improvement
were new automated teller machine (ATM) service charges for non-customers of PTB
and MACB's portion of second quarter earnings of JMC.
Non-interest income for the year ended December 31, 1997 totaled
$852,000, a 36.5% increase over non-interest income for the year ended December
31, 1996. Certain fees were increased in the second half of 1996, and their
beneficial impact was immaterial for the year. However, the impact on the full
year of 1997 proved quite positive. MACB will continue its efforts to control
what customers perceive as nuisance charges to maximize its competitive
position, although the ability to maintain consistent profit levels will require
greater contributions from non-interest income to offset future pressure on net
interest income.
Non-interest Expense
Non-interest expense for the six months ended June 30, 1998 totaled
$3.0 million, a 12.1% increase over non-interest expense of $2.7 million for the
same period in 1997. The increase was attributable to several factors. The check
imaging process, described above, was joined by other increases in depreciation
expense associated with the opening of PTB's new permanent office for its
Newport News branch in the second quarter of 1998. PTB also converted to a new
software package for its ATM processing. The software will permit better risk
management of the ATM product and enhanced customer
-83-
<PAGE>
service. One-time costs related to the de-conversion of the old ATM software, as
well as installation of the new software should be offset by improved
profitability and efficiency in this area of PTB's operation.
Non-interest expense for the year ended December 31, 1997 totaled $5.6
million, a 32.7% increase over non-interest expense of $4.2 million for the year
ended December 31, 1996. This increase was due primarily to the additional
expenses incurred with the opening of PTB's operations center and a fifth full
service branch in January 1997. Additionally, the implementation of independent
loan review and internal audit contributed to increased payroll and benefits
expense.
Deposits
MACB's primary source of funds is deposit accounts, which include
demand deposits, savings and money market accounts and other time deposits.
MACB's deposits are primarily from individuals and businesses located within
MACB's market.
The following table is a summary of average deposits and average rates
paid.
Average Deposits and Average Rates Paid
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------- -----------------------
1998 1997 1996
---- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand deposits $ 17,787 -- $ 16,725 -- $ 13,514 --
Interest bearing demand
deposits 28,698 3.21% 22,469 3.50% 21,471 3.21%
Savings deposits 16,153 2.88% 15,469 2.84% 10,710 3.33%
Time deposits 83,252 5.60% 73,072 5.58% 57,115 5.78%
------ ------ ------
Total (weighted
average rate) $145,890 4.15% $127,735 4.15% $102,810 4.23%
======== ======== ========
</TABLE>
The following table is a summary of time deposits of $100,000 or more
by remaining maturities at June 30, 1998.
Maturities of Time Deposits of $100,000 and Over
At June 30, 1998
----------------
Amount Percent
------ -------
(Dollars in Thousands)
Three months or less $ 4,054 23.8%
Three to twelve months 8,744 51.3
Over twelve months 4,254 24.9
----- ----
Total $17,052 100.0%
======= ======
To the extent that deposits grow faster than loans, PTB will use these
excess funds for investment securities and other earning assets. Management will
seek to control the growth of deposits in any new branches, as it does in its
current operations, through interest rate management and marketing.
-84-
<PAGE>
Capital Resources and Liquidity
Equity capital at June 30, 1998 totaled $20.6 million, representing
11.35% of total assets. This level is considered ample to support continued
asset growth for the immediate future and to provide a buffer against
unforeseeable downturns in business and economic cycles and is substantially
above regulatory prescribed minimum recommended levels.
Capital growth for the year ended December 31, 1997 was supported
through the improved earnings performance discussed above and by a common stock
offering in the third quarter of 1997, which resulted in an increase to capital,
net of issuance costs, of $3.35 million. The increase in capital resulted in a
ratio of capital to total assets at December 31, 1997 of 12.1%, compared to
10.6% at December 31, 1996.
The following table shows PTB's risk-based capital ratios and
stockholders' equity to total assets at June 30, 1998 and December 31, 1997 and
1996.
Analysis of Capital
<TABLE>
<CAPTION>
At June 30, At December 31,
----------- ---------------
Regulatory
Minimum 1998 1997 1996
------- ---- ---- ----
<S> <C> <C> <C> <C>
Capital Ratios:
Risk-based capital:
Tier 1 4.00% 16.39% 17.33% 14.99%
Total 8.00 17.56 18.52 16.14
Leverage 4.00 11.94 12.29 11.42
Stockholders' equity to total assets n/a 11.35 12.10 10.58
</TABLE>
Liquidity is provided through several sources. The most readily
convertible to cash is "Federal funds sold," or the overnight sale of excess
reserves to other banks. MACB has adopted policy and procedure guidelines to
comply with Regulation F of the Federal Reserve regarding interbank liabilities
risk, limiting MACB's exposure to credit risk in its dealing with correspondent
banks. Sales of Fed funds averaged $8.1 million during 1997, up 92.9% from the
$4.2 million average of 1996. The increase was due to call activity in the
investment portfolio.
Management has targeted an average Fed funds sales level of $7.5
million for 1998. The balance at June 30, 1998 of $9.6 million represented a
$1.2 million increase from the balance at December 31, 1997. Fed funds sold
equaled 17.6% of total demand deposits at June 30, 1998. This percentage
compares to 19.3% at June 30, 1997 and is considered an adequate level of
liquidity to meet anticipated withdrawals and expected loan demand.
Additional liquidity exists within the investment account, which totals
$36.6 million, or 20.1% of total assets, at June 30, 1998. The portfolio is
comprised of 2% US Treasuries, 75% US Government Agencies, 21% State, County and
Municipal governments, and 2% other equity securities and Federal Reserve Bank
Stock.
In addition, at June 30, 1998, $700,000 of callable bonds is projected
to be called within three months at current interest rate levels and another
$1,125,000 is projected to be called in three to twelve months. MACB also
maintains confirmed lines of credit with its primary correspondent banks to
purchase Federal funds in amounts up to $5.4 million. MACB's ability to satisfy
credit demands, routine deposit withdrawals, and other corporate needs is
considered adequate. Management is not aware of any known trends, demands,
events, commitments, or uncertainties that either will result or reasonably
might result in a material decrease in liquidity.
-85-
<PAGE>
Effects of Inflation
Interest rates are affected by inflation, but the timing and magnitude
of the changes may not coincide with changes in the consumer price index.
Management actively monitors interest rate sensitivity, as illustrated by the
Gap Analysis, in order to minimize the effects of inflationary trends on
interest rates. Other areas of non-interest expenses may be more directly
affected by inflation.
Year 2000
MACB utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems include various
software packages licensed to MACB by outside vendors and a mainframe processing
system, which are run on in-house computer networks. All of these systems are
vulnerable to the Year 2000 issue.
In 1997, MACB initiated a review and assessment of all hardware and
software to confirm that it will function properly in the year 2000. Based on
this assessment, MACB concluded that its mainframe hardware and banking software
are currently Year 2000 compliant. However, testing is scheduled for the fourth
quarter of 1998 and early 1999 to confirm this compliance. For certain other
systems, MACB has determined that it will have to replace or modify certain
pieces of hardware and/or software so that the systems will properly function in
the year 2000. The third party vendors of these systems have been contacted and
have indicated that the hardware and/or software will be Year 2000 compliant,
provided necessary modifications or replacements are made.
MACB has also begun to formulate a process by which all significant
loan and deposit customers will be contacted to determine the extent to which
MACB is vulnerable to those third parties' failure to address their own Year
2000 issues. No conclusion has been drawn at this time on exposure to these
customers, due to the fact that this process is still in the developmental
stages.
MACB plans to complete the majority of the Year 2000 project by the
second quarter of 1999. Remaining expenditures are not expected to have a
material effect on its consolidated financial statements.
The costs of the project and the date on which MACB plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel trained in this area, the ability of third
party vendors to correct their software and hardware, the ability of significant
customers to remedy their Year 2000 issues, and similar uncertainties.
New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers Disclosures
about Pensions and Other Post Retirement Benefits." This statement revises
employers' disclosures about pension and other post-retirement benefit plans. It
does not change the measurement or recognition of those plans. This statement
standardizes the disclosure requirements for pensions and other post-retirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. Restatement of
disclosures for earlier periods is required. This statement is effective for
MACB's financial statements for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for
-86-
<PAGE>
depending on the use of the derivative and whether it qualifies for hedge
accounting. This statement is not expected to have a material impact on MACB's
financial statements. This statement is effective for fiscal years beginning
after June 15, 1999, with earlier adoption encouraged. MACB will adopt this
accounting standard as required by January 1, 2000.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP provided
guidance on accounting for the costs of computer software developed or obtained
for internal use. This SOP requires that entities capitalize certain
internal-use software costs once certain criteria are met. This SOP is not
expected to have a material impact on MACB's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires the costs of start-up activities and
organization costs to be expensed as incurred. This SOP is effective for the
fiscal year 1999 financial statements. This SOP is not expected to have a
material impact on MACB's financial statements.
Effective January 1, 1998, MACB adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. Financial statements for prior periods have been
restated as required.
SHAREHOLDER PROPOSALS
Proposals of MACB shareholders intended to be presented at the next
annual meeting of MACB, which would be held on or about April 27, 1999, must be
received in writing by the Secretary of MACB no later than January 27, 1999, in
order to be included in the proxy materials relating to the next annual meeting.
-87-
<PAGE>
MANAGEMENT FOLLOWING THE REORGANIZATION
The Board of Directors
The MACB Board currently is comprised of 15 members. At the Effective
Date, eight current directors of MACB will resign, and seven current directors
of UCB or its subsidiaries will become directors of MACB.
The following paragraphs set forth certain information, as of June 30,
1998, for each person who is expected to serve as a Director of MACB following
the consummation of the Reorganization. In the case of those individuals who
currently are Directors of MACB, length of service includes service as a
Director of MACB and PTB. In the case of those individuals who currently are
Directors of UCB or a subsidiary of UCB, length of service includes service as a
Director of UCB and either BOF or BSS.
J. Philip Bain, Jr., 34, is a stockbroker with Davenport & Company LLC
in Richmond, Virginia, and has served as a Director of UCB since 1988.
Charles F. Dawson, 56, is a land surveyor and a principal in Bay Design
Group, P.C. in Saluda, Virginia, and has served as a Director of MACB since
1988.
William J. Farinholt, 51, is the President and Chief Executive Officer
of MACB and has served as a Director of MACB since 1988.
Robert D. Foster, 55, is President of Tre-Suz-Ann Development and
Foster Management and Vice President of Foster Realty, both of which are in
Gloucester, Virginia, and has served as a Director of MACB since 1988.
Harry M. Healy, 64, is retired and formerly was President of Bailey
Amusements in Gloucester, Virginia. He has served as a Director of MACB since
1988.
Joseph A. Lombard, Jr., DDS, 51, is a principal in Lombard, Luckham &
Smith, a dentistry practice in Gloucester, Virginia, and has served as the
Chairman of the Board and a director of MACB since 1988.
Hersey M. Mason, Jr., 68, is the owner of Mason Realty, Inc. in
Middlesex County, Virginia, and has served as a Director of MACB since 1990.
Wenifred O. Pearce, 57, is the President and Chief Executive Officer of
UCB and BOF and has served as a Director of UCB since 1994.
Harvey G. Pope, 78, is the Vice Chairman of UCB and the Chairman of the
Board of BOF and was formerly the President of Hancock Peanut Company in
Courtland, Virginia. He has served as a Director of UCB since 1988.
William B. Savedge, 50, is Vice President of Manry Rawls Corporation in
Franklin, Virginia and has served as a Director of BSS since 1995.
J. D. Spivey, 71, is retired and formerly was Vice President of
Southampton Tractor Co., Inc. in Courtland, Virginia. He has served as a
Director of UCB since 1991.
F. Bruce Stewart, 58, is an attorney with Stewart & Stewart in
Franklin, Virginia, and has served as a Director of UCB since 1988.
-88-
<PAGE>
J. Russell West, 72, is the Chairman of UCB and the owner of Ivor
Furniture Company in Ivor, Virginia. He has served as a Director of UCB since
1970.
Thomas Z. Wilke, 44, is an agent with State Farm Insurance in
Gloucester Point, Virginia, and has served as a Director of MACB since 1990.
Board Committees
MACB's bylaws prescribe for one permanent standing committee, the Audit
Committee, the principal responsibilities of which are described below.
The Audit Committee meets on a bi-monthly basis. The Committee met
seven times in 1997. Members of the committee currently include Thomas Z. Wilke,
Chairman, Charles F. Dawson, Robert D. Foster and Joseph A. Lombard, Jr., DDS,
who will be Directors of MACB following the consummation of the Reorganization,
and Charles F. Bristow and Jeanne P. Hockaday. The composition of the Audit
Committee will change after the Effective Date. The Audit Committee recommends
to the Board the appointment of a firm to serve as independent auditors, subject
to ratification by the Board and the shareholders at the Annual Meeting.
MACB does not have a standing Nomination or Compensation Committee.
The Chairman of the Board is an ex-officio member of all committees.
Executive Officers Who Are Not Directors
Kenneth E. Smith, 47, has served as Executive Vice President and Chief
Financial Officer of MACB and PTB, with primary oversight of operations, since
1988. He will continue in those positions after the Effective Date. Mr. Smith
has 25 years of banking experience. Prior to joining MACB, he served as
Compliance Officer and Auditor with Citizens and Farmers Bank, West Point. Prior
to that he spent 11 years as a commercial bank examiner with the Federal Reserve
Bank of Richmond. He served for two years with The Colonial Bank of Providence
Forge, Virginia. Before that he worked as an internal auditor with United
Virginia Bank and as a teller with Second National Bank, Richmond, Virginia. He
has experience in virtually all areas of MACB, including lending, liquidity
management, bank regulations and financial analysis. He has attended various
banking schools, is a graduate of the University of Richmond and has taught at
Rappahannock Community College.
D. Eugene Brittle, 49, will serve as Executive Vice President of MACB
and will continue as President and Chief Executive Officer of BSS after the
effective date. Mr. Brittle has served as the Chief Executive Officer of BSS
since 1986 and has 26 years of banking experience. He has served in the
positions of Assistant Cashier, Cashier and Executive Vice President of BSS,
becoming President in 1994. Mr. Brittle has been a director of BSS since 1986.
He has experience in virtually all areas of UCB, having served as a teller and
loan officer. He also has experience in virtually all other areas of UCB,
including liquidity management, compliance, financial record keeping and
analysis, and is in charge of BSS's investment portfolio. He has completed
various American Institute of Banking courses, is a graduate of the
Virginia-Maryland School of Bank Management at The University of Virginia and
graduated with a B.A. degree in Economics from Randolph-Macon College. He has
served in numerous capacities with state banking organizations and is past
President of the Virginia Association of Community Banks.
Security Ownership of Management
The following table sets forth, based on information as of August 1,
1998, the beneficial ownership of MACB Common Stock, the beneficial ownership of
UCB Common Stock and the anticipated beneficial ownership, after giving effect
to the Reorganization, of MACB Common Stock by each director of MACB and UCB and
by each person who will serve as a director or executive officer of MACB after
the Effective Date.
-89-
<PAGE>
<TABLE>
<CAPTION>
Ownership Before Ownership After
the Reorganization the Reorganization
------------------ ------------------
MACB Common Stock
-----------------
MACB UCB Number Percent
Common Stock+ Common Stock+ of Shares of Class (%)
------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
MACB Directors:
Charles F. Bristow 10,000 -- 10,000 *
John R. Curtis 5,600 -- 5,600 *
Charles F. Dawson (1) 10,790 -- 10,790 *
William J. Farinholt (1) 72,850 -- 72,850 1.79
William D. Fary 23,300 -- 23,300 *
Robert D. Foster (1) 84,092 -- 84,092 2.09
Harry M. Healy (1) 29,000 -- 29,000 *
Jeanne P. Hockaday 8,600 -- 8,600 *
David W. Holland -- -- -- --
Joseph A. Lombard, Jr., DDS (1) 54,026 -- 54,026 1.34
George A. Marston, Jr. 27,000 -- 27,000 *
Hersey M. Mason, Jr. (1) 68,148 -- 68,148 1.69
Henry C. Rowe, M.D. 10,800 -- 10,800 *
Kenneth E. Smith (2) 39,460 -- 39,460 *
Thomas Z. Wilke (1) 18,940 -- 18,940 *
All current MACB Directors and
Executive Officers as a group (16
Persons) 465,486 -- 465,486 11.25
UCB Directors:
Jack P. Bain 1,000 198,435 214,317 5.32
J. Philip Bain, Jr. (1) 800 68,025 73,926 1.84
D. Eugene Brittle (2) -- 6,260 6,729 *
Hunter Darden, Jr. -- 4,806 5,166 *
Gregor O. Huber 200 13,920 15,164 *
Wenifred O. Pearce (1) -- 4,624 4,970 *
Harvey G. Pope (1) -- 8,881 9,547 *
William B. Savedge (1)(3) -- 27,632 29,804 *
J. D. Spivey (1) -- 5,122 5,506 *
F. Bruce Stewart (1) 80 8,486 9,202 *
J. Russell West (1) 1,000 63,694 69,471 1.72
All current UCB Directors and
Executive Officers as a group (10
Persons) 3,080 382,253 413,998 10.27
All post-Reorganization MACB Directors
and Executive Officers as a group
(16 persons) 586,361 14.22
</TABLE>
* Percentage of ownership is less than one percent of the outstanding
shares of Common Stock.
- -----------------------
-90-
<PAGE>
+ Amounts disclosed include shares of Common Stock issuable upon the
exercise of stock options exercisable within 60 days of October 15,
1998.
(1) Director of MACB following the consummation of the Reorganization.
(2) Executive Officer of MACB following the consummation of the
Reorganization.
(3) Director of BSS only prior to the Reorganization.
Security Ownership of Certain Beneficial Owners
The following table sets forth, to the knowledge of MACB and UCB and
based on information as of August 1, 1998, (i) the beneficial ownership of each
person who owns more than five percent of the outstanding shares of UCB Common
Stock and (ii) the anticipated beneficial ownership of each person expected to
own more than five percent of the outstanding shares of MACB Common Stock after
giving effect to the Reorganization. No person is known to be the beneficial
owner of more than five percent of the outstanding shares of MACB Common Stock.
<TABLE>
<CAPTION>
Ownership of Ownership of
UCB Common Stock MACB Common Stock
Before the Reorganization After the Reorganization
------------------------- ------------------------
Number Percent Number Percent
of Shares of Class (%) of Shares of Class (%)
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Jack P. Bain 198,435 (1) 10.85 214,317 (2) 5.32
Hannah B. Bain
Wakefield, Virginia
James H. Lee, III 94,066 5.14 101,120 2.51
Courtland, Virginia
</TABLE>
- ---------------------------
(1) Amount includes 56,559 shares held by Mr. Bain, 18,000 shares held in
trust by Mr. Bain as trustee for the benefit of his daughter, and
23,880 shares held by Mr. Bain as trustee under the will of Robert F.
Bain, Jr., all to which Mrs. Bain disclaims beneficial ownership;
amount also includes 99,996 shares held by Mrs. Bain, to which Mr. Bain
disclaims beneficial ownership.
(2) Amount includes shares of MACB Common Stock currently owned by Mr.
Bain.
Director Compensation
Each Director of MACB is paid a fee of $350 for each Board of Directors
meeting attended and $175 for each committee meeting attended.
Executive Officer Compensation
The following table presents information concerning the compensation of
Messrs. Farinholt, Pearce, Smith and Brittle. This table presents compensation
for services rendered in all capacities to MACB and its subsidiaries by Messrs.
Farinholt and Smith and to UCB and its subsidiaries by Messrs. Pearce and
Brittle in 1997, 1996 and 1995.
-91-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------- ----------------------
Other Annual Securities
Name and Compen- Underlying All Other
Principal Position Year Salary ($) (1) Bonus ($) sation ($) Options (#)(1) Compensation ($)(2)
------------------ ---- -------------- --------- ---------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
William J. Farinholt 1997 106,266 25,000 * - 1,649
President and Chief 1996 100,651 25,650 * - 1,501
Executive Officer of 1995 86,699 19,464 * 20,000 1,777
MACB
Wenifred O. Pearce 1997 100,000 9,768 * 17,917 15,218
President and Chief 1996 90,000 4,579 * - 9,480
Executive Officer of 1995 80,098 - * - 8,594
UCB and BOF
Kenneth E. Smith 1997 92,942 21,750 * - 1,442
Executive Vice President 1996 88,675 22,410 * - 1,321
and Chief Financial 1995 75,966 17,000 * 20,000 1,555
Officer of MACB
D. Eugene Brittle 1997 90,539 5,000 * 16,125 766
Executive Vice President 1996 86,648 - * - 797
and Chief Operating 1995 75,020 - * - 726
Officer of UCB and
President and Chief
Executive Officer of
BSS
</TABLE>
- ----------------------------
* All benefits that might be considered of a personal nature did not
exceed the lesser of $50,000 or 10% of total annual salary and bonus
for all the officers named in the table.
(1) Amounts represent options to purchase shares of MACB Common Stock and
have been adjusted to reflect (i) a two-for-one stock split of MACB
Common Stock in March 1998 and (ii) the Exchange Ratio.
(2) Amounts for Messrs. Farinholt and Smith represent matching
contributions by MACB in its 401(k) plan, which was established on
March 1, 1995. Amounts for Mr. Pearce include $8,712, $7,500 and $7,500
for 1997, 1996, and 1995, respectively, relating to contributions by
BOF on behalf of Mr. Pearce under BOF's deferred compensation plan.
Amounts for Messrs. Pearce and Brittle also include premiums for life
insurance policies with death benefits over $50,000 (for Mr. Pearce,
$1,710, $1,980 and $1,094, and for Mr. Brittle, $766, $797 and $726 for
1997, 1996 and 1995, respectively).
-92-
<PAGE>
Stock Options
No stock options were granted to Mr. Farinholt or Mr. Smith in 1997.
The table below provides information concerning stock options granted by UCB to
Messrs. Pearce and Brittle during 1997.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Exercise or Base
Granted (#)(1)(2) Fiscal Year (%) Price ($/Share)(2) Expiration Date
----------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Wenifred O. Pearce 17,917 52.6 9.61 February 5, 2007
D. Eugene Brittle 16,125 47.4 9.61 February 5, 2007
</TABLE>
- --------------------
(1) Stock options were awarded at or above the fair market value of the
shares of Common Stock at the date of award.
(2) The total number of securities underlying unexercised options and the
exercise price per share have been adjusted to reflect the Exchange
Ratio.
Option Exercises and Holdings
The following table sets forth information with respect to exercised
and unexercised options held by such officers as of December 31, 1997. No stock
options were exercised by Messrs. Farinholt, Pearce, Smith or Brittle in 1997.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The-
Unexercised Options at Money Options at
Name December 31, 1997 (#)(1) December 31, 1997 ($)(2)
- ---- ----------------------- ------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William J. Farinholt 34,000 - 307,750 -
Wenifred O. Pearce 717 17,200 4,582 109,908
Kenneth E. Smith 34,000 - 307,750 -
D. Eugene Brittle 645 15,480 4,122 98,917
</TABLE>
(1) The total number of securities underlying unexercised options have been
adjusted to reflect, in the cases of Messrs. Farinholt and Smith, a
two-for-one stock split of MACB Common Stock in March 1998 and, in the
cases of Messrs. Pearce and Brittle, the Exchange Ratio.
(2) The value of unexercised in-the-money options at fiscal year end was
calculated by determining the difference between (i) the fair market
value of common stock underlying the options at December 31, 1997,
which, in the cases of Messrs. Farinholt and Smith, have been adjusted
to reflect a two-for-one stock split of MACB Common Stock on March 16,
1998 ($16.00 per share) and (ii) the exercise price of the options,
which, in the cases of Messrs. Pearce and Brittle, have been adjusted
to reflect the Exchange Ratio.
-93-
<PAGE>
Employment Agreements
As a condition to the obligations of MACB and UCB under the
Reorganization Agreement, Messrs. Farinholt, Pearce, Smith and Brittle each must
enter into a five-year employment agreement with MACB that will begin on the
Effective Date. For additional information regarding the terms of these
employment agreements, see "The Reorganization - Employment Agreements."
Interest of Management in Certain Transactions
MACB's officers, directors and other corporations, business
organizations and persons with which certain of MACB's officers and directors
are associated customarily have banking transactions with MACB. During 1997
loans to related parties amounted to $1,143,484. New loans made to related
parties during this same period totaled $788,070, with repayments of $393,165.
All such transactions have been made in the ordinary course of business on
substantially the same terms, including interest rates and security for loans,
as those prevailing at the time for comparable transactions with others and have
not involved more than the normal risk of collectibility or presented other
unfavorable features.
Some of the directors and officers of UCB and their families are at
present, as in the past, customers of one of the banking subsidiaries of UCB,
and have had and expect to have transactions with either or both of the
subsidiary banks in the ordinary course of business. In addition, some of the
directors and officers of UCB or its subsidiaries are at present, as in the
past, also directors and officers of corporations which are customers of the
subsidiary banks and which have had or expect to have transactions with the
subsidiary banks in the ordinary course of business. Such transactions were made
in the ordinary course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than normal risk of
collectibility or present other unfavorable features.
As of December 31, 1997, the amount of loans, direct and indirect, from
BOF and BSS to executive officers, directors of UCB, shareholders holding more
than 5% of the outstanding voting securities and entities in which they own
significant interest, was $1,185,083.
-94-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
MACB's Articles of Incorporation authorize 20,000,000 shares of Common
Stock, par value $5.00 of which 2,198,900 shares were issued and outstanding on
October 7, 1998. There were 924 shareholders of record as of October 7, 1998.
The Board of Directors may issue shares of its Common Stock from time
to time for such consideration as the Board may deem advisable without further
shareholder approval.
The Common Stock of MACB represents nonwithdrawable capital, is not an
account of the insurable type, and is not insured by the FDIC.
Certain characteristics of the Common Stock are summarized below:
Dividend Rights. MACB may pay dividends as declared from time to time
by the Board of Directors out of funds legally available therefore, subject to
certain restrictions imposed by federal and state laws. The holders of Common
Stock will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors.
Voting Rights. In all elections of directors, each shareholder has the
right to cast one vote for each share of Common Stock owned by him and is
entitled to vote for as many persons as there are directors to be elected.
Shareholders do not have cumulative voting rights. On any other question to be
determined by a vote of shares at any meeting of shareholders, each shareholder
shall be entitled to one vote for each share of Common Stock owned by him and
entitled to vote.
Liquidation Rights. Upon liquidation, after payment of all creditors,
the remaining assets of MACB would be distributed to the holders of the Common
Stock on a pro rata basis.
Preemptive Rights. Holders of Common Stock have no preemptive rights
with respect to the issuance of additional shares of Common Stock.
Calls and Assessments. All Common Stock outstanding is fully paid and
nonassessable.
Removal of Directors. Virginia law provides that unless a corporation's
articles of incorporation provide otherwise, any Director or the entire Board
may be removed, with or without cause, by a majority vote of shares at an
election of Directors. MACB's Articles of Incorporation require a vote of more
than 70% of the outstanding shares of Common Stock to remove a Director. MACB's
Articles of Incorporation thus preclude a third party who holds less than 70% of
MACB's outstanding shares from unilaterally removing incumbent Directors and
simultaneously gaining control of the Board by installing his own nominees.
Amendment of Governing Instruments. Amendments to the articles of
incorporation of Virginia corporations, such as MACB, can be submitted to the
shareholders for a vote only by the board of directors. As a general rule, the
Articles of Incorporation of MACB can be amended by the vote of holders of a
majority of the issued and outstanding shares of Common Stock. However, any
amendment that is not approved by at least two-thirds of the Directors, must be
approved by holders of more than two-thirds of the issued and outstanding shares
of Common Stock.
Business Combinations. Under the Articles of Incorporation of MACB, a
plan of merger or share exchange or a direct or indirect sale, lease, exchange
or other disposition of all or substantially all of the property of MACB not in
the ordinary course of business, must be approved by holders of a majority of
the issued and outstanding shares of Common Stock. However, if such a
transaction is not approved by at least two-thirds of the Directors, it must be
approved by holders of more than two-thirds of the issued and outstanding shares
of Common Stock. Consistent with Virginia law, the Board of Directors may
condition
-95-
<PAGE>
its submission of such a plan of merger or share exchange or a sale or
disposition of assets to the shareholders on any basis, including the
requirement of a greater vote than the required vote described above.
Indemnification of Officers and Directors. The Articles of
Incorporation provide for the indemnification of officers and directors of MACB
for their actions unless a court finds them liable for willful misconduct or a
knowing violation of criminal law. In any proceeding brought by a shareholder
against an officer or director in connection with his position with MACB, the
amount of damages that may be assessed against an officer or director is limited
to $50,000 per transaction, unless the individual is liable for willful
misconduct or a knowing violation of criminal or securities laws.
Reports to Shareholders. MACB furnishes its shareholders with annual
reports, including audited financial statements, as well as quarterly reports
containing unaudited financial information.
Transfer Agent. PTB acts as MACB's transfer agent.
COMPARATIVE RIGHTS OF SECURITY HOLDERS
General
MACB and UCB each is a Virginia corporation subject to the provisions
of the Virginia SCA. Shareholders of UCB, whose rights are governed by UCB's
Articles of Incorporation ("UCB's Articles") and Bylaws and by the Virginia SCA,
will become shareholders of MACB upon consummation of the Reorganization. The
rights of such shareholders as shareholders of MACB will then be governed by
MACB's Articles of Incorporation ("MACB's Articles") and Bylaws and by the
Virginia SCA.
Furthermore, the Reorganization Agreement provides for various
amendments to MACB's Articles and Bylaws. As a result, at and after the
Effective Date, MACB's Articles and Bylaws will differ in certain material
respects from UCB's Articles and Bylaws and MACB's Articles and Bylaws in their
current form. Consequently, the Reorganization not only will affect the rights
of UCB shareholders, but also will affect the rights of MACB shareholders. There
will be no amendments to MACB's Articles and Bylaws other than those amendments
that are summarized in this section.
Except as set forth below, there are no material differences between
the rights of a MACB shareholder or UCB shareholder under the respective
Articles and Bylaws of MACB and UCB prior to consummation of the Reorganization
and under the Virginia SCA, on the one hand, and the rights of a MACB
shareholder under MACB's Articles and Bylaws following consummation of the
Reorganization and under the Virginia SCA, on the other hand. This summary is
qualified in its entirety by reference to the Articles and Bylaws of MACB and
UCB prior to consummation of the Reorganization, the complete texts of which are
on file with the Commission, MACB's Articles and Bylaws following consummation
of the Reorganization, the complete texts of which are exhibits to the
Reorganization Agreement attached to this Joint Proxy Statement as Appendix A,
and to the Virginia SCA.
Name Change
Following consummation of the Reorganization, MACB will change its name
from "Mid-Atlantic Community BankGroup, Inc." to "Atlantic Financial Corp."
Authorized Capital
UCB. UCB's Articles authorize the issuance of up to 6,000,000 shares of
UCB Common Stock, par value $1.00 per share, of which 1,829,209 shares were
issued and outstanding as of the UCB Record Date. UCB's Articles also authorize
the issuance of up to 1,000,000 shares of preferred stock, par value $1.00 per
share, of which no shares were issued and outstanding as of the UCB Record Date.
-96-
<PAGE>
MACB. MACB's Articles authorize the issuance of up to 20,000,000 shares
of MACB Common Stock, par value $5.00 per share, of which 2,198,900 shares were
issued and outstanding as of the MACB Record Date. MACB is not authorized to
issue shares of preferred stock.
Following consummation of the Reorganization, MACB's Articles will also
authorize the issuance of up to 1,000,000 shares of preferred stock, par value
$1.00 per share. MACB's Board of Directors will be authorized to issue, without
shareholder approval, shares of preferred stock in one or more series, and to
fix and determine the preferences, limitations and relative rights of the shares
of any series so established, and to provide for the issuance thereof.
The ability of the Board of Directors to issue preferred stock, while
providing flexibility in connection with possible acquisitions and corporate
purposes, could, among other things, adversely effect the voting power of
holders of MACB Common Stock. While such issuances could also, under certain
circumstances, be considered to have the effect of making a change in control
more difficult, any issuance of stock would be subject to applicable law,
including, without limitation, the duty of the Board of Directors to exercise
its good faith business judgment in the best interests of MACB and its
shareholders.
Amendment of Articles of Incorporation or Bylaws
The Virginia SCA provides that an amendment to a corporation's articles
of incorporation must be approved by each voting group entitled to vote on the
proposed amendment. Under Virginia law, an amendment to the corporation's
articles of incorporation must be approved by more than two-thirds of all votes
entitled to be cast by that voting group. However, the corporation's articles of
incorporation may require a greater vote or a lesser vote, which may not be not
less than a majority, by each voting group entitled to vote on the transaction.
A corporation's board of directors may require a greater vote.
UCB. UCB's Articles provide that an amendment to UCB's articles must be
approved by a majority of all the votes entitled to be cast on the amendment by
each voting group entitled to vote, provided that such amendment is approved and
recommended by at least two-thirds of the directors then in office. In the event
that two-thirds of the directors then in office do not approve the amendment,
UCB's Articles provide that the amendment must be approved by a vote of 80% or
more of all the votes entitled to be cast on the amendment by each voting group
entitled to vote.
UCB's Bylaws provide that the board of directors may amend the Bylaws
except to the extent that the power is reserved to the shareholders by law or by
UCB's Articles or to the extent that the shareholders expressly provide in
adopting or amending particular bylaws. In addition, the shareholders may amend
UCB's Bylaws.
MACB. MACB's Articles provide that an amendment to MACB's Articles must
be approved by a majority of the votes entitled to be cast on the amendment by
each voting group entitled to vote, provided that such amendment is approved and
recommended by at least two-thirds of the directors then in office. In the event
that two-thirds of the directors then in office do not approve of the amendment,
MACB's Articles provide that the amendment must be approved by holders of at
least two-thirds of the issued and outstanding shares of MACB Common Stock (the
vote generally required under Virginia law).
MACB's Articles provide that the Board of Directors may amend MACB's
Bylaws, except to the extent that any Bylaw adopted by the shareholders shall
otherwise provide. Thus, MACB's Bylaws may be amended by a simple majority of
the entire Board of Directors. Under Virginia law, MACB's Bylaws may also be
amended by action of the majority of the shareholders.
Following consummation of the Reorganization, MACB's Bylaws will
provide that approval of any amendment to MACB's Bylaws by the Board of
Directors will require the affirmative vote of at least 60% of the entire Board
of Directors. Since MACB will have 14 directors, the Board of Directors will be
able to amend MACB's Bylaws if at least nine directors vote in favor of the
amendment.
-97-
<PAGE>
Mergers, Consolidations and Sales of Assets
UCB. UCB's Articles provide that a plan of merger or share exchange, a
transaction involving the sale of all or substantially all UCB's assets other
than in the regular course of business or a plan of dissolution shall be
approved by the same vote that is required to amend UCB's Articles.
MACB. MACB's Articles provide that a plan of merger or share exchange
to which MACB is a party or any direct or indirect sale, lease, exchange or
other disposition of all or substantially all of MACB's property, otherwise than
in the usual and regular course of business, shall be approved by the same vote
that is required to amend MACB's Articles. Additionally, consistent with
Virginia law, the Board of Directors of MACB may condition its submission of
such plan of merger or share exchange or such sale, lease, exchange or other
disposition on any basis, including the requirement of a greater vote than the
required vote described above.
A proposed merger, share exchange or sale, as described above, that is
favored by two-thirds of the directors could be adopted as long as a majority
(rather than two-thirds) of the outstanding shares entitled to vote in each
voting group entitled to vote are voted in favor of the proposed action. In
addition to requiring the affirmative vote of a majority of the shares entitled
to vote in each voting group entitled to vote, MACB's Articles would require
that, unless a proposed action is approved by at least two-thirds of the
directors, more than two-thirds of the issued and outstanding shares vote in
favor of the proposed action. The purpose of such additional requirements is to
ensure that if a proposed major corporate action does not have the support of a
board of directors who can provide continuity to and an in-depth knowledge of
the business of MACB, the action must be supported by more than two-thirds of
the issued and outstanding shares of MACB Common Stock.
Following consummation of the Reorganization, MACB's Bylaws will
provide that approval of any such merger, share exchange or sale by the Board of
Directors will require the affirmative vote of at least 60% of the entire Board
of Directors.
Size and Classification of Board of Directors
UCB. UCB's Bylaws provide that its board of directors shall consist of
a minimum of five and a maximum of 15 individuals. UCB's Bylaws provides
further, subject to the rights of holders of any series of preferred stock, for
the division of the directors into three classes, consisting, as nearly as may
be possible, of one-third of the total number of directors constituting the
entire board of directors. At each annual meeting of shareholders, successors to
the class of directors whose term expires at that annual meeting are elected for
a three-year term. If the number of directors has changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
A director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
MACB. MACB's Bylaws provide that the Board of Directors consists of 15
individuals. All directors are elected at each annual meeting of the
shareholders and shall hold their offices until their successors are elected.
MACB's directors currently do not serve staggered terms.
Following consummation of the Reorganization, MACB's Bylaws will
provide that its Board of Directors shall consist of 14 individuals. MACB's
Articles will provide further that, subject to the rights of holders of any
series of preferred stock, the directors shall be classified, with respect to
the time for which they severally hold office, into three classes, as nearly
equal in number as possible, with each class to hold office until its successor
is elected and qualified. At each annual meeting of the shareholders of MACB,
the successors of the class of directors whose term expires at that meeting
shall be elected to hold
-98-
<PAGE>
office for a term expiring at the annual meeting of shareholders held in the
third year following the year of their election.
Vacancies and Removal of Directors
UCB. UCB's Articles provide that a vacancy on the board of directors
shall be filled by a majority vote of the directors then in office, whether or
not a quorum, of a successor who shall hold office until the next annual meeting
of shareholders. In such event, the successor elected by the directors then in
office shall hold office for a term that shall coincide with the remaining term
of the class of directors to which that person has been elected. UCB's Bylaws
further provide that UCB's directors may be removed by UCB's shareholders only
for cause and with the affirmative vote of at least two-thirds of the
outstanding shares entitled to vote.
MACB. MACB's Articles and Bylaws do not address the filling of
vacancies on the Board of Directors. Under the Virginia SCA, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause, can be filled by the shareholders, by
the Board of Directors, or by the affirmative vote of the majority of the
remaining directors then in office, if the number of remaining directors is less
than a quorum of the Board of Directors. MACB's Articles provide that any
director may be removed from office with or without cause, but only if holders
of more than 70% of the issued and outstanding shares of MACB Common Stock vote
in favor of such action.
Following consummation of the Reorganization, MACB's Bylaws will
provide that a vacancy on the Board of Directors, arising from the resignation,
death, or removal of a Director before the annual meeting of shareholders in the
year 2004, shall be filled by an individual agreed to by 75% of the entire Board
of Directors. If 75% of the entire Board of Directors do not agree on an
individual, such vacancy will be filled by (i) an individual designated by the
directors who were directors of MACB on the Effective Date and any Director
chosen for nomination by such directors after the Effective Date (the "MACB
Nominees"), if the vacant seat was held by a MACB Nominee or (ii) an individual
designated by the directors who were directors of UCB on the Effective Date and
any Director chosen for nomination by such directors after the Effective Date
(the "UCB Nominees"), if the vacant seat was held by a UCB Nominee.
Director Liability and Indemnification
The Virginia SCA provides that in any proceeding brought by or in the
right of a corporation or brought by or on behalf of shareholders of the
corporation, the damages assessed against an officer or director arising out of
a single transaction, occurrence or course of conduct may not exceed the lesser
of (1) the monetary amount, including the elimination of liability, specified in
the articles of incorporation or, if approved by the shareholders, in the bylaws
as a limitation on or elimination of the liability of the officer or director;
or (2) the greater of (a) $100,000 or (b) the amount of cash compensation
received by the officer or director from the corporation during the twelve
months immediately preceding the act or omission for which liability was
imposed. The liability of an officer or director is not limited under the
Virginia SCA or a corporation's articles of incorporation and bylaws if the
officer or director engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities law.
In addition, the Virginia SCA permits a Virginia corporation to
indemnify any director or officer for reasonable expenses incurred in any legal
proceeding in advance of final disposition of the proceeding, if the director or
officer furnishes the corporation a written statement of his good faith belief
that he has conducted himself in good faith and that he believed that his
conduct was in the best interests of the corporation, and a determination is
made by the board of directors that such standard has been met. In a proceeding
by or in the right of the corporation, no indemnification shall be made in
respect of any matter as to which an officer or director is adjudged to be
liable to the corporation, unless the court in which the proceeding took place
determines that, despite such liability, such person is reasonably entitled to
indemnification in view of all the relevant circumstances. In any other
proceeding, no indemnification shall
-99-
<PAGE>
be made if the director or officer is adjudged liable to the corporation on the
basis that personal benefit was improperly received by him. Corporations are
given the power to make any other or further indemnity, including advancement of
expenses, to any director or officer that may be authorized by the articles of
incorporation or any bylaw made by the shareholders, or by any resolution
adopted, before or after the event, by the shareholders, except an indemnity
against willful misconduct or a knowing violation of the criminal law. Unless
limited by its articles of incorporation, indemnification of a director or
officer is mandatory when he entirely prevails in the defense of any proceeding
to which he is a party because he is or was a director or officer.
UCB. UCB's Articles provide that, to the full extent permitted by the
Virginia SCA, each director and officer shall be indemnified by UCB against
liabilities, fines, penalties, and claims imposed upon or asserted against him
because he was or is a director or officer of UCB, and against all expenses
reasonably incurred by him in connection therewith, except in relation to
matters as to which he shall have been finally adjudged liable by reason of his
willful misconduct or a knowing violation of criminal law in the performance of
his duties. UCB's Articles further provide that the determination that the
indemnification is permissible shall be made as provided by law and that the
right of indemnification shall not be exclusive of any other rights to which any
director or officer may be entitled. UCB may also indemnify its other employees
or agents.
UCB's Articles provide that, to the full extent permitted by the
Virginia SCA, a director or officer of UCB shall not be liable in any monetary
amount for damages arising out of or resulting from a single transaction,
occurrence or course of conduct in any proceeding brought by a shareholder of
UCB in the right of UCB or brought by or on behalf of shareholders of UCB,
provided that the elimination of liability shall not be applicable if the
director or officer engaged in willful misconduct or a knowing violation of the
criminal law or of any federal or state securities law.
MACB. MACB's Articles provide that any director or officer of MACB
shall be indemnified by MACB for his actions, unless he is adjudged liable for
willful misconduct or a knowing violation of criminal law. The amount of damages
that may be assessed against an officer or director in any proceeding brought by
or in the right of MACB or brought by or on behalf of MACB's shareholders is
limited to $50,000 per transaction.
The rights of indemnification provided in MACB's Articles are not
exclusive of any other rights of the officer or director, including without
limitation rights conferred by applicable law and any right under insurance
policies which may be purchased and maintained by MACB or others, even as to
liabilities against which MACB would not have the power to indemnify.
Following consummation of the Reorganization, MACB's Articles will
provide for indemnification and the elimination of liability similar to that
currently provided by UCB's Articles. That is, MACB's Articles will provide
that, to the full extent permitted by the Virginia SCA, each director and
officer shall be indemnified by MACB against liabilities, fines, penalties, and
claims imposed upon or asserted against him because he was or is a director or
officer of MACB, and against all expenses reasonably incurred by him in
connection therewith, except in relation to matters as to which he shall have
been finally adjudged liable by reason of his willful misconduct or a knowing
violation of criminal law in the performance of his duties. MACB's Articles will
further provide that the determination that the indemnification is permissible
shall be made as provided by law, and that the right of indemnification shall
not be exclusive of any other rights to which any director or officer may be
entitled. MACB may also indemnify its other employees or agents.
In addition, MACB's Articles will provide that, to the full extent
permitted by the Virginia SCA, a director or officer of MACB shall not be liable
in any monetary amount for damages arising out of or resulting from a single
transaction, occurrence or course of conduct in any proceeding brought by a
shareholder of MACB in the right of MACB or brought by or on behalf of
shareholders of MACB, provided that the elimination of liability shall not be
applicable if the director or officer engaged in willful misconduct or a knowing
violation of the criminal law or of any federal or state securities law.
-100-
<PAGE>
Special Meetings of Shareholders
UCB. UCB's Bylaws provide that special meetings of shareholders shall
be held on the call of the Chairman or Vice Chairman of the board of directors,
the President or the board of directors.
MACB. MACB's Bylaws provide that special meetings of shareholders may
be held on the call of the President, the Chairman of the Board of Directors,
the Board of Directors, or by holders of at least 25% of the issued and
outstanding shares of MACB Common Stock.
Director Nominations
UCB. UCB's Bylaws set forth certain advance notice or information
requirements and time limitations on any director nomination that a shareholder
wishes to propose for consideration at an annual or special meeting of
shareholders. Written notice of any shareholder's intent to make a director
nomination must be given, either by personal delivery or by mail, to UCB's
Secretary not less than thirty (30) days prior to the first anniversary date of
the initial notice given to the shareholders of record on the record date for
the previous annual meeting by or at the direction of the board of directors,
provided that such notice shall not be required to be given more than 90 days
prior to the annual meeting of the shareholders. The notice must contain certain
information relating to the nominee for director. The Chairman of the meeting
may reject any nomination proposal not timely made or supported by sufficient
information.
UCB's Bylaws provide that the written notice must set forth: (a) the
name and address of the shareholder who intends to make the nomination of the
person and of the person to be nominated; (b) a representation that the
shareholder is the owner of stock of UCB to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person specified in
the notice; (c) a description of all arrangements or understandings pursuant to
which the nomination is to be made by the shareholder; (d) such other
information regarding such nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Commission, had the nominee been nominated, or intended to be nominated,
by the board of directors, including, but not limited to, the amount and nature
of his beneficial ownership of UCB's securities, his principle occupation for
the past five years and his age; and (e) the written consent of each nominee to
serve as a director of UCB if so elected.
MACB. MACB's Bylaws set forth certain advance notice or information
requirements and time limitations on any director nomination or any new business
which a shareholder wishes to propose for consideration at an annual or special
meeting of shareholders. Any director nomination must be stated in writing and
filed with MACB's Secretary at least 60 days prior to the date of the
shareholder meeting and no more than 90 days prior to that meeting. The notice
must contain certain information relating to the nominee for director. The
Chairman of the meeting must reject any nomination proposal not timely made or
supported by sufficient information.
MACB's Bylaws require that the shareholder's notice set forth (a) as to
each nominee (i) the name, age, business address, and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of MACB which are beneficially owned by such person
and (iv) any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act; and
(b) as to the shareholder giving the notice, the name and address and the class
and number of shares of such shareholder and of any other person or entity who
is the record or beneficial owner of shares of MACB and who, to the knowledge of
the shareholder giving notice, supports such nominee. If the information
supplied by shareholder is deficient in any material aspect or if the foregoing
procedure is not followed, the chairman of the annual meeting may determine that
such shareholder's nomination should not be brought before the annual meeting
and that such nominee shall not be eligible for election as a director of MACB.
-101-
<PAGE>
Shareholder Proposals
UCB. UCB's Bylaws provide that for business to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to UCB's Secretary. Notice of any such
shareholder proposal must be given, either by personal delivery or by mail, to
UCB's Secretary not less than 30 days prior to the first anniversary date of the
initial notice given to shareholders of record on the record date for the
previous annual meeting by or at the direction of the board of directors;
provided, however, that such notice shall not be required to be given more than
90 days prior to the annual meeting of shareholders. The notice must set forth
each matter and a brief description of the business desired to be brought before
the meeting as well as certain other information relating to the shareholder
requesting the proposal. The presiding officer of the meeting must reject any
such shareholder proposal not timely made or supported by insufficient
information.
MACB. MACB's Bylaws provide that for business to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to MACB's Secretary. To be timely, a
shareholder's notice must be delivered to or mailed and received at MACB's
principal executive offices, not less than 60 days nor more than 90 days prior
to the date of the scheduled annual meeting, regardless of any postponements,
deferrals or adjournments of that meeting to a later date; provided, however,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the scheduled annual meeting is given or made, notice by a
shareholder, to be timely, must be so received not later than the close of
business on the 10th day following the earlier of the day on which such notice
of the date of the scheduled annual meeting was mailed or the day on which such
public disclosure was made. The notice must set forth each matter and a brief
description of the business desired to be brought before the meeting as well as
certain other information relating to the shareholder requesting the proposal.
The Chairman of an annual meeting must reject any such shareholder proposal not
timely made or supported by insufficient information.
Shareholder Voting Rights in General
The Virginia SCA generally provides that shareholders do not have
cumulative voting rights unless those rights are provided in the corporation's
articles. The Virginia SCA also specifies additional voting requirements for
Affiliated Transactions which are discussed below under "State Anti-Takeover
Statutes."
UCB. UCB's Articles do not provide shareholders cumulative rights for
the election of directors. Therefore, the holders of a majority of the shares
voted in the election of directors can elect all of the directors then standing
for election. The holders of UCB Common Stock are entitled to one vote per share
on all matters submitted to a vote of shareholders. Except to the extent to
which the board of directors shall have specified voting power with respect to
any other class of stock and except as otherwise provided by law, the exclusive
voting power shall be vested in the holders of UCB Common Stock.
MACB. See "Description of Capital Stock."
State Anti-Takeover Statutes
The Virginia SCA restricts transactions between a corporation and its
affiliates and potential acquirors. The summary below is necessarily general and
is not intended to be a complete description of all the features and
consequences of those provisions, and is qualified in its entirety by reference
to the statutory provisions contained in the Virginia SCA. Because both MACB and
UCB are Virginia corporations, the provisions of the Virginia SCA described
below apply to MACB and UCB and will continue to apply to MACB after the
Reorganization.
Affiliated Transactions. The Virginia SCA contains provisions governing
"Affiliated Transactions," found at Sections 13.1-725 - 727.1 of the Virginia
SCA. Affiliated Transactions include certain mergers and share exchanges,
certain material dispositions of corporate assets not in the ordinary course of
business, any dissolution of a corporation proposed by or on behalf of an
Interested Shareholder
-102-
<PAGE>
(as defined below), and reclassifications, including reverse stock splits,
recapitalizations or mergers of a corporation with its subsidiaries, or
distributions or other transactions which have the effect of increasing the
percentage of voting shares beneficially owned by an Interested Shareholder by
more than 5%. For purposes of the Virginia SCA, an Interested Shareholder is
defined as any beneficial owner of more than 10% of any class of the voting
securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined below). A
Disinterested Director is defined in the Virginia SCA as a member of a
corporation's board of directors who (i) was a member before the later of
January 1, 1988 or the date on which an Interested Shareholder became an
Interested Shareholder and (ii) was recommended for election by, or was elected
to fill a vacancy and received the affirmative vote of, a majority of the
Disinterested Directors then on the corporation's board of directors. At the
expiration of the three year period after a shareholder becomes an Interested
Shareholder, these provisions require approval of the Affiliated Transaction by
the affirmative vote of the holders of two-thirds of the outstanding shares of
the corporation entitled to vote, other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that the shareholders must receive the higher of: the highest per share
price for their shares as was paid by the Interested Shareholder for his or its
shares, or the fair market value of the shares. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and no special
financial accommodations have been accorded the interested Shareholder, unless
approved by a majority of the Disinterested Directors.
None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder who has been an
Interested Shareholder continuously since the effective date of the statute
(January 26, 1988) or who became an Interested Shareholder by gift or
inheritance from such a person or whose acquisition of shares making such person
an Interested Shareholder was approved by a majority of the Disinterested
Directors of the corporation.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia SCA provides that by affirmative vote of
a majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation may adopt by meeting certain voting requirements, an
amendment to its articles of incorporation or bylaws providing that the
Affiliated Transactions provisions shall not apply to the corporation. Neither
MACB nor UCB has adopted such an amendment. Currently, no shareholder of MACB
owns or controls 10% or more of MACB Common Stock, and there are no Interested
Shareholders of MACB or UCB as defined by the Virginia SCA.
Control Share Acquisitions. The Virginia Control Share Acquisitions
statute, found at Sections 13.1-728 - 728.8 of the Virginia SCA, also is
designed to afford shareholders of a public company incorporated in Virginia
protection against certain types of non-negotiated acquisitions in which a
person, entity or group ("Acquiring Person") seeks to gain voting control of
that corporation. With certain enumerated exceptions, the statute applies to
acquisitions of shares of a corporation which would result in an Acquiring
Persons ownership of the corporation's shares entitled to vote in the election
of directors falling within any one of the following ranges: 20% to 33-1/3%,
33-1/3% to 50% or 50% or more (a "Control Share Acquisition"). Shares that are
the subject of a Control Share Acquisition ("Control Shares") will not be
entitled to voting rights unless the holders of a majority of the "Disinterested
Shares" vote at an annual or special meeting of shareholders of the corporation
to accord the Control Shares with voting rights. Disinterested Shares do not
include shares owned by the Acquiring Person or by officers and inside directors
of the target company. Under certain circumstances, the statute permits an
Acquiring
-103-
<PAGE>
Person to call a special shareholders' meeting for the purpose of considering
granting voting rights to the holders of the Control Shares. As a condition to
having this matter considered at either an annual or special meeting, the
Acquiring Person must provide shareholders with detailed disclosures about his
identity, the method and financing of the Control Share Acquisition and any
plans to engage in certain transactions with, or to make fundamental changes to,
the corporation, its management or business. Under certain circumstances, the
statute grants dissenters' rights to shareholders who vote against granting
voting rights to the Control Shares. The Virginia Control Share Acquisitions
Statute also enables a corporation to make provisions for redemption of Control
Shares with no voting rights. A corporation may opt-out of the statute, which
UCB has not done, by so providing in its articles of incorporation or bylaws.
MACB, however, has opted out of the statute by so providing in its Bylaws. Among
the acquisitions specifically excluded from the statute are acquisitions which
are a part of certain negotiated transactions to which the corporation is a
party and which, in the case of mergers or share exchanges, have been approved
by the corporation's shareholders under other provisions of the Virginia SCA.
Dissenters' Rights
The provisions of Article 15 of the Virginia SCA provide shareholders
of Virginia corporations certain rights of appraisal or dissent, for payment of
the fair value of their shares in the event of mergers, consolidations and
certain other corporate transactions. The Virginia SCA provides dissenters'
rights in a merger to the corporations that are seeking shareholder approval of
the transaction. Therefore, the shareholders of both MACB and UCB have
dissenters' rights and may exercise that right and obtain payment of the fair
value of their shares upon compliance and in accordance with the provisions of
Article 15 of the Virginia SCA.
SUPERVISION AND REGULATION
Banks and their holding companies are extensively regulated entities.
MACB is a bank holding company, subject to supervision and regulation by the
Federal Reserve. MACB's sole subsidiary bank is PTB, a Virginia chartered bank
which is subject to supervision and regulation by the Federal Reserve and the
SCC. UCB is a Virginia chartered bank holding company regulated principally at
the federal level by the Federal Reserve and at the state level by the SCC. The
regulatory oversight of MACB will not change as a result of the Reorganization.
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework before and after the
Reorganization. The descriptions of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, do not purport
to be complete and are qualified in their entirety by reference to applicable
laws and regulations.
Bank Holding Companies
The Federal Reserve has jurisdiction under the BHC Act to approve any
bank or nonbank acquisition, merger or consolidation proposed by a bank holding
company. The BHC Act generally limits the activities of a bank holding company
and its subsidiaries to that of banking, managing or controlling banks, or any
other activity which is so closely related to banking or to managing or
controlling banks as to be a proper incident thereto.
Formerly the BHC Act prohibited the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the bank holding company's banking
subsidiaries are principally conducted, unless such an acquisition was
authorized by statute of the state where the bank whose shares were to be
acquired was located. However, under federal legislation enacted in 1994, the
restriction on interstate acquisitions was abolished, effective September 1995.
A bank holding company from any state now may acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
nationwide and state imposed concentration limits. Banks also are able to branch
across state lines by acquisition, merger or de novo,
-104-
<PAGE>
provided certain conditions are met, including that applicable state law must
expressly permit such interstate branching.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries that are
designed to reduce potential loss exposure to the depositors of the depository
institutions and to the FDIC insurance fund. For example, under a policy of the
Federal Reserve with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss suffered or
reasonably anticipated by the FDIC as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the Bank Insurance Fund
("BIF"). The FDIC's claim for damages is superior to claims of shareholders of
the insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
Banking laws also provide that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or shareholder. This
provision would give depositors a preference over general and subordinated
creditors and shareholders in the event a receiver is appointed to distribute
the assets of any bank subsidiaries.
Certain Regulatory Considerations of MACB Following the Reorganization
Regulatory Capital Requirements
All depository institutions are required to maintain minimum levels of
regulatory capital. The federal bank regulatory agencies have established
substantially similar risked based and leverage capital standards for financial
institutions they regulate. These regulatory agencies also may impose capital
requirements in excess of these standards on a case-by-case basis for various
reasons, including financial condition or actual or anticipated growth. Under
the risk-based capital requirements of these regulatory agencies, MACB, UCB and
the bank subsidiaries are required to maintain a minimum ratio of total capital
to risk-weighted assets of at least 8%. At least half of the total capital is
required to be "Tier 1 capital," which consists principally of common and
certain qualifying preferred shareholders' equity, less certain intangibles and
other adjustments. The remainder ("Tier 2 capital") consists of a limited amount
of subordinated and other qualifying debt (including certain hybrid capital
instruments) and a limited amount of the general loan loss allowance. The Tier 1
and total capital to risk-weighted asset ratios of MACB and UCB on a pro forma
combined basis following the Reorganization as of June 30, 1998, are 18.00% and
19.13%, exceeding the minimums required. Based upon the applicable Federal
Reserve regulations, at June 30, 1998, PTB, BOF and BSS would be considered
"well capitalized." (See the "Capital Ratios" table in this section below.)
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio (Tier 1 capital to tangible assets). These guidelines
provide for a minimum leverage capital ratio of 3% for banks and their
respective holding companies that meet certain specified criteria, including
that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. The pro forma leverage ratio
of MACB and UCB as of June 30, 1998, was 12.63% which is well above the minimum
requirements.
-105-
<PAGE>
The following table summarizes the minimum regulatory and current
capital ratios for each of MACB and UCB on a consolidated basis at June 30, 1998
and also the pro forma combined capital ratios as of June 30, 1998.
Capital Ratios
<TABLE>
<CAPTION>
Regulatory MACB UCB Pro Forma Combined
Minimum Current Current MACB and UCB
<S> <C> <C> <C> <C>
Risk-based capital (1)
Tier 1 (3).................... 4.00% 16.39% 19.97% 18.00%
Total (3)..................... 8.00% 17.56% 21.06% 19.13%
Leverage (2)(3)................. 4.00% 11.94% 13.10% 12.63%
Total shareholders' equity
to total assets............... N/A 11.35% 14.12% 12.63%
</TABLE>
- -------------------------
(1) The pro forma risk-based capital ratios have been computed using pro
forma combined historical data for MACB and UCB at June 30, 1998.
(2) Leverage ratio is calculated by Tier 1 capital as a percentage of
quarterly period end assets.
(3) Calculated in accordance with the Federal Reserve's capital rules, with
adjustment for net unrealized depreciation on securities available for
sale.
Limits on Dividends and Other Payments
Certain state law restrictions are imposed on distributions of
dividends to shareholders of MACB. MACB shareholders are entitled to receive
dividends as declared by the MACB Board of Directors. However, no such
distribution may be made if, after giving effect to the distribution, it would
not be able to pay its debts as they become due in the usual course of business
or its total assets would be less than its total liabilities. There are similar
restrictions with respect to stock repurchases and redemptions.
Banks have limitations imposed upon all "capital distributions,"
including cash dividends, payments to repurchase or otherwise acquire its
shares, payments to shareholders of another institution in a cash-out merger,
and other distributions charged against capital. As of June 30, 1998, PTB had
the capacity to pay no more than $3.6 million in total dividends to its sole
shareholder, MACB, and BOF and BSS, combined, had the capacity to pay $4.8
million in total dividends to UCB.
Similarly, PTB, BOF and BSS each is subject to legal limitations on
capital distributions including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized" (as such term is
used in the statute). For all state member banks of the Federal Reserve seeking
to pay dividends, the prior approval of the applicable Federal Reserve Bank is
required if the total of all dividends declared in any calendar year will exceed
the sum of the bank's net profits for that year and its retained net profits for
the preceding two calendar years. Federal law also generally prohibits a
depository institution from making any capital distribution (including payment
of a dividend or payment of a management fee to its holding company) if the
depository institution would thereafter fail to maintain capital above
regulatory minimums. Federal Reserve Banks are also authorized to limit the
payment of dividends by any state member bank if such payment may be deemed to
constitute an unsafe or unsound practice. In addition, under Virginia law no
dividend may be declared or paid that would impair a Virginia chartered bank's
paid-in capital. The SCC has general authority to prohibit payment of dividends
by a Virginia chartered bank if it determines that the limitation is in the
public interest and is necessary to ensure the bank's financial soundness.
Following the consummation of the Reorganization, most of the revenues
of MACB and MACB's ability to pay dividends to its shareholders will depend on
dividends paid to it by PTB, BOF and BSS. Based on the current financial
condition of PTB, BOF and BSS, MACB expects that the above-described provisions
will have no impact on MACB's ability to obtain dividends from PTB, BOF and BSS
or on MACB's ability to pay dividends to its shareholders.
-106-
<PAGE>
The Depository Institutions
In addition to the regulatory provisions regarding holding companies
addressed above, PTB, BOF and BSS are subject to extensive regulation as well.
The following discussion addresses certain primary regulatory considerations
affecting PTB, BOF and BSS.
PTB, BOF and BSS are regulated extensively under both federal and state
law. PTB, BOF and BSS each is organized as a Virginia chartered banking
corporation and is regulated and supervised by the Bureau of Financial
Institutions of the SCC. As a member of the Federal Reserve System, PTB is
regulated and supervised by the Federal Reserve Bank of Richmond. In connection
with the anticipated merger of BOF and BSS, the resulting bank is expected to
become a member of the Federal Reserve System. The SCC and the Federal Reserve
Bank of Richmond conduct regular examinations of the banks that they supervise,
reviewing such matters as the adequacy of loan loss reserves, quality of loans
and investments, management practices, compliance with laws, and other aspects
of their operations. In addition to these regular examinations, supervised banks
must furnish the SCC and the Federal Reserve with periodic reports containing a
full and accurate statement of its affairs. Supervision, regulation and
examination of banks by these agencies are intended primarily for the protection
of depositors rather than shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC
The deposits of PTB, BOF and BSS are insured up to $100,000 per insured
depositor (as defined by law and regulation) through the BIF. The BIF is
administered and managed by the FDIC. As insurer, the FDIC is authorized to
conduct examinations of and to require reporting by BIF-insured institutions.
The actual assessment to be paid by each BIF member is based on the
institution's assessment risk classification and whether the institution is
considered by its supervisory agency to be financially sound or to have
supervisory concerns.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution, including PTB, BOF or BSS,
if it determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, order or
any condition imposed in writing by the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If deposit insurance
is terminated, the deposits at the institution at the time of termination, less
subsequent withdrawals, shall continue to be insured for a period from six
months to two years, as determined by the FDIC. Management is aware of no
existing circumstances that could result in termination of deposit insurance of
PTB, BOF or BSS.
Other Safety and Soundness Regulations
The federal banking agencies have broad powers under current federal
law to take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the institutions
in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," as such terms are defined under uniform regulations defining
such capital levels issued by each of the federal banking agencies.
In addition, FDIC regulations require that management report on the
institution's responsibility to prepare financial statements, and to establish
and to maintain an internal control structure and procedures for financial
reporting and compliance with designated laws and regulations concerning safety
and
-107-
<PAGE>
soundness; and that independent auditors attest to and report separately on
assertions in management's reports concerning compliance with such laws and
regulations, using FDIC-approved audit procedures.
Each of the federal banking agencies also must develop regulations
addressing certain safety and soundness standards for insured depository
institutions and depository institution holding companies, including
compensation standards, operational and managerial standards, asset quality,
earnings and stock valuation. The federal banking agencies have issued a joint
notice of proposed rulemaking, which requested comment on the implementation of
these standards. The proposed rule sets forth general operational and managerial
standards in the areas of internal controls, information systems and internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth and compensation, fees and benefits. The proposal contemplates that
each federal agency would determine compliance with these standards through the
examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. MACB has not
yet determined the effect that the proposed rule would have on its operations
and the operations of its depository institution subsidiary if it is enacted
substantially as proposed.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") affect PTB, BOF and BSS. The CRA imposes on financial institutions
an affirmative and ongoing obligation to meet the credit needs of their local
communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting community credit needs currently are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. To the best knowledge of PTB, BOF and BSS, each is meeting
its obligations under the CRA.
LEGAL OPINION
The validity of MACB Common Stock to be issued in connection with the
Reorganization will be passed upon by Williams, Mullen, Christian & Dobbins.
EXPERTS
The financial statements of the Company included in this Joint Proxy
Statement have been examined by Smith & Eggleston, P.C., Richmond, Virginia,
independent auditors, whose report thereon appears elsewhere herein. Such
financial statements have been included herein in reliance upon the reports of
Smith & Eggleston, P.C., given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of UCB included in this Joint
Proxy Statement have been so included in reliance on the report of Goodman &
Company, L.L.P., independent accountants, given on the authority of said firm as
experts in auditing and accounting.
PRO FORMA COMBINED FINANCIAL INFORMATION
(Unaudited)
Pro Forma Combined Balance Sheets
The following unaudited pro forma combined balance sheets combines the
consolidated historical balance sheets of MACB and UCB on the assumption that
the Reorganization had been effective as of June 30, 1998, giving effect to the
transaction on a pooling of interests accounting basis. These unaudited pro
forma combined balance sheets should be read in conjunction with the
consolidated historical financial statements of both MACB and UCB, including the
respective notes thereto, included elsewhere in this Joint Proxy Statement or in
documents delivered herewith. See "Available Information."
-108-
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS MACB UCB ADJUSTMENTS COMBINED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $10,079 $6,298 $16,377
Investment securities:
Available for sale 25,336 47,081 72,417
Held to maturity 11,243 7,604 18,847
Federal funds sold 9,604 1,503 11,107
Loans, net 113,704 86,253 199,957
Bank premises and equipment, net 7,700 2,293 9,993
Other real estate owned 437 148 585
Accrued interest receivable 1,288 1,711 2,999
Other assets 1,950 2,106 4,056
----------------- ------------------ ----------------- -----------------
Total Assets $181,341 $154,997 $0 $336,338
================= ================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing deposits $26,331 $18,503 $44,834
Interest-bearing deposits 133,220 112,645 245,865
----------------- ------------------ ----------------- -----------------
Total Deposits 159,551 131,148 290,699
Short-term borrowings 266 650 916
Long-term debt 24 0 24
Accrued interest payable 538 492 1,030
Other liabilities 374 822 1,196
----------------- ------------------ ----------------- -----------------
Total Liabilities 160,753 133,112 293,865
----------------- ------------------ ----------------- -----------------
Stockholders' Equity
Common stock 10,995 1,829 8,003 20,827
Surplus 4,026 3,059 (7,085) 0
Retained earnings 5,460 16,169 (918) 20,711
Accumulated other comprehensive
income, net 107 828 935
----------------- ------------------ ----------------- -----------------
Total Stockholders' Equity 20,588 21,885 0 42,473
----------------- ------------------ ----------------- -----------------
Total Liabilities and Stockholders'
Equity $181,341 $154,997 $0 $336,338
================= ================== ================= =================
</TABLE>
See Notes to Pro Forma Combined Financial Information.
-109-
<PAGE>
Pro Forma Combined Statements of Income
The following unaudited pro forma combined statements of income for the
six months ended June 30, 1998 and the three years ended December 31, 1997
present the combined statements of income of MACB and UCB assuming that MACB and
UCB were combined at the beginning of each period presented on a pooling of
interests accounting basis. These unaudited pro forma combined statements of
income should be read in conjunction with the consolidated historical financial
statements of both MACB and UCB, including the respective notes thereto,
included elsewhere in this Joint Proxy Statement or in documents delivered
herewith or incorporated herein by reference.
The pro forma information is not necessarily indicative of the results
of operations that would have resulted had the Reorganization been consummated
at the beginning of the periods indicated, nor is it necessarily indicative of
the results of operations of future periods.
-110-
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MACB UCB ADJUSTMENTS COMBINED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $5,772 $3,807 $ - $9579
Interest on investment securities: -
Taxable 1,067 975 - 2,042
Tax exempt 129 486 - 615
Interest on federal funds sold 253 243 - 496
----------------- --------------- ------------------ -----------------
Total interest income 7,221 5,511 - 12,732
----------------- --------------- ------------------ -----------------
Interest expense:
Interest on deposits 3,027 2,452 - 5,479
Interest on long-term debt 1 - - 1
Interest on short-term borrowings 5 9 - 14
----------------- --------------- ------------------ -----------------
Total interest expense 3,033 2,461 - 5,494
----------------- --------------- ------------------ -----------------
Net interest income 4,188 3,050 - 7,238
Provision for loan losses 233 53 - 286
----------------- --------------- ------------------ -----------------
Net interest income after provision
for loan losses 3,955 2,997 - 6,952
----------------- --------------- ------------------ -----------------
Non-interest income:
Service charges and fees 348 430 - 778
Gain (loss) on sale of securities 1 - - 1
Other 180 43 - 223
----------------- --------------- ------------------ -----------------
Total other income 529 473 - 1,002
----------------- --------------- ------------------ -----------------
Non-interest expenses:
Salaries and employee benefits 1,580 1,086 - 2,666
Occupancy expense 260 118 - 378
Equipment 406 160 - 566
Other operating expenses 757 691 - 1,448
----------------- --------------- ------------------ -----------------
Total other expenses 3,003 2,055 - 5,058
----------------- --------------- ------------------ -----------------
Income before income taxes 1,481 1,415 - 2,896
Income taxes 474 348 - 822
----------------- --------------- ------------------ -----------------
Net income $1,007 $1,067 $ - $2,074
================= =============== ================== =================
Per Share Data:
Net income, basic $0.46 $0.58 $0.50
Net income, diluted $0.44 $0.58 $0.49
Cash dividends $0.00 $0.17 $0.00
Basic weighted average shares outstanding 2,193,376 1,829,209 4,159,776
Diluted weighted average shares outstanding 2,291,996 1,843,124 4,273,354
</TABLE>
See Notes to Pro Forma Combined Financial Information.
-111-
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MACB UCB ADJUSTMENTS COMBINED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $10,368 $7,572 $ - $17,940
Interest on investment securities: -
Taxable 1,791 2,159 - 3,950
Tax exempt 256 926 - 1,182
Interest on federal funds sold 454 212 - 666
----------------- --------------- ------------------ -----------------
Total interest income 12,869 10,869 - 23,738
----------------- --------------- ------------------ -----------------
Interest expense:
Interest on deposits 5,317 4,750 - 10,067
Interest on short-term borrowings - 58 - 58
----------------- --------------- ------------------ -----------------
Total interest expense 5,317 4,808 - 10,125
----------------- --------------- ------------------ -----------------
Net interest income 7,552 6,061 - 13,613
Provision for loan losses 347 129 - 476
----------------- --------------- ------------------ -----------------
Net interest income after provision
for loan losses 7,205 5,932 - 13,137
----------------- --------------- ------------------ -----------------
Non-interest income:
Service charges and fees 690 811 - 1,501
Gain (loss) on sale of securities 14 4 - 18
Other 148 49 - 197
----------------- --------------- ------------------ -----------------
Total other income 852 864 - 1,716
----------------- --------------- ------------------ -----------------
Non-interest expenses:
Salaries and employee benefits 2,843 2,164 - 5,007
Occupancy expense 472 284 - 756
Equipment 823 269 1,092
Other operating expenses 1,423 1,155 - 2,578
----------------- --------------- ------------------ -----------------
Total other expenses 5,561 3,872 - 9,433
----------------- --------------- ------------------ -----------------
Income before income taxes 2,496 2,924 - 5,420
Income taxes 666 694 - 1,360
----------------- --------------- ------------------ -----------------
Net income $1,830 $2,230 $ - $4,060
================= =============== ================== =================
Per Share Data (1):
Net income, basic $0.91 $1.22 $1.02
Net income, diluted $0.88 $1.22 $1.00
Cash dividends $0.25 $0.31 $0.25
Basic weighted average shares outstanding 2,013,286 1,829,209 3,979,686
Diluted weighted average shares outstanding 2,080,902 1,833,616 4,052,039
</TABLE>
(1) MACB per share data and average shares outstanding have been restated to
reflect a two-for-one stock split of MACB Common Stock in March 1998.
See Notes to Pro Forma Combined Financial Information.
-112-
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MACB UCB ADJUSTMENTS COMBINED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $8,689 $6,925 $ - $15,614
Interest on investment securities: -
Taxable 1,393 2,333 - 3,726
Tax exempt 340 954 - 1,294
Interest on federal funds sold 231 206 - 437
----------------- --------------- ------------------ -----------------
Total interest income 10,653 10,418 - 21,071
----------------- --------------- ------------------ -----------------
Interest expense:
Interest on deposits 4,359 4,706 - 9,065
Interest on short-term borrowings - 43 - 43
----------------- --------------- ------------------ -----------------
Total interest expense 4,359 4,749 - 9,108
----------------- --------------- ------------------ -----------------
Net interest income 6,294 5,669 - 11,963
Provision for loan losses 380 101 - 481
----------------- --------------- ------------------ -----------------
Net interest income after provision
for loan losses 5,914 5,568 - 11,482
----------------- --------------- ------------------ -----------------
Non-interest income:
Service charges and fees 537 793 - 1,330
Gain (loss) on sale of securities (2) 13 - 11
Other 89 71 - 160
----------------- --------------- ------------------ -----------------
Total other income 624 877 - 1,501
----------------- --------------- ------------------ -----------------
Non-interest expenses:
Salaries and employee benefits 2,154 2,083 - 4,237
Occupancy expense 308 264 - 572
Equipment 642 240 882
Other operating expenses 1,087 1,339 - 2,426
----------------- --------------- ------------------ -----------------
Total other expenses $4,191 $3,926 $ - $8,117
----------------- --------------- ------------------ -----------------
Income before income taxes $2,347 $2,519 $ - $4,866
Income taxes 813 596 - 1,409
----------------- --------------- ------------------ -----------------
Net income $1,534 $1,923 $ - $3,457
================= =============== ================== =================
Per Share Data (1):
Net income, basic $0.81 $1.05 $0.90
Net income, diluted $0.79 $1.05 $0.88
Cash dividends $0.13 $0.31 $0.13
Basic weighted average shares outstanding 1,888,666 1,829,209 3,855,066
Diluted weighted average shares outstanding 1,950,972 1,829,209 3,917,372
(1) MACB per share data and average shares outstanding have been restated to
reflect a two-for-one stock split of MACB Common Stock in March 1998.
</TABLE>
See Notes to Pro Forma Combined Financial Information.
-113-
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MACB UCB ADJUSTMENTS COMBINED
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $6,653 $6,327 $ - $12,980
Interest on investment securities: -
Taxable 1,052 2,063 - 3,115
Tax exempt 142 709 - 851
Interest on federal funds sold 377 361 - 738
----------------- --------------- ------------------ -----------------
Total interest income 8,224 9,460 - 17,684
----------------- --------------- ------------------ -----------------
Interest expense:
Interest on deposits 3,469 4,156 - 7,625
Interest on short-term borrowings - 5 - 5
----------------- --------------- ------------------ -----------------
Total interest expense 3,469 4,161 - 7,630
----------------- --------------- ------------------ -----------------
Net interest income 4,755 5,299 - 10,054
Provision for loan losses 288 183 - 471
----------------- --------------- ------------------ -----------------
Net interest income after provision
for loan losses 4,467 5,116 - 9,583
----------------- --------------- ------------------ -----------------
Non-interest income:
Service charges and fees 419 655 - 1,073
Gain (loss) on sale of securities (1) (2) - (3)
Other 59 90 - 149
----------------- --------------- ------------------ -----------------
Total other income 477 743 - 1,220
----------------- --------------- ------------------ -----------------
Non-interest expenses:
Salaries and employee benefits 1,843 1,909 - 3,752
Occupancy expense 264 258 - 522
Equipment 499 221 720
Other operating expenses 890 1,191 - 2,081
----------------- --------------- ------------------ -----------------
Total other expenses $3,496 $3,579 $ - $7,075
----------------- --------------- ------------------ -----------------
Income before income taxes $1,448 $2,280 $ - $3,728
Income taxes 425 565 - 990
----------------- --------------- ------------------ -----------------
Net income $1,023 $1,715 $ - $2,738
================= =============== ================== =================
Per Share Data (1):
Net income, basic $0.66 $0.94 $0.78
Net income, diluted $0.65 $0.94 $0.77
Cash dividends $0.06 $0.23 $0.06
Basic weighted average shares outstanding 1,548,642 1,829,209 3,515,042
Diluted weighted average shares outstanding 1,588,752 1,829,209 3,555,152
</TABLE>
(1) MACB per share data and average shares outstanding have been restated to
reflect a two-for-one stock split of MACB Common Stock in March 1998.
See Notes to Pro Forma Combined Financial Information.
-114-
<PAGE>
Notes to Pro Forma Combined Financial Information
(1) The pro forma combined information presented is not necessarily
indicative of the results of operations or the financial position that
would have resulted had the Reorganization been consummated at the
beginning of the periods indicated, nor is it necessarily indicative of
the results of operations in future periods or the future financial
position of the combined entities.
(2) It is assumed that the Reorganization will be accounted for on a
pooling of interests accounting basis and, accordingly, the related pro
forma adjustments have been calculated using the exchange ratio,
whereby MACB will issue 1.075 shares of MACB Common Stock for each
share of UCB Common stock.
(3) Per share data has been computed based on the combined historical
income applicable to common shareholders of MACB and UCB using the
historical weighted average shares outstanding, adjusted to equivalent
shares of MACB Common Stock, of MACB and UCB, adjusted after the
exchange as of the earliest periods presented.
(4) Information was appropriately adjusted to reflect the Reorganization
for (i) the issuance of shares of MACB Common Stock and (ii) the
elimination of surplus to reflect this issuance of MACB Common Stock
with a $5.00 par value.
-115-
<PAGE>
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
UNITED COMMUNITY BANKSHARES, INC.
AND
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
-------------------------
July 8, 1998
A-1
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
The Reorganization and Related Matters
<TABLE>
<CAPTION>
Page
<S> <C>
1.1 Definitions....................................................................... A-6
1.2 The Reorganization................................................................ A-7
1.3 Name and Continuing Operations.................................................... A-7
1.4 Management of Surviving Corporation............................................... A-7
1.5 The Closing and Effective Date.................................................... A-9
ARTICLE 2
Basis and Manner of Exchange
2.1 Conversion of UCB Stock........................................................... A-9
2.2 Manner of Exchange................................................................ A-9
2.3 No Fractional Shares.............................................................. A-10
2.4 Dividends......................................................................... A-10
2.5 Rights of Dissenting Shareholders................................................. A-10
ARTICLE 3
Representations and Warranties
3.1 Representations and Warranties of UCB............................................. A-10
(a) Organization, Standing and Power......................................... A-10
(b) Authority................................................................ A-11
(c) Capital Structure........................................................ A-11
(d) Ownership of the UCB Subsidiaries; Capital Structure
of the UCB Subsidiaries; and Organization of the UCB
Subsidiaries............................................................. A-11
(e) Financial Statements..................................................... A-12
(f) Absence of Undisclosed Liabilities....................................... A-12
(g) Legal Proceedings; Compliance with Laws.................................. A-12
(h) Regulatory Approvals..................................................... A-13
(i) Labor Relations.......................................................... A-13
(j) Tax Matters.............................................................. A-13
(k) Property................................................................. A-13
(l) Reports.................................................................. A-13
(m) Employee Benefit Plans................................................... A-14
(n) Investment Securities.................................................... A-14
(o) Certain Contracts........................................................ A-14
(p) Insurance................................................................ A-15
(q) Loans, OREO and Allowance for Loan Losses................................ A-15
(r) Absence of Material Changes and Events................................... A-16
(s) Statements True and Correct.............................................. A-16
(t) Brokers and Finders...................................................... A-16
(u) Repurchase Agreements.................................................... A-16
A-2
<PAGE>
(v) Administration of Trust Accounts......................................... A-16
(w) Environmental Matters.................................................... A-17
3.2 Representations and Warranties of MACB............................................ A-18
(a) Organization, Standing and Power......................................... A-18
(b) Authority................................................................ A-18
(c) Capital Structure........................................................ A-19
(d) Ownership of the MACB Subsidiaries; Capital Structure
of the MACB Subsidiaries; and Organization of the MACB
Subsidiaries............................................................. A-19
(e) Financial Statements..................................................... A-19
(f) Absence of Undisclosed Liabilities....................................... A-20
(g) Legal Proceedings; Compliance with Laws.................................. A-20
(h) Regulatory Approvals..................................................... A-20
(i) Labor Relations.......................................................... A-20
(j) Tax Matters.............................................................. A-21
(k) Property................................................................. A-21
(l) Reports.................................................................. A-21
(m) Employee Benefit Plans................................................... A-21
(n) Investment Securities.................................................... A-22
(o) Certain Contracts........................................................ A-22
(p) Insurance................................................................ A-22
(q) Loans, OREO, and Allowance for Loan Losses............................... A-23
(r) Absence of Material Changes and Events................................... A-23
(s) Statements True and Correct.............................................. A-24
(t) Brokers and Finders...................................................... A-24
(u) Repurchase Agreements.................................................... A-24
(v) Administration of Trust Accounts......................................... A-24
(w) Environmental Matters.................................................... A-24
ARTICLE 4
Conduct Prior to the Effective Date
4.1 Access to Records and Properties.................................................. A-25
4.2 Confidentiality................................................................... A-26
4.3 Registration Statement, Proxy Statement and Shareholder Approval.................. A-26
4.4 Operation of the Business of UCB and MACB......................................... A-27
4.5 Dividends......................................................................... A-27
4.6 No Solicitation................................................................... A-28
4.7 Regulatory Filings................................................................ A-28
4.8 Public Announcements.............................................................. A-28
4.9 Notice of Breach.................................................................. A-28
4.10 Accounting Treatment.............................................................. A-28
4.11 Reorganization Consummation....................................................... A-28
A-3
<PAGE>
ARTICLE 5
Additional Agreements
5.1 Conversion of Stock Options....................................................... A-28
5.2 Accounting Treatment.............................................................. A-29
5.3 Benefit Plans..................................................................... A-29
5.4 Indemnification................................................................... A-30
ARTICLE 6
Conditions to the Reorganization
6.1 Conditions to Each Party's Obligations to Effect the Reorganization............... A-30
(a) Shareholder Approvals.................................................... A-30
(b) Regulatory Approvals..................................................... A-30
(c) Registration Statement................................................... A-31
(d) Tax Opinion.............................................................. A-31
(e) Accountants' Letter...................................................... A-31
(f) Opinions of Counsel...................................................... A-31
(g) Legal Proceedings........................................................ A-31
(h) Employment Contracts..................................................... A-31
6.2 Conditions to Obligations of MACB................................................. A-31
(a) Representations and Warranties........................................... A-31
(b) Performance of Obligations............................................... A-31
(c) Affiliate Letters........................................................ A-32
(d) Investment Banking Letter................................................ A-32
6.3 Conditions to Obligations of UCB.................................................. A-32
(a) Representations and Warranties........................................... A-32
(b) Performance of Obligations............................................... A-32
(c) Investment Banking Letter................................................ A-32
ARTICLE 7
Termination
7.1 Termination....................................................................... A-32
7.2 Effect of Termination............................................................. A-33
7.3 Non-Survival of Representations, Warranties and Covenants......................... A-33
7.4 Expenses.......................................................................... A-33
ARTICLE 8
General Provisions
8.1 Entire Agreement.................................................................. A-34
8.2 Waiver and Amendment.............................................................. A-34
8.3 Descriptive Headings.............................................................. A-34
8.4 Governing Law..................................................................... A-34
8.5 Notices........................................................................... A-34
A-4
<PAGE>
8.6 Counterparts...................................................................... A-35
8.7 Severability...................................................................... A-35
8.8 Subsidiaries...................................................................... A-35
</TABLE>
Exhibit A - Plan of Merger between United Community Bankshares, Inc. and
Mid-Atlantic Community BankGroup, Inc.
Exhibit B - Employment Contract with William J. Farinholt
Exhibit C - Employment Contract with Wenifred O. Pearce
Exhibit D - Employment Contract with Kenneth E. Smith
Exhibit E - Employment Contract with D. Eugene Brittle
A-5
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of July 8, 1998 by and between United Community Bankshares,
Inc., a Virginia corporation with its principal office located in Franklin,
Virginia ("UCB"), and Mid-Atlantic Community BankGroup, Inc., a Virginia
corporation with its principal office located in Gloucester, Virginia ("MACB").
WITNESSETH:
WHEREAS, UCB and MACB (the "Companies") desire to affiliate in a merger
of equals transaction, so that Peninsula Trust Bank, Incorporated ("PTB"), The
Bank of Franklin ("BOF") and The Bank of Sussex and Surry ("BSS") (together, the
"Banks) will be under common control; and
WHEREAS, UCB and MACB have agreed to the affiliation of their two
companies through a merger under Virginia law, as a result of which UCB would
merge with MACB and the shareholders of UCB would become shareholders of MACB,
all as more specifically provided in this Agreement and the Plan of Merger in
the form attached hereto as Exhibit A (the "Plan"); and
WHEREAS, the Boards of Directors of MACB and UCB each believe it is in
the best interests of their respective corporations and their shareholders to
affiliate as provided herein and not in a transaction structured as an
acquisition of one by the other, and that the respective shareholder values of
UCB and MACB can be maximized over time through this affiliation; and
WHEREAS, the Boards of Directors of the Companies each believe that the
transaction contemplated in this Agreement is in the best interests of the
communities they serve and of their respective employees; and
WHEREAS, the Boards of Directors of MACB and UCB each believe that
after the affiliation, the holding company structure should provide management
and technical assistance and support for recruitment, training and retention of
skilled officers and employees to the Banks in order to enable the combined
organization to operate more efficiently; and
WHEREAS, the respective Boards of Directors of UCB and MACB have
resolved that the transactions described herein are in the best interests of the
parties and their respective shareholders and have authorized and approved the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
ARTICLE 1
The Reorganization and Related Matters
1.1 Definitions. Any term defined anywhere in this Agreement shall
have the meaning ascribed to it for all purposes of this Agreement (unless
expressly noted to the contrary). In addition:
(a) the term "knowledge" when used with respect to a party
shall mean the knowledge, after due inquiry, of any "Executive Officer" of such
party, as such term is defined in Regulation O, (12 C.F.R. 215);
A-6
<PAGE>
(b) the term "Material Adverse Effect", when applied to a
party, shall mean an event, occurrence or circumstance (including without
limitation (i) the making of any provisions for possible loan and lease losses,
write-downs or other real estate and taxes and (ii) any breach of a
representation or warranty by such party) which (a) has or is reasonably likely
to have a material adverse effect on the financial position, results of
operations or business of the party and its subsidiaries, taken as a whole, or
(b) would materially impair the party's ability to perform its obligations under
this Agreement or the consummation of the Reorganization and the other
transactions contemplated by this Agreement; provided, however, that solely for
purposes of measuring whether an event, occurrence or circumstance has a
material adverse effect on such party's results of operations, the term "results
of operations" shall mean net interest income plus non-interest income (less
securities gains) less gross expenses (excluding provisions for possible loan
and lease losses, write-downs of other real estate and taxes); and provided
further, that material adverse effect and material impairment shall not be
deemed to include the impact of (i) changes in banking and similar laws of
general applicability or interpretations thereof by courts or governmental
authorities, (ii) changes in generally accepted accounting principles or
regulatory accounting requirements applicable to banks and bank holding
companies generally, and (iii) the Reorganization on the operating performance
of the parties to this Agreement; and
(c) the term "Previously Disclosed" by a party shall mean
information set forth in a written disclosure letter that is delivered by that
party to the other party prior to or contemporaneously with the execution of
this Agreement and specifically designated as information "Previously Disclosed"
pursuant to this Agreement.
(d) "MACB Nominee" shall refer to any individual named in
Section 1.4(a) who is a director of MACB on the date hereof and to any Director
chosen for nomination by the MACB Nominees after the Effective Date.
(e) "UCB Nominee" shall refer to any individual named in
Section 1.4(a) who is a director of UCB or a subsidiary of UCB on the date
hereof and to any Director chosen for nomination by the UCB Nominees after the
Effective Date.
1.2 The Reorganization. Subject to the terms and conditions of this
Agreement, at the Effective Date as defined in Section 1.5 hereof, UCB will be
merged with and into MACB (the "Reorganization"). The separate corporate
existence of UCB shall thereupon cease, and MACB will be the surviving
corporation in the Merger.
1.3 Name and Continuing Operations. The Plan of Merger in the form
of Exhibit A hereto will effect certain amendments to the MACB Articles of
Incorporation, including a change of MACB's corporate name to Atlantic Financial
Corp. The respective names and banking offices of the Banks will not change as a
result of the Reorganization. After the Effective Date, the surviving
corporation shall be headquartered in Newport News, Virginia.
1.4 Management of Surviving Corporation. (a) The directors,
officers and employees of the Banks will not change as a result of the
Reorganization. MACB's Board of Directors presently has fifteen (15) members. On
the Effective Date, eight (8) members of such Board of Directors shall resign
and the board of Directors of the surviving corporation shall consist of the
following fourteen (14) individuals: Charles F. Dawson, William J. Farinholt,
Robert D Foster, Harry M. Healy, Joseph A. Lombard, Jr., Hersey M. Mason, Jr.,
Thomas Z. Wilke, J. Russell West, Wenifred O. Pearce, J. Philip Bain, Jr.,
Harvey G. Pope, J. D. Spivey, F. Bruce Stewart and William B. Savedge.
A-7
<PAGE>
If any individual named above who is a member of the Board of Directors
of UCB or a UCB subsidiary is not a member of such Board of Directors on the
Effective Date, a replacement shall be designated by the UCB Board of Directors.
If any individual named above who is a member of the MACB Board of Directors is
not a member of the MACB Board of Directors on the Effective Date, a replacement
shall be designated by the MACB Board of Directors.
(b) On and after the Effective Date, the Board of Directors
shall be divided into three classes. Class I shall consist of J. Russell West,
Harvey G. Pope, William J. Farinholt, Thomas Z. Wilke and Charles F. Dawson;
Class II shall consist of William B. Savedge, F. Bruce Stewart, J. D. Spivey,
Hersey M. Mason and Harry M. Healy; and Class III shall consist of J. Philip
Bain, Wenifred O. Pearce, Joseph L. Lombard, Jr. and Robert D. Foster. Members
of Class I shall serve for a term that expires at the 1999 annual meeting of
shareholders. Members of Class II shall serve for a term that expires at the
2000 annual meeting of shareholders. Members of Class III shall serve for a term
that expires at the 2001 annual meeting of shareholders.
(c) (1) In the first five annual elections of Directors,
after the Effective Date, nominations for election to the Board of Directors
made by the Board of Directors shall be made in the manner described in Section
1.4(c)(2) unless seventy-five percent (75%) of the full Board of Directors
otherwise agrees.
(2) If a Director whose term expires at an annual meeting
is an MACB Nominee and he is not nominated for re-election, the Directors who
are MACB Nominees shall designate a successor who shall be nominated for
election to the Board of Directors by the Board of Directors. If a Director
whose term expires at an annual meeting is a UCB Nominee and he is not nominated
for re-election, the Directors who are UCB Nominees shall designate a successor
who shall be nominated for election to the Board of Directors by the Board of
Directors.
(d) Unless seventy-five percent (75%) of the full Board of
Directors otherwise agrees, if a vacancy arises from the resignation, death or
removal of a Director, before the annual meeting of shareholders in the year
2004, the vacancy shall be filled by an individual designated by the MACB
Nominees (if the vacant seat was held by an MACB Nominee) or by the UCB Nominees
(if the vacant seat was held by a UCB Nominee).
(e) On and after the Effective Date the officers of the
surviving corporation shall be as follows:
<TABLE>
<CAPTION>
<S> <C>
Chairman of the Board - Joseph A. Lombard, Jr.
Vice Chairman of the Board - J. Russell West
President and Chief Executive Officer - William J. Farinholt
Vice Chairman and
Chief Operating Officer - Wenifred O. Pearce
Executive Vice President,
Chief Financial Officer and
Secretary - Kenneth E. Smith
Executive Vice President - D. Eugene Brittle
</TABLE>
The Plan of Merger in the form of Exhibit A hereto will effect certain
amendments to the Articles of Incorporation and Bylaws of the surviving
corporation when the Reorganization becomes effective.
A-8
<PAGE>
1.5 The Closing and Effective Date. The closing of the transactions
contemplated by this Agreement and the Plan of Reorganization shall take place
at the offices of Williams, Mullen, Christian & Dobbins, 1021 East Cary Street,
Richmond, Virginia or at such other place as may be mutually agreed upon by the
parties. The Reorganization shall become effective on the date shown on the
Certificate of Merger issued by the State Corporation Commission of Virginia
effecting the Reorganization (the "Effective Date"). Unless otherwise agreed
upon in writing by the chief executive officers of MACB and UCB, subject to the
conditions to the obligations of the parties to effect the Reorganization as set
forth in Article 6, the parties shall use their best efforts to cause the
Effective Date to occur on the first day of the month following the month in
which the conditions set forth in Sections 6.1(a) and 6.1(b) are satisfied. All
documents required by the terms of this Agreement to be delivered at or prior to
consummation of the Reorganization will be exchanged by the parties at the
closing of the Reorganization (the "Reorganization Closing"), which shall be
held on or before the Effective Date. MACB and UCB shall execute and deliver to
the Virginia State Corporation Commission Articles of Merger containing a Plan
of Merger in substantially the form of Exhibit A hereto.
ARTICLE 2
Basis and Manner of Exchange
2.1 Conversion of UCB Stock. At the Effective Date, by virtue of
the Reorganization and without any action on the part of the holders thereof,
each share of common stock, par value $1.00 per share, of UCB ("UCB Common
Stock") issued and outstanding immediately prior to the Effective Date (other
than Dissenting Shares as defined in Section 2.5) shall cease to be outstanding
and shall be converted into and exchanged for 1.075 shares (the "Exchange
Ratio") of common stock, par value $5.00 per share of MACB ("MACB Common
Stock"), plus cash for fractional shares. Each holder of a certificate
representing any shares of UCB Common Stock shall thereafter cease to have any
rights with respect to such UCB Common Stock, except the right to receive any
dividends previously declared but unpaid as to such stock and the consideration
described in Sections 2.1 and 2.3 upon the surrender of such certificate in
accordance with Section 2.2. In the event MACB changes the number of shares of
MACB Common Stock issued and outstanding prior to the Effective Date as a result
of any stock split, stock dividend, recapitalization or similar transaction with
respect to the outstanding MACB Common Stock and the record date therefor shall
be prior to the Effective Date, the Exchange Ratio shall be proportionately
adjusted.
2.2 Manner of Exchange. As promptly as practicable after the
Effective Date, MACB shall cause Peninsula Trust Bank, Incorporated, acting as
the exchange agent ("Exchange Agent"), to send to each former shareholder of
record of UCB immediately prior to the Effective Date transmittal materials for
use in exchanging such shareholder's certificates of UCB Common Stock (other
than shares held by shareholders who perfect their dissenters' rights as
provided under Section 2.5 hereof) for the consideration set forth in Section
2.1 above and Section 2.3 below. Any fractional share checks which a UCB
shareholder shall be entitled to receive in exchange for such shareholder's
shares of UCB Common Stock, and any dividends paid on any shares of MACB Common
Stock that such shareholder shall be entitled to receive prior to the delivery
to the Exchange Agent of such shareholder's certificates representing all of
such shareholder's shares of UCB Common Stock will be delivered to such
shareholder only upon delivery to the Exchange Agent of the certificates
representing all of such shares (or indemnity satisfactory to MACB and the
Exchange Agent, in their judgement, if any of such certificates are lost, stolen
or destroyed). No interest will be paid on any such fractional share checks or
dividends to which the holder of such shares shall be entitled to receive upon
such delivery.
A-9
<PAGE>
2.3 No Fractional Shares. No certificates or scrip for fractional
shares of MACB Common Stock will be issued. In lieu thereof, MACB will pay the
value of such fractional shares in cash on the basis of the average of the
closing prices of MACB Common Stock as reported by NASDAQ for trades reported
during the ten (10) trading days immediately preceding the Effective Date.
2.4 Dividends. No dividend or other distribution payable to the
holders of record of MACB Common Stock at or as of any time after the Effective
Date shall be paid to the holder of any certificate representing shares of UCB
Common Stock issued and outstanding at the Effective Date until such holder
physically surrenders such certificate for exchange as provided in Section 2.2
of this Agreement, promptly after which time all such dividends or distributions
shall be paid (without interest).
2.5 Rights of Dissenting Shareholders. Shareholders of UCB and MACB
who object to the Reorganization will be entitled to the rights and remedies set
forth in sections 13.1-729 through 13.1-741 of the Virginia Stock Corporation
Act.
ARTICLE 3
Representation and Warranties
3.1 Representations and Warranties of UCB. UCB represents and
warrants to MACB as follows:
(a) Organization, Standing and Power. (1) UCB is a
corporation duly organized, validly existing and in good standing under the laws
of Virginia. It has all requisite corporate power and authority to carry on its
business as now being conducted and to own and operate its assets, properties
and business, and UCB has the corporate power and authority to execute and
deliver this Agreement and perform the respective terms of this Agreement and
Plan of Reorganization. UCB is duly registered as a bank holding company under
the Bank Holding Company Act of 1956. The Bank of Franklin and The Bank of
Sussex and Surry each is a wholly owned subsidiary of UCB and each is a Virginia
corporation and a Virginia state bank, duly organized, validly existing and in
good standing under the laws of Virginia, is in compliance in all material
respects with all rules and regulations promulgated by any relevant regulatory
authority, and it has all requisite corporate power and authority to carry on
its business as now being conducted and to own and operate its assets,
properties and business.
(2) UCB has Previously Disclosed its subsidiary
corporations (and the subsidiaries thereof), all of which are duly organized,
validly existing and in good standing in their respective states of
incorporation and which have all requisite corporate power and authority to
carry on their businesses as now being conducted and to own and operate their
assets, properties and business (the "UCB Subsidiaries" and, collectively with
UCB, the "UCB Companies"). Each UCB Subsidiary that is a depository institution
is an "insured bank" as defined in the Federal Deposit Insurance Act and
applicable regulations thereunder. All of the shares of capital stock of the UCB
Subsidiaries held by UCB are duly and validly issued, fully paid and
nonassessable, and all such shares are owned by UCB or a UCB Subsidiary free and
clear of any claim, lien, pledge or encumbrance of any kind, and were not issued
in violation of the preemptive rights of any shareholder or in violation of any
agreement or of any registration or qualification provisions of federal or state
securities laws. Except as Previously Disclosed, none of the UCB Companies owns
any equity securities of any other corporation or entity. Except as Previously
Disclosed, each of the UCB Companies is in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or operated,
or the business
A-10
<PAGE>
conducted, by it require such qualification and where failure to so qualify
either singly or in the aggregate would have a material adverse effect on the
financial condition, properties, businesses or results of operations of the UCB
Companies.
(b) Authority. (1) The execution and delivery of this
Agreement and the Plan of Merger and the consummation of the Reorganization have
been duly and validly authorized by all necessary corporate action on the part
of UCB, except the approval of shareholders. The Agreement represents the legal,
valid, and binding obligation of UCB, enforceable against UCB in accordance with
its terms (except in all such cases as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought).
(2) Neither the execution and delivery of the Agreement,
the consummation of the transactions contemplated therein, nor the compliance by
UCB with any of the provisions thereof will (i) conflict with or result in a
breach of any provision of the Articles of Incorporation or Bylaws of UCB, (ii)
except as Previously Disclosed, constitute or result in the breach of any term,
condition or provision of, or constitute default under, or give rise to any
right of termination, cancellation or acceleration with respect to, or result in
the creation of any lien, charge or encumbrance upon, any property or assets of
the UCB Companies pursuant to (A) any note, bond, mortgage, indenture, or (B)
any material license, agreement, lease or other instrument or obligation, to
which any of the UCB Companies is a party or by which any of them or any of
their properties or assets may be bound, or (iii) subject to the receipt of the
requisite approvals referred to in Section 4.7, violate any order, writ,
injunction, decree, statute, rule or regulation applicable to any of the UCB
Companies or any of their properties or assets.
(c) Capital Structure. The authorized capital stock of UCB
consists of: 6,000,000 shares of common stock, par value $1.00 per share ("UCB
Common Stock), of which 1,829,209 shares are issued and outstanding, fully paid
and nonassessable, not subject to shareholder preemptive rights, and not issued
in violation of any agreement to which UCB is a party or otherwise bound, or of
any registration or qualification provisions of any federal or state securities
laws; and 1,000,000 shares of preferred stock, par value $1.00 per share, of
which none are issued and outstanding. The shares of UCB Common Stock to be
issued in exchange for shares of MACB Common Stock upon consummation of the
Reorganization will have been duly authorized and, when issued in accordance
with the terms of this Agreement, will be validly issued, fully paid and
nonassessable and subject to no preemptive rights. Except as Previously
Disclosed, there are no outstanding understandings or commitments of any
character pursuant to which UCB and any of the UCB Companies could be required
or expected to issue shares of capital stock.
(d) Ownership of the UCB Subsidiaries; Capital Structure of
UCB Subsidiaries; and Organization of the UCB Subsidiaries. (1) UCB does not
own, directly or indirectly, 5% or more of the outstanding capital stock or
other voting securities of any corporation, bank or other organization actively
engaged in business except as Previously Disclosed (collectively the "UCB"
Subsidiaries" and each individually a "UCB Subsidiary"). The outstanding shares
of capital stock of each UCB Subsidiary have been duly authorized and are
validly issued, and are fully paid and nonassessable and all such shares are
directly or indirectly owned by UCB free and clear of all liens, claims and
encumbrances. No Rights are authorized, issued or outstanding with respect to
the capital stock of any UCB Subsidiary and there are no agreements,
understandings or commitments relating to the right of UCB to vote or to dispose
of said shares. None of the shares of capital stock of any UCB Subsidiary has
been issued in violation of the preemptive rights of any person.
A-11
<PAGE>
(2) Each UCB Subsidiary is a duly organized corporation,
validly existing and in good standing under applicable laws. Each UCB Subsidiary
(i) has full corporate power and authority to own, lease and operate its
properties and to carry on its business as now conducted except where the
absence of such power or authority would not have a material adverse effect on
the financial condition, results of operations or business of UCB on a
consolidated basis, and (ii) is duly qualified to do business in the states of
the United States and foreign jurisdictions where its ownership or leasing of
property or the conduct of its business requires such qualification and where
failure to do qualify would have a material adverse effect on the financial
condition, results of operations or business of UCB on a consolidated basis.
Each UCB Subsidiary has all federal, state, local and foreign governmental
authorizations and licenses necessary for it to own or lease its properties and
assets and to carry on its business as it is now being conducted, except where
failure to obtain such authorization or license would not have a material
adverse effect on the business of such UCB Subsidiary.
(e) Financial Statements. UCB's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, and all other documents filed or to
be filed subsequent to December 31, 1997 under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (together with the
rules and regulations thereunder, the "Exchange Act"), in the form filed with
the SEC (in each such case, the "UCB Financial Statements") did not and will not
contain any untrue statement of a material fact or omit to state a material face
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading; and
each of the balance sheets in or incorporated by reference into the UCB
Financial Statements (including the related notes and schedules thereto) fairly
presents and will fairly present the financial position of the entity or
entities to which it relates as of its date and each of the statements of income
and changes in stockholders' equity and cash flows or equivalent statements in
the UCB Financial Statements (including any related notes and schedules thereto)
fairly presents and will fairly present the results of operations, changes in
stockholders' equity and changes in cash flows, as the case may be, of the
entity or entities to which it relates for the periods set forth therein, in
each case in accordance with generally accepted accounting principles
consistently applied to banks and bank holding companies during the periods
involved, except as may be noted therein, subject to normal and recurring
year-end audit adjustments in the case of unaudited statements.
(f) Absence of Undisclosed Liabilities. At December 31,
1997, none of the UCB Companies had any obligation or liability (contingent or
otherwise) of any nature which were not reflected in the UCB Financial
Statements, except for those which in the aggregate are immaterial or have been
Previously Disclosed.
(g) Legal Proceedings; Compliance with Laws. Except as
Previously Disclosed, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of UCB's management, threatened or probable of
assertion against any of the UCB Companies, or against any property, asset,
interest or right of any of them, that are reasonably expected to have, either
individually or in the aggregate, a material adverse effect on the financial
condition of UCB on a consolidated basis or that are reasonably expected to
threaten or impede the consummation of the transactions contemplated by this
Agreement. None of the UCB Companies is a party to any agreement or instrument
or subject to any judgment, order, writ, injunction, decree or rule that might
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), business or prospects of UCB on a consolidated basis.
Except as Previously Disclosed, as of the date of this Agreement, none of the
UCB Companies nor any of their properties is a party to or is subject to any
order, decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment letter or similar submission to, any federal or state
governmental agency or authority charged with the supervision or regulation of
depository institutions or mortgage lenders or engaged in the insurance of
deposits which restricts or purports to restrict in any material respect the
conduct of
A-12
<PAGE>
the business of it or any of its subsidiaries or properties, or in any manner
relates to the capital, liquidity, credit policies or management of it; and
except as Previously Disclosed, none of the UCB Companies has been advised by
any such regulatory authority that such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement, memorandum of understanding, commitment letter or
similar submission. To the best knowledge of UCB, the UCB Companies have
complied in all material respects with all laws, ordinances, requirements,
regulations or orders applicable to its business (including environmental laws,
ordinances, requirements, regulations or orders).
(h) Regulatory Approvals. UCB knows of no reason why the
regulatory approvals referred to in Section 6.1(b) should not be obtained
without the imposition of any condition of the type referred to in Section
6.1(b).
(i) Labor Relations. None of the UCB Companies is a party
to, or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is it
the subject of a proceeding asserting that is has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or seeking to
compel it to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike or other labor dispute involving it, pending
or, to the best of its knowledge, threatened, nor is it aware of any activity
involving its employees seeking to certify a collective bargaining unit or
engaging in any other organizational activity.
(j) Tax Matters. The UCB Companies have filed all federal,
state, and local tax returns and reports required to be filed, and all taxes
shown by such returns to be due and payable have been paid or are reflected as a
liability in the UCB Financial Statements or are being contested in good faith
and have been Previously Disclosed. Except to the extent that liabilities
therefor are specifically reflected in the UCB Financial Statements, there are
no federal, state or local tax liabilities of the UCB Companies other than
liabilities that have arisen since December 31, 1997, all of which have been
properly accrued or otherwise provided for on the books and records of the UCB
Companies. Except as Previously Disclosed, no tax return or report of any of the
UCB Companies is under examination by any taxing authority or the subject of any
administrative or judicial proceeding, and no unpaid tax deficiency has been
asserted against any of the UCB Companies by any taxing authority.
(k) Property. Except as disclosed or reserved against in
the UCB Financial Statements, all of the UCB Companies have good and marketable
title free and clear of all material liens, encumbrances, charges, defaults or
equities of whatever character to all of the material properties and assets,
tangible or intangible, reflected in the UCB Financial Statements as being owned
by the UCB Companies as of the dates thereof. To the best knowledge of UCB, all
buildings, and all fixtures, equipment, and other property and assets which are
material to its business on a consolidated basis, held under leases or subleases
by the UCB Companies are held under valid instruments enforceable in accordance
with their respective terms, subject to bankruptcy, insolvency, reorganization,
moratorium and similar laws. The buildings, structures, and appurtenances owned,
leased, or occupied by the UCB Companies are, to the best knowledge of UCB, in
good operating condition, in a state of good maintenance and repair and (i)
comply with applicable zoning and other municipal laws and regulations, and (ii)
there are no latent defects therein.
(l) Reports. Since January 1, 1995, the UCB Companies have
filed all reports and statements, together with any amendments required to be
made with respect thereto, that were required to be filed with the SEC, the
Federal Reserve, the SCC, and any other governmental or regulatory authority or
agency having jurisdiction over their operations.
A-13
<PAGE>
(m) Employee Benefit Plans. (1) UCB will deliver for MACB's
review, as soon as practicable, true and complete copies of all material
pension, retirement, profit-sharing, deferred compensation, stock option, bonus,
vacation or other material incentive plans or agreements, all material medical,
dental or other health plans, all life insurance plans and all other material
employee benefit plans or fringe benefit plans, including, without limitation,
all "employee benefit plans" as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
UCB for the benefit of employees, retirees or other beneficiaries eligible to
participate (collectively, the "UCB Benefit Plans"). Any of the UCB Benefit
Plans which is an "employee pension benefit plan," as that term is defined in
Section 3(2) of ERISA, is referred to herein as a "UCB ERISA Plan." No UCB
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA.
(2) Except as Previously Disclosed, all UCB Benefit Plans
are in compliance with the applicable terms of ERISA and the Internal Revenue
Code of 1986, as amended (the "IRC") and any other applicable laws, rules and
regulations the breach or violation of which could result in a material
liability to UCB on a consolidated basis.
(3) Except as Previously Disclosed, no UCB ERISA Plan which
is a defined benefit pension plan has any "unfunded current liability," as that
term is defined in Section 302(d)(8)(A) of ERISA, and the present fair market
value of the assets of any such plan exceeds the plan's "benefit liabilities,"
as that term is defined in Section 4001(a)(16) of ERISA, when determined under
actuarial factors that would apply if the plan was terminated in accordance with
all applicable legal requirements.
(n) Investment Securities. Except as Previously Disclosed
and except for pledges to secure public and trust deposits and obligations under
agreements pursuant to which any of the UCB Companies has sold securities
subject to an obligation to repurchase, none of the investment securities
reflected in the UCB Financial Statements is subject to any restriction,
contractual, statutory, or otherwise, which would impair materially the ability
of the holder of such investment to dispose freely of any such investment at any
time.
(o) Certain Contracts. (1) Except as Previously Disclosed,
neither UCB nor any UCB subsidiary is a party to, or is bound by, (i) any
material agreement, arrangement or commitment, (ii) any agreement, indenture or
other instrument relating to the borrowing of money by UCB or any UCB Subsidiary
or the guarantee by UCB or any UCB Subsidiary of any such obligation, (iii) any
agreement, arrangement or commitment relating to the employment of a consultant
or the employment, election, retention in office or severance of any present or
former director or officer, (iv) any agreement to make loans or for the
provision, purchase or sale of goods, services or property between UCB or any
UCB Subsidiary and any director or officer of UCB or any UCB Subsidiary, or any
member of the immediate family or affiliate of any of the foregoing, or (v) any
agreement between UCB or any UCB Subsidiary and any 5% or more shareholder of
UCB; in each case other than agreements entered into in the ordinary course of
the banking business of UCB or a UCB Subsidiary consistent with past practice.
(2) Neither UCB or any UCB Subsidiary, nor to the knowledge
of UCB, the other party thereto, is in default under any material agreement,
commitment, arrangement, lease, insurance policy or other instrument whether
entered into in the ordinary course of business or otherwise, nor has there
occurred any event that, with the lapse of time or giving of notice or both,
would constitute such a default, other than defaults of loan agreements by
borrowers from UCB or a UCB Subsidiary in the ordinary course of its business.
A-14
<PAGE>
(p) Insurance. A complete list of all policies or binders
of fire, liability, product liability, workmen's compensation, vehicular and
other insurance held by or on behalf of the UCB Companies has previously been
furnished to MACB and all such policies or binders are valid and enforceable in
accordance with their terms, are in full force and effect, and insure against
risks and liabilities to the extent and in the manner customary for the industry
and are deemed appropriate and sufficient by UCB. The UCB Companies are not in
default with respect to any provision contained in any such policy or binder and
have not failed to give any notice or present any claim under any such policy or
binder in due and timely fashion. None of the UCB Companies has received notice
of cancellation or non-renewal of any such policy or binder. None of the UCB
Companies has knowledge of any inaccuracy in any application for such policies
or binders, any failure to pay premiums when due or any similar state of facts
or the occurrence of any event that is reasonably likely to form the basis for
any material claim against it not fully covered (except to the extent of any
applicable deductible) by the policies or binders referred to above. None of the
UCB Companies has received notice from any of its insurance carriers that any
insurance premiums will be increased materially in the future or that any such
insurance coverage will not be available in the future on substantially the same
terms as now in effect.
(q) Loans, OREO, and Allowance for Loan Losses. (1) Except
as Previously Disclosed, and except for matters which individually or in the
aggregate, do not materially adversely affect the Reorganization or the
financial condition of UCB, to UCB's best knowledge each loan reflected as an
asset in the UCB Financial Statements (i) is evidenced by notes, agreements, or
other evidences of indebtedness which are true, genuine and what they purport to
be, (ii) to the extent secured, has been secured by valid liens and security
interests which have been perfected, and (iii) is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles. All loans and extensions of credit which are subject to regulation
of the Federal Reserve which have been made by UCB and the UCB Subsidiaries
comply therewith.
(2) The classification on the books and records of UCB and
each UCB Subsidiary of loans and/or non-performing assets as nonaccrual,
troubled debt restructuring, OREO or other similar classification, complies in
all material respects with generally accepted accounting principles and
applicable regulatory accounting principles.
(3) Except for liens, security interests, claims, charges,
or such other encumbrances as have been appropriately reserved for in the UCB
Financial Statements or are not material, title to the OREO is good and
marketable, and there are no adverse claims or encumbrances on the OREO. All
title, hazard and other insurance claims and mortgage guaranty claims with
respect to the OREO have been timely filed and neither UCB nor any UCB
Subsidiary has been received any notice of denial of any such claim.
(4) UCB and each UCB Subsidiary are in possession of all of
the OREO or, if any of the OREO remains occupied by the mortgagor, eviction or
summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and UCB and/or each UCB Subsidiary are
diligently pursuing such eviction of summary proceedings or such rental
arrangements. Except as Previously Disclosed, no legal proceeding or quasi-legal
proceeding is pending or, to the knowledge of UCB and each UCB Subsidiary,
threatened concerning any OREO or any servicing activity or omission to provide
a servicing activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all loans made by any
of the UCB Companies to facilitate the disposition of OREO are performing in
accordance with their terms.
A-15
<PAGE>
(6) The allowance for possible loan losses shown on the UCB
Financial Statements was, and the allowance for possible loan losses shown on
the financial statements of UCB as of dates subsequent to the execution of this
Agreement will be, in each case as of the dates thereof, adequate in all
material respects to provide for possible losses, net of recoveries relating to
loans previously charged off, on loans outstanding (including accrued interest
receivable) of the UCB Companies and other extensions of credit (including
letters of credit and commitments to make loans or extend credit) by UCB.
(r) Absence of Material Changes and Events. Since December
31, 1997, there has not been any material adverse change in the condition
(financial or otherwise), aggregate assets or liabilities, cash flow, earnings
or business or UCB, and UCB has conducted its business only in the ordinary
course consistent with past practice.
(s) Statements True and Correct. None of the information
supplied or to be supplied by UCB for inclusion in the Registration Statement,
the Proxy Statement/Prospectus or any other document to be filed with the SEC or
any other regulatory authority in connection with the transactions contemplated
hereby, will, at the respective time such documents are filed, and, in the case
of the Registration Statement, when it becomes effective and with respect to the
Proxy Statement/Prospectus, when first mailed to MACB shareholders, be false or
misleading with respect to any material fact or omit to state any material fact
necessary in order to make the statements therein not misleading, or, in the
case of the Proxy Statement/Prospectus or any supplement thereto, at the time of
the MACB Shareholders' Meeting, be false or misleading with respect to any
material fact or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the MACB Shareholders' Meeting. All documents that UCB is responsible
for filing with the SEC or any other regulatory authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable law, including applicable provisions of
federal and state securities law.
(t) Brokers and Finders. Neither UCB nor any UCB
Subsidiary, nor any of their respective officers, directors or employees, has
employed any broker, finder or financial advisor or incurred any liability for
any fees or commissions in connection with the transactions contemplated herein,
except for Scott & Stringfellow, Inc.
(u) Repurchase Agreements. With respect to all agreements
pursuant to which UCB or any UCB Subsidiary has purchased securities subject to
an agreement to resell, if any, UCB or such UCB Subsidiary, as the case may be,
has a valid, perfected first lien or security interest in the government
securities or other collateral securing the repurchase agreement, and the value
of such collateral equals or exceeds the amount of the debt secured thereby.
(v) Administration of Trust Accounts. UCB and UCB
Subsidiaries have properly administered, in all respects material and which
could reasonably be expected to be material to the business, operations or
financial condition of UCB and UCB Subsidiaries, taken as a whole, all accounts
for which they act as fiduciaries including but not limited to accounts for
which they serve as trustees, agents, custodians, personal representatives,
guardians, conservators or investment advisors, in accordance with the terms of
the governing documents and applicable state and federal law and regulation and
common law. Neither UCB nor a UCB Subsidiary, nor any director, officer or
employee of UCB or a UCB Subsidiary has committed any breach of trust with
respect to any such fiduciary account which is material to or could reasonably
be expected to be material to the business, operations or financial condition of
UCB, or a UCB Subsidiary, taken as a whole, and the accountings
A-16
<PAGE>
for each such fiduciary account are true and correct in all material respects
and accurately reflect the assets of such fiduciary account in all material
respects.
(w) Environmental Matters. (1) Except as Previously
Disclosed, to the best of UCB's knowledge, neither UCB nor any UCB Subsidiary
owns or leases any properties affected by toxic waste, radon gas or other
hazardous conditions or constructed in part with the use of asbestos. Each of
UCB and the UCB Subsidiaries is in substantial compliance with all Environmental
Laws applicable to real or personal properties in which it has a direct fee
ownership or, with respect to a direct interest as lessee, applicable to the
leasehold premises or, to the best knowledge of UCB and the UCB Subsidiaries,
the premises on which the leasehold is situated. Neither UCB nor any UCB
Subsidiary has received any Communication alleging that UCB or such UCB
Subsidiary is not in such compliance and, to the best knowledge of UCB and the
UCB Subsidiaries, there are no present circumstances (including Environmental
Laws that have been adopted but are not yet effective) that would prevent or
interfere with the continuation of such compliance.
(2) There are no legal, administrative, arbitral or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on UCB and the UCB
Subsidiaries of any liability arising under any Environmental Laws pending or,
to the best knowledge of UCB and the UCB Subsidiaries, threatened against (A)
UCB or any UCB Subsidiary, (B) any person or entity whose liability for any
Environmental Claim, UCB or any UCB Subsidiary has or may have retained or
assumed either contractually or by operation of law, or (C)any real or personal
property which UCB or any UCB Subsidiary owns or leases, or has been or is
judged to have managed or to have supervised or participated in the management
of, which liability might have a material adverse effect on the business,
financial condition or results of operations of UCB. UCB and the UCB
Subsidiaries are not subject to any agreement, order, judgment, decree or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any such liability.
(3) To the best knowledge of UCB and the UCB Subsidiaries,
there are no legal, administrative, arbitral or other proceedings, or
Environmental Claims or other claims, causes of action or governmental
investigations of any nature, seeking to impose, or that could result in the
imposition, on UCB or any UCB Subsidiary of any liability arising under any
Environmental Laws pending or threatened against any real or personal property
in which UCB or any UCB Subsidiary holds a security interest in connection with
a loan or a loan participation which liability might have a material adverse
effect on the business, financial condition or results of operations of UCB. UCB
and the UCB Subsidiaries are not subject to any agreement, order, judgment,
decree or memorandum by or with any court, governmental authority, regulatory
agency or third party imposing any such liability.
(4) With respect to all real and personal property owned or
leased by UCB or any UCB Subsidiary, other than OREO, UCB has made available to
MACB copies of any environmental audits, analyses and surveys that have been
prepared relating to such properties. With respect to all OREO held by UCB or
any UCB Subsidiary and all real or personal property which UCB or any UCB
Subsidiary has been or is judged to have managed or to have supervised or
participated in the management of, UCB has made available to MACB the
information relating to such OREO available to UCB. UCB and the UCB Subsidiaries
are in compliance in all material respects with all recommendations contained in
any environmental audits, analyses and surveys relating to any of the
properties, real or personal, described in this subsection (4).
(5) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge or disposal of any Materials of Environmental
Concern, that could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could result in the
imposition of any liability
A-17
<PAGE>
arising under any Environmental Laws currently in effect or adopted but not yet
effective against UCB or any UCB Subsidiary or against any person or entity
whose liability for any Environmental Claim UCB or any UCB Subsidiary has or may
have retained or assumed either contractually or by operation of law.
3.2 Representations and Warranties of MACB. MACB represents and
warrants to UCB as follows:
(a) Organization, Standing and Power. (1) MACB is a
corporation duly organized, validly existing and in good standing under the laws
of Virginia. It has all requisite corporate power and authority to carry on its
business as now being conducted and to own and operate its assets, properties
and business, and MACB has the corporate power and authority to execute and
deliver this Agreement and perform the respective terms of this Agreement and
Plan of Reorganization. MACB is duly registered as a bank holding company under
the Bank Holding Company Act of 1956. Peninsula Trust Bank, Incorporated, a
wholly owned subsidiary of MACB, is a Virginia corporation and a Virginia state
bank, duly organized, validly existing and in good standing under the laws of
Virginia, is in compliance in all material respects with all rules and
regulations promulgated by any relevant regulatory authority, and it has all
requisite corporate power and authority to carry on its business as now being
conducted and to own and operate its assets, properties and business.
(2) MACB has Previously Disclosed its subsidiary
corporations (and the subsidiaries thereof), all of which are duly organized,
validly existing and in good standing in their respective states of
incorporation and which have all requisite corporate power and authority to
carry on their businesses as now being conducted and to own and operate their
assets, properties and business (the "MACB Subsidiaries" and, collectively with
MACB, the "MACB Companies"). Each MACB Subsidiary that is a depository
institution is an "insured bank" as defined in the Federal Deposit Insurance Act
and applicable regulations thereunder. All of the shares of capital stock of the
MACB Subsidiaries held by MACB are duly and validly issued, fully paid and
nonassessable, and all such shares are owned by MACB or a MACB Subsidiary free
and clear of any claim, lien, pledge or encumbrance of any kind, and were not
issued in violation of the preemptive rights of any shareholder or in violation
of any agreement or of any registration or qualification provisions of federal
or state securities laws. Except as Previously Disclosed, none of the MACB
Companies owns any equity securities of any other corporation or entity. Except
as Previously Disclosed, each of the MACB Companies is in good standing as a
foreign corporation in each jurisdiction where the properties owned, leased or
operated, or the business conducted, by it require such qualification and where
failure to so qualify either singly or in the aggregate would have a material
adverse effect on the financial condition, properties, businesses or results of
operations of the MACB Companies.
(b) Authority. (1) The execution and delivery of this
Agreement and the Plan of Merger and the consummation of the Reorganization have
been duly and validly authorized by all necessary corporate action on the part
of MACB, except the approval of shareholders. The Agreement represents the
legal, valid, and binding obligation of MACB, enforceable against MACB in
accordance with its terms (except in all such cases as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and except
that the availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court before which any
proceeding may be brought).
(2) Neither the execution and delivery of the Agreement,
the consummation of the transactions contemplated therein, nor the compliance by
MACB with any of the provisions thereof will (i) conflict with or result in a
breach of any provision of the Articles of Incorporation or Bylaws of
A-18
<PAGE>
MACB, (ii) except as Previously Disclosed, constitute or result in the breach of
any term, condition or provision of, or constitute default under, or give rise
to any right of termination, cancellation or acceleration with respect to, or
result in the creation of any lien, charge or encumbrance upon, any property or
assets of the MACB Companies pursuant to (A) any note, bond, mortgage,
indenture, or (B) any material license, agreement, lease or other instrument or
obligation, to which any of the MACB Companies is a party or by which any of
them or any of their properties or assets may be bound, or (iii) subject to the
receipt of the requisite approvals referred to in Section 4.7, violate any
order, writ, injunction, decree, statute, rule or regulation applicable to any
of the MACB Companies or any of their properties or assets.
(c) Capital Structure. The authorized capital stock of MACB
consists of: 20,000,000 shares of common stock, par value $5.00 per share ("MACB
Common Stock), of which 2,198,900 shares are issued and outstanding, fully paid
and nonassessable, not subject to shareholder preemptive rights, and not issued
in violation of any agreement to which MACB is a party or otherwise bound, or of
any registration or qualification provisions of any federal or state securities
laws. The shares of MACB Common Stock to be issued in exchange for shares of UCB
Common Stock upon consummation of the Reorganization will have been duly
authorized and, when issued in accordance with the terms of this Agreement, will
be validly issued, fully paid and nonassessable and subject to no preemptive
rights. Except as Previously Disclosed, there are no outstanding understandings
or commitments of any character pursuant to which MACB and any of the MACB
Companies could be required or expected to issue shares of capital stock.
(d) Ownership of the MACB Subsidiaries; Capital Structure
of MACB Subsidiaries; and Organization of the MACB Subsidiaries. (1) MACB does
not own, directly or indirectly, 5% or more of the outstanding capital stock or
other voting securities of any corporation, bank or other organization actively
engaged in business except as Previously Disclosed (collectively the "MACB"
Subsidiaries" and each individually a "MACB Subsidiary"). The outstanding shares
of capital stock of each MACB Subsidiary have been duly authorized and are
validly issued, and are fully paid and nonassessable and all such shares are
directly or indirectly owned by MACB free and clear of all liens, claims and
encumbrances. No Rights are authorized, issued or outstanding with respect to
the capital stock of any MACB Subsidiary and there are no agreements,
understandings or commitments relating to the right of MACB to vote or to
dispose of said shares. None of the shares of capital stock of any MACB
Subsidiary has been issued in violation of the preemptive rights of any person.
(2) Each MACB Subsidiary is a duly organized corporation,
validly existing and in good standing under applicable laws. Each MACB
Subsidiary (i) has full corporate power and authority to own, lease and operate
its properties and to carry on its business as now conducted except where the
absence of such power or authority would not have a material adverse effect on
the financial condition, results of operations or business of MACB on a
consolidated basis, and (ii) is duly qualified to do business in the states of
the United States and foreign jurisdictions where its ownership or leasing of
property or the conduct of its business requires such qualification and where
failure to do qualify would have a material adverse effect on the financial
condition, results of operations or business of MACB on a consolidated basis.
Each MACB Subsidiary has all federal, state, local and foreign governmental
authorizations and licenses necessary for it to own or lease its properties and
assets and to carry on its business as it is now being conducted, except where
failure to obtain such authorization or license would not have a material
adverse effect on the business of such MACB Subsidiary.
(e) Financial Statements. MACB's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997, and all other documents filed or to
be filed subsequent to December 31, 1997 under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (together with the
rules and regulations thereunder, the "Exchange Act"), in the form filed with
the
A-19
<PAGE>
SEC (in each such case, the "MACB Financial Statements") did not and will not
contain any untrue statement of a material fact or omit to state a material face
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading; and
each of the balance sheets in or incorporated by reference into the MACB
Financial Statements (including the related notes and schedules thereto) fairly
presents and will fairly present the financial position of the entity or
entities to which it relates as of its date and each of the statements of income
and changes in stockholders' equity and cash flows or equivalent statements in
the MACB Financial Statements (including any related notes and schedules
thereto) fairly presents and will fairly present the results of operations,
changes in stockholders' equity and changes in cash flows, as the case may be,
of the entity or entities to which it relates for the periods set forth therein,
in each case in accordance with generally accepted accounting principles
consistently applied to banks and bank holding companies during the periods
involved, except as may be noted therein, subject to normal and recurring
year-end audit adjustments in the case of unaudited statements.
(f) Absence of Undisclosed Liabilities. At December 31,
1997, none of the MACB Companies had any obligation or liability (contingent or
otherwise) of any nature which were not reflected in the MACB Financial
Statements, except for those which in the aggregate are immaterial or have been
Previously Disclosed.
(g) Legal Proceedings; Compliance with Laws. Except as
Previously Disclosed, there are no actions, suits or proceedings instituted or
pending or, to the best knowledge of MACB's management, threatened or probable
of assertion against any of the MACB Companies, or against any property, asset,
interest or right of any of them, that are reasonably expected to have, either
individually or in the aggregate, a material adverse effect on the financial
condition of MACB on a consolidated basis or that are reasonably expected to
threaten or impede the consummation of the transactions contemplated by this
Agreement. None of the MACB Companies is a party to any agreement or instrument
or subject to any judgment, order, writ, injunction, decree or rule that might
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), business or prospects of MACB on a consolidated basis.
Except as Previously Disclosed, as of the date of this Agreement, none of the
MACB Companies nor any of their properties is a party to or is subject to any
order, decree, agreement, memorandum of understanding or similar arrangement
with, or a commitment letter or similar submission to, any federal or state
governmental agency or authority charged with the supervision or regulation of
depository institutions or mortgage lenders or engaged in the insurance of
deposits which restricts or purports to restrict in any material respect the
conduct of the business of it or any of its subsidiaries or properties, or in
any manner relates to the capital, liquidity, credit policies or management of
it; and except as Previously Disclosed, none of the MACB Companies has been
advised by any such regulatory authority that such authority is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, decree, agreement, memorandum of understanding,
commitment letter or similar submission. To the best knowledge of MACB, the MACB
Companies have complied in all material respects with all laws, ordinances,
requirements, regulations or orders applicable to its business (including
environmental laws, ordinances, requirements, regulations or orders).
(h) Regulatory Approvals. MACB knows of no reason why the
regulatory approvals referred to in Section 6.1(b) should not be obtained
without the imposition of any condition of the type referred to in Section
6.1(b).
(i) Labor Relations. None of the MACB Companies is a party
to, or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is it
the subject of a proceeding asserting that is has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or seeking to
compel it
A-20
<PAGE>
to bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or other labor dispute involving it, pending or, to the
best of its knowledge, threatened, nor is it aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in any
other organizational activity.
(j) Tax Matters. The MACB Companies have filed all federal,
state, and local tax returns and reports required to be filed, and all taxes
shown by such returns to be due and payable have been paid or are reflected as a
liability in the MACB Financial Statements or are being contested in good faith
and have been Previously Disclosed. Except to the extent that liabilities
therefor are specifically reflected in the MACB Financial Statements, there are
no federal, state or local tax liabilities of the MACB Companies other than
liabilities that have arisen since December 31, 1997, all of which have been
properly accrued or otherwise provided for on the books and records of the MACB
Companies. Except as Previously Disclosed, no tax return or report of any of the
MACB Companies is under examination by any taxing authority or the subject of
any administrative or judicial proceeding, and no unpaid tax deficiency has been
asserted against any of the MACB Companies by any taxing authority.
(k) Property. Except as disclosed or reserved against in
the MACB Financial Statements, all of the MACB Companies have good and
marketable title free and clear of all material liens, encumbrances, charges,
defaults or equities of whatever character to all of the material properties and
assets, tangible or intangible, reflected in the MACB Financial Statements as
being owned by the MACB Companies as of the dates thereof. To the best knowledge
of MACB, all buildings, and all fixtures, equipment, and other property and
assets which are material to its business on a consolidated basis, held under
leases or subleases by the MACB Companies are held under valid instruments
enforceable in accordance with their respective terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws. The buildings,
structures, and appurtenances owned, leased, or occupied by the MACB Companies
are, to the best knowledge of MACB, in good operating condition, in a state of
good maintenance and repair and (i) comply with applicable zoning and other
municipal laws and regulations, and (ii) there are no latent defects therein.
(l) Reports. Since January 1, 1995, the MACB Companies have
filed all reports and statements, together with any amendments required to be
made with respect thereto, that were required to be filed with the SEC, the
Federal Reserve, the SCC, and any other governmental or regulatory authority or
agency having jurisdiction over their operations.
(m) Employee Benefit Plans. (1) MACB will deliver for UCB's
review, as soon as practicable, true and complete copies of all material
pension, retirement, profit-sharing, deferred compensation, stock option, bonus,
vacation or other material incentive plans or agreements, all material medical,
dental or other health plans, all life insurance plans and all other material
employee benefit plans or fringe benefit plans, including, without limitation,
all "employee benefit plans" as that term is defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), currently
adopted, maintained by, sponsored in whole or in part by, or contributed to by
MACB for the benefit of employees, retirees or other beneficiaries eligible to
participate (collectively, the "MACB Benefit Plans"). Any of the MACB Benefit
Plans which is an "employee pension benefit plan," as that term is defined in
Section 3(2) of ERISA, is referred to herein as a "MACB ERISA Plan." No MACB
Benefit Plan is or has been a multi-employer plan within the meaning of Section
3(37) of ERISA.
(2) Except as Previously Disclosed, all MACB Benefit Plans
are in compliance with the applicable terms of ERISA and the Internal Revenue
Code of 1986, as amended (the "IRC")
A-21
<PAGE>
and any other applicable laws, rules and regulations the breach or violation of
which could result in a material liability to MACB on a consolidated basis.
(3) No MACB ERISA Plan which is a defined benefit pension
plan has any "unfunded current liability," as that term is defined in Section
302(d)(8)(A) of ERISA, and the present fair market value of the assets of any
such plan exceeds the plan's "benefit liabilities," as that term is defined in
Section 4001(a)(16) of ERISA, when determined under actuarial factors that would
apply if the plan was terminated in accordance with all applicable legal
requirements.
(n) Investment Securities. Except for pledges to secure
public and trust deposits and obligations under agreements pursuant to which any
of the MACB Companies has sold securities subject to an obligation to
repurchase, none of the investment securities reflected in the MACB Financial
Statements is subject to any restriction, contractual, statutory, or otherwise,
which would impair materially the ability of the holder of such investment to
dispose freely of any such investment at any time.
(o) Certain Contracts. (1) Except as Previously Disclosed,
neither MACB nor any MACB subsidiary is a party to, or is bound by, (i) any
material agreement, arrangement or commitment, (ii) any agreement, indenture or
other instrument relating to the borrowing of money by MACB or any MACB
Subsidiary or the guarantee by MACB or any MACB Subsidiary of any such
obligation, (iii) any agreement, arrangement or commitment relating to the
employment of a consultant or the employment, election, retention in office or
severance of any present or former director or officer, (iv) any agreement to
make loans or for the provision, purchase or sale of goods, services or property
between MACB or any MACB Subsidiary and any director or officer of MACB or any
MACB Subsidiary, or any member of the immediate family or affiliate of any of
the foregoing, or (v) any agreement between MACB or any MACB Subsidiary and any
5% or more shareholder of MACB; in each case other than agreements entered into
in the ordinary course of the banking business of MACB or a MACB Subsidiary
consistent with past practice.
(2) Neither MACB or any MACB Subsidiary, nor to the
knowledge of MACB, the other party thereto, is in default under any material
agreement, commitment, arrangement, lease, insurance policy or other instrument
whether entered into in the ordinary course of business or otherwise, nor has
there occurred any event that, with the lapse of time or giving of notice or
both, would constitute such a default, other than defaults of loan agreements by
borrowers from MACB or a MACB Subsidiary in the ordinary course of its business.
(p) Insurance. A complete list of all policies or binders
of fire, liability, product liability, workmen's compensation, vehicular and
other insurance held by or on behalf of the MACB Companies has previously been
furnished to UCB and all such policies or binders are valid and enforceable in
accordance with their terms, are in full force and effect, and insure against
risks and liabilities to the extent and in the manner customary for the industry
and are deemed appropriate and sufficient by MACB. The MACB Companies are not in
default with respect to any provision contained in any such policy or binder and
have not failed to give any notice or present any claim under any such policy or
binder in due and timely fashion. None of the MACB Companies has received notice
of cancellation or non-renewal of any such policy or binder. None of the MACB
Companies has knowledge of any inaccuracy in any application for such policies
or binders, any failure to pay premiums when due or any similar state of facts
or the occurrence of any event that is reasonably likely to form the basis for
any material claim against it not fully covered (except to the extent of any
applicable deductible) by the policies or binders referred to above. None of the
MACB Companies has received notice from any of its insurance carriers that any
insurance premiums will be increased
A-22
<PAGE>
materially in the future or that any such insurance coverage will not be
available in the future on substantially the same terms as now in effect.
(q) Loans, OREO, and Allowance for Loan Losses. (1) Except
as Previously Disclosed, and except for matters which individually or in the
aggregate, do not materially adversely affect the Reorganization or the
financial condition of MACB, to MACB's best knowledge each loan reflected as an
asset in the MACB Financial Statements (i) is evidenced by notes, agreements, or
other evidences of indebtedness which are true, genuine and what they purport to
be, (ii) to the extent secured, has been secured by valid liens and security
interests which have been perfected, and (iii) is the legal, valid and binding
obligation of the obligor named therein, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles. All loans and extensions of credit which are subject to regulation
of the Federal Reserve which have been made by MACB and the MACB Subsidiaries
comply therewith.
(2) The classification on the books and records of MACB and
each MACB Subsidiary of loans and/or non-performing assets as nonaccrual,
troubled debt restructuring, OREO or other similar classification, complies in
all material respects with generally accepted accounting principles and
applicable regulatory accounting principles.
(3) Except for liens, security interests, claims, charges,
or such other encumbrances as have been appropriately reserved for in the MACB
Financial Statements or are not material, title to the OREO is good and
marketable, and there are no adverse claims or encumbrances on the OREO. All
title, hazard and other insurance claims and mortgage guaranty claims with
respect to the OREO have been timely filed and neither MACB nor any MACB
Subsidiary has been received any notice of denial of any such claim.
(4) MACB and each MACB Subsidiary are in possession of all
of the OREO or, if any of the OREO remains occupied by the mortgagor, eviction
or summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and MACB and/or each MACB Subsidiary
are diligently pursuing such eviction of summary proceedings or such rental
arrangements. Except as Previously Disclosed, no legal proceeding or quasi-legal
proceeding is pending or, to the knowledge of MACB and each MACB Subsidiary,
threatened concerning any OREO or any servicing activity or omission to provide
a servicing activity with respect to any of the OREO.
(5) Except as Previously Disclosed, all loans made by any
of the MACB Companies to facilitate the disposition of OREO are performing in
accordance with their terms.
(6) The allowance for possible loan losses shown on the
MACB Financial Statements was, and the allowance for possible loan losses shown
on the financial statements of MACB as of dates subsequent to the execution of
this Agreement will be, in each case as of the dates thereof, adequate in all
material respects to provide for possible losses, net of recoveries relating to
loans previously charged off, on loans outstanding (including accrued interest
receivable) of the MACB Companies and other extensions of credit (including
letters of credit and commitments to make loans or extend credit) by MACB.
(r) Absence of Material Changes and Events. Since December
31, 1997, there has not been any material adverse change in the condition
(financial or otherwise), aggregate assets or liabilities, cash flow, earnings
or business or MACB, and MACB has conducted its business only in the ordinary
course consistent with past practice.
A-23
<PAGE>
(s) Statements True and Correct. None of the information
supplied or to be supplied by MACB for inclusion in the Registration Statement,
the Proxy Statement/Prospectus or any other document to be filed with the SEC or
any other regulatory authority in connection with the transactions contemplated
hereby, will, at the respective time such documents are filed, and, in the case
of the Registration Statement, when it becomes effective and with respect to the
Proxy Statement/Prospectus, when first mailed to UCB shareholders, be false or
misleading with respect to any material fact or omit to state any material fact
necessary in order to make the statements therein not misleading, or, in the
case of the Proxy Statement/Prospectus or any supplement thereto, at the time of
the UCB Shareholders' Meeting, be false or misleading with respect to any
material fact or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the UCB Shareholders' Meeting. All documents that MACB is responsible
for filing with the SEC or any other regulatory authority in connection with the
transactions contemplated hereby will comply as to form in all material respects
with the provisions of applicable law, including applicable provisions of
federal and state securities law.
(t) Brokers and Finders. Neither MACB nor any MACB
Subsidiary, nor any of their respective officers, directors or employees, has
employed any broker, finder or financial advisor or incurred any liability for
any fees or commissions in connection with the transactions contemplated herein,
except for the Davenport & Company LLC.
(u) Repurchase Agreements. With respect to all agreements
pursuant to which MACB or any MACB Subsidiary has purchased securities subject
to an agreement to resell, if any, MACB or such MACB Subsidiary, as the case may
be, has a valid, perfected first lien or security interest in the government
securities or other collateral securing the repurchase agreement, and the value
of such collateral equals or exceeds the amount of the debt secured thereby.
(v) Administration of Trust Accounts. MACB and MACB
Subsidiaries have properly administered, in all respects material and which
could reasonably be expected to be material to the business, operations or
financial condition of MACB and MACB Subsidiaries, taken as a whole, all
accounts for which they act as fiduciaries including but not limited to accounts
for which they serve as trustees, agents, custodians, personal representatives,
guardians, conservators or investment advisors, in accordance with the terms of
the governing documents and applicable state and federal law and regulation and
common law. Neither MACB nor a MACB Subsidiary, nor any director, officer or
employee of MACB or a MACB Subsidiary has committed any breach of trust with
respect to any such fiduciary account which is material to or could reasonably
be expected to be material to the business, operations or financial condition of
MACB, or a MACB Subsidiary, taken as a whole, and the accountings for each such
fiduciary account are true and correct in all material respects and accurately
reflect the assets of such fiduciary account in all material respects.
(w) Environmental Matters. (1) Except as Previously
Disclosed, to the best of MACB's knowledge, neither MACB nor any MACB Subsidiary
owns or leases any properties affected by toxic waste, radon gas or other
hazardous conditions or constructed in part with the use of asbestos. Each of
MACB and the MACB Subsidiaries is in substantial compliance with all
Environmental Laws applicable to real or personal properties in which it has a
direct fee ownership or, with respect to a direct interest as lessee, applicable
to the leasehold premises or, to the best knowledge of MACB and the MACB
Subsidiaries, the premises on which the leasehold is situated. Neither MACB nor
any MACB Subsidiary has received any Communication alleging that MACB or such
MACB Subsidiary is not in such compliance and, to the best knowledge of MACB and
the MACB Subsidiaries, there are no present circumstances (including
Environmental Laws that have been adopted but are not yet effective) that would
prevent or interfere with the continuation of such compliance.
A-24
<PAGE>
(2) There are no legal, administrative, arbitral or other
claims, causes of action or governmental investigations of any nature, seeking
to impose, or that could result in the imposition, on MACB and the MACB
Subsidiaries of any liability arising under any Environmental Laws pending or,
to the best knowledge of MACB and the MACB Subsidiaries, threatened against (A)
MACB or any MACB Subsidiary, (B) any person or entity whose liability for any
Environmental Claim, MACB or any MACB Subsidiary has or may have retained or
assumed either contractually or by operation of law, or (C)any real or personal
property which MACB or any MACB Subsidiary owns or leases, or has been or is
judged to have managed or to have supervised or participated in the management
of, which liability might have a material adverse effect on the business,
financial condition or results of operations of MACB. MACB and the MACB
Subsidiaries are not subject to any agreement, order, judgment, decree or
memorandum by or with any court, governmental authority, regulatory agency or
third party imposing any such liability.
(3) To the best knowledge of MACB and the MACB
Subsidiaries, there are no legal, administrative, arbitral or other proceedings,
or Environmental Claims or other claims, causes of action or governmental
investigations of any nature, seeking to impose, or that could result in the
imposition, on MACB or any MACB Subsidiary of any liability arising under any
Environmental Laws pending or threatened against any real or personal property
in which MACB or any MACB Subsidiary holds a security interest in connection
with a loan or a loan participation which liability might have a material
adverse effect on the business, financial condition or results of operations of
MACB. MACB and the MACB Subsidiaries are not subject to any agreement, order,
judgment, decree or memorandum by or with any court, governmental authority,
regulatory agency or third party imposing any such liability.
(4) With respect to all real and personal property owned or
leased by MACB or any MACB Subsidiary, other than OREO, MACB has made available
to UCB copies of any environmental audits, analyses and surveys that have been
prepared relating to such properties. With respect to all OREO held by MACB or
any MACB Subsidiary and all real or personal property which MACB or any MACB
Subsidiary has been or is judged to have managed or to have supervised or
participated in the management of, MACB has made available to UCB the
information relating to such OREO available to MACB. MACB and the MACB
Subsidiaries are in compliance in all material respects with all recommendations
contained in any environmental audits, analyses and surveys relating to any of
the properties, real or personal, described in this subsection (4).
(5) There are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without limitation,
the release, emission, discharge or disposal of any Materials of Environmental
Concern, that could reasonably form the basis of any Environmental Claim or
other claim or action or governmental investigation that could result in the
imposition of any liability arising under any Environmental Laws currently in
effect or adopted but not yet effective against MACB or any MACB Subsidiary or
against any person or entity whose liability for any Environmental Claim MACB or
any MACB Subsidiary has or may have retained or assumed either contractually or
by operation of law.
ARTICLE 4
Conduct Prior to the Effective Date
4.1 Access to Records and Properties. UCB will keep MACB, and MACB
will keep UCB advised of all material developments relevant to their respective
businesses prior to consummation of the Reorganization. Prior to the Effective
Date, MACB, on the one hand, and UCB on the other, agree to give to the other
party reasonable access to all the premises and books and
A-25
<PAGE>
records (including tax returns filed and those in preparation) of it and its
subsidiaries and to cause its officers to furnish the other with such financial
and operating data and other information with respect to the business and
properties as the other shall from time to time request for the purposes of
verifying the warranties and representations set forth herein; provided,
however, that any such investigation shall be conducted in such manner as not to
interfere unreasonably with the operation of the respective business of the
other.
4.2 Confidentiality. Between the date of this Agreement and the
Effective Date, MACB and UCB each will maintain in confidence, and cause its
directors, officers, employees, agents and advisors to maintain in confidence,
and not use to the detriment of the other party, any written, oral or other
information obtained in confidence from the other party or a third party in
connection with this Agreement or the transactions contemplated hereby unless
such information is already known to such party or to others not bound by a duty
of confidentiality or unless such information becomes publicly available through
no fault of such party, unless use of such information is necessary or
appropriate in making any filing or obtaining any consent or approval required
for the consummation of the transactions contemplated hereby or unless the
furnishing or use of such information is required by or necessary or appropriate
in connection with legal proceedings. If the Reorganization is not consummated,
each party will return or destroy as much of such written information as may
reasonably be requested.
4.3 Registration Statement, Proxy Statement and Shareholder
Approval. The Board of Directors of UCB, and the Board of Directors of MACB,
each will duly call and will hold a meeting of their respective shareholders as
soon as practicable for the purpose of approving the Reorganization (the "UCB
Shareholders' Meeting" and the "MACB Shareholders' Meeting", respectively) and,
subject to the fiduciary duties of the Board of Directors of UCB and of MACB (as
advised in writing by its counsel), UCB and MACB each shall use its best efforts
to solicit and obtain votes of the holders of its Common Stock in favor of the
Reorganization and will comply with the provisions in their respective Articles
of Incorporation and Bylaws relating to the call and holding of a meeting of
shareholders for such purpose; each member of the Board of Directors of UCB and
MACB shall vote all shares of UCB Common Stock and MACB Common Stock under his
or her control (and not held in a fiduciary capacity) in favor of the
Reorganization; and UCB and MACB shall, at the other's request, recess or
adjourn the meeting if such recess or adjournment is deemed by the other to be
necessary or desirable. MACB and UCB will prepare jointly the proxy
statement/prospectus to be used in connection with the UCB Shareholders' Meeting
and the MACB Shareholders' Meeting (the "Joint Proxy Statement"). MACB will
prepare and file with the SEC the Registration Statement, of which such Joint
Proxy Statement shall be a part and will use its best efforts to have the
Registration Statement declared effective as promptly as possible. When the
Registration Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such effectiveness, up to
and including the date of the Meeting, such Registration Statement and all
amendments or supplements thereto, with respect to all information set forth
therein furnished or to be furnished by UCB relating to the UCB Companies and by
MACB relating to the MACB Companies, (i) will comply in all material respects
with the provisions of the Securities Act of 1933 and any other applicable
statutory or regulatory requirements, including applicable state blue-sky and
securities laws, and (ii) will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements contained therein not misleading; provided, however, in
no event shall any party hereto be liable for any untrue statement of a material
fact or omission to state a material fact in the Registration Statement made in
reliance upon, and in conformity with, written information concerning another
party furnished by such other party specifically for use in the Registration
Statement.
A-26
<PAGE>
4.4 Operation of the Business of UCB and MACB. UCB and MACB each
agrees that from the date hereof to the Effective Date it will operate its
business substantially as presently operated and only in the ordinary course,
and, consistent with such operation, it will use its best efforts to preserve
intact its relationships with persons having business dealings with it. Without
limiting the generality of the foregoing, UCB and MACB each agrees that it will
not, without the prior written consent of the other:
(a) Make any change in its authorized capital stock, or
issue or sell any additional shares of, securities convertible into or
exchangeable for, or options, warrants or rights to purchase, its capital stock,
nor shall it purchase, redeem or otherwise acquire any of its outstanding shares
of capital stock, provided that MACB and UCB each may issue shares of common
stock pursuant to options granted or issued prior to the date hereof:
(b) Voluntarily make any changes in the composition of its
officers, directors or other key management personnel;
(c) Make any change in the compensation or title of any
officer, director or key management employee or make any change in the
compensation or title of any other employee, other than permitted by current
employment policies in the ordinary course of business, any of which changes
shall be reported promptly to the other party;
(d) Enter into any bonus, incentive compensation, stock
option, deferred compensation, profit sharing, thrift, retirement, pension,
group insurance or other benefit plan or any employment or consulting agreement;
(e) Incur any obligation or liability (whether absolute or
contingent, excluding suits instituted against it), make any pledge, or encumber
any of its assets, nor dispose of any of its assets in any other manner, except
in the ordinary course of its business and for adequate value, or as otherwise
specifically permitted in this Agreement;
(f) Except as permitted by Section 4.4(a) hereof, issue or
contract to issue any shares of its Common Stock, options for shares of its
Common Stock, or securities exchangeable for or convertible into such shares;
(g) Knowingly waive any right to substantial value:
(h) Enter into material transactions otherwise than in the
ordinary course of its business;
(i) Alter, amend or repeal its Bylaws or Articles of
Incorporation; or
(j) Propose or take any other action which would make any
representation or warranty in Section 3.1 or Section 3.2 hereof untrue.
4.5 Dividends. MACB and UCB each agree that the other may declare
and pay only regular periodic cash dividends in the ordinary course of business
and consistent with past practice from the date of this Agreement through the
Effective Date. Any dividend increase by UCB or MACB in excess of $.01 per share
must be approved by the other and neither MACB nor UCB may increase its dividend
if such increase would cause the Reorganization not to qualify for pooling of
interests accounting treatment.
A-27
<PAGE>
4.6 No Solicitation. Unless and until this Agreement shall have
been terminated pursuant to its terms, neither UCB nor MACB nor any of their
respective officers, directors, representatives or agents shall, directly or
indirectly, (i) encourage, solicit or initiate discussions or negotiations with
any person concerning any merger, share exchange, sale of substantial assets,
tender offer, sale of shares of capital stock or similar transaction involving
UCB or MACB, (ii) enter into any agreement with any third party providing for a
business combination transaction, equity investment or sale of a significant
amount of assets, or (iii) furnish any information to any other person relating
to or in support of such transaction. UCB or MACB will promptly communicate to
the other the terms of any proposal which it may receive in respect to any of
the foregoing transactions. Unless and until the Effective Date or until this
Agreement shall have been terminated pursuant to its terms, neither MACB nor any
of its officers, directors, representatives or agents shall enter into any
agreement or letter of intent that provides for the acquisition by MACB of
substantially all of the assets or voting stock of a third party.
4.7 Regulatory Filings. MACB and UCB shall prepare jointly all
regulatory filings required to consummate the transactions contemplated by the
Agreement and the Plan of Merger and submit the filings for approval with the
Federal Reserve Board and the SCC, and any other governing regulatory authority,
as soon as practicable after the date hereof. MACB and UCB shall use their best
efforts to obtain approvals of such filings.
4.8 Public Announcements. Each party will consult with the other
before issuing any press release or otherwise making any public statements with
respect to the Reorganization and shall not issue any such press release or make
any such public statement prior to such consultations except as may be required
by law.
4.9 Notice of Breach. MACB and UCB will give written notice to the
other promptly upon becoming aware of the impending or threatened occurrence of
any event which would cause or constitute a breach of any of the
representations, warranties or covenants made to the other party in this
Agreement and will use its best efforts to prevent or promptly remedy the same.
4.10 Accounting Treatment. MACB and UCB shall each use their best
efforts to ensure that the Reorganization qualifies for pooling-of-interests
accounting treatment.
4.11 Reorganization Consummation. Subject to the terms and
conditions of this Agreement, each party shall use its best efforts in good
faith to take, or cause to be taken, all actions, and to do or cause to be done
all things necessary, proper or desirable, or advisable under applicable laws,
as promptly as practicable so as to permit consummation of the Reorganization at
the earliest possible date, consistent with Section 1.3 herein, and to otherwise
enable consummation of the transactions contemplated hereby and shall cooperate
fully with the other parties hereto to that end, and each of UCB and MACB shall
use, and shall cause each of their respective subsidiaries to use, its best
efforts to obtain all consents (governmental or other) necessary or desirable
for the consummation of the transactions contemplated by this Agreement.
ARTICLE 5
Additional Agreements
5.1 Conversion of Stock Options. (a) On the Effective Date, all
rights with respect to UCB Common Stock pursuant to stock options ("UCB
Options") granted by UCB under a UCB stock option plan which are outstanding on
the Effective Date, whether or not they are exercisable, shall be converted into
and become rights with respect to MACB Common Stock, and MACB shall assume each
UCB Option in accordance with the terms of the stock option plan under which it
was issued and the stock option agreement by which it is evidenced. From the
Effective Date forward, (i)
A-28
<PAGE>
each UCB Option assumed by MACB may be excised solely for shares of MACB Common
Stock, (ii) the number of shares of MACB Common Stock subject to each UCB Option
shall be equal to the number of shares of UCB Common Stock subject to such
option immediately prior to the Effective Date multiplied by the Exchange Ratio
and (iii) the per share exercise price under each such UCB Option shall be
adjusted by dividing the per share exercise price under each such option by the
Exchange Ratio and rounding down to the nearest cent; provided, however, that
the terms of each UCB Option shall, in accordance with its terms, be subject to
further adjustment as appropriate to reflect any stock split, stock dividend,
recapitalization or other similar transaction after the Effective Date. It is
intended that the foregoing assumption shall be undertaken in a manner that will
not constitute a "modification" as defined in Section 425 of the Code, as to any
stock option which is an "incentive stock option."
5.2 Accounting Treatment. This Reorganization shall qualify for
pooling-of-interests accounting treatment.
5.3 Benefit Plans.
(a) After consummation of the Reorganization, at the option
of MACB (which may be applied on a plan or program by plan or program basis) and
subject to MACB's best efforts, employees of UCB and its Subsidiaries shall be
entitled to participate either (x) in one or more combined plans or programs of
MACB and UCB on substantially the same basis as similarly situated employees
(taking into account all applicable factors, including but not limited to
position, employment classification, age, length of service, pay, part time or
full time status, and the like, as well as changes made in such plans and
programs in the future, or (y) in plans and programs which, subject to changes
required by applicable laws or by limitations imposed by insurance companies
providing plan benefits, are comparable to (or a continuation of), and provide
for participation on substantially the same basis, as UCB's employee benefit
plans and programs currently in effect. If and to the extent option (x) is
effectuated:
(1) MACB agrees that (A) the coverage under its
plans and programs shall be available to each employee of UCB and its
Subsidiaries and his or her dependents without regard to any waiting
period, evidence or requirement of insurability, actively at work
requirement or preexisting condition exclusion or limitation (except to
the extent and in the manner any such waiting period, evidence or
requirement of insurability, actively at work requirement or exclusion
or limitation applies immediately prior to the effectuation of option
(x) and (B) amounts paid or payable by employees for health care
expenses for the portion of the annual benefit period prior to the date
as of which option (x) becomes effective shall be credited in
satisfaction of any deductible requirement and any out-of-pocket limit
for the balance of the annual benefit period which includes such date.
(2) MACB agrees that the welfare plans and programs
(including cafeteria plans) generally shall offer coverage options and
costs to employees not less favorable in the aggregate (but including
reasonable cost sharing for premium or other cost changes due to
experience or other factors) than the most favorable welfare benefits
package provided to employees of either UCB or MACB immediately before
the consummation of the Reorganization.
(3) MACB agrees to provide a profit sharing
retirement plan to employees of UCB and its Subsidiaries which is not
less favorable to employees of UCB and its Subsidiaries in terms of
employee contribution rights, employer mandatory,
A-29
<PAGE>
matching and discretionary contribution formulas, and vesting than
provided under the UCB profit sharing plan immediately before the
consummation of the Reorganization.
(4) MACB agrees to treat service with UCB and its
Subsidiaries before the consummation of the Reorganization as service
with MACB for purposes of eligibility to begin participation and
vesting (but not benefit accruals, except in the case of a continuation
of any plan maintained by UCB or any of its Subsidiaries) for purposes
of all employee benefit and seniority based plans and programs,
including but not limited to annual, sick and personal leave accruing
following the consummation of the Reorganization.
(b) Except to extent individually negotiated replacement
contracts or settlement agreements are entered into, MACB agrees to honor all
employment severance, consulting and other compensation contracts and agreements
Previously Disclosed and executed in writing by UCB on the one hand and any
individual current or former director, officer or employee thereof on the other
hand, copies of which have been previously delivered by UCB to MACB.
5.4 Indemnification. MACB agrees that following the Effective Date,
it shall indemnify and hold harmless any person who has rights to
indemnification from UCB, to the same extent and on the same conditions as such
person is entitled to indemnification pursuant to Virginia law and UCB's
Articles of Incorporation or Bylaws, as in effect on the date of this Agreement,
to the extent legally permitted to do so, with respect to matters occurring on
or prior to the Effective Date. MACB further agrees that any such person who has
rights to indemnification pursuant to this Section 5.4 is expressly made a third
party beneficiary of this Section 5.4 and may directly, in such person's
personal capacity, enforce such rights through an action at law or in equity or
through any other manner or means of redress allowable under Virginia law to the
same extent as if such person were a party hereto. Without limiting the
foregoing, in any case in which corporate approval may be required to effectuate
any indemnification, MACB shall direct, at the election of the party to be
indemnified, that the determination of permissibility of indemnification shall
be made by independent counsel mutually agreed upon between MACB and the
indemnified party. MACB shall use its reasonable best efforts to maintain UCB's
existing directors' and officers' liability policy, or some other policy,
including MACB's existing policy, providing at least comparable coverage,
covering persons who are currently covered by such insurance of UCB for a period
of five years after the Effective Date on terms no less favorable than those in
effect on the date hereof.
ARTICLE 6
Conditions to the Reorganization
6.1 Conditions to Each Party's Obligations to Effect the
Reorganization. The respective obligations of each of MACB and UCB to effect the
Reorganization and the other transactions contemplated by this Agreement shall
be subject to the fulfillment or waiver at or prior to the Effective Date of the
following conditions:
(a) Shareholder Approvals. Shareholders of UCB and of MACB
shall have approved all matters relating to this Agreement and the
Reorganization required to be approved by such shareholders in accordance with
Virginia law.
(b) Regulatory Approvals. This Agreement and the Plan of
Merger shall have been approved by the Federal Reserve, the SCC, and any other
regulatory authority whose approval is required for consummation of the
transactions contemplated hereby, and such approvals shall not have
A-30
<PAGE>
imposed any condition or requirement which would so materially adversely impact
the economic or business benefits of the transactions contemplated by this
Agreement as to render inadvisable the consummation of the Reorganization in the
reasonable opinion of the Board of Directors of MACB or UCB.
(c) Registration Statement. The Registration Statement
shall have been declared effective and shall not be subject to a stop order or
any threatened stop order.
(d) Tax Opinion. MACB and UCB shall have received an
opinion of Williams, Mullen, Christian & Dobbins, or other counsel reasonably
satisfactory to MACB and UCB, to the effect that the Reorganization will
constitute a reorganization within the meaning of Section 368 of the Internal
Revenue Code and that no gain or loss will be recognized by the shareholders of
UCB to the extent they receive MACB Common Stock solely in exchange for their
UCB Common Stock in the Reorganization.
(e) Accountants' Letter. MACB and UCB shall have received a
letter, dated as of the Effective Date, from Yount, Hyde & Barbour, satisfactory
in form and substance to each of MACB and UCB, that the Reorganization will
qualify for pooling-of-interests accounting treatment under generally accepted
accounting principles.
(f) Opinions of Counsel. UCB shall have delivered to MACB
and MACB shall have delivered to UCB opinions of counsel, dated as of the
Effective Date, as to such matters as they may each reasonably request with
respect to the transactions contemplated by this Agreement and in a form
reasonably acceptable to each of them.
(g) Legal Proceedings. Neither MACB nor UCB shall be
subject to any order, decree or injunction of a court or agency of competent
jurisdiction which enjoins or prohibits the consummation of the Reorganization.
(h) Employment Contracts. MACB shall have entered into
employment contracts with William J. Farinholt, Wenifred O. Pearce, Kenneth E.
Smith and D. Eugene Brittle in the forms attached hereto as Exhibits B, C, D and
E, respectively.
6.2 Conditions to Obligations of MACB. The obligations of MACB to
effect the Reorganization shall be subject to the fulfillment or waiver at or
prior to the Effective Date of the following additional conditions:
(a) Representations and Warranties. Each of the
representations and warranties contained herein of UCB shall be true and correct
as of the date of this Agreement and upon the Effective Date with the same
effect as though all such representations and warranties had been made on the
Effective Date, except (i) for any such representations and warranties made as
of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, or (iii) for representations and
warranties the inaccuracies of which relate to matters that, individually or in
the aggregate, do not materially adversely affect the Reorganization and the
other transactions contemplated by this Agreement and MACB shall have received a
certificate or certificates signed by the Chief Executive Officer and Chief
Financial Officer of UCB dated the Effective Date, to such effect.
(b) Performance of Obligations. UCB shall have performed in
all material respects all obligations required to be performed by it under this
Agreement prior to the Effective Date,
A-31
<PAGE>
and MACB shall have received a certificate signed by the Chief Executive Officer
of UCB to that effect.
(c) Affiliate Letters. Each shareholder of UCB who may be
deemed by counsel for MACB to be an "affiliate" of UCB within the meaning of
Rule 145 under the Securities Act of 1933 shall have executed and delivered a
commitment and undertaking to the effect that (1) such shareholder will dispose
of the shares of MACB Common Stock received by him in connection with the
Reorganization only in accordance with the provisions of paragraph (d) of Rule
145 and in a manner that would not prevent the Reorganization from qualifying
for pooling-of-interests accounting treatment; (2) such shareholders will not
dispose of any such shares until MACB has received an opinion of counsel
acceptable to it that such proposed disposition will not violate the provisions
of any applicable security laws; and (3) the certificates representing said
shares may bear a conspicuous legend referring to the forgoing restrictions.
(d) Investment Banking Letter. MACB shall have received a
written opinion in form and substance satisfactory to MACB from Davenport &
Company LLC addressed to MACB and dated the date the Proxy Statement/Prospectus
is mailed to shareholders of MACB, to the effect that the terms of the
Reorganization, including the Exchange Ratio, are fair, from a financial point
of view, to MACB.
6.3 Conditions to Obligations of UCB. The obligations of UCB to
effect the Reorganization shall be subject to the fulfillment or waiver at or
prior to the Effective Date of the following additional conditions:
(a) Representations and Warranties. Each of the
representations and warranties contained herein of MACB shall be true and
correct as of the date of this Agreement and upon the Effective Date with the
same effect as though all such representations and warranties had been made on
the Effective date, except (i) for any such representations and warranties made
as of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, or (iii) for representations and
warranties the inaccuracies of which relate to matters that, individually or in
the aggregate, do not materially adversely affect the Reorganization and the
other transactions contemplated by this Agreement and UCB shall have received a
certificate or certificates signed by the Chief Executive Officer and Chief
Financial Officer of MACB dated the Effective Date, to such effect.
(b) Performance of Obligations. MACB shall have performed
in all material respects all obligations required to be performed by it under
this Agreement prior to the Effective Date, and UCB shall have received a
certificate signed by Chief Executive Officer of MACB to that effect.
(c) Investment Banking Letter. UCB shall have received a
written opinion in form and substance satisfactory to UCB from Scott &
Stringfellow, Inc. addressed to UCB and dated the date the Proxy
Statement/Prospectus is mailed to shareholders of UCB, to the effect that the
terms of the Reorganization, including the Exchange Ratio, are fair, from a
financial point of view, to UCB.
ARTICLE 7
Termination
7.1 Termination. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement and the Plan of
Merger by the shareholders of MACB and UCB, this Agreement may be terminated and
the Reorganization abandoned at any time prior to the Effective Date:
A-32
<PAGE>
(a) By the mutual consent of the Board of Directors of each
of MACB and UCB;
(b) By the respective Boards of Directors of MACB or UCB if
the conditions set forth in Section 6.1 have not been met or waived by MACB and
UCB;
(c) By the Board of Directors of MACB if the conditions set
forth in Section 6.2 have not been met or waived by MACB;
(d) By the Board of Directors of UCB if the conditions set
forth in Section 6.3 have not been met or waived by UCB;
(e) By the respective Boards of Directors MACB or UCB if
the Reorganization is not consummated by February 28, 1999.
(f) (1) By the Board of Directors of MACB if the Board of
Directors of UCB receives a subsequent offer to acquire UCB and does not within
fourteen (14) days after receipt of such subsequent offer confirm in writing to
MACB that each member of the Board of Directors of UCB supports the
Reorganization, will vote his shares of UCB Common Stock in favor of the
Reorganization, and will recommend to the shareholders of UCB that they approve
the Reorganization.
(2) By the Board of Directors of UCB if the Board of
Directors of MACB receives a subsequent offer to acquire MACB and does not
within fourteen (14) days after receipt of such subsequent offer confirm in
writing to UCB that each member of the Board of Directors of MACB supports the
Reorganization and will vote his shares of MACB Common Stock in favor of the
Reorganization, and will recommend to the shareholders of MACB that they
approval the Reorganization.
(g) By the Board of Directors of UCB if, before the
Effective Date, MACB shall enter into any agreement or letter of intent
providing for the direct or indirect acquisition of substantially all of the
assets and liabilities or voting stock of MACB.
7.2 Effect of Termination. In the event of the termination and
abandonment of this agreement and the Reorganization pursuant to Section 7.1,
this Agreement shall become void and have no effect, except that (i) the last
sentence of Section 4.2 and all of Sections 4.8 and 7.4 shall survive any such
termination and abandonment and (ii) no party shall be relieved or released from
any liability arising out of an intentional breach of any provision of this
Agreement.
7.3 Non-Survival of Representations, Warranties and Covenants.
Except for Sections 1.2, 1.4, 2.1, 2.2, 2.3, 2.4, 5.3, 5.4 and 7.4 of this
Agreement, none of the respective representations and warranties, obligations,
covenants and agreements of the parties shall survive the Effective Date,
provided that no such representations, warranties, obligations, covenants and
agreements shall be deemed to be terminated or extinguished so as to deprive
MACB or UCB (or any director, officer, or controlling person thereof) of any
defense in law or equity which otherwise would be available against the claims
of any person, including without limitation any shareholder or former
shareholder of either MACB or UCB.
7.4 Expenses. The parties provide for the payment of expenses as
follows:
(a) Except as provided in Section 7.4(b) below, each of the
parties shall bear and pay all costs and expenses incurred by it or on its
behalf in connection with the transactions
A-33
<PAGE>
contemplated herein, including fees and expenses of its own consultants,
investment bankers, accountants and counsel.
(b) Notwithstanding the provisions of Section 7.4(a)
hereof, if for any reason the Reorganization is not approved by the shareholders
of either party as required, that party shall bear and pay 50% of the costs and
expenses incurred by the other party with respect to the fees and expenses of
accountants, counsel, printers and persons involved in the transactions
contemplated by this Agreement, including the preparation of the Registration
Statement and the Joint Proxy Statement.
(c) If this Agreement is terminated by MACB or UCB because
of a willful and material breach by the other of any representation, warranty,
covenant, undertaking or restriction set forth herein, and provided that the
terminating party shall not have been in breach (in any material respect) of any
representation and warranty, covenant, undertaking or restriction contained
herein, then the breaching party shall bear and pay all such costs and expenses
of the other party, including fees and expenses of consultants, investment
bankers, accountants, counsel, printers, and persons involved in the
transactions contemplated by this Agreement, including the preparation of the
Registration Statement and the Joint Proxy Statement.
(d) Any liability to the other incurred by UCB or MACB
pursuant to this Section 7.4 shall not exceed a total of $100,000.
(e) Final settlement with respect to the payment of such
fees and expenses by the parties shall be made within thirty (30) days after the
termination of this Agreement.
ARTICLE 8
General Provisions
8.1 Entire Agreement. This Agreement contains the entire agreement
among MACB and UCB with respect to the Reorganization and the related
transactions and supersedes all prior arrangements or understandings with
respect thereto.
8.2 Waiver and Amendment. Any term or provision of this Agreement
may be waived in writing at any time by the party which is, or whose
shareholders are, entitled to the benefits thereof, and this Agreement may be
amended or supplemented by written instructions duly executed by the parties
hereto at any time, whether before or after the meetings of UCB and MACB
shareholders referred to in Section 6.1(a) hereof, except statutory requirements
and requisite approvals of shareholders and regulatory authorities.
8.3 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning and construction of any
provisions of this Agreement.
8.4 Governing Law. Except as required otherwise or otherwise
indicated herein, this Agreement shall be construed and enforced according to
the laws of the Commonwealth of Virginia.
8.5 Notices. All notices or other communications which are required
or permitted hereunder shall be in writing and sufficient if delivered
personally or sent by registered or certified mail, postage prepaid, addressed
as follows:
A-34
<PAGE>
If to MACB:
William J. Farinholt, President
Mid-Atlantic Community BankGroup, Inc.
7171 George Washington Memorial Highway
P. O Box 1310
Gloucester, Virginia 23061-1310
(Tel. 804-693-0628)
Copy to:
Wayne A. Whitham, Jr., Esquire
Williams, Mullen, Christian & Dobbins
1021 East Cary Street
P.O. Box 1320
Richmond, Virginia 23210-1320
(Tel. 804-783-6473)
If to UCB:
Wenifred O. Pearce, President
United Community Bankshares, Inc.
100 East Fourth Avenue
Franklin, Virginia 23851
(Tel. 1-800-343 8241)
Copy to:
Fred W. Palmore, III, Esquire
Mays & Valentine
NationsBank Center
1111 E. Main Street
Richmond, VA 23219
(Tel. 804-697-1200)
8.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts together
shall constitute one and the same agreement.
8.7 Severability. In the event any provisions of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provisions
hereof. Any provision of this Agreement held invalid or unenforceable only in
part or degree shall remain in full force and effect to the extent not held
invalid or unenforceable. Further, the parties agree that a court of competent
jurisdiction may reform any provision of this Agreement held invalid or
unenforceable so as to reflect the intended agreement of the parties hereto.
8.8 Subsidiaries. All representations, warranties, and covenants
herein, where pertinent, include and shall apply to the Subsidiaries of the
party making such representations, warranties, and covenants.
A-35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the dates first written above.
Mid-Atlantic Community BankGroup, Inc.
By: /s/ William J. Farinholt
--------------------------------------
William J. Farinholt
President and Chief Executive Officer
ATTEST:
/s/ Kathleen C. Healy
- ---------------------
Kathleen C. Healy
Secretary
United Community Bankshares, Inc.
By: /s/ Wenifred O. Pearce
--------------------------------------
Wenifred O. Pearce
President and Chief Executive Officer
ATTEST:
/s/ F. Bruce Stewart
- ---------------------
F. Bruce Stewart
Secretary
A-36
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
BOARD OF DIRECTORS
Each of the undersigned members of the Board of Directors of
Mid-Atlantic Community BankGroup, Inc. agrees to be bound by his personal
obligations as provided in Section 4.3 and 4.6 of this Agreement.
/s/ Charles F. Bristow /s/ John R. Curtis
- ------------------------------------ ------------------------------------
Charles F. Bristow John R. Curtis
/s/ Charles F. Dawson /s/ William J. Farinholt
- ------------------------------------ ------------------------------------
Charles F. Dawson William J. Farinholt
/s/ William D. Fary /s/ Robert D. Foster
- ------------------------------------ ------------------------------------
William D. Fary Robert D. Foster
/s/ Harry M. Healy /s/ Jeanne P. Hockaday
- ------------------------------------ ------------------------------------
Harry M. Healy Jeanne P. Hockaday
/s/ Joseph A. Lombard, Jr., DDS /s/ George A. Marston, Jr.
- ------------------------------------ ------------------------------------
Joseph A. Lombard, Jr., DDS George A. Marston, Jr.
/s/ Hersey M. Mason, Jr. /s/ Henry C. Rowe, MD
- ------------------------------------ ------------------------------------
Hersey M. Mason, Jr. Henry C. Rowe, MD
/s/ Kenneth E. Smith /s/ Thomas Z. Wilke
- ------------------------------------ ------------------------------------
Kenneth E. Smith Thomas Z. Wilke
/s/ David W. Holland
- ------------------------------------
David W. Holland
A-37
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
BOARD OF DIRECTORS
Each of the undersigned members of the Board of Directors of United
Community Bankshares, Inc. agrees to be bound by his personal obligations as
provided in Section 4.3 and 4.6 of this Agreement.
/s/ Hunter Darden, Jr. /s/ Gregor O. Huber
- ------------------------------------ ------------------------------------
Hunter Darden, Jr. Gregor O. Huber
/s/ F. Bruce Stewart /s/ J. Philip Bain, Jr.
- ------------------------------------ ------------------------------------
F. Bruce Stewart J. Philip Bain, Jr.
/s/ Jack P. Bain /s/ Harvey G. Pope
- ------------------------------------ ------------------------------------
Jack P. Bain Harvey G. Pope
/s/ D. Eugene Brittle /s/ Wenifred O. Pearce
- ------------------------------------ ------------------------------------
D. Eugene Brittle Wenifred O. Pearce
/s/ J. D. Spivey /s/ J. Russell West
- ------------------------------------ ------------------------------------
J. D. Spivey J. Russell West
A-38
<PAGE>
EXHIBIT A
to the
Agreement and Plan
of Reorganization
PLAN OF MERGER
BETWEEN
UNITED COMMUNITY BANKSHARES, INC.
AND
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Pursuant to this Plan of Merger ("Plan of Merger"), United Community
Bankshares, Inc. ("UCB"), a Virginia corporation, shall merge with and into
Mid-Atlantic Community BankGroup, Inc. ("MACB"), a Virginia corporation in a
merger under Section 13.1-716 of the Virginia Stock Corporation Act.
ARTICLE 1
Terms of the Share Exchange
1.1 The Merger. Subject to the terms and conditions of the
Agreement and Plan of Reorganization, dated as of July 8, 1998 between UCB and
MACB, at the Effective Date, UCB shall merge with and into MACB , which shall be
the surviving corporation. Each outstanding share of common stock of UCB shall
be converted into and exchanged for shares of the common stock of MACB in
accordance with Section 2.1 of this Plan of Merger and pursuant to a merger
under Section 13.1-716 of the Virginia Stock Corporation Act (the "Merger"). At
the Effective Date, the Merger shall have the effect as provided in Section
13.1-721 of the Virginia Stock Corporation Act.
1.2 Articles of Incorporation and Bylaws. The Articles of
Incorporation of MACB in the form attached hereto as Annex I shall be the
Articles of Incorporation of the surviving corporation following the Effective
Date until amended or repealed. The Bylaws of MACB in the form attached hereto
as Annex II shall be the Bylaws of the surviving corporation following the
Effective Date until amended or repealed in accordance with the terms of such
Bylaws.
1.3 Management of Surviving Corporation. (a) The directors,
officers and employees of the Banks will not change as a result of the
Reorganization. MACB's Board of Directors presently has fifteen (15) members. On
the Effective Date, eight (8) members of such Board of Directors shall resign
and the board of Directors of the surviving corporation shall consist of the
following fourteen (14) individuals: Charles F. Dawson, William J. Farinholt,
Robert D Foster, Harry M. Healy, Joseph A. Lombard, Jr., Hersey M. Mason, Jr.,
Thomas Z. Wilke, J. Russell West, Wenifred O. Pearce, J. Philip Bain, Jr.,
Harvey G. Pope, J. D. Spivey, F. Bruce Stewart and William B. Savedge.
If any individual named above who is a member of the Board of Directors
of UCB or a UCB subsidiary is not a member of such Board of Directors on the
Effective Date, a replacement shall be designated by the UCB Board of Directors.
If any individual named above who is a member of the MACB Board of Directors is
not a member of the MACB Board of Directors on the Effective Date, a replacement
shall be designated by the MACB Board of Directors.
As used herein, "MACB Nominee" shall refer to any individual named in
Section 1.3(a) who is a director of MACB on the day before the Effective Date
and to any Director chosen for
A-39
<PAGE>
nomination by the MACB Nominees after the Effective Date and "UCB Nominee" shall
refer to any individual named in Section 1.3(a) who is a director of UCB or a
subsidiary of UCB on the day before the Effective Date hereof and to any
Director chosen for nomination by the UCB Nominees after the Effective Date.
(b) On and after the Effective Date, the Board of Directors
shall be divided into three classes. Class I shall consist of J. Russell West,
Harvey G. Pope, William J. Farinholt, Thomas Z. Wilke and Charles F. Dawson;
Class II shall consist of William B. Savedge, F. Bruce Stewart, J. D. Spivey,
Hersey M. Mason and Harry M. Healy; and Class III shall consist of J. Philip
Bain, Wenifred O. Pearce, Joseph A. Lombard, Jr. and Robert D. Foster. Members
of Class I shall serve for a term that expires at the 1999 annual meeting of
shareholders. Members of Class II shall serve for a term that expires at the
2000 annual meeting of shareholders. Members of Class III shall serve for a term
that expires at the 2001 annual meeting of shareholders.
(c) (1) In the first five annual elections of
Directors, after the Effective Date, nominations for election to the Board of
Directors made by the Board of Directors shall be made in the manner described
in Section 1.3(c)(2) unless seventy-five percent (75%) of the full Board of
Directors otherwise agrees.
(2) If a Director whose term expires at an annual meeting
is an MACB Nominee and he is not nominated for re-election, the Directors who
are MACB nominees shall designate a successor who shall be nominated for
election to the Board of Directors by the Board of Directors. If a Director
whose term expires at an annual meeting is a UCB Nominee and he is not nominated
for re-election, the Directors who are UCB Nominees shall designate a successor
who shall be nominated for election to the Board of Directors by the Board of
Directors.
(d) Unless seventy-five percent (75%) of the full Board of
Directors otherwise agrees, if a vacancy arises from the resignation, death or
removal of a Director, before the annual meeting of shareholders in the year
2004, the vacancy shall be filled by an individual designated by the MACB
Nominees (if the vacant seat was held by an MACB Nominee) or by the UCB Nominees
(if the vacant seat was held by a UCB Nominee).
(e) On and after the Effective Date the officers of the
surviving corporation shall be as follows:
<TABLE>
<CAPTION>
<S> <C>
Chairman of the Board - Joseph A. Lombard, Jr.
Vice Chairman of the Board - J. Russell West
President and Chief Executive Officer - William J. Farinholt
Vice Chairman and
Chief Operating Officer - Wenifred O. Pearce
Executive Vice President,
Chief Financial Officer and
Secretary - Kenneth E. Smith
Executive Vice President - D. Eugene Brittle
</TABLE>
A-40
<PAGE>
ARTICLE 2
Manner of Converting Shares
2.1 Conversion of Shares. Upon, and by reason of, the Merger
becoming effective pursuant to the issuance of a Certificate of Merger by the
Virginia State Corporation Commission, no cash, except as set forth in section
2.3 below, shall be allocated to the shareholders of UCB, and stock shall be
issued and allocated as follows:
Each share of common stock, par value $1.00 per share, of UCB
("UCB Common Stock") issued and outstanding immediately prior to the Effective
Date shall be entitled to the rights set forth in this Section 2.1 or to their
rights under Article 15 of the Virginia Stock Corporation Act as set forth in
Section 2.6 below. On the Effective Date, each issued and outstanding share of
UCB Common Stock shall be converted into 1.075 shares of MACB Common Stock (the
"Exchange Ratio"). Each holder of a certificate which immediately prior to the
Effective Date represented shares of UCB Common Stock, upon the surrender of his
UCB stock certificates to MACB, duly endorsed for transfer in accordance with
Section 2.3 below, will be entitled to receive in exchange therefor a
certificate or certificates representing the number of shares of MACB Common
Stock that such UCB stock certificates shall entitle him to pursuant to the
Exchange Ratio. After the Effective Date, each such former holder of UCB Common
Stock shall have the right to receive (i) any dividend or such distribution
payable at or as of any time after the Effective Date to holders of record of
MACB Common Stock at or as of any time after the Effective Date, and (ii) the
consideration described in Sections 2.1 and 2.4 upon the surrender of such
certificate in accordance with Section 2.3. In the event MACB changes the number
of shares of MACB Common Stock issued and outstanding prior to the Effective
Date as a result of any stock split, stock dividend, reclassification,
recapitalization or similar transaction with respect to the outstanding MACB
Common Stock and the record date therefor shall be prior to the Effective Date,
the Exchange Ratio shall be proportionally adjusted.
2.2 Conversion of Stock Options. (a) On the Effective Date, all
rights with respect to UCB Common Stock pursuant to stock options ("UCB
Options") granted by UCB under a UCB stock option plan which are outstanding on
the Effective Date, whether or not then exercisable, shall be converted into and
become rights with respect to MACB Common Stock, and MACB shall assume each UCB
Option in accordance with the terms of the stock option plan under which it was
issued and the stock option agreement by which it is evidenced. From the
Effective Date forward, (i) each UCB Option assumed by MACB may be exercised
solely for shares of MACB Common Stock, (ii) the number of shares of MACB Common
Stock subject to each UCB Option shall be equal to the number of shares of UCB
Common Stock subject to such option immediately prior to the Effective Date
multiplied by the Exchange Ratio and (iii) the per share exercise price under
each such UCB Option shall be adjusted by dividing the per share exercise price
under each such option by the Exchange Ratio and rounding down to the nearest
cent; provided, however, that the terms of each UCB Option shall, in accordance
with its terms, be subject to further adjustment as appropriate to reflect any
stock split, stock dividend, recapitalization or other similar transaction after
the Effective Date. It is intended that the forgoing assumption shall be
undertaken in a manner that will not constitute a "modification" as defined in
Section 425 of the Code, as to any stock option which is an "incentive stock
option."
(b) Pursuant to approval of this Plan of Merger, the MACB
1998 Incentive Plan shall be amended to increase the number of authorized shares
to cover the conversion of the UCB Options into options to purchase MACB common
stock pursuant to Section 2.2(a) above and to otherwise provide for conversion
of the UCB Options as described herein.
A-41
<PAGE>
2.3 Manner of Exchange. As promptly as practicable after the
Effective Date, MACB shall cause Peninsula Trust Bank, Incorporated, acting as
the exchange agent ("Exchange Agent") to send to each former shareholder of
record of UCB immediately prior to the Effective Date transmittal materials for
use in exchanging such shareholder's certificates of UCB Common Stock (other
than shares held by shareholders who perfect their dissenter's rights as
provided under Section 2.5 hereof) for the consideration set forth in Section
2.1 above and Section 2.4 below. Any fractional share checks which a UCB
shareholder shall be entitled to receive in exchange for such shareholder's
shares of UCB Common Stock, and any dividends paid on any shares of MACB Common
Stock that such shareholder shall be entitled to receive prior to the delivery
to the Exchange Agent of such shareholder's certificates representing all of
such shareholder's shares of UCB Common Stock will be delivered to such
shareholder only upon delivery to the Exchange Agent of the certificates
representing all of such shares (or indemnity satisfactory to MACB and the
Exchange Agent, in their judgment, if any of such certificates are lost, stolen
or destroyed). No interest will be paid on any such fractional share checks or
dividends to which the holder of such shares shall be entitled to receive upon
such delivery.
2.4 No Fractional Shares. No certificates or scrip for fractional
shares of MACB Common Stock will be issued. In lieu thereof, MACB will pay the
value of such fractional shares in cash on the basis of the average of the
closing prices of MACB Common Stock as reported by NASDAQ for trades reported
during the ten (10) trading days immediately preceding the Effective Date.
2.5 Dividends. No dividend or other distribution payable to the
holders of record of MACB Common Stock at or as of any time after the Effective
Date shall be paid to the holder of any certificate representing shares of UCB
Common Stock issued and outstanding immediately prior to the Effective Date
until such holder physically surrenders such certificate for exchange as
provided in Section 2.3, promptly after which time all such dividends or
distributions shall be paid by MACB (without interest).
2.6 Rights of Dissenting Shareholders. Shareholders of UCB and MACB
who object to the Share Exchange will be entitled to the dissenters' rights and
remedies set forth in sections 13.1-729 through 13.1-741 of the Virginia Stock
Corporation Act.
ARTICLE 3
Termination
This Plan of Merger may be terminated at any time prior to the
Effective Date by the parties hereto as provided in Article 7 of the Agreement
and Plan of Reorganization, dated July 8, 1998, between the parties.
Mid-Atlantic Community BankGroup, Inc.
By:________________________________
President
United Community Bankshares, Inc.
By:________________________________
President
A-42
<PAGE>
ANNEX I
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ATLANTIC FINANCIAL CORP.
ARTICLE I
NAME
The name of the corporation is Atlantic Financial Corp.
ARTICLE II
CAPITAL STOCK
Paragraph A. The aggregate number of shares of stock which the
Corporation shall have the authority to issue and the par value per share are as
follows:
Number of
Class Shares Par Value
----- --------- ---------
Common Stock 20,000,000 $5.00
Preferred Stock 1,000,000 $1.00
Paragraph B. No holders of any class of stock of the Corporation shall
have any preemptive or other preferential right to purchase or subscribe to (i)
any shares of any class of stock of the Corporation, whether now or hereafter
authorized, (ii) any warrants, rights or options to purchase any such stock, or
(iii) any obligations convertible into any such stock or into warrants, rights
or options to purchase any such stock.
Paragraph C. The holders of the Common Stock shall, to the exclusion of
the holders of any other class of stock of the Corporation, have the sole and
full power to vote for the election of directors and for all other purposes
without limitation except only as otherwise provided in any articles of
amendment applicable to any series of Preferred Stock, and as otherwise
expressly provided by the then existing statutes of Virginia. The holders of the
Common Stock shall have one vote for each share of Common Stock held by them.
Except as may be set forth in any articles of amendment applicable to shares of
Preferred Stock, the holders of the Common Stock shall be entitled to receive
the net assets of the Corporation upon dissolution.
Paragraph D. Authority is expressly vested in the Board of Directors to
divide the Preferred Stock into and issue the same in series and, to the fullest
extent permitted by law, to fix and determine the preferences, limitations and
relative rights of the shares of any series so established, and to provide for
the issuance thereof.
A-43
<PAGE>
Prior to the issuance of any share of a series of Preferred Stock, the
Board of Directors shall establish such series by adopting a resolution setting
forth the designation and number of shares of the series and the preferences,
limitations and relative rights thereof, and the Corporation shall file with the
State Corporation Commission articles of amendment as required by law, and the
State Corporation Commission shall have issued a certificate of amendment.
ARTICLE III
INDEMNIFICATION AND LIMITS ON LIABILITY
OF DIRECTORS AND OFFICERS
Paragraph A. To the full extent permitted by the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended,
each Director and officer shall be indemnified by the Corporation against
liabilities, fines penalties and claims imposed upon or asserted against him
(including amounts paid in settlement) by reason of having been such Director or
officer, whether or not then continuing so to be, and against all expenses
(including counsel fees) reasonably incurred by him in connection therewith,
except in relation to matters as to which he shall have been finally adjudged
liable by reason of his willful misconduct or a knowing violation of criminal
law in the performance of his duty as such Director of officer. The
determination that the indemnification under this Paragraph A is permissible
shall be made as provided by law. The right of indemnification hereby provided
shall not be exclusive of any other rights to which any Director or officer may
be entitled.
Paragraph B. To the full extent permitted by the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended, in
any proceeding brought by a shareholder of the Corporation in the right of the
Corporation or brought by or on behalf of shareholders of the Corporation, a
director or officer of the Corporation shall not be liable in any monetary
amount for damages arising out of or resulting from a single transaction,
occurrence or course of conduct, provided that the elimination of liability
herein set forth shall not be applicable if the Director or officer engaged in
willful misconduct or a knowing violation of the criminal law or of any federal
or state securities law.
Paragraph C. The Board of Directors is hereby empowered, by a majority
vote of a quorum of disinterested Directors, to indemnify or contract in advance
to indemnify any person not specified in Paragraph A of this Article against
liabilities, fines, penalties and claims imposed upon or asserted against him
(including amounts paid in settlement) by reason of having been an employee,
agent or consultant of the Corporation, whether or not then continuing so to be,
and against all expenses (including counsel fees) reasonably incurred by him in
connection therewith, to the same extent as if such person were specified as one
to whom indemnification is granted in Paragraph A of this Article.
Paragraph D. Every reference in this Article to Director, officer,
employee, agent or consultant shall include (i) every Director, officer,
employee, agent or consultant of the Corporation or any corporation the majority
of the voting stock of which is owned directly or indirectly by the Corporation,
(ii) every former Director, officer, employee, agent or consultant of the
Corporation, (iii) every person who may have served at the request of or on
behalf of the Corporation as a Director, officer, employee, agent, consultant or
trustee of another corporation, partnership, joint venture, trust or other
entity, and (iv) in all of such cases, his executors and administrators.
A-44
<PAGE>
Paragraph E. The provisions of this Article shall be applicable from
and after its adoption even though some or all of the underlying conduct or
events relating to such a proceeding may have occurred before such adoption. No
amendment, modification or repeal of this Article shall diminish the rights
provided hereunder to any person arising from conduct or events occurring before
the adoption of such amendment, modification or repeal.
Paragraph F. In the event there has been a change in the composition of
a majority of the Board of Directors after the date of the alleged act or
omission with respect to which indemnification is claimed, any determination as
to indemnification and advancements of expenses with respect to any claim for
indemnification made pursuant to Paragraph A of this Article shall be made by
special legal counsel agreed upon by the Board of Directors and the proposed
indemnitee. If the Board of Directors and the proposed indemnitee are unable to
agree upon such special legal counsel, the Board of Directors and the proposed
indemnitee each shall select a nominee, and the nominees shall select such
special legal counsel.
ARTICLE IV
DIRECTORS
Paragraph A. Except as otherwise fixed by any articles of amendment
adopted by the Board of Directors pursuant to Paragraph D of Article II relating
to the rights of the holders of any Series of Preferred Stock to elect
additional directors under specified circumstances, the number of the directors
of the Corporation shall be fixed from time to time by or pursuant to the Bylaws
of the Corporation.
Paragraph B. The directors, other than those who may be elected by the
holders of any series of Preferred Stock, shall be classified, with respect to
the time for which they severally hold office, into three classes, as nearly
equal in number as possible, with each class to hold office until its successor
is elected and qualified. At each annual meeting of the stockholders of the
Corporation, the successors of the class of directors whose term expires at that
meeting shall be elected to hold office for a term expiring the annual meeting
of stockholders held in the third year following the year of their election.
Paragraph C. Except as otherwise fixed by any articles of amendment
adopted by the Board of Directors pursuant to Paragraph D of Article II relating
to the rights of the holders of any series of Preferred Stock to elect directors
under specified circumstances, newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled only by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the class of director in which
the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
Paragraph D. Advance notice of stockholder nominations for the election
of directors shall be given in the manner provided in the Bylaws of the
Corporation.
A-45
<PAGE>
ARTICLE V
BYLAW AMENDMENTS
The Board of Directors shall have power to make, alter, amend and
repeal the Bylaws of the Corporation except so far as any of the Bylaws of the
Corporation adopted by the stockholders shall otherwise provide. Any Bylaws made
by the directors under the powers conferred hereby may be altered, amended or
repealed by the directors or by the stockholders.
ARTICLE VI
SPECIAL VOTING PROVISIONS
Paragraph A. An amendment to the Articles of Incorporation of the
Corporation shall be approved if:
1. A majority of the votes entitled to be cast by each voting
group entitled to vote on such action are cast in favor of
such action; and,
2. Unless such action shall have been approved by at least
two-thirds of the directors, holders of more than two-thirds
of the issued and outstanding shares of the Corporation's
Common Stock vote in favor of such action.
Paragraph B. Any director may be removed from office with or without
cause, but only if holders of more than seventy percent (70%) of the issued and
outstanding shares of Common Stock vote in favor of such action.
Paragraph C. Any merger or share exchange to which the Corporation is a
party or any direct or indirect sale, lease, exchange or other disposition of
all or substantially all of the Corporation's property, otherwise than in the
usual and regular course of business, shall be approved if:
1. A majority of the votes entitled to be cast by each voting
group entitled to vote on such action are cast in favor of
such action; and,
2. Unless such action shall have been approved by at least
two-thirds of the directors, at least two-thirds of the issued
and outstanding shares of the Corporation's Common Stock vote
in favor of such action.
This Paragraph C shall not affect the power of the Board of Directors
to condition its submission of any plan of merger, share exchange or direct or
indirect sale, lease, exchange or other disposition of all or substantially all
of the Corporation's property, otherwise than in the usual and regular course of
business, on any basis, including the requirement of a greater vote.
A-46
<PAGE>
ANNEX II
BYLAWS
OF
ATLANTIC FINANCIAL CORP.
ARTICLE I
Shareholder Matters
Section 1.1. Annual Meetings.
A. The annual meeting of the shareholders of the Corporation shall
be held at such a place as may be decided by, the Board of Directors on a date
during the month of April, May and June of each and every year, the exact date,
place and hour to be fixed by the Board of Directors.
B. At the annual meeting of the shareholders of the Corporation,
Directors shall be elected and reports of the affairs of the Corporation shall
be received and considered. Any other business may be transacted which is within
the powers of the shareholders, except that, if any shareholder shall bring new
business before the annual meeting, the shareholder must give advance notice as
set forth in Section 1.6 of these Bylaws.
C. The Board of Directors may designate any place, either within
or without the Commonwealth of Virginia, as the place of meeting for any annual
meeting or for any special meeting. If no place is designated by the Board, the
place of meeting shall be the principal office of the Corporation.
Section 1.2. Special Meetings. A special meeting of the
shareholders may be called for any purpose or purposes whatsoever at any time,
by the President, the Chairman of the Board of Directors, the Board of Directors
or by holders of at least twenty-five percent of the issued and outstanding
shares of Common Stock.
Section 1.3. Notice of Meetings. Notice of the time and place of
every annual meeting or special meeting shall be mailed to each Shareholder of
record entitled to vote at the meeting at his address as it appears on the
records of the Corporation not less than ten (10) nor more than sixty (60) days
before the date of such meeting (except as a different time may be specified by
law).
Section 1.4. Quorum. A majority of the votes entitled to be cast on
a matter by a voting group constitutes a quorum of such voting group for action
on such matter. If there is not a quorum at the time for which a meeting shall
have been called, the meeting may be adjourned from time to time by a majority
of the shareholders present or represented by proxy without notice, other than
by announcement at the meeting, until there is a quorum.
Section 1.5. Voting. Except as the Articles of Incorporation
otherwise provide, at any meeting of the shareholders, each outstanding share,
regardless of class, is entitled to one vote on each matter voted on at a
shareholders' meeting.
Section 1.6. Notice of Shareholder Business. At an annual meeting
of the shareholders of the Corporation, only such business shall be conducted as
shall have been properly brought
A-47
<PAGE>
before the meeting. To be brought before an annual meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise bought before the meeting
by or at the direction of the Board of Directors, or (c) otherwise properly
brought before the meeting by a shareholder. For business to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation, not less than sixty (60)
days nor more than ninety (90) days prior to the date of the scheduled annual
meeting, regardless of any postponements, deferrals or adjournments of that
meeting to a later date; provided, however, that in the event that less than
seventy (70) days' notice or prior public disclosure of the date of the
scheduled annual meeting is given or made, notice by a shareholder, to be
timely, must be so received not later than the close of business on the tenth
(10th) day following the earlier of the day on which such notice of the date of
the scheduled annual meeting was mailed or the day on which such public
disclosure was made. A shareholder's notice to the Secretary of the Corporation
shall set forth as to each matter the shareholder proposes to bring before the
annual meeting (a) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (b) the name and address, as they appear on the Corporation's
books of the shareholder proposing such business and of any other person or
entity who is the record or beneficial owner of any shares of the Corporation
and who, to the knowledge of the shareholder proposing such business, supports
such proposal, (c) the class and number of shares of the Corporation which are
beneficially owned and owned of record by the shareholder proposing such
business on the date of his notice to the Corporation and the number of shares
so owned by any person or entity who, to the knowledge of the shareholder
proposing such business, supports such proposal and (d) any material interest
(financial or other) of such shareholder in such proposal. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
Section 1.6. The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 1.6. and if
the Chairman should so determine, the Chairman shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
Section 1.7. Order of Business. All meetings of shareholders shall
be conducted in accordance with such rules as are prescribed by the Chairman of
the meeting and the Chairman shall determine the order of business at all
meetings of the shareholders.
Section 1.8. Inspectors. The Board of Directors, in advance of any
meeting of shareholders, may, but shall not be required to, appoint one or more
inspectors to act at such meeting or any adjournment thereof. If any of the
inspectors so appointed shall fail to appear or act, the Chairman of the meeting
may appoint one or more inspectors. The inspectors shall determine the number of
shares of capital stock of the Corporation outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the results, and do such acts as are proper to conduct the election or
vote with fairness to all shareholders. On request of the Chairman of the
meeting, the inspectors shall make a report of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as an inspector of an
election of directors. Inspectors need not be shareholders.
A-48
<PAGE>
ARTICLE II
Directors
Section 2.1. General Powers. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors and,
except as otherwise expressly provided by law or by the Articles of
Incorporation, or by these Bylaws, all of the powers of the Corporation shall be
exercised by or under the authority of said Board of Directors.
Section 2.2. Number and Qualification. The Board of Directors shall
consist of fourteen (14) Directors.
Section 2.3. Election of Directors. The Directors shall be elected
at the annual meeting of shareholders, and shall hold their offices until their
successors are elected in accordance with the Articles of Incorporation.
Nominations for the election of Directors shall be given in the manner provided
in Section 2.5.
Section 2.4. Honorary and Advisory Directors. The Board may appoint
to the position of Honorary Director or the position of Advisory Director such
person or persons as it deems appropriate. Honorary Directors shall not be
entitled to receive notice of or to attend meetings of the Board. Advisory
Directors shall be entitled only to notice of meetings of Advisory or other
Boards of the Corporation to which they shall be appointed. Honorary and
Advisory Directors shall receive such compensation as may be authorized by the
Board of Directors for attendance at meetings of Advisory or other Boards to
which such Advisory or Honorary Directors are appointed.
Section 2.5. Nominations. (a) Only persons who are nominated in
accordance with the procedures set forth in this Section 2.5 shall be eligible
for election as Directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made by or at the direction of the Board of
Directors, or by any shareholder of the Corporation entitled to vote for the
election of Directors who complies with the notice procedures set forth in this
Section 2.5. Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporations not less than sixty (60) days nor more than ninety (90) days prior
to the date of the scheduled annual meeting, regardless of postponements,
deferrals, or adjournments of that meeting to a later date; provided, however,
in the event that less than seventy (70) days' notice or prior public disclosure
of the date of the meeting is given or made, notice by the shareholder to be
timely must be so received not later than the close of business on the 10th day
following the earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on which such public disclosure
was made. Such shareholder's notice shall set forth (a) as to each person whom
the shareholder proposes to nominate for election as a Director, (1) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the Corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended; and (b) as to the shareholder giving the notice (i) the name and
address of such shareholder and of any other person or entity who is the record
or beneficial owner of shares of the Corporation and who, to the knowledge of
the shareholder giving notice, supports such nominee(s) and (ii) the class and
number of shares of the Corporation which are beneficially owned and owned of
record by such shareholder and by any other person or entity who is the
A-49
<PAGE>
record or beneficial owner of shares of the Corporation and who, to the
knowledge of the shareholder giving the notice, supports such nominee(s). At the
request of the Board of Directors any person nominated by the Board of Directors
for election as a Director shall furnish to the Secretary of the Corporation the
information required to be set forth in a shareholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
Director of the Corporation unless nominated in accordance with the procedures
set forth in this Section 2.5. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the Bylaws, and if the Chairman
should so determine, the Chairman shall so declare to the meeting and the
defective nomination shall be disregarded.
(b) (1) In the first five annual elections of Directors, after
the Effective Date, nominations for election to the Board of Directors made by
the Board of Directors shall be made in the manner described in Section
2.5(b)(2) unless seventy-five percent (75%) of the full Board of Directors
otherwise agrees.
(2) If a Director whose term expires at an annual meeting is an
MACB Nominee and he is not nominated for re-election, the Directors who are MACB
Nominees shall designate a successor who shall be nominated for election to the
Board of Directors by the Board of Directors. If a Director whose term expires
at an annual meeting is a UCB Nominee and he is not nominated for re-election,
the Directors who are UCB Nominees shall designate a successor who shall be
nominated for election to the Board of Directors by the Board of Directors.
(c) Unless seventy-five percent (75%) of the full Board of
Directors otherwise agrees, if a vacancy arises from the resignation, death or
removal of a Director, before the annual meeting of shareholders in the year
2004, the vacancy shall be filled by an individual designated by the MACB
Nominees (if the vacant seat was held by an MACB Nominee) or by the UCB Nominees
(if the vacant seat was held by a UCB Nominee).
(d) The terms "MACB Nominee" and "UCB Nominee" shall have the
meanings specified in Section 1.1(d) and 1.1(e) of the Agreement and Plan of
Reorganization between United Community Bankshares, Inc. and Mid-Atlantic
Community BankGroup, Inc., dated July __, 1998.
Section 2.7. Meetings of Directors. Meetings of the Board of
Directors shall be held at places within or without the Commonwealth of Virginia
and at times fixed by resolution of the Board of Directors, or upon call of the
Chairman of the Board of Directors or the President. The Secretary, or officer
performing his duties, shall give at least twenty-four (24) hours' notice by
telegraph, letter, telephone or in person, of all meetings of the Directors;
provided, that notice need not be given of regular meetings held at times and
places fixed by resolution of the Board. Regular meetings of the Board of
Directors shall be held at least six times in every calendar year. Meetings may
be held at any time without notice if all of the Directors are present, or if
those not present waive notice either before or after the meeting. Neither the
business to be transacted nor the purpose of any annual or special meeting of
the Board of Directors need be specified in the notice or waiver of notice of
such meeting.
Section 2.8. Quorum. A majority of the members of the Board of
Directors shall constitute a quorum.
Section 2.9. Compensation. The Board of Directors shall fix the
compensation of the Directors.
A-50
<PAGE>
Section 2.10. Committees. The Board of Directors may create
committees and appoint members of committees in accordance with Virginia law.
There may be an Executive Committee and such committee may exercise the
authority of the Board of Directors to the fullest extent permitted by law.
ARTICLE III
Officers
Section 3.1. Election. The Officers of the Corporation shall
consist of the Chairman of the Board of Directors, one or more Vice Chairmen of
the Board of Directors, the President, one or more Executive or Senior Vice
Presidents, a Chief Financial Officer, one or more additional Vice Presidents, a
Secretary, one or more Assistant Secretaries, and such other officers as may be
elected as provided in Section 3.3 of this Article. All Officers shall be
elected by the Board of Directors, and shall hold office until their successors
are elected and qualify. Vacancies may be filled at any meeting of the Board of
Directors. Subject to any applicable provision of Virginia law, more than one
office may be combined in the same person as the Board of Directors may
determine.
Section 3.2. Removal of Officers. Subject to Article V, any Officer
of the Corporation may be summarily removed with or without cause, at any time,
by a resolution passed by affirmative vote of a majority of all of the
Directors; provided that any such removal shall not affect an Officer's right to
any compensation to which he is entitled under any employment contract between
such officer and the Corporation.
Section 3.3. Other Officers. Other Officers may from time to time
be appointed by the Board of Directors, and such Officers shall hold office for
such term as may be designated by the said Board of Directors.
Section 3.4. Chairman of the Board. The Chairman of the Board shall
be the senior Officer of the Corporation, and shall preside at all meetings of
the Directors and all meetings of the shareholders. The Chairman of the Board
shall appoint all standing committees and temporary committees and shall be a
member ex officio of all standing committees and shall have all other powers and
duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 3.5. Vice Chairman of the Board. In the absence or
disability of the Chairman of the Board, the Vice Chairman of the Board shall
preside at all meetings of the Directors and all meetings of the Shareholders.
If there shall be more than one Vice Chairman, the duties of the Vice Chairman
shall be discharged by a Vice Chairman who is not a full time employee of the
Corporation.
Section 3.6. President. The President shall be the Chief Executive
Officer of the Corporation. In the absence or disability of the Chairman of the
Board and the Vice Chairman of the Board, the President shall preside at all
meetings of the Directors and at meetings of the shareholders and in the absence
or disability of the Chairman of the Board and the Vice Chairman of the Board
the duties and responsibilities of such office shall devolve upon the President.
The President shall have such other powers and duties as may be prescribed by
the Chairman of the Board of Directors, the Board of Directors or by the Bylaws.
A-51
<PAGE>
Section 3.7. Chief Operating Officer. Subject to the authority
granted to the Chief Executive Officer, the Chief Operating Officer shall have
general supervision over the day-to-day operations of the Corporation and shall
perform such other duties as may be prescribed from time to time by the Board of
Directors or the Chief Executive Officer.
Section 3.8. Chief Financial Officer. The Chief Financial Officer
shall, subject to the direction of the Chief Executive Officer, have general
custody of all the property, funds and securities of the Corporation and shall
have general supervision of the collection and disbursement of funds of the
Corporation. He shall provide for the keeping of proper records of all
transactions of the Corporation and shall perform such other duties as may be
assigned to him by the Chief Executive Officer.
Section 3.9. Vice Presidents. Executive Vice Presidents, Senior
Vice Presidents and Vice Presidents shall perform such duties as may be
prescribed for them from time to time by the Chief Executive Officer or the
Board of Directors.
Section 3.10. Secretary. The Secretary shall have the duties and
responsibilities prescribed by law for the secretary of a Virginia corporation.
Section 3.11. Surety Bonds. All Officers and employees who shall
have charge or possession of money, securities or property of the Corporation
must, before entering upon their duties, be covered by a bond with a surety
company approved by the Board of Directors and state and federal authorities.
The costs of such bond shall be borne by the Corporation.
ARTICLE IV
Capital Stock
Section 4.1. Issues of Certificate of Stock. Certificates of
capital stock shall be in such form as may be prescribed by law and by the Board
of Directors. All certificates shall be signed by the President and by the
Secretary or an Assistant Secretary, or by any other two Officers authorized by
resolution of the Board of Directors.
Section 4.2. Transfer of Stock. The stock of the corporation shall
be transferable or assignable on the books of the Corporation by the holders in
person or by attorney on surrender of the certificate or certificates for such
shares duly endorsed, and, if sought to be transferred by attorney, accompanied
by a written power of attorney to have such stock transferred on the books of
the Corporation.
Section 4.3. Restrictions on Transfer of Stock. Any restrictions
that may be imposed by law, by the Articles of Incorporation or Bylaws of the
Corporation, or by an agreement among shareholders of the Corporation, shall be
noted conspicuously on the front or back of all certificates representing shares
of stock of the Corporation.
Section 4.4. Lost, Destroyed or Mutilated Certificates. The holder
of stock of the Corporation shall immediately notify the Corporation of any
loss, destruction, or mutilation of the certificate therefor, and the
Corporation may in its discretion cause one or more new certificates for the
same aggregate number of shares to be issued to such Stockholder upon the
surrender of the mutilated certificate, or upon satisfactory proof of such loss
or destruction accompanied by the deposit of a bond in such form and amount and
with such surety as the Corporation may require.
A-52
<PAGE>
Section 4.5. Holder of Record. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder thereof
in fact and shall not be bound to recognize any equitable or other claim to or
interest in such shares of stock on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise expressly
provided by law.
Section 4.6. Record Date. The Board of Directors shall fix in
advance the record date in order to make a determination of shareholders for any
purpose, including the determination of shareholders entitled to notice of or to
vote at any shareholders' meeting or entitled to payment of any dividend or
distribution to shareholders. Such record date shall not be more than seventy
(70) days prior to the date on which the particular action requiring such
determination of shareholders is to be taken.
Section 4.7. Control Share Acquisitions. Article 14.1 of the
Virginia Stock Corporation Act shall not apply to the Corporation.
ARTICLE V
Amendments and Special Voting Provisions
Section 5.1. Voting Generally. Except as otherwise provided by law
or as set forth in this Article V, the Board of Directors shall act by majority
vote at any duly held meeting at which a quorum is present.
Section 5.2. Special Voting Requirements. The affirmative vote of
at least sixty percent (60%) of the entire Board of Directors shall be required
to:
(a) Amend these Bylaws;
(b) Submit to the shareholders any plan of merger or share exchange
or any proposal to dissolve the Corporation or to sell, lease, exchange or
otherwise dispose of all or substantially all of the Corporation's property,
otherwise than in the usual and regular course of business;
(c) Submit to the shareholders any proposal to change the name of
the Corporation;
(d) Cause The Bank of Franklin or The Bank of Sussex and Surry or
Peninsula Trust Bank, Incorporated to change its name or amend its articles of
incorporation or bylaws;
(e) Cause The Bank of Franklin or The Bank of Sussex and Surry or
Peninsula Trust Bank, Incorporated to appoint, remove or transfer its Chief
Executive Officer;
(f) Dispose of any of the stock of The Bank of Franklin or The Bank
of Sussex and Surry or Peninsula Trust Bank, Incorporated or cause any of such
banks to dissolve or enter into a plan of merger or share exchange or to sell,
lease, exchange or otherwise dispose of all or substantially all of its
property, otherwise than in the usual and regular cause of business.
(g) Appoint, remove or transfer the Corporation's Chief Executive
Officer, Chief Operating Officer or any Executive Vice President.
A-53
<PAGE>
Section 5.3. Subsidiary Bank Directors. (a) The Directors of The
Bank of Franklin, The Bank of Sussex and Surry and Peninsula Trust Bank,
Incorporated (each a "Bank" and collectively the "Banks") each shall nominate
individuals for election to their respective Boards each year.
(b) The Corporation shall not remove any Director of a Bank or
refuse to vote its shares of any of such Bank's common stock in favor of the
election of those nominated in accordance with Section 5.3(a) unless (i) a
Director of one of such Banks violates a code of conduct that is generally
applicable to Directors of the Corporation and its subsidiaries, (ii) the
Corporation's Board of Directors determines that such a Bank is experiencing
business, financial or regulatory difficulties and, as a result, the Corporation
determines that a change in the Board of Directors of such Bank is necessary or
advisable in order to protect the Corporation or its investment in such Bank or
(iii) a director of one of such Banks acts in a manner inconsistent with his
fiduciary duty to such Bank.
ARTICLE VI
Miscellaneous Provisions
Section 6.1. Seal. The seal of the Corporation shall be circular in
shape with the name of the Corporation around the circumference thereof, and the
word "SEAL" in the center thereof.
Section 6.2. Examination of the Books and Records. The books and
records of account of the Corporation, the minutes of the proceedings of the
shareholders, the Board and Committees appointed by the Board of Directors and
the records of the shareholders showing the names and addresses of all
shareholders and the number of shares held by each, shall be subject to
inspection during the normal business hours by any person who is a duly
qualified Director of the Corporation at the time he makes such inspection.
Shareholders shall have such rights to inspect records of the Corporation as are
prescribed by applicable law.
Section 6.3. Checks, Notes and Drafts. Checks, notes, drafts, and
other orders for the payment of money shall be signed by such persons as the
Board of Directors from time to time may authorize.
Section 6.4. Amendments to ByLaws. These Bylaws may be altered,
amended or repealed in accordance with the Articles of Incorporation.
Section 6.5. Voting of Stock Held. Unless otherwise provided by
resolution of the Board of Directors, the Chairman of the Board of Directors,
the President or any Executive Vice President may from time to time appoint an
attorney or attorneys as agent or agents of the Corporation to cast in the name
of the Corporation the votes which the Corporation may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose stock or
securities may be held by the Corporation, at meetings of the holders of the
stock or other securities of such other corporation, or to consent in writing to
any action by any such other corporation; and such Officers may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed on behalf of the
Corporation and under its corporate seal, or otherwise, such written proxies,
consents, waivers, or other instruments as may be necessary or proper in the
premises; or any of such Officers may himself attend any meeting of the holders
of stock or other securities of any such other corporation and there vote or
exercise any or all other powers of the Corporation as the holder of such stock
or other securities of such other corporation.
A-54
<PAGE>
EXHIBIT B
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the ___ day of _______ 1998, by and
between Atlantic Financial Corp., a Virginia corporation, (the "Corporation"),
and William J. Farinholt (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting
President and Chief Executive Officer of the Corporation and, as such, is a key
executive officer of the Corporation whose continued dedication, availability,
advice and counsel to the Corporation is deemed important to the Board of
Directors of the Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on _________ __, 2003,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. RENEWAL TERM: This Agreement shall be extended for an additional
year annually following the original term unless either party notifies the other
in writing at least three (3) months prior to the end of the original term, or
the end of any additional one-year term, that the Agreement shall not be
extended beyond its current term.
3. EXECUTIVE DUTIES: The Executive agrees to accept and perform the
managerial duties and responsibilities of President and Chief Executive Officer
of the Corporation and agrees to devote his time and attention on a full-time
basis to the discharge of such duties
A-55
<PAGE>
and responsibilities of an executive nature as may be assigned him by the Board
of Directors of the Corporation, including general responsibility for the
business of the Corporation. As President and Chief Executive Officer, the
Executive shall have the duties set forth for such officer in the Corporation's
Bylaws. The Executive also shall serve as a director and as President of
Peninsula Trust Bank, Incorporated. The Executive may accept any elective or
appointed positions or offices with any duly recognized associations or
organizations whose activities or purposes are closely related to the banking
business or purposes are closely related to the banking business or service to
which would generate good will for the Corporation and its subsidiaries.
4. COMPENSATION: (a) The Corporation agrees to pay Executive, and
Executive agrees to accept, as compensation for all services rendered by him to
the Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Sixty Thousand Dollars ($160,000.00),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. On or
before the first anniversary of this Agreement and for each year thereafter, the
Corporation agrees to review the Executive's base salary and to consider
implementing increases to such base salary as may be warranted based upon the
performance of the Executive and the performance of the Corporation and
comparable data related to similarly sized institutions as may be available;
however, such base salary shall not be reduced below the previous year's base
salary without the specific written agreement by the Executive.
(b) Executive shall receive only such bonuses as the Board of
Directors, in its discretion, decides to pay to Executive.
(c) The Executive shall be entitled to four weeks vacation which
shall be without loss of pay. Attendance at meetings or conventions of banking
associations or organizations shall not be charged against the Executive's
annual vacation entitlement.
(d) The Executive shall be paid all normal directors' fees, other
than committee meeting fees, for service on the Board of Directors of the
Corporation, and shall not be paid any fees in connection with service as a
director of any subsidiary of the Corporation unless otherwise determined by the
Board of Directors of the Corporation.
(e) During the term of this Agreement, Corporation shall provide the
Executive with an appropriate automobile as determined by the Board of Directors
of the Corporation.
(f) The Corporation will pay the Executive's country club initiation
fee and dues on such basis as may be determined by the Board of Directors of the
Corporation from time to time.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS
EXPENSES AND MOVING EXPENSES: (a) During the term of employment under this
Agreement, Executive shall be entitled to participate in any pension, group
insurance, hospitalization, deferred compensation or other benefit, bonus or
incentive plans of the Corporation presently in effect (including, without
limitation, the Corporation's stock option plans) or hereafter adopted by the
Corporation and generally available to any employees of senior executive status,
and, additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
(b) The Corporation shall promptly reimburse the Executive, upon
presentation of adequate substantiation, including receipts, for the reasonable
travel, entertainment, lodging and other business expenses incurred by the
Executive, including, without limitation, those expenses
A-56
<PAGE>
incurred by the Executive and his spouse in attending trade and professional
association conventions, meetings and other related functions attended by other
bank executives and their spouses.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for the greater of ninety (90)
consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Corporation, the Corporation may
terminate this Agreement without further or additional compensation payment
being due the Executive from the Corporation pursuant to this Agreement, except
benefits accrued through the date of such termination under employee benefit
plans of the Corporation. These benefits shall include long-term disability and
other insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's salary from the Corporation
at the rate in effect at the time of Executive's death for a period of three (3)
months from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days written notice to the Executive. The
Executive may resign for Good Reason (as hereafter defined) at any time by
giving not less than thirty (30) days written notice to the Corporation. If the
Corporation terminates the Executive's employment without Cause or the Executive
resigns for Good Reason before or after a Change of Control (as hereafter
defined), then in either event:
(i) The Executive shall be paid for the remainder of the
then current term of this Agreement or for a period of one year from the date of
termination, whichever is greater, at such times as payment was theretofore
made, the salary required under Section 4(a) that the Executive would have been
entitled to receive during the remainder of the then current term of this
Agreement had such termination not occurred (and the Corporation shall continue
such payments to Executive's estate if Executive dies before all such payments
have been made); and
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program.
(b) Notwithstanding the foregoing, all such payments and benefits
under Section 8(a) otherwise continuing for periods after the Executive's
termination of employment shall cease to be paid, and the Corporation shall have
no further obligation due with respect thereto, in the event the Executive
engages in "Competition" or makes any "Unauthorized Disclosure of Confidential
Information". For purposes hereof:
-57-
<PAGE>
(i) "Competition" means the Executive's engaging during the
one (1) year period following termination of employment, without the written
consent of the Board of Directors of the Corporation or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or any
other individual or representative capacity (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in, or entering into services or
providing advice pertaining to, any banking, lending or other financial activity
that the Corporation or any of its affiliates actively engages in within five
(5) miles of any branch of the Corporation or any of its subsidiaries at the
time of Executive's termination of employment, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Corporation or any of its
affiliates for the purpose of competing with the products or services provided
by the Corporation or any of its affiliates, or
(C) employing or soliciting for employment any
employees of the Corporation or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information"
means the disclosure of information in violation of Section 19 of this
Agreement.
(c) For purposes of this Agreement, "Good Reason" shall mean:
(i) Prior to a Change of Control (as hereafter defined) the
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date hereof, or (B)
result in the Executive having significantly less authority and/or
responsibility than he has on the date hereof, without his express written
consent;
(ii) After a Change of Control (as hereafter defined) the
assignment of a title or duties that are not commensurate with Executive's
seniority and experience;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof;
(v) The relocation of the Executive to any other primary
place of employment which requires him to move his residence, without the
Executive's express written consent to such relocation;
(vi) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 11(b) hereof;
(vii) The failure of the shareholders of the Corporation to
elect the Executive as a director of the Corporation; or
(viii) A material breach of this Agreement by the Corporation.
A-58
<PAGE>
(d) Resignation by the Executive for Good Reason shall be
communicated by a written Notice of Resignation to the Corporation. A "Notice of
Resignation" shall mean a notice which shall indicate the specific provision(s)
in this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for a resignation for Good Reason.
(e) If within thirty (30) days after any Notice of Resignation is
given the Corporation notifies the Executive that a dispute exists concerning
the resignation for Good Reason and that it is requesting arbitration pursuant
to Section 18, the Corporation shall continue to pay the Executive his full
salary and benefits as described in Sections 4(a) and 5(a), as and when due and
payable, at least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then (y) all sums paid by the Corporation to the
Executive, including but not limited to the cost to the Corporation of providing
the Executive such fringe benefits, from the date of such resignation to the
date of the resolution of such dispute, less (z) any sums otherwise owed by the
Corporation to the Executive shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
9. RESIGNATION - TERMINATION FOR CAUSE: (a) The Corporation's Board
of Directors may terminate the Executive's employment for cause at any time.
Cause shall be defined as the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses that have no
material detrimental effect on the Corporation) or final cease-and-desist order,
or a material breach of any provision of this Employment Agreement.
Notwithstanding the foregoing, the Corporation shall notify and counsel
the Executive as to the nature of any instance of "cause" described above within
30 days of the Corporation's discovery of such neglect or misconduct and shall
provide a reasonable probationary and cure period from the date of such notice
and counseling, but this provision shall only apply to the first occurrence of
any such circumstances and the Corporation in good faith may immediately
terminate the Executive for such continued or additional instance of "cause"
following the initial notice and counseling.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
If within thirty (30) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by
A-59
<PAGE>
the Corporation is challenged by the Executive and the termination is ultimately
determined to be justified, then all sums paid by the Corporation to the
Executive pursuant to this Section 9(b), plus the cost to the Corporation of
providing the Executive such fringe benefits from the date of such termination
to the date of the resolution of such dispute, shall be promptly repaid by the
Executive to the Corporation with interest at the rate charged from time to time
by the Corporation, to its most substantial customers for unsecured lines of
credit. Should it ultimately be determined that a termination by the Corporation
pursuant Section 9(a) was not justified, then the Executive shall be entitled to
retain all sums paid to him pending the resolution of such dispute and he shall
be entitled to receive, in addition, the payments and other benefits provided
for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within thirty (30) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise
voluntarily terminates his employment by the Corporation, or his employment by
the Corporation's wholly owned subsidiary, Peninsula Trust Bank, Incorporated,
at any time (except a termination for Good Reason pursuant to Section 8 hereof),
or if the Corporation rightfully terminates the Executive's employment for
Cause, this Agreement shall terminate upon the date of such resignation or
termination of employment for Cause, and (subject to Section 9(b)) the
Corporation thereafter shall have no obligation to make any further payments
under this Agreement, provided that the Executive shall be entitled to receive
any benefits, insured or otherwise, that he would otherwise be eligible to
receive under any benefit plans of the Corporation or any affiliate of the
Corporation.
10. CHANGE OF CONTROL: (a) At any time within one hundred eighty
(180) days after a Change of Control, the Executive may resign without Good
Reason and on or before the Executive's last day of employment with the
Corporation (in addition to all other payments to which the Executive is
entitled under this Agreement) the Corporation shall pay to the Executive a cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to $200,000, provided that, at the option of the Executive, the
cash amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the twelve (12) months succeeding the date of
termination, payable on the first day of each such month; provided, however, if
Executive dies before all payments to which he is entitled under this Section
10(a) have been made, then such payments he did not receive shall be made to his
estate. If the Executive resigns for Good Reason at any time after a Change of
Control, Section 8(a) shall control.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors; (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a sale of assets, a contested election, or any combination of these
events, the persons who were directors of the Corporation before the first of
such events cease to constitute a majority of the Corporation's Board, or any
successor's board, within two years of the last of such transactions; or (iii)
the shareholders of the Corporation approve (x) a merger, consolidation or other
business combination of the Corporation with any other "person" or "group" (as
defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) or affiliate thereof, other than a merger or consolidation that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock of the
A-60
<PAGE>
surviving entity or a parent or affiliate thereof) more than fifty percent (50%)
of the outstanding common stock of the Corporation or such surviving entity or a
parent or affiliate thereof outstanding immediately after such merger,
consolidation or other business combination, or (y) a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition by
the Corporation of all or substantially all of the Corporation's assets, or (iv)
any other event or circumstance which is not covered by the foregoing
subsections but which the Board of Directors of the Corporation determines to
affect control of the Corporation and with respect to which the Board of
Directors adopts a resolution that the event or circumstance constitutes a
Change of Control for purposes of this Agreement. The date of a Change of
Control is the date on which an event described in items (i) through (iv) above
occurs.
(b) If the Executive resigns pursuant to Section 10(a) or if his
employment terminates pursuant to Section 8(a) after a Change of Control, all
stock options granted to the Executive under any of the Corporation's stock
option plans shall become immediately exercisable with respect to all the shares
covered thereby regardless of whether such options are otherwise exercisable and
Executive shall have thirty (30) days after the date of his resignation to
exercise such stock options
11. CERTAIN OBLIGATIONS - SUCCESSORS: (a) The Corporation's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against him or anyone else. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Except as expressly provided in Sections
8(d) and 9(b), each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whosoever may be entitled thereto, for any
reason whatsoever. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.
(b) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the Corporation to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation described in Section 8(a). As used in this
Agreement, "Corporation" shall mean Atlantic Financial Corp. and any successor
to its respective business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 11(b) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
12. LIMITATION OF BENEFITS: If the independent accountants serving
as auditors for the Corporation on the date of a Change of Control (or the
Internal Revenue Service upon examination of the tax returns of the Corporation
or the Executive) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits
contingent on a Change of Control, constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on the Executive under Section 4999 of the Code (the "Excise Tax"), then the
payments scheduled under this Agreement shall be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be
A-61
<PAGE>
nondeductible and subject to the Excise Tax. The Executive may designate which
payments or benefits will be reduced.
13. NOTICES: For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or five days after it is mailed
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive:
If to the Corporation:
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability
of any provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Executive should die while any amounts would still be payable to
him hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
A-62
<PAGE>
18. ARBITRATION: Any dispute, controversy or claim arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Richmond, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgement may be entered on the arbitrator's
award in any court having jurisdiction. Unless otherwise provided in the rules
of the American Arbitration Association, the arbitrators shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees and expenses of the parties, as well as the
arbitrator's fees and expenses, in such proportions as the arbitrators deem
just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or disclosed to the general public, or which gives to the Corporation
an opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or administrative law judge issued after the
Executive and his legal counsel urge that the aforementioned confidentiality be
preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
A-63
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
EXECUTIVE
ATTEST: ____________________ __________________________________
William J. Farinholt
ATLANTIC FINANCIAL CORP.
ATTEST: ____________________ By: _____________________________
AUTHORIZED OFFICER
A-64
<PAGE>
EXHIBIT C
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the ___ day of _______ 1998, by and
between Atlantic Financial Corp., a Virginia corporation, (the "Corporation"),
and Wenifred O. Pearce (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting Vice
Chairman and Chief Operating Officer of the Corporation and, as such, is a key
executive officer of the Corporation whose continued dedication, availability,
advice and counsel to the Corporation is deemed important to the Board of
Directors of the Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on _________ __, 2003,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. RENEWAL TERM: This Agreement shall be extended for an additional
year annually following the original term unless either party notifies the other
in writing at least fifteen (15) months prior to the end of the original term,
or the end of any additional one-year term, that the Agreement shall not be
extended beyond its current term.
A-65
<PAGE>
3. EXECUTIVE DUTIES: The Executive agrees to accept and perform the
managerial duties and responsibilities of director, Vice Chairman and Chief
Operating Officer of the Corporation and agrees to devote his time and attention
on a full-time basis to the discharge of such duties and responsibilities of an
executive nature as may be assigned him by the Board of Directors of the
Corporation or the Chief Executive Officer, including , subject to the authority
of the Chief Executive Officer, primary responsibility for all non-interest
income activities, human resources and personnel (provided that the Executive
shall not hire or discharge any officer of the Corporation without the prior
approval of the Chief Executive Officer) and strategic planning (including
budgeting, expansion, branch locations and branch acquisitions). As Vice
Chairman and Chief Operating Officer, the Executive shall have the duties set
forth for such officer in the Corporation's Bylaws. The Executive also shall
serve as a director and as Vice Chairman of the Bank of Franklin or its
successor. The Executive may accept any elective or appointed positions or
offices with any duly recognized associations or organizations whose activities
or purposes are closely related to the banking business or purposes are closely
related to the banking business or service to which would generate good will for
the Corporation and its subsidiaries.
4. COMPENSATION: (a) The Corporation agrees to pay Executive, and
Executive agrees to accept, as compensation for all services rendered by him to
the Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Fifty Thousand Dollars ($150,000.00),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. On or
before the first anniversary of this Agreement and for each year thereafter, the
Corporation agrees to review the Executive's base salary and to consider
implementing increases to such base salary as may be warranted based upon the
performance of the Executive and the performance of the Corporation and
comparable data related to similarly sized institutions as may be available;
however, such base salary shall not be reduced below the previous year's base
salary without the specific written agreement by the Executive.
(b) Executive shall receive only such bonuses as the Board of
Directors, in its discretion, decides to pay to Executive.
(c) The Executive shall be entitled to four weeks vacation which
shall be without loss of pay. Attendance at meetings or conventions of banking
associations or organizations shall not be charged against the Executive's
annual vacation entitlement.
(d) The Executive shall be paid all normal directors' fees, other
than committee meeting fees, for service on the Board of Directors of the
Corporation, and shall not be paid any fees in connection with service as a
director of any subsidiary of the Corporation unless otherwise determined by the
Board of Directors of the Corporation.
(e) On or before August 1, 2001, the Corporation shall grant the
Executive an option to purchase under the Corporation's 1998 Incentive Plan
common stock of the Corporation with a fair market value at the time of grant
equal to One Hundred Sixty-Seven Percent (167%) of the Executive's annual salary
at the date of grant at a per share exercise price which does not exceed 100%
(or any higher amount required under IRC Section 422) of the fair market value
per share of such common stock at the date of grant. Such option shall be an
incentive stock option and shall vest as rapidly as is consistent with incentive
stock option treatment. In addition, the Executive shall be considered for stock
option grants whenever the Corporation's Chief Executive Officer is considered
and the stock option to be granted to the Executive pursuant to this Section
4(e) shall be disregarded when the Executive is so considered for additional
stock option grants.
A-66
<PAGE>
(f) The Salary Continuation Plan Agreement provided by The Bank of
Franklin for the Executive's benefit will be continued as specified under the
terms of such Agreement, except as otherwise agreed in writing by the Executive.
(g) The Corporation will pay the Executive's country club initiation
fee and dues on such basis as may be determined by the Board of Directors of the
Corporation from time to time.
(h) During the term of this Agreement, the Corporation shall provide
the Executive with an appropriate automobile as determined by the Board of
Directors of the Corporation.
(i) If the Executive moves his personal residence to the Newport
News, Virginia area, the Corporation will pay all reasonable expenses incurred
by Executive in connection with such move, including reimbursement of any
reasonable and customary real estate commission incurred in connection with the
sale of his present personal residence.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS
EXPENSES AND MOVING EXPENSES: (a) During the term of employment under this
Agreement, Executive shall be entitled to participate in any pension, group
insurance, hospitalization, deferred compensation or other benefit, bonus or
incentive plans of the Corporation presently in effect (including, without
limitation, the Corporation's stock option plans) or hereafter adopted by the
Corporation and generally available to any employees of senior executive status,
and, additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
(b) The Corporation shall promptly reimburse the Executive, upon
presentation of adequate substantiation, including receipts, for the reasonable
travel, entertainment, lodging and other business expenses incurred by the
Executive, including, without limitation, those expenses incurred by the
Executive and his spouse in attending trade and professional association
conventions, meetings and other related functions attended by other bank
executives and their spouses.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for the greater of ninety (90)
consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Corporation, the Corporation may
terminate this Agreement without further or additional compensation payment
being due the Executive from the Corporation pursuant to this Agreement, except
benefits accrued through the date of such termination under employee benefit
plans of the Corporation. These benefits shall include long-term disability and
other insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's salary from the Corporation
at the rate in effect at the time of Executive's death for a period of three (3)
months from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days
A-67
<PAGE>
written notice to the Executive. The Executive may resign for Good Reason (as
hereafter defined) at any time by giving not less than thirty (30) days written
notice to the Corporation. If the Corporation terminates the Executive's
employment without Cause or the Executive resigns for Good Reason before or
after a Change of Control (as hereafter defined), then in either event:
(i) The Executive shall be paid for the remainder of the
then current term of this Agreement or for a period of one year from the date of
termination, whichever is greater, at such times as payment was theretofore
made, the salary required under Section 4(a) that the Executive would have been
entitled to receive during the remainder of the then current term of this
Agreement had such termination not occurred (and the Corporation shall continue
such payments to Executive's estate if Executive dies before all such payments
have been made); and
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program.
(b) Notwithstanding the foregoing, all such payments and benefits
under Section 8(a) otherwise continuing for periods after the Executive's
termination of employment shall cease to be paid, and the Corporation shall have
no further obligation due with respect thereto, in the event the Executive
engages in "Competition" or makes any "Unauthorized Disclosure of Confidential
Information". For purposes hereof:
(i) "Competition" means the Executive's engaging during the
one (1) year period following termination of employment, without the written
consent of the Board of Directors of the Corporation or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or any
other individual or representative capacity (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in, or entering into services or
providing advice pertaining to, any banking, lending or other financial activity
that the Corporation or any of its affiliates actively engages in within five
(5) miles of any branch of the Corporation or any of its subsidiaries at the
time of Executive's termination of employment, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Corporation or any of its
affiliates for the purpose of competing with the products or services provided
by the Corporation or any of its affiliates, or
(C) employing or soliciting for employment any
employees of the Corporation or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information"
means the disclosure of information in violation of Section 19 of this
Agreement.
(c) For purposes of this Agreement, "Good Reason" shall mean:
A-68
<PAGE>
(i) Prior to a Change of Control (as hereafter defined) the
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date hereof, or (B)
result in the Executive having significantly less authority and/or
responsibility than he has on the date hereof, without his express written
consent;
(ii) After a Change of Control (as hereafter defined) the
assignment of a title or duties that are not commensurate with Executive's
seniority and experience;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof;
(v) The relocation of the Executive to any other primary
place of employment which requires him to move his residence, without the
Executive's express written consent to such relocation; or
(vi) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 11(b) hereof;
(vii) The failure of the shareholders of the Corporation to
elect the Executive as a director of the Corporation; or
(viii) A material breach of this Agreement by the Corporation.
(d) Resignation by the Executive for Good Reason shall be
communicated by a written Notice of Resignation to the Corporation. A "Notice of
Resignation" shall mean a notice which shall indicate the specific provision(s)
in this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for a resignation for Good Reason.
(e) If within thirty (30) days after any Notice of Resignation is
given the Corporation notifies the Executive that a dispute exists concerning
the resignation for Good Reason and that it is requesting arbitration pursuant
to Section 18, the Corporation shall continue to pay the Executive his full
salary and benefits as described in Sections 4(a) and 5(a), as and when due and
payable, at least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then all sums paid by the Corporation to the Executive,
including but not limited to the cost to the Corporation of providing the
Executive such fringe benefits, from the date of such resignation to the date of
the resolution of such dispute, less (z) any sums otherwise owed by the
Corporation to the Executive shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
A-69
<PAGE>
9. RESIGNATION - TERMINATION FOR CAUSE: (a) The Corporation's Board
of Directors may terminate the Executive's employment for cause at any time.
"Cause" shall be defined as the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses that have no
material detrimental effect on the Corporation) or final cease-and-desist order,
or a material breach of any provision of this Employment Agreement.
Notwithstanding the foregoing, the Corporation shall notify and counsel
the Executive as to the nature of any instance of "cause" described above within
30 days of the Corporation's discovery of such neglect or misconduct and shall
provide a reasonable probationary and cure period from the date of such notice
and counseling, but this provision shall only apply to the first occurrence of
any such circumstances and the Corporation in good faith may immediately
terminate the Executive for such continued or additional instance of "cause"
following the initial notice and counseling.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
If within thirty (30) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by the Corporation is challenged by the Executive and the
termination is ultimately determined to be justified, then all sums paid by the
Corporation to the Executive pursuant to this Section 9(b), plus the cost to the
Corporation of providing the Executive such fringe benefits from the date of
such termination to the date of the resolution of such dispute, shall be
promptly repaid by the Executive to the Corporation with interest at the rate
charged from time to time by the Corporation, to its most substantial customers
for unsecured lines of credit. Should it ultimately be determined that a
termination by the Corporation pursuant Section 9(a) was not justified, then the
Executive shall be entitled to retain all sums paid to him pending the
resolution of such dispute and he shall be entitled to receive, in addition, the
payments and other benefits provided for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within thirty (30) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise
voluntarily terminates his employment by the Corporation, or his employment by
the Corporation's wholly owned subsidiary, The Bank of Franklin, at any time
(except a termination for Good Reason pursuant to Section 8 hereof), or if the
Corporation rightfully terminates the Executive's employment for Cause, this
Agreement shall terminate upon the date of such resignation or termination of
employment for Cause, and (subject to Section 9(b)) the Corporation thereafter
shall have no obligation to make any further payments under this Agreement,
provided that the Executive shall be entitled to receive any benefits, insured
or otherwise, that he would otherwise be eligible to receive under any benefit
plans of the Corporation or any affiliate of the Corporation.
A-70
<PAGE>
10. CHANGE OF CONTROL: (a) At any time within one hundred eighty
(180) days after a Change of Control, the Executive may resign without Good
Reason and on or before the Executive's last day of employment with the
Corporation (in addition to all other payments to which the Executive is
entitled under this Agreement) the Corporation shall pay to the Executive a cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to $200,000, provided that, at the option of the Executive, the
cash amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the twelve (12) months succeeding the date of
termination, payable on the first day of each such month; provided, however, if
Executive dies before all payments to which he is entitled under this Section
10(a) have been made, then such payments he did not receive shall be made to his
estate. If the Executive resigns for Good Reason at any time after a Change of
Control, Section 8(a) shall control.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors; (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a sale of assets, a contested election, or any combination of these
events, the persons who were directors of the Corporation before the first of
such events cease to constitute a majority of the Corporation's Board, or any
successor's board, within two years of the last of such transactions; (iii) the
shareholders of the Corporation approve (x) a merger, consolidation or other
business combination of the Corporation with any other "person" or "group" (as
defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) or affiliate thereof, other than a merger or consolidation that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock of the surviving entity or a parent or
affiliate thereof) more than fifty percent (50%) of the outstanding common stock
of the Corporation or such surviving entity or a parent or affiliate thereof
outstanding immediately after such merger, consolidation or other business
combination, or (y) a plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation of all or substantially
all of the Corporation's assets, or (iv) any other event or circumstance which
is not covered by the foregoing subsections but which the Board of Directors of
the Corporation determines to affect control of the Corporation and with respect
to which the Board of Directors adopts a resolution that the event or
circumstance constitutes a Change of Control for purposes of this Agreement. The
date of a Change of Control is the date on which an event described in items (i)
through (iv) above occurs.
(b) If the Executive resigns pursuant to Section 10(a) or if his
employment terminates pursuant to Section 8(a) after a Change of Control, all
stock options granted to the Executive under any of the Corporation's stock
option plans shall become immediately exercisable with respect to all the shares
covered thereby regardless of whether such options are otherwise exercisable and
Executive shall have thirty (30) days after the date of his resignation to
exercise such stock options
11. CERTAIN OBLIGATIONS - SUCCESSORS: (a) The Corporation's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against him or anyone else. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Except as expressly provided in Sections
8(d)
A-71
<PAGE>
and 9(b), each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whosoever may be entitled thereto, for any
reason whatsoever. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.
(b) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the Corporation to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation described in Section 8(a). As used in this
Agreement, "Corporation" shall mean Atlantic Financial Corp. and any successor
to its respective business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 11(b) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
12. LIMITATION OF BENEFITS: If the independent accountants serving
as auditors for the Corporation on the date of a Change of Control (or the
Internal Revenue Service upon examination of the tax returns of the Corporation
or the Executive) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits
contingent on a Change of Control, constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on the Executive under Section 4999 of the Code (the "Excise Tax"), then the
payments scheduled under this Agreement shall be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be nondeductible and subject to the Excise Tax. The Executive may designate
which payments or benefits will be reduced.
13. NOTICES: For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or five days after it is mailed
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive:
With a copy to: James J. Wheaton
Willcox & Savage, P.C.
1800 NationsBank Center
Norfolk, Virginia 23510
If to the Corporation:
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
A-72
<PAGE>
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability
of any provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Executive should die while any amounts would still be payable to
him hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Norfolk, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgement may be entered on the arbitrator's
award in any court having jurisdiction. Unless otherwise provided in the rules
of the American Arbitration Association, the arbitrators shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees and expenses of the parties, as well as the
arbitrator's fees and expenses, in such proportions as the arbitrators deem
just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or
A-73
<PAGE>
disclosed to the general public, or which gives to the Corporation an
opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or administrative law judge issued after the
Executive and his legal counsel urge that the aforementioned confidentiality be
preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
EXECUTIVE
ATTEST: ____________________ __________________________________
Wenifred O. Pearce
ATLANTIC FINANCIAL CORP.
ATTEST: ____________________ By: _____________________________
AUTHORIZED OFFICER
A-74
<PAGE>
EXHIBIT D
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the ___ day of _______ 1998, by and
between Atlantic Financial Corp., a Virginia corporation, (the "Corporation"),
and Kenneth E. Smith (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting
Executive Vice President and Chief Financial Officer of the Corporation and, as
such, is a key executive officer of the Corporation whose continued dedication,
availability, advice and counsel to the Corporation is deemed important to the
Board of Directors of the Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on _________ __, 2003,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. RENEWAL TERM: This Agreement shall be extended for an additional
year annually following the original term unless either party notifies the other
in writing at least three (3) months prior to the end of the original term, or
the end of any additional one-year term, that the Agreement shall not be
extended beyond its current term.
3. EXECUTIVE DUTIES: The Executive agrees to accept and perform the
managerial duties and responsibilities of Executive Vice President and Chief
Financial Officer of
A-75
<PAGE>
the Corporation and agrees to devote his time and attention on a full-time basis
to the discharge of such duties and responsibilities of an executive nature as
may be assigned him by the Board of Directors or the Chief Executive Officer of
the Corporation, including, subject to the authority of the Chief Executive
Officer, primary responsibility for financial statements, reports to
governmental agencies, data processing and investment portfolio management. As
Executive Vice President and Chief Financial Officer, the Executive shall have
the duties set forth for such officer in the Corporation's Bylaws. The Executive
also shall serve as a director and as Chief Financial Officer of Peninsula Trust
Bank, Incorporated. The Executive may accept any elective or appointed positions
or offices with any duly recognized associations or organizations whose
activities or purposes are closely related to the banking business or purposes
are closely related to the banking business or service to which would generate
good will for the Corporation and its subsidiaries.
4. COMPENSATION: (a) The Corporation agrees to pay Executive, and
Executive agrees to accept, as compensation for all services rendered by him to
the Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Twenty Five Thousand Dollars
($125,000.00), which shall be payable in monthly, semi-monthly or bi-weekly
installments in conformity with Corporation's policy relating to salaried
employees. On or before the first anniversary of this Agreement and for each
year thereafter, the Corporation agrees to review the Executive's base salary
and to consider implementing increases to such base salary as may be warranted
based upon the performance of the Executive and the performance of the
Corporation and comparable data related to similarly sized institutions as may
be available; however, such base salary shall not be reduced below the previous
year's base salary without the specific written agreement by the Executive.
(b) Executive shall receive only such bonuses as the Board of
Directors, in its discretion, decides to pay to Executive.
(c) The Executive shall be entitled to four weeks vacation which
shall be without loss of pay. Attendance at meetings or conventions of banking
associations or organizations shall not be charged against the Executive's
annual vacation entitlement.
(d) The Executive shall be paid all normal directors' fees for
service on the Board of Directors of Peninsula Trust Bank, Incorporated, or its
successor.
(e) During the term of this Agreement, Corporation shall provide the
Executive with an appropriate automobile as determined by the Board of Directors
of the Corporation.
(f) The Corporation will pay the Executive's country club initiation
fees and dues on such basis as may be determined by the Board of Directors of
the Corporation from time to time.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS
EXPENSES AND MOVING EXPENSES: (a) During the term of employment under this
Agreement, Executive shall be entitled to participate in any pension, group
insurance, hospitalization, deferred compensation or other benefit, bonus or
incentive plans of the Corporation presently in effect (including, without
limitation, the Corporation's stock option plans) or hereafter adopted by the
Corporation and generally available to any employees of senior executive status,
and, additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
A-76
<PAGE>
(b) The Corporation shall promptly reimburse the Executive, upon
presentation of adequate substantiation, including receipts, for the reasonable
travel, entertainment, lodging and other business expenses incurred by the
Executive, including, without limitation, those expenses incurred by the
Executive and his spouse in attending trade and professional association
conventions, meetings and other related functions attended by other bank
executives and their spouses.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for the greater of ninety (90)
consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Corporation, the Corporation may
terminate this Agreement without further or additional compensation payment
being due the Executive from the Corporation pursuant to this Agreement, except
benefits accrued through the date of such termination under employee benefit
plans of the Corporation. These benefits shall include long-term disability and
other insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's salary from the Corporation
at the rate in effect at the time of Executive's death for a period of three (3)
months from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days written notice to the Executive. The
Executive may resign for Good Reason (as hereafter defined) at any time by
giving not less than thirty (30) days written notice to the Corporation. If the
Corporation terminates the Executive's employment without Cause or the Executive
resigns for Good Reason before or after a Change of Control (as hereafter
defined), then in either event:
(i) The Executive shall be paid for the remainder of the
then current term of this Agreement or for a period of one year from the date of
termination, whichever is greater, at such times as payment was theretofore
made, the salary required under Section 4(a) that the Executive would have been
entitled to receive during the remainder of the then current term of this
Agreement had such termination not occurred (and the Corporation shall continue
such payments to Executive's estate if Executive dies before all such payments
have been made); and
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program.
(b) Notwithstanding the foregoing, all such payments and benefits
under Section 8(a) otherwise continuing for periods after the Executive's
termination of employment shall cease to be paid, and the Corporation shall have
no further obligation due with respect thereto, in the event
A-77
<PAGE>
the Executive engages in "Competition" or makes any "Unauthorized Disclosure of
Confidential Information". For purposes hereof:
(i) "Competition" means the Executive's engaging during the
one (1) year period following termination of employment, without the written
consent of the Board of Directors of the Corporation or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or any
other individual or representative capacity (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in, or entering into services or
providing advice pertaining to, any banking, lending or other financial activity
that the Corporation or any of its affiliates actively engages in within ten
(10) miles of any branch of the Corporation or any of its subsidiaries at the
time of Executive's termination of employment, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Corporation or any of its
affiliates for the purpose of competing with the products or services provided
by the Corporation or any of its affiliates, or
(C) employing or soliciting for employment any
employees of the Corporation or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information"
means the disclosure of information in violation of Section 19 of this
Agreement.
(c) For purposes of this Agreement, "Good Reason" shall mean:
(i) Prior to a Change of Control (as hereafter defined) the
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date hereof, or (B)
result in the Executive having significantly less authority and/or
responsibility than he has on the date hereof, without his express written
consent;
(ii) After a Change of Control (as hereafter defined) the
assignment of a title or duties that are not commensurate with Executive's
seniority and experience;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof;
(v) The relocation of the Executive to any other primary
place of employment which requires him to move his residence, without the
Executive's express written consent to such relocation;
(vi) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 11(b) hereof; or
(vii) A material breach of this Agreement by the Corporation.
A-78
<PAGE>
(d) Resignation by the Executive for Good Reason shall be
communicated by a written Notice of Resignation to the Corporation. A "Notice of
Resignation" shall mean a notice which shall indicate the specific provision(s)
in this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for a resignation for Good Reason.
(e) If within thirty (30) days after any Notice of Resignation is
given the Corporation notifies the Executive that a dispute exists concerning
the resignation for Good Reason and that it is requesting arbitration pursuant
to Section 18, the Corporation shall continue to pay the Executive his full
salary and benefits as described in Sections 4(a) and 5(a), as and when due and
payable, at least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then (y) all sums paid by the Corporation to the
Executive, including but not limited to the cost to the Corporation of providing
the Executive such fringe benefits, from the date of such resignation to the
date of the resolution of such dispute, less (z) any sums otherwise owed by the
Corporation to the Executive shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
9. RESIGNATION - TERMINATION FOR CAUSE: (a) The Corporation's Board
of Directors may terminate the Executive's employment for cause at any time.
Cause shall be defined as the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses that have no
material detrimental effect on the Corporation) or final cease-and-desist order,
or a material breach of any provision of this Employment Agreement.
Notwithstanding the foregoing, the Corporation shall notify and counsel
the Executive as to the nature of any instance of "cause" described above within
30 days of the Corporation's discovery of such neglect or misconduct and shall
provide a reasonable probationary and cure period from the date of such notice
and counseling, but this provision shall only apply to the first occurrence of
any such circumstances and the Corporation in good faith may immediately
terminate the Executive for such continued or additional instance of "cause"
following the initial notice and counseling.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
If within thirty (30) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by
A-79
<PAGE>
the Corporation is challenged by the Executive and the termination is ultimately
determined to be justified, then all sums paid by the Corporation to the
Executive pursuant to this Section 9(b), plus the cost to the Corporation of
providing the Executive such fringe benefits from the date of such termination
to the date of the resolution of such dispute, shall be promptly repaid by the
Executive to the Corporation with interest at the rate charged from time to time
by the Corporation, to its most substantial customers for unsecured lines of
credit. Should it ultimately be determined that a termination by the Corporation
pursuant Section 9(a) was not justified, then the Executive shall be entitled to
retain all sums paid to him pending the resolution of such dispute and he shall
be entitled to receive, in addition, the payments and other benefits provided
for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within thirty (30) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise
voluntarily terminates his employment by the Corporation, or his employment by
the Corporation's wholly owned subsidiary, Peninsula Trust Bank, Incorporated,
at any time (except a termination for Good Reason pursuant to Section 8 hereof),
or if the Corporation rightfully terminates the Executive's employment for
Cause, this Agreement shall terminate upon the date of such resignation or
termination of employment for Cause, and (subject to Section 9(b)) the
Corporation thereafter shall have no obligation to make any further payments
under this Agreement, provided that the Executive shall be entitled to receive
any benefits, insured or otherwise, that he would otherwise be eligible to
receive under any benefit plans of the Corporation or any affiliate of the
Corporation.
10. CHANGE OF CONTROL: (a) At any time within one hundred eighty
(180) days after a Change of Control, the Executive may resign without Good
Reason and on or before the Executive's last day of employment with the
Corporation (in addition to all other payments to which the Executive is
entitled under this Agreement) the Corporation shall pay to the Executive a cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to $200,000, provided that, at the option of the Executive, the
cash amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the twelve (12) months succeeding the date of
termination, payable on the first day of each such month; provided, however, if
Executive dies before all payments to which he is entitled under this Section
10(a) have been made, then such payments he did not receive shall be made to his
estate. If the Executive resigns for Good Reason at any time after a Change of
Control, Section 8(a) shall control.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors; (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a sale of assets, a contested election, or any combination of these
events, the persons who were directors of the Corporation before the first of
such events cease to constitute a majority of the Corporation's Board, or any
successor's board, within two years of the last of such transactions; or (iii)
the shareholders of the Corporation approve (x) a merger, consolidation or other
business combination of the Corporation with any other "person" or "group" (as
defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) or affiliate thereof, other than a merger or consolidation that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock
A-80
<PAGE>
of the surviving entity or a parent or affiliate thereof) more than fifty
percent (50%) of the outstanding common stock of the Corporation or such
surviving entity or a parent or affiliate thereof outstanding immediately after
such merger, consolidation or other business combination, or (y) a plan of
complete liquidation of the Corporation or an agreement for the sale or
disposition by the Corporation of all or substantially all of the Corporation's
assets, or (iv) any other event or circumstance which is not covered by the
foregoing subsections but which the Board of Directors of the Corporation
determines to affect control of the Corporation and with respect to which the
Board of Directors adopts a resolution that the event or circumstance
constitutes a Change of Control for purposes of this Agreement. The date of a
Change of Control is the date on which an event described in items (i) through
(iv) above occurs.
(b) If the Executive resigns pursuant to Section 10(a) or if his
employment terminates pursuant to Section 8(a) after a Change of Control, all
stock options granted to the Executive under any of the Corporation's stock
option plans shall become immediately exercisable with respect to all the shares
covered thereby regardless of whether such options are otherwise exercisable and
Executive shall have thirty (30) days after the date of his resignation to
exercise such stock options
11. CERTAIN OBLIGATIONS - SUCCESSORS: (a) The Corporation's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against him or anyone else. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Except as expressly provided in Sections
8(d) and 9(b), each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whosoever may be entitled thereto, for any
reason whatsoever. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.
(b) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the Corporation to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation described in Section 8(a). As used in this
Agreement, "Corporation" shall mean Atlantic Financial Corp. and any successor
to its respective business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 11(b) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
12. LIMITATION OF BENEFITS: If the independent accountants serving
as auditors for the Corporation on the date of a Change of Control (or the
Internal Revenue Service upon examination of the tax returns of the Corporation
or the Executive) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits
contingent on a Change of Control, constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on the Executive under Section 4999 of the Code (the "Excise Tax"), then the
payments scheduled under this Agreement shall be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be
A-81
<PAGE>
nondeductible and subject to the Excise Tax. The Executive may designate which
payments or benefits will be reduced.
13. NOTICES: For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or five days after it is mailed
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive:
If to the Corporation:
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability
of any provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Executive should die while any amounts would still be payable to
him hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a
A-82
<PAGE>
panel of three arbitrators, in Richmond, Virginia in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then in
effect. The Corporation shall pay all administrative fees associated with such
arbitration. Judgement may be entered on the arbitrator's award in any court
having jurisdiction. Unless otherwise provided in the rules of the American
Arbitration Association, the arbitrators shall, in their award, allocate between
the parties the costs of arbitration, which shall include reasonable attorneys'
fees and expenses of the parties, as well as the arbitrator's fees and expenses,
in such proportions as the arbitrators deem just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or disclosed to the general public, or which gives to the Corporation
an opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or administrative law judge issued after the
Executive and his legal counsel urge that the aforementioned confidentiality be
preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
EXECUTIVE
ATTEST: ____________________ __________________________________
Kenneth E. Smith
ATLANTIC FINANCIAL CORP.
ATTEST: ____________________ By: ______________________________
AUTHORIZED OFFICER
A-83
<PAGE>
EXHIBIT E
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the ___ day of _______ 1998, by and
between Atlantic Financial Corp., a Virginia corporation, (the "Corporation"),
and D. Eugene Brittle (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting
Executive Vice President of the Corporation and President and Chief Executive
Officer of The Bank of Sussex and Surry, as such, is a key executive officer of
the Corporation whose continued dedication, availability, advice and counsel to
the Corporation is deemed important to the Board of Directors of the
Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on _________ __, 2003,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. RENEWAL TERM: This Agreement shall be extended for an additional
year annually following the original term unless either party notifies the other
in writing at least three (3) months prior to the end of the original term, or
the end of any additional one-year term, that the Agreement shall not be
extended beyond its current term.
3. EXECUTIVE DUTIES: The Executive agrees to accept and perform the
managerial duties and responsibilities of Executive Vice President of the
Corporation and agrees
A-84
<PAGE>
to devote his time and attention on a full-time basis to the discharge of such
duties and responsibilities of an executive nature as may be assigned him by the
Board of Directors of the Corporation or the Chief Executive Officer. As
Executive Vice President, the Executive shall have the duties set forth for such
officer in the Corporation's Bylaws. The Executive also shall serve as a
director and as President and Chief Executive Officer of The Bank of Sussex and
Surry or its successor. The Executive may accept any elective or appointed
positions or offices with any duly recognized associations or organizations
whose activities or purposes are closely related to the banking business or
purposes are closely related to the banking business or service to which would
generate good will for the Corporation and its subsidiaries.
4. COMPENSATION: (a) The Corporation agrees to pay Executive, and
Executive agrees to accept, as compensation for all services rendered by him to
the Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Fifteen Thousand Dollars ($115,000.00),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. On or
before the first anniversary of this Agreement and for each year thereafter, the
Corporation agrees to review the Executive's base salary and to consider
implementing increases to such base salary as may be warranted based upon the
performance of the Executive and the performance of the Corporation and
comparable data related to similarly sized institutions as may be available;
however, such base salary shall not be reduced below the previous year's base
salary without the specific written agreement by the Executive.
(b) Executive shall receive only such bonuses as the Board of
Directors, in its discretion, decides to pay to Executive.
(c) The Executive shall be entitled to four weeks vacation which
shall be without loss of pay. Attendance at meetings or conventions of banking
associations or organizations shall not be charged against the Executive's
annual vacation entitlement.
(d) The Executive shall be paid all normal directors' fees for
service on the Board of Directors of The Bank of Sussex and Surry or its
successor.
(e) On or before August 1, 2001, the Corporation shall grant the
Executive an option to purchase under the Corporation's 1998 Incentive Plan
common stock of the Corporation with a fair market value at the time of grant
equal to One Hundred Sixty-Seven Percent (167%) of the Executive's annual salary
at the date of grant at a per share exercise price which does not exceed 100%
(or any higher amount required under IRC Section 422) of the fair market value
per share of such common stock at the date of grant. Such option shall be an
incentive stock option and shall vest as rapidly as is consistent with incentive
option treatment. In addition, the Executive shall be considered for stock
option grants whenever the Corporation's Chief Executive Officer is considered
and the stock option to be granted to the Executive pursuant to this Section
4(e) shall be disregarded when the Executive is so considered for additional
stock option grants.
(f) The Corporation will pay the Executive's country club initiation
fee and dues on such basis as may be determined by the Board of Directors of the
Corporation from time to time.
(g) During the term of this Agreement, the Corporation shall provide
the Executive with an appropriate automobile as determined by the Board of
Directors of the Corporation.
(h) If the Executive is required to move his personal residence to
any place other than the Wakefield, Virginia area, the Corporation will pay all
reasonable expenses incurred by Executive in connection with such move,
including the reimbursement of any reasonable and
A-85
<PAGE>
customary real estate commission incurred in connection with the sale of his
present personal residence.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS
EXPENSES AND MOVING EXPENSES: (a) During the term of employment under this
Agreement, Executive shall be entitled to participate in any pension, group
insurance, hospitalization, deferred compensation or other benefit, bonus or
incentive plans of the Corporation presently in effect (including, without
limitation, the Corporation's stock option plans) or hereafter adopted by the
Corporation and generally available to any employees of senior executive status,
and, additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
(b) The Corporation shall promptly reimburse the Executive, upon
presentation of adequate substantiation, including receipts, for the reasonable
travel, entertainment, lodging and other business expenses incurred by the
Executive, including, without limitation, those expenses incurred by the
Executive and his spouse in attending trade and professional association
conventions, meetings and other related functions attended by other bank
executives and their spouses.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for the greater of ninety (90)
consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Corporation, the Corporation may
terminate this Agreement without further or additional compensation payment
being due the Executive from the Corporation pursuant to this Agreement, except
benefits accrued through the date of such termination under employee benefit
plans of the Corporation. These benefits shall include long-term disability and
other insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's salary from the Corporation
at the rate in effect at the time of Executive's death for a period of three (3)
months from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days written notice to the Executive. The
Executive may resign for Good Reason (as hereafter defined) at any time by
giving not less than thirty (30) days written notice to the Corporation. If the
Corporation terminates the Executive's employment without Cause or the Executive
resigns for Good Reason before or after a Change of Control (as hereafter
defined), then in either event:
(i) The Executive shall be paid for the remainder of the
then current term of this Agreement or for a period of one year from the date of
termination, whichever is greater, at such times as payment was theretofore
made, the salary required under Section 4(a) that the Executive would have been
entitled to receive during the remainder of the then current term of this
Agreement had such termination not occurred (and the Corporation shall continue
such payments to Executive's estate if Executive dies before all such payments
have been made); and
A-86
<PAGE>
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program.
(b) Notwithstanding the foregoing, all such payments and benefits
under Section 8(a) otherwise continuing for periods after the Executive's
termination of employment shall cease to be paid, and the Corporation shall have
no further obligation due with respect thereto, in the event the Executive
engages in "Competition" or makes any "Unauthorized Disclosure of Confidential
Information". For purposes hereof:
(i) "Competition" means the Executive's engaging during the
one (1) year period following termination of employment, without the written
consent of the Board of Directors of the Corporation or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or any
other individual or representative capacity (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in, or entering into services or
providing advice pertaining to, any banking, lending or other financial activity
that the Corporation or any of its affiliates actively engages in within five
(5) miles of any branch of the Corporation or any of its subsidiaries at the
time of Executive's termination of employment, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Corporation or any of its
affiliates for the purpose of competing with the products or services provided
by the Corporation or any of its affiliates, or
(C) employing or soliciting for employment any
employees of the Corporation or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information"
means the disclosure of information in violation of Section 19 of this
Agreement.
(c) For purposes of this Agreement, "Good Reason" shall mean:
(i) Prior to a Change of Control (as hereafter defined) the
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date hereof, or (B)
result in the Executive having significantly less authority and/or
responsibility than he has on the date hereof, without his express written
consent;
(ii) After a Change of Control (as hereafter defined) the
assignment of a title or duties that are not commensurate with Executive's
seniority and experience;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
A-87
<PAGE>
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof;
(v) The relocation of the Executive to any other primary
place of employment which requires him to move his residence, without the
Executive's express written consent to such relocation;
(vi) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 11(b) hereof;
(vii) The merger of The Bank of Franklin and The Bank of
Sussex and Surry or the merger of all the Corporation's bank subsidiaries into a
single bank, unless, in each case, the Executive is made the Chief Executive
Officer of the surviving bank.; or
(viii) A material breach of this Agreement by the Corporation.
(d) Resignation by the Executive for Good Reason shall be
communicated by a written Notice of Resignation to the Corporation. A "Notice of
Resignation" shall mean a notice which shall indicate the specific provision(s)
in this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for a resignation for Good Reason.
(e) If within thirty (30) days after any Notice of Resignation is
given the Corporation notifies the Executive that a dispute exists concerning
the resignation for Good Reason and that it is requesting arbitration pursuant
to Section 18, the Corporation shall continue to pay the Executive his full
salary and benefits as described in Sections 4(a) and 5(a), as and when due and
payable, at least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then (y) all sums paid by the Corporation to the
Executive, including but not limited to the cost to the Corporation of providing
the Executive such fringe benefits, from the date of such resignation to the
date of the resolution of such dispute, less (z) any sums otherwise owed by the
Corporation the Executive shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
9. RESIGNATION - TERMINATION FOR CAUSE: (a) The Corporation's Board
of Directors may terminate the Executive's employment for cause at any time.
Cause shall be defined as the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses that have no
material detrimental effect on the Corporation) or final cease-and-desist order,
or a material breach of any provision of this Employment Agreement.
Notwithstanding the foregoing, the Corporation shall notify and counsel
the Executive as to the nature of any instance of cause described above within
30 days of the Corporation's discovery of such neglect or misconduct and shall
provide a reasonable probationary and cure
A-88
<PAGE>
period from the date of such notice and counseling, but this provision shall
only apply to the first occurrence of any such circumstances and the Corporation
in good faith may immediately terminate the Executive for such continued or
additional instance of cause following the initial notice and counseling.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
If within thirty (30) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by the Corporation is challenged by the Executive and the
termination is ultimately determined to be justified, then all sums paid by the
Corporation to the Executive pursuant to this Section 9(b), plus the cost to the
Corporation of providing the Executive such fringe benefits from the date of
such termination to the date of the resolution of such dispute, shall be
promptly repaid by the Executive to the Corporation with interest at the rate
charged from time to time by the Corporation, to its most substantial customers
for unsecured lines of credit. Should it ultimately be determined that a
termination by the Corporation pursuant Section 9(a) was not justified, then the
Executive shall be entitled to retain all sums paid to him pending the
resolution of such dispute and he shall be entitled to receive, in addition, the
payments and other benefits provided for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within thirty (30) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise
voluntarily terminates his employment by the Corporation, or his employment by
the Corporation's wholly owned subsidiary, Bank of Sussex and Surry (or its
successor), at any time (except a termination for Good Reason pursuant to
Section 8 hereof), or if the Corporation rightfully terminates the Executive's
employment for Cause, this Agreement shall terminate upon the date of such
resignation or termination of employment for Cause, and (subject to Section
9(b)) the Corporation thereafter shall have no obligation to make any further
payments under this Agreement, provided that the Executive shall be entitled to
receive any benefits, insured or otherwise, that he would otherwise be eligible
to receive under any benefit plans of the Corporation or any affiliate of the
Corporation.
10. CHANGE OF CONTROL: (a) At any time within one hundred eighty
(180) days after a Change of Control, the Executive may resign without Good
Reason and on or before the Executive's last day of employment with the
Corporation (in addition to all other payments to which the Executive is
entitled under this Agreement) the Corporation shall pay to the Executive a cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to $200,000, provided that, at the option of the Executive, the
cash amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the twelve (12) months succeeding the date of
termination, payable on the first day of each such month; provided, however, if
Executive dies before all payments to which he is entitled under this Section
10(a) have
A-89
<PAGE>
been made, then such payments he did not receive shall be made to his estate. If
the Executive resigns for Good Reason at any time after a Change of Control,
Section 8(a) shall control.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors; (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a sale of assets, a contested election, or any combination of these
events, the persons who were directors of the Corporation before the first of
such events cease to constitute a majority of the Corporation's Board, or any
successor's board, within two years of the last of such transactions; or (iii)
the shareholders of the Corporation approve (x) a merger, consolidation or other
business combination of the Corporation with any other "person" or "group" (as
defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) or affiliate thereof, other than a merger or consolidation that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock of the surviving entity or a parent or
affiliate thereof) more than fifty percent (50%) of the outstanding common stock
of the Corporation or such surviving entity or a parent or affiliate thereof
outstanding immediately after such merger, consolidation or other business
combination, or (y) a plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation of all or substantially
all of the Corporation's assets, or (iv) any other event or circumstance which
is not covered by the foregoing subsections but which the Board of Directors of
the Corporation determines to affect control of the Corporation and with respect
to which the Board of Directors adopts a resolution that the event or
circumstance constitutes a Change of Control for purposes of this Agreement. The
date of a Change of Control is the date on which an event described in items (i)
through (iv) above occurs.
(b) If the Executive resigns pursuant to Section 10(a) or if his
employment terminates pursuant to Section 8(a) after a Change of Control, all
stock options granted to the Executive under any of the Corporation's stock
option plans shall become immediately exercisable with respect to all the shares
covered thereby regardless of whether such options are otherwise exercisable and
Executive shall have thirty (30) days after the date of his resignation to
exercise such stock options
11. CERTAIN OBLIGATIONS - SUCCESSORS: (a) The Corporation's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against him or anyone else. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Except as expressly provided in Sections
8(d) and 9(b), each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whosoever may be entitled thereto, for any
reason whatsoever. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.
(b) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the
A-90
<PAGE>
Corporation to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to the compensation described in Section 8(a). As used in this Agreement,
"Corporation" shall mean Atlantic Financial Corp. and any successor to its
respective business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 11(b) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
12. LIMITATION OF BENEFITS: If the independent accountants serving
as auditors for the Corporation on the date of a Change of Control (or the
Internal Revenue Service upon examination of the tax returns of the Corporation
or the Executive) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits
contingent on a Change of Control, constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on the Executive under Section 4999 of the Code (the "Excise Tax"), then the
payments scheduled under this Agreement shall be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be nondeductible and subject to the Excise Tax. The Executive may designate
which payments or benefits will be reduced.
13. NOTICES: For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
With a copy to: James J. Wheaton
Willcox & Savage, P.C.
1800 NationsBank Center
Norfolk, Virginia 23510
If to the Corporation:
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this
A-91
<PAGE>
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability
of any provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Executive should die while any amounts would still be payable to
him hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Richmond, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgement may be entered on the arbitrator's
award in any court having jurisdiction. Unless otherwise provided in the rules
of the American Arbitration Association, the arbitrators shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees and expenses of the parties, as well as the
arbitrator's fees and expenses, in such proportions as the arbitrators deem
just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or disclosed to the general public, or which gives to the Corporation
an opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or
A-92
<PAGE>
administrative law judge issued after the Executive and his legal counsel urge
that the aforementioned confidentiality be preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
EXECUTIVE
ATTEST: ____________________ __________________________________
D. Eugene Brittle
ATLANTIC FINANCIAL CORP.
ATTEST: ____________________ By: ______________________________
AUTHORIZED OFFICER
A-93
<PAGE>
Appendix B
Code of Virginia (1950), as amended
Title 13.1
Chapter 9 Article 15.
Dissenters' Rights.
ss. 13.1-729. Definitions.
In this article:
"Corporation" means the issuer of the shares held by a
dissenter before the corporate action, except that (i) with respect to
a merger, "corporation" means the surviving domestic or foreign
corporation or limited liability company by merger of that issuer, and
(ii) with respect to a share exchange, "corporation" means the
acquiring corporation by share exchange, rather than the issuer, if the
plan of share exchange places the responsibility for dissenters' rights
on the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent
from corporate action under ss. 13.1-730 and who exercises that right
when and in the manner required by ss.ss. 13.1-732 through 13.1-739.
"Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any
appreciation or depreciation in anticipation of the corporate action
unless exclusion would be inequitable.
"Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate
currently paid by the corporation on its principal bank loans or, if
none, at a rate that is fair and equitable under all the circumstances.
"Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on
file with a corporation.
"Beneficial shareholder" means the person who is a beneficial
owner of shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial
shareholder.
ss. 13.1-730. Right to dissent.
A. A shareholder is entitled to dissent from, and obtain payment
of the fair value of his shares in the event of, any of the following corporate
actions:
B-1
<PAGE>
1. Consummation of a plan of merger to which the
corporation is a party (i) if shareholder approval is required for the
merger by ss. 13.1-718 or the articles of incorporation and the
shareholder is entitled to vote on the merger or (ii) if the
corporation is a subsidiary that is merged with its parent under ss.
13.1-719;
2. Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation if the
shareholder was entitled to vote on the sale or exchange or if the sale
or exchange was in furtherance of a dissolution on which the
shareholder was entitled to vote, provided that such dissenter's rights
shall not apply in the case of (i) a sale or exchange pursuant to court
order, or (ii) a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed
to the shareholders within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder
vote to the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their
shares.
B. A shareholder entitled to dissent and obtain payment for his
shares under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with
respect to a plan of merger or share exchange or a sale or exchange of property
there shall be no right of dissent in favor of holders of shares of any class or
series which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation
issuing such shares provide otherwise;
2. In the case of a plan of merger or share exchange, the
holders of the class or series are required under the plan of merger or
share exchange to accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or
membership interests and cash in lieu of fractional shares (i)
of the surviving or acquiring corporation or limited liability
company or (ii) of any other corporation or limited liability
company which, at the record date fixed to determine the
shareholders entitled to receive notice of and to vote at the
meeting at which the plan of merger or share exchange is to be
acted on, were either listed subject to notice of issuance on
a national securities exchange or held of record by at least
2,000 record shareholders or members; or
c. A combination of cash and shares or membership
interests as set forth in subdivisions 2 a and 2 b of this
subsection; or
B-2
<PAGE>
3. The transaction to be voted on is an "affiliated
transaction" and is not approved by a majority of "disinterested
directors" as such terms are defined in ss. 13.1-725.
D. The right of a dissenting shareholder to obtain payment of the
fair value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or
rescinded;
2. A court having jurisdiction permanently enjoins or sets
aside the corporate action; or
3. His demand for payment is withdrawn with the written
consent of the corporation.
ss. 13.1-731. Dissent by nominees and beneficial owners.
A. A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in his name only if he dissents with respect to
all shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
1. He submits to the corporation the record shareholder's
written consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
2. He does so with respect to all shares of which he is
the beneficial shareholder or over which he has power to direct the
vote.
ss. 13.1-732. Notice of dissenters' rights.
A. If proposed corporate action creating dissenters' rights under
ss. 13.1-730 is submitted to a vote at a shareholders' meeting, the meeting
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and be accompanied by a copy of this
article.
B. If corporate action creating dissenters' rights under ss.
13.1-730 is taken without a vote of shareholders, the corporation, during the
ten-day period after the effectuation of such corporate action, shall notify in
writing all record shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in ss. 13.1-734.
B-3
<PAGE>
ss. 13.1-733. Notice of intent to demand payment.
A. If proposed corporate action creating dissenters' rights under
ss. 13.1-730 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights (i) shall deliver to the corporation
before the vote is taken written notice of his intent to demand payment for his
shares if the proposed action is effectuated and (ii) shall not vote such shares
in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of
subsection A of this section is not entitled to payment for his shares under
this article.
ss. 13.1-734. Dissenters' notice.
A. If proposed corporate action creating dissenters' rights under
ss. 13.1-730 is authorized at a shareholders' meeting, the corporation, during
the ten-day period after the effectuation of such corporate action, shall
deliver a dissenters' notice in writing to all shareholders who satisfied the
requirements of ss. 13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where
and when certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment demand is
received;
3. Supply a form for demanding payment that includes the
date of the first announcement to news media or to shareholders of the
terms of the proposed corporate action and requires that the person
asserting dissenters' rights certify whether or not he acquired
beneficial ownership of the shares before or after that date;
4. Set a date by which the corporation must receive the
payment demand, which date may not be fewer than thirty nor more than
sixty days after the date of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
ss. 13.1-735. Duty to demand payment.
A. A shareholder sent a dissenters' notice described in ss.
13.1-734 shall demand payment, certify that he acquired beneficial ownership of
the shares before or after the date required to be set forth in the dissenters'
notice pursuant to subdivision 3 of subsection B of ss. 13.1-734, and, in the
case of certificated shares, deposit his certificates in accordance with the
terms of the notice.
B. The shareholder who deposits his shares pursuant to subsection
A of this section retains all other rights of a shareholder except to the extent
that these rights are canceled or modified by the taking of the proposed
corporate action.
B-4
<PAGE>
C. A shareholder who does not demand payment and deposits his
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his shares under this article.
ss. 13.1-736. Share restrictions.
A. The corporation may restrict the transfer of uncertificated
shares from the date the demand for their payment is received.
B. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder except to the
extent that these rights are canceled or modified by the taking of the proposed
corporate action.
ss. 13.1-737. Payment.
A. Except as provided in ss. 13.1-738, within thirty days after
receipt of a payment demand made pursuant to ss. 13.1-735, the corporation shall
pay the dissenter the amount the corporation estimates to be the fair value of
his shares, plus accrued interest. The obligation of the corporation under this
paragraph may be enforced (i) by the circuit court in the city or county where
the corporation's principal office is located, or, if none in this Commonwealth,
where its registered office is located or (ii) at the election of any dissenter
residing or having its principal office in the Commonwealth, by the circuit
court in the city or county where the dissenter resides or has its principal
office. The court shall dispose of the complaint on an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a
fiscal year ending not more than sixteen months before the effective
date of the corporate action creating dissenters' rights, an income
statement for that year, a statement of changes in shareholders' equity
for that year, and the latest available interim financial statements,
if any;
2. An explanation of how the corporation estimated the
fair value of the shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment
under ss. 13.1-739; and
4. A copy of this article.
ss. 13.1-738. After-acquired shares.
A. A corporation may elect to withhold payment required by ss.
13.1-737 from a dissenter unless he was the beneficial owner of the shares on
the date of the first publication by news media or the first announcement to
shareholders generally, whichever is earlier, of the terms of the proposed
corporate action, as set forth in the dissenters' notice.
B-5
<PAGE>
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount to each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under ss. 13.1-739.
ss. 13.1-739. Procedure if shareholder dissatisfied with payment or offer.
A. A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of interest due, and demand
payment of his estimate (less any payment under ss. 13.1-737), or reject the
corporation's offer under ss. 13.1-738 and demand payment of the fair value of
his shares and interest due, if the dissenter believes that the amount paid
under ss. 13.1-737 or offered under ss. 13.1-738 is less than the fair value of
his shares or that the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this
section unless he notifies the corporation of his demand in writing under
subsection A of this section within thirty days after the corporation made or
offered payment for his shares.
ss. 13.1-740. Court action.
A. If a demand for payment under ss. 13.1-739 remains unsettled,
the corporation shall commence a proceeding within sixty days after receiving
the payment demand and petition the circuit court in the city or county
described in subsection B of this section to determine the fair value of the
shares and accrued interest. If the corporation does not commence the proceeding
within the sixty-day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or
county where its principal office is located, or, if none in this Commonwealth,
where its registered office is located. If the corporation is a foreign
corporation without a registered office in this Commonwealth, it shall commence
the proceeding in the city or county in this Commonwealth where the registered
office of the domestic corporation merged with or whose shares were acquired by
the foreign corporation was located.
C. The corporation shall make all dissenters, whether or not
residents of this Commonwealth, whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties shall be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
D. The corporation may join as a party to the proceeding any
shareholder who claims to be a dissenter but who has not, in the opinion of the
corporation, complied with the provisions of this article. If the court
determines that such shareholder has not complied with the provisions of this
article, he shall be dismissed as a party.
E. The jurisdiction of the court in which the proceeding is
commenced under subsection B of this section is plenary and exclusive. The court
may appoint one or more persons as appraisers to receive evidence and recommend
a decision on the question of fair value. The appraisers have the powers
B-6
<PAGE>
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other civil
proceedings.
F. Each dissenter made a party to the proceeding is entitled to
judgment (i) for the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the corporation or (ii)
for the fair value, plus accrued interest, of his after-acquired shares for
which the corporation elected to withhold payment under ss. 13.1-738.
ss. 13.1-741. Court costs and counsel fees.
A. The court in an appraisal proceeding commenced under ss.
13.1-740 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters did not act in good faith in demanding
payment under ss. 13.1-739.
B. The court may also assess the reasonable fees and expenses of
experts, excluding those of counsel, for the respective parties, in amounts the
court finds equitable:
1. Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially
comply with the requirements of ss.ss. 13.1-732 through 13.1-739; or
2. Against either the corporation or a dissenter, in favor
of any other party, if the court finds that the party against whom the
fees and expenses are assessed did not act in good faith with respect
to the rights provided by this article.
C. If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
the court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
D. In a proceeding commenced under subsection A of ss. 13.1-737
the court shall assess the costs against the corporation, except that the court
may assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court finds
that such parties did not act in good faith in instituting the proceeding.
B-7
<PAGE>
Appendix C
UNITED COMMUNITY BANKSHARES, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors C-2
Consolidated Financial Statements
Balance Sheets as of December 31, 1997 and 1996 C-3
Statements of Income for the years ended December 31, 1997 and 1996 C-4
Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996 C-5
Statements of Cash Flows for the years ended December 31, 1997 and 1996 C-6
Notes to Consolidated Financial Statements C-7 - C-23
Unaudited Consolidated Interim Financial Statements
Balance Sheets as of June 30, 1998 and December 31, 1997 C-24
Statement of Income for the three and six months ended June 30, 1998 and 1997 C-25
Statement of Changes in Stockholders' Equity for the period ended June 30, 1998 C-26
Statement of Cash Flows for the six months ended June 30, 1998 and 1997 C-27
Notes to Consolidated Interim Financial Statements C-28
</TABLE>
C-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
================================================================================
GOODMAN & COMPANY, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
United Community Bankshares, Inc.
Franklin, Virginia
We have audited the accompanying consolidated balance sheets of United Community
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Community Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
January 30, 1998
C-2
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996
------------------- -------------------
ASSETS
Cash and cash equivalents
<S> <C> <C>
Cash and due from banks $ 6,361,985 $ 7,262,129
Federal funds sold 10,813,898 3,889,538
------------------- -------------------
Total cash and cash equivalents 17,175,883 11,151,667
Securities available for sale 41,855,787 46,064,158
Securities held to maturity, at amortized cost
(Fair value approximates $9,771,869 and $10,196,586
at December 31, 1997 and 1996) 9,707,815 10,325,502
------------------- -------------------
Total securities 51,563,602 56,389,660
Loans, net of unearned income 82,555,220 78,163,083
Less: allowance for loan losses 1,105,901 1,209,365
------------------- -------------------
Net loans 81,449,319 76,953,718
Premises and equipment, net 1,923,248 1,975,687
Accrued interest 1,663,452 1,698,586
Intangibles, net 668,211 719,037
Other assets 1,508,536 989,284
------------------- -------------------
Total assets $ 155,952,251 $ 149,877,639
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 20,827,839 $ 20,292,314
Interest-bearing 112,676,628 109,533,322
------------------- -------------------
Total deposits 133,504,467 129,825,636
Short-term borrowings 309,108 229,207
Deferred compensation 122,846 188,802
Accrued interest payable 426,502 400,069
Other liabilities 557,822 254,470
------------------- -------------------
Total liabilities 134,920,745 130,898,184
------------------- -------------------
Stockholders' equity
Preferred stock, $1.00 par value; authorized 1,000,000 shares;
none outstanding - -
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued and outstanding 1,829,209 shares in 1997 and 1996 1,829,209 1,829,209
Additional paid-in capital 3,059,038 3,059,038
Retained earnings 15,412,800 13,749,417
Net unrealized gains on securities available for sale, net of taxes
of $376,306 in 1997 and $176,082 in 1996 730,459 341,791
------------------- -------------------
Total stockholders' equity 21,031,506 18,979,455
------------------- -------------------
Total liabilities and stockholders' equity $ 155,952,251 $ 149,877,639
=================== ===================
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
C-3
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996
------------------ ------------------
Interest income
<S> <C> <C>
Interest and fees on loans $ 7,572,609 $ 6,925,331
Interest on investment securities:
Taxable 2,159,357 2,332,960
Non-taxable 925,702 953,877
------------------ ------------------
3,085,059 3,286,837
Interest on federal funds sold 211,607 205,682
------------------ ------------------
Total interest income 10,869,275 10,417,850
Interest expense
Interest on deposits 4,750,375 4,706,435
Interest on short-term borrowings 58,078 42,538
------------------ ------------------
Total interest expense 4,808,453 4,748,973
------------------ ------------------
Net interest income 6,060,822 5,668,877
Provision for loan losses 128,750 101,000
------------------ ------------------
Net interest income after provision for loan losses 5,932,072 5,567,877
Noninterest income
Service charges and fees 810,730 793,104
Gain on sale of available-for-sale securities 3,935 12,734
Other 49,744 71,557
------------------ ------------------
Total noninterest income 864,409 877,395
Noninterest expenses
Salaries and employee benefits 2,164,873 2,083,205
Occupancy expenses 283,817 264,257
Depreciation and equipment maintenance 268,945 240,435
FDIC insurance 14,762 4,000
Professional fees 210,472 127,673
Postage 99,487 103,403
Merger related expenses - 189,758
Other 830,338 913,455
------------------ ------------------
Total noninterest expenses 3,872,694 3,926,186
------------------ ------------------
Income before income taxes 2,923,787 2,519,086
Income tax expense 693,349 596,181
------------------ ------------------
Net income $ 2,230,438 $ 1,922,905
================== ==================
Net income per share - basic and diluted $ 1.22 $ 1.05
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
C-4
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Net Unrealized
Additional Gain (Loss)
Common Paid-In Retained on Securities
Stock Capital Earnings Available for Sale Total
----------------- ----------------- ------------------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1996 $ 1,829,209 $ 3,062,580 $ 12,398,702 $ 462,778 $ 17,753,269
Net income - - 1,922,905 - 1,922,905
Cash dividends declared
($.31 per share) - - (572,190) - (572,190)
Other - (3,542) - - (3,542)
Change in unrealized gains and
losses on securities available
for sale, net of tax of $62,319 - - - (120,987) (120,987)
----------------- ----------------- ------------------- ------------------ --------------
BALANCE - DECEMBER 31, 1996 1,829,209 3,059,038 13,749,417 341,791 18,979,455
Net income - - 2,230,438 - 2,230,438
Cash dividends declared
($.31 per share) - - (567,055) - (567,055)
Change in unrealized gains and
losses on securities available
for sale, net of tax of $200,224 - - - 388,668 388,668
----------------- ----------------- ------------------- ------------------ --------------
BALANCE - DECEMBER 31, 1997 $ 1,829,209 $ 3,059,038 $ 15,412,800 $ 730,459 $ 21,031,506
----------------- ----------------- ------------------- ------------------- --------------
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
C-5
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996
----------------- -----------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,230,438 1,922,905
Adjustments to reconcile to net cash provided by operating activities:
Provision for loan losses
128,750 101,000
Depreciation and amortization
225,915 244,901
Amortization of investment security premiums, net of discounts
(3,641) (38,224)
Net (gain) loss on sale of investment securities
(3,935) (12,734)
Gain on sale of premises and equipment
(250) -
Changes in:
Interest receivable
35,134 (79,982)
Interest payable
26,433 16,855
Other assets
(519,251) (263,439)
Deferred compensation and other liabilities
37,172 (84,631)
----------------- -----------------
Net cash provided by operating activities
2,156,765 1,806,651
----------------- -----------------
INVESTING ACTIVITIES:
Proceeds from maturities and sales of available-for-sale securities
11,022,921 11,751,723
Purchases of available-for-sale securities (6,215,528) (10,812,561)
Redemptions of held-to-maturity securities
1,252,000 2,634,900
Purchases of held-to-maturity securities
(636,868) (2,231,174)
Loan originations, net of principal repayments (4,598,984) (10,870,050)
Purchases of premises and equipment
(148,017) (119,028)
Proceeds from sale of premises and equipment
250 -
----------------- -----------------
Net cash provided (used) by investing activities
675,774 (9,646,190)
----------------- -----------------
FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings
79,901 (106,995)
Cash dividends paid
(567,055) (572,190)
Fractional share payout
- (3,542)
Net increase in noninterest bearing deposits
535,525 3,304,603
Net increase in interest bearing deposits
3,143,306 2,306,814
----------------- -----------------
Net cash provided by financing activities
3,191,677 4,928,690
----------------- -----------------
Increase (decrease) in cash and cash equivalents
6,024,216 (2,910,849)
Cash and cash equivalents at beginning of year
11,151,667 14,062,516
----------------- -----------------
Cash and cash equivalents at end of year $ 17,175,883 $ 11,151,667
================= =================
Supplemental disclosures of cash flow information
Cash paid for:
Interest on deposits and other borrowings
$ 4,782,020 $ 4,732,118
Income taxes $ 687,104 $ 664,488
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
C-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 -- ORGANIZATION AND BUSINESS COMBINATION
- --------------------------------------------------------------------------------
On August 1, 1996, The Bank of Franklin ("BOF") and The Bank of Sussex and Surry
("BSS"), collectively referred to as the "Banks," became affiliated pursuant to
an Agreement and Plan of Reorganization (the "Agreement") dated January 25,
1996. The transaction contemplated by the Agreement created a holding company,
United Community Bankshares, Inc. ("UCB"), which facilitated a share exchange
transaction between UCB and each of the respective banks. The stockholders of
BOF and BSS approved the Agreement at annual meetings held on June 27, 1996.
After the share exchange, BOF and BSS became wholly owned subsidiaries of UCB
and each shareholder of BOF and BSS became a shareholder of UCB. Under the terms
of the Agreement, BOF and BSS shareholders received 4.806 and 3.0 shares,
respectively, of UCB common stock for each share previously held. This resulted
in the issuance of 1,829,209 share of UCB common stock. This combination was
accounted for as a pooling of interests. In connection with this transaction,
merger expenses totaling $189,758 were recognized in 1996. On June 30, 1996, BOF
and BSS reported unaudited total assets of $82.2 million and $61.8 million,
respectively, and unaudited stockholders' equity of $8.1 million and $9.7
million, respectively.
The following summarizes the separate historical results of operations for BOF
and BSS for periods prior to the merger, during which time there were no
intercompany transactions:
<TABLE>
<CAPTION>
BOF BSS Combined
---------------- ------------------ -------------------
Six months ended June 30, 1996: (Unaudited)
<S> <C> <C>
Net interest income $ 1,576,000 $ 1,160,000 $ 2,736,000
Net income $ 601,000 $ 403,000 $ 1,004,000
</TABLE>
The combined stockholders' equity remained relatively unchanged for December 31,
1995 to June 30, 1996. BOF stockholders' equity decreased to $8.1 million at
June 30, 1996 from $8.2 million at December 31, 1995. BSS stockholders' equity
increased to $9.7 million at June 30, 1996 from $9.6 million at December 31,
1995. Theses changes resulted primarily from: (1) $601,000 and $403,000 of net
income for the BOF and BSS respectively during the six month period ended June
30, 1996; (2) a $495,000 and $219,000 increase in the net unrealized losses on
securities available for sale, net of income taxes, for the respective banks;
and (3) dividends paid of $209,000 and $107,000, for the respective banks,
during the same period.
The Banks' are state-chartered commercial banks with two offices in Franklin,
and offices in Wakefield, Courtland, Ivor, Newsoms, Suffolk and Surry, Virginia.
The Banks' primary market area is within western Tidewater, Virginia.
The Banks' principal business consists of providing a broad range of lending and
deposit services to individual and commercial customers with an emphasis on
those services traditionally associated with independent community banks. These
services include checking and savings accounts, certificates of deposit and
charge cards. The Banks' lending activities include commercial and personal
loans, lines of credit, installment loans, home improvement loans, overdraft
protection and construction loans.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
United Community Bankshares, Inc. and its wholly-owned subsidiaries, The Bank of
Franklin, The Bank of Sussex and Surry, and their wholly-owned subsidiaries, The
Bank of Franklin Service Corporation and BSS Service Corporation, respectively.
All significant intercompany accounts and transactions have been eliminated.
BOF and BSS commenced operations in 1971 and 1902, respectively. The Bank of
Franklin Service Corporation and BSS Service Corporation were organized in 1996
and 1994, respectively, to facilitate investment in financial related services.
The consolidation has been prepared using the pooling of interests method of
accounting. All information included in the financial statements has been
combined as if the merger occurred at the earliest date presented.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks, interest-bearing deposits with banks and federal
funds sold. Generally, federal funds are sold for one-day periods.
C-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Securities
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. Investments that are purchased and held principally for the
purpose of selling them in the near term are classified as "trading securities"
and reflected at fair value, with unrealized gains and losses included in
earnings. Neither UCB nor the Banks and their subsidiaries maintain securities
classified as trading. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, changes in prepayment risk, to increase regulatory capital or
other similar factors, are classified as securities available for sale.
Available-for-sale securities are carried at fair value with any adjustments to
fair value, after tax, reported as a separate component of shareholders' equity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary, if any, are included
in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity on held-to-maturity and available-for-sale
securities. Other-than-temporary declines in the fair market value of
individual held-to-maturity and available-for-sale securities result in
write-downs of the individual securities to fair market value. Gains and losses
are determined using the specific-identification method.
In December of 1995, pursuant to a special report issued by the Financial
Accounting Standards Board ("FASB") regarding the application of FASB Statement
No. 115, Accounting for Certain Investments In Debt and Equity Securities, the
Banks reassessed their intent with respect to their securities portfolios. As a
result, held-to-maturity securities, with an amortized cost basis of $25,210,316
and unrealized gains and losses of $231,048 and $297,105, respectively, were
transferred to the available-for-sale category.
Loans
Loans are reported at their principal outstanding balance net of charge-offs,
unearned income, and unamortized premiums or discounts, if any, on purchased
loans. Interest income is generally recognized when income is earned using the
interest method.
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of impaired loans, if applicable, are included
in the provision for loan losses. Loans continue to be classified as impaired
unless they are brought fully current and the collection of scheduled interest
and principal is considered probable. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.
The Banks periodically evaluate the adequacy of the allowance for loan losses in
order to maintain the allowance at a level that is sufficient to absorb probable
credit losses. Management's evaluation of the adequacy of the allowance is based
on a review of the Banks' historical loss experience, known and inherent risks
in the loan portfolio, including adverse circumstances that may affect the
ability of the borrower to repay interest and/or principal, the estimated value
of collateral, and an analysis of the levels and trends of delinquencies, and
charge-offs. Such factors as the level and trend of interest rates and the
condition of the national and local economies are also considered. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for losses on loans. Such agencies may
require the Banks to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
A loan is considered impaired, based on current information and events, if it is
probable that the Banks will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process of
collection. If a loan or a portion of a loan is classified as doubtful, or is
partially charged off, the loan is generally classified as
C-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
Other Real Estate Owned
Other real estate owned is comprised of real estate and other assets acquired
through foreclosure, acceptance of a deed in lieu of foreclosure, or loans in
which the Banks receive physical possession of the debtor's assets. Other real
estate owned is carried at the lower of the recorded investment in the loan or
the fair value less estimated costs to sell. Upon transfer of a loan to
foreclosed status, the fair value of the property is assessed and any excess of
the loan balance over fair value is charged against the allowance for loan
losses. Revenues and expenses related to the property, and subsequent
adjustments to fair value less estimated costs to sell are classified as an
expense for other real estate owned.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. For
financial reporting purposes, assets are depreciated over their estimated useful
lives using the straight-line and accelerated methods. For income tax purposes,
the accelerated cost recovery system and the modified accelerated cost recovery
system are used. Net gains and losses on disposal or retirement of premises and
equipment are included in other income.
Intangible Assets
Intangible assets relate to the purchase of a branch by BOF in 1995 and are
amortized over fifteen years using the straight-line method.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, deferred compensation, and accumulated
depreciation for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Banks have entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, standby letters of credit, and financial guarantees written. Such
financial instruments are recorded in the financial statements when they become
payable.
Earnings Per Common Share
The company adopted FASB Statement No. 128, Earnings per Share, on December 31,
1997. This Statement established standards for computing and presenting earnings
per share ("EPS"). This Statement supersedes standards previously set in APB
Opinion No. 15, Earnings per Share. The Statement requires dual presentation of
basic and diluted EPS on the face of the income statement, and it requires a
reconciliation of the numerator and denominator of the basic EPS with the
numerator and denominator of the diluted EPS computation.
Basis EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
C-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
This statement is effective for financial statements issued for periods ending
after December 15, 1997. In accordance with the requirements of the Statement,
all prior period EPS data has been restated to reflect the change in accounting
requirements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties. While management uses available
information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary based on changes in local economic
conditions and other factors.
Reclassifications
Certain reclassifications have been made to prior year financial statements to
conform them to the current year's presentation.
NOTE 3 -- SECURITIES
- --------------------------------------------------------------------------------
Securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities available for sale
December 31, 1997
<S> <C> <C> <C> <C>
U.S. Government and federal agencies $ 17,201,900 $ 115,511 $ 145,713 $ 17,171,698
State and local governments 17,665,622 372,226 9,648 18,028,200
Corporate debt securities 3,780,313 29,070 2,778 3,806,605
Mortgage-backed securities 2,035,435 6,679 6,020 2,036,094
Collateralized mortgage obligations 56,942 - 3 56,939
Equity securities 10,006 746,245 - 756,251
---------------- --------------- --------------- ----------------
$ 40,750,218 $ 1,269,731 $ 164,162 $ 41,855,787
----------------- --------------- --------------- ----------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities available for sale
December 31, 1996
U.S. Government and federal agencies $ 22,579,494 $ 18,954 $ 186,890 $ 22,411,558
State and local governments 17,078,633 182,000 4,585 17,256,048
Corporate debt securities 4,127,697 4,875 - 4,132,572
Mortgage-backed securities 1,634,498 - 15,569 1,618,929
Collateralized mortgage obligations 115,957 - 246 115,711
Equity securities 10,006 519,334 - 529,340
---------------- --------------- --------------- ----------------
$ 45,546,285 $ 725,163 $ 207,290 $ 46,064,158
----------------- --------------- --------------- ----------------
</TABLE>
C-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities Held to Maturity
December 31, 1997
<S> <C> <C> <C> <C>
U.S. federal agencies $ 4,728,786 $ - $ 26,351 $ 4,702,435
State and local governments 4,770,477 91,258 1,046 4,860,689
Other 208,552 208 15 208,745
---------------- --------------- --------------- ----------------
$ 9,707,815 $ 91,466 $ 27,412 $ 9,771,869
================ =============== =============== ================
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities Held to Maturity
December 31, 1996
U.S. federal agencies $ 5,428,101 $ - $ 86,316 $ 5,341,785
State and local governments 4,797,401 - 42,520 4,754,881
Equity securities 100,000 - 80 99,920
---------------- --------------- ----------- -------------
$ 10,325,502 $ - $ 128,916 $ 10,196,586
--------------- ----------------- ----------- -------------
</TABLE>
The amortized cost and fair value of securities by maturity date at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Securities held to maturity Securities available for sale
------------------------------------ ------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,499,558 $ 1,496,859 $ 4,658,505 $ 4,660,993
Due from one to five years 4,432,344 4,441,152 19,240,964 19,284,185
Due from five to ten years 2,885,160 2,928,427 14,820,236 15,103,524
Due after ten years 890,753 905,431 2,020,507 2,050,834
---------------- ---------------- ---------------- ----------------
9,707,815 9,771,869 40,740,212 41,099,536
Equity securities - - 10,006 756,251
---------------- ---------------- ---------------- ----------------
Total $ 9,707,815 $ 9,771,869 $ 40,750,218 $ 41,855,787
---------------- ---------------- ---------------- ----------------
</TABLE>
At December 31, 1997 and 1996, approximately $8,331,000 and $6,374,000,
respectively, of securities were pledged to secure deposits of the U.S.
Government or the Commonwealth of Virginia. In addition, as of December 31, 1997
and 1996, approximately $983,000 and $966,000, respectively, of securities were
pledged to secure two repurchase agreements.
C-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Gross realized gains and gross realized losses on available for sale securities
were:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
Gross realized gains:
<S> <C> <C>
U.S. government agencies $ 3,320 $ 21,379
State and local governments 15,570 3,753
Corporate debt securities - 4,421
Mortgage backed securities 1,345 -
Equity securities 1,980 -
--------------- ---------------
$ 22,215 $ 29,553
--------------- ---------------
Gross realized losses:
U.S. government agencies $ 17,805 $ 1,750
State and local governments - 2,698
Mortgage backed securities 475 12,371
--------------- ---------------
$ 18,280 $ 16,819
--------------- ---------------
Net realized gains (losses) $ 3,935 $ 12,734
--------------- ---------------
</TABLE>
NOTE 4 -- LOANS
- --------------------------------------------------------------------------------
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Commercial $ 16,257 $ 14,273
Agricultural 7,045 6,437
Real estate construction 2,537 2,304
Real estate mortgage:
Residential (1-4 family) 20,758 20,868
Home equity lines 2,260 2,117
Commercial 17,098 14,164
Agricultural 2,485 2,894
----------- ------------
Real estate subtotal 45,138 42,347
----------- ------------
Loans to individuals:
Consumer and installment loans 13,842 14,881
Credit card and related plans 329 277
----------- ------------
Loans to individuals subtotal 14,171 15,158
----------- ------------
Total gross loans 82,611 78,215
Less:
Allowance for loan losses 1,106 1,209
Deferred loan fees 56 52
----------- ------------
Total net loans $ 81,449 $ 76,954
----------- ------------
</TABLE>
Loans on which the accrual of interest has been discontinued amount to $180,181
and $182,060 at December 31, 1997 and 1996, respectively. Impaired loans at
December 31, 1997 and 1996 were not significant.
C-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the activity in the allowance for loan losses account is as
follows:
Year Ended December 31,
---------------------------------------
1997 1996
----------------- ------------------
Balance, beginning of year $ 1,209,365 $ 1,250,474
Provisions charged to operations 128,750 101,000
Loans charged-off (333,099) (254,546)
Recoveries 100,885 112,437
----------------- ------------------
Balance, end of year $ 1,105,901 $ 1,209,365
----------------- ------------------
NOTE 5 -- PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
--------------- -----------------
<S> <C> <C>
Land $ 393,238 $ 393,238
Buildings and improvements 1,962,308 1,951,271
Leasehold improvements 104,066 100,515
Equipment, furniture and fixtures 2,153,864 2,022,125
--------------- -----------------
4,613,476 4,467,149
Less accumulated depreciation 2,690,228 2,491,462
--------------- -----------------
Premises and equipment, net $ 1,923,248 $1,975,687
=============== =================
</TABLE>
Depreciation charged to operating expense for the years ended December 31, 1997
and 1996 was $209,349 and $204,397, respectively.
NOTE 6 -- DEPOSITS
- --------------------------------------------------------------------------------
Interest-bearing deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1997 1996
--------------------- ------------------------
<S> <C> <C>
NOW accounts $ 17,574,538 $ 17,368,673
Money market accounts 19,364,840 20,553,509
Savings accounts 11,975,470 11,629,507
Certificates of deposit $100,000 and over 11,959,660 10,224,208
Other time deposits 51,802,120 49,757,425
------------------- -----------------------
Total interest-bearing deposits $ 112,676,628 $ 109,533,322
-------------------- ------------------------
</TABLE>
At December 31, 1997, the scheduled maturities of time deposits with remaining
maturities in excess of one year are as follows:
(Dollars in Thousands)
Year Maturing Amount
------------- ------
1999 $9,015
2000 5,163
2001 1,368
2002 2,772
2003 and thereafter 6
C-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table summarizes the maturities of certificates of deposit with a
minimum denomination of $100,000.
(Dollars in Thousands)
Within Three Six to Over
Three to Six Twelve Twelve
Months Months Months Months Total
------ ------ ------ ------ -----
At December 31, 1997 $ 3,222 $2,123 $3,755 $ 2,860 $11,960
NOTE 7 -- STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
- --------------------------------------------------------------------------------
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Banks' financial statement. Under capital adequacy guidelines and regulatory
framework for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997 that the Banks
meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized both Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage rations as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions' categories.
The Banks' actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
------------------------ -------------------------------
Amount Ratio Amount Ratio
------------ ----------- ---------------- -------------
As of December 31, 1997: (Dollars in Thousands)
Total Capital (to Risk Weighted Assets):
<S> <C> <C> <C> <C>
Consolidated $ 20,457 21.11% >/=$7,752 >/=8.00%
The Bank of Franklin $ 9,761 16.71% >/=$4,674 >/=8.00%
The Bank of Sussex and Surry $ 10,696 27.80% >/=$3,078 >/=8.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 19,351 19.97% >/=$3,876 >/=4.00%
The Bank of Franklin $ 9,081 15.54% >/=$2,337 >/=4.00%
The Bank of Sussex and Surry $ 10,270 26.69% >/=$1,539 >/=4.00%
Tier I Capital (to Average Assets):
Consolidated $ 19,351 12.69% >/=$6,101 >/=4.00%
The Bank of Franklin $ 9,081 10.35% >/=$3,508 >/=4.00%
The Bank of Sussex and Surry $ 10,270 15.84% >/=$2,593 >/=4.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
----------------------------------
Amount Ratio
----------------- ---------------
Total Capital (to Risk Weighted Assets):
<S> <C>
Consolidated >/= $ N/A
The Bank of Franklin >/= $ 5,843 >/=10.00%
The Bank of Sussex and Surry >/= $ 3,848 >/=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated >/= $ N/A
The Bank of Franklin >/= $3,506 >/=6.00%
The Bank of Sussex and Surry >/= $2,309 >/=6.00%
Tier I Capital (to Average Assets):
Consolidated >/= $ N/A
The Bank of Franklin >/= $4,385 >/=5.00%
The Bank of Sussex and Surry >/= $3,241 >/=5.00%
</TABLE>
C-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================================================
NOTE 8 -- INCOME TAXES
- --------------------------------------------------------------------------
The principal components of income tax expense are as follows:
Year Ended December 31,
--------------------------
1997 1996
------------ -----------
Federal income tax expense - current $ 652,648 $ 639,110
Deferred federal income tax expense (benefit)
related to temporary differences in reporting 40,701 (42,929)
------------ -----------
Income tax expense $ 693,349 $ 596,181
------------- -----------
Differences between income tax expense calculated at the statutory rate and
that shown in the statements of income are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Federal income tax expense at statutory rate $ 994,088 $ 856,489
Tax effect of:
Tax exempt interest (309,931) (320,227)
Merger fees - 64,518
Other 9,192 (4,599)
-------------- --------------
Income tax expense $ 693,349 $ 596,181
-------------- --------------
</TABLE>
The Banks have the following deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
Deferred tax assets:
<S> <C> <C>
Deferred compensation $ 41,768 $ 64,194
Accrued employee benefits 3,039 5,085
Interest on nonaccrual loans 15,835 29,427
--------------- ---------------
Total deferred tax asset 60,642 98,706
--------------- ---------------
Deferred tax liabilities:
Premises and equipment 30,212 38,226
Allowance for loan losses 96,151 89,411
Net unrealized gains on available-for-sale 376,300 176,082
securities
Discount accretion on sale of securities 16,675 10,901
Deferred fees 5,430 7,954
Pension expense 661 -
--------------- ---------------
Total deferred tax liabilities 525,429 322,574
--------------- ---------------
Net deferred tax liability $ 464,787 $ 223,868
=============== ===============
</TABLE>
NOTE 9 -- RETIREMENT PLANS
- --------------------------------------------------------------------------------
United Community Bankshares
Effective January 1, 1998, the Company adopted a defined contribution plan with
401(K) features, which covers substantially all employees of the Company and its
subsidiary Banks who have completed one year of service. Vesting in the plan
begins with the second year of participation and increases annually by 20% until
full vesting occurs after six years.
C-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Employees may contribute up to 15% of their salaries, and the Company matches
50% of the first 6% of employee contributions. Additional contributions can be
made by the Company at the discretion of the Board of Directors. Prior to the
formation of this plan, each of the Company's subsidiary Banks had qualified
retirement plans for the future benefit of their employees. All of these plans
were terminated on December 31, 1997. The details of each Bank's plan are
detailed below.
The Bank of Franklin
The Bank had a profit-sharing plan for all eligible officers and employees.
Requirements for eligibility to participate include reaching the age of 21 and
one year of service. Vesting in the plan began in the second year of
participation and increased annually by 20% until fully vested after six years.
Employer contributions were determined annually and calculated based on the
participant's annual compensation. The amounts contributed to the plan were
$31,250 and $28,000 for 1997 and 1996, respectively.
The Bank of Sussex and Surry
The Bank sponsored a non-contributory defined benefit plan for all employees.
Pension benefits vested after five years of service and are based on year of
service and average final salary. The Bank's funding policy was to make the
minimal annual contribution that was required by applicable regulation, plus
such amounts as the Bank determined was appropriate from time to time.
The amount charged to expense for the Bank's pension plan totaled $59,363 and
$59,792 for the years ended December 31, 1997 and 1996, respectively. The
components of the pension cost charged to expense consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Service cost $ 50,276 $ 50,276
Interest cost on projected benefit obligation 42,845 42,845
Expected return on plan assets (35,564) (35,564)
Net amortization and deferral 1,806 2,235
---------- -----------
$ 59,363 $ 59,792
---------- -----------
</TABLE>
The following table sets forth the plan's funded status, as of the most recent
actuarial valuation date, October 1, 1997, and the amount recognized in the
Bank's consolidated financial statements as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits $ 524,491 $ 419,584
============== ==============
Accumulated benefits $ 536,180 $ 425,327
============== ==============
Projected benefit obligation $ (803,401) $ (614,540)
Plan assets at fair value 688,614 510,525
-------------- --------------
Projected benefit obligation in excess of plan assets (114,787) (104,015)
Unrecognized prior service costs (57,402) (60,990)
Unrecognized net loss 27,958 14,951
Remaining unrecognized net obligation from the beginning of the year 84,326 89,720
-------------- --------------
Liability on the balance sheet $ (59,905) $ (60,334)
-------------- --------------
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the benefit obligations was 7% at December 31, 1997 and 1996. The
expected long-term rate of return on plan assets was 7% at December 31, 1997 and
1996. The rate of increase in future compensation levels used in determining the
actuarial present value of the benefit obligations was 6% at December 31, 1997
and 1996.
Plan assets at December 31, 1997 consist of an investment in a stock mutual
fund, and in money market, equity, fixed income and balanced funds offered by
the Virginia Bankers Association Pension Investment Program.
C-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
=============================================================================
NOTE 10 -- FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE AND OTHER BORROWED FUNDS
- --------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds consist of term federal funds purchased and advances from the
Federal Home Loan Bank ("FHLB") of Atlanta and generally are repaid within one
to 120 days from the transaction date.
Information concerning securities sold under agreements to repurchase and FHLB
advances is summarized as follows:
1997 1996
----- ----
Securities Sold Under Agreements to Repurchase:
Average balance during the year $ 308,777 $ 376,564
Average interest rate during the year 4.17% 4.23%
Maximum month end balance during the year $ 554,656 $ 750,678
Federal Home Loan Bank Advances:
Average balance during the year $ 225,753 $ 372,951
Average interest rate during the year 5.78% 5.71%
Maximum month end balance during the year $2,500,000 $1,500,000
Federal Funds Purchased:
Average balance during the year $ 560,413 $ 109,888
Average interest rate during the year 5.73% 4.81%
Maximum month end balance during the year $1,748,000 $1,469,000
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
BOF leases one of its branches with an operating lease. The lease term is for
one year and expires in February 1998, with an option to extend the lease for
one twelve month period. The minimum lease payments for 1998 are $12,000. Total
lease expense was $12,000 for 1997 and 1996.
BOF is a member of the Federal Home Loan Bank ("FHLB") of Atlanta. As such, the
Bank may borrow funds based on criteria established by the FHLB. As of December
31, 1997, BOF could borrow approximately $6,500,000, if collateral acceptable to
the FHLB was provided. In addition, federal funds arrangements with other
institutions provide an additional $9,277,000 of short-term borrowing capacity.
The Bank had not drawn on these lines of credit at December 31, 1997.
BSS became a member of the FHLB in 1997. As of December 31, 1997, the Bank could
borrow approximately $6,500,000, if collateral acceptable to the FHLB was
provided. In addition, BSS has federal funds arrangements with two institutions
which provide $6,000,000 of short-term borrowing capacity. At December 31, 1997,
BSS did not have an outstanding balance on these lines of credit.
The Banks are subject to claims and lawsuits that arise primarily in the
ordinary course of business. Based on information presently available and advice
received from legal counsel representing the Banks in connection with such
claims and lawsuits, it is the opinion of management that only one such lawsuit
could have a material adverse effect on the financial position of the Banks.
This suit is described below. The only other litigation in which UCB and its
subsidiaries, BOF and BSS, are involved are collection suits involving
delinquent loan accounts.
Fidelity National Title Insurance Company of New York, successor by merger to
Security Title and Guaranty Company (the "Title Company"), filed suit against
the Bank of Sussex and Surry in November, 1997. The Title Company issued a title
insurance policy in favor of the BSS (the "Title Policy") insuring that the Bank
had a first priority deed of trust lien on a one-quarter interest in certain
real property located in Isle of Wight County, Virginia (the "Isle of Wight
Property"). The Circuit Court for Isle of Wight entered a Final Decree on March
6, 1996 that Farmers Bank, Windsor had a first priority deed of trust lien on
that one-quarter interest in the Isle of Wight Property and that BSS had a
second priority deed of trust lien on that same one-quarter interest.
C-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Title Company seeks the following relief: (i) a declaratory
judgment that the first priority deed of trust lien in favor of Farmers Bank,
Windsor on the one-quarter interest Isle of Wight Property be excluded from
coverage under the Title Policy, (ii) that the Title Policy be reformed to
exclude the Farmers Bank, Windsor deed of trust from coverage under the Title
Policy and (iii) that the Title Company be reimbursed for its costs and
attorneys' fees.
BSS intends to vigorously defend this suit. At this time, the Bank's legal
counsel is unable to express any view as to the possible outcome of this matter.
Counsel notes, however, that if this matter is resolved in a manner adverse to
the interests of the Bank, the amount of any loss that will be sustained by BSS
will not be more than the approximately $75,000 expended by the Title Company
for costs and attorneys' fees.
NOTE 12 -- RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Banks have loan and deposit transactions with its officers and directors,
and with companies in which the officers and directors have a financial
interest. Related party deposits amounted to approximately $4,002,000 and
$4,956,000 at December 31, 1997 and 1996, respectively. A summary of related
party loan activity during 1997 is as follows:
Balance, December 31, 1996 $ 1,534,918
Originations - 1997 1,461,723
Repayments - 1997 (744,037)
Net change due to changes in Board membership (23,072)
-----------------
Balance, December 31, 1997 $ 2,229,532
=================
In the opinion of management, such loans are made in the ordinary course of
business at normal credit terms, including interest rate and collateral
requirements, and do not represent more than normal credit risk. Commitments to
extend credit to related parties amounted to $597,919 and $910,416 at December
31, 1997 and 1996, respectively.
In the ordinary course of business, the Banks have engaged in certain
transactions with different directors' firms to provide legal, insurance and
real estate brokerage services.
NOTE 13 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER
DERIVATIVE FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------------------------------------------
The Banks are party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, commercial and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount recognized in
the consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of the Banks' involvement in particular classes
of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, commercial
and standby letters of credit, is represented by the contractual notional amount
of those instruments. The Banks use the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The following table summarizes the Banks' off-balance sheet financial
instruments as of December 31, 1997 and 1996. The Banks do not use these
financial instruments for trading purposes.
<TABLE>
<CAPTION>
Contract or Notional Amount
--------------------------------
1997 1996
-------------- --------------
(Dollars in Thousands)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit:
<S> <C> <C>
Commercial $ 7,068 $ 10,071
Commercial real estate, construction and land development 2,603 1,512
Residential real estate 1,414 1,253
Consumer 1,047 976
-------------- --------------
$ 12,132 $ 13,812
-------------- --------------
Standby letters of credit $ 133 $ 165
Commercial and similar letters of credit $ 750 $ 975
</TABLE>
C-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Loan commitments, standby letters of credit and guarantees written have
off-balance sheet credit risk because only origination fees and accruals for
probable losses, if any, are recognized in the statement of financial position,
until the commitments are fulfilled or the standby letters of credit or
guarantees expire. Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that, in accordance with the
requirements of FASB Statement No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISKS, collateral or other security is of no value. The
Banks' policy is to require customers to provide collateral prior to the
disbursement of approved loans. For retail loans, the Banks usually retain a
security interest in the property or products financed, which provides
repossession rights in the event of default by the customer. For business loans
and financial guarantees, collateral is usually in the form of inventory or
marketable securities (held in trust) or property (notations on title).
Commitments to Extend Credit
Commitments to extend credit are arrangements to lend to a customer, as long as
there is no violation of any condition established in the contract, and includes
unutilized credit card lines. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
majority of commitments to extend credit have terms up to one year, and
contracted interest rates in the range from 7.50% to 11.50%, except for consumer
loans. Of the total commitments and letters of credit, approximately $2.9
million had fixed rates of interest and $10.1 million had variable interest
rates. Management evaluates each customer's creditworthiness in determining the
amount of collateral to obtain. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and real estate.
Standby Letters of Credit and Financial Guarantees Written
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Banks to guarantee the performance of customers to
third parties. Those guarantees are primarily issued to support the financing
needs of the Banks' commercial customers, and are short-term in nature. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Banks hold
marketable securities as collateral supporting those commitments for which
collateral is deemed necessary.
Concentration of Credit Risk
Concentrations of credit risk (whether on or off balance sheet) arising from
financial instruments exist in relation to certain groups of customers. A group
concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Banks
do not have significant exposure to any individual customer or counterparty. The
major concentrations of credit risk for the Banks arise by customer loan type in
relation to loans and credit commitments, as shown in the table above. A
geographic concentration arises because the Banks operate primarily in western
Tidewater, Virginia.
The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted and any collateral or security proved to be of no value. The Banks
have experienced little difficulty in accessing collateral when required. The
amounts of credit risk shown, therefore, greatly exceed expected losses, which
are included in the allowance for loan losses.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
FASB 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS ("FASB 107"),
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to individual
markets and, in many cases, could not be realized in immediate settlement. FASB
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
C-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following methods and assumptions were used by the Banks in estimating the
fair value for the consolidated financial statements as required by FASB 107:
Cash and due from banks: The carrying amount approximates fair value.
Federal funds sold: For federal funds sold, the carrying amount
approximates fair value.
Investment securities: Fair values for securities are based on published
market prices, if available. For unquoted securities, the fair value is
estimated by the Banks on the basis of financial and other information.
Loans: For loans with short-term and variable rate characteristics, the
total receivables outstanding approximate fair value. This amount excludes
any value related to account relationships. The fair value of other types
of loans is estimated by discounting future cash flows, using the
contractual rates in effect for such loans at the reporting date and
adjusting for credit risk and operating costs.
Interest receivable and Interest payable: The carrying amount approximates
fair value.
Non-interest-bearing deposits: The fair value of these instruments is the
amount payable on demand at the reporting date.
Interest-bearing deposits: The fair value of demand deposits, saving
accounts and money market deposits with no defined maturity is the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated by discounting the future cash flows using the current
rates at which similar deposits would be made. This amount excludes any
value related to account relationships.
Commitments to extend credit and standby and commercial letters of credit:
It is not practicable to separately estimate the fair values for
off-balance-sheet credit commitments, including standby letters of credit,
and guarantees written, due to the lack of cost-effective and reliable
measurement methods for these instruments.
The estimated fair values of the Banks' financial instruments required to be
disclosed under FASB 107 at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -----------
(Dollars in thousands)
Assets
<S> <C> <C> <C> <C>
Cash and due from banks $ 6,362 $ 6,362 $ 7,262 $ 7,262
Federal funds sold 10,814 10,814 3,890 3,890
Investment securities 51,564 51,628 56,390 56,261
Loans 81,449 81,457 76,954 77,789
Interest receivable 1,663 1,663 1,699 1,699
--------- ---------- --------- ---------
$ 151,852 $ 151,924 $ 146,195 $ 146,901
========= ========== ========= =========
Liabilities
Non-interest bearing deposits $ 20,829 $ 20,829 $ 20,292 $ 20,292
Interest bearing deposits 112,677 111,735 109,533 109,794
Short-term borrowings 309 309 229 229
Interest payable 427 427 399 399
--------- --------- --------- ---------
$ 134,242 $ 133,300 $ 130,453 $ 130,714
========= ========= ========= =========
</TABLE>
C-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
NOTE 15 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income (Numerator, Basic and Diluted) $ 2,230,438 $ 1,922,905
Weighted-average shares outstanding (Denominator) 1,829,209 1,829,209
----------- -----------
Basic net income per share $ 1.22 $ 1.05
=========== ===========
Effect of dilutive securities:
Weighted-average shares outstanding 1,829,209 1,829,209
Effect of stock options 4,407 -
----------- -----------
Diluted average shares outstanding (Denominator) 1,833,616 1,829,209
----------- -----------
Diluted net income per share $ 1.22 $ 1.05
=========== ===========
</TABLE>
NOTE 16 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements for UCB should be read in
conjunction with the consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
CONDENSED STATEMENT TO FINANCIAL CONDITION
December 31,
----------------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash $ 33,587 $ 509
Premises and equipment, net 63,115 -
Equity in net assets of the Banks 20,749,007 18,990,510
Other assets 185,797 -
----------- -----------
$21,031,506 $18,991,019
=========== ===========
LIABILITIES $ - $ 509
STOCKHOLDERS' EQUITY 21,031,506 18,990,510
----------- -----------
$21,031,506 $18,991,019
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Equity in earnings of the Banks $ 2,230,171 $ 1,922,905
Other income 152,874 9,000
------------ ------------
Total noninterest income 2,383,045 $ 1,931,905
Other expenses (151,503) (9,000)
------------ ------------
Income before income taxes 2,231,542 1,922,905
Income tax expense 1,104 -
------------ ------------
Net income $ 2,230,438 $ 1,922,905
------------ ------------
</TABLE>
C-21
<PAGE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996
----------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,230,438 $ 1,922,905
Adjustments to reconcile to net cash provided by
operating activities:
Equity in earnings of the Banks (2,230,171) (1,922,905)
Depreciation 4,304 -
Changes in:
Other assets (85,797) -
Other liabilities (509) 509
----------------- ----------------
Net cash provided by operating activities $ (81,735) $ 509
----------------- ----------------
Cash flows from investing activities:
Dividends received from the Banks 849,287 572,190
Purchases of premises and equipment (67,419) -
Purchases of investment (100,000) -
----------------- ----------------
Net cash used by investing activities 681,868 572,190
----------------- ----------------
Cash flows from financing activities:
Cash dividends paid (567,055) (572,190)
----------------- ----------------
Net cash used for financial activities (567,055) (572,190)
----------------- ----------------
Net increase in cash and cash equivalents 33,078 509
Cash and cash equivalents at beginning of period 509 -
================= ================
Cash and cash equivalents at end of period $ 33,587 $ 509
================= ================
</TABLE>
Certain restrictions exist regarding the ability of the Banks to transfer funds
to UCB in the form of cash dividends, loans or advances. The prior approval of
the Board of Governors of the Federal Reserve is required, if the total
dividends declared in any calendar year will exceed the sum of thr respective
net profits, as defined, for the current year, plus retained net profits for the
previous two years. As of Decemeber 31, 1997, dividends from BOF and BSS were
limited to approximately $2,388,000 and $1,636,000, respectively, under these
regulations. Under Virginia law, no dividend may be declared or paid that would
impair a Virginia chartered bank's paid-in-capital.
C-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 17-STOCK COMPENSATION PLANS
================================================================================
At Decemebr 31, 1997, the Company has fixed stock compensation plans for certain
key employees. The Company applies Accounting Principles Board Opinion No. 25
("APB 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations in accounting for its plans. Accordingly, no compensation cost
was recognized for these plans against earnings. For those companies applying
APB 25, FASB Statement No. 123. ACCOUNTING FOR STOCK-BASED COMPENSATION,
requires certain proforma disclosures of net income and earnings per share. Net
income and earnings per share computed under FASB Statement No. 123 do not
materially differ from the amounts reported.
All options have ten year terms, vest and become fully exercisable in six
months. The option price equals or exceeds the market price of the stock as of
the date the option was granted. The following is a summary of the Company's
stock option plan activity, and related information for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
----------- ---------------- ----------- ----------------
<S> <C> <C>
Outstanding - Beginning of year - $ - - $ -
Granted 31,667 10.33 - -
Exercised - - - -
Forfeited - - - -
----------- --------------- ----------- -------------
Outstanding - End of year 31,667 $ 10.33 - $ -
=========== =============== =========== =============
Exercisable - End of year 1,167 $ 10.33 - $ -
=========== =============== =========== =============
</TABLE>
NOTE 18 - SUBSEQUENT EVENT
On January 24, 1998, the declaration date, the Board of Directors approved the
payment of a semi-annual cash divident of $.17 per share for shareholders of
record on February 27, 2998. The dividend, totaling $310,966, is payable on
March 31, 1998.
===============================================================================
C-23
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
1998 1997
---------------- ------------
<S> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 6,298 $ 6,362
Federal funds sold 1,503 10,814
------------ ------------
Total cash and cash equivalents 7,801 17,176
Investment securities:
Securities available for sale 47,081 41,856
Securities held to maturity (market value of
$7,684 and $9,772, respectively) 7,604 9,708
------------ ------------
Total securities 54,685 51,564
Loans, net 86,253 81,449
Interest receivable 1,711 1,663
Property and equipment, net 2,293 1,923
Intangibles, net 643 668
Other assets 1,611 1,509
------------ ------------
Total assets $ 154,997 $ 155,952
============ ============
LIABILITIES:
Deposits:
Noninterest-bearing $ 18,503 $ 20,828
Interest-bearing 112,645 112,677
------------ ------------
Total deposits 131,148 133,505
Federal funds purchased and securities sold
under agreement to repurchase 650 309
Accrued interest 492 426
Deferred compensation 123 123
Other liabilities 699 558
------------ ------------
Total liabilities 133,112 134,921
STOCKHOLDERS' EQUITY:
Common stock 1,829 1,829
Additional paid-in capital 3,059 3,059
Retained earnings 16,169 15,413
Net unrealized gains on securities available for
sale (net of income taxes) 828 730
------------ ------------
Total stockholders' equity 21,885 21,031
------------ ------------
Total liabilities & stockholder's equity $ 154,997 $ 155,952
============ ============
</TABLE>
C-24
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
Consolidated Statement of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended June 30, 6 Months Ended June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C>
Interest income:
Interest and fees on loans $ 1,958 $ 1,891 $ 3,807 $ 3,633
Interest on investment securities:
Taxable 493 570 975 1,139
Nontaxable 249 231 486 463
Interest on federal funds sold 99 24 243 95
-------------- -------------- -------------- --------------
Total interest income 2,799 2,716 5,511 5,330
Interest expense:
Interest on deposits 1,239 1,171 2,452 2,328
Interest on federal funds purchased
and repurchase agreements 5 20 9 24
-------------- -------------- -------------- --------------
Total interest expense 1,244 1,191 2,461 2,352
-------------- -------------- -------------- --------------
Net interest income 1,555 1,525 3,050 2,978
Provision for loan losses 24 25 53 51
-------------- -------------- -------------- --------------
Net interest income after provision
for loan losses 1,531 1,500 2,997 2,927
Noninterest income:
Gain (loss) on sale of securities - - - 6
Service charges 219 178 430 355
Other 35 18 43 29
-------------- -------------- -------------- --------------
Total other income 254 196 473 390
Noninterest expenses:
Salaries and employee benefits 557 544 1,086 1,093
Equipment 87 57 160 130
FDIC insurance 5 4 9 7
Occupancy 61 79 118 142
Professional fees 43 38 111 55
Postage 18 28 57 59
Other 257 224 444 403
-------------- -------------- -------------- --------------
Total other expenses 1,028 974 1,985 1,889
-------------- -------------- -------------- --------------
Income before income taxes 757 722 1,485 1,428
Provision for income taxes 219 187 418 389
-------------- -------------- -------------- --------------
Net income $ 538 $ 535 $ 1,067 $ 1,039
============== ============== ============== ==============
Basic net income per share $ 0.29 $ 0.29 $ 0.58 $ 0.57
Diluted net income per share $ 0.29 $ 0.29 $ 0.58 $ 0.57
</TABLE>
C-25
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD ENDED JUNE 30, 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
-------------------------------------------------------------------
Other Additional
Comprehensive Retained Comprehensive Common Paid-In
Total Income Earnings Income Stock Capital
--------- ------------- --------- -------------- ---------- -----------
<S> <C>
BALANCE - JANUARY 1, 1998 $ 21,031 $ 15,413 $ 730 $ 1,829 $ 3,059
Comprehensive income
Net income 1,067 1,067 1,067
Other comprehensive income, net of tax
Unrealized gains on securities available 98 98 98
for sale, net of reclassification
adjustment (see disclosure)
------------
Other comprehensive income 98
------------
Comprehensive income $ 1,165
============
Dividends declared on common stock (311) (311)
----------- --------- -------------- ---------- -----------
BALANCE - JUNE 30, 1998 $ 21,885 $ 16,169 $ 828 $ 1,829 $ 3,059
----------- --------- -------------- ---------- -----------
</TABLE>
C-26
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
6 Months Ended June 30,
-----------------------------------
1998 1997
--------------- --------------
<S> <C>
Operating activities:
Net income $ 1,067 $ 1,039
Adjustments to reconcile to net cash provided by operating activities:
Provision for loan losses 53 51
Gain on sale of investment securities - (6)
Depreciation and amortization 137 124
Amortization of investment securities premiums, net of discounts 8 (3)
Gain on sale of property and equipment (3) -
Changes in:
Interest receivable (48) 2
Interest payable 66 50
Other assets (102) (249)
Other liabilities 92 117
--------------- --------------
Net cash provided by operating activities 1,270 1,125
Investing activities:
Proceeds from maturities and sales of available-for-sale securities 4,148 5,964
Purchases of available-for-sale securities (9,232) (3,409)
Maturities of held-to-maturity securities 2,483 802
Purchases of held-to-maturity securities (381) (429)
Loan originations, net of principal repayments (4,857) (6,711)
Purchases of premises and equipment (482) (74)
Proceeds from sales of property and equipment 3 -
--------------- --------------
Net cash used by investing activities (8,318) (3,857)
Financing activities:
Net increase (decrease) in short-term borrowings 341 3,068
Cash dividends paid (311) (274)
Net decrease in noninterest bearing deposits (2,325) (2,202)
Net decrease in interest bearing deposits (32) (2,268)
--------------- --------------
Net cash used by financing activities (2,327) (1,676)
DECREASE IN CASH AND CASH EQUIVALENTS (9,375) (4,408)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,176 11,153
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,801 $ 6,745
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest on deposits and other borrowings $ 2,395 $ 2,302
Income taxes $ 382 $ 518
</TABLE>
C-27
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not include all of the disclosures and notes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the three-month periods ended June
30, 1998 and 1997 are not necessarily indicative of the results that may be
expected for the entire year or any interim periods.
The accompanying unaudited consolidated financial statements include the
accounts of United Community Bankshares, Inc. ("UCB" or "the Company") and its
wholly-owned subsidiaries, The Bank of Franklin ("BOF"), The Bank of Sussex and
Surry ("BSS"), and their wholly-owned subsidiaries, The Bank of Franklin Service
Corporation and BSS Service Corporation, respectively. All significant
intercompany accounts and transactions have been eliminated.
BOF and BSS commenced operations in 1971 and 1902, respectively. The Bank of
Franklin Service Corporation and BSS Service Corporation were organized in 1997
and 1994, respectively, to facilitate investment in financial related services.
The consolidation has been prepared using the pooling of interests method of
accounting.
NOTE B - EARNINGS PER SHARE
Basic earnings per share, for the periods ended June 30, 1998 and 1997, are
calculated by dividing net income by the average number of common shares
outstanding of 1,829,209 shares.
Diluted earnings per common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
would then share in the earnings of the entity. In accordance with the
requirements of adopted FASB Statement No. 128, Earnings per Share, all prior
period EPS data has been restated to reflect the change in accounting
requirements. Diluted earnings per share are calculated by dividing net income
by the diluted average shares outstanding. For the second quarters of 1998 and
1997, the average diluted shares outstanding was 1,840,992 and 1,829,209,
respectively. For the six month periods ended June 30, 1998 and 1997, the
average diluted shares outstanding was 1,843,124 and 1,829,209, respectively.
C-28
<PAGE>
[SCOTT & STRINGFELLOW, INC. LETTERHEAD]
Appendix D
October 15, 1998
The Board of Directors
United Community Bankshares, Inc.
100 East Fourth Avenue
Franklin, VA 23851
Gentlemen:
United Community Bankshares, Inc. ("UCB") and Mid-Atlantic Community
BankGroup, Inc. ("MACB") have entered into an Agreement and Plan of
Reorganization and a related Plan of Merger, dated as of July 8, 1998 (the
"Reorganization Agreement"). The Reorganization Agreement provides for the
merger of UCB and MACB (the "Reorganization") and further provides that each
share of Common Stock of UCB, par value $1.00 per share, which is issued and
outstanding immediately prior to the Effective Date of the Reorganization shall
be exchanged for 1.075 shares of MACB Common Stock, par value $5.00 per share.
The terms and conditions of the Reorganization are more fully set forth in the
Reorganization Agreement. You have requested our opinion as to the fairness,
from a financial point of view, of the Exchange Ratio to the UCB shareholders.
Scott & Stringfellow, Inc. as part of its investment banking business,
is regularly engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions and other corporate
transactions. In connection with this opinion, we have, among other things,
reviewed and analyzed: (1) the Reorganization Agreement and exhibits thereto;
(2) this Joint Proxy Statement; (3) UCB's financial statements for the three
years ended December 31, 1997; (4) UCB's unaudited financial statements for the
six months ended June 30, 1997 and 1998, and other internal information relating
to UCB prepared by UCB's management; (5) information regarding the trading
market for the common stocks of UCB and MACB and the price ranges within which
the respective stocks have traded; (6) MACB's annual reports to shareholders and
its financial statements for the three years ended December 31, 1997; and (7)
MACB's unaudited financial statements for the six months ended June 30, 1997 and
1998, and other internal information relating to MACB prepared by MACB's
management. We have discussed with members of management of UCB and MACB the
background to the Reorganization, reasons and basis for the Reorganization and
the business and future prospects of UCB and MACB individually and as a combined
entity. Finally, we have conducted such other studies, analyses and
investigations, particularly of the banking industry, and considered such other
information as we deemed appropriate.
D-1
<PAGE>
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by or on behalf of UCB and MACB. We have not attempted independently to
verify such information, nor have we made any independent appraisal of the
assets of UCB and MACB. We have taken into account our assessment of general
economic, financial market and industry conditions as they exist and can be
evaluated at the date hereof, as well as our experience in business valuation in
general. We have not undertaken to update, revise or reaffirm this opinion or
otherwise comment upon events occurring after the date hereof. We are expressing
no opinion herein as to what the value of MACB common stock will be when issued
to UCB shareholders pursuant to the Reorganization Agreement.
Our opinion is directed to the Board of Directors of UCB in connection
with its consideration of the Reorganization and does not constitute a
recommendation to any stockholder of UCB as to how such stockholder should vote
at the special meeting of stockholders called to consider and vote upon the
Reorganization.
On the basis of our analyses and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions noted above, it is our opinion that, as of the date hereof, the
Exchange Ratio is fair from a financial point of view, to the shareholders of
UCB Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.,
By: /s/ Gary S. Penrose
Gary S. Penrose
Managing Director, Financial Institutions Group
D-2
<PAGE>
Appendix E
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report E-2
Consolidated Financial Statements
Balance Sheets as of December 31, 1997 and 1996 E-3
Statements of Income for the years ended December 31, 1997, 1996 and 1995 E-4
Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996
and 1995 E-5
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 E-6
Notes to Consolidated Financial Statements E-7 - E-21
Consolidated Interim Financial Statements
Balance Sheets as of June 30, 1998 and December 31, 1997 E-22
Statements of Income for the three and six months ended June 30, 1998 and 1997 E-23
Statements of Stockholders' Equity for the six months ended June 30, 1998 and 1997 E-24
Statements of Cash Flows for the six months ended June 30, 1998 and 1997 E-25
Notes to Consolidated Interim Financial Statements E-26 - E-29
</TABLE>
E-1
<PAGE>
- --------------------------------------------------------------------------------
Mid-Atlantic Community BankGroup, Inc.
[Smith & Eggleston Letterhead]
Smith & Eggleston, P.C.
Certified Public Accountants
8003 Franklin Farms Drive, Suite 100
Richmond, Virginia 23229-5107
(804) 288-4938
FAX (804) 288-5085
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mid-Atlantic Community BankGroup, Inc.
Gloucester, Virginia
We have audited the accompanying consolidated balance sheets of Mid-Atlantic
Community BankGroup, Inc. and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mid-Atlantic
Community BankGroup, Inc. and subsidiary as of December 31, 1997 and 1996, and
the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Smith & Eggleston, P.C.
January 16, 1998
E-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS (Note 15) $ 6,959,941 $ 6,014,540
INVESTMENT SECURITIES (Notes 1 & 2) 31,394,293 27,297,458
FEDERAL FUNDS SOLD 8,414,383 5,363,865
LOANS: (Net of allowance for loan losses of $1,324,242 and
$1,111,607 for 1997 and 1996, respectively) (Notes 1 & 3) 104,240,410 90,978,452
PREMISES AND EQUIPMENT (Notes 1 & 7) 5,928,036 4,922,897
OTHER ASSETS (Note 4) 2,368,416 1,856,961
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 159,305,479 $ 136,434,173
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand $ 18,790,674 $ 15,133,165
NOW and money market 25,673,493 25,967,974
Savings 15,757,868 14,969,421
Time, $100,000 and over 13,528,085 9,416,511
Other time 64,672,962 54,998,270
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits $ 138,423,082 $ 120,485,341
OTHER BORROWED FUNDS (Note 13) 30,833 43,406
OTHER LIABILITIES (Note 5) 1,574,740 1,473,836
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 140,028,655 $ 122,002,583
- -----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock - par value $5 per share: (Notes 9 & 10)
Shares issued and outstanding - 1997 - 1,093,833; 1996 - 944,333 $ 5,469,165 $ 4,721,665
Stock options (Note 10) 7,380 7,380
Surplus 9,294,260 6,693,925
Retained earnings 4,453,102 3,170,029
Unrealized gain (loss) on securities available for sale (Note 2) 52,917 (161,409)
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 19,276,824 $ 14,431,590
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 159,305,479 $ 136,434,173
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
E-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 10,367,696 $ 8,689,054 $ 6,652,980
Interest on investment securities:
Taxable 1,790,945 1,393,367 1,051,863
Tax exempt 255,933 340,031 141,497
Interest on federal funds sold 454,515 230,862 377,327
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest Income $ 12,869,089 $ 10,653,314 $ 8,223,667
Interest on deposits 5,316,641 4,359,461 3,468,896
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 7,552,448 $ 6,293,853 $ 4,754,771
PROVISION FOR LOAN LOSSES (Notes 1 & 3) 347,000 380,000 288,000
- -----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision For Loan Losses $ 7,205,448 $ 5,913,853 $ 4,466,771
- -----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME:
Service charges on deposit accounts $ 618,324 $ 479,651 $ 388,245
Other service charges 71,657 57,765 30,353
Other 147,568 88,504 59,106
Net investment securities gains (losses) 14,159 (1,936) (740)
- -----------------------------------------------------------------------------------------------------------------------------
$ 851,708 $ 623,984 $ 476,964
- -----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE:
Salaries and employee benefits $ 2,842,510 $ 2,153,570 $ 1,842,746
Occupancy 472,334 308,224 264,135
Equipment 822,827 642,085 499,273
Other 1,423,412 1,087,374 889,443
- -----------------------------------------------------------------------------------------------------------------------------
$ 5,561,083 $ 4,191,253 $ 3,495,597
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax $ 2,496,073 $ 2,346,584 $ 1,448,138
PROVISION FOR INCOME TAX (Notes 1 & 11) 666,084 812,650 424,989
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,829,989 $ 1,533,934 $ 1,023,149
- -----------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 1,006,643 944,333 774,321
Diluted 1,040,451 975,486 794,376
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
Basic $ 1.82 $ 1.62 $ 1.32
Diluted $ 1.76 $ 1.57 $ 1.29
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes To Consolidated Financial Statements
E-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock Class A Retained
Stock Options Warrants Surplus Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE-JANUARY 1, 1995 $ 3,289,890 $ 7,380 $ 53,229 $ 3,734,707 $ 814,879 $ 7,900,085
Sold 149,500 shares 747,500 -- -- 1,514,401 -- 2,261,901
Sold 16,180 shares 80,900 -- -- 186,070 -- 266,970
Warrants exercised 603,375 -- (51,552) 1,256,072 -- 1,807,895
Warrants purchased (1,677) 1,525 -- (152)
Dividends declared -- -- -- -- (113,338) (113,338)
Net income -- -- -- -- 1,023,149 1,023,149
Unrealized gain on securities
available for sale (Note 2) -- -- -- -- 188,966 188,966
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE-DECEMBER 31, 1995 $ 4,721,665 $ 7,380 $ -- $ 6,692,775 $ 1,913,656 $ 13,335,476
Additional contributed capital -- -- -- 1,150 -- 1,150
Dividends declared -- -- -- -- (236,083) (236,083)
Net income -- -- -- -- 1,533,934 1,533,934
Unrealized loss on securities
available for sale (Note 2) -- -- -- -- (202,887) (202,887)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE-DECEMBER 31, 1996 $ 4,721,665 $ 7,380 $ -- $ 6,693,925 $ 3,008,620 $ 14,431,590
Sold 149,500 shares 747,500 -- -- 2,600,335 -- 3,347,835
Dividends declared -- -- -- -- (546,916) (546,916)
Net income -- -- -- -- 1,829,989 1,829,989
Unrealized gain on securities
available for sale (Note 2) -- -- -- -- 214,326 214,326
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE-DECEMBER 31, 1997 $ 5,469,165 $ 7,380 $ -- $ 9,294,260 $ 4,506,019 $ 19,276,824
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes To Consolidated Financial Statements
E-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,829,989 $ 1,533,934 $ 1,023,149
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 371,698 276,908 250,514
Loss on disposal of equipment -- 19,438 --
Provision for loan losses 347,000 380,000 288,000
Amortization of premium on investment securities 43,565 63,419 62,246
(Gain) loss on sale of investment securities (14,159) 1,936 740
Changes in operating assets and liabilities:
(Increase) decrease in:
Deferred income taxes (175,368) (104,518) 29,009
Interest receivable (120,831) (205,125) (308,139)
Prepaid expenses (89,476) (38,398) (47,783)
Other real estate owned (207,728) -- --
Other assets (28,463) (84,235) (136,769)
Increase (decrease) in:
Accrued interest on deposits 76,088 55,140 170,874
Accrued income taxes (248,912) 208,339 (245,570)
Other liabilities 20,972 49,742 52,768
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities $ 1,804,375 $ 2,156,580 $ 1,139,039
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $ (13,608,234) $(21,802,127) $(16,240,137)
Purchase of investment securities (13,108,261) (22,383,956) (20,802,211)
Proceeds from sales of investment securities 9,306,756 19,611,015 9,093,835
(Increase) decrease in federal funds sold - net (3,050,518) (685,535) 2,587,960
Purchase of premises and equipment (1,376,836) (1,910,858) (846,507)
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities $ (21,837,093) $(27,171,461) $(26,207,060)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net $ 17,939,492 $ 26,370,603 $ 22,590,307
Increase (decrease) in treasury, tax and loan (60,552) 229,579 (57,786)
Dividends paid (236,083) (113,320) (65,816)
Proceeds from issuance of stock - net 3,347,835 -- 2,528,871
Proceeds from exercise of warrants - net -- -- 1,807,743
Curtailment of other borrowed funds (12,573) (11,916) (11,295)
Additional contributed capital -- 1,150 --
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities $ 20,978,119 $ 26,476,096 $ 26,792,024
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase In Cash and Due From Banks $ 945,401 $ 1,461,215 $ 1,724,003
CASH AND DUE FROM BANKS - BEGINNING OF YEAR 6,014,540 4,553,325 2,829,322
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS - END OF YEAR $ 6,959,941 $ 6,014,540 $ 4,553,325
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
E-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Mid-Atlantic Community BankGroup, Inc. is the parent of Peninsula Trust Bank,
Inc. which provides general commercial banking services primarily within
Gloucester, Charles City, Newport News and Williamsburg, Virginia and
surrounding communities. It is subject to the regulations of certain federal and
state agencies and undergoes periodic examinations by regulatory authorities.
Principles of Consolidation
On August 15, 1996, Peninsula Trust Bank created Mid-Atlantic Community
BankGroup, Inc., a bank holding company, and exchanged one share of the holding
company stock for one share of Peninsula Trust Bank stock. The total number of
$5 par value shares of holding company stock exchanged for the outstanding stock
of the bank was 944,333. The transaction is accounted for at historical cost in
a manner similar to that in pooling-of-interests accounting. As a result of this
change in legal structure, the bank is now a wholly-owned subsidiary of the
holding company. The holding company did not generate any revenues or incur any
expenses prior to the consummation of the share exchange. The consolidated
financial statements include the accounts of Mid-Atlantic Community BankGroup,
Inc. and its wholly-owned subsidiary, Peninsula Trust Bank. All material
intercompany transactions have been eliminated.
Before the creation of the holding company, the Bank had the following results
of operations for the period January 1, 1996 through August 14, 1996:
<TABLE>
<S> <C>
Total interest income $ 7,762,000
Total interest expense 3,172,000
------------------------------------------------------------------------
Net Interest Income $ 4,590,000
Allowance for loan losses 239,000
------------------------------------------------------------------------
Net Interest Income after Allowance for Loan Losses $ 4,351,000
Other income 426,000
Other expenses (3,034,000)
------------------------------------------------------------------------
$ 1,743,000
Provision for income taxes (624,000)
------------------------------------------------------------------------
Net Income $ 1,119,000
------------------------------------------------------------------------
</TABLE>
Investment Securities
Investment debt securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized gains and losses on
securities available-for-sale are recognized as direct increases or decreases in
stockholders' equity. Cost of securities sold is recognized using the specific
identification method.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and discounts
are amortized using methods approximating the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Mortgage-backed securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity. Other mortgage-backed securities
are classified as available-for-sale and are carried at fair value. Should any
be sold, cost of securities sold is determined using the specific identification
method.
Income Tax
Income tax is provided for the tax effects of transactions reported in the
consolidated financial statements and consists of tax currently due plus
deferred tax related primarily to differences between the basis of the allowance
for loan losses, premises and equipment, and deferred loan fees for financial
and income tax reporting. The deferred tax asset represents the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Income tax expense is the tax payable or refundable for the year plus or minus
the change for the year in deferred tax assets and liabilities.
E-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding. The policy with respect
to interest accruals on commercial and consumer loans specifies that interest
will stop being accrued on any loan that is 90 days past due if such loan is not
well secured or if there appears to be no reasonable expectation that the
borrower will be able to pay the interest within a reasonable time period and
the value of the collateral is not at least equal to the amount at which the
loan plus all interest accrued is recorded. Interest accruals on real estate
loans will stop being accrued whenever management feels that the borrower will
not be able to pay such interest within a reasonable time period and the value
of the collateral is not at least equal to the loan principal plus all accrued
interest. Interest income is recognized on these loans only when received. A
loan will remain on a nonaccrual status until the loan is current, as to payment
of both interest and principal, and the borrower demonstrates the ability to pay
and remain current.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan (SFAS 114),
as amended by SFAS 118, Accounting by Creditors for Impairment of a Loan Income
Recognition and Disclosures, collectively SFAS 114. SFAS 114 requires that
impaired loans within the scope of the statements be presented in the financial
statements at the present value of expected future cash flows or at the fair
value of the loan's collateral. A valuation allowance is required to the extent
that such measurement is less than the recorded investment. Under this standard,
a loan is considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal and interest when due under the contractual terms of the loan
agreement. Charge-offs for impaired loans occur when the loan, or portion of the
loan, is determined to be uncollectible, as is the case for all loans. The
effect of the adoption of SFAS 114 was not material to the Company's
consolidated financial statements as of and for the year ended December 31,
1995.
The allowance for loan losses is established through a provision for loan losses
charged to operations. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
probable losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrowers'
abilities to pay.
Premises and Equipment
Premises and equipment is recorded at cost. Depreciation is based on estimated
useful service lives and is computed on the straight-line method for reporting
purposes. Computer software is amortized over 5 years.
Cash Flow Information
The statement of cash flows reconciles net income with the increase in cash and
due from banks. The indirect method has been used. For purposes of reporting
cash flows, cash and due from banks includes cash on hand and amounts due from
depository institutions. The Company considers amounts due from banks and money
market investments which have original maturities of three months or less to be
cash equivalents.
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share, effective for the year ended December 31, 1997. Prior period
earnings per share have been restated for comparison purposes.
Net income per share is calculated on the basis of the weighted average number
of shares outstanding. The Company's stock options outstanding are considered
potential common stock and are included in the calculation of weighted average
number of shares outstanding for the purpose of calculating diluted earnings per
share.
Loan Fees and Costs
Loan fees and certain direct loan origination costs of completed loans are
deferred and recognized as an adjustment of the yields on related loans using
the interest method over the lives of the loans.
Off Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
consolidated financial statements when they become payable.
E-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain previously reported amounts have been reclassified to conform to current
presentations.
NOTE 2: INVESTMENT SECURITIES:
Securities held-to-maturity at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U. S. Government and federal agencies $ 3,035,337 $ 22,758 $ 10 $ 3,058,085
State and local governments 1,682,137 51,780 -- 1,733,917
Mortgage-backed securities 2,572,976 16,060 -- 2,589,036
- -----------------------------------------------------------------------------------------------------------------------------
$ 7,290,450 $ 90,598 $ 10 $ 7,381,038
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities available-for-sale at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 631,967 $ 491 $ 3,552 $ 628,906
U. S. Government and federal agencies 10,301,942 83,962 4,439 10,381,465
State and local governments 4,946,168 90,367 80,225 4,956,310
Mortgage-backed securities 7,743,439 40,376 46,803 7,737,012
- -----------------------------------------------------------------------------------------------------------------------------
$ 23,623,516 $ 215,196 $ 135,019 $ 23,703,693
Federal Reserve Bank stock 342,650 -- -- 342,650
Other restricted equity investments 57,500 -- -- 57,500
- -----------------------------------------------------------------------------------------------------------------------------
$ 24,023,666 $ 215,196 $ 135,019 $ 24,103,843
- -----------------------------------------------------------------------------------------------------------------------------
Amortized cost - held-to-maturity securities $ 7,290,450
Fair value - available-for-sale securities 24,103,843
- -----------------------------------------------------------------------------------------------------------------------------
$ 31,394,293
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
E-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
Securities available-for-sale at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 534,510 $ -- $ 4,510 $ 530,000
U. S. Government and federal agencies 15,650,657 35,193 211,449 15,474,401
State and local governments 7,467,586 40,224 86,833 7,420,977
Mortgage-backed securities 3,195,614 1,652 20,648 3,176,618
- -----------------------------------------------------------------------------------------------------------------------------
$ 26,848,367 $ 77,069 $ 323,440 $ 26,601,996
Federal Reserve Bank stock 342,650 -- -- 342,650
Marketable equity securities 351,000 1,812 -- 352,812
- -----------------------------------------------------------------------------------------------------------------------------
$ 27,542,017 $ 78,881 $ 323,440 $ 27,297,458
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The effect on stockholders' equity of the unrealized gain (loss) on
available-for-sale securities is as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Unrealized gain (loss) on available-for-sale securities $ 80,177 $ (244,559)
Deferred income tax on unrealized gain (loss) (27,260) 83,150
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (reduction) in stockholders' equity $ 52,917 $ (161,409)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
U. S. Government and government backed obligations and state and municipal
backed obligations with a carrying amount of $3,395,845 are pledged to secure
municipality and treasury, tax and loan deposits as of December 31, 1997.
The Federal Reserve Bank stock owned by Peninsula Trust Bank, Inc. at December
31, 1997 and 1996 met the amount of stock ownership required as a member of the
Federal Reserve System.
The schedule below reflects the maturities of investment securities. The
classification of mortgage-backed securities was based on expected maturities,
while contractual maturities were used for other debt securities. Expected
maturities differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 604,571 $ 575,401
Due after one year through five years 2,683,812 2,712,420
Due after five years through ten years 10,573,627 10,711,260
Due after ten years 17,051,956 17,085,650
Federal Reserve Bank stock 342,650 342,650
Restricted equity security 57,500 57,500
- ---------------------------------------------------------------------------------------------------------------------
$ 31,314,116 $ 31,484,881
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of securities available for sale were $9,307,000,
$19,611,000, and $9,094,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Gross gains realized on those sales were $14,000, $28,000,
and $1,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
Gross losses totaled $-0-, $30,000 and $2,000 for the years ended December 31,
1997, 1996, and 1995, respectively.
E-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES:
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial loans $ 42,140,394 $ 56,251,276
Consumer loans 19,990,538 1,884,672
Real estate loans 43,976,049 34,437,476
Deferred net loan fees (542,329) (483,365)
- -------------------------------------------------------------------------------------------------------------
$ 105,564,652 $ 92,090,059
Allowance for loan losses 1,324,242 1,111,607
- -------------------------------------------------------------------------------------------------------------
$ 104,240,410 $ 90,978,452
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Certain directors, officers and employees were indebted to the Company in the
aggregate amount of $1,143,484 as of December 31, 1997. During the year ended
December 31, 1997 new loans made to related parties totaled $525,017 and
repayments totaled $393,165.
Management evaluates its loans for purposes of determining the allowance for
loan losses. Large groups of smaller-balance homogeneous loans, such as mortgage
loans and installment loans, are evaluated for impairment collectively and SFAS
114 does not apply to such loans. If, based on current information and events,
it is anticipated that all amounts due will be collected under the terms of a
loan, management does not consider the loan to be impaired, even if there are
insignificant delays in the collection of payments, including delays that are of
a term under which the Company would cease to accrue interest on the loan. At
December 31, 1997 and 1996, the balance of impaired loans was immaterial in
accordance with SFAS 114 and no specific charge to the allowance for loan losses
has been made for such loans. At December 31, 1997 and 1996, loans on which the
accrual of interest had been discontinued totaled $302,000 and $190,000,
respectively. Interest on non-accrual loans not recognized was $38,200 and
$9,200 for the years ended December 31, 1997 and 1996, respectively.
An analysis of the changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance - beginning of year $ 1,111,607 $ 865,479
Additions:
Provision charged to operations 347,000 380,000
Recoveries of loans charged off in prior years 65,493 27,476
- -----------------------------------------------------------------------------------------------------------------------------
$ 1,524,100 $ 1,272,955
Deduction:
Loans charged off 199,858 161,348
- -----------------------------------------------------------------------------------------------------------------------------
Balance - end of year $ 1,324,242 $ 1,111,607
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 4: OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and fees receivable $ 1,137,940 $ 1,017,109
Deferred income tax 477,610 412,652
Computer software - net of amortization 181,032 124,304
Prepaid expenses 194,898 162,150
Other real estate owned 207,728 --
Other 169,208 140,746
- -----------------------------------------------------------------------------------------------------------------------------
$ 2,368,416 $ 1,856,961
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
E-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 5: OTHER LIABILITIES:
Other liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest payable on deposits $ 472,220 $ 396,132
Accounts payable and accrued expenses 213,807 190,361
Treasury, tax and loan 291,555 352,107
Dividends payable 546,917 236,083
Accrued income tax 50,241 299,153
- -----------------------------------------------------------------------------------------------------------------------------
$ 1,574,740 $ 1,473,836
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 6: OFF-BALANCE-SHEET ITEMS, COMMITMENTS
AND CONTINGENT LIABILITIES:
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, lines of
credit, commercial letters of credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the statements of financial
condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit, lines
of credit, commercial letters of credit and standby letters of credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Company upon extension of credit, varies
and is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Company's policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit.
At December 31, 1997, the Company had outstanding letters of credit totaling
$2,294,000 and does not anticipate losses as a result of these transactions. The
Company also had, at December 31, 1997 undisbursed funds under various lines of
credit and loan commitments totaling $21,924,178.
The Company leases its branch facility in Newport News, Virginia under a
non-cancelable operating lease expiring October 31, 1998. Monthly lease payments
total $2,898 and future minimum lease payments for 1998 under the lease total
$28,980 as of December 31, 1997.
In April, 1997, the Company entered into an agreement to purchase a 50% interest
in Johnson Mortgage Company L.L.C. (a Virginia limited liability company) for
$500,000. The closing of this purchase is contingent upon regulatory approval
and the purchase had not closed as of December 31, 1997. The purchase price is
payable in $250,000 cash and $250,000 stock based on the average last sale price
over the last three trade days prior to closing.
The Company has contracted for the construction of a new branch office in
Newport News, Virginia, to replace the existing leased office. The contract
totals $771,000, of which $276,411 had been paid, leaving a remaining amount of
$494,589 as of December 31, 1997.
The Company has contracted to purchase data processing software and hardware
totaling $325,000. As of December 31, 1997, $32,500 had been paid towards these
contracts leaving a balance of $292,500.
E-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 7: PREMISES AND EQUIPMENT:
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Building and improvements $ 2,217,481 $ 1,347,437
Furniture and equipment 2,057,905 1,248,869
Land 1,654,101 1,498,656
Land improvements 733,803 410,342
Vehicles 50,118 20,501
Construction in progress 367,016 1,177,783
- -----------------------------------------------------------------------------------------------------------------------------
$ 7,080,424 $ 5,703,588
Accumulated depreciation (1,152,388) (780,691)
- -----------------------------------------------------------------------------------------------------------------------------
$ 5,928,036 $ 4,922,897
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 8: FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair values of
financial instruments for which it is practicable to estimate such values. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Cash and Due from Banks
The carrying amounts reported in the consolidated financial statements for cash
and due from banks approximate those assets' fair values.
Investment Securities and Federal Funds Sold
Fair values for investment securities and federal funds sold, including
mortgage-backed securities, are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans
The fair value of loans is estimated by discounting the future cash flows using
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities, after considering the
credit risk in various loan categories.
Deposits
The fair values disclosed for deposits (for example, checking, savings, and
money market accounts) are equal to the amount payable on demand at the
reporting date. The fair values disclosed for time deposits are estimated using
the rates currently paid for deposits of similar size and remaining maturities.
The carrying amount of accrued interest payable approximates fair value.
Other Borrowed Funds
The carrying amounts of other borrowed funds approximate their fair values.
Other Liabilities
Commitments to extend credit were evaluated and fair value was estimated using
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties. The fair value of standby letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties at the
reporting date. The carrying amount of treasury, tax and loan deposits
approximates the fair value.
E-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
The carrying amounts and fair values of financial instruments as of December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
(In Thousands) (In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 6,960 $ 6,960 $ 6,015 $ 6,015
Investment securities 31,395 31,485 27,297 27,297
Federal funds sold 8,414 8,414 5,364 5,364
Loans - net 104,240 104,257 90,978 91,104
Liabilities:
Deposits 138,425 138,402 120,485 120,675
Other borrowed funds 31 31 43 43
Treasury, tax and loan 292 292 352 352
Outstanding letters of credit 2,294 2,294 2,050 2,050
Undisbursed lines of credit and loan commitments 21,924 21,924 13,034 13,034
</TABLE>
NOTE 9: COMMON STOCK AND CLASS A WARRANTS:
During 1997, the Company sold 149,500 shares of its common stock at $24.50 per
share. As a result of this sale, equity was increased by $3,347,835, which was
net of issuance costs of $314,915.
The Company sold 149,500 shares of its common stock at a price of $16.50 per
share pursuant to an offering agreement dated April 21, 1995. The Company also
sold 16,180 shares of its common stock at a price of $16.50 per share pursuant
to a private placement offering in June, 1995. The related increase in equity of
$2,528,871 was net of issuance costs totaling $204,849.
During 1992, the bank sold 2,500 units, each of which was comprised of 100
shares of common stock, $5.00 par value, and 100 redeemable Class A warrants.
Each Class A warrant entitled the holder thereof to purchase one-half of one
share of common stock at an exercise price of $7.50. Seven hundred warrants were
exercised during 1994 and 241,350 were exercised during 1995. The Company
purchased 7,850 warrants that were not exercised for $78 and there were no
warrants outstanding at December 31, 1995. The increase in equity related to the
1995 warrant transactions of $1,807,743 was net of issuance costs totaling
$2,304.
NOTE 10: EMPLOYMENT AGREEMENTS AND STOCK OPTION PLANS:
The Company has entered into employment agreements with certain of its
executives. The agreements provide for severance benefits payable to the
executives upon termination of employment following a change of control in the
bank. If certain requirements are met, the aggregate maximum benefits payable
will be $378,336.
The Company adopted an employee incentive stock option plan and a nonemployee
directors' stock option plan. The employee incentive stock option plan provides
for granting options to allow key employees to purchase the Company's common
stock. The stock options give the holder the right, over a ten-year period, to
acquire the Company's common stock. Future options, when granted under this
plan, will have an exercise price equal to the greater of the stock's fair
market value or 100% of the book value per share of the Company's common stock
at the date of the grant. The Company has reserved up to a maximum of 50,000
shares of unissued common stock for issuance under the employee incentive stock
option plan. A summary of options granted through December 31, 1997 follows:
<TABLE>
<CAPTION>
Number of Exercise
Date Granted Options Price
- ----------------------------------------------------------------------------------
<S> <C> <C>
1990 4,000 $10.00
1991 10,000 $11.25
1995 21,000 $16.00
1995 1,000 $16.50
1996 2,500 $22.50
1997 3,500 $25.00
- ----------------------------------------------------------------------------------
42,000
- ----------------------------------------------------------------------------------
</TABLE>
E-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
The nonemployee directors' stock option plan allowed the directors to purchase
options during August, 1990. A total of 29,522 were sold at a price of $.25.
Each option entitles the owner thereof to purchase one share of common stock for
$9.75. These options expire during August, 2000.
A summary of the activity in the stock options plans follows. No options granted
under these plans have been exercised or canceled.
<TABLE>
<CAPTION>
Weighted
Options Average
Available Options Exercise
for Grant Outstanding Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance - December 31, 1993 36,000 43,522 $ 10.12
Granted -- -- $ 0.00
- -----------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1994 36,000 43,522 $ 10.12
Granted (22,000) 22,000 $ 16.02
- -----------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1995 14,000 65,522 $ 11.40
Granted (2,500) 2,500 $ 22.50
- -----------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 11,500 68,022 $ 12.48
Granted (3,500) 3,500 $ 25.00
- -----------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 8,000 71,522 $ 13.10
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of fixed stock options outstanding at December 31, 1997, follows:
<TABLE>
<CAPTION>
Weighted
Number Average
Exercise Prices of Shares Life
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 9.75 29,522 3
$ 10.00 4,000 3
$ 11.25 10,000 4
$ 16.00 21,000 7
$ 16.50 1,000 7
$ 22.50 2,500 8
$ 25.00 3,500 9
</TABLE>
The Company applies APB Opinion 25 in accounting for its plans. Therefore, no
compensation cost has been recognized. Had compensation cost for the Company's
stock option plans been determined based on the fair value at grant dates
consistent with SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below. The pro forma
amounts reflect options with grant dates subsequent to January 1, 1995. The pro
forma disclosures shown may not be representative of the effects on reported net
income in future years.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 1,829,989 $ 1,533,934 $ 1,023,149
Pro forma 1,799,215 1,512,980 900,377
Earnings per share:
As reported:
Basic $ 1.82 $ 1.62 $ 1.32
Diluted 1.76 1.57 1.29
Proforma:
Basic $ 1.79 $ 1.60 $ 1.16
Diluted 1.73 1.55 1.13
</TABLE>
E-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
The Company uses the Black-Scholes option-pricing model for purposes of
estimating the fair value of each option on the date of grant. The fair value is
used to compute the pro forma amounts shown above. The following weighted
average assumptions were used:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 1.00% .53% .42%
Expected volatility 34.68% 35.38% 23.76%
Risk free interest rates 6.96% 6.58% 7.40%
Expected lives 10 years 10 years 10 years
Weighted fair value of each option granted during the year $ 13.30 $ 12.70 $ 8.46
</TABLE>
The Company adopted a management incentive bonus plan designed to reward its
tier one executive officers for the achievement of certain Company goals
regarding its return on average total assets, capital and loan loss reserve.
Bonuses under this plan totaled $46,750 and $48,060 for 1997 and 1996,
respectively.
NOTE 11: INCOME TAX:
The provision for income tax consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 841,453 $ 787,619 $493,326
Deferred (175,369) 25,031 (68,337)
- -----------------------------------------------------------------------------------------------------------------------------
$ 666,084 $ 812,650 $424,989
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following reconciles income tax reported in the consolidated financial
statements to tax that would be obtained by applying regular tax rates to net
income before income tax.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at statutory rate $ 848,664 $ 797,839 $492,367
Increase (decrease) resulting from:
Tax exempt income (87,017) (115,611) (48,110)
Other (95,563) 130,422 (19,268)
- -----------------------------------------------------------------------------------------------------------------------------
Provision for Income Tax $ 666,084 $ 812,650 $424,989
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Unrealized loss on available-for-sale securities $ -- $ 83,150
Deferred loan fees 184,392 135,232
Allowance for loan losses 402,947 277,107
Other 20,550 --
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 607,889 $ 495,489
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
E-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on available-for-sale securities $ 27,260 $ --
Fixed assets 103,019 82,820
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $ 130,279 $ 82,820
- -----------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 477,610 $ 412,669
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 12: OTHER INFORMATION:
The principal components of "Salaries and employee benefits", "Occupancy",
"Equipment", and "Other non-interest expense" are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits:
Salaries and wages $ 2,424,625 $ 1,828,575 $ 1,555,258
Fringe benefits 417,885 324,995 287,488
- -----------------------------------------------------------------------------------------------------------------------------
$ 2,842,510 $ 2,153,570 $ 1,842,746
- -----------------------------------------------------------------------------------------------------------------------------
Occupancy (includes no items in excess of 1% of total revenue) $ 472,334 $ 308,224 $ 264,135
- -----------------------------------------------------------------------------------------------------------------------------
Equipment:
Depreciation and amortization $ 352,212 $ 275,665 $ 203,043
Computer equipment rental 36,659 33,943 35,315
Data processing 294,707 239,788 177,363
Other (includes no items in excess of 1% of total revenue) 139,249 92,689 83,552
- -----------------------------------------------------------------------------------------------------------------------------
$ 822,827 $ 642,085 $ 499,273
- -----------------------------------------------------------------------------------------------------------------------------
Other non-interest expense:
Postage, courier and freight $ 206,944 $ 160,273 $ 123,423
Advertising and public relations 251,731 152,315 158,230
Stationery, supplies and printing 168,457 127,392 118,168
FDIC assessment 14,536 2,000 79,972
Directors' fees 121,350 99,010 67,357
Taxes 108,811 88,515 72,258
Other (includes no items in excess of 1% of total revenue) 551,584 457,869 270,035
- -----------------------------------------------------------------------------------------------------------------------------
$ 1,423,413 $ 1,087,374 $ 889,443
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13: SUPPLEMENTARY CASH FLOW INFORMATION:
Additional cash flow information follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $ 5,240,553 $ 4,304,321 $ 3,298,022
- -----------------------------------------------------------------------------------------------------------------------------
Cash paid for income tax $ 1,090,365 $ 604,311 $ 738,896
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
E-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 14: EARNINGS PER SHARE:
The following is a reconciliation of the basic and diluted earnings per share
computations:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income available to stockholders $ 1,829,989 $ 1,533,934 $ 1,023,149
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 1,006,643 944,333 774,321
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per outstanding share 1.82 1.62 1.32
- -----------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Weighted average shares outstanding 1,006,643 944,333 774,321
Nonemployees directors' stock option 17,727 16,813 12,748
Employee incentive stock option 16,081 14,340 7,307
- -----------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding 1,040,451 975,486 794,376
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per outstanding share 1.76 1.57 1.29
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 15: CONCENTRATION OF CREDIT RISK:
The Company maintains a deposit relationship with several financial
institutions, all of which are insured by the FDIC. As of December 31, 1997,
deposits with these banks in excess of federal deposit insurance coverage
totaled $5,330,782.
NOTE 16: PROFIT SHARING PLAN:
The Company maintains a qualified profit sharing plan under section 401(k) of
the Internal Revenue Code. Under the plan, employees may elect to defer up to
15% of their salary, subject to Internal Revenue Service limits. The plan is
available to substantially all employees and the Company makes discretionary
matching contributions. For 1997 and 1996, the Company matched 25% of up to 5%
of elected deferrals. The Company's contributions for 1997 and 1996 totaled
$19,893 and $15,051, respectively. The plan may be amended or terminated at any
time by the board of directors and its contributions to the plan are included in
salaries and employee benefits.
NOTE 17: CAPITAL REQUIREMENTS:
Peninsula Trust Bank (the "Bank"), the subsidiary of Mid-Atlantic Community
BankGroup, Inc., is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for Prompt Corrective Action ("PCA"),
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum ratios (set forth in the table below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
E-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
The most recent notification from the Federal Reserve, the Bank's primary
regulator, categorized the Bank as well capitalized under the regulatory
framework for PCA. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table. The Bank's category is determined solely for the purposes of
applying PCA and that category may not constitute an accurate representation of
the Bank's overall financial condition or prospects. There have been no
conditions or events since that notification that management believes have
changed the Bank's capital adequacy category.
The regulatory framework for PCA is applicable only to banks and not to bank
holding companies and their non-bank subsidiaries. The actual and required
capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
For Minimum Ratio To
Actual Capital Be Considered Well
Amount Adequacy Capitalized Under
(In Thousands) Ratio Purposes PCA Provisions
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Total risk-weighted assets:
Consolidated $ 110,957 --% --% --%
Subsidiary bank 110,931 --% --% --%
Total average assets:
Consolidated 156,415 --% --% --%
Subsidiary bank 156,381 --% --% --%
Total capital (to risk-weighted assets):
Consolidated 20,548 18.52 8.00 N/A
Subsidiary bank 17,274 15.57 8.00 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated 19,224 17.33 4.00 N/A
Subsidiary bank 15,950 14.38 4.00 6.00
Tier 1 capital (to average assets):
Consolidated 19,224 12.29 4.00 N/A
Subsidiary bank 15,950 10.20 4.00 5.00
DECEMBER 31, 1996:
Total risk-weighted assets:
Consolidated 97,325 --% --% --%
Subsidiary bank 97,433 --% --% --%
Total average assets:
Consolidated 127,801 --% --% --%
Subsidiary bank 128,103 --% --% --%
Total capital (to risk-weighted assets):
Consolidated 15,704 16.14 8.00 N/A
Subsidiary bank 15,727 16.14 8.00 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated 14,593 14.99 4.00 N/A
Subsidiary bank 14,616 15.00 4.00 6.00
Tier 1 capital (to average assets):
Consolidated 14,593 11.42 4.00 N/A
Subsidiary bank 14,616 11.41 4.00 5.00
</TABLE>
E-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 18: PARENT COMPANY FINANCIAL INFORMATION:
Condensed financial information of Mid-Atlantic Community BankGroup, Inc.
follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 3,246,899 $ 2,709
Due from subsidiary 546,916 237,233
Investment securities -- 352,812
Investment in subsidiary bank 16,002,566 14,452,085
Other assets 27,359 3,794
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $ 19,823,740 $ 15,048,633
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ -- $ 380,960
Dividends payable 546,916 236,083
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities $ 546,916 $ 617,043
- -----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock $ 5,469,165 $ 4,721,665
Surplus 9,301,640 6,701,305
Retained earnings 4,453,102 3,170,029
Unrealized gain (loss) on securities available for sale 52,917 (161,409)
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 19,276,824 $ 14,431,590
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 19,823,740 $ 15,048,633
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Condensed Income Statements
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dividends from investments $ -- $ 3,015
Dividend from bank subsidiary 546,916 236,083
Gain from sale of investments 800 --
- -----------------------------------------------------------------------------------------------------------------------------
Total Income $ 547,716 $ 239,098
- -----------------------------------------------------------------------------------------------------------------------------
Miscellaneous stockholder expenses $ 30,695 $ --
Other expenses 21,375 26,473
- -----------------------------------------------------------------------------------------------------------------------------
Total Expenses $ 52,070 $ 26,473
- -----------------------------------------------------------------------------------------------------------------------------
Income before Income Tax and Equity in
Undistributed Net Income of Subsidiary $ 495,646 $ 212,625
Income tax benefit 17,432 7,976
- -----------------------------------------------------------------------------------------------------------------------------
Income before Equity in Undistributed Net
Income of Subsidiary $ 513,078 $ 220,601
Equity in Undistributed Net Income of Subsidiary 1,316,911 1,313,333
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,829,989 $ 1,533,934
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
E-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,829,989 $ 1,533,934
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiary (1,316,911) (1,313,333)
(Gain) on sale of investment securities (800) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Due from subsidiary (309,683) (237,233)
Other assets (23,565) (3,794)
Deferred income taxes (17,432) (7,975)
Increase (decrease) in:
Accounts payable (380,960) 380,960
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities $ (219,362) $ 352,559
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities $ -- $ (351,000)
Proceeds from sale of investment securities 351,800 --
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities $ 351,800 $ (351,000)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (236,083) $ --
Proceeds from issuance of stock - net 3,347,835 --
Additional contributed capital -- 1,150
- -----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities $ 3,111,752 $ 1,150
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash $ 3,244,190 $ 2,709
CASH - BEGINNING OF YEAR 2,709 --
- -----------------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 3,246,899 $ 2,709
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
E-21
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS: 1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $ 10,079 $ 6,960
Securities available for sale (at market value) 25,336 24,104
Securities held to maturity (market value)
$11,328 in 1998 and $7,381 in 1997) 11,243 7,290
Federal funds sold 9,604 8,414
Loans, net 113,704 104,240
Premises and equipment 7,700 5,928
Other real estate owned 437 208
Other assets 3,238 2,161
------------ ------------
TOTAL ASSETS $ 181,341 $ 159,305
============ ============
LIABILITIES:
Deposits
Demand $ 26,331 $ 18,791
Interest-bearing demand 28,308 25,673
Savings 16,617 15,758
Certificates of deposit, $100,000 or more 17,052 13,528
Other Time 71,243 64,673
------------ ------------
TOTAL DEPOSITS 159,551 138,423
Short-term debt 266 292
Long-term debt 24 31
Other liabilities 912 1,282
------------ ------------
TOTAL LIABILITIES 160,753 140,028
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, par value $5 per share,
10,000,000 shares authorized, 2,198,900
shares issued in 1998 and 1,093,833 in 1997 10,995 5,477
Surplus 4,026 9,294
Undivided profits 5,460 4,453
Accumulated other comprehensive income, net 107 53
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 20,588 19,277
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 181,341 $ 159,305
============ ============
</TABLE>
Notes to financial statements are an integral part of these statements.
E-22
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and Fees $ 2968 $ 2548 $ 5773 $ 4960
Federal Funds Sold 121 63 253 100
Investment Securities 632 511 1195 1021
------- ------- ------- -------
Total Interest Income 3721 3122 7221 6081
INTEREST EXPENSE:
Demand Deposits 227 194 461 384
Savings Deposits 119 109 233 215
Certificates of Deposit,
$1000,000 or more 226 157 415 291
Other Time Deposits 986 835 1918 1605
Short-term Debt 2 2 5 5
Long-term Debt -- 1 1 1
------- ------- ------- -------
Total Interest Expense 1560 1298 3033 2501
------- ------- ------- -------
Net Interest Income 2161 1824 4188 3580
PROVISION FOR LOAN
AND LEASE LOSSES 152 117 233 210
------- ------- ------- -------
Net Interest Income After
Provision for Loan
and Lease Losses 2009 1707 3955 3370
------- ------- ------- -------
OTHER INCOME:
Service Chgs on Deposit Accts 177 144 348 291
Other Service Charges & Fees 115 55 180 100
Securities Gains (Losses) -- -- 1 2
------- ------- ------- -------
Total Other Income 292 199 529 393
------- ------- ------- -------
OTHER EXPENSES:
Salaries & Employee Benefits 813 700 1580 1365
Occupancy Expenses 141 125 260 222
Furniture & Equipment Expenses 235 202 406 368
Other Operating Expenses 381 392 757 724
------- ------- ------- -------
Total Other Expenses 1570 1419 3003 2679
------- ------- ------- -------
Income Before Income Taxes 731 487 1481 1084
Applicable Income Taxes 229 138 474 319
------- ------- ------- -------
Net Income $ 502 $ 349 $ 1007 $ 765
======= ======= ======= =======
EARNINGS PER SHARE, BASIC .23 .18 .46 .40
EARNINGS PER SHARE,
ASSUMING DILUTION .22 .18 .44 .39
======= ======= ======= =======
</TABLE>
Notes to financial statements are an integral part of these statements.
E-23
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital
Total Income Earnings Income Stock Surplus
----- ------ -------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Balances - January 1, 1997 $14,431 $ 3,170 ($162) $ 4,722 $ 6,701
Comprehensive income:
Net income 764 $ 764 764
Other comprehensive income,
net of tax:
Unrealized gain on securities
available for sale
Unrealized holding gain
arising during the period 86 86
Less: reclassification
adjustment 2 2
------- ---------
Other comprehensive income,
net of tax 84 84 84
------- --------- --------
Total comprehensive income 848 $ 848 ($78)
------- ========= ------- ======== ------- -------
Balances - June 30, 1997 $15,279 $ 3,934 $ 4,722 $ 6,701
======= ======= ======= =======
Balances - January 1, 1998 $19,277 $ 4,453 $ 53 $ 5,477 $ 9,294
Comprehensive income:
Net income 1,007 $ 1,007 1,007
Other comprehensive income,
net of tax:
Unrealized gain on securities
for sale
Unrealized holding gain arising
during the period 55 55
Less: reclassification
adjustment 1 1
------- ---------
Other comprehensive income,
net of tax 54 54 54
------- --------- --------
Total comprehensive income $ 541 $ 1,061
------- =========
Issuance of common stock -
stock split effected in the form
of 100% stock dividend 5,490 (5,490)
Issuance of common stock -
Johnson Mortgage Co. 250 28 222
------- ------- -------- ------- -------
Balances - June 30, 1998 $20,588 $ 5,460 $ 107 $10,995 $ 4,026
======= ======= ======== ======= =======
</TABLE>
Notes to financial statements are an integral part of these statements.
E-24
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,007 $ 765
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 210 201
Provision for loan losses 233 210
Amortization of premiums on investment securities 46 16
(Gain) on sale of investment securities (1) (2)
Changes in operating assets and liabilities:
(Increase) in other assets (1,106) (467)
Increase (decrease) in accrued income taxes 45 (152)
Increase (decrease) in other liabilities (159) (22)
--------- ---------
Net Cash Provided By Operating Activities $ 275 $ 549
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans ($9,696) ($5,964)
Proceeds from sales of securities available for sale 200 1,593
(Increase) decrease in federal funds sold (1,419) (3,067)
Purchase of securities available for sale (6,628) (2,603)
Purchase of securities held to maturity (5,301) --
Purchase of property and equipment (1,983) (808)
Proceeds from maturities of securities available for sale 4,538 --
Proceeds from maturities of securities held to maturity 2,043 --
--------- ---------
Net Cash (Used In) Investing Activities ($18,246) ($10,849)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 21,128 $ 11,121
Dividends paid (547) (236)
Increase (decrease) in short-term debt 266 (15)
Curtailment of other borrowed funds (7) (6)
Issuance of common stock - Johnson Mortgage Co. 250 --
--------- ---------
Net Cash Provided by Financing Activities $ 21,090 $ 10,864
--------- ---------
Net Increase In Cash and Due From Banks $ 3,119 $ 564
CASH AND DUE FROM BANKS - BEGINNING OF PERIOD 6,960 6,015
--------- ---------
CASH AND DUE FROM BANKS - END OF PERIOD $ 10,079 $ 6,579
========= =========
</TABLE>
Notes to financial statements are an integral part of these statements.
E-25
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The consolidated statements include the accounts of Mid-Atlantic Community
BankGroup, Inc. and its subsidiaries, Peninsula Trust Bank, Incorporated
and Johnson Mortgage Company, LLC. All significant intercompany balances
and transactions have been eliminated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial positions as of June 30, 1998 and December
31, 1997, and the results of operations and cash flows for the six months
ended June 30, 1998 and 1997.
The results of operations for the six months ended June 30, 1998 and 1997
are not necessarily indicative of the results to be expected for the full
year.
2. Investment Securities
Amortized cost and carrying amount (estimated fair value) of securities
available for sale are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Treasury Securities 626 -- 2 624
US Government Agencies & Corporations 7,360 59 4 7,415
Obligations of States & Political Subdivisions 5,544 92 16 5,620
Mortgage-backed Securities 10,756 62 29 10,789
Federal Reserve Bank Stock 343 -- -- 343
Other Equity Securities 545 -- -- 545
--------- ---------- ---------- ---------
$ 25,174 $ 213 $ 51 $ 25,336
========= ========== ========== =========
</TABLE>
Amortized cost and carrying amount (estimated fair value) of securities held
to maturity are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Government Agencies & Corporations 6,064 22 1 6,085
Obligations of States & Political Subdivisions 1,911 55 13 1,953
Mortgage-backed Securities 3,268 22 -- 3,290
--------- ---------- ---------- ---------
$ 11,243 $ 99 $ 14 $ 11,328
========= ========== ========== =========
</TABLE>
E-26
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Securities available for sale at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Treasury Securities 632 -- 3 629
US Government Agencies & Corporations 10,301 84 4 10,381
Obligations of States & Political Subdivisions 4,946 90 80 4,956
Mortgage-backed Securities 7,743 40 46 7,737
Federal Reserve Bank Stock 343 -- -- 343
Other Equity Securities 57 -- -- 57
--------- ---------- ---------- ---------
$ 24,024 $ 215 $ 135 $ 24,104
========= ========== ========== =========
</TABLE>
Securities held to maturity at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Government Agencies & Corporations 3,035 23 -- 3,058
Obligations of States & Political Subdivisions 1,682 52 -- 1,734
Mortgage-backed Securities 2,573 16 -- 2,589
--------- ---------- ---------- ---------
$ 7,290 $ 91 $ -- $ 7,381
========= ========== ========== =========
</TABLE>
Six Months Ended
June 30,
1998 1997
-------- --------
(In Thousands of Dollars)
Gross proceeds from sales of securities 200 1,593
======== =======
Gross Gains on Sale of Securities 1 2
Gross Losses on Sale of Securities -- --
-------- -------
Net Securities Gains (Losses) 1 2
======== =======
E-27
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Loans
The following is a summary of loans outstanding at the end of the periods
indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(In Thousands of Dollars)
<S> <C> <C>
Commercial Mortgage 24,022 23,135
Residential Mortgage 31,243 28,987
Home Equity 12,574 10,905
Construction 7,640 6,059
Commercial 13,951 12,477
Installment 25,680 23,926
All Other 604 617
------------ ------------
115,714 106,106
Less Unearned Income 546 542
------------ ------------
115,168 105,564
Less Allowance for Loan and Lease Losses 1,464 1,324
------------ ------------
$ 113,704 $ 104,240
============ ============
</TABLE>
The following schedule summarizes the changes in the allowance for loan and
lease losses:
<TABLE>
<CAPTION>
Six Months Six Months
Ending Ending
June 30, June 30, December 31,
1998 1997 1997
------------ ----------- ------------
(In Thousands of Dollars)
<S> <C> <C> <C>
Balance, Beginning 1,324 1,112 1,112
Provision Charged Against Income 233 210 347
Recoveries 21 29 55
Loans Charged Off (114) (57) (190)
------------ ----------- ------------
Balance, Ending $ 1,464 $ 1,294 $ 1,324
============ =========== ============
</TABLE>
Nonperforming assets consist of the following:
June 30, December 31,
1998 1997
------------ ------------
(In Thousands of Dollars)
Nonaccrual Loans $ 339 $ 302
Restructured Loans -- --
----------- ------------
Nonperforming Loans 339 302
Foreclosed Properties 437 208
----------- ------------
Nonperforming Assets $ 776 $ 510
=========== ============
Total loans past due 90 days or more and still accruing were $280 on June 30,
1998 and $77 on December 31, 1997.
E-28
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of diluted potential common stock income available to common shareholders.
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic Earnings Per Share 2,193,376 $ .46 1,888,666 $ .40
Effect of dilutive securities:
Nonemployee directors' stock options 45,391 36,170
Employee incentive stock options 53,229 32,444
--------- ---------
Diluted Earnings Per Share 2,291,996 $ .44 1,957,280 $ .39
========= ======= ========= =======
</TABLE>
5. Capital Requirements
A comparison of the Company's capital as of June 30, 1998 with the minimum
requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier I Risk-based Capital 16.39 % 4.00 %
Total Risk-based Capital 17.56 % 8.00 %
Leverage Ratio 11.94 % 4.00 %
E-29
<PAGE>
[DAVENPORT & COMPANY LLC LETTERHEAD]
Appendix F
October 15, 1998
The Board of Directors
Mid-Atlantic Community BankGroup, Inc.
7171 George Washington Memorial Highway
Gloucester, Virginia 23061
Members of the Board:
Mid-Atlantic Community BankGroup, Inc. ("MACB") and United Community
Bankshares, Inc. ("UCB") have entered into an Agreement and Plan of
Reorganization and a related Plan of Merger, dated as of July 8, 1998 (the
"Agreement"), pursuant to which UCB will merge with and into MACB (the
"Merger"). Upon consummation of the Merger, each share of UCB common stock, par
value $1.00 (the "UCB Shares"), will be exchanged for 1.075 shares (the
"Exchange Ratio") of the common stock, par value $5.00 per share, of MACB (the
"MACB Shares"), all as set forth more fully in the Agreement. In addition, MACB
will change its name to Atlantic Financial Corp. ("Atlantic") and cause seven of
its fourteen directors to be nominated by UCB.
You have asked us whether, in our opinion, the proposed Exchange Ratio
in the Merger is fair to the stockholders of MACB from a financial point of
view.
Davenport & Company LLC, as a customary part of its investment banking
and general securities business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, private placements and valuations for
estate, corporate and other purposes. Our fee in connection with this engagement
was not contingent upon consummation of the Merger, nor was it contingent upon
our findings.
In arriving at the opinion set forth below, we have, among other
things: (i) reviewed certain publicly available business and financial
information relating to MACB and UCB which we deemed to be relevant; (ii)
reviewed certain information, including financial forecasts, relating to the
business, earnings, cash flow, assets, liabilities and prospects of MACB and
UCB, furnished to us by senior management of MACB; (iii) conducted discussions
with members of senior management of MACB concerning the foregoing, including
the respective businesses, prospects, regulatory condition and contingencies of
MACB and UCB, before and after giving effect to the Merger; (iv) reviewed the
market prices and valuation multiples for the MACB Shares and the UCB Shares and
compared them with those of certain publicly traded companies
F-1
<PAGE>
which we deemed to be relevant; (v) reviewed the results of operations of MACB
and UCB and compared them with those of certain publicly traded companies which
we deemed to be relevant; (vi) reviewed the proposed financial terms of the
Merger with the financial terms of certain other transactions which we deemed to
be relevant; (vii) reviewed the pro forma impact of the Merger; (viii) reviewed
the Agreement and Plan of Merger; and (ix) reviewed such other financial studies
and analyses and took into account such other matters as we deemed necessary,
including our assessment of general economic, market and monetary conditions.
In preparing our opinion we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities, contingent or otherwise, of MACB or UCB or any of their
subsidiaries, nor have we been furnished with any such evaluation or appraisal.
We are not experts in the evaluation of allowances for loan losses and we have
not made an independent evaluation of the adequacy of the allowance for loan
losses of MACB or UCB, nor have we reviewed any individual credit files relating
to MACB or UCB and we have assumed that the aggregate allowance for loan losses
for each of MACB and UCB is adequate to cover such losses and will be adequate
on a pro forma basis for the combined entity. In addition, we have not conducted
any physical inspection of the properties or facilities of MACB or UCB. With
respect to the financial forecast information, including, without limitation,
financial forecasts, evaluations of contingencies and projections regarding
under-performing and non-performing assets, net charge-offs, adequacy of
reserves and future economic conditions, furnished to or discussed with us by
MACB, we have assumed that they have been reasonably prepared and reflect the
best currently available estimates, allocations and judgment of MACB's
management as to the expected future financial performance of MACB or UCB, as
the case may be. We express no opinion as to such financial forecast information
or the assumptions on which they were based. We have further assumed that the
Merger will be accounted for as a pooling-of-interests under generally accepted
accounting principles and that it will qualify as a tax-free reorganization for
United States federal income tax purposes.
Our opinion is necessarily based upon market, economic and other
conditions as in effect on, and the information made available to us as of, the
date hereof. For purposes of rendering this opinion we have assumed, in all
respects material to our analysis, that the representations and warranties of
each party in the Agreement and all related documents and instruments
(collectively, the "Documents") contained therein are true and correct, that
each party to the Documents will perform all of the covenants and agreements
required to be performed by such party under such Documents, and that all
conditions to the consummation of the Merger will be
F-2
<PAGE>
satisfied without waiver thereof. We have also assumed that in the course of
obtaining the necessary regulatory or other consents or approvals (contractual
or otherwise) for the Merger, no restrictions, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger.
We are acting as financial advisor to MACB in connection with the
Merger and will receive a fee from MACB for our services, none of which is
contingent upon the consummation of the Merger. In addition, MACB has agreed to
indemnify us for certain liabilities arising out of our engagement. We have, in
the past, provided financial advisory and financing services to MACB and UCB and
may continue to do so and have received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of our business, we may
actively trade equity securities of MACB and UCB and their respective affiliates
for our own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of
MACB. Our opinion does not address the merits of the underlying decision by MACB
to engage in the Merger, and does not constitute a recommendation to any
shareholder as to how such shareholder should vote on the proposed Merger. We
are not expressing any opinion herein as to the prices at which the MACB Shares
will trade following the announcement or consummation of the Merger.
On the basis of, and subject to the foregoing, we are of the opinion
that, as of the date hereof, the Exchange Ratio is fair from a financial point
of view to the stockholders of MACB.
Very truly yours,
DAVENPORT & COMPANY LLC
By: /s/ Robert F. Mizell
------------------------------------
Robert F. Mizell
Senior Vice President
F-3
<PAGE>
United Community Bankshares, Inc.
Proxy Solicited on Behalf of the Board of Directors
The undersigned hereby appoints F. Bruce Stewart and J. Russell West,
jointly and severally, proxies, with full power to act alone, and with full
power of substitution, to represent the undersigned and to vote, as designated
below and upon any and all other matters that may properly be brought before
such meeting, all shares of Common Stock that the undersigned would be entitled
to vote at a Special Meeting of Shareholders of United Community Bankshares,
Inc. ("UCB") to be held at the Virginia Diner, Highway 460, Wakefield, Virginia
on November 19, 1998 at 9:30 a.m., local time, or any adjournments thereof, for
the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
July 8, 1998, between UCB and Mid-Atlantic Community BankGroup,
Inc. ("MACB") and a related Plan of Merger (collectively, the
"Reorganization Agreement"), providing for a Merger between UCB
and MACB (the "Reorganization") upon the terms and conditions
therein, including, among other things, that each issued and
outstanding share of UCB Common Stock will be exchanged for
1.075 shares of MACB common stock, with cash being paid in lieu
of issuing fractional shares. The Reorganization Agreement is
enclosed with the accompanying Joint Proxy Statement as Appendix
A.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon any
other business that may properly come before the meeting, or any
adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE SHAREHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE
VOTED FOR ITEM 1.
__________________________________________
Signature
__________________________________________
Signature
Dated:
(In signing as Attorney, Administrator,
Executor, Guardian or Trustee, please
add your title as such.)
PLEASE MARK, DATE, SIGN AND RETURN PROMPTLY
