As filed with the Securities and Exchange Commission on July 11, 1997.
Registration No. 333-25557
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
(Name of small business issuer in its charter)
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Virginia 6022 54-1809409
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
7171 George Washington Memorial Highway
Gloucester, Virginia 23061
(804) 693-0628
(Address and telephone number of registrant's principal executive offices
and place of business)
W. J. Farinholt
President/Chief Executive Officer
Mid-Atlantic Community Bankgroup, Inc.
7171 George Washington Memorial Highway
Gloucester, Virginia 23061
(804) 693-0628
(Name, address and telephone number of agent for service)
Copies of Communications to:
R. Brian Ball, Esquire Carr L. Kinder, III, Esquire
Wayne A. Whitham, Jr., Esquire Hunton & Williams
Williams, Mullen, Christian & Dobbins 951 East Byrd Street
1021 East Cary Street, 16th Floor Richmond, Virginia 23219
Richmond, Virginia 23219 (804) 788-8200
(804) 643-1991
Approximate date of proposed sale to the public: As soon as practicable
after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ____________
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box: [ ]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
Mid-Atlantic Community BankGroup, Inc.
CROSS REFERENCE SHEET
Pursuant to Item 501 of Regulation S-B
Showing Heading or Location in Prospectus of Information
Required by Items in Part I of Form SB-2
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Item in Form SB-2 Location in Prospectus
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1. Forepart of the Registration Statement and Facing Page; Cross Reference Sheet; Outside Front
Outside Front Cover Page of Prospectus Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Page
Prospectus
3. Summary Information and Risk Factors Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Underwriting
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Underwriting
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters and Management
Control Persons
11. Security Ownership of Certain Beneficial Owners Management
and Management
12. Description of Securities Outside Front Cover Page; Description of Capital
Stock
13. Interests of Named Experts and Counsel Legal Opinions; Experts
14. Disclosure of Commission Position on Description of Capital Stock
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Management
16. Description of Business Prospectus Summary; The Company; Recent Developments;
Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Transactions Management
20. Market for Common Equity and Related Stockholder Market for Common Stock; Dividend Information
Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants on Not Applicable
Accounting and Financial Disclosure
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PRELIMINARY PROSPECTUS DATED JULY 11, 1997, SUBJECT TO COMPLETION
PROSPECTUS
130,000 Shares
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Common Stock
Mid-Atlantic Community BankGroup, Inc. (the "Company"), the holding
company for Peninsula Trust Bank, Incorporated, is hereby offering for sale
130,000 shares of its Common Stock, $5.00 par value per share (the "Common
Stock"). The Common Stock is traded on the Nasdaq SmallCap Market under the
symbol MABG, but there has been limited trading volume to date. On June 26,
1997, the most recent date on which the Common Stock traded, the last reported
sale price for the Common Stock was $24.50. On July 10, 1997, the closing
quotation for the Common Stock was $23.00 bid -- $27.00 offered. See "Market for
Common Stock." See "Underwriting" for a discussion of the factors considered in
determining the public offering price.
See "Risk Factors" on page 5 for certain information that should be
considered by prospective investors.
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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR
DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE
INSURANCE FUND OF THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY.
--------------------
Price to Underwriting Proceeds to
Public Discount (1) the Company(2)
Per Share................. $ $ $
Total (3)................. $ $ $
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(1) Payable to the Underwriter. The Company has agreed to indemnify the
Underwriter against certain civil liabilities.
(2) Before deducting offering expenses payable by the Company estimated at
$ .
(3) The Company has granted the Underwriter a 30-day option to purchase up to
19,500 additional shares of Common Stock on the same terms and conditions
set forth above solely to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, total
Underwriting Discount and total Proceeds to the Company will be $ , $
and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of certificates for shares of Common Stock will be
made at the offices of Davenport & Company LLC, in Richmond, Virginia, on or
about , 1997.
DAVENPORT & COMPANY LLC
The date of this Prospectus is July , 1997.
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MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Market Area
[MAP]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON
STOCK PRIOR TO PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE
OF THE COMMON STOCK, THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated herein by reference. Unless otherwise indicated, the information
contained in this Prospectus assumes that the Underwriter's overallotment option
is not exercised. The Company
The Company
Mid-Atlantic Community BankGroup, Inc., a Virginia corporation (the
"Company"), is the holding company for Peninsula Trust Bank, Incorporated, a
Virginia-chartered commercial bank (the "Bank") that commenced operations on
July 20, 1989. The Company and the Bank are headquartered at the same location
in Gloucester, Virginia. The Company has experienced consistent growth since
1989. At March 31, 1997 the Company had $138.4 million in assets, $122.6 million
in deposits and $14.7 million in stockholders' equity. In 1996 the Company's net
income was $1.5 million, compared to $1.0 million in 1995 and $752,000 in 1994.
Net income for the three months ended March 31, 1997 was $415,000, compared to
$345,000 for the same period in 1996.
The Company'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 Bank currently operates five full-service banking offices, including
the main office in Gloucester County and branch offices in Williamsburg, Charles
City County, Newport News and Glenns (northern Gloucester County). The Glenns
location opened on January 30, 1997 and also houses the Bank's Operations
Center. The Bank is a community-oriented bank that provides a broad range of
banking services to small- and medium-sized businesses and individuals, with
extended lobby hours and drive-in windows at each location. The Bank strives to
provide its customers with the breadth of products comparable to a regional
bank, while maintaining the quick response and high level of service of a
community bank. The Bank's lending activities include commercial, real estate
and consumer loans.
The Company's business strategy is to maintain the Bank as a leading
community bank in the Peninsula Region of Virginia by building a strong local
ownership base in each community it serves and by further developing a
community-based branch banking network. The Bank'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
the Bank's market area has created a niche for community-based lenders
emphasizing smaller loans and customer service. To exploit this niche,
management intends to continue to develop its community-based branch banking
network in the Peninsula Region. The Company plans to establish a branch office
in Hampton, Virginia, which lies immediately to the east of Newport News, and is
currently evaluating available sites.
The Offering
Shares offered...................... 130,000 shares of Common Stock.(1)
Common Stock outstanding............ 944,333 shares at March 31, 1997, and
1,074,333 shares after completion of
this offering. (1)
Use of proceeds..................... General corporate purposes, including
new branches and to support future
growth in deposits and assets. See "Use
of Proceeds."
Market area......................... The Bank operates in the Peninsula
Region of Virginia with two offices in
Gloucester County, and one office in
each of Charles City County and the
cities of Williamsburg and Newport News.
Nasdaq SmallCap Market Symbol....... MABG
Dividends........................... The Company currently pays annual
dividends. The Company paid dividends
of $.25 per share in 1997, $.12 per
share in 1996, $.10 per share in 1995
and $.06 per share in 1994. See
"Dividend Information," "Description of
Capital Stock-Common Stock" and
"Business-Supervision and Regulation."
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(1) If the Underwriter's overallotment option is exercised in full, 149,500
shares will be offered and Common Stock outstanding after the Offering will
be 1,093,833 shares.
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following Summary Consolidated Financial Data and ratios for the
Company have been derived from information included elsewhere in this
Prospectus. See the Company's financial statements, including footnotes thereto,
which are set forth elsewhere in this Prospectus and are an integral part of the
information presented.
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At and for the
three months
ended March 31, (1) At and for the year ended December 31,
------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
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EARNINGS STATEMENT DATA:
Interest income.............. $ 2,959 $2,416 $10,653 $8,224 $5,651 $3,829 $2,930
Interest expense............. 1,203 997 4,359 3,469 2,120 1,624 1,540
------- ------ ------- ------ ------ ------ ------
Net interest income.......... 1,756 1,419 6,294 4,755 3,531 2,205 1,390
Provision for loan losses.... 93 77 380 288 258 255 122
Other income................. 193 148 624 477 358 290 202
Other expenses............... 1,261 959 4,191 3,496 2,481 1,838 1,246
Income taxes................. 180 185 813 425 398 66 12
------- ------ ------- ------ ------ ------ ------
Net income (loss)............ $ 415 $ 346 $ 1,534 $1,023 $ 752 $ 336 $ 212
======= ====== ======= ====== ====== ====== ======
PER SHARE DATA:
Net income................... $ .42 $ .35 $ 1.57 $ 1.29 $ 1.20 $ .57 $ .45
Weighted average shares outstanding... 977,311 973,064 975,486 794,376 624,789 592,735 476,798
Book value at period end..... $ 15.53 $ 14.33 $ 15.28 $ 14.12 $ 12.01 $ 10.89 $ 10.31
Total shares outstanding..... 944,333 944,333 944,333 944,333 657,978 582,628 582,628
Cash dividends............... $ .25 $ .12 $ .12 $ .10 $ .06 $ - $ -
BALANCE SHEET DATA:
Total assets................. $138,398 $108,010 $136,434 $108,314 $80,332 $58,792 $40,775
Loans, net................... 93,886 74,760 90,978 69,556 53,604 39,571 23,337
Investment securities........ 27,772 20,722 27,297 24,793 12,958 10,769 9,888
Deposits..................... 122,582 93,340 120,485 94,115 71,524 51,930 34,512
Borrowings................... 40 52 43 55 67 77 -
Shareholders' equity......... 14,664 13,531 14,432 13,335 7,900 6,345 6,009
PERFORMANCE RATIOS:
Net interest margin(2)....... 5.64% 5.73% 5.72% 5.51% 5.59% 4.97% 4.34%
Return on average assets..... 1.13% 1.31% 1.30% 1.11% 1.10% .69% .61%
Return on average equity..... 10.20% 10.26% 10.91% 10.38% 10.84% 5.06% 4.52%
Efficiency ratio(3).......... 64.70% 61.43% 60.21% 66.81% 63.81% 74.67% 78.34%
Dividend pay-out ratio....... - - 7.39% 6.43% 4.65% - -
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans.......... 1.25% 1.24% 1.21% 1.23% 1.31% 1.20% 1.11%
Allowance for loan losses to
nonaccrual loans(4)........ 2.40x 3.95x 5.85x 6.32x 28.52x 9.45x -
Nonperforming assets to period end
loans and foreclosed properties... .56% .31% .21% .19% .05% .13% -
Net charge-offs to average loans.... .01% .01% .16% .22% .06% .12% .23%
CAPITAL AND LIQUIDITY RATIOS:
Leverage..................... 11.19% 12.89% 11.42% 12.79% 10.81% 11.65% 15.28%
Risk Based Capital Ratios:
Tier 1 capital........... 15.07% 17.57% 14.99% 18.28% 14.54% 17.60% -
Total capital............ 16.28% 18.78% 16.14% 19.47% 15.80% 18.80% -
Equity to assets............. 10.60% 12.53% 10.58% 12.31% 9.83% 10.79% 14.74%
Average loans to average
deposits.................... 79.16% 80.25% 79.10% 74.68% 75.94% 76.20% 67.62%
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(1) The ratios for the three months ended March 31, 1997 and 1996 are
annualized.
(2) Net interest margin is calculated as tax equivalent net interest income
divided by average earning assets and represents the Bank's net yield on its
earning assets.
(3) Computed by dividing non-interest expense by the sum of net interest income
and non-interest income, net of securities gains or losses.
(4) The Bank had no non-accrual loans at December 31, 1992.
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<PAGE>
RISK FACTORS
Prospective investors should consider carefully, in addition to the
other information contained in this Prospectus, the following risk factors
before purchasing shares of the Common Stock offered hereby. This Prospectus
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate" or "continue" or the negative
thereof or other comparable terminology. The Company cautions readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause the
Company's actual results in 1997 and beyond to differ materially from those
expressed in any forward-looking statements made herein.
Dependence on Key Personnel. The Company is substantially dependent
upon the services of William J. Farinholt, President and Chief Executive Officer
of the Company and the Bank, and Kenneth E. Smith, Executive Vice President and
Chief Financial Officer of the Company and the Bank. The loss of the services of
Mr. Farinholt or Mr. Smith could have a material adverse effect upon the future
prospects of the Company. The Company has entered into employment agreements
with Mr. Farinholt and Mr. Smith. See "Management."
Continued Growth. The Company has experienced rapid growth since the
Company commenced operations as a state chartered bank in July, 1989. Although
the Company expects to continue growing in the future, there can be no assurance
that the recent rate of growth can be maintained. The Bank is a relatively new
financial institution in a highly competitive market with a loan portfolio
developed over the last eight years. In addition, continued growth will be
dependent in part on management's ability to supervise the Company's personnel
and operations in an efficient and productive manner consistent with its past
practices.
Competition. The Company encounters strong competition from numerous
financial institutions within its primary service area, including many large
banks that operate in the Peninsula Region of Virginia. By virtue of their large
capital bases, such banks have substantially greater lending limits than the
Company and perform certain services for their customers, such as trust
services, that the Company does not currently offer. In addition to commercial
banks, the Company competes with other financial institutions, such as savings
and loan associations, finance companies, credit unions, money market funds,
stock brokerage firms, insurance companies and other financial service
organizations. Many of the financial organizations in competition with the
Company have greater financial resources and loan capacities than the Company
and are able to offer similar services at lower costs. The Company cannot
accurately predict the effect of competition on its ability to further penetrate
its current and prospective markets. See "Business."
Economic Conditions and Related Uncertainties. The Company's primary
service area is limited to the Peninsula Region of Virginia. Approximately 98%
of the loans in the Company's portfolio are to borrowers within the Company's
primary service area. Declines in economic activity or increased unemployment in
this area could have an adverse effect on the business and prospects of the
Company. More generally, commercial banking is affected by general economic and
political conditions and by governmental monetary and fiscal policies.
Conditions such as inflation, recession, unemployment, volatile interest rates,
tight money supply, and other factors beyond the Company's control may adversely
affect the financial performance of the Company.
Government Regulations. The banking industry is subject to extensive
governmental supervision, regulation and control, which has materially affected
the business of the Company and other financial institutions in the past and is
likely to do so in the future. Regulations affecting the banking industry may be
changed at any time, and the interpretation of those regulations by examining
authorities of the banking industry is also subject to change. There can be no
assurance that future changes in legislation,
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<PAGE>
administrative regulations or governmental policy will not adversely affect the
banking industry and the business of the Company. See "Business-Supervision and
Regulation."
Payment of Dividends. The Company or the Bank has paid an annual cash
dividend since 1994. The Company currently intends to continue to pay an annual
dividend. However, there can be no assurance that the Company's results of
operations will continue to permit the payment of dividends. The ability of the
Company to pay cash dividends also is subject to both federal and state banking
regulations. See "Dividend Information."
Determination of Offering Price. The offering price of the Common Stock
has been determined by negotiation between the Company and the Underwriter based
on certain factors including the current market for the Common Stock, an
evaluation of assets, earnings and other established criteria of value, as well
as the comparisons of the relationships between market prices and book values of
other banking institutions deemed comparable by the Underwriter. Such decision
will not be solely based upon the actual trading market for the Common Stock;
accordingly, there can be no assurance that the Common Stock may be resold at or
above the offering price. See "Underwriting."
Limited Trading Market. The Common Stock of the Bank or the Company has
been quoted on the Nasdaq SmallCap Market continuously since September 1995 and
trading volume has averaged approximately 1,000 shares per week. There can be no
assurance that an active trading market will develop or, if developed, will be
maintained following the Offering.
THE COMPANY
The Bank was organized on April 4, 1988 and commenced business on July
20, 1989, with initial capital of $3.3 million. The Company, which was formed to
be the Bank's holding company, acquired all of the outstanding capital stock of
the Bank pursuant to a plan of share exchange, on August 15, 1996.
The Company'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 the Company and the Bank is in Gloucester,
Virginia. In addition to the main office in Gloucester County, the Bank
currently operates branch offices in Williamsburg, Charles City County, Newport
News and Glenns (northern Gloucester County). The opening dates of the branch
offices were as follows: Williamsburg, November 1992; Charles City County, April
1994; Newport News, June 1995; and Glenns, January 1997. Each branch office is a
full-service facility offering a full range of deposit and loan products, and
each is equipped with an ATM. There are extended lobby hours and drive-in
windows at all locations. The Bank plans to open a branch office in Hampton,
Virginia, to complement its Newport News office, and is currently evaluating
available sites, although there can be no assurance that this branch will be
opened in accordance with the Company's current plan.
At June 30, 1996 the Bank held approximately 23.0% of bank deposits in
Gloucester County, approximately 8.1% of the bank deposits in Williamsburg and
1.0% of the bank deposits in Newport News. The Company is the only depository
institution with an office in Charles City County. Deposits in the Charles City
County branch office totaled $11.0 million at March 31, 1997.
The Bank is a community-oriented bank that provides a broad range of
banking services to small and medium-sized businesses and individuals. The Bank
strives to provide its customers with products and services comparable to those
offered by regional banks, while focusing on the enhanced customer service that
smaller customers often do not receive at larger banks. The Bank's lending
activities include commercial, real estate and consumer loans.
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<PAGE>
The Bank has become a leading community bank in the Peninsula Region of
Virginia by building a strong local ownership base and by developing a
community-based branch banking network. The Bank has experienced significant
growth since opening. At March 31, 1997, the Company had $138.4 million in
assets, $122.6 million in deposits and $93.9 million in net loans. Management
believes that the current banking environment favors community-based lenders
emphasizing smaller loans. Accordingly, the Bank has developed a full range of
loan products and deposit products for small and medium-sized businesses and
individuals. The Bank's loan portfolio at March 31, 1997, consists of 66% real
estate loans (of which 10.5% are construction loans representing 6.8% of total
loans), 11% commercial loans and 23% installment loans. The Bank's real estate
loans include residential real estate loans and home equity lines, construction
loans and commercial mortgage loans. See "Business-Lending Activities."
The Company's senior management has an average of 26 years of banking
experience and has been with the Company since its inception as a state
chartered bank. The Company believes it has hired and retained experienced
employees whose banking backgrounds have helped the Company deliver excellent
customer service and develop and retain a highly trained professional staff.
At March 31, 1997, the Company's total capital, which included no
subordinated debt or debentures, was $14.7 million or 10.60% of total assets.
The Company and the Bank are subject to regulation by the Board of
Governors of the Federal Reserve (the "Federal Reserve") and the Bureau of
Financial Institutions of the SCC. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to a maximum of $100,000 for
each insured depositor.
The Company's principal executive offices are located at 7171 George
Washington Memorial Highway, Gloucester, Virginia 23061. The telephone number at
that location is (804) 693-0628.
RECENT DEVELOPMENTS
For the quarter ended June 30, 1997, total assets increased to $148.0
million, compared to $138.4 million at March 31, 1997, and $119.7 million at
June 30, 1996. Total deposits increased to $131.6 million at June 30, 1997
compared to $122.6 million and $105 million at March 31, 1997 and June 30, 1996,
respectively. Net income for the second quarter of 1997 declined to $349,000,
compared to $415,000 for the first quarter of 1997 and $371,000 for the second
quarter of 1996. The decline in earnings resulted from an increase in
non-interest expense, which was partially offset by increases in net interest
income and non-interest income.
Non-interest expense for the second quarter totaled $1.42 million,
compared to $1.26 million for the first quarter of 1997 and $1.0 million for the
second quarter of 1996. The increase in non-interest expense resulted from costs
incurred in connection with opening the Company's fifth banking office and new
operations center during the first quarter of 1997, the full impact of which was
not realized until the second quarter. In addition, the capitalization of
improvements and furniture, fixtures and equipment relating to the new branch
and operations center resulted in increased depreciation expense of
approximately $12,000 per month. In May the loan loss provision was increased by
$12,000 per month due to increased loan volume, resulting in a $24,000 increase
in the second quarter of 1997.
USE OF PROCEEDS
The Company intends to use the net proceeds from the shares of Common
Stock offered hereby (estimated at $ , after deduction of the
underwriting discount and other expenses of the offering of approximately
$ ) for general corporate purposes, including financing the opening of
future branches and to support the growth of assets and deposits. Additional
capital is expected to allow the Company to grow internally and through new
branches to support greater loan and deposit volumes. Any proceeds
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<PAGE>
received by the Company upon the exercise of the Underwriter's over-allotment
option will also be used for general corporate purposes and for financing future
growth.
MARKET FOR COMMON STOCK
The Common Stock of the Company or the Bank has been quoted on the
Nasdaq SmallCap Market continuously since September 20, 1995. There has been
limited trading volume in the Common Stock, with trading volume averaging
approximately 1,000 shares per week since September 1995. During the period
September 20, 1995 to August 14, 1996 the Bank's Common Stock traded under the
symbol "PNTB". Since the consummation of a plan of share exchange on August 15,
1996 pursuant to which the Company became the Bank's holding company, the
Company's Common Stock has traded under the symbol "MABG". Prior to September
20, 1995 the Common Stock traded sporadically in the over-the-counter market,
and such trades may not have accurately reflected the fair market value of the
Common Stock. On June 30, 1997, the Company had 902 shareholders of record.
The following table sets forth the high and low sales prices of the
Common Stock for the period January 1, 1995 to July 10, 1997.
High Low
1997
Third Quarter (through July 10, 1997)..... no trades no trades
Second Quarter............................ $26.00 $23.00
First Quarter............................. 26.00 23.00
1996
Fourth Quarter............................ $26.00 $21.00
Third Quarter............................. 25.00 20.00
Second Quarter............................ 25.00 22.00
First Quarter............................. 23.50 18.50
1995
Fourth Quarter............................ $21.50 $19.00
Third Quarter............................. 22.00 17.00
Second Quarter............................ 17.50 16.50
First Quarter............................. 17.00 16.00
DIVIDEND INFORMATION
The Company or the Bank has paid annual dividends as follows: $.25 per
share in 1997; $.12 per share in 1996; $.10 per share in 1995; and $.06 per
share in 1994. No dividends were paid by the Bank prior to 1994. The Company
currently intends to continue to pay annual cash dividends on the Common Stock.
However, the payment of dividends is at the discretion of the Board of
Directors, and is subject to various state and federal regulatory limitations
and is dependent upon the overall performance and capital requirements of the
Company. Holders of Common Stock are entitled to receive such dividends as are
declared by the Company's Board of Directors. See "Description of Capital
Stock-Common Stock" and "Business-Supervision and Regulation."
-8-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
March 31, 1997, and as adjusted as of that date for the issuance of the shares
of Common Stock offered hereby. The information below should be read in
conjunction with the detailed information and financial statements, and the
notes related thereto, included in this Prospectus.
<TABLE>
<CAPTION>
At March 31, 1997
-----------------------------------------------------
Actual Adjustments(1) As Adjusted
<S> <C> <C> <C>
Stockholders' equity:
Common Stock, $5.00 par value;
10,000,000 shares authorized;
944,333 shares issued; 1,074,333
shares issued, as adjusted........................... $4,721,665 $650,000 $5,371,665
Organizers' stock options................................. 7,380 7,380
Capital surplus........................................... 6,693,925
Retained earnings......................................... 3,585,363 3,585,363
Unrealized loss on securities available for sale.......... (344,318) (344,318)
--------- -------- ---------
Total stockholders' equity................................ $14,664,015 $ $
=========== ======== =========
</TABLE>
- ---------------
(1) Adjustments due to offering.
-9-
<PAGE>
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 the Company as of
the dates and for the periods indicated. This discussion should be read in
conjunction with the Summary Financial Data, the Company's Consolidated
Financial Statements and the Notes thereto, and other financial data appearing
elsewhere in this Prospectus.
The Consolidated Financial Statements include the financial information
of the Company and the Bank. As a result of a share exchange completed in
August, 1996, the Company became the parent corporation of the Bank; however,
the Bank represents more than 99.0% of the Company's activities. Therefore,
comparative discussions of consolidated versus non-consolidated financial
statements are unnecessary.
Overview
After organizing in 1988 and opening in July 1989, the Bank has posted
consistent increases in assets, deposits, and profitability. The Bank's asset
growth has exceeded 25% in each of its seven full years of operation. Earnings
of $1.5 million in 1996 represented the seventh consecutive year of increased
income. Asset growth also evidenced strong performance. In 1996 the Company's
total assets increased to $136.4 million which represented a $28.1 million
increase, or 25.9% over year-end 1995. The primary source of this growth was an
increase in total deposits of $26.4 million (28.1%). Employment of these new
resources was accomplished through increases in the loan portfolio and
investment securities account of $21.4 million (30.8%) and $2.5 million (10.1%),
respectively. Loan demand was strong throughout 1996. Growth of 47.5% in
interest bearing demand deposits (NOW and Money Market accounts) was the primary
contributor to the Company's increase in deposits during the year. These
transaction accounts had a year end balance of $26.0 million.
The Company had net income of $1.5 million in 1996, a 49.9% increase
over 1995 net income of $1.0 million. On a pre-tax basis, net income for 1996
was $2.3 million, a 62.1% increase over 1995 pre-tax income of $1.4 million. A
common measure of a bank's performance is return on average total assets
("ROA"). The Company's ROA for 1996 was 1.3%, a 17% increase over the Company's
1995 ROA of 1.1%. The Company believes that this increase represents a
continuation of the Company's trend of improving earnings every year since
opening, both in absolute dollars and in the ROA ratio. The improvement in ROA
has facilitated an increasing return on average equity ("ROE"), despite a
conservative leverage ratio. In 1996 the Company's ROE was 10.9%, compared to
10.4% in 1995.
Net income for the three months ended March 31, 1997 was $415,000,
compared to $345,000 for the same period in 1996. Total assets, deposits and net
loans at March 31, 1997 exceeded their respective December 31, 1996 balances.
Results of Operations
The Company's sole subsidiary, the Bank, 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. The Company's major
expense is interest paid on deposits.
-10-
<PAGE>
Net Interest Income
Net interest income represents the principal source of earnings for the
Company. 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 the Company's net yield on its earning assets.
The following table presents 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.
-11-
<PAGE>
<TABLE>
<CAPTION>
Average Balances, Interest Income and Expenses, Average Yields and Rates(1)
Three Months Ended
March 31, Year Ended December 31,
--------------------------- --------------------------------------------------------------
1997 1996 1995
---------- ----------- -----------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Federal funds sold............. $2,662 36 5.41% $4,153 $231 5.56% $ 6,445 $ 378 5.87%
Securities: (2)..............
U.S. Treasury obligations... 604 11 7.28% 61 5 8.20% - - -
U.S. government agency
and corporate obligations. 20,129 376 7.47% 17,930 1,291 7.20% 13,642 894 6.55%
Other securities ........... 7,642 123 6.46% 6,562 437 6.66% 4,551 299 6.57%
------ --- ------ ------ ------- ------
Total securities.......... 28,375 510 7.18% 24,553 1,733 7.06% 18,193 1,193 6.56%
Loans (3)................... 93,472 2,413 10.33% 81,323 8,689 10.68% 61,703 6,653 10.78%
------ ----- ------ ------ ------- ------
Total interest-earning assets.... 124,509 2,959 9.51% 110,029 10,653 9.68% 86,341 8,224 9.53%
Noninterest-earning assets:
Cash and due from banks........ 3,869 3,797 2,721
Other assets................... 7,387 5,526 4,301
Less: allowance for loan
losses......................... (1,142) (985) (796)
Deferred loan fees............. (482) (431) (375)
----- -------- -------
Total noninterest-earning
assets...................... 9,632 7,907 5,851
-------- -------
Total assets..................... $134,141 $117,936 $92,192
======== ======== =======
Liabilities and
shareholders' equity:
Interest bearing liabilities:
Deposits:
Interest bearing demand..... $21,923 $ 191 3.48% $ 21,471 $ 690 3.21% $ 16,600 $ 523 3.15%
Savings..................... 14,994 105 2.80% 10,710 357 3.33% 9,018 303 3.36%
Other time.................. 66,168 904 5.46% 57,115 3,301 5.78% 45,302 2,632 5.81%
------ --- ------ ------ ------- ------
Total interest bearing
deposits.................... 103,085 1,200 4.66% 89,296 4,348 4.87% 70,920 3,458 4.88%
Short-term borrowings.......... 250 2 4.00% 233 9 3.86% 197 8 4.06%
Long-term debt................. 42 1 4.76% 50 3 6.00% 61 3 4.92%
-- - ------ ------ ------- ------
Total interest-bearing
liabilities...................... 103,377 1,203 4.65% 89,579 4,360 4.87% 71,178 3,469 4.87%
Noninterest-bearing
liabilities:
Demand deposits................ 15,000 13,514 10,132
Other liabilities.............. 943 785 1,017
--- -------- -------
Total noninterest-bearing
liabilities.................... 15,943 14,299 11,149
------- -------- -------
Total liabilities................ 119,320 103,878 82,327
Shareholders' equity............. 14,821 14,058 9,865
------ -------- -------
Total liabilities and
shareholders' equity........... $134,141 $117,936 $92,192
======== ======== =======
Interest spread (4).............. 4.86% 4.81% 4.66%
Net interest margin (5).......... $1,756 5.64% $6,293 5.72% $4,755 5.51%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1994
------------
Interest
Average Income/ Yield/
Balance Expense Rate
------- ------- ----
<S> <C> <C> <C>
Assets:
Interest earning assets:
Federal funds sold............. $ 3,546 $ 144 4.06%
Securities: (2)..............
U.S. Treasury obligations.... - - -
U.S. government agency
and corporate obligations. 9,049 521 5.76%
Other securities ........... 3,614 200 5.53%
------- ------
Total securities.......... 12,663 721 5.70%
Loans (3)................... 46,905 4,786 10.20%
------- ------
Total interest-earning assets.... 63,114 5,651 8.95%
Noninterest-earning assets:
Cash and due from banks........ 2,832
Other assets................... 3,134
Less: allowance for loan
losses......................... (599)
Deferred loan fees............. (335)
-------
Total noninterest-earning
assets...................... 5,032
-------
Total assets..................... $68,146
=======
Liabilities and
shareholders' equity:
Interest bearing liabilities:
Deposits:
Interest bearing demand..... $18,373 $ 586 3.19%
Savings..................... 7,936 266 3.35%
Other time.................. 26,735 1,260 4.74%
------- ------
Total interest bearing
deposits.................... 53,044 2,112 3.98%
Short-term borrowings.......... 125 4 3.20%
Long-term debt................. 72 4 5.56%
------- ------
Total interest-bearing
liabilities...................... 53,241 2,120 3.98%
Noninterest-bearing
liabilities:
Demand deposits................ 7,485
Other liabilities.............. 481
-------
Total noninterest-bearing
liabilities.................... 7,966
-------
Total liabilities................ 61,207
Shareholders' equity............. 6,939
-------
Total liabilities and
shareholders' equity........... $68,146
=======
Interest spread (4).............. 4.97%
Net interest margin (5)........... $3,531 5.59%
======
</TABLE>
- --------------
(1) Income and yields are computed on a tax-equivalent basis.
(2) Includes investment securities and securities available for sale. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Securities."
(3) Non-Accrual Loans are included in the average loan balances, and income
on such loans is recognized on a cash basis.
(4) Interest spread is the average yield earned on earning assets less the
average rate incurred on interest-bearing liabilities.
(5) Net interest margin is tax equivalent net interest income expressed as
a percentage of average earning assets.
-12-
<PAGE>
Total interest and fee income from loans and investments for 1996 was
$10.7 million compared to $8.2 million in 1995, a 29.5% increase. This was
accomplished through an increase in average total earning assets from $86.3
million for 1995 to $110.0 million for 1996. As a percentage of average total
assets, earning assets remained relatively constant, declining slightly from
93.7% in 1995 to 93.3% in 1996. Total interest expense increased $890,600
(25.7%) in 1996 to a total of $4.4 million.
Net interest income increased by $1.5 million (32.4%) in 1996. The net
interest margin increased in 1996 to 5.72% from 5.51% in 1995. Expected pressure
on the net interest margin during 1995 occurred throughout the first half of the
year, as a result of downward repricing of loans and aggressive pricing of
deposits in anticipation of loan demand from the Newport News branch, which
opened in mid-1995. The Bank's net interest margin stabilized in July 1995 and
improved steadily during the balance of 1995 and 1996 as a result of improved
yields in its loan portfolio, as a significant volume of three year balloon
mortgage loans repriced during the second half of 1995 and 1996, resulting in
rate increases ranging from 50 to 150 basis points. The Company also enjoyed an
increased average yield on its investment portfolio of approximately 50 basis
points in 1996.
Net interest income was $1.8 million for the three months ended March
31, 1997, compared to $1.4 million for the same period in 1996. Average total
interest-earning assets were $124.5 million for the three months ended March 31,
1997, compared to $99.1 million for the three months ended March 31, 1996 and
$110.0 million for the year ended December 31, 1996.
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.
-13-
<PAGE>
<TABLE>
<CAPTION>
Volume and Rate Analysis
Three Months Ended
March 31, Year Ended December 31,
-------------------------------------------------------------------------------------
1997 Compared to 1996 1996 Compared to 1995 1995 Compared to 1994
--------------------- --------------------- ---------------------
Change Due To: Change Due To: Change Due To:
-------------- -------------- --------------
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................... $(2) $(3) $(5) $(128) $(19) $(147) $234 $83 $234
Securities:
U.S. Treasury Obligations......... 11 - 11 5 - 5 - - -
Obligations of U.S. government
agencies and corporations...... 67 26 93 302 95 397 294 79 373
Other............................. 18 (5) 13 134 4 138 57 42 99
-- --- -- --- - --- -- -- --
Total securities................ 96 21 117 441 99 540 351 121 472
Loans................................ 513 (82) 431 2,097 (61) 2,036 1,582 285 1,867
--- ---- --- ----- ---- ----- ----- --- -----
Total interest income............. 607 (64) 543 2,410 19 2,429 2,084 489 2,573
--- ---- --- ----- -- ----- ----- --- -----
Interest Expense:
Deposits:
Interest bearing demand........... 35 18 53 157 10 167 (56) (7) (63)
Savings........................... 36 (10) 26 57 (3) 54 36 1 37
Other time........................ 176 (49) 127 683 (14) 669 1,035 337 1,372
--- ---- --- --- ---- --- ----- --- -----
Total deposits.................. 247 (41) 206 897 (7) 890 1,015 331 1,346
Short-term borrowing................. - - - 1 - 1 3 1 4
Long-term debt....................... - - - - - - (1) - (1)
Total interest expense............ 247 (41) 206 898 (7) 891 1,017 332 1,349
--- ---- --- --- --- --- ----- --- -----
Increase (decrease) in net interest
income............................. $360 $(23) $337 $1,512 $26 $1,538 $1,067 $157 $1,224
==== ==== ==== ====== === ====== ====== ==== ======
</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.
The Company 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.
The following table illustrates the interest sensitivity gap position
of the Company at March 31, 1997. It summarizes the contractual repayment terms
or nearest repricing dates of the Company's interest-earning assets and
interest-bearing liabilities. This table presents the position that existed on
one particular day. This position changes continually and is not necessarily
indicative of the Company's position at any other time.
-14-
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitivity Analysis(1)
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............... $ 4,423 $ - $ - $ - $ 4,423
Investment securities............ - 130 2,570 25,071 27,771
Loans............................ 36,873 2,947 54,613 1,142 95,575
------- ------ ------- ------- --------
Total interest-earning assets. $41,296 $3,077 $57,183 $26,213 $127,769
======== ======= ======== ======= ========
Interest Bearing Liabilities:
Deposits:
Interest bearing demand
deposits..................... 11,170 - - - 11,170
MMDAs and other savings...... 25,715 - - - 25,715
Time deposits $100,000
and over................... 1,064 5,683 4,269 - 11,016
Other time deposits.......... 6,332 26,339 24,948 - 57,619
Other borrowed money............. 332 10 27 - 369
------- ------ ------- ------- --------
Total interest-bearing
liabilities................ $44,613 $32,032 $29,244 $ - $105,889
======== ======= ======== ======= ========
Period gap.......................... $(3,317) $(28,955) $27,939 $26,213 $ 21,880
Cumulative gap...................... $(3,317) $(32,272) $ 4,333) $21,880
Cumulative gap as a percent of total
earning assets................... (2.60%) (25.26%) (3.39%) 17.12%
</TABLE>
- ---------------
(1) The amounts shown for loans have not been reduced by the allowance for
loan losses or unearned income, which were approximately $1.2 million
and $493,000, respectively, at March 31, 1997.
The Bank had $32.3 million more in liabilities than assets that
repriced within one year and was, therefore, in a liability-sensitive or
negative gap position for this interval at March 31, 1997. 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. The negative gap in
the one year interval is outside of the range that the Company's management
considers acceptable. However, a mitigating factor is the $36.9 million in
interest bearing demand deposits, MMDAs and other savings accounts that have
demonstrated less sensitivity to changes in market interest rates. Rates offered
by the Company on interest bearing demand deposits, MMDAs and other savings
accounts did not change between January 1, 1994 and March 31, 1997. Balances in
these accounts have demonstrated a continuous although gradual increase since
January 1, 1994. Fluctuations in average rates paid over such period are
attributable to a tiered rate structure and changes in the mix of higher and
lower balance accounts. Therefore, although these accounts are subject to
immediate withdrawal and are repricable on an immediate basis, their historical
interest rate sensitivity has been consistently less than both time certificates
of deposit and interest rate sensitive assets. The Bank manages interest rate
risk by monitoring the balances, rates, and maturities of interest rate
sensitive assets and liabilities.
-15-
<PAGE>
Securities
The Company's securities portfolio serves several purposes. Portions of
the portfolio are held as investments, while the remaining portions are used to
assist the Company 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, the
Company 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 available for sale. The remaining $4.3 million of
investment securities were classified as held to maturity. This classification
had no material effect on the Company'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.
Securities are classified as securities held to maturity when
management has the intent and the Company 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
shareholders' 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. The Company's recent purchases of investment
securities have generally been limited to securities of high credit quality with
short to medium term maturities.
The following table summarizes the book value of the Company's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
Securities Portfolio
March 31, December 31,
-------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities........................... $ 635 $ 535 $ - $ -
U. S. government agencies and corporations......... 16,878 15,651 12,967 6,798
State and local governments........................ 7,308 7,467 5,860 3,527
Mortgage-backed securities......................... 3,131 3,195 5,613 2,644
Other securities................................... 343 343 289 213
Marketable equity securities....................... - 351 - -
Unrealized gain (loss) on securities available
for sale......................................... (523) (245) 63 (223)
-------- -------- -------- --------
Total securities.......................... $ 27,771 $ 27,297 $ 24,792 $ 12,959
======== ========= ======= ========
</TABLE>
The book value and weighted average yield of the Company's investment
securities at March 31, 1997, 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.
-16-
<PAGE>
Amount and Average Yield of Investment Securities
<TABLE>
<CAPTION>
Amount Average Yield
------ -------------
(Dollars in Thousands)
<S> <C> <C>
Due in one year or less.................. $ 130 5.58%
Due after one year through five years.... 2,768 5.62%
Due after five years through ten years... 10,895 7.17%
Due after ten years...................... 14,158 7.56%
Federal Reserve Bank stock............... 343 6.00%
Marketable equity securities ............ - -
--------
Total securities...................... $ 28,294 7.19%
</TABLE>
Loan Portfolio
The Company 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
"Business-Lending Activities." The Company's lending activity extends to
individuals and small and medium-sized businesses within its primary service
area which is predominately the Peninsula Region of Virginia. Consistent with
its focus on providing community-based financial services, the Company does not
attempt to diversify its loan portfolio geographically by making significant
amounts of loans to borrowers outside of its primary service area.
Net loans consist of total loans minus unearned income and the
allowance for loan losses. Net loans were $91.0 million at December 31, 1996, an
increase of $21.4 million from December 31, 1995. At December 31, 1995, net
loans were $69.6 million, which was an increase over 1994 of approximately $16.0
million. At March 31, 1997, net loans had increased to $93.9 million.
The following table summarizes the Company's loan portfolio for the
periods indicated.
Loan Portfolio
<TABLE>
<CAPTION>
March 31, December 31,
-------------- ----------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Commercial mortgage.......................... $20,267 $19,622 $10,581 $ 8,377
Residential mortgage......................... 26,008 25,056 21,609 17,560
Home equity.................................. 10,057 9,318 7,742 5,871
Construction................................. 6,453 6,915 6,806 6,024
Commercial................................... 10,535 10,292 6,534 4,057
Installment.................................. 21,797 20,848 16,854 12,391
All other.................................... 458 522 717 392
------- ------- ------- -------
Total loans................................ 95,575 92,573 70,843 54,672
Less: unearned income....................... 493 483 421 355
Less: allowance for loan losses............. 1,196 1,112 866 713
------- ------- ------- -------
Loans, net................................. $93,886 $90,978 $69,556 $53,604
======= ======= ======= =======
</TABLE>
-17-
<PAGE>
The following table summarizes the contractual repayment terms of the
Company's fixed rate loans and the repricing characteristics of its adjustable
rate loans at the dates indicated.
<TABLE>
<CAPTION>
Loan Portfolio Maturity Schedule
March 31, December 31,
--------------- ----------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed rate loans with a remaining maturity of:
Three months or less........................... $1,225 $2,161 $3,159 $1,776
Over three months through 12 months............ 2,913 2,280 3,941 2,966
Over one year through five years............... 21,755 20,471 10,553 7,012
Over five years................................ 1,142 1,344 557 593
------ ------ ------ ------
Total fixed rate loans....................... 27,035 26,256 18,210 12,347
------ ------ ------ ------
Floating rate loans with a repricing frequency of:
Quarterly or more frequently................... 35,150 34,114 25,812 19,529
Annually or more frequently, but less frequently
than quarterly............................... 34 157 6,005 3,609
Every five years or more frequently, but less
frequently than annually..................... 32,858 31,856 20,679 19,162
Less frequently than five years................ - - - -
------ ------ ------ ------
Total floating rate loans.................... 68,042 66,127 52,496 42,300
------ ------ ------ ------
Non-accrual loans.............................. 498 190 137 25
------ ------ ------ ------
Total loans.............................. 95,575 92,573 70,843 54,672
------ ------ ------ ------
Less:
Unearned income................................ 493 483 421 355
Allowance for loan losses...................... 1,196 1,112 865 713
----- ----- --- ---
Total loans, net.................................. $93,886 $90,978 $69,556 $53,604
======= ======= ======= =======
</TABLE>
Asset Quality
As of March 31, 1997 and at December 31, 1996, 1995 or 1994, all loans
90 days or more past due were on non-accrual status or adequately secured and in
the process of collection. The Company discontinues accrual of interest when
reasonable doubt exists about the full and timely collection of interest or
principal. When a loan is placed on non-accrual status, all interest previously
accrued but not collected is reversed against current period interest income.
Income on such loans is then recognized only to the extent that cash is received
and where the future collection of principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans have
demonstrated a new period of improved performance and are estimated to be fully
collectible as to both principal and interest.
There were no restructured loans at March 31, 1997 or at December 31,
1996, 1995, or 1994. Restructured loans are defined as those loans on which
concessions in terms have been granted because of a borrower's financial
difficulty.
-18-
<PAGE>
The following table summarizes non-performing assets at the dates
indicated.
<TABLE>
<CAPTION>
Non-Performing Assets
March 31, December 31,
------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis.............. $498 $190 $137 $25
Loans contractually past due 90 days or more as to
interest or principal payments (not included in
non-accrual loans above)............................. 56 88 71 35
Loans restructured and in compliance with modified
terms (not included in non-accrual loans or loans
contractually past due 90 days or more above)........ - - - -
Other real estate owned................................. 31 - - -
-- -- -- --
Total................................................ $585 $278 $208 $60
==== ==== ==== ===
</TABLE>
Approximately $9,200 and $8,300 of interest income would have been
recorded in 1996 and the three months ended March 31, 1997, respectively, if
non-accrual loans had been current and the interest thereon had been accrued.
During 1996 the Company provided $380,000 to the allowance for loan
losses. This represents an increase of $92,000 over 1995. At year-end 1996 the
allowance for loan losses equaled $1.1 million, or 1.2% of outstanding loans.
Loans past due 30 days or more and still accruing interest totaled $2.1 million
(2.3% of outstanding loans) compared to 1.6% at December 31, 1995. Non-accrual
loans at year-end 1996 totaled $190,000. Net charge-offs for 1996 were $134,000
compared to $135,000 in 1995. Non-accrual loans increased to $498,000 at March
31, 1997, primarily as a result of two loans, secured by real estate, to two
different borrowers, one of whom has filed for protection under bankruptcy
statutes. The provision for loan losses was $93,000 in the first quarter of
1997.
Credit decisions continue to be based on the borrower's cash flow, the
value of underlying collateral, and the integrity of the borrower. 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 the Company's loan portfolio
increases.
-19-
<PAGE>
An analysis of the allowance for loan losses, including charge-off
activity is presented in the following table.
<TABLE>
<CAPTION>
Allowance for Loan Losses
March 31, December 31,
--------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period....................... $1,112 $866 $713 $482
Charge-offs:
Commercial mortgage............................... - - - -
Residential mortgage.............................. - 9 15 -
Real estate construction.......................... - - - -
Home equity....................................... - - - -
Commercial........................................ 13 134 13 5
Installment and all other consumer loans.......... 3 18 142 35
-- -- --- --
Total charge-offs.................................... 16 161 170 40
-- --- --- --
Recoveries on previous loan losses:
Commercial mortgage............................... - - - -
Residential mortgage.............................. - - - -
Real estate construction.......................... - - - -
Home equity....................................... - - - -
Commercial........................................ 3 12 4 -
Installment and all other consumer loans.......... 4 15 31 13
Total recoveries..................................... 7 27 35 13
- -- -- --
Net charge-offs...................................... 9 134 135 27
Provision charged to operations...................... 93 380 288 258
-- --- --- ---
Balance at end of period............................. $1,196 $1,112 $866 $713
====== ====== ==== ====
Net charge-offs as a percent of average loans........ .01% .16% .22% .06%
Total allowance as a percent of loans outstanding at
period end......................................... 1.26% 1.21% 1.23% 1.31%
</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 Company's 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 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, such a breakdown has not historically been maintained
by the Company and 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
-20-
<PAGE>
indicative of the character of future loan losses. The entire amount of the
allowance is available to absorb losses in any category. The allowance is
allocated below based primarily on the relative percent of loan losses in each
category, which represents the expected and provided for inherent losses in the
portfolio. In March 1997, the Company implemented a loan review process, which
is being performed by an individual not involved in the Company's lending
operations. The objective of the loan review process will be to assign every
loan a credit quality rating, thereby enabling management to better assess the
risk of loss within the Company's loan portfolio and to create a more accurate
relationship between the allowance for loan losses and categories of loans.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------- ---------------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
Percentage Percentage Percentage Percentage
of Total of Total of Total of Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial mortgage.............. $ 140 21% $ 133 21% $ 103 15% $ 88 15%
Residential mortgage............. 15 27 13 27 9 30 8 32
Real estate construction......... 61 7 56 8 43 10 36 11
Home equity...................... 20 11 20 10 18 11 11 11
Commercial....................... 545 11 500 11 390 9 320 8
Installment and other consumer
loans.......................... 415 23 390 23 303 25 250 23
--- -- --- -- --- -- --- --
Total......................... $1,196 100% $1,112 100% $866 100% $713 100%
====== ====== ==== ====
</TABLE>
Non-interest Income
Total non-interest income in 1996 was $624,000, a 30.8% increase over
the previous year. In the first quarter of 1997, total non-interest income was
$193,000, compared to $148,000 in the corresponding period of 1996. The primary
source of non-interest income is service charges and fees related to deposit
accounts. Certain fees were increased in the second half of 1996, but their
beneficial impact was not material for the year. All service fees are reviewed
frequently for the possibility of upward adjustment. The Company, however,
strives to charge consistently lower service fees than its competition.
Non-interest Expense
In the first quarter of 1997, total non-interest expense was $1.3
million, a 31.3% increase over the first quarter of 1996. Total non-interest
expense of $4.2 million in 1996 represented a 20.0% increase over $3.5 million
in 1995. The 1996 increase compared favorably with the 40.9% increase between
1994 and 1995. The impact of staffing and equipping the Company's fifth branch
office began late in the fourth quarter of 1996 and continued during the first
quarter of 1997, resulting in increased non-interest expense. Because staffing
for the fifth branch office was phased in during the first quarter of 1997, the
Company expects that quarterly non-interest expense for the balance of 1997 will
be somewhat higher than in the first quarter. The primary cause for increased
non-interest expense continues to be personnel expenses. Other personnel related
expenses include furniture, fixtures and computer equipment related to
increasing numbers of employees late in the fourth quarter of 1996. The increase
from 1994 to 1995 was associated with opening the Bank's fourth office in June
1995. With no new offices opened until late 1996, non-interest expense grew at a
slower rate than total assets, an indication of operational efficiencies. The
extended hours of operation offered by the Bank have required and will continue
to require expanded staffing. However, the Company believes that its commitment
to customer service has enabled it to compete effectively against larger
statewide and regional banks.
-21-
<PAGE>
Deposits
The Company's primary source of funds is deposit accounts, which
include demand deposits, savings and money market accounts and other time
deposits. The Company's deposits are primarily from individuals and businesses
located within the Company's market.
As shown below, average total deposits were $118.1 million for the
three months ended March 31, 1997. Average total deposits grew by 26.8% during
1996, from $81.1 million to $102.8 million. Total deposits were $122.6 million
at March 31, 1997, $120.5 million at December 31, 1996, $94.1 million at
December 31, 1995 and $71.5 million at December 31, 1994. The average aggregate
interest rate paid on deposits was 4.06% during the first quarter of 1997,
compared to 4.23% in 1996, 4.27% for 1995 and 3.50% for 1994.
The following table is a summary of average deposits and average rates
paid.
Average Deposits and Average Rates Paid
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits $15,000 - $13,514 - $10,132 - $7,485 -
Interest bearing demand deposits... 21,923 3.48% 21,471 3.21% 16,600 3.15% 18,373 3.19%
Savings deposits................... 14,994 2.80% 10,710 3.33% 9,018 3.36% 7,936 3.35%
Time deposits...................... 66,168 5.46% 57,115 5.78% 45,302 5.81% 26,735 4.74%
------ ------ ------ ------
Total (weighted average rate)... $118,085 4.06% $102,810 4.23% $81,052 4.27% $60,529 3.50%
</TABLE>
The following table is a summary of time deposits of $100,000 or
more by remaining maturities at March 31, 1997.
Maturities of Time Deposits of $100,000 and Over
<TABLE>
<CAPTION>
Amount Percent
(Dollars in Thousands)
<S> <C> <C>
Three months or less......................... $1,064 9.7%
Three to six months.......................... 2,105 19.1%
Six to twelve months......................... 3,578 32.5%
Over twelve months........................... 4,269 38.7%
----- -----
Total........................................... $11,016 100.0%
======= ======
</TABLE>
To the extent that deposits grow faster than loans, the Company
intends to use these excess funds to purchase 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.
-22-
<PAGE>
Capital Resources and Liquidity
An assessment of the Company's capital adequacy depends on a number of
factors such as asset quality, liquidity, earnings performance and changing
competitive conditions and economic forces. The Company seeks to maintain a
strong capital base to support its growth and expansion activities, to provide
stability to current operations and to promote public confidence.
The Company's capital position continues to exceed regulatory minimums.
The primary indicators relied on by the Federal Reserve and other bank
regulators in measuring strength of capital position are the Tier 1 Capital,
Total Capital and Leverage ratios. Tier 1 Capital consists of common and
qualifying preferred stockholders' equity less goodwill. Total Capital consists
of Tier 1 Capital, qualifying subordinated debt and a portion of the allowance
for loan losses. Risk-based capital ratios are calculated with reference to
risk-weighted assets which consist of both on and off-balance sheet risks. See
"Business-Supervision and Regulation--Capital."
The following table shows the Company's risk-based capital ratios and
shareholders' equity to total assets at March 31, 1997 and at December 31, 1996
and 1995.
Analysis of Capital
<TABLE>
<CAPTION>
Regulatory
Minimum March 31, December 31,
------- --------- ------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Capital Ratios:
Risk-based capital:
Tier 1 4.00% 15.07% 14.99% 18.28%
Total 8.00 16.28 16.14 19.47
Leverage 4.00 11.19 11.42 12.79
Shareholders' equity to total assets n/a 10.60 10.58 12.31
</TABLE>
Liquidity is provided through several sources. The source most readily
convertible to cash is "Federal funds sold," or the overnight sale of excess
reserves to other banks. The Company has adopted policy and procedure guidelines
to comply with Regulation F of the Board of Governors of the Federal Reserve
System regarding interbank liabilities risk, limiting the Company's exposure to
credit risk in its dealings with correspondent banks. Sales of Federal funds
averaged $4.2 million during 1996, down 34.4% from the $6.4 million average of
1995. Additional liquidity exists within the Company's investment account where
$120,000 of securities mature within ninety days and $4.8 million of securities
are callable within three months. The Company also maintains confirmed lines of
credit with its primary correspondent banks to purchase Federal funds in amounts
up to $5.4 million. The Company'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.
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.
-23-
<PAGE>
BUSINESS
General
The Company is chartered under the laws of the Commonwealth of Virginia
and headquartered in Gloucester, Virginia. The Company is the holding company
for the Bank, which operates five full-service banking offices in Gloucester,
Charles City County, Williamsburg, Newport News and Glenns (northern Gloucester
County). The Bank opened for business in 1989 and at March 31, 1997, the Company
had grown to $138.4 million in assets, $122.6 million in deposits and $14.7
million in stockholders' equity.
The Bank 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. The Bank also
offers credit cards and related services to both individual and merchant
accounts.
The Bank 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 the
Bank's offices offer extended lobby and drive-in hours and a 24 hour ATM. The
Bank also offers traveler's checks, cashier's checks and money orders, U.S.
savings bonds and withholding tax depository services.
The Bank 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, the
Company maintains an experienced, highly-trained professional staff. Senior
management has an average of 26 years of banking experience.
The Company intends to strengthen the Bank'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. The Bank'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 the Bank'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.
The Company had 902 shareholders of record as of June 30, 1997,
approximately 95% of whom reside in Virginia.
Market Area
The Company'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 the Company and the Bank is in Gloucester,
Virginia, while the Bank has branch offices in Glenns (northern Gloucester
County), Charles City County and the cities of Newport News and Williamsburg.
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. The company's offices in Gloucester County also draw customers
from the adjacent counties of Mathews, Middlesex and King & Queen.
The market area served by the Bank'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
-24-
<PAGE>
approximately nine square miles and is bordered by York County to the north and
east and James City County to the south and west.
The Bank'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. The Bank 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.
Future Plans
The Company began construction of a permanent building for its Newport
News branch office during the first half of 1997. The branch will be located at
the corner of Thimble Shoals Boulevard and J. Clyde Morris Boulevard near the
entrance to the Oyster Point Industrial Park. The Company acquired the land for
its permanent Newport News branch site in 1996 at a cost of approximately
$620,000. Construction costs for the branch building are expected to be
approximately $850,000. The current operations for the Newport News branch are
conducted in rented office space, with a lease that expires in October 1998.
The Company plans to establish a branch office in Hampton, Virginia to
complement its Newport News office and is currently evaluating available sites.
Hampton lies immediately to the east of Newport News. Although plans are
incomplete and subject to change, it is the Company's desire to open a branch
office in Hampton, Virginia in the second half of 1998. There can be no
assurance that the Company will be able to open this branch in accordance with
its current plans.
The Company expects to enter into an agreement, subject to state and
federal regulatory approval, to acquire a 50% membership interest in Johnson
Mortgage Company, L.L.C., which will be the successor to Johnson Mortgage
Company ("Johnson Mortgage"), for a total of $500,000. Half the purchase price
will be paid in cash and the other half will be paid in shares of the Company's
common stock with a market value of $250,000 at the time of closing. Johnson
Mortgage originates and sells long-term, fixed-rate mortgage loans, a product
the Company has not previously offered. In 1996, Johnson Mortgage originated a
total of $20.3 million of mortgage loans. Through the Bank, the Company will
continue to originate fixed-rate and adjustable-rate mortgage loans.
Johnson Mortgage has loan origination offices in Portsmouth and Newport
News and currently leases space and originates loans in the Bank's Gloucester
office. The Company anticipates that Johnson Mortgage Company, L.L.C. will sell
substantially all of the mortgage loans it originates and will neither
securitize loans it originates nor seek to acquire or create a portfolio of loan
servicing rights. In contrast to the Company's historical mortgage lending
operations, a mortgage banking operation, such as that operated by Johnson
Mortgage, involves certain interest rate risks. Mortgage banking activities
involve risks of loss if secondary mortgage market interest rates increase or
decrease substantially while a loan is in the "pipeline" (the period beginning
with the application to make or the commitment to purchase a loan and ending
with the sale of the loan). In order to reduce this interest rate risk, the
Company anticipates that Johnson Mortgage Company, L.L.C. will enter into
forward sales commitments in an amount approximately equal to the closed loans
held in inventory, plus a portion of the unclosed loans it has committed to make
and which are expected to close.
Lending Activities
The Bank'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, the Bank has not attempted to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside its primary market area. The Bank's legal lending limit was
approximately $2.2 million
-25-
<PAGE>
at December 31, 1996. The Bank had approximately $13.0 million in loan
commitments outstanding at December 31, 1996.
Commercial Business Lending. The Bank'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 the Bank which, in many cases,
can provide for a stable lending and depository relationship. Commercial loans
were $10.5 million, or 11.0% of total loans at March 31, 1997.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but also offer commensurately higher yields.
Although the Bank typically looks to the borrower's cash flow as the principal
source of repayment for such loans, the large majority of the Company'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 the Bank's business loans. In addition, the
Bank's commercial loans are generally personally guaranteed by the principals of
the business.
Commercial Mortgage and Construction Lending. Commercial mortgage loans
were $20.3 million, or 21.2% of total loans at March 31, 1997, compared to $19.6
million, or 21.2% of total loans at December 31, 1996, and $10.6 million or
14.9% of total loans at December 31, 1995. In recent years larger banks in the
Company's market area have demonstrated less interest in commercial mortgage
lending, which has led to increased opportunities for the Company to originate
loans of this type. The increase in commercial mortgage loans in 1996 was not a
result of a deliberate strategy to seek additional credits in this category. The
Bank 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. The Company's commercial mortgage loans are predominantly
owner-occupied properties and are not for speculative purposes. In general, the
Bank 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 March 31, 1997, real estate construction loans comprised $6.5
million, or 6.8%, of total loans. The majority of construction loans are for
one-family residences that are either pre-sold or contract homes with permanent
financing pre-arranged. The Bank's construction loans for residential purposes
are limited to situations where the borrower has a pre-approved take-out
commitment for permanent financing. The Bank also obtains a first lien on the
security property as collateral for its construction loans. The Bank 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 the Bank's strict underwriting standards, the Company
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,
the Bank limits loan amounts to 80% of appraised value on pre-sold homes in
addition to its usual credit analysis of its borrowers. The Bank 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.
-26-
<PAGE>
Residential Mortgage Lending. The Company's residential real estate
loan portfolio, which includes home equity lines, comprised approximately $36.1
million, or 37.7%, of total loans at March 31, 1997. The residential mortgage
loans made by the Bank have a fixed interest rate for no more than 36 months and
are limited to single family, owner-occupied residences within the Bank'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. The Bank 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 March
31, 1997, the Company's installment loans comprised approximately $21.8 million,
or 22.8%, of the total loan portfolio. The performance of the consumer loan
portfolio is directly tied to and dependent upon the general economic conditions
in the Company's market area.
Credit Policies and Loan Administration. The Bank has adopted a
comprehensive lending policy which includes underwriting standards for all types
of loans and pricing guidelines. The Bank'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.
The Bank'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. The Bank 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 the
Bank'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 the Company's business, the Bank 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, $400,000 and $250,000, respectively. Lesser lending limits
apply to loans 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, the Company 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 the Company have much
-27-
<PAGE>
greater financial resources and larger branch networks than the Company. Certain
of these institutions have significantly higher lending limits than the Bank and
may provide various services for their customers, such as trust services, which
the Bank does not presently offer to customers. In addition, there can be no
assurance that additional financial institutions, with substantially greater
resources than the Company, will not establish operations in the Bank's service
area.
The Company is one of 11 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, 1996, the
Bank held approximately 23.0% of the total bank deposits in Gloucester County,
100% in Charles City County and approximately 8.1% and 1.0%, respectively, in
the cities of Williamsburg and Newport News.
The Bank 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 the Bank. The Bank pays competitive interest rates on its
deposits.
Employees
As of March 31, 1997, the Company employed a total of 99 individuals
on a full-time basis, including its three executive officers, and nine
individuals on a part-time basis. None of the Company's employees is represented
by a union or covered by a collective bargaining agreement. Management considers
employee relations to be good.
Properties
The Company's headquarters is located at 7171 George Washington
Memorial Highway. The property was purchased by the Company at a cost of
$255,000. The total capitalized cost of the building and land improvements is
$680,000.
The Williamsburg branch office is located at 1031 Richmond Road. The
total capitalized cost of the building and land improvements is approximately
$610,000.
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 the Company at a cost of $27,000. The total capitalized cost of the
building and land improvements is approximately $663,000.
The Newport News branch office is located in the Newport Square
Shopping Center across from the Oyster Point Industrial Park. The branch office
was leased and was already equipped for bank operations. The Company has leased
the office for a term of three and one half years. The Company began
construction of a permanent building for its Newport News branch office during
the first half of 1997. The branch will be located at the corner of Thimble
Shoals Boulevard and J. Clyde Morris Boulevard near the entrance to the Oyster
Point Industrial Park. The Company acquired the land for its permanent Newport
News branch site in 1996 at a cost of approximately $620,000. Construction costs
for the branch building are expected to be approximately $850,000.
In January 1997, the Company opened a fifth branch office at Glenns
(northern Gloucester County). The office is on a 43 acre site that the Bank
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 the Company intends to market the portion of the property that is
not used for Bank branch operations.
-28-
<PAGE>
Legal Proceedings
The Company 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 the
Company, would not have a material adverse effect on the Company's business,
financial position or results of operations.
Supervision and Regulation
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework applicable to the Company and
the Bank. 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.
As a bank holding company, The Company is subject to regulation under
the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the
examination and reporting requirements of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank holding
company may not directly or indirectly acquire ownership or control of more than
5% of the voting shares or substantially all of the assets of any additional
bank or merge or consolidate with another bank holding company without the prior
approval of the Federal Reserve Board. The BHCA also generally limits the
activities of a bank holding company to that of banking, managing or controlling
banks, or any other activity which is determined to be so closely related to
banking or to managing or controlling banks that an exception is allowed for
those activities.
As a state-chartered bank, the Bank is subject to regulation,
supervision and examination by the Virginia State Corporation Commission's
Bureau of Financial Institutions (the "Virginia SCC"). The Bank is also subject
to regulation, supervision and examination by the Federal Reserve Board and the
Federal Deposit Insurance Corporation (the "FDIC"). State and federal law also
govern the activities in which the Bank may engage, the investments it may make
and the aggregate amount of loans that may be granted to one borrower. Various
consumer and compliance laws and regulations also affect the Bank's operations.
The earnings of the Bank, and therefore the earnings of the Company,
are affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including those referred to above. The following description summarizes some of
the state and federal laws to which the Company and the Bank are subject.
The Virginia SCC and the Federal Reserve Bank of Richmond conduct
regular examinations of the Bank, 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, the Bank must furnish the Virginia 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 the Bank are insured by the FDIC up to the limits set forth under
applicable law. The deposits of the Bank are subject to the deposit insurance
assessments of the Bank Insurance Fund ("BIF") of the FDIC.
For the semi-annual period beginning January 1, 1997, the assessments
imposed on all FDIC deposits for deposit insurance have an effective rate
ranging from 0 to 27 basis points per $100 of insured deposits, depending on the
institution's capital position and other supervisory factors. However, because
the legislation enacted in 1996 requires that both Savings Association Insurance
Fund ("SAIF") insured and BIF-insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO"),
the FDIC is assessing BIF-insured deposits an additional 1.30 basis points per
$100 of deposits to cover those obligations.
-29-
<PAGE>
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 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 the Bank's deposit insurance.
Capital. The Federal Reserve Board has issued risk-based and leverage
capital guidelines applicable to banking organizations they supervise. Under the
risk-based capital requirements, the Company and the Bank are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit), of 8%. At least half of the total capital is to be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles ("Tier 1 capital"). The remainder may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital"). At March 31, 1997,
the Company's Tier 1 capital and total capital ratios were 15.07% and 16.28%,
respectively, and the Tier 1 and total capital ratios for the Bank were 15.09%
and 16.29%, respectively.
In addition, each of the Federal bank regulatory agencies have
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for banks and bank
holding companies that meet certain specified criteria. All other banks and bank
holding companies will generally be required to maintain a leverage ratio of at
least 100 to 200 basis points above the stated minimum. The Company's leverage
ratio at March 31, 1997 was 11.19%, and the Bank's leverage ratio was 11.21%.
The risk-based capital standards of the Federal Reserve Board
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The Federal Reserve Board also has
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve Board 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 otherwise. 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 either the SAIF or
the BIF 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 provision if it determines that a waiver is in the
best interests of the SAIF or the BIF or both. The FDIC's claim for
reimbursement 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 institution.
-30-
<PAGE>
The Federal banking agencies also 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
institution in question is well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized,
as defined by the law. As of March 31, 1997, the Company and the Bank were
classified as well-capitalized.
State regulatory authorities also have broad enforcement powers over
the Bank, including the power to impose fines and other civil and criminal
penalties, and to appoint a receiver in order to conserve the assets of any such
institution for the benefit of depositors and other creditors.
Payment of Dividends. The Company is a legal entity separate and
distinct from the Bank. Virtually all of the revenues of the Company result from
dividends paid to the Company by the Bank. The Bank also is subject to state
laws that limit the amount of dividends it can pay. In addition, both the
Company and the Bank are subject to various general regulatory policies relating
to the payment of dividends, including requirements to maintain adequate capital
above regulatory minimums. The Federal Reserve Board has indicated that banking
organizations should generally pay dividends only if (1) the organization's net
income available to common shareholders over the past year has been sufficient
to fund fully the dividends and (2) the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and
overall financial condition. The Company does not expect that any of these laws,
regulations or policies will materially impact the ability of the Bank to pay
dividends.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are also applicable to the Bank. 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. A 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 the Bank, it is meeting
its obligations under the CRA. The Bank's CRA rating is "satisfactory".
Interstate Banking and Branching. Current Federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state will be
authorized to merge with a bank headquartered in another state, as long as
neither of the states has opted out of such interstate merger authority prior to
such date. States are authorized to enact laws permitting such interstate bank
merger transactions prior to June 1, 1997, as well as authorizing a bank to
establish "de novo" interstate branches. Virginia has enacted early "opt in"
laws, permitting interstate bank merger transactions. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the state
where a bank headquartered in that state could have established or acquired
branches under applicable Federal or state law.
Economic and Monetary Polices. The operations of the Company are
affected not only by general economic conditions, but also by the economic and
monetary policies of various regulatory authorities. In particular, the Federal
Reserve regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
-31-
<PAGE>
MANAGEMENT
Board of Directors
There are 14 members of the Company's Board of Directors. The following
table sets forth the name, age, year first elected as a director, principal
occupation and beneficial ownership of Common Stock as of March 31, 1997, for
each Director.
<TABLE>
<CAPTION>
Shares Beneficially
Owned (1 & 2)
Principal Occupation Director
Name (age) & Position with Company Since No. %
---------- ----------------------- ----- --- -
<S> <C> <C> <C> <C>
Charles F. Bristow Farmer-Gloucester 1988 4,500 0.48
(74) Director
John R. Curtis Banking Consultant, Retired Regional 1989 2,800 0.30
(65) Director of FDIC-Richmond
Director
Charles F. Dawson Partner, Bay Design Group P.C.-Saluda 1988 5,095 0.54
(55) Director
W. J. Farinholt President and CEO, Mid-Atlantic 1988 36,246 3.77
(50) Community BankGroup, Incorporated
Director
William D. Fary Owner, Bill Fary Ford-Gloucester 1988 11,250 1.19
(67) Director
Robert D. Foster President, Tre-Suz-Ann 1988 41,843 4.42
(54) Development/Foster Management; VP,
Foster Realty-Gloucester
Director
Harry M. Healy Retired President, Bailey 1988 14,300 1.51
(63) Amusements-Gloucester
Director
Jeanne P. Hockaday President, Coldwell Banker 1990 4,200 0.44
(49) Virginia Country Realty-Gloucester
Director
Joseph A. Lombard, Jr., DDS Owner/Dentist, Lombard, Luckam & 1988 20,662 2.18
(50) Smith-Gloucester
Chairman of the Board
George A. Marston, Jr. Retired Owner, Oakland Farm- Norge 1992 13,500 1.43
(75) Director
Hersey M. Mason, Jr. Owner, Mason Realty-Middlesex Co. 1990 32,074 3.39
(67) Director
-32-
<PAGE>
Shares Beneficially
Owned (1 & 2)
Principal Occupation Director
Name (age) & Position with Company Since No. %
---------- ----------------------- ----- --- -
Henry C. Rowe, MD Medical Director, Riverside Hayes 1988 4,900 0.52
(49) Medical Center-Gloucester
Director
Kenneth E. Smith Executive Vice President, 1988 19,430 2.02
(45) Mid-Atlantic Community BankGroup,
Incorporated
Director
Thomas Z. Wilke Agent, State Farm Insurance-Gloucester 1990 8,620 0.91
(43) Point
Director
All present executive officers and 219,770 23.14
directors as a group (15 persons)
</TABLE>
- ---------------------------------------
(1) The total shares reported include sole voting shares, shared voting
shares, sole investment shares and shared investment shares. Included
in the totals are shared voting and investment shares as follows: W.
J. Farinholt, 1,866 shares; W. D. Fary, 300 shares; R. D. Foster,
6,520 shares; J. P. Hockaday, 200 shares; J. A. Lombard, Jr., 2,354
shares; G. A. Marston, Jr., 6,750 shares; K. E. Smith, 75 shares.
(2) Included in shares beneficially owned are shares that may be acquired
within 60 days upon the exercise of stock options held by individuals
as follows: C. F. Bristow, 1,500 shares; J. R. Curtis, 1,300 shares;
C. F. Dawson, 1,540 shares; W. J. Farinholt, 17,000 shares; W. D.
Fary, 1,600 shares; R. D. Foster, 2,500 shares; H. M. Healy, 2,300
shares; K. C. Healy, 200 shares; J. P. Hockaday, 1,500 shares; J. A.
Lombard, Jr., 2,362 shares; H. M. Mason, Jr., 1,500 shares; H. C.
Rowe, MD, 2,400 shares; K. E. Smith, 17,000 shares; T.Z. Wilke, 1,520
shares.
Security Ownership of Certain Beneficial Owners. No one is known to be
the beneficial owner of more than five percent of the issued and outstanding
Company Common Stock.
The Board of Directors. The Board of Directors is responsible for the
overall performance of the Company and for establishing Company policy. The
Board establishes the compensation of all executive officers. Regular meetings
of the Board are held each month. The Board held 16 meetings in 1996, including
the organizational meeting in June and three special meetings. Each Director
attended at least 75% of the total number of meetings of the Board and meetings
of committees of which the director was a member in 1996.
Board Committees. The Company's bylaws provide for one permanent
standing committee, the Audit Committee, the principal responsibilities of which
are described below.
The Audit Committee meets on an on call basis as needed. The
Committee met six times in 1996. Members of the committee include Thomas Z.
Wilke, Chairman, Charles F. Bristow, Charles F. Dawson, Robert D. Foster, Jeanne
P. Hockaday and Joseph A. Lombard, Jr., DDS. 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.
The Company does not have a standing Nomination or Compensation
Committee.
-33-
<PAGE>
The Chairman of the Board is an ex-officio member of all committees.
Executive Officers. The Company currently has three Executive
Officers:
William J. Farinholt has served as President and Chief Executive
Officer of the Company and the Bank since 1988. He has more than 25 years of
banking experience. He was employed as a bank examiner with the Virginia Bureau
of Financial Institutions from 1970 to 1972. He then served as an officer with
the Bank of Middlesex, Urbanna, Virginia, from 1972 to 1974. He then served with
Citizens and Farmers Bank, West Point, Virginia, from 1974 to 1988, where he was
the Senior Vice President in charge of all lending and Secretary of the bank. He
is experienced in lending, marketing, branch management and bank operations. He
has held various officer positions in industry associations, including chairman
of the Northern Neck-Southside Bankers Association. He also has served on
several committees as well as the Board of Directors of the Virginia Bankers
Association. He has taught numerous banking classes at Rappahannock Community
College. He has also been active in many civic and religious activities. Mr.
Farinholt was born in Gloucester County and has a broad knowledge of the
Company's general trade area.
Kenneth E. Smith has served as Executive Vice President, Chief
Administrative and Chief Financial Officer of the Company and the Bank, with
primary oversight of the Company's operations, since 1988. Mr. Smith has 23
years of banking experience. Prior to joining the Company, 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 the Company, 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.
Kathleen C. Healy, age 36, serves as Vice President, Chief Accounting
Officer and Secretary of the Company. Ms. Healy works in conjunction with the
Chief Administrative Officer having more specific oversight of the accounting
area, including the accuracy of financial records and regulatory financial
reporting. Prior to joining the Company, she served as office supervisor and
insurance producer with an independent insurance agency. She has approximately
seven years of banking experience. She has attended the Virginia Bankers School
of Bank Management and she is a graduate of the School of Business
Administration at the University of Richmond.
Family Relationships. The husband of Kathleen C. Healy, Chief
Accounting Officer, is the nephew of Harry M. Healy, a director of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
requires the Company's directors and executive officers, and any persons who own
more than 10% of Company Common Stock, to file with the Securities and Exchange
Commission ("SEC") reports of ownership and changes in ownership of Company
Common Stock. Officers and directors are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms that they file. Based solely
on review of the copies of such reports furnished to the Company or written
representation that no other reports were required, the Company believes that,
during fiscal year 1996, all filing requirements applicable to its officers and
directors were complied with except that Joseph A. Lombard, Jr., DDS, Director,
inadvertently filed one late report on Form 5 in February 1997 covering the
purchase of 125 shares of Common Stock by his son in September 1996.
Executive Officer Compensation. The following table presents
information concerning the annual and long-term compensation of Messrs.
Farinholt and Smith. This table presents compensation for services rendered in
all capacities to the Company in 1996, 1995 and 1994.
-34-
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities All Other
Name and Other Annual Underlying Compensation
Principal Position Year Salary Bonus Compensation Options (#) (2)
- ------------------ ---- ---------- --------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
W. J. Farinholt 1996 $100,651 $25,650 (1) - $1,501
President/Chief 1995 86,699 19,464 (1) 10,000 1,777
Executive Officer 1994 81,682 17,901 (1) - -
Kenneth E. Smith 1996 88,675 22,410 (1) - 1,321
Executive Vice- 1995 75,966 17,000 (1) 10,000 1,555
President/Chief Financial 1994 71,087 15,635 (1) - -
Officer
</TABLE>
- -------------------
(1) The value of perquisites and other personal benefits did not
exceed the lesser of $50,000 or 10% of total annual salary and bonus.
(2) "All Other Compensation" represents matching contributions by the
Company in its 401(k) plan, which was established on March 1, 1995.
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, 1996. No stock options were exercised by Mr.
Farinholt or Mr. Smith in 1996.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-The-Money
Options at Options at
Name December 31, 1996 (#) December 31, 1996 (1)
- ---- --------------------- ---------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
W. J. Farinholt 13,250 3,750 $155,000 $33,750
Kenneth E. Smith 13,250 3,750 155,000 33,750
</TABLE>
- -------------------
(1) 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 the Company Common Stock underlying the options at December
31, 1996 ($25.00 per share) and (ii) the exercise price of the options.
-35-
<PAGE>
Employment Agreements. Messrs. Farinholt and Smith entered into
employment agreements with the Company effective as of November 29, 1988. The
Agreements are general in nature and have few conditions relative to current or
ongoing employment conditions. However, these agreements provide that in the
event the Company, acting through either its shareholders or its Directors,
sells or disposes of the controlling interest in the Company to a conglomerate
or "bank holding company" (as such term is defined in Article I of Title 6.1 of
the Code of Virginia, as amended), with the result that the Company is either
50% or more owned or controlled by such entity (provided that the respective
bank officer, at the time of such transaction, is employed at either his current
position or an equal or higher ranking position of the Company) each such
officer shall be entitled to receive from the Company $150,000. Restrictive
covenants contained in each agreement require that such payment shall be paid in
addition to any and all normal compensation payable at the time of such
transaction, but also shall be dependent upon the sale price of the Company
being equal to at least 1.75 times the then current "book value" of the Company
Common Stock as determined by the independent accounting firm being utilized by
the Company at the time of such sale of the Company. As incentive for the
Company's officers to remain in the employ of the Company and as protection for
the Company from the Company's officers' leaving the Company's employ, absent a
sale of the Company as defined above, each agreement provides that if the
officer voluntarily leaves the employ of the Company without there being any
such sale of the Company, he may not become employed with or work in any office
of any financial institution (bank, savings bank, savings and loan association
or credit union) that is located in Gloucester, Mathews, or Middlesex counties.
Directors Compensation. Each Director was paid a fee of $300 for each
Board meeting attended and $150 for each Board Committee meeting attended in
1996. The total expense to the Company for directors fees in 1996 was $83,050.
Interest of Management in Certain Transactions. The Company's officers,
directors and other corporations, business organizations and persons with which
certain of the Company's officers and directors are associated customarily have
banking transactions with the Company. Loans to related parties amounted to
approximately $1.0 million at December 31, 1996 and at March 31, 1997. During
the year ended December 31, 1996 and the three months ended March 31, 1997, new
loans to related parties totaled $918,000 and $69,000, respectively, and
repayments totaled $327,000 and $78,000, respectively. 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.
-36-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Articles of Incorporation authorize 10,000,000 shares of
Common Stock, par value $5.00 of which 944,333 shares were issued and
outstanding on March 31, 1997. There were 902 shareholders of record as of June
30, 1997.
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 the Company 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. The Company 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. See "Dividend
Information." 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 of the Company 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 the Company 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. The Company's Articles of Incorporation require a vote of
more than 70% of the outstanding shares of Common Stock to remove a Director.
The Company's Articles of Incorporation thus preclude a third party who holds
less than 70% of the Company'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 the Company, can be submitted to
the shareholders for a vote only by the board of directors. As a general rule,
the Articles of Incorporation of the Company 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 the
Company, 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 the
Company 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
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<PAGE>
of the Company may condition 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 the
Company 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 the Company, 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. The company furnishes its shareholders with
annual reports, including audited financial statements, as well as quarterly
reports containing unaudited financial information.
Transfer Agent. The Bank acts as the Company's transfer agent.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement
between the Company and Davenport & Company LLC (the "Underwriter"), the
Underwriter has agreed to purchase from the Company and the Company has agreed
to sell to the Underwriter, 130,000 shares of Common Stock.
The Underwriting Agreement provides that the obligations of the
Underwriter thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriter's
obligation is such that it is committed to purchase and pay for all of the above
shares of Common Stock if any are purchased.
The Underwriter proposes to offer the shares of Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to selected dealers who are members of the National Association
of Securities Dealers, Inc. at such price less a concession not in excess of
$ per share of Common Stock. The Underwriter may allow, and such selected
dealers may reallow, a concession not in excess of $ per share of Common
Stock to certain other dealers who are members of the National Association of
Securities Dealers, Inc.
The Underwriter has a 30-day option to purchase from the Company up to
19,500 additional shares of Common Stock to cover over-allotments, if any, at
the public offering price set forth on the cover page of the Prospectus. The
Underwriter may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby.
Certain officers and directors of the Company have agreed that they
will not offer, sell or contract to sell or otherwise dispose of shares of
Common Stock of the Company (other than by gift to a person who agrees not to so
sell, or by operation of law) for a period of 90 days after the date hereof
without the prior written consent of the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities or to contribute to payments that the Underwriter may be required to
make in respect thereof.
The Common Stock of the Company or the Bank has been traded on the
Nasdaq SmallCap Market since September 20, 1995. There is a limited public
market for the Common Stock, with trading volume averaging approximately 1,000
shares per week since September 1995. See "Market for Common Stock." The public
offering price for the Common Stock will be determined by negotiation between
the Company and the Underwriter. Among the factors that will be considered in
such negotiations are the current market for the Common Stock, the history of,
and the prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations, the
past and
-38-
<PAGE>
present earnings and the trend of such earnings, the prospects for future
earnings of the Company, the present state of the Company's development, the
general condition of the securities markets at the time of the offering, and the
market prices of and demand for the Common Stock and for the publicly-traded
common stock of comparable companies in recent periods. The Underwriter intends
to make a market in the Common Stock following completion of the offering.
In order to facilitate the offering of the Common Stock, the
Underwriter may engage in the transactions that stabilize, maintain or otherwise
affect the price of the Common Stock. Specifically, the Underwriter may
overallot in connection with the offering creating a short position in the
Common Stock for its own account. In addition, to cover overallotments or to
stabilize the price of the Common Stock, the Underwriter may bid for, and
purchase, shares of Common Stock in the open market. Finally, the Underwriter
may reclaim selling concessions allowed to a dealer for distributing the Common
Stock in the offering, if the Underwriter repurchases previously distributed
Common Stock in transactions to cover short positions, in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the Common Stock above independent market levels. The
Underwriter is not required to engage in these activities, and may end any of
these activities at any time.
The Underwriter and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission. In general, a passive
market maker may not bid for, or purchase, the Common Stock at a price that
exceeds the highest independent bid. In addition, the net daily purchases made
by any passive market maker generally may not exceed 30% of its average daily
trading volume in the Common Stock during a specified two month prior period, or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriter and dealers are
not required to engage in passive market making and may end passive market
making activities at any time.
The Underwriter has from time to time provided investment banking
services to the Company in the ordinary course of business.
LEGAL OPINIONS
Certain legal matters relating to the shares offered hereby will be
passed upon for the Company by Williams, Mullen, Christian & Dobbins, P.C., Two
James Center, 1021 East Cary Street, Richmond, Virginia 23219, counsel for the
Company. Certain legal matters in connection with the offering will be passed
upon for the Underwriter by Hunton & Williams, Riverfront Plaza, East Tower, 951
East Byrd Street, Richmond, Virginia 23219.
EXPERTS
The financial statements of the Company included in this Offering
Circular 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.
AVAILABLE INFORMATION
The principal executive offices of the Company are located at 7171
George Washington Memorial Highway, Gloucester, Virginia 23061, and its
telephone number is (804) 693-0628. The Company is subject to the informational
requirements of the Exchange Act, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission").
-39-
<PAGE>
Such reports, proxy statements and other information can be inspected and copied
at the offices of the Commission, at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at regional offices of the Commission at the
following locations: Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and World Trade Center, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. In addition, the Commission maintains a Web site (address:
http://www.sec.gov) that contains reports, proxy statements and other
information regarding the Company.
The Company has filed with the Commission a Registration Statement, on
Form SB-2 under the Securities Act, with respect to the Common Stock offered
herein. This 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 the Company and the Common Stock offered herein, reference is made
to the Registration Statement and amendments and exhibits thereto, which may be
inspected and copied as described above.
-40-
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report...............................................F-1A
Consolidated Financial Statements
Consolidated Balance Sheet........................................F-2
Consolidated Statements of Income.................................F-3
Consolidated Statements of Changes in Shareholders' Equity........F-4
Consolidated Statements of Cash Flows.............................F-5
Notes to Consolidated Financial Statements.................................F-7
F-1
<PAGE>
[SMITH, EGGLESTON, P.C. LETTERHEAD]
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, 1996
and 1995, 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, 1996. 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, 1996 and 1995, and
the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Smith & Eggleston, P.C.
February 13, 1997
[Richmond, Virginia]
F-1A
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31,
1997 December 31,
(Unaudited) 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and due from banks (Note 15) $ 4,488,074 $ 6,014,540 $ 4,553,325
Investment securities (Notes 1 & 2) 27,772,197 27,297,458 24,792,759
Federal funds sold 4,422,703 5,363,865 4,678,330
Loans: (Net of allowance for loan losses of $1,195,764,
$1,111,607 and $865,479 for 1997, 1996, and 1995,
respectively) (Notes 1 & 3) 93,885,908 90,978,452 69,556,325
Premises and equipment (Notes 1 & 7) 5,621,083 4,922,897 3,308,385
Other assets (Note 4) 2,208,404 1,856,961 1,424,685
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $138,398,369 $136,434,173 $108,313,809
=========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,
1997 December 31,
(Unaudited) 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Deposits:
Demand $ 17,062,191 $ 15,133,165 $ 14,333,604
NOW and money market 21,376,736 25,967,974 17,605,457
Savings 15,508,702 14,969,421 9,331,624
Time, $100,000 and over 11,099,442 9,416,511 8,798,436
Other time 57,535,212 54,998,270 44,045,617
- -------------------------------------------------------------------------------------------------------------------------
Total Deposits $122,582,283 $120,485,341 $ 94,114,738
Other borrowed funds (Note 13) 40,327 43,406 55,322
Other liabilities (Note 5) 1,111,744 1,473,836 808,273
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities $123,734,354 $122,002,583 $ 94,978,333
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock - par value $5 per share: (Notes 9 & 10)
Issued and outstanding - 944,333 shares $ 4,721,665 $ 4,721,665 $ 4,721,665
Stock options (Note 10) 7,380 7,380 7,380
Surplus 6,693,925 6,693,925 6,692,775
Retained earnings 3,585,363 3,170,029 1,872,178
Unrealized gain (loss) on securities available for sale (Note 2) (344,318) (161,409) 41,478
- -------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 14,664,015 $ 14,431,590 $ 13,335,476
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $138,398,369 $136,434,173 $108,313,809
=========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996 Years Ended December 31,
-----------------------------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 2,412,685 $ 1,981,739 $ 8,689,054 $ 6,652,980 $ 4,785,973
Interest on investment securities:
Taxable 438,824 310,147 1,393,367 1,051,863 597,910
Tax exempt 71,288 83,392 340,031 141,497 122,458
Interest on federal funds sold 36,378 40,889 230,862 377,327 144,420
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income $ 2,959,175 $ 2,416,167 $ 10,653,314 $ 8,223,667 $ 5,650,761
Interest on deposits 1,202,546 995,978 4,359,461 3,468,896 2,120,123
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 1,756,629 $ 1,420,189 $ 6,293,853 $ 4,754,771 $ 3,530,638
PROVISION FOR LOAN LOSSES (Notes 1 & 3) 93,000 77,000 380,000 288,000 257,500
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision For Loan Losses $ 1,663,629 $ 1,343,189 $ 5,913,853 $ 4,466,771 $ 3,273,138
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts $ 147,201 $ 106,200 $ 479,651 $ 388,245 $ 288,413
Other service charges 25,715 9,802 57,765 30,353 26,154
Other 18,852 26,438 88,504 59,106 43,591
Net investment securities
gains (losses) 1,545 5,665 (1,936) (740) -
- ---------------------------------------------------------------------------------------------------------------------------
$ 193,313 $ 148,105 $ 623,984 $ 476,964 $ 358,158
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits $ 664,847 $ 516,012 $ 2,153,570 $ 1,842,746 $ 1,304,361
Occupancy 39,831 32,851 308,224 264,135 174,386
Equipment 166,023 125,451 642,085 499,273 339,740
Other 390,407 287,022 1,087,374 889,443 662,826
- ---------------------------------------------------------------------------------------------------------------------------
$ 1,261,108 $ 961,336 $ 4,191,253 $ 3,495,597 $ 2,481,313
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax $ 595,834 $ 529,958 $ 2,346,584 $ 1,448,138 $ 1,149,983
PROVISION FOR INCOME TAX (Notes 1 & 11) 180,500 185,000 812,650 424,989 397,850
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 415,334 $ 344,958 $ 1,533,934 $ 1,023,149 $ 752,133
===========================================================================================================================
Net income per common share and
common equivalent (Note 1) $ .42 $ .35 $ 1.57 $ 1.29 $ 1.20
===========================================================================================================================
Weighted average shares outstanding 977,311 973,064 975,486 794,376 624,789
===========================================================================================================================
</TABLE>
See Notes To Consolidated Financial Statements
F-3
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Class A Retained
Stock Options Warrants Surplus Earnings Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1994 $2,913,140 $ 7,380 $ 53,378 $3,060,015 $ 310,984 $ 6,344,897
Sold 75,000 shares (Note 9) 375,000 - - 671,042 - 1,046,042
Warrants exercised 1,750 - (149) 3,650 - 5,251
Dividends declared - - - - (100,750) (100,750)
Net income - - - - 752,133 752,133
Unrealized loss on securities
available for sale (Note 2) - - - - (147,488) (147,488)
- ------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1994 $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
Net income (unaudited) - - - - 415,334 415,334
Unrealized loss on securities
available for sale (Note 2)
(unaudited) - - - - (182,909) (182,909)
- ------------------------------------------------------------------------------------------------------------------------------
Balance - March 31, 1997
(Unaudited) $4,721,665 $ 7,380 $ - $6,693,925 $3,241,045 $14,664,015
=============================================================================================================================
</TABLE>
See Notes To Consolidated Financial Statements
F-4
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996 Years Ended December 31,
-----------------------------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 415,334 $ 344,958 $ 1,533,934 $ 1,023,149 $ 752,133
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 88,069 73,180 276,908 250,514 160,321
Loss on disposal of equipment - - 19,438 - -
Provision for loan losses 93,000 77,000 380,000 288,000 257,500
Amortization of premium on
investment securities 15,855 15,562 63,419 62,246 30,946
(Gain) loss on sale of investment
securities (1,545) (5,665) 1,936 740 -
Changes in operating assets and
liabilities:
(Increase) decrease in:
Deferred income taxes - - (104,518) 29,009 (100,401)
Interest receivable (165,760) (151,223) (205,125) (308,139) (143,247)
Prepaid expenses (33,795) (4,461) (38,398) (47,783) 6,554
Other assets (68,886) (52,893) (84,235) (136,769) (41,191)
Increase (decrease) in:
Accrued interest on deposits (2,280) (15,510) 55,140 170,874 55,637
Accrued income taxes (94,500) 112,689 208,339 (245,570) 211,899
Other liabilities (6,000) 42,567 49,742 52,768 41,109
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By
Operating Activities $ 239,492 $ 436,204 $ 2,156,580 $ 1,139,039 $ 1,231,260
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans ($3,000,456) ($5,280,681) ($21,802,127) ($16,240,137) ($14,290,791)
Purchase of investment securities (2,359,182) (4,541,899) (22,383,956) (20,802,211) (4,142,959)
Proceeds from sales of investment
securities 1,593,000 8,376,000 19,611,015 9,093,835 1,698,898
(Increase) decrease in federal
funds sold - net 941,162 1,100,622 (685,535) 2,587,960 (3,801,290)
Purchase of premises and equipment (775,033) (51,468) (1,910,858) (846,507) (801,377)
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Used In
Investing Activities ($3,600,509) ($ 397,426) ($27,171,461) ($26,207,060) ($21,337,519)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31,
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996 Years Ended December 31,
-----------------------------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net $ 2,096,942 ($ 774,952) $26,370,603 $22,590,307 $19,594,503
Increase (decrease) in treasury,
tax and loan (23,229) 252,115 229,579 (57,786) 26,251
Dividends paid (236,083) (113,320) (113,320) (65,816) (34,952)
Proceeds from issuance of
stock - net - - - 2,528,871 1,046,042
Proceeds from exercise of
warrants - net - - - 1,807,743 5,251
Curtailment of other borrowed funds (3,079) (2,920) (11,916) (11,295) (10,708)
Additional contributed capital - - 1,150 - -
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By
Financing Activities $ 1,834,551 ($ 639,077) $26,476,096 $26,792,024 $20,626,387
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase In Cash
and Due From Banks ($ 1,526,466) ($ 600,299) $ 1,461,215 $ 1,724,003 $ 520,128
CASH AND DUE FROM BANKS -
BEGINNING OF YEAR 6,014,540 4,553,325 4,553,325 2,829,322 2,309,194
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS -
END OF YEAR $ 4,488,074 $ 3,953,026 $ 6,014,540 $ 4,553,325 $ 2,829,322
===========================================================================================================================
</TABLE>
See Notes To Consolidated Financial Statements
F-6
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 1997 and for
the Three Months Ended March 31, 1997 and 1996 is
Unaudited)
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:
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
===========
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.
F-7
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
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.
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.
F-8
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
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 include 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
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
common stock equivalents and are included in the calculation of weighted average
number of shares outstanding. The Company's Class A warrants were also
considered common stock equivalents; however, the assumed exercise of these
warrants was not included in earnings per share computations for 1994 because
the result would not have a dilutive effect. There were no Class A warrants
outstanding as of December 31, 1995.
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.
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.
Interim Financial Statements
The financial statements as of March 31, 1997 and for the three months ended
March 31, 1997 and 1996 are unaudited but, in the opinion of management, include
all adjustments necessary for a fair presentation of financial position and
results of operations. Results for the interim periods are not necessarily
indicative of the results for a full year.
F-9
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 2: INVESTMENT SECURITIES:
Securities available-for-sale at March 31, 1997 (unaudited) 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 $ 634,684 $ - $ 12,590 $ 622,094
U. S. Government and federal agencies 16,877,971 3,327 388,840 16,492,458
State and local governments 7,308,023 28,630 99,075 7,237,578
Mortgage-backed securities 3,130,561 - 53,144 3,077,417
- -----------------------------------------------------------------------------------------------------------------------
$27,951,239 $ 31,957 $ 553,649 $27,429,547
Federal Reserve Bank stock 342,650 - - 342,650
- -----------------------------------------------------------------------------------------------------------------------
$28,293,889 $ 31,957 $ 553,649 $27,772,197
=======================================================================================================================
</TABLE>
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>
Securities available-for-sale at December 31, 1995 consist of the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U. S. Government and
federal agencies $12,967,341 $ 63,493 $ 16,509 $13,014,325
State and local governments 5,860,498 39,024 66,679 5,832,843
Mortgage-backed securities 5,613,024 47,100 3,583 5,656,541
- -----------------------------------------------------------------------------------------------------------------------
$24,440,863 $ 149,617 $ 86,771 $24,503,709
Federal Reserve Bank stock 289,050 - - 289,050
- -----------------------------------------------------------------------------------------------------------------------
$24,729,913 $ 149,617 $ 86,771 $24,792,759
=======================================================================================================================
</TABLE>
F-10
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 2: INVESTMENT SECURITIES: (Continued)
The effect on stockholders' equity of the unrealized gain (loss) on
available-for-sale securities is as follows:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gain (loss) on available-for-sale securities ($ 521,692) ($ 244,559) $ 62,846
Deferred income tax on unrealized gain (loss) 177,374 83,150 (21,368)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (reduction) in stockholders' equity ($ 344,318) ($ 161,409) $ 41,478
=======================================================================================================================
</TABLE>
U. S. Government and government backed obligations and state and municipal
backed obligations with a carrying amount of $3,230,785 and $3,263,473 are
pledged to secure municipality and treasury, tax and loan deposits as of March
31, 1997 and December 31, 1996, respectively.
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>
March 31, 1997 (Unaudited) December 31, 1996
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,279,485 $ 1,238,736 $ 1,526,236 $ 1,469,086
Due after one year through five years 5,365,590 5,294,579 5,126,323 5,103,482
Due after five years through ten years 11,405,168 11,223,867 9,893,301 9,842,746
Due after ten years 9,900,996 9,672,365 10,302,507 10,186,682
Federal Reserve Bank stock 342,650 342,650 342,650 342,650
Marketable equity security - - 351,000 352,812
- --------------------------------------------------------------------------------------------------------------------
$28,293,889 $27,772,197 $27,542,017 $27,297,458
====================================================================================================================
</TABLE>
Proceeds from sales of securities available for sale were $19,611,000,
$9,094,000 and $1,699,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, and $1,593,000 and $8,376,000 for the three months ended March 31,
1997 and 1996, respectively. Gross gains realized on those sales were $28,000
and $1,000 for the years ended December 31, 1996 and 1995, respectively and
$1,545 and $20,000 for the three months ended March 31, 1997 and 1996,
respectively. Gross losses totaled $30,000 and $2,000 for the years ended
December 31, 1996 and 1995, respectively, and $14,335 for the three months ended
March 31, 1996. No gains or losses were recognized in 1994.
F-11
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES:
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial loans $58,243,124 $56,251,276 $38,872,133
Consumer loans 1,445,958 1,884,672 3,777,954
Real estate loans 35,885,679 34,437,476 28,193,050
Deferred net loan fees (493,089) (483,365) (421,333)
- --------------------------------------------------------------------------------------------------------------------
$95,081,672 $92,090,059 $70,421,804
Allowance for loan losses 1,195,764 1,111,607 865,479
- --------------------------------------------------------------------------------------------------------------------
$93,885,908 $90,978,452 $69,556,325
====================================================================================================================
</TABLE>
Certain directors, officers and employees were indebted to the Company in the
aggregate amount of $1,016,746 and $1,007,213 as of December 31, 1996 and March
31, 1997, respectively. During the year ended December 31, 1996 and the three
months ended March 31, 1997, new loans made to related parties totaled $917,976
and $68,500, respectively and repayments totaled $327,303 and $78,033,
respectively.
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
March 31, 1997 and December 31, 1996 and 1995, 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 March 31, 1997 and December 31,
1996 and 1995, loans on which the accrual of interest had been discontinued
totaled $498,000, $190,000 and $137,000, respectively. Interest on non-accrual
loans not recognized was $9,200 and $19,000 for the year ended December 31, 1996
and the three months ended March 31, 1997, respectively.
An analysis of the changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - beginning of period $1,111,607 $ 865,479 $ 712,663
Additions:
Provision charged to operations 93,000 380,000 288,000
Recoveries of loans charged off
in prior years 7,000 27,476 34,140
- --------------------------------------------------------------------------------------------------------------------
$1,211,607 $1,272,955 $1,034,803
Deduction:
Loans charged off 15,843 161,348 169,324
- --------------------------------------------------------------------------------------------------------------------
Balance - end of period $1,195,764 $1,111,607 $ 865,479
====================================================================================================================
</TABLE>
F-12
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 4: OTHER ASSETS:
Other assets consist of the following:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and fees receivable $1,182,869 $1,017,109 $ 811,984
Deferred income tax 506,878 412,652 308,134
Computer software - net of amortization 173,148 124,304 152,844
Prepaid expenses 195,945 162,150 123,752
Other 149,564 140,746 27,971
- --------------------------------------------------------------------------------------------------------------------
$2,208,404 $1,856,961 $1,424,685
====================================================================================================================
</TABLE>
NOTE 5: OTHER LIABILITIES:
Other liabilities consist of the following:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest payable on deposits $ 393,852 $ 396,132 $ 340,992
Accounts payable and accrued expenses 184,361 190,361 140,619
Treasury, tax and loan 328,878 352,107 122,528
Dividends payable - 236,083 113,320
Accrued income tax 204,653 299,153 90,814
- --------------------------------------------------------------------------------------------------------------------
$1,111,744 $1,473,836 $ 808,273
====================================================================================================================
</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.
F-13
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 6: OFF-BALANCE-SHEET ITEMS, COMMITMENTS AND CONTINGENT LIABILITIES:
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, 1996 and March 31, 1997, the Company had outstanding letters of
credit totaling $2,049,866 and $1,816,000, respectively, and does not anticipate
losses as a result of these transactions. The Company also had, at December 31,
1996 and March 31, 1997 undisbursed funds under various lines of credit and loan
commitments totaling $13,034,099 and $13,106,000, respectively.
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 under the lease are as follows as
of December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 34,776
1998 $ 28,980
</TABLE>
NOTE 7: PREMISES AND EQUIPMENT:
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
- --------------------------------------------------------------------------------------------------------------------
(Unaudited) 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Building and improvements $2,277,506 $1,347,437 $1,329,520
Furniture and equipment 1,918,411 1,269,370 1,246,464
Land 1,526,568 1,498,656 887,398
Land improvements 726,143 410,342 408,729
Construction in progress 30,093 1,177,783 23,160
- --------------------------------------------------------------------------------------------------------------------
$6,478,721 $5,703,588 $3,895,271
Accumulated depreciation (857,638) (780,691) (586,886)
- --------------------------------------------------------------------------------------------------------------------
$5,621,083 $4,922,897 $3,308,385
====================================================================================================================
</TABLE>
F-14
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
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.
F-15
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 8: FAIR VALUES OF FINANCIAL INSTRUMENTS: (Continued)
The carrying amounts and fair values of financial instruments as of December 31,
1996 and 1995 and March 31, 1997 (unaudited) are presented below:
<TABLE>
<CAPTION>
March 31, 1997
(Unaudited) December 31, 1996 December 31, 1995
(In Thousands) (In Thousands) (In Thousands)
Amount Value Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------
March 31, 1997 (unaudited):
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 4,488 $ 4,488 $ 6,015 6,015 $ 4,553 $ 4,553
Investment securities 27,772 27,772 27,297 27,297 24,793 24,793
Federal funds sold 4,423 4,423 5,364 5,364 4,678 4,678
Loans - net 93,886 94,016 90,978 91,104 69,556 73,815
Liabilities:
Deposits 122,582 122,775 120,485 120,675 94,115 94,859
Other borrowed funds 40 40 43 43 55 55
Treasury, tax and loan 329 329 352 352 123 123
Outstanding letters of credit 1,816 1,816 2,050 2,050 1,176 1,176
Undisbursed lines of credit
and loan commitments 13,106 13,106 13,034 13,034 12,356 12,356
</TABLE>
NOTE 9: COMMON STOCK AND CLASS A WARRANTS:
During 1994, the Company sold 75,000 shares of its common stock at $14.50 per
share. As a result of this sale, equity was increased by $1,046,897, which was
net of issuance costs of $41,458.
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.
F-16
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
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 $373,725.
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 March 31, 1997 follows:
Number of Exercise
Date Granted Options Price
--------------------------------------------------------
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
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> <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 - March 31, 1997 8,000 71,522 $ 13.10
==========================================
</TABLE>
During the three months ended March 31, 1997, the Company granted options to
purchase 3,500 shares of stock with an exercise price of $25 and a life of 10
years.
F-17
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 10: EMPLOYMENT AGREEMENTS AND STOCK OPTION PLANS: (Continued)
A summary of fixed stock options outstanding at December 31, 1996 follows:
<TABLE>
<CAPTION>
Weighted
Number Average
Exercise Prices of Shares Life
----------------------------------------------
<S> <C> <C>
$ 9.75 29,522 4
$10.00 4,000 4
$11.25 10,000 5
$16.00 21,000 8
$16.50 1,000 8
$22.50 2,500 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>
Three Months Ended March 31,
1997 1996 Years Ended December 31,
-------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net income:
As reported $ 415,334 $ 344,958 $1,533,934 $1,023,149
Pro forma 407,722 339,720 1,512,980 1,017,402
Earnings per share:
As reported $ .42 $ .35 $1.57 $1.29
Pro forma .42 .35 1.55 1.28
</TABLE>
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>
Three Months Ended March 31,
1997 1996 Year Ended December 31,
------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995
------------------------------------------------------
<S> <C> <C> <C> <C>
Dividend yield 1.00% .53% .53% .42%
Expected volatility 35.38% 35.38% 35.38% 23.76%
Risk free interest rates 6.58% 6.58% 6.58% 7.40%
Expected lives 10 years 10 years 10 years 10 years
Weighted fair value of each option
granted during the year $13.18 $12.70 $12.70 $ 8.71
</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 $48,060 and $36,464 for 1996 and 1995,
respectively.
F-18
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 11: INCOME TAX:
The provision for income tax consists of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996 Years Ended December 31,
------------------------------------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995 1994
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current $ 180,500 $ 185,000 $ 787,619 $ 493,326 $ 498,251
Deferred - - 25,031 (68,337) (100,401)
------------------------------------------------------------------------------------
$ 180,500 $ 185,000 $ 812,650 $ 424,989 $ 397,850
====================================================================================
</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>
Three Months Ended
March 31,
1997 1996 Years Ended December 31,
-----------------------------------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995 1994
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax at statutory rate $ 202,584 $ 180,186 $ 797,839 $ 492,367 $ 390,994
Increase (decrease) resulting from:
Tax exempt income (24,238) (28,353) (115,611) (48,110) (6,229)
Other 2,154 33,167 130,422 (19,268) 43,085
-----------------------------------------------------------------------------------
Provision for Income Tax $ 180,500 $ 185,000 $ 812,650 $ 424,989 $ 397,850
===================================================================================
</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, 1996 and
1995 and March 31, 1997 are presented below:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
--------------------------------------------------------
(Unaudited) 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Unrealized loss on available-
for-sale securities $ 177,374 $ 83,150 $ -
Deferred loan fees 167,650 135,232 143,253
Allowance for loan losses 244,674 277,107 264,298
--------------------------------------------------------
Total deferred tax assets $ 589,698 $ 495,489 $ 407,551
--------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on available-
for-sale securities $ - $ - $ 21,368
Fixed assets 82,820 82,820 78,049
--------------------------------------------------------
Total deferred tax liabilities $ 82,820 $ 82,820 $ 99,417
--------------------------------------------------------
Net deferred tax assets $ 506,878 $ 412,669 $ 308,134
========================================================
</TABLE>
F-19
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 12: OTHER INFORMATION:
The principal components of "Salaries and employee benefits", "Occupancy",
"Equipment" and "Other noninterest expense" are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996 Years Ended December 31,
--------------------------------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits:
Salaries and wages $ 567,899 $ 437,184 $ 1,828,575 $ 1,555,258 $1,104,310
Fringe benefits 96,948 78,828 324,995 287,488 200,051
-----------------------------------------------------------------------------
$ 664,847 $ 516,012 $ 2,153,570 $ 1,842,746 $1,304,361
============================================================================
Occupancy (includes no items in
excess of 1% of total revenue) $ 39,831 $ 32,851 $ 308,224 $ 264,135 $ 174,386
=============================================================================
Equipment:
Depreciation $ 70,884 $ 61,091 $ 275,665 $ 203,043 $ 132,249
Computer equipment rental 8,604 8,446 33,943 35,315 23,240
Data processing 57,128 34,626 239,788 177,363 135,626
Other (includes no items in excess
of 1% of total revenue) 29,407 21,288 92,689 83,552 48,625
-----------------------------------------------------------------------------
$ 166,023 $ 125,451 $ 642,085 $ 499,273 $ 339,740
=============================================================================
Other noninterest expense:
Postage and freight $ 49,189 $ 34,481 $ 107,961 $ 81,569 $ 87,410
Advertising and public relations 57,266 34,965 152,315 158,230 100,532
Insurance 10,257 9,327 37,541 31,646 29,985
Stationery and supplies 34,806 32,809 179,062 160,022 66,603
FDIC assessment 3,930 500 2,000 79,972 121,440
Other (includes no items in excess
of 1% of total revenue) 234,959 174,940 608,495 378,004 256,856
-----------------------------------------------------------------------------
$ 390,407 $ 287,022 $1,087,374 $ 889,443 $ 662,826
=============================================================================
</TABLE>
F-20
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 13: OTHER BORROWED FUNDS:
During 1993, in a noncash transaction, the Company executed a deed of trust note
as payment for the purchase of land which cost $85,000 adjacent to its
Williamsburg, Virginia office. The mortgage provides for monthly payments of
$1,214 for 84 months and includes 5.32% interest. The purchased land secures
this debt.
Maturities of this long-term debt are as follows:
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
---------------------------
<S> <C> <C>
1997 $ - $ 12,563
1998 12,732 13,247
1999 13,426 13,969
2000 14,169 3,627
---------------------------
$ 40,327 $ 43,406
===========================
</TABLE>
NOTE 14: SUPPLEMENTARY CASH FLOW INFORMATION:
Additional cash flow information follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996 Years Ended December 31,
-----------------------------------------------------------------------------
(Unaudited) (Unaudited) 1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash paid for interest $1,204,826 $1,011,488 $4,304,321 $3,298,022 $2,064,486
=============================================================================
Cash paid for income tax $ 275,000 $ 72,311 $ 604,311 $ 738,896 $ 286,352
=============================================================================
</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, 1996 and
March 31, 1997, deposits with these banks in excess of federal deposit insurance
coverage totaled $4,374,427 and $2,912,221, respectively.
F-21
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
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. During 1995, the plan's first year, the Company matched
100% of elected deferrals for up to 5% of covered compensation during the first
90 days of the plan. For the balance of 1995 and 1996, the Company matched 25%
of up to 5% of elected deferrals. The Company's contributions for 1996 and 1995
totaled $15,051 and $22,027, 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. The Company continued its 25% match
of up to 5% of elected deferrals for the three months ended March 31, 1997.
Contributions to the plan for the three months ended March 31, 1997 and 1996
totaled $4,845 and $3,540, respectively.
NOTE 17: DISCLAIMER:
This financial information has not been reviewed, or confirmed for accuracy or
relevance, by the Federal Reserve System.
NOTE 18: 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, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
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.
F-22
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of March 31, 1997 and for the
Three Months Ended March 31, 1997 and 1996 is Unaudited)
NOTE 18: CAPITAL REQUIREMENTS: (Continued)
<TABLE>
<CAPTION>
Minimum
Ratio To Be
Considered
For Well
Capital Capitalized
Actual Adequacy Under PCA
(In Thousands) Amount Ratio Purposes Provisions
- -------------- ------ ----- -------- ----------
<S> <C> <C> <C> <C>
March 31, 1997 (Unaudited):
Total risk-weighted assets:
Consolidated $ 99,560 -% -% -%
Subsidiary bank 99,589 - - -
Total average assets:
Consolidated 134,056 - - -
Subsidiary bank 134,123 - - -
Total capital (to risk-weighted assets):
Consolidated 16,204 16.28 8.00 N/A
Subsidiary bank 16,229 16.30 8.00 10.00
Tier 1 capital (to risk-weighted assets):
Consolidated 15,008 15.07 4.00 N/A
Subsidiary bank 15,033 15.10 4.00 6.00
Tier 1 capital (to average assets):
Consolidated 15,008 11.20 4.00 N/A
Subsidiary bank 15,033 11.21 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>
F-23
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
No dealer, salesman or other person has been
authorized to give any information or to make
any representation not contained in this 130,000 Shares
Prospectus, and if given or made, such
information or representation must not be
relied upon as having been authorized by the
Company. This Prospectus does not constitute MID-ATLANTIC COMMUNITY
an offer to sell or a solicitation of an
offer to buy any securities other than those BANKGROUP, INC.
specifically offered hereby or an offer or
solicitation in any jurisdiction to any person Common Stock
to whom it is unlawful to make an offer or
solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication
that there has been no change in the affairs of
the Company since the date hereof or that the
information herein is correct as of any time
ubsequent to its date or the date hereof.
--------------------
------------------
PROSPECTUS
Table of Contents
Page --------------------
----
Prospectus Summary................................. 3
Summary Consolidated Financial Data................ 4
Risk Factors....................................... 5
The Company........................................ 6 DAVENPORT & COMPANY LLC
Recent Developments................................ 7
Use of Proceeds.................................... 7
Market for Common Stock............................ 8
Dividend Information............................... 8
Capitalization..................................... 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations..............10 , 1997
Business...........................................24
Management.........................................32
Description of Capital Stock.......................37
Underwriting.......................................38
Legal Opinions.....................................39
Experts............................................39
Available Information..............................39
Index to Consolidated Financial Statements.........F-1
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 27. Exhibits
The following exhibits are filed on behalf of the Registrant as part of
this Registration Statement:
1 Form of Underwriting Agreement.
3(i) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form 8-A, filed August 30, 1996.
3(ii) Bylaws, incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form 8-A, filed August 30, 1996.
4 Form of Stock Certificate.
5 Opinion of Williams, Mullen, Christian & Dobbins.
10.1 Employment Agreement between W. J. Farinholt and the Registrant.
10.2 Employment Agreement between Kenneth E. Smith and the Registrant.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.*
23.1 Consent of Williams, Mullen, Christian & Dobbins(included in Exhibit
5).
23.2 Consent of Smith & Eggleston, P.C.
24 Powers of Attorney(included on Signature Page).*
- -------------------
* Filed previously.
II-1
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
County of Gloucester, Commonwealth of Virginia, on July 11, 1997.
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
By: /s/ William J. Farinholt
-------------------------------------
William J. Farinholt
President and Chief Executive Officer
and Director
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William J. Farinholt President and Chief Executive July 11, 1997
- -------------------------------------------
William J. Farinholt Officer and Director
(Principal Executive Officer)
/s/ Kenneth E. Smith Executive Vice President and July 11, 1997
- -------------------------------------------
Kenneth E. Smith Chief Financial Officer and Director
(Principal Financial Officer)
/s/ Kathleen C. Healy Vice President and July 11, 1997
- -------------------------------------------
Kathleen C. Healy Chief Accounting Officer
(Principal Accounting Officer)
* Chairman of the Board
- -------------------------------------------
Joseph A. Lombard, Jr., DDS
Director
- -------------------------------------------
Charles F. Bristow
Director
- -------------------------------------------
John R. Curtis
<PAGE>
Director
- -------------------------------------------
Charles F. Dawson
* Director
- -------------------------------------------
William D. Fary
Director
- -------------------------------------------
Robert D. Foster
* Director
- -------------------------------------------
Harry M. Healy
Director
- -------------------------------------------
Jeanne P. Hockaday
* Director
- -------------------------------------------
George A. Marston, Jr.
* Director
- -------------------------------------------
Hersey M. Mason, Jr.
* Director
- -------------------------------------------
Henry C. Rowe, MD
Director
- -------------------------------------------
Thomas Z. Wilke
</TABLE>
* William J. Farinholt, by signing his name hereto, signs this document
on behalf of each of the persons indicated by an asterisk above pursuant to
powers of attorney duly executed by such persons and previously filed with the
Securities and Exchange Commission as part of the Registration Statement.
Date: July 11, 1997 /s/ William J. Farinholt
----------------------------
William J. Farinholt
Attorney-in-Fact
<PAGE>
Exhibit Index
Number Description
1 Form of Underwriting Agreement.
3(i) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form 8-A, filed August 30, 1996.
3(ii) Bylaws, incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form 8-A, filed August 30, 1996.
4 Form of Stock Certificate.
5 Opinion of Williams, Mullen, Christian & Dobbins.
10.1 Employment Agreement between W. J. Farinholt and the Registrant.
10.2 Employment Agreement between Kenneth E. Smith and the Registrant.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.*
23.1 Consent of Williams, Mullen, Christian & Dobbins(included in Exhibit
5).
23.2 Consent of Smith & Eggleston, P.C.
24 Powers of Attorney(included on Signature Page).*
- -------------------
* Filed previously.
Exhibit 1
130,000 SHARES
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
COMMON STOCK
-----------------------------
UNDERWRITING AGREEMENT
-----------------------------
DAVENPORT & COMPANY LLC
One James Center
P. O. Box 85678
Richmond, Virginia 23285-5678 ______________, 1997
Dear Sirs:
Mid-Atlantic Community Bankgroup, Inc., a Virginia corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to Davenport & Company LLC (the "Underwriter" or "you") an
aggregate of 130,000 shares of common stock, $5.00 par value per share, of the
Company ("Common Stock") and, at the election of the Underwriter, up to 19,500
additional shares of Common Stock. The aggregate of 130,000 shares of Common
Stock to be sold by the Company are herein called the "Firm Securities," and the
aggregate of 19,500 additional shares of Common Stock to be sold by the Company
are herein called the "Optional Securities." The Firm Securities and the
Optional Securities which the Underwriter elects to purchase pursuant to Section
2 hereof are collectively called the "Securities."
1. Representations and Warranties.
The Company represents and warrants to, and agrees with, the
Underwriter that:
(a) A registration statement in respect of the Securities
on Form SB-2 (File No. 333 - 25557) under the Securities Act of 1933,
as amended (the "Act"), and as a part thereof a preliminary prospectus,
in respect of the Securities has been filed with the Securities and
Exchange Commission (the "Commission") in the form heretofore delivered
to you; such registration statement, as amended, has been declared
effective by the Commission; no other document with respect to such
registration statement has heretofore been filed with the Commission;
and no stop order suspending the effectiveness of such registration
statement has been issued and no proceeding for that purpose has been
instituted or threatened by the Commission (any preliminary prospectus
included in such registration statement or filed with the Commission
pursuant to Rule 424 of the rules and regulations of the Commission
under the Act, being hereinafter called a "Preliminary Prospectus",
the
<PAGE>
various parts of such registration statement, including all exhibits
thereto, and including the information contained in the form of final
prospectus filed with the Commission pursuant to Rule 424(b) under the
Act in accordance with Section 5(a) of this Agreement and deemed by
virtue of Rule 430A under the Act to be part of the registration
statement at the time it was declared effective, together with any
related registration statement filed with the Commission for
registration of a portion of the Securities, which registration
statement became effective pursuant to Rule 462(b) under the Act,
being herein called collectively the "Registration Statement," and the
final prospectus, in the form first filed pursuant to Rule 424(b),
being hereinafter called the "Prospectus," provided, that if the
Company elects to rely on Rule 434 under the Act, all references to
the Prospectus shall be deemed to include, without limitation, the
form of prospectus and the abbreviated term sheet, taken together,
provided to the Underwriter by the Company in reliance on Rule 434);
(b) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in all
material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did 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
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by the Underwriter for use therein;
(c) The Registration Statement conforms, and the Prospectus
and any amendments or supplements thereto will conform, in all material
respects to the requirements of the Act and the rules and regulations
of the Commission thereunder and do not and will not as of the
applicable effective date as to the Registration Statement and any
amendment thereto and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company
by the Underwriter expressly for use therein;
(d) Except for the Company's wholly-owned subsidiary,
Peninsula Trust Bank, Incorporated, a Virginia-chartered commercial
bank (the "Bank"), the Company does not own more than 5% of the equity
interests of any other business entities other than shares of
publicly-held companies held solely for investment;
(e) Neither the Company nor the Bank has sustained since
the date of the latest audited financial statements included in the
Prospectus any material loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not
been any change in the outstanding capital stock or long-term debt of
the Company or the Bank or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
-2-
<PAGE>
stockholders' equity or results of operations of the Company or the
Bank, otherwise than as set forth or contemplated in the Prospectus;
(f) Each of the Company and the Bank has good and
marketable title in fee simple to all real property and good title to
all personal property owned by it, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus, or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be
made of such property by either the Company or the Bank; and any real
property and buildings held under lease by either the Company or the
Bank are held by it under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the
use made and propose to be made of such property and buildings by
either the Company or the Bank;
(g) Each of the Company and the Bank has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of Virginia, with power and authority (corporate and
other) to own or lease its properties and conduct its business as
described in the Prospectus; the Company and the Bank do not conduct
business in any jurisdiction other than the Commonwealth of Virginia;
the Company is duly registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, and the rules and regulations
promulgated thereunder; and each of the Company and the Bank holds all
material licenses, certificates, authorizations and permits from
governmental authorities necessary for the conduct of its business as
described in the Registration Statement and the Prospectus;
(h) The Company has an authorized capitalization as set
forth in the Prospectus; all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued, are
fully paid and nonassessable and conform to the description of the
capital stock of the Company contained in the Prospectus; there are no
preemptive or other similar rights to subscribe for or to purchase any
securities of the Company; except as described in the Prospectus,
there are no warrants, options or other rights to purchase any
securities of the Company; neither the filing of the Registration
Statement nor the offering or sale of the Securities as contemplated
by this Agreement give rise to any rights for or relating to the
registration of any securities of the Company with respect to such
filing, offering or sale;
(i) The Securities have been duly and validly authorized
and, when issued and delivered against payment therefor as provided
herein, will be duly and validly issued and fully paid and
nonassessable and will conform to the description of the Securities
contained in the Prospectus as amended or supplemented;
(j) The issuance and sale of the Securities being issued at
each Delivery Date (as hereinafter defined) by the Company and the
performance of this Agreement and the consummation by the Company of
the other transactions herein contemplated will not conflict with or
result in a breach or violation of any terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or
the Bank is a party or by which any of the property or assets of the
Company or the Bank is bound or to which any of the property or assets
of the Company or the Bank is subject, nor will such action result in
any violation of the
-3-
<PAGE>
provisions of the Articles of Incorporation, as amended, or By-laws,
as amended, of the Company or the Bank or any statute or any order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or the Bank or any of their properties;
and no consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required for the issuance and sale of the Securities or the
consummation by the Company of the transactions contemplated by this
Agreement, except such consents, approvals, authorizations,
registrations or qualifications as may be required under the Act and
under state securities or Blue Sky laws in connection with the
purchase and distribution of the Securities by the Underwriter;
(k) There are no legal or governmental proceedings pending
to which the Company or the Bank is a party or of which any property of
the Company or the Bank is the subject, which, if determined adversely
to the Company or the Bank, would individually or in the aggregate,
have a material adverse effect on the consolidated financial position,
stockholders' equity or results of operations of the Company or of the
Company and the Bank taken as a whole and, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or by others;
(l) Smith & Eggleston, P.C., which has certified certain
financial statements of the Company, are independent public accountants
as required by the Act and the rules and regulations of the Commission
thereunder;
(m) All employee benefit plans (as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) established, maintained or contributed to by the Company or
the Bank (except any such plan for which the principal sponsor or plan
administrator is an affiliate other than the Company or the Bank)
comply in all material respects with the requirements of ERISA and no
employee pension benefit plan (as defined in Section 3(2) of ERISA) has
incurred or assumed an "accumulated funding deficiency" within the
meaning of Section 302 of ERISA or has incurred or assumed any material
liability (other than for the payment of premiums) to the Pension
Benefit Guaranty Corporation;
(n) The consolidated financial statements of the Company
and the Bank, together with related notes, as set forth in the
Registration Statement present fairly the consolidated financial
position and the results of operations of the Company and the Bank at
the indicated dates and for the indicated periods; such financial
statements have been prepared in accordance with generally accepted
accounting principles, consistently applied throughout the periods
presented except as noted in the accountants' notes thereon, and all
adjustments necessary for a fair presentation of results for such
periods have been made; and the selected financial information
included in the Prospectus presents fairly the information shown
therein and has been compiled on a basis consistent with the financial
statements presented therein;
(o) The Company and the Bank have timely filed all
necessary federal, state and foreign income, franchise and excise tax
returns and have paid all taxes shown thereon as due, and there is no
tax deficiency that has been or, to the best knowledge of the Company,
might be asserted against the Company that might have a material
adverse effect on the business, properties, business prospects,
condition (financial or otherwise), earnings or
-4-
<PAGE>
results of operations of the Company, and all tax liabilities are
adequately provided for on the books of the Company and the Bank;
(p) The Company is not in violation of any federal or state
law, regulation, or treaty relating to the storage, handling,
transportation, treatment or disposal of hazardous substances (as
defined in 42 U.S.C. Section 9601) or hazardous materials (as defined
by any federal or state law or regulation) or other waste products,
which violation may have a material adverse effect on the financial
condition or business operations or properties of the Company; the
Company has received all permits, licenses or other approvals as may be
required of it under applicable federal and state environmental laws
and regulations to conduct its business as described in the Prospectus,
and the Company is in compliance in all material respects with the
terms and conditions of any such permit, license or approval; the
Company has not received any notices or claims that it is a responsible
party or a potentially responsible party in connection with any claim
or notice asserted pursuant to 42 U.S.C. Section 9601 et seq. or any
state superfund law; and the disposal of all of the Company's hazardous
substances, hazardous materials and other waste products has been
lawful;
(q) No material relationship, direct or indirect, exists
between or among the Company or the Bank, on the one hand, and the
directors, officers, stockholders, customers or suppliers of the
Company or the Bank on the other hand, that is required by the Act, or
by the rules and regulations under such Act to be described in the
Registration Statement and the Prospectus that is not so described;
(r) Neither the Company nor the Bank has taken and neither
of such entities will take, directly or indirectly, any action which
is designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities;
(s) Each of the Company and the Bank holds and is operating
in compliance, in all material respects, with all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates
and orders of any governmental or self-regulatory body required for
the conduct of its business as presently being conducted ("licenses")
and all licenses are valid and in full force and effect; and each of
the Company and the Bank is in compliance, in all material respects,
with all laws, regulations, orders and decrees applicable to it;
(t) Each of the Company and the Bank maintains insurance of
the types and in the amounts that are reasonable or required for the
business operated by it, all of which insurance is in full force and
effect;
(u) This Agreement has been duly authorized, executed and
delivered by the Company;
(v) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is
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permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences;
(w) There is no document or contract of a character
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required. All such contracts to
which the Company or the Bank is a party constitute valid and binding
agreements of the Company or the Bank and are enforceable against the
Company or the Bank in accordance with the terms thereof, except as
may be limited by bankruptcy, insolvency, fraudulent transfer or other
similar laws affecting the rights and remedies of creditors generally
and subject to general principles of equity, and except to the extent
that any such contract contains provisions for indemnification for
liabilities under the Act; and
(x) The Company and the Bank are in compliance in all
material respects with all applicable laws administered by and
regulations of the Board of Governors of the Federal Reserve System
(the "Board of Governors"), the Federal Deposit Insurance Corporation
(the "FDIC") and any state bank regulatory authority with jurisdiction
over the Bank, the failure to comply with which would have a material
adverse effect on the Company and the Bank taken as a whole.
2. Purchase and Sale.
Subject to the terms and conditions herein set forth, (a) the Company
agrees to sell to the Underwriter, and the Underwriter agrees to purchase from
the Company at a purchase price per share of $____, the Firm Securities and (b)
in the event and to the extent that the Underwriter shall exercise the election
to purchase Optional Securities as provided below, the Company agrees to sell to
the Underwriter, and the Underwriter agrees to purchase from the Company at the
purchase price set forth in clause (a) of this Section 2, that portion of the
number of Optional Securities as to which such election shall have been
exercised.
The Company hereby grants to the Underwriter the right to purchase at
its election up to 19,500 Optional Securities, at the purchase price per share
of $____, for the sole purpose of covering over-allotments in the sale of the
Firm Securities. Any such election to purchase Optional Securities may be
exercised not more than once by written notice from you to the Company, given
within a period of 30 calendar days after the date of this Agreement, setting
forth the aggregate amount of Optional Securities to be purchased and the date
on which such Optional Securities are to be delivered, as determined by you but
in no event earlier than the First Delivery Date (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than 10 business days after the date of such notice.
3. Offering by the Underwriter.
Upon the authorization by you of the release of the Firm Securities,
the Underwriter proposes to offer the Firm Securities for sale upon the terms
and conditions set forth in the Prospectus.
4. Delivery and Payment.
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<PAGE>
Certificates in definitive form for the Securities to be purchased by
the Underwriter hereunder, and in such denominations and registered in such
names as the Underwriter may request upon at least two business days' prior
notice to the Company, shall be delivered by or on behalf of the Company to the
Underwriter against payment of the purchase price therefor. Payment of the
purchase price for the Securities shall be made by certified or official bank
check in immediately available funds or, at the option of the Underwriter, by
wire transfer of immediately available funds, all at the offices of Davenport &
Company LLC, One James Center, Richmond, Virginia. The time and date of such
delivery and payment shall be, with respect to the Firm Securities, 10:00 a.m.,
Richmond, Virginia time, on ________, 1997, or at such other time and date as
the Underwriter and the Company may agree upon in writing, and, with respect to
the Optional Securities, 10:00 a.m., Richmond, Virginia time, on the date
specified by the Underwriter in the written notice of the Underwriter's election
to purchase such Optional Securities, or at such other time and date as the
Underwriter and the Company may agree upon in writing. Such time and date for
delivery of the Firm Securities is herein called the "First Delivery Date," such
time and date for delivery of the Optional Securities, if not the First Delivery
Date, is herein called the "Second Delivery Date," and each such time and date
for delivery is herein called a "Delivery Date." Such certificates will be made
available for checking and packaging at least twenty-four hours prior to each
Delivery Date in Richmond, Virginia or such other location designated by the
Underwriter to the Company.
5. Agreements of the Company.
The Company agrees with the Underwriter:
(a) To prepare the Prospectus in a form reasonably approved by you
and to file such Prospectus (or a term sheet as permitted by Rule 434(c))
pursuant to Rule 424(b) under the Act not later than the Commission's close of
business on the second business day following the execution and delivery of this
Agreement or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Act; to make no amendment or supplement to the Registration
Statement or Prospectus prior to any Delivery Date which shall be reasonably
disapproved by you promptly after reasonable notice thereof; to advise you,
promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any supplement to
the Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to file promptly all reports and any definitive proxy or
information statements required to be filed by the Company with the Commission
subsequent to the date of the Prospectus and for so long as the delivery of a
Prospectus is required in connection with the offering or sale of the
Securities; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus, of the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any such
purpose, of any request by the Commission for the amending or supplementing of
the Registration Statement or Prospectus or for additional information and, in
the event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or suspending
any such qualification, to use promptly its best efforts to obtain its
withdrawal;
(b) Promptly from time to time to take such actions as you may
reasonably request to qualify the Securities for offering and sale under the
securities laws of such jurisdictions as you may
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<PAGE>
reasonably request and to comply with such laws so as to permit the continuance
of sales and dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution of the Securities, provided that in
connection therewith the Company shall not be required to qualify as a foreign
corporation or to file a general consent to service of process in any
jurisdiction;
(c) To furnish the Underwriter with copies of the Registration
Statement and the Prospectus in such quantities as you may from time to time
reasonably request during such period following the date hereof that a
prospectus is required to be delivered in connection with offers or sales of
Securities, and, if the delivery of a prospectus is required during this period
and if at such time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement the
Prospectus to comply with the Act, to notify you and upon your request to file
such document and to prepare and furnish without charge to you and to any dealer
in securities as many copies as you may from time to time reasonably request of
an amended Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance;
(d) As soon as practicable after the effective date of the
Registration Statement, to make generally available to its stockholders and to
deliver to you, an earnings statement of the Company, conforming with the
requirements of Section 11(a) of the Act and Rule 158 under the Act, covering a
period of at least 12 months beginning after the effective date of the
Registration Statement;
(e) For a period of 90 days from the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of any shares of the
Company's Common Stock or securities exercisable for or convertible into shares
of Common Stock (other than the Securities or pursuant to employee stock option
or stockholder dividend reinvestment plans or pursuant to options, warrants or
rights outstanding on the date of this Agreement or pursuant to bona fide gifts
to persons who agree in writing with the donor to be bound by this restriction)
without your prior written consent, which consent shall not be unreasonably
withheld;
(f) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Board of Governors, the FDIC, the
Commission, any national securities exchange or quotation system on which any
class of securities of the Company is listed or included; and (ii) such
additional information concerning the business and financial condition of the
Company as you may from time to time reasonably request; and
(g) To apply the net proceeds from the sale of the Securities for the
purposes set forth in the Prospectus.
6. Payment of Expenses.
The Company covenants and agrees with you that it will pay or cause to
be paid the following: (i) the fees, disbursements and expenses of the Company's
counsel and accountants in connection
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with the registration of the Securities under the Act and all other expenses in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus and the Prospectus and any amendments or
supplements thereto, and the mailing and delivering of copies thereof to the
Underwriter and dealers; (ii) the cost of printing or reproducing this
agreement, the Blue Sky Survey, any dealer agreements and any other documents in
connection with the offering, purchase, sale and delivery of the Securities;
(iii) all expenses in connection with the qualification of the Securities for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the reasonable fees and disbursements of counsel for the
Underwriter in connection with such qualification and in connection with the
Blue Sky Survey; (iv) the filing fees incident to securing any required review
by the National Association of Securities Dealers, Inc. of the terms of the sale
of the Securities; (v) the cost of preparing stock certificates; (vi) the costs
or expenses of any transfer agent or registrar; (vii) all fees relating to the
inclusion of the Common Stock on The Nasdaq SmallCap Market; and (viii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section.
Except as provided in this Section, Section 8 and Section 10 hereof, the
Underwriter will pay all of its own costs and expenses, including the fees of
its counsel, stock transfer taxes on resale of any of the Securities by it, and
any advertising expenses connected with any offers it may make.
7. Conditions to Obligations of Underwriter.
The obligations of the Underwriter hereunder, as to the Securities to
be delivered at each Delivery Date, shall be subject, in its discretion, to the
condition that all representations and warranties and other statements of the
Company are, at and as of such Delivery Date, true and correct in all material
respects and the condition that the Company shall have performed in all material
respects all of its obligations hereunder theretofore to be performed, and the
following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) under the Act within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance with
Section 5(a) of this Agreement; no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceeding for that
purpose shall have been initiated or threatened by the Commission; and all
requests for additional information on the part of the Commission shall have
been complied with to your reasonable satisfaction;
(b) Hunton & Williams, counsel for the Underwriter, shall have
furnished to you such opinion or opinions, dated such Delivery Date, with
respect to the incorporation of the Company, the validity of the Securities
being issued at such Delivery Date, the Registration Statement, the Prospectus,
and other related matters as you may reasonably request, and such counsel shall
have received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(c) Williams, Mullen, Christian & Dobbins, .C., counsel for the
Company, shall have furnished to you their written opinion, dated such Delivery
Date, in form and substance satisfactory to you, to the effect that:
(i) Each of the Company and the Bank has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the Commonwealth of Virginia, with corporate power
and authority to own or lease its properties and conduct its business
as
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<PAGE>
described in the Prospectus;
(ii) Each of the Company and the Bank has been duly
qualified as a foreign corporation for the transaction of business and
is in good standing under the laws of each jurisdiction in which it
owns or leases properties, or conducts any business, so as to require
such qualification, except where the failure to so qualify will not
result in a material adverse effect on the Company (such counsel being
entitled to rely in respect of the opinion in this clause upon
certificates of appropriate governmental authorities in such
jurisdictions, opinions of local counsel and, in respect of matters of
fact, upon certificates of officers of the Company);
(iii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capitalization," and all of
the issued shares of capital stock of the Company have been duly and
validly authorized and issued, are fully paid and nonassessable and
conform to the description of the capital stock contained in the
Prospectus; there are no preemptive or other similar rights to
subscribe for or to purchase any securities of the Company; except as
described in the Prospectus, there are no warrants or options to
purchase any securities of the Company; to the best of such counsel's
knowledge, neither the filing of the Registration Statement nor the
offering or sale of the Securities as contemplated by this Agreement
gives rise to any rights for or relating to the registration of any
securities of the Company with respect to such filing, offering or
sale; and the form of the certificates evidencing the Securities
complies with all formal requirements of Virginia law;
(iv) The Securities have been duly and validly authorized
and issued and, when issued and delivered against payment therefor,
will be fully paid and nonassessable, and the Securities conform to
the description of the Securities contained in the Prospectus as
amended or supplemented;
(v) To such counsel's knowledge, there is no legal or
governmental proceeding pending to which either the Company or the Bank
is a party or of which any property of either the Company or the Bank
is the subject, other than as set forth or contemplated in the
Prospectus, that, if determined adversely to the Company or the Bank,
would individually or in the aggregate have a material adverse effect
on the financial position, stockholders' equity or results of
operations of the Company; and, to such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(vi) The issuance and sale of the Securities being issued at
such Delivery Date by the Company and the performance of this Agreement
by the Company and the consummation by the Company of the other
transactions herein contemplated will not conflict with or result in a
breach or violation of any terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument known to such counsel to which the
Company is a party or by which the Company is bound or to which any of
the property or assets of the Company is subject, nor will such action
result in any violation of the provisions of the Articles of
Incorporation, as amended, or By-laws, as amended, of the Company or of
any statute or any order, rule or regulation known to such counsel of
any court or governmental agency or body having
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<PAGE>
jurisdiction over the Company or any of its properties;
(vii) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body is required for the issuance and sale of
the Securities by the Company or the consummation by the Company of
the other transactions contemplated by this Agreement, except such as
have been obtained under the Act and such as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Securities by the Underwriter;
(viii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior to
such Delivery Date (other than the financial statements and related
schedules and such other financial and statistical data included
therein as to which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the Act and the
rules and regulations thereunder; such counsel does not know of any
contracts or other documents of a character required to be filed as an
exhibit to the Registration Statement or required to be described in
the Registration Statement or the Prospectus which are not filed or
described as required;
(ix) The descriptions in the Registration Statement and
Prospectus under the captions "Business--Supervision and Regulation"
and "Description of Capital Stock" and any further amendments or
supplements thereto, insofar as such descriptions constitute a summary
of documents referred to therein or matters of law, are accurate and
fairly present the information required to be shown;
(x) The descriptions in the Prospectus and any further
amendments or supplements thereto of statutes, legal and governmental
proceedings and contracts and other documents are accurate and fairly
present such information in all material respects; and
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
Such counsel shall also provide a written statement to the effect that
such counsel participated in conferences with officers and other representatives
of the Company, representatives of the independent public accountants of the
Company and representatives of the Underwriter at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in subparagraphs
(iii), (iv) and (ix) above with respect to certain descriptions contained
therein), on the basis of the foregoing (relying as to materiality where
appropriate upon the opinions of officers and other representatives of the
Company) nothing has come to the attention of such counsel that causes them to
believe that the Registration Statement or any amendment thereto at the time
such Registration Statement or amendment became effective contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus, at the date of such Prospectus, and at all times up to and
including the date of such counsel's opinion, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no opinion with respect to
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the financial statements and schedules and other financial and statistical data
included in the Registration Statement or Prospectus).
Where any of the foregoing opinions refers to the knowledge of counsel,
such counsel may state that their opinion is limited to the actual knowledge of
attorneys actively involved in the transactions contemplated by this agreement
or in the preparation of the opinion letter required by this subsection (c).
(d) At 10:00 a.m., Richmond time, on the date of this Agreement and
the effective date of the most recently filed post-effective amendment to the
Registration Statement and also at each Delivery Date, Smith & Eggleston, P.C.
shall have furnished to you a letter or letters, dated the respective date of
delivery thereof, in form and substance satisfactory to you, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information relating to the Company contained in the
Registration Statement and the Prospectus;
(e) (i) Neither the Company nor the Bank shall have sustained, since
the date of the latest audited financial statements included in the Prospectus,
any loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus, and (ii) since the respective dates as of which
information is given in the Prospectus there shall not have been any change in
the capital stock or long-term debt of the Bank or any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
either the Company or the Bank otherwise than as set forth or contemplated in
the Prospectus, the effect of which, in any such case described in clause (i) or
(ii) is in your reasonable judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities being delivered at such Delivery Date on the terms and in the
manner contemplated by the Prospectus;
(f) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading of any of the
equity securities of the Company on the Nasdaq SmallCap Market; (ii) any United
States federal or state statute, regulation, rule or order of any court,
legislative body, agency or other governmental authority shall have been
enacted, published, decreed or promulgated or any proceeding or investigation
shall have been commenced which, in your reasonable judgment, materially and
adversely affects the business or operations of the Company; (iii) a suspension
or material limitation in trading in securities generally on the New York Stock
Exchange or in the publication of quotations on The Nasdaq SmallCap Market; (ii)
a general moratorium on commercial banking activities in New York or Virginia
declared by either federal or New York or Virginia authorities; (iii) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war if any such
event specified in this clause (iii) would have such a materially adverse
effect, in your judgment, as to make it impracticable or inadvisable to proceed
with the public offering or the delivery of the Securities being delivered at
such Delivery Date on the terms and in the manner contemplated in the
Prospectus; or (iv) such a material adverse change in general economic,
political, financial or international conditions affecting financial markets in
the United States having a material adverse impact on trading prices of
securities in general, as, in your judgment, makes it inadvisable to proceed
with the payment for and delivery of the Securities;
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<PAGE>
(g) The Company shall have furnished to you copies of agreements
between the Company and each of the executive officers and directors of the
Company specified by you, in form and content satisfactory to you, pursuant to
which such persons agree not to offer, sell, or contract to sell, or otherwise
dispose of, any shares of Common Stock beneficially owned by them or any
securities convertible into, or exchangeable for, Common Stock, on or before the
90th day after the date of this Agreement without your prior written consent;
and
(h) The Company shall have furnished or caused to be furnished to you
at such Delivery Date certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Delivery Date, as to the performance by the Company of
all of its obligations hereunder to be performed at or prior to such Delivery
Date, as to the matters set forth in subsections (a) and (e) of this Section and
as to such other matters as you may reasonably request.
8. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless the Underwriter
against any losses, claims, damages or liabilities to which the Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will promptly reimburse the Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating, preparing to defend
or defending, or appearing as a third party witness in connection with, any such
action or claim; provided, however, that the Company shall not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by the Underwriter expressly for use therein.
(b) The Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities, joint or several, to which
the Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus or Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by you expressly for use therein; and will
promptly reimburse the Company for any legal or other expenses reasonably
incurred by the Company in connection with investigating, preparing to defend or
defending, or appearing as a third party witness in connection with, any such
action or claim. The Company acknowledges that the statements set forth in the
last paragraph of the cover page, the second paragraph on the inside
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front cover page and the first, second, third, fourth, seventh and eighth
paragraphs under the heading "Underwriting" in the Preliminary Prospectus and
the Prospectus constitute the only information furnished in writing by the
Underwriter for inclusion in the Preliminary Prospectus or the Prospectus, and
the Underwriter confirms that such statements are correct.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party shall have been advised by
counsel that representation of such indemnified party and the indemnifying party
may be inappropriate under applicable standards of professional conduct due to
actual or potential differing interests between them, the indemnified party or
parties shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. It is understood that the
indemnifying party shall, in connection with any such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys together with appropriate
local counsel at any time for all indemnified parties unless such firm of
attorneys shall have reasonably concluded that one or more indemnified parties
has actual differing interests with any other indemnified party. Upon receipt of
notice from the indemnifying party to such indemnified party of its election so
to appoint counsel to defend such action and approval by the indemnified party
of such counsel, the indemnifying party will not be liable for any settlement
entered into without its consent and will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence, (ii) the indemnifying party shall not
have employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party; and except that, if clause (i) or (iii) is applicable, such
liability shall be only in respect of the counsel referred to in such clause (i)
or (iii). Notwithstanding the immediately preceding sentence and the third
preceding sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then
-14-
<PAGE>
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and the
Underwriter on the other from the offering of the Securities. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (c) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriter on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriter on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (after deducting the total underwriting discount, but before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriter, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriter on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriter agree that it would not be just and equitable if
contributions pursuant to this subsection (d) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of damages which the Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls the
Underwriter within the meaning of the Act; and the obligations of the
Underwriter under this Section 8 shall be in addition to any liability which the
Underwriter may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company within the meaning of the Act.
-15-
<PAGE>
9. Representations and Indemnities to Survive.
The respective indemnities, agreements, representations, warranties and
other statements of the Company and the Underwriter, as set forth in this
Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any termination
or cancellation of this Agreement or any investigation (or any statement as to
the results thereof) made by or on behalf of the Underwriter, or any controlling
person of the Underwriter, or the Company, or any officer or director or
controlling person of the Company, and shall survive delivery of and payment for
the Securities.
10. Termination and Payment of Expenses.
If for any reason any Securities are not delivered by or on behalf of
the Company as provided herein, the Company will reimburse the Underwriter for
all out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred by the Underwriter in making preparations for the purchase,
sale and delivery of the Securities not so delivered, but the Company shall then
be under no further liability to the Underwriter except as provided in Section 6
and Section 8 hereof.
11. Notices.
All statements, requests, notices and agreements hereunder shall be in
writing or by telegram if promptly confirmed in writing, and if to the
Underwriter shall be sufficient in all respects if delivered or sent by reliable
courier, first class mail, telex or facsimile transmission to Davenport &
Company LLC, One James Center, P.O. Box 85678, Richmond, Virginia 23285-5678
Attention: Corporate Finance Department; and if to the Company shall be
sufficient in all respects if delivered or sent by reliable courier, first class
mail, telex or facsimile transmission to the address of the Company set forth in
the Prospectus, Attention: President. Any such statements, requests, notices or
agreements shall take effect upon receipt thereof.
12. Successors.
This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriter and the Company and, to the extent provided in Sections 8
and 9 hereof, the officers and directors of the Company and each person who
controls the Company, or the Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this agreement. No purchaser of any of the
Securities from the Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
13. Time of the Essence.
Time shall be of the essence in this Agreement.
-16-
<PAGE>
14. Business Day.
As used herein, the term "business day" shall mean any day when the
Commission's office in Washington, D.C. is open for business.
15. Applicable Law.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Virginia.
16. Captions.
The captions included in this Agreement are included solely for
convenience of reference and shall not be deemed to be a part of this Agreement.
17. Counterparts.
This Agreement may be executed by any one or more of the parties in any
number of counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same instrument.
18. Pronouns.
All pronouns used herein shall be deemed to refer to the masculine,
feminine or neuter gender as the context requires.
-17-
<PAGE>
If the foregoing is in accordance with your understanding, please sign
and return to us two counterparts hereof, and upon the acceptance hereof by you,
this letter and such acceptance hereof shall constitute a binding agreement
between us.
Very truly yours,
MID-ATLANTIC COMMUNITY BANKGROUP,
INC.
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
Accepted as of the date hereof
at Richmond, Virginia:
DAVENPORT & COMPANY LLC
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
-18-
Exhibit 4
[STOCK CERTIFICATE]
[FRONT]
INCORPORATED UNDER THE LAWS OF
VIRGINIA
NUMBER SHARES
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
GLOUCESTER, VIRGINIA 23061
Authorized Common Stock 10,000,000 Shares
This Certifies that _______________________________
is the owner of ___________________________________ Shares of the Common Stock
of
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this __________ day of ___________ A.D.
Dated
SECRETARY PRESIDENT
<PAGE>
[BACK OF STOCK CERTIFICATE]
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Gloucester, Virginia 23061
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ..... Custodian .....
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
Act .........................
JT TEN - as joint tenants with right of (State)
survivorship and not as tenants
in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, __________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING
POSTAL ZIP CODE OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
Attorney
- -----------------------------------------------------------------------
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
- ------------------------- ----------------------------------
Dated Signature
- ------------------------- ----------------------------------
Dated In presence of
Exhibits 5 and 23.1
July __, 1997
Board of Directors
Mid-Atlantic Community BankGroup, Inc.
7171 George Washington Memorial Highway
Gloucester, Virginia 23061
Ladies and Gentlemen:
This letter is in reference to the Registration Statement on Form SB-2,
as amended, (the "Registration Statement") filed by Mid-Atlantic Community
BankGroup, Inc.(the "Company") with the Securities and Exchange Commission (the
"Commission") for the registration under the Securities Act of 1933, as amended
(the "Act"), of 149,500 shares of the Company's common stock, par value $5.00
per share (the "Common Stock"), which shares are proposed to be offered to the
public pursuant to an Underwriting Agreement filed as an exhibit to the
Registration Statement (the "Offering").
We have examined such corporate proceedings, records and documents as
we considered necessary for the purposes of this opinion.
The opinion expressed herein is limited in all respects to the
application of the law of the Commonwealth of Virginia.
Based on the foregoing, and subject to the limitations and
qualifications set forth herein, it is our opinion that the aforementioned
shares of Common Stock, when issued against payment therefor pursuant to the
Offering, will be validly issued, fully paid and non-assessable under the laws
of the Commonwealth of Virginia.
Our opinion is expressed as of the date that shares of Common Stock are
issued pursuant to the Offering against payment therefor, and we do not assume
any obligation to update or supplement our opinion to reflect any fact or
circumstance subsequently arising or any change in law subsequently occurring
after such date. We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement and to the reference to
us under the caption "Legal Opinions" in the Prospectus forming a part of the
Registration Statement.
Very truly yours,
WILLIAMS, MULLEN, CHRISTIAN & DOBBINS
By: ___________________________________
Exhibit 10.1
THIS AGREEMENT, made this 29 day of November, 1988, by and between
Peninsula Trust Bank, party of the first part, herein referred to as "Bank", and
W. J. Farinholt, party of the second part, herein referred to as "Bank Officer".
R E C I T A L S
(a) Bank Officer is employed as President and C.E.O. of
Peninsula Trust Bank and has been instrumental in the planning and organization
of said Bank.
C O V E N A N T S
In consideration of the mutual covenants and undertakings herein set
forth, the parties hereto do agree as follows:
1. Bank Officer shall be entitled to receive from Peninsula Trust
Bank the sum of One Hundred and Fifty Thousand Dollars ($150,000) in the event
the Bank, acting either through its shareholders or its Board of Directors,
sells or disposes of the controlling interest in the corporation to a
conglomerate or bank holding company (as said term is defined in Article I of
Title 6.1 of the Code of Virginia, as amended) with the result that the Bank is
either 50% or more owned or controlled by such entity, provided that the Bank
Officer is at the time of said transaction then employed as the President and
C.E.O. (or equal or higher ranking position) of the Bank and elects to thereupon
terminate his employment and not become re-employed with any such surviving
entity or subsidiary thereof or any affiliate or related company thereof for a
period
<PAGE>
of at least one year after disbursement of such amount above. Such sum of money
shall be in addition to any and all other forms and amounts of compensation to
which the Bank Officer is at that time entitled and paid.
2. Bank Officer shall be entitled to the payment of said
additional compensation, described in Covenant #1 above, either upon demand /
lump sum, or in such increments or installments as he shall request in writing,
periodically over a period not to exceed three (3) years. Such payment shall be
considered a contract right and a part of the Bank Officer's estate in the event
of his death between the time the benefit is earned, accrued, or conferred and
the time the total amount ($150,000) has been paid in full.
3. This agreement does not give Bank Officer any vested right
in any benefit payable by Bank or to continued employment with Bank, except as
may be negotiated by Bank Officer individually with the surviving entity. Bank
Officer shall remain in the employ of the Bank at the discretion of the Board of
Directors of Bank and this agreement shall in no way restrict, limit or impair
the right or privilege of Bank, through its Board of Directors to contract with
Bank Officer concerning employment and to change and modify such terms of
employment or to terminate employment of Bank Officer.
4. Payment of the $150,000 additional compensation stated above
shall be dependent upon the sale price of the Bank being at least equal to one
hundred and seventy-five percent (175%) of or 1-3/4 times the then current "book
value" of the Bank's common stock as
<PAGE>
determined by the independent accounting firm being utilized by the Bank at the
time of such sale of the Bank.
5. As incentive for the Bank Officer to remain in the employ of
the Bank and as protection for the Bank from the Bank Officer leaving the Bank's
employ absent a sale of the Bank as defined above, the Bank Officer covenants
with the Bank that, should he voluntarily leave the employ of the Bank without
there being any such sale of the Bank heretofore described, he will not become
employed with and work in any office of any financial institution (bank, savings
bank, savings and loan association, or credit union) which is located in
Gloucester, Mathews, or Middlesex Counties. This covenant shall become null and
void in the event the Bank is sold as described above.
WITNESS the following signatures and seals as of the day and year first
above written (November Twenty-ninth, Nineteen hundred & Eighty eight).
ATTEST: Peninsula Trust Bank (Bank)
/s/ Kenneth E. Smith By /s/ Joseph A. Lombard, Jr.
- ------------------------------ -------------------------------
/s/ W. J. Farinholt
----------------------------------
W. J. Farinholt (Bank Officer)
Exhibit 10.2
THIS AGREEMENT, made this 29th day of November, 1988, by and between
Peninsula Trust Bank, party of the first part, herein referred to as "Bank", and
Kenneth E. Smith, party of the second part, herein referred to as "Bank
Officer".
R E C I T A L S
(a) Bank Officer is employed as Executive Vice President of
Peninsula Trust Bank and has been instrumental in the planning and organization
of said Bank.
C O V E N A N T S
In consideration of the mutual covenants and undertakings herein set
forth, the parties hereto do agree as follows:
1. Bank Officer shall be entitled to receive from Peninsula Trust
Bank the sum of One Hundred and Fifty Thousand Dollars ($150,000) in the event
the Bank, acting either through its shareholders or its Board of Directors,
sells or disposes of the controlling interest in the corporation to a
conglomerate or bank holding company (as said term is defined in Article I of
Title 6.1 of the Code of Virginia, as amended) with the result that the Bank is
either 50% or more owned or controlled by such entity, provided that the Bank
Officer is at the time of said transaction then employed as the Executive Vice
President (or equal or higher ranking position) of the Bank and elects to
thereupon terminate his employment and not become re-employed with any such
surviving entity or subsidiary thereof or any affiliate or related company
thereof for a
<PAGE>
period of at least one year after disbursement of such amount above. Such sum of
money described herein shall be in addition to any and all other forms and
amounts of compensation to which the Bank Officer is at that time entitled and
paid.
2. Bank Officer shall be entitled to the payment of said
additional compensation, described in Covenant #1 above, either upon demand /
lump sum, or in such increments or installments, as he shall request in writing,
periodically over a period not to exceed three (3) years. Such payment shall be
considered a contract right and a part of the Bank Officer's estate in the event
of his death between the time the benefit is earned, accrued, or conferred and
the time the total amount ($150,000) has been paid in full.
3. This agreement does not give Bank Officer any vested right in
any benefit payable by Bank or to continued employment with Bank, except as may
be negotiated by Bank Officer individually with surviving entity. Bank Officer
shall remain in the employ of the Bank at the discretion of the Board of
Directors of Bank and this agreement shall in no way restrict, limit or impair
the right or privilege of Bank, through its Board of Directors to contract with
Bank Officer concerning employment and to change and modify such terms of
employment or to terminate employment of Bank Officer.
4. Payment of the $150,000 additional compensation stated above
shall be dependent upon the sale price of the Bank being at least equal to one
hundred and seventy-five percent (175%) of or 1-3/4 times the then current "book
value" of the Bank's common stock as
<PAGE>
determined by the independent accounting firm being utilized by the Bank at the
time of such sale of the Bank.
5. As incentive for the Bank Officer to remain in the employ
of the Bank and as protection for the Bank from the Bank Officer leaving the
Bank's employ absent a sale of the Bank as defined above, the Bank Officer
covenants with the Bank that, should he voluntarily leave the employ of the Bank
without there being any such sale of the Bank heretofore described, he will not
become employed with and work in any office of any financial institution (bank,
savings bank, or savings and loan association) which is located in Gloucester,
Mathews, or Middlesex Counties. This covenant shall become null and void in the
event the Bank is sold as described above.
WITNESS the following signatures and seals as of the day and year first
above written (November 29, 1988).
ATTEST: Peninsula Trust Bank (Bank)
/s/ W. J. Farinholt By /s/ Joseph A. Lombard, Jr.
- ------------------------------ ----------------------------
/s/ Kenneth E. Smith
-------------------------------
Kenneth E. Smith (Bank Officer)
Exhibit 11
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Statement re: computation of per share earnings
-----------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 944,333 944,333 774,321 612,081 582,628 470,187
Net effect of dilutive stock
options--based on the
treasury stock method using
average market price 32,978 31,153 20,055 12,708 10,107 6,611
------ ------ ------ ------ ------ -----
Total 977,311 975,486 794,376 624,789 592,735 476,798
======= ======= ======= ======= ======= =======
Net Income $415,334 $1,533,934 $1,023,149 $752,133 $336,274 $212,271
======== ========== ========== ======== ======== ========
Per Share Amount $0.42 $1.57 $1.29 $1.20 $0.57 $0.45
===== ===== ===== ===== ===== =====
FULLY DILUTED
Average shares outstanding 944,333 944,333 774,321 612,081 582,628 470,187
Net effect of dilutive stock
options--based on the
treasury stock method using
the year end market price,
if higher than average
market price 35,158 33,763 26,487 15,540 12,103 8,406
------ ------ ------ ------ ------ -----
Total 979,491 978,096 800,808 627,621 594,731 478,593
======= ======= ======= ======= ======= =======
Net Income $415,334 $1,533,934 $1,023,149 $752,133 $336,274 $212,271
======== ========== ========== ======== ======== ========
Per Share Amount $0.42 $1.57 $1.28 $1.20 $0.57 $0.44
===== ===== ===== ===== ===== =====
</TABLE>
Exhibit 23.2
[SMITH & EGGLESTON, P.C.]
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Mid-Atlantic Community BankGroup, Inc.
Gloucester, Virginia
We hereby consent to the use of our report, dated February 13, 1997,
relating to the consolidated financial statements and schedules of Mid-Atlantic
Community BankGroup, Inc., in the Prospectus constituting a part of this
Registration Statement on Form SB-2 and to the reference to our firm under the
heading "Experts" in such Prospectus.
/s/ Smith & Eggleston, P.C.
Richmond, Virginia
July 11, 1997
