SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-21285
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
VIRGINIA 54-1809409
- - ------------------------------------ ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
7171 George Washington Memorial Highway
Gloucester, Virginia 23061
-------------------------------------
(Address of Principal Executive Offices)
(804) 693-0628
------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
- - --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X . No ___.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of September 30, 1998.
Common stock, $5 par value--2,198,900
-------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
MID-ATLANTIC COMMUNITY BANKGROUP, INC. Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets--
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income-- 4
Nine months ended September 30, 1998 and 1997
Three months ended September 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity-- 5
Nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows-- 6
Nine months ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part II. Other Information:
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 5,760 $ 6,960
Securities available for sale (at market value) 30,755 24,104
Securities held to maturity (market value
$8,845 in 1998 and $7,381 in 1997) 8,694 7,290
Federal funds sold 10,111 8,414
Loans, net 118,156 104,240
Premises and equipment 8,410 5,928
Other real estate owned 374 208
Other assets 3,420 2,161
------------- ------------
TOTAL ASSETS $ 185,680 $ 159,305
============= ============
LIABILITIES:
Deposits
Demand $ 25,864 $ 18,791
Interest-bearing demand 26,022 25,673
Savings 18,358 15,758
Certificates of deposit, $100,000 or more 19,168 13,528
Other Time 73,809 64,673
------------- -------------
TOTAL DEPOSITS 163,221 138,423
Short-term debt 286 292
Long-term debt 49 31
Other liabilities 1,033 1,282
------------- -------------
TOTAL LIABILITIES 164,589 140,028
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, par value $5 per share,
10,000,000 shares authorized, 2,198,900
shares issued in 1998 and 1,093,833 in 1997 10,995 5,477
Surplus 4,026 9,294
Undivided profits 5,857 4,453
Accumulated other comprehensive income, net 213 53
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 21,091 19,277
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 185,680 $ 159,305
============= =============
</TABLE>
Notes to financial statements are an integral part of these statements.
3
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans and Fees $ 3089 $ 2631 $ 8861 $ 7592
Federal Funds Sold 172 181 426 281
Investment Securities 607 506 1802 1527
------- ------- ------- -------
Total Interest Income 3868 3318 11089 9400
INTEREST EXPENSE:
Demand Deposits 219 202 679 587
Savings Deposits 133 115 366 329
Certificates of Deposit, $100,000 or more 252 180 668 471
Other Time Deposits 1042 892 2961 2497
Short-term Debt 2 2 7 7
Long-term Debt 1 1 1 2
-------- ------- ------- -------
Total Interest Expense 1649 1392 4682 3893
-------- ------- ------- -------
Net Interest Income 2219 1926 6407 5507
PROVISION FOR
LOAN AND LEASE LOSSES 80 117 313 327
-------- ------- ------- -------
Net Interest Income After
Provision for Loan and Lease Losses 2139 1809 6094 5180
OTHER INCOME:
Service Charges on Deposit Accounts 182 152 567 443
Other Service Charges & Fees 90 56 233 156
Securities Gains (Losses) 0 0 1 2
-------- -------- ------- -------
Total Other Income 272 208 801 601
OTHER EXPENSES:
Salaries & Employee Benefits 883 731 2464 2094
Occupancy Expenses 181 133 441 356
Furniture & Equipment Expenses 238 168 644 537
Other Operating Expenses 528 385 1284 1112
-------- -------- ------- -------
Total Other Expenses 1830 1417 4833 4099
-------- -------- ------- -------
Income Before Income Taxes 581 600 2062 1682
Applicable Income Taxes 183 184 658 502
-------- -------- ------- -------
Net Income $ 398 $ 416 $ 1404 $ 1180
======== ======== ======= =======
NET INCOME PER SHARE .17 .19 .61 .58
======== ======== ======= =======
</TABLE>
Notes to financial statements are an integral part of these statements.
4
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital
Total Income Earnings Income Stock Surplus
<S> <C> <C> <C> <C> <C> <C>
Balances - January 1, 1997 $14,431 $ 3,170 ($162) $ 4,722 $ 6,701
Comprehensive income:
Net income 1,180 $ 1,180 1,180
Other comprehensive income,
net of tax:
Unrealized gain on
securities available for sale
Unrealized holding gain
arising during the period 179 179
Less: reclassification
adjustment 2 2
-------- -------
Other comprehensive income,
net of tax 177 177 177
-------- ------- -------
Total comprehensive income 1,357 $ 1,357 ($15)
-------- ======= ------- ======= ------- -------
Issuance of common stock 3,348 755 2,593
Balances - September 30, 1997 $ 19,136 $ 4,350 $ 5,477 $ 9,294
======== ======= ======= =======
Balances - January 1, 1998 $ 19,277 $ 4,453 $ 53 $ 5,477 $ 9,294
Comprehensive income:
Net income 1,404 $ 1,404 1,404
Other comprehensive income,
net of tax:
Unrealized gain on securities
for sale
Unrealized holding gain arising
during the period 161 161
Less: reclassification
adjustment 1 1
-------- -------
Other comprehensive income,
net of tax 160 160 160
-------- ------- -------
Total comprehensive income $ 1,564 $ 1,564
-------- =======
Issuance of common stock -
stock split effected in the form
of 100% stock dividend 5,490 (5,490)
Issuance of common stock -
Johnson Mortgage Co. 250 28 222
-------- ------- -------- ------- -------
Balances - September 30, 1998 $ 21,091 $ 5,857 $ 213 $10,995 $ 4,026
======== ======= ======== ======= =======
</TABLE>
Notes to financial statements are an integral part of these statements.
5
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,404 $ 1,180
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 364 227
Provision for loan losses 313 327
Amortization of premiums on investments (net) 42 --
(Profits) on sale of securities available for sale (1) (2)
Changes in operating assets and liabilities:
(Increase) in other assets (1,183) (617)
(Decrease) in other liabilities (249) (235)
---------- ---------
Net Cash Provided by Operating Activities $ 690 $ 880
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans ($14,229) ($9,650)
Purchase of securities available for sale (12,338) (1,894)
Proceeds from sales of securities available for sale 200 1,593
Purchase of investment securities (5,301) (1,853)
Net (increase) in federal funds sold (1,697) (5,620)
Purchase of premises and equipment (2,846) (850)
---------- ---------
Proceeds from maturities of securities available for sale 5,613 --
Proceeds from maturities of securities held to maturity 3,898 --
Net Cash (Used in) Investing Activities ($26,700) ($18,274)
========== =========
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net $ 24,798 $ 13,532
Proceeds from issuance of stock - net -- 3,348
Curtailment of other borrowed funds (6) (82)
Advances from borrowed funds 18 --
---------- ---------
Net Cash Provided by Financing Activities $ 24,810 $ 16,798
---------- ---------
Net (Decrease) In Cash and Due From Banks (1,200) (596)
CASH AND DUE FROM BANKS - BEGINNING OF PERIOD 6,960 6,015
---------- ---------
CASH AND DUE FROM BANKS - END OF PERIOD $ 5,760 $ 5,419
========== =========
</TABLE>
Notes to financial statements are an integral part of these statements.
6
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The consolidated statements include the accounts of Mid-Atlantic Community
BankGroup, Inc. and its subsidiaries, Peninsula Trust Bank, Incorporated
and Johnson Mortgage Company, LLC. All significant intercompany balances
and transactions have been eliminated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial positions as of September 30, 1998 and
December 31, 1997, and the results of operations and cash flows for the
nine months ended September 30, 1998 and 1997.
The results of operations for the nine months ended September 30, 1998 and
1997 are not necessarily indicative of the results to be expected for the
full year.
2. Investment Securities
Amortized cost and carrying amount (estimated fair value) of securities
available for sale are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Treasury Securities 622 6 -- 628
US Government Agencies & Corporations 13,601 97 24 13,674
Obligations of States & Political Subdivisions 6,495 152 11 6,636
Mortgage-backed Securities 8,827 92 -- 8,919
Federal Reserve Bank Stock 343 -- -- 343
Other Equity Securities 545 10 -- 555
---------- -------- -------- ---------
$ 30,408 $ 357 $ 35 $ 30,755
========== ======== ======== =========
</TABLE>
Amortized cost and carrying amount (estimated fair value) of securities
held to maturity are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Government Agencies & Corporations 4,364 57 -- 4,421
Obligations of States & Political Subdivisions 1,910 77 11 1,976
Mortgage-backed Securities 2,420 28 -- 2,448
---------- -------- -------- ---------
$ 8,694 $ 162 $ 11 $ 8,845
========== ======== ======== =========
</TABLE>
7
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Securities available for sale at December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Treasury Securities 632 -- 3 629
US Government Agencies & Corporations 10,301 84 4 10,381
Obligations of States & Political Subdivisions 4,946 90 80 4,956
Mortgage-backed Securities 7,743 40 46 7,737
Federal Reserve Bank Stock 343 -- -- 343
Other Equity Securities 57 -- -- 57
--------- --------- -------- --------
$ 24,024 $ 215 $ 135 $ 24,104
========= ========= ======== ========
</TABLE>
Securities held to maturity at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Government Agencies & Corporations 3,035 23 -- 3,058
Obligations of States & Political Subdivisions 1,682 52 -- 1,734
Mortgage-backed Securities 2,573 16 -- 2,589
--------- --------- -------- --------
$ 7,290 $ 91 $ -- $ 7,381
========= ========= ======== ========
</TABLE>
Nine Months Ended
September 30, 1998
1998 1997
(In Thousands of Dollars)
Gross proceeds from sales of securities 200 1,962
========== =========
Gross Gains on Sale of Securities 1 2
Gross Losses on Sale of Securities -- --
---------- ---------
Net Securities Gains 1 2
========== =========
8
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Loans
The following is a summary of loans outstanding at the end of the periods
indicated:
September 30, December 31,
1998 1997
------------ ------------
(In Thousands of Dollars)
Commercial Mortgage $ 24,331 $ 23,135
Residential Mortgage 31,578 28,987
Home Equity 12,719 10,905
Construction 8,911 6,059
Commercial 14,920 12,477
Installment 27,067 23,926
All Other 661 617
----------- -----------
120,187 106,106
Less Unearned Income 537 542
----------- -----------
119,650 105,564
Less Allowance for Loan and Lease Losses 1,494 1,324
----------- -----------
$ 118,156 $ 104,240
=========== ===========
The following schedule summarizes the changes in the allowance for loan
and lease losses:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30, December 31,
1998 1997 1997
------------- ------------- ------------
(In Thousands of Dollars)
<S> <C> <C> <C>
Balance, Beginning 1,324 1,112 1,112
Provision Charged Against Income 313 327 347
Recoveries 42 46 55
Loans Charged Off (185) (146) (190)
------------- ------------- ------------
Balance, Ending $ 1,494 $ 1,339 $ 1,324
============= ============= ============
</TABLE>
Nonperforming assets consist of the following:
September 30, December 31,
1998 1997
------------- ------------
(In Thousands of Dollars)
Nonaccrual Loans $ 583 $ 302
Restructured Loans -- --
------------- ------------
Nonperforming Loans 583 302
Foreclosed Properties 374 208
------------- ------------
Nonperforming Assets $ 957 $ 510
============= ============
Total loans past due 90 days or more and still accruing were $338 on
September 30, 1998 and $77 on December 31, 1997.
9
<PAGE>
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of
shares of diluted potential common stock income available to common
shareholders.
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic Earnings Per Share 2,195,238 $ .64 1,954,524 $ .60
Effect of dilutive securities:
Nonemployee directors' stock options 45,166 36,118
Employee incentive stock options 52,719 32,327
--------- ---------
Diluted Earnings Per Share 2,293,123 $ .61 2,022,969 $ .58
========= ======= ========= =======
</TABLE>
5. Capital Requirements
A comparison of the Company's capital as of September 30, 1998 with the
minimum requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier I Risk-based Capital 15.77 % 4.00 %
Total Risk-based Capital 16.92 % 8.00 %
Leverage Ratio 11.29 % 4.00 %
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of Mid-Atlantic Community
BankGroup, Inc. (the "Company") as of the dates and for the periods indicated.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto and other financial data appearing
elsewhere in this report. The consolidated financial statements include the
accounts of the Company and its subsidiaries, Peninsula Trust Bank, Incorporated
(the "Bank") and Johnson Mortgage Company, LLC ("JMC").
Results of Operations
The Company experienced moderate balance sheet expansion during the third
quarter of 1998, with total assets increasing $4.3 million, or 2.4% over June
30, 1998, and $26.4 million, or 16.6% over December 31, 1997. Growth was funded
from new deposits, which reflected $3.7 million and $24.8 million increases for
the three months and nine months ended September 30, 1998, respectively. As the
interest rate environment began to soften, with a mood toward falling rates and
predictions of the Federal Reserve targeting lower short-term rates over the
near term, management became less aggressive on pricing consumer CDs during the
third quarter of 1998. The Company considered its liquidity position to be
adequate to allow renewing CDs to be redeemed rather than meet competition from
non-financial sources.
Loan demand somewhat mirrored the moderate growth in deposits during the third
quarter, evidenced by net loans increasing $4.5 million (3.9%) and $13.4 million
(13.3%), respectively, over June 30, 1998 and December 31, 1997.
Asset quality continues to be strong. Total loans past due 30 days or more
equaled $4.0 million (3.31% of total outstandings). Included in the 30 day total
are $338,000 in loans that are 90 days or more past due and still accruing
interest. Non-accrual loans totaled $583,000 at September 30, 1998, which
represented 0.49% of total outstanding loans and 39.0% of the loan loss reserve.
Foreclosed properties totaled $374,000 at September 30, 1998. The provision for
loan losses was $80,000 in the third quarter of 1998 and $313,000 in the first
nine months of 1998. Gross charge-offs for the quarter were $70,000, while total
recoveries were $21,000.
The Company maintained its practice during the third quarter of selling Federal
funds, having sold continuously on a daily basis in amounts averaging $12.4
million, 6.87% of average total assets. These figures compare to $8.8 million
and 5.13%, respectively, for the second quarter of 1998. The quarter-end balance
of $10.1 million represented a $.5 million increase from the second quarter of
1998 and a $1.7 million increase from December 31, 1997.
The level of the investment account increased $2.9 million during the third
quarter of 1998, ending the period at $39.4 million or 21.2% of total assets.
The portfolio is comprised of 2% US Treasuries, 74% US Government Agencies, 22%
State, County and Municipal governments, and 2% other equity securities and
Federal Reserve Bank Stock.
Financial Accounting Standards Board (FASB) Statement 115 stipulated the way in
which banks must classify and account for their securities portfolio, beginning
with the first quarter of 1994. Securities are classified as Investment
Securities when management has both the intent and the ability at the time of
purchase to hold the securities until maturity. Investment Securities are
carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities that are held for an indefinite period of time are
classified as Securities Available for Sale and are marked to market at each
financial reporting date, or at each month-end. Securities Available for Sale
include securities that may be sold in response to changes in interest rates,
changes in the security's prepayment risk, increases in loan demand, general
liquidity needs and other similar factors.
11
<PAGE>
The Company elected, as of year-end 1995, to classify the entire portfolio as
"available for sale". In an effort to manage the fluctuation in the "net
unrealized gains/losses", the Company elected to reclassify $5.1 million of the
portfolio as "held to maturity" as of July 31, 1997, resulting in a one-time
capital adjustment for the gain. These reclassified bonds have longer final
maturities but, due their respective call structures, exhibit more price
volatility with subtle changes in overall interest rates. Also, the need for
such bonds to be used for liquidity purposes is considered remote. The Company
purchased an additional $9.0 million and $6.1 million, during the first nine
months of 1998, that were classified as available for sale and held to maturity,
respectively.
Management currently uses various tools for the measurement of three critical
elements in portfolio management: interest rate risk, call and/or extension risk
and maturity distribution. With better tools to monitor duration, long-term
earnings performance of the portfolio is expected to demonstrate improved
stability over varying interest rate cycles. These parameters will also draw a
tighter relationship between effective modified duration (EMD) and bond
convexity. Convexity measures the percentage amount of portfolio price
appreciation if interest rates fall 1% relative to the percentage of price
depreciation if interest rates rise 1%. The more that a bond declines relative
to its depreciation, the higher the negative convexity, and consequently the
more potential call and extension risk that that bond is likely to have.
The Company has attempted to narrow the bands of extremes in the investment
portfolio's performance acknowledging that some earnings opportunities must be
allowed to pass in the interest of minimizing extreme losses during volatile
interest environments. The current falling rate environment has caused increased
prepayment speeds in the Company's mortgage-backed securities as well as
accelerating call activity in the callable US Government Agency bonds. As a
result in a shift in buying philosophy combined with the calls and increased
prepayments, management has been able to somewhat restructure the portfolio and
accomplish its targeted convexity level mentioned above. The negative convexity
as of September 30, 1998 was .73, approaching management's target of .70 and
down significantly from the negative 1.40 level one year ago. The composition of
the portfolio has shifted from a mix of more than 50% of the portfolio in
callable agencies during the first half of 1997 to its current level of 35% as
of September 30, 1998. Management considers this shift in keeping with its
desire to stabilize both interest earnings and market value performance.
The Company actively monitors principal cash flow analysis within the investment
portfolio relative to both current interest rate levels and the projected impact
of 1% increases and decreases in overall interest rate levels. This analysis
takes into account the impact of interest rates on the probability that call
features will be exercised and that prepayment speeds of mortgage backed
securities will either speed up or slow down. This analysis better equips
management to project the expected maturity of a bond versus the contract
maturity. It also allows management to more effectively plan reinvestment
opportunities of principal cash flows.
Deposits represent 99.2% of total liabilities of the Company, including
non-interest bearing checking accounts, which represent 15.8% of total deposits.
Earnings
Net income for the third quarter of 1998 totaled $398,000, compared to $502,000
for the second quarter of 1998 and $416,000 for the third quarter of 1997. The
third quarter reflected substantial expenses associated with branch expansion
and activities relating to the proposed merger with United Community Bankshares,
Inc. ("UCB"). Year to date income for the nine months ended September 30, 1998
was $1,404,000, or a 19% increase over the same period in 1997. On a per share
basis, earnings for the quarter were $ .17 compared to $ .19 for the same
quarter in 1997. Exclusive of after tax merger-related expenses approximating
$70,000, earnings for the third quarter of 1998 were $ .20 per share, a 5.3%
increase over the same period in 1997. Year to date per share income equaled $
.61 versus $ .58 for the same period in
12
<PAGE>
1997. Excluding year to date after tax merger-related expenses, earnings for the
nine months ended September 30, 1998 were $ .65 per share, a 12.1% increase over
the first nine months of 1997. It is important to note that earnings per share
were impacted not only by the increased expenses noted above, but also by the
issuance of 299,000 additional shares in the Company's public offering of common
stock during the third quarter of 1997. This issuance caused weighted average
shares outstanding to reflect a 6.6% increase for quarter over quarter
comparison and a 13.4% increase for the respective nine-month periods.
Net interest income for the third quarter of 1998 totaled $2,219,000 (a 15.2%
increase over the similar period in 1997). The net interest margin experienced
modest contraction as the average yield on interest earning assets declined by 7
basis points during a time when the average rate on interest bearing liabilities
increased by 6 basis points. As a result, the 16.6% increase in interest income
for the third quarter of 1998 compared to third quarter of 1997 was offset by a
18.5% increase in interest expense for the same period.
Non-interest expense for the third quarter totaled $1.8 million, compared to
$1.6 million in the second quarter of 1998 and $1.4 million for the third
quarter of 1997. The increase in non-interest expense resulted from costs
incurred in connection with the acquisition and conversion of the Company's
sixth banking office, the implementation of an image processing system in the
Bank, the computer conversion of the Bank of Sussex and Surry, a subsidiary of
UCB, to the Company's Data Processing Center in association with the proposed
merger with UCB and various other merger-related activities such as regulatory
application and proxy statement preparation. The Company also hired and trained
staff in preparation of the October 22, 1998 opening of a seventh banking office
in the Kingsmill area of Williamsburg. Substantial planning has also occurred
for a fourth quarter computer conversion of the Bank of Franklin, also a
subsidiary of UCB, as a part of the merger-related activities.
Capital and Liquidity
Equity capital at September 30, 1998 totaled $21.1 million, representing 11.4%
of total assets. This level of capital will position the Company for growth well
into the future and could support asset growth to more than $265 million.
Liquidity is provided by both excess funds in the form of Federal funds sold and
access to the Federal funds market through the purchase of Federal funds from
correspondent banks. The Bank maintains lines of credit to purchase Federal
funds totaling $5.4 million. Federal funds sold of $10.1 million equaled 19.5%
of total demand deposits at September 30, 1998. This percentage compares to
27.0% at September 30, 1997. While Federal funds sold declined as a source of
liquidity relative to demand deposits, management closely monitors principal
cash flows within the investment portfolio as discussed above. Within the next
90 days, the investment portfolio will produce $1.8 million through called
securities with an additional estimate of $3 million in principal paydowns
and/or maturities. Total projected cash flows from the investment portfolio
during the next six months will approximate $10 million. This is considered an
adequate level of liquidity to meet anticipated deposit withdrawals and expected
loan demand.
As mentioned above, future purchases in the investment portfolio will more
clearly delineate those bonds purchased for liquidity purposes. These
instruments will be purchased with greater attention to minimizing potential
price and market value volatility.
Future Plans
Completion of the third floor of the Newport News office, located at the corner
of Thimble Shoals Boulevard and J. Clyde Morris Boulevard near the entrance to
the Oyster Point Industrial Park, is expected to begin during the fourth quarter
of 1998. The Company's headquarters will be
13
<PAGE>
housed in this location. Construction costs for the completion of the third
floor of the building are expected to approximate $50,000.
The Company plans to establish a branch office in Gloucester Point, Virginia to
complement its Main Office and Newport News office. In December 1997 and May
1998, the Bank purchased for $252,000 two parcels of property, including two
houses, on Route 17 in Gloucester Point. The Bank anticipates relocating the
houses prior to beginning construction of the banking office in 1999.
Year 2000 Issue
The Bank utilizes and is dependent upon data processing systems and software to
conduct its business. The data processing systems include various software
packages licensed to the Bank by outside vendors and a mainframe processing
system, which are run on in-house computer networks. All of these systems are
vulnerable to the Year 2000 (Y2K) issue. The Company's Board of Directors has
addressed the Y2K issue and identified the seriousness of the challenge. The
Directors receive routine reports from management of the Company to enable them
to monitor the Company's progress in its preparation for Y2K readiness. The
Board has passed a resolution authorizing management to commit the full
financial and human resources of the Company to achieve satisfactory Y2K
readiness with a minimum of disruption to ordinary operations. The Company's Y2K
coordinator, who was hired in 1997, commits approximately 75% of her schedule to
the Y2K project. In addition, a Y2K project team was formed and meets regularly
to review and ensure consistent progress in moving toward Y2K readiness.
In 1997, the Bank initiated a review and assessment of all hardware and software
to confirm that it will function properly in the year 2000. The Company
inventoried more than 70 applications on which it relies for its routine
operations. The degree of reliance was evaluated, with each application being
identified as either mission critical, mission necessary or mission desirable.
An application was deemed mission critical if it is vital to the successful
continuation of a core business activity. The Federal Financial Institutions
Examination Council (FFIEC) has issued several inter-agency statements providing
guidance and/or requirements of all financial institutions. Included in this
guidance was an emphasis that mission critical applications be identified and
related priorities be set by the end of the third quarter of 1998. Based on this
regulatory guidance, the Company's inventory process identified twelve mission
critical applications, all of which are associated with information technology
(IT). There were no non-IT systems identified as mission critical. Such systems
might include elevators or other equipment with embedded microcontrollers that
may be century date sensitive. The Company currently has only two elevators
throughout its branching network. In each of these locations, all business
activities can be conducted in the event that the elevators are rendered
inoperable. Other non-IT systems include electricity and telephone line
communications. Both of these are necessary for daily operations but are
considered to be beyond the Company's control to facilitate Y2K readiness. The
Company is communicating with the providers of these services to monitor their
progress toward Y2K readiness. The Company possesses and routinely tests a
gasoline-powered generator for temporary electrical power for its primary
computer room operations. This form of backup power provides limited business
continuation features to the Company in the area of processing customer
information in its core data processing package. Therefore, the Company believes
that the integrity of critical customer information will be protected.
Based on the assessment described above, the Bank's mainframe hardware and
banking software are currently Y2K compliant. However, testing is scheduled for
the fourth quarter of 1998 and early 1999 to confirm this compliance. The
Company's core data processing package is currently installed in more than 200
banks across the country. The vendor of this software has completed their
testing of the software and distributed the software release to provide for Y2K
compliance. However, the vendor is also facilitating a process for independent
user group testing in order for the user banks to test their live customer data
files in a non-production test environment. The Company was one of the users
selected for the user group testing. This test
14
<PAGE>
will be conducted in December 1998. Total estimated cost to the Company
including the vendor's certification, third party certification of the vendor's
testing, user group testing and third party certification of the latter's test
is less than $10,000. For certain other systems, the Company has determined that
it will have to replace or modify certain pieces of hardware and/or software so
that the systems will properly function in the year 2000. The third party
vendors of these systems have been contacted and have indicated that the
hardware and/or software will be Y2K compliant. Modifications and/or
replacements depend on the individual vendor and their respective products.
The Company utilizes an extensive network of personal computers (PCs) in its
daily operations. With the rapid changes in technology in the past 10 years, the
Company adopted a philosophy more than five years ago that acknowledged that the
average useful life of PCs was in the three-to four-year time range. Having
embraced this philosophy previously, replacement of PCs is a part of routine
hardware planning. Currently, approximately 30% of the Company's PCs are viewed
as nearing the end of their useful life even absent any Y2K considerations.
Management has identified approximately 20% of its PCs in addition to the above
stated 30% as requiring upgrades or replacement to make them Y2K capable. At an
average cost of $2,200 per work station, this renovation/replacement process
could result in a capital outlay approaching $50,000. This would result, on a
standard depreciation basis, in an increase of approximately $17,000 per year
over and above ordinary hardware replacement expense. Management considers that
its total requirement in hardware expenditure associated with Y2K readiness will
not have a significant negative effect on the Company's total earning
performance.
The Company has implemented a process by which all significant loan and deposit
customers will be contacted to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Y2K issue. Loan
officers have received training to include a Y2K understanding in the credit
decision making process. Existing borrowers have been evaluated to determine the
risk that Y2K poses to their respective cash flow capacities or other related
factors that may impact their ability to repay their loans. The Company is also
working with borrowers who have current line of credit commitments to properly
plan for the liquidity requirements of the Company to fund greater than normal
line of credit draw requests. In this same vein, deposit customers are being
evaluated to produce some basis for projecting possible interruption to daily
deposit inflows. While the Company does not intend to abandon meeting the credit
needs of its community, it has adopted a more conservative position in its
lending associated with overall liquidity planning as well as credit evaluation
of borrowing requests. Also in the interest of liquidity, the Company will be
more aggressive in its pricing of certificates of deposit with maturities that
extend beyond the Year 2000. This position should reduce the possibility of
deposit runoff during the fourth quarter of 1999 and first quarter of the year
2000.
The Company plans to complete the majority of the Y2K project by the second
quarter of 1999. Expenditures are not expected to have a large material effect
on the Company's consolidated financial statements. The following tables present
the Company's overall progress of its mission critical applications.
15
<PAGE>
Year 2000 Plan - Planned Number of Mission Critical Applications In Each Phase
<TABLE>
<CAPTION>
Year 2000 Plan
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Phase 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
- - --------------------------------------------------------------------------------------------------------------
Awareness - - - - - - - - -
- - --------------------------------------------------------------------------------------------------------------
Assessment 9 6 2 1 - - - - -
- - --------------------------------------------------------------------------------------------------------------
Renovation 3 6 7 8 5 - - - -
- - --------------------------------------------------------------------------------------------------------------
Validation - - 3 3 7 9 3 - -
- - --------------------------------------------------------------------------------------------------------------
Implementation - - - - - 3 9 12 12
- - --------------------------------------------------------------------------------------------------------------
TOTAL 12 12 12 12 12 12 12 12 12
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
Year 2000 Plan - Planned Percentage of Completion by Phase
<TABLE>
<CAPTION>
Year 2000 Plan
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Phase 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
- - --------------------------------------------------------------------------------------------------------------
Awareness - - - - - - - - -
- - --------------------------------------------------------------------------------------------------------------
Assessment 75 50 17 8 - - - - -
- - --------------------------------------------------------------------------------------------------------------
Renovation 25 50 58 67 42 75 - - -
- - --------------------------------------------------------------------------------------------------------------
Validation - - 25 25 58 25 25 - -
- - --------------------------------------------------------------------------------------------------------------
Implementation - - - - - - 75 100 100
- - --------------------------------------------------------------------------------------------------------------
TOTAL 100 100 100 100 100 100 100 100 100
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has established a series of trigger dates associated with core
application products that govern primarily the customer loan and deposit data
bases. These applications address production of new and renewal loan and deposit
accounts as well as maintenance of ongoing customer relationships. The trigger
dates start November 30, 1998 and conclude on February 28, 1999. Through the
various testing methods that management has selected to validate the readiness
of these applications, management will determine on these trigger dates whether
to begin negotiations with alternate vendors of the applications that are not
Y2K ready of to explore alternative solutions with existing vendors.
The expected costs of the project and the date on which the Company plans to
complete the Y2K modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel trained in this area, the ability of third
party vendors to correct their software and hardware, the ability of significant
customers to remedy their Y2K issues, and similar uncertainties. Management does
not anticipate that the total cost directly associated with the Y2K project will
exceed $100,000 (approximately 5% of projected 1999 net income).
New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued a Statement of
Financial Accounting Standards No. 132, "Employers Disclosure about Pensions and
Other Post Retirement Benefits". This Statement revises employers' disclosure
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. This Statement standardizes the
disclosure requirements for pensions and other postretirement
-16-
<PAGE>
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. Restatement of
disclosures for earlier periods is required. This Statement is effective for the
Company's financial statements for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This Statement is not expected to have a material impact
on the Company's financial statements. This Statement is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged. The
Company will adopt this accounting standard as required by January 1, 2000.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Development or Obtained for Internal Use". This SOP provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. This SOP requires that entities capitalize certain
internal-use software costs once certain criteria are met. This SOP is not
expected to have a material impact on the Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities", which requires the costs of start-up activities and organization
costs to be expensed as incurred. This SOP is effective for the fiscal year 1999
financial statements. This SOP is not expected to have a material impact on the
Company's financial statements.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full of general purpose financial
statements. Financial statements for prior periods have been restated as
required.
Forward-Looking Statements
Certain information contained in this discussion may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally identified by phrases such as
"the Company expects," "the Company believes" or words of similar import. Such
forward-looking statements involve known and unknown risks including, but not
limited to, changes in general economic and business conditions, interest rate
fluctuations, competition within and from outside the banking industry, new
products and services in the banking industry, risk inherent in making loans
such as repayment risks and fluctuating collateral values, problems with
technology utilized by the Company, changing trends in customer profiles and
changes in laws and regulations applicable to the Company. Although the Company
believes that its expectations with respect to the forward-looking statements
are based upon reliable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results,
performance or achievements of the Company will not differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule (filed electronically only)
b) Reports on Form 8-K - None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Date: November 13, 1998 BY /s/ W. J. Farinholt
---------------------------------------
W. J. Farinholt, President & CEO
Date: November 13, 1998 BY /s/ Kenneth E. Smith
---------------------------------------
Kenneth E. Smith, Exec. Vice President
& Chief Financial Officer
Date: November 13, 1998 BY /s/ Kathleen C. Healy
---------------------------------------
Kathleen C. Healy, Vice President &
Chief Accounting Officer
19
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,760
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<FED-FUNDS-SOLD> 10,111
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<TOTAL-ASSETS> 185,680
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<SHORT-TERM> 286
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0
0
<COMMON> 10,995
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<TOTAL-LIABILITIES-AND-EQUITY> 185,680
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