================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 8-K/A
AMENDMENT NO. 1
TO
CURRENT REPORT
ON
FORM 8-K
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: December 1, 1998
(Date of earliest event reported)
ATLANTIC FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Virginia 0-21285 54-1809409
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
7171 George Washington Mem. Hwy.
Gloucester, Virginia 23061
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(804) 693-0628
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On December 1, 1998, Atlantic Financial Corp., formerly known as
Mid-Atlantic Community BankGroup, Inc. (the "Company"), and United Community
Bankshares, Inc. ("UCB") consummated the merger of UCB with and into the Company
(the "Merger") pursuant to an Agreement and Plan of Reorganization, dated as of
July 8, 1998 between the Company and UCB and a related Plan of Merger. Pursuant
to the Merger, each outstanding share of UCB's common stock, par value $1.00 per
share ("UCB Common Stock"), other than shares as to which dissenters' rights
have been duly exercised, was converted into 1.075 shares of the Company's
common stock, par value $5.00 per share ("Company Common Stock"), and cash in
lieu of fractional shares. In addition, all rights to acquire UCB Common Stock
pursuant to stock options granted by UCB under UCB's stock option plans were
converted into options for Company Common Stock.
As a result of the Merger, The Bank of Franklin and The Bank of Sussex
and Surry, the former subsidiaries of UCB, became wholly owned subsidiaries of
the Company. In addition, in connection with the Merger, the Company changed its
name from "Mid-Atlantic Community BankGroup, Inc." to "Atlantic Financial Corp."
effective as of December 1, 1998.
For a more detailed description of the Merger, see the Joint Proxy
Statement of the Company contained in the Company's Registration Statement on
Form S-4 (File No. 333-62997), dated September 4, 1998, which is incorporated
herein by reference (the "Registration Statement").
Effective December 1, 1998, shares of Company Common Stock began
trading on the Nasdaq SmallCap Market ("Nasdaq") under the symbol "AFIC." Prior
to that date, shares of Company Common Stock traded on Nasdaq under the symbol
"MABG."
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
The following financial statements of UCB are included in this report:
Report of Independent Auditors
Consolidated Financial Statements
Balance Sheets as of December 31, 1997 and 1996
Statements of Income for the years ended December 31, 1997 and 1996
Statements of Stockholders' Equity for the years ended December 31,
1997 and 1996
Statements of Cash Flows for the years ended December 31, 1997 and
1996
Notes to Consolidated Financial Statements
Unaudited Consolidated Interim Financial Statements
Balance Sheets as of September 30, 1998 and December 31, 1997
Statement of Income for the three and nine months ended September
30, 1998 and 1997
Statement of Cash Flows for the nine months ended September 30, 1998
and 1997
Statement of Changes in Stockholders' Equity for the period ended
September 30, 1998
Notes to Consolidated Interim Financial Statements
<PAGE>
REPORT OF INDEPENDENT AUDITORS
================================================================================
GOODMAN & COMPANY, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
United Community Bankshares, Inc.
Franklin, Virginia
We have audited the accompanying consolidated balance sheets of United Community
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Community Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Goodman & Company, L.L.P.
One Commercial Place
Norfolk, Virginia
January 30, 1998
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996
------------------- -------------------
ASSETS
Cash and cash equivalents
<S> <C> <C>
Cash and due from banks $ 6,361,985 $ 7,262,129
Federal funds sold 10,813,898 3,889,538
------------------- -------------------
Total cash and cash equivalents 17,175,883 11,151,667
Securities available for sale 41,855,787 46,064,158
Securities held to maturity, at amortized cost
(Fair value approximates $9,771,869 and $10,196,586
at December 31, 1997 and 1996) 9,707,815 10,325,502
------------------- -------------------
Total securities 51,563,602 56,389,660
Loans, net of unearned income 82,555,220 78,163,083
Less: allowance for loan losses 1,105,901 1,209,365
------------------- -------------------
Net loans 81,449,319 76,953,718
Premises and equipment, net 1,923,248 1,975,687
Accrued interest 1,663,452 1,698,586
Intangibles, net 668,211 719,037
Other assets 1,508,536 989,284
------------------- -------------------
Total assets $ 155,952,251 $ 149,877,639
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 20,827,839 $ 20,292,314
Interest-bearing 112,676,628 109,533,322
------------------- -------------------
Total deposits 133,504,467 129,825,636
Short-term borrowings 309,108 229,207
Deferred compensation 122,846 188,802
Accrued interest payable 426,502 400,069
Other liabilities 557,822 254,470
------------------- -------------------
Total liabilities 134,920,745 130,898,184
------------------- -------------------
Stockholders' equity
Preferred stock, $1.00 par value; authorized 1,000,000 shares;
none outstanding - -
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued and outstanding 1,829,209 shares in 1997 and 1996 1,829,209 1,829,209
Additional paid-in capital 3,059,038 3,059,038
Retained earnings 15,412,800 13,749,417
Net unrealized gains on securities available for sale, net of taxes
of $376,306 in 1997 and $176,082 in 1996 730,459 341,791
------------------- -------------------
Total stockholders' equity 21,031,506 18,979,455
------------------- -------------------
Total liabilities and stockholders' equity $ 155,952,251 $ 149,877,639
=================== ===================
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996
------------------ ------------------
Interest income
<S> <C> <C>
Interest and fees on loans $ 7,572,609 $ 6,925,331
Interest on investment securities:
Taxable 2,159,357 2,332,960
Non-taxable 925,702 953,877
------------------ ------------------
3,085,059 3,286,837
Interest on federal funds sold 211,607 205,682
------------------ ------------------
Total interest income 10,869,275 10,417,850
Interest expense
Interest on deposits 4,750,375 4,706,435
Interest on short-term borrowings 58,078 42,538
------------------ ------------------
Total interest expense 4,808,453 4,748,973
------------------ ------------------
Net interest income 6,060,822 5,668,877
Provision for loan losses 128,750 101,000
------------------ ------------------
Net interest income after provision for loan losses 5,932,072 5,567,877
Noninterest income
Service charges and fees 810,730 793,104
Gain on sale of available-for-sale securities 3,935 12,734
Other 49,744 71,557
------------------ ------------------
Total noninterest income 864,409 877,395
Noninterest expenses
Salaries and employee benefits 2,164,873 2,083,205
Occupancy expenses 283,817 264,257
Depreciation and equipment maintenance 268,945 240,435
FDIC insurance 14,762 4,000
Professional fees 210,472 127,673
Postage 99,487 103,403
Merger related expenses - 189,758
Other 830,338 913,455
------------------ ------------------
Total noninterest expenses 3,872,694 3,926,186
------------------ ------------------
Income before income taxes 2,923,787 2,519,086
Income tax expense 693,349 596,181
------------------ ------------------
Net income $ 2,230,438 $ 1,922,905
================== ==================
Net income per share - basic and diluted $ 1.22 $ 1.05
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Net Unrealized
Additional Gain (Loss)
Common Paid-In Retained on Securities
Stock Capital Earnings Available for Sale Total
----------------- ----------------- ------------------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1996 $ 1,829,209 $ 3,062,580 $ 12,398,702 $ 462,778 $ 17,753,269
Net income - - 1,922,905 - 1,922,905
Cash dividends declared
($.31 per share) - - (572,190) - (572,190)
Other - (3,542) - - (3,542)
Change in unrealized gains and
losses on securities available
for sale, net of tax of $62,319 - - - (120,987) (120,987)
----------------- ----------------- ------------------- ------------------ --------------
BALANCE - DECEMBER 31, 1996 1,829,209 3,059,038 13,749,417 341,791 18,979,455
Net income - - 2,230,438 - 2,230,438
Cash dividends declared
($.31 per share) - - (567,055) - (567,055)
Change in unrealized gains and
losses on securities available
for sale, net of tax of $200,224 - - - 388,668 388,668
----------------- ----------------- ------------------- ------------------ --------------
BALANCE - DECEMBER 31, 1997 $ 1,829,209 $ 3,059,038 $ 15,412,800 $ 730,459 $ 21,031,506
----------------- ----------------- ------------------- ------------------- --------------
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996
----------------- -----------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,230,438 1,922,905
Adjustments to reconcile to net cash provided by operating activities:
Provision for loan losses
128,750 101,000
Depreciation and amortization
225,915 244,901
Amortization of investment security premiums, net of discounts
(3,641) (38,224)
Net (gain) loss on sale of investment securities
(3,935) (12,734)
Gain on sale of premises and equipment
(250) -
Changes in:
Interest receivable
35,134 (79,982)
Interest payable
26,433 16,855
Other assets
(519,251) (263,439)
Deferred compensation and other liabilities
37,172 (84,631)
----------------- -----------------
Net cash provided by operating activities
2,156,765 1,806,651
----------------- -----------------
INVESTING ACTIVITIES:
Proceeds from maturities and sales of available-for-sale securities
11,022,921 11,751,723
Purchases of available-for-sale securities (6,215,528) (10,812,561)
Redemptions of held-to-maturity securities
1,252,000 2,634,900
Purchases of held-to-maturity securities
(636,868) (2,231,174)
Loan originations, net of principal repayments (4,598,984) (10,870,050)
Purchases of premises and equipment
(148,017) (119,028)
Proceeds from sale of premises and equipment
250 -
----------------- -----------------
Net cash provided (used) by investing activities
675,774 (9,646,190)
----------------- -----------------
FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings
79,901 (106,995)
Cash dividends paid
(567,055) (572,190)
Fractional share payout
- (3,542)
Net increase in noninterest bearing deposits
535,525 3,304,603
Net increase in interest bearing deposits
3,143,306 2,306,814
----------------- -----------------
Net cash provided by financing activities
3,191,677 4,928,690
----------------- -----------------
Increase (decrease) in cash and cash equivalents
6,024,216 (2,910,849)
Cash and cash equivalents at beginning of year
11,151,667 14,062,516
----------------- -----------------
Cash and cash equivalents at end of year $ 17,175,883 $ 11,151,667
================= =================
Supplemental disclosures of cash flow information
Cash paid for:
Interest on deposits and other borrowings
$ 4,782,020 $ 4,732,118
Income taxes $ 687,104 $ 664,488
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 -- ORGANIZATION AND BUSINESS COMBINATION
- --------------------------------------------------------------------------------
On August 1, 1996, The Bank of Franklin ("BOF") and The Bank of Sussex and Surry
("BSS"), collectively referred to as the "Banks," became affiliated pursuant to
an Agreement and Plan of Reorganization (the "Agreement") dated January 25,
1996. The transaction contemplated by the Agreement created a holding company,
United Community Bankshares, Inc. ("UCB"), which facilitated a share exchange
transaction between UCB and each of the respective banks. The stockholders of
BOF and BSS approved the Agreement at annual meetings held on June 27, 1996.
After the share exchange, BOF and BSS became wholly owned subsidiaries of UCB
and each shareholder of BOF and BSS became a shareholder of UCB. Under the terms
of the Agreement, BOF and BSS shareholders received 4.806 and 3.0 shares,
respectively, of UCB common stock for each share previously held. This resulted
in the issuance of 1,829,209 share of UCB common stock. This combination was
accounted for as a pooling of interests. In connection with this transaction,
merger expenses totaling $189,758 were recognized in 1996. On June 30, 1996, BOF
and BSS reported unaudited total assets of $82.2 million and $61.8 million,
respectively, and unaudited stockholders' equity of $8.1 million and $9.7
million, respectively.
The following summarizes the separate historical results of operations for BOF
and BSS for periods prior to the merger, during which time there were no
intercompany transactions:
<TABLE>
<CAPTION>
BOF BSS Combined
---------------- ------------------ -------------------
Six months ended June 30, 1996: (Unaudited)
<S> <C> <C>
Net interest income $ 1,576,000 $ 1,160,000 $ 2,736,000
Net income $ 601,000 $ 403,000 $ 1,004,000
</TABLE>
The combined stockholders' equity remained relatively unchanged for December 31,
1995 to June 30, 1996. BOF stockholders' equity decreased to $8.1 million at
June 30, 1996 from $8.2 million at December 31, 1995. BSS stockholders' equity
increased to $9.7 million at June 30, 1996 from $9.6 million at December 31,
1995. Theses changes resulted primarily from: (1) $601,000 and $403,000 of net
income for the BOF and BSS respectively during the six month period ended June
30, 1996; (2) a $495,000 and $219,000 increase in the net unrealized losses on
securities available for sale, net of income taxes, for the respective banks;
and (3) dividends paid of $209,000 and $107,000, for the respective banks,
during the same period.
The Banks' are state-chartered commercial banks with two offices in Franklin,
and offices in Wakefield, Courtland, Ivor, Newsoms, Suffolk and Surry, Virginia.
The Banks' primary market area is within western Tidewater, Virginia.
The Banks' principal business consists of providing a broad range of lending and
deposit services to individual and commercial customers with an emphasis on
those services traditionally associated with independent community banks. These
services include checking and savings accounts, certificates of deposit and
charge cards. The Banks' lending activities include commercial and personal
loans, lines of credit, installment loans, home improvement loans, overdraft
protection and construction loans.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
United Community Bankshares, Inc. and its wholly-owned subsidiaries, The Bank of
Franklin, The Bank of Sussex and Surry, and their wholly-owned subsidiaries, The
Bank of Franklin Service Corporation and BSS Service Corporation, respectively.
All significant intercompany accounts and transactions have been eliminated.
BOF and BSS commenced operations in 1971 and 1902, respectively. The Bank of
Franklin Service Corporation and BSS Service Corporation were organized in 1996
and 1994, respectively, to facilitate investment in financial related services.
The consolidation has been prepared using the pooling of interests method of
accounting. All information included in the financial statements has been
combined as if the merger occurred at the earliest date presented.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks, interest-bearing deposits with banks and federal
funds sold. Generally, federal funds are sold for one-day periods.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Securities
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. Investments that are purchased and held principally for the
purpose of selling them in the near term are classified as "trading securities"
and reflected at fair value, with unrealized gains and losses included in
earnings. Neither UCB nor the Banks and their subsidiaries maintain securities
classified as trading. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, changes in prepayment risk, to increase regulatory capital or
other similar factors, are classified as securities available for sale.
Available-for-sale securities are carried at fair value with any adjustments to
fair value, after tax, reported as a separate component of shareholders' equity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary, if any, are included
in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity on held-to-maturity and available-for-sale
securities. Other-than-temporary declines in the fair market value of
individual held-to-maturity and available-for-sale securities result in
write-downs of the individual securities to fair market value. Gains and losses
are determined using the specific-identification method.
In December of 1995, pursuant to a special report issued by the Financial
Accounting Standards Board ("FASB") regarding the application of FASB Statement
No. 115, Accounting for Certain Investments In Debt and Equity Securities, the
Banks reassessed their intent with respect to their securities portfolios. As a
result, held-to-maturity securities, with an amortized cost basis of $25,210,316
and unrealized gains and losses of $231,048 and $297,105, respectively, were
transferred to the available-for-sale category.
Loans
Loans are reported at their principal outstanding balance net of charge-offs,
unearned income, and unamortized premiums or discounts, if any, on purchased
loans. Interest income is generally recognized when income is earned using the
interest method.
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of impaired loans, if applicable, are included
in the provision for loan losses. Loans continue to be classified as impaired
unless they are brought fully current and the collection of scheduled interest
and principal is considered probable. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.
The Banks periodically evaluate the adequacy of the allowance for loan losses in
order to maintain the allowance at a level that is sufficient to absorb probable
credit losses. Management's evaluation of the adequacy of the allowance is based
on a review of the Banks' historical loss experience, known and inherent risks
in the loan portfolio, including adverse circumstances that may affect the
ability of the borrower to repay interest and/or principal, the estimated value
of collateral, and an analysis of the levels and trends of delinquencies, and
charge-offs. Such factors as the level and trend of interest rates and the
condition of the national and local economies are also considered. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for losses on loans. Such agencies may
require the Banks to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
A loan is considered impaired, based on current information and events, if it is
probable that the Banks will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process of
collection. If a loan or a portion of a loan is classified as doubtful, or is
partially charged off, the loan is generally classified as
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
Other Real Estate Owned
Other real estate owned is comprised of real estate and other assets acquired
through foreclosure, acceptance of a deed in lieu of foreclosure, or loans in
which the Banks receive physical possession of the debtor's assets. Other real
estate owned is carried at the lower of the recorded investment in the loan or
the fair value less estimated costs to sell. Upon transfer of a loan to
foreclosed status, the fair value of the property is assessed and any excess of
the loan balance over fair value is charged against the allowance for loan
losses. Revenues and expenses related to the property, and subsequent
adjustments to fair value less estimated costs to sell are classified as an
expense for other real estate owned.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. For
financial reporting purposes, assets are depreciated over their estimated useful
lives using the straight-line and accelerated methods. For income tax purposes,
the accelerated cost recovery system and the modified accelerated cost recovery
system are used. Net gains and losses on disposal or retirement of premises and
equipment are included in other income.
Intangible Assets
Intangible assets relate to the purchase of a branch by BOF in 1995 and are
amortized over fifteen years using the straight-line method.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, deferred compensation, and accumulated
depreciation for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Banks have entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, standby letters of credit, and financial guarantees written. Such
financial instruments are recorded in the financial statements when they become
payable.
Earnings Per Common Share
The company adopted FASB Statement No. 128, Earnings per Share, on December 31,
1997. This Statement established standards for computing and presenting earnings
per share ("EPS"). This Statement supersedes standards previously set in APB
Opinion No. 15, Earnings per Share. The Statement requires dual presentation of
basic and diluted EPS on the face of the income statement, and it requires a
reconciliation of the numerator and denominator of the basic EPS with the
numerator and denominator of the diluted EPS computation.
Basis EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
This statement is effective for financial statements issued for periods ending
after December 15, 1997. In accordance with the requirements of the Statement,
all prior period EPS data has been restated to reflect the change in accounting
requirements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties. While management uses available
information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary based on changes in local economic
conditions and other factors.
Reclassifications
Certain reclassifications have been made to prior year financial statements to
conform them to the current year's presentation.
NOTE 3 -- SECURITIES
- --------------------------------------------------------------------------------
Securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities available for sale
December 31, 1997
<S> <C> <C> <C> <C>
U.S. Government and federal agencies $ 17,201,900 $ 115,511 $ 145,713 $ 17,171,698
State and local governments 17,665,622 372,226 9,648 18,028,200
Corporate debt securities 3,780,313 29,070 2,778 3,806,605
Mortgage-backed securities 2,035,435 6,679 6,020 2,036,094
Collateralized mortgage obligations 56,942 - 3 56,939
Equity securities 10,006 746,245 - 756,251
---------------- --------------- --------------- ----------------
$ 40,750,218 $ 1,269,731 $ 164,162 $ 41,855,787
----------------- --------------- --------------- ----------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities available for sale
December 31, 1996
U.S. Government and federal agencies $ 22,579,494 $ 18,954 $ 186,890 $ 22,411,558
State and local governments 17,078,633 182,000 4,585 17,256,048
Corporate debt securities 4,127,697 4,875 - 4,132,572
Mortgage-backed securities 1,634,498 - 15,569 1,618,929
Collateralized mortgage obligations 115,957 - 246 115,711
Equity securities 10,006 519,334 - 529,340
---------------- --------------- --------------- ----------------
$ 45,546,285 $ 725,163 $ 207,290 $ 46,064,158
----------------- --------------- --------------- ----------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities Held to Maturity
December 31, 1997
<S> <C> <C> <C> <C>
U.S. federal agencies $ 4,728,786 $ - $ 26,351 $ 4,702,435
State and local governments 4,770,477 91,258 1,046 4,860,689
Other 208,552 208 15 208,745
---------------- --------------- --------------- ----------------
$ 9,707,815 $ 91,466 $ 27,412 $ 9,771,869
================ =============== =============== ================
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities Held to Maturity
December 31, 1996
U.S. federal agencies $ 5,428,101 $ - $ 86,316 $ 5,341,785
State and local governments 4,797,401 - 42,520 4,754,881
Equity securities 100,000 - 80 99,920
---------------- --------------- ----------- -------------
$ 10,325,502 $ - $ 128,916 $ 10,196,586
--------------- ----------------- ----------- -------------
</TABLE>
The amortized cost and fair value of securities by maturity date at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Securities held to maturity Securities available for sale
------------------------------------ ------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,499,558 $ 1,496,859 $ 4,658,505 $ 4,660,993
Due from one to five years 4,432,344 4,441,152 19,240,964 19,284,185
Due from five to ten years 2,885,160 2,928,427 14,820,236 15,103,524
Due after ten years 890,753 905,431 2,020,507 2,050,834
---------------- ---------------- ---------------- ----------------
9,707,815 9,771,869 40,740,212 41,099,536
Equity securities - - 10,006 756,251
---------------- ---------------- ---------------- ----------------
Total $ 9,707,815 $ 9,771,869 $ 40,750,218 $ 41,855,787
---------------- ---------------- ---------------- ----------------
</TABLE>
At December 31, 1997 and 1996, approximately $8,331,000 and $6,374,000,
respectively, of securities were pledged to secure deposits of the U.S.
Government or the Commonwealth of Virginia. In addition, as of December 31, 1997
and 1996, approximately $983,000 and $966,000, respectively, of securities were
pledged to secure two repurchase agreements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Gross realized gains and gross realized losses on available for sale securities
were:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
Gross realized gains:
<S> <C> <C>
U.S. government agencies $ 3,320 $ 21,379
State and local governments 15,570 3,753
Corporate debt securities - 4,421
Mortgage backed securities 1,345 -
Equity securities 1,980 -
--------------- ---------------
$ 22,215 $ 29,553
--------------- ---------------
Gross realized losses:
U.S. government agencies $ 17,805 $ 1,750
State and local governments - 2,698
Mortgage backed securities 475 12,371
--------------- ---------------
$ 18,280 $ 16,819
--------------- ---------------
Net realized gains (losses) $ 3,935 $ 12,734
--------------- ---------------
</TABLE>
NOTE 4 -- LOANS
- --------------------------------------------------------------------------------
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Commercial $ 16,257 $ 14,273
Agricultural 7,045 6,437
Real estate construction 2,537 2,304
Real estate mortgage:
Residential (1-4 family) 20,758 20,868
Home equity lines 2,260 2,117
Commercial 17,098 14,164
Agricultural 2,485 2,894
----------- ------------
Real estate subtotal 45,138 42,347
----------- ------------
Loans to individuals:
Consumer and installment loans 13,842 14,881
Credit card and related plans 329 277
----------- ------------
Loans to individuals subtotal 14,171 15,158
----------- ------------
Total gross loans 82,611 78,215
Less:
Allowance for loan losses 1,106 1,209
Deferred loan fees 56 52
----------- ------------
Total net loans $ 81,449 $ 76,954
----------- ------------
</TABLE>
Loans on which the accrual of interest has been discontinued amount to $180,181
and $182,060 at December 31, 1997 and 1996, respectively. Impaired loans at
December 31, 1997 and 1996 were not significant.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the activity in the allowance for loan losses account is as
follows:
Year Ended December 31,
---------------------------------------
1997 1996
----------------- ------------------
Balance, beginning of year $ 1,209,365 $ 1,250,474
Provisions charged to operations 128,750 101,000
Loans charged-off (333,099) (254,546)
Recoveries 100,885 112,437
----------------- ------------------
Balance, end of year $ 1,105,901 $ 1,209,365
----------------- ------------------
NOTE 5 -- PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
--------------- -----------------
<S> <C> <C>
Land $ 393,238 $ 393,238
Buildings and improvements 1,962,308 1,951,271
Leasehold improvements 104,066 100,515
Equipment, furniture and fixtures 2,153,864 2,022,125
--------------- -----------------
4,613,476 4,467,149
Less accumulated depreciation 2,690,228 2,491,462
--------------- -----------------
Premises and equipment, net $ 1,923,248 $1,975,687
=============== =================
</TABLE>
Depreciation charged to operating expense for the years ended December 31, 1997
and 1996 was $209,349 and $204,397, respectively.
NOTE 6 -- DEPOSITS
- --------------------------------------------------------------------------------
Interest-bearing deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1997 1996
--------------------- ------------------------
<S> <C> <C>
NOW accounts $ 17,574,538 $ 17,368,673
Money market accounts 19,364,840 20,553,509
Savings accounts 11,975,470 11,629,507
Certificates of deposit $100,000 and over 11,959,660 10,224,208
Other time deposits 51,802,120 49,757,425
------------------- -----------------------
Total interest-bearing deposits $ 112,676,628 $ 109,533,322
-------------------- ------------------------
</TABLE>
At December 31, 1997, the scheduled maturities of time deposits with remaining
maturities in excess of one year are as follows:
(Dollars in Thousands)
Year Maturing Amount
------------- ------
1999 $9,015
2000 5,163
2001 1,368
2002 2,772
2003 and thereafter 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table summarizes the maturities of certificates of deposit with a
minimum denomination of $100,000.
(Dollars in Thousands)
Within Three Six to Over
Three to Six Twelve Twelve
Months Months Months Months Total
------ ------ ------ ------ -----
At December 31, 1997 $ 3,222 $2,123 $3,755 $ 2,860 $11,960
NOTE 7 -- STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
- --------------------------------------------------------------------------------
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Banks' financial statement. Under capital adequacy guidelines and regulatory
framework for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997 that the Banks
meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized both Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage rations as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions' categories.
The Banks' actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
------------------------ -------------------------------
Amount Ratio Amount Ratio
------------ ----------- ---------------- -------------
As of December 31, 1997: (Dollars in Thousands)
Total Capital (to Risk Weighted Assets):
<S> <C> <C> <C> <C>
Consolidated $ 20,457 21.11% >/=$7,752 >/=8.00%
The Bank of Franklin $ 9,761 16.71% >/=$4,674 >/=8.00%
The Bank of Sussex and Surry $ 10,696 27.80% >/=$3,078 >/=8.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 19,351 19.97% >/=$3,876 >/=4.00%
The Bank of Franklin $ 9,081 15.54% >/=$2,337 >/=4.00%
The Bank of Sussex and Surry $ 10,270 26.69% >/=$1,539 >/=4.00%
Tier I Capital (to Average Assets):
Consolidated $ 19,351 12.69% >/=$6,101 >/=4.00%
The Bank of Franklin $ 9,081 10.35% >/=$3,508 >/=4.00%
The Bank of Sussex and Surry $ 10,270 15.84% >/=$2,593 >/=4.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
----------------------------------
Amount Ratio
----------------- ---------------
Total Capital (to Risk Weighted Assets):
<S> <C>
Consolidated >/= $ N/A
The Bank of Franklin >/= $ 5,843 >/=10.00%
The Bank of Sussex and Surry >/= $ 3,848 >/=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated >/= $ N/A
The Bank of Franklin >/= $3,506 >/=6.00%
The Bank of Sussex and Surry >/= $2,309 >/=6.00%
Tier I Capital (to Average Assets):
Consolidated >/= $ N/A
The Bank of Franklin >/= $4,385 >/=5.00%
The Bank of Sussex and Surry >/= $3,241 >/=5.00%
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================================================
NOTE 8 -- INCOME TAXES
- --------------------------------------------------------------------------
The principal components of income tax expense are as follows:
Year Ended December 31,
--------------------------
1997 1996
------------ -----------
Federal income tax expense - current $ 652,648 $ 639,110
Deferred federal income tax expense (benefit)
related to temporary differences in reporting 40,701 (42,929)
------------ -----------
Income tax expense $ 693,349 $ 596,181
------------- -----------
Differences between income tax expense calculated at the statutory rate and
that shown in the statements of income are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Federal income tax expense at statutory rate $ 994,088 $ 856,489
Tax effect of:
Tax exempt interest (309,931) (320,227)
Merger fees - 64,518
Other 9,192 (4,599)
-------------- --------------
Income tax expense $ 693,349 $ 596,181
-------------- --------------
</TABLE>
The Banks have the following deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
Deferred tax assets:
<S> <C> <C>
Deferred compensation $ 41,768 $ 64,194
Accrued employee benefits 3,039 5,085
Interest on nonaccrual loans 15,835 29,427
--------------- ---------------
Total deferred tax asset 60,642 98,706
--------------- ---------------
Deferred tax liabilities:
Premises and equipment 30,212 38,226
Allowance for loan losses 96,151 89,411
Net unrealized gains on available-for-sale 376,300 176,082
securities
Discount accretion on sale of securities 16,675 10,901
Deferred fees 5,430 7,954
Pension expense 661 -
--------------- ---------------
Total deferred tax liabilities 525,429 322,574
--------------- ---------------
Net deferred tax liability $ 464,787 $ 223,868
=============== ===============
</TABLE>
NOTE 9 -- RETIREMENT PLANS
- --------------------------------------------------------------------------------
United Community Bankshares
Effective January 1, 1998, the Company adopted a defined contribution plan with
401(K) features, which covers substantially all employees of the Company and its
subsidiary Banks who have completed one year of service. Vesting in the plan
begins with the second year of participation and increases annually by 20% until
full vesting occurs after six years.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Employees may contribute up to 15% of their salaries, and the Company matches
50% of the first 6% of employee contributions. Additional contributions can be
made by the Company at the discretion of the Board of Directors. Prior to the
formation of this plan, each of the Company's subsidiary Banks had qualified
retirement plans for the future benefit of their employees. All of these plans
were terminated on December 31, 1997. The details of each Bank's plan are
detailed below.
The Bank of Franklin
The Bank had a profit-sharing plan for all eligible officers and employees.
Requirements for eligibility to participate include reaching the age of 21 and
one year of service. Vesting in the plan began in the second year of
participation and increased annually by 20% until fully vested after six years.
Employer contributions were determined annually and calculated based on the
participant's annual compensation. The amounts contributed to the plan were
$31,250 and $28,000 for 1997 and 1996, respectively.
The Bank of Sussex and Surry
The Bank sponsored a non-contributory defined benefit plan for all employees.
Pension benefits vested after five years of service and are based on year of
service and average final salary. The Bank's funding policy was to make the
minimal annual contribution that was required by applicable regulation, plus
such amounts as the Bank determined was appropriate from time to time.
The amount charged to expense for the Bank's pension plan totaled $59,363 and
$59,792 for the years ended December 31, 1997 and 1996, respectively. The
components of the pension cost charged to expense consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Service cost $ 50,276 $ 50,276
Interest cost on projected benefit obligation 42,845 42,845
Expected return on plan assets (35,564) (35,564)
Net amortization and deferral 1,806 2,235
---------- -----------
$ 59,363 $ 59,792
---------- -----------
</TABLE>
The following table sets forth the plan's funded status, as of the most recent
actuarial valuation date, October 1, 1997, and the amount recognized in the
Bank's consolidated financial statements as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits $ 524,491 $ 419,584
============== ==============
Accumulated benefits $ 536,180 $ 425,327
============== ==============
Projected benefit obligation $ (803,401) $ (614,540)
Plan assets at fair value 688,614 510,525
-------------- --------------
Projected benefit obligation in excess of plan assets (114,787) (104,015)
Unrecognized prior service costs (57,402) (60,990)
Unrecognized net loss 27,958 14,951
Remaining unrecognized net obligation from the beginning of the year 84,326 89,720
-------------- --------------
Liability on the balance sheet $ (59,905) $ (60,334)
-------------- --------------
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the benefit obligations was 7% at December 31, 1997 and 1996. The
expected long-term rate of return on plan assets was 7% at December 31, 1997 and
1996. The rate of increase in future compensation levels used in determining the
actuarial present value of the benefit obligations was 6% at December 31, 1997
and 1996.
Plan assets at December 31, 1997 consist of an investment in a stock mutual
fund, and in money market, equity, fixed income and balanced funds offered by
the Virginia Bankers Association Pension Investment Program.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
=============================================================================
NOTE 10 -- FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE AND OTHER BORROWED FUNDS
- --------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds consist of term federal funds purchased and advances from the
Federal Home Loan Bank ("FHLB") of Atlanta and generally are repaid within one
to 120 days from the transaction date.
Information concerning securities sold under agreements to repurchase and FHLB
advances is summarized as follows:
1997 1996
----- ----
Securities Sold Under Agreements to Repurchase:
Average balance during the year $ 308,777 $ 376,564
Average interest rate during the year 4.17% 4.23%
Maximum month end balance during the year $ 554,656 $ 750,678
Federal Home Loan Bank Advances:
Average balance during the year $ 225,753 $ 372,951
Average interest rate during the year 5.78% 5.71%
Maximum month end balance during the year $2,500,000 $1,500,000
Federal Funds Purchased:
Average balance during the year $ 560,413 $ 109,888
Average interest rate during the year 5.73% 4.81%
Maximum month end balance during the year $1,748,000 $1,469,000
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
BOF leases one of its branches with an operating lease. The lease term is for
one year and expires in February 1998, with an option to extend the lease for
one twelve month period. The minimum lease payments for 1998 are $12,000. Total
lease expense was $12,000 for 1997 and 1996.
BOF is a member of the Federal Home Loan Bank ("FHLB") of Atlanta. As such, the
Bank may borrow funds based on criteria established by the FHLB. As of December
31, 1997, BOF could borrow approximately $6,500,000, if collateral acceptable to
the FHLB was provided. In addition, federal funds arrangements with other
institutions provide an additional $9,277,000 of short-term borrowing capacity.
The Bank had not drawn on these lines of credit at December 31, 1997.
BSS became a member of the FHLB in 1997. As of December 31, 1997, the Bank could
borrow approximately $6,500,000, if collateral acceptable to the FHLB was
provided. In addition, BSS has federal funds arrangements with two institutions
which provide $6,000,000 of short-term borrowing capacity. At December 31, 1997,
BSS did not have an outstanding balance on these lines of credit.
The Banks are subject to claims and lawsuits that arise primarily in the
ordinary course of business. Based on information presently available and advice
received from legal counsel representing the Banks in connection with such
claims and lawsuits, it is the opinion of management that only one such lawsuit
could have a material adverse effect on the financial position of the Banks.
This suit is described below. The only other litigation in which UCB and its
subsidiaries, BOF and BSS, are involved are collection suits involving
delinquent loan accounts.
Fidelity National Title Insurance Company of New York, successor by merger to
Security Title and Guaranty Company (the "Title Company"), filed suit against
the Bank of Sussex and Surry in November, 1997. The Title Company issued a title
insurance policy in favor of the BSS (the "Title Policy") insuring that the Bank
had a first priority deed of trust lien on a one-quarter interest in certain
real property located in Isle of Wight County, Virginia (the "Isle of Wight
Property"). The Circuit Court for Isle of Wight entered a Final Decree on March
6, 1996 that Farmers Bank, Windsor had a first priority deed of trust lien on
that one-quarter interest in the Isle of Wight Property and that BSS had a
second priority deed of trust lien on that same one-quarter interest.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Title Company seeks the following relief: (i) a declaratory
judgment that the first priority deed of trust lien in favor of Farmers Bank,
Windsor on the one-quarter interest Isle of Wight Property be excluded from
coverage under the Title Policy, (ii) that the Title Policy be reformed to
exclude the Farmers Bank, Windsor deed of trust from coverage under the Title
Policy and (iii) that the Title Company be reimbursed for its costs and
attorneys' fees.
BSS intends to vigorously defend this suit. At this time, the Bank's legal
counsel is unable to express any view as to the possible outcome of this matter.
Counsel notes, however, that if this matter is resolved in a manner adverse to
the interests of the Bank, the amount of any loss that will be sustained by BSS
will not be more than the approximately $75,000 expended by the Title Company
for costs and attorneys' fees.
NOTE 12 -- RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Banks have loan and deposit transactions with its officers and directors,
and with companies in which the officers and directors have a financial
interest. Related party deposits amounted to approximately $4,002,000 and
$4,956,000 at December 31, 1997 and 1996, respectively. A summary of related
party loan activity during 1997 is as follows:
Balance, December 31, 1996 $ 1,534,918
Originations - 1997 1,461,723
Repayments - 1997 (744,037)
Net change due to changes in Board membership (23,072)
-----------------
Balance, December 31, 1997 $ 2,229,532
=================
In the opinion of management, such loans are made in the ordinary course of
business at normal credit terms, including interest rate and collateral
requirements, and do not represent more than normal credit risk. Commitments to
extend credit to related parties amounted to $597,919 and $910,416 at December
31, 1997 and 1996, respectively.
In the ordinary course of business, the Banks have engaged in certain
transactions with different directors' firms to provide legal, insurance and
real estate brokerage services.
NOTE 13 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER
DERIVATIVE FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------------------------------------------
The Banks are party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, commercial and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount recognized in
the consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of the Banks' involvement in particular classes
of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, commercial
and standby letters of credit, is represented by the contractual notional amount
of those instruments. The Banks use the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The following table summarizes the Banks' off-balance sheet financial
instruments as of December 31, 1997 and 1996. The Banks do not use these
financial instruments for trading purposes.
<TABLE>
<CAPTION>
Contract or Notional Amount
--------------------------------
1997 1996
-------------- --------------
(Dollars in Thousands)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit:
<S> <C> <C>
Commercial $ 7,068 $ 10,071
Commercial real estate, construction and land development 2,603 1,512
Residential real estate 1,414 1,253
Consumer 1,047 976
-------------- --------------
$ 12,132 $ 13,812
-------------- --------------
Standby letters of credit $ 133 $ 165
Commercial and similar letters of credit $ 750 $ 975
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Loan commitments, standby letters of credit and guarantees written have
off-balance sheet credit risk because only origination fees and accruals for
probable losses, if any, are recognized in the statement of financial position,
until the commitments are fulfilled or the standby letters of credit or
guarantees expire. Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that, in accordance with the
requirements of FASB Statement No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISKS, collateral or other security is of no value. The
Banks' policy is to require customers to provide collateral prior to the
disbursement of approved loans. For retail loans, the Banks usually retain a
security interest in the property or products financed, which provides
repossession rights in the event of default by the customer. For business loans
and financial guarantees, collateral is usually in the form of inventory or
marketable securities (held in trust) or property (notations on title).
Commitments to Extend Credit
Commitments to extend credit are arrangements to lend to a customer, as long as
there is no violation of any condition established in the contract, and includes
unutilized credit card lines. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
majority of commitments to extend credit have terms up to one year, and
contracted interest rates in the range from 7.50% to 11.50%, except for consumer
loans. Of the total commitments and letters of credit, approximately $2.9
million had fixed rates of interest and $10.1 million had variable interest
rates. Management evaluates each customer's creditworthiness in determining the
amount of collateral to obtain. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and real estate.
Standby Letters of Credit and Financial Guarantees Written
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Banks to guarantee the performance of customers to
third parties. Those guarantees are primarily issued to support the financing
needs of the Banks' commercial customers, and are short-term in nature. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Banks hold
marketable securities as collateral supporting those commitments for which
collateral is deemed necessary.
Concentration of Credit Risk
Concentrations of credit risk (whether on or off balance sheet) arising from
financial instruments exist in relation to certain groups of customers. A group
concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Banks
do not have significant exposure to any individual customer or counterparty. The
major concentrations of credit risk for the Banks arise by customer loan type in
relation to loans and credit commitments, as shown in the table above. A
geographic concentration arises because the Banks operate primarily in western
Tidewater, Virginia.
The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted and any collateral or security proved to be of no value. The Banks
have experienced little difficulty in accessing collateral when required. The
amounts of credit risk shown, therefore, greatly exceed expected losses, which
are included in the allowance for loan losses.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
FASB 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS ("FASB 107"),
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to individual
markets and, in many cases, could not be realized in immediate settlement. FASB
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following methods and assumptions were used by the Banks in estimating the
fair value for the consolidated financial statements as required by FASB 107:
Cash and due from banks: The carrying amount approximates fair value.
Federal funds sold: For federal funds sold, the carrying amount
approximates fair value.
Investment securities: Fair values for securities are based on published
market prices, if available. For unquoted securities, the fair value is
estimated by the Banks on the basis of financial and other information.
Loans: For loans with short-term and variable rate characteristics, the
total receivables outstanding approximate fair value. This amount excludes
any value related to account relationships. The fair value of other types
of loans is estimated by discounting future cash flows, using the
contractual rates in effect for such loans at the reporting date and
adjusting for credit risk and operating costs.
Interest receivable and Interest payable: The carrying amount approximates
fair value.
Non-interest-bearing deposits: The fair value of these instruments is the
amount payable on demand at the reporting date.
Interest-bearing deposits: The fair value of demand deposits, saving
accounts and money market deposits with no defined maturity is the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated by discounting the future cash flows using the current
rates at which similar deposits would be made. This amount excludes any
value related to account relationships.
Commitments to extend credit and standby and commercial letters of credit:
It is not practicable to separately estimate the fair values for
off-balance-sheet credit commitments, including standby letters of credit,
and guarantees written, due to the lack of cost-effective and reliable
measurement methods for these instruments.
The estimated fair values of the Banks' financial instruments required to be
disclosed under FASB 107 at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -----------
(Dollars in thousands)
Assets
<S> <C> <C> <C> <C>
Cash and due from banks $ 6,362 $ 6,362 $ 7,262 $ 7,262
Federal funds sold 10,814 10,814 3,890 3,890
Investment securities 51,564 51,628 56,390 56,261
Loans 81,449 81,457 76,954 77,789
Interest receivable 1,663 1,663 1,699 1,699
--------- ---------- --------- ---------
$ 151,852 $ 151,924 $ 146,195 $ 146,901
========= ========== ========= =========
Liabilities
Non-interest bearing deposits $ 20,829 $ 20,829 $ 20,292 $ 20,292
Interest bearing deposits 112,677 111,735 109,533 109,794
Short-term borrowings 309 309 229 229
Interest payable 427 427 399 399
--------- --------- --------- ---------
$ 134,242 $ 133,300 $ 130,453 $ 130,714
========= ========= ========= =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
NOTE 15 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income (Numerator, Basic and Diluted) $ 2,230,438 $ 1,922,905
Weighted-average shares outstanding (Denominator) 1,829,209 1,829,209
----------- -----------
Basic net income per share $ 1.22 $ 1.05
=========== ===========
Effect of dilutive securities:
Weighted-average shares outstanding 1,829,209 1,829,209
Effect of stock options 4,407 -
----------- -----------
Diluted average shares outstanding (Denominator) 1,833,616 1,829,209
----------- -----------
Diluted net income per share $ 1.22 $ 1.05
=========== ===========
</TABLE>
NOTE 16 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements for UCB should be read in
conjunction with the consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
CONDENSED STATEMENT TO FINANCIAL CONDITION
December 31,
----------------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash $ 33,587 $ 509
Premises and equipment, net 63,115 -
Equity in net assets of the Banks 20,749,007 18,990,510
Other assets 185,797 -
----------- -----------
$21,031,506 $18,991,019
=========== ===========
LIABILITIES $ - $ 509
STOCKHOLDERS' EQUITY 21,031,506 18,990,510
----------- -----------
$21,031,506 $18,991,019
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Equity in earnings of the Banks $ 2,230,171 $ 1,922,905
Other income 152,874 9,000
------------ ------------
Total noninterest income 2,383,045 $ 1,931,905
Other expenses (151,503) (9,000)
------------ ------------
Income before income taxes 2,231,542 1,922,905
Income tax expense 1,104 -
------------ ------------
Net income $ 2,230,438 $ 1,922,905
------------ ------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996
----------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,230,438 $ 1,922,905
Adjustments to reconcile to net cash provided by
operating activities:
Equity in earnings of the Banks (2,230,171) (1,922,905)
Depreciation 4,304 -
Changes in:
Other assets (85,797) -
Other liabilities (509) 509
----------------- ----------------
Net cash provided by operating activities $ (81,735) $ 509
----------------- ----------------
Cash flows from investing activities:
Dividends received from the Banks 849,287 572,190
Purchases of premises and equipment (67,419) -
Purchases of investment (100,000) -
----------------- ----------------
Net cash used by investing activities 681,868 572,190
----------------- ----------------
Cash flows from financing activities:
Cash dividends paid (567,055) (572,190)
----------------- ----------------
Net cash used for financial activities (567,055) (572,190)
----------------- ----------------
Net increase in cash and cash equivalents 33,078 509
Cash and cash equivalents at beginning of period 509 -
================= ================
Cash and cash equivalents at end of period $ 33,587 $ 509
================= ================
</TABLE>
Certain restrictions exist regarding the ability of the Banks to transfer funds
to UCB in the form of cash dividends, loans or advances. The prior approval of
the Board of Governors of the Federal Reserve is required, if the total
dividends declared in any calendar year will exceed the sum of thr respective
net profits, as defined, for the current year, plus retained net profits for the
previous two years. As of Decemeber 31, 1997, dividends from BOF and BSS were
limited to approximately $2,388,000 and $1,636,000, respectively, under these
regulations. Under Virginia law, no dividend may be declared or paid that would
impair a Virginia chartered bank's paid-in-capital.
NOTE 17-STOCK COMPENSATION PLANS
At December 31, 1997, the Company has fixed stock compensation plans for certain
key employees. The Company applies Accounting Principles Board Opinion No. 25
("APB 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations in accounting for its plans. Accordingly, no compensation cost
was recognized for these plans against earnings. For those companies applying
APB 25, FASB Statement No. 123. ACCOUNTING FOR STOCK-BASED COMPENSATION,
requires certain proforma disclosures of net income and earnings per share. Net
income and earnings per share computed under FASB Statement No. 123 do not
materially differ from the amounts reported.
All options have ten year terms, vest and become fully exercisable in six
months. The option price equals or exceeds the market price of the stock as of
the date the option was granted. The following is a summary of the Company's
stock option plan activity, and related information for the years ended
December 31, 1997 and 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
----------- ---------------- ----------- ----------------
<S> <C> <C>
Outstanding - Beginning of year - $ - - $ -
Granted 31,667 10.33 - -
Exercised - - - -
Forfeited - - - -
----------- --------------- ----------- -------------
Outstanding - End of year 31,667 $ 10.33 - $ -
=========== =============== =========== =============
Exercisable - End of year 1,167 $ 10.33 - $ -
=========== =============== =========== =============
</TABLE>
NOTE 18 - SUBSEQUENT EVENT
On January 24, 1998, the declaration date, the Board of Directors approved the
payment of a semi-annual cash divident of $.17 per share for shareholders of
record on February 27, 2998. The dividend, totaling $310,966, is payable on
March 31, 1998.
===============================================================================
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, December 31,
1998 1997
---------------- -------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 4,785 $ 6,362
Federal funds sold 3,630 10,814
----------- -----------
Total cash and cash equivalents 8,415 17,176
Investment securities:
Securities available for sale 45,220 41,856
Securities held to maturity (market value of
$7,662 and $9,772, respectively) 7,505 9,708
----------- -----------
Total investment securities 52,725 51,564
Loans, net 88,828 81,449
Interest receivable 1,978 1,663
Property and equipment, net 2,420 1,923
Intangibles, net 630 668
Other assets 1,553 1,509
----------- -----------
Total assets $ 156,549 $ 155,952
=========== ===========
LIABILITIES:
Deposits:
Noninterest-bearing $ 18,631 $ 20,828
Interest-bearing 111,394 112,677
----------- ----------
Total deposits 130,025 133,505
Federal funds purchased and securities sold under
agreement to repurchase 2,689 309
Accrued interest 489 426
Deferred compensation 123 123
Other liabilities 874 558
---------- ----------
Total liabilities 134,200 134,921
STOCKHOLDERS' EQUITY:
Common stock 1,829 1,829
Additional paid-in capital 3,059 3,059
Retained earnings 16,386 15,413
Net unrealized gains on securities available for sale
(net of income taxes) 1,075 730
----------- ----------
Total stockholders' equity 22,349 21,031
------------- ----------
Total liabilities & stockholder's equity $ 156,549 $ 155,952
------------- ----------
</TABLE>
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
Consolidated Statement of Income
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 2,050 $ 1,971 $ 5,861 $ 5,603
Interest on investment securities:
Taxable 502 503 1,477 1,642
Nontaxable 250 231 736 694
Interest on federal funds sold 42 29 285 124
----- ----- ----- -----
Total interest income 2,844 2,734 8,359 8,063
Interest expense:
Interest on deposits 1,240 1,204 3,692 3,532
Interest on federal funds purchased
and repurchase agreements 22 26 31 50
----- ----- ----- -----
Total interest expense 1,262 1,230 3,723 3,582
----- ----- ----- -----
Net interest income 1,582 1,504 4,636 4,481
Provision for loan losses 9 36 62 87
----- ----- ----- -----
Net interest income after provision
for loan losses 1,573 1,468 4,574 4,394
Noninterest income:
Gain (loss) on sale of securities 1 - 1 6
Service charges on deposit accounts 193 173 551 496
Other fee income 35 36 99 92
Other 12 35 49 39
---- --- --- ---
Total other income 241 244 700 633
Noninterest expenses:
Salaries and employee benefits 568 504 1,671 1,597
Equipment 72 60 232 179
FDIC insurance 3 4 12 10
Occupancy 80 67 198 208
Professional fees 22 55 133 104
Franchise, state and local taxes 37 31 107 94
Postage 35 24 92 83
Other 266 197 683 618
----- --- --- ---
Total other expenses 1,083 942 3,128 2,893
----- --- ----- -----
Income before income taxes 731 770 2,146 2,134
Provision for income taxes 185 221 533 547
----- ----- ------- -------
Net income $ 546 $ 549 $1,613 $1,587
======= ======= ======== =======
Basic net income per share $ 0.30 $ 0.30 $ 0.88 $ 0.87
Diluted net income per share $ 0.30 $ 0.30 $ 0.87 $ 0.87
</TABLE>
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
9 Months Ended September 30,
--------------------------------------
1998 1997
--------------- ---------------
Operating activities:
<S> <C> <C>
Net income $ 1,613 $ 1,587
Adjustments to reconcile to net cash provided by operating activities:
Provision for loan losses 62 87
Gain on sale of investment securities (1) (6)
Depreciation and amortization 209 186
Amortization of investment securities premiums, net of discounts 6 (4)
Gain on sale of property and equipment (3) -
Changes in:
Interest receivable (315) (221)
Interest payable 63 119
Other assets (45) (190)
Other liabilities 138 97
--------------- ---------------
Net cash provided by operating activities 1,727 1,655
Investing activities:
Proceeds from maturities and sales of available-for-sale securities 7,827 7,774
Purchases of available-for-sale securities (10,672) (4,462)
Maturities of held-to-maturity securities 2,582 702
Purchases of held-to-maturity securities (381) (428)
Loan originations, net of principal repayments (7,441) (6,482)
Purchases of premises and equipment (667) (88)
Proceeds from sales of property and equipment 3 -
--------------- ---------------
Net cash used by investing activities (8,749) (2,984)
Financing activities:
Net increase (decrease) in short-term borrowings 2,380 1,691
Cash dividends paid (640) (567)
Net decrease in noninterest bearing deposits (2,196) (1,016)
Net decrease in interest bearing deposits (1,283) (561)
--------------- ---------------
Net cash used by financing activities (1,739) (453)
DECREASE IN CASH AND CASH EQUIVALENTS (8,761) (1,782)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17,176 11,153
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,415 $ 9,371
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest on deposits and other borrowings $ 3,648 $ 3,463
Income taxes $ 688 $ 685
</TABLE>
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PERIOD ENDED SEPTEMBER 30, 1998
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
----------------------------------------------------------------------------
Other Additional
Comprehensive Retained Comprehensive Common Paid-In
Total Income Earnings Income Stock Capital
----- ------ -------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1998 $21,031 $15,413 $ 730 $ 1,829 $ 3,059
Comprehensive income
Net income 1,613 1,613 1,613
Other comprehensive income, net of tax
Unrealized gains on securities available 345 345 345
for sale, net of reclassification
adjustment (see disclosure)
Other comprehensive income 345
-------
Comprehensive income $ 1,958
=======
Dividends declared on common stock (640) (640)
------- ------- ------- ------- -------
BALANCE - SEPTEMBER 30, 1998 $22,349 $16,386 $ 1,075 $ 1,829 $ 3,059
======= ======= ======= ======= =======
Disclosure of reclassification amount:
Unrealized holding gains during period $ 523
Less: reclassification adjustment for
ains included in net income (178)
------
Net unrealized gains on securities $ 345
------
</TABLE>
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
Notes to Consolidated Financial Statements
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and, therefore, do
not include all of the disclosures and notes required by generally accepted
accounting principles. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the nine-month periods ended
September 30, 1998 and 1997 are not necessarily indicative of the results that
may be expected for the entire year or any interim periods.
The accompanying unaudited consolidated financial statements include the
accounts of United Community Bankshares, Inc. ("UCB" or "the Company") and its
wholly-owned subsidiaries, The Bank of Franklin ("BOF"), The Bank of Sussex and
Surry ("BSS"), and their wholly-owned subsidiaries, The Bank of Franklin Service
Corporation and BSS Service Corporation, respectively. All significant
intercompany accounts and transactions have been eliminated.
BOF and BSS commenced operations in 1971 and 1902, respectively. The Bank of
Franklin Service Corporation and BSS Service Corporation were organized in 1997
and 1994, respectively, to facilitate investment in financial related services.
NOTE B - EARNINGS PER SHARE
Basic earnings per share, for the periods ended September 30, 1998 and 1997, are
calculated by dividing net income by the average number of common shares
outstanding of 1,829,209 shares.
Diluted earnings per common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
would then share in the earnings of the entity. In accordance with the
requirements of adopted FASB Statement No. 128, Earnings per Share, all prior
period EPS data has been restated to reflect the change in accounting
requirements. Diluted earnings per share are calculated by dividing net income
by the diluted average shares outstanding. For the third quarters of 1998 and
1997, the average diluted shares outstanding was 1,842,423 and 1,829,209,
respectively. For the nine-month periods ended September 30, 1998 and 1997, the
average diluted shares outstanding was 1,844,712 and 1,829,209, respectively.
<PAGE>
(b) Pro Forma Financial Information.
Pro Forma Combined Balance Sheet
The following unaudited pro forma combined balance sheet combines the
consolidated historical balance sheets of the Company and UCB on the assumption
that the Merger had been effective as of September 30, 1998, giving effect to
the Merger on a pooling of interests accounting basis. This unaudited pro forma
combined balance sheet should be read in conjunction with the consolidated
historical financial statements of both the Company and UCB, including the
respective notes thereto, included in the Registration Statement.
ATLANTIC FINANCIAL CORP.
PRO FORMA COMBINED BALANCE SHEET
AS OF September 30, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ASSETS MACB UCB ADJUSTMENTS COMBINED
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $5,760 $4,785 $10,545
Investment securities:
Available for sale 30,755 45,220 75,975
Held to maturity 8,694 7,505 16,199
Federal funds sold 10,111 3,630 13,741
Loans, net 118,156 88,828 206,984
Bank premises and equipment, net 8,410 2,420 10,830
Other real estate owned 374 148 522
Accrued interest receivable 1,352 1,978 3,330
Other assets 2,068 2,035 4,103
----------------------------------------------------------------------------
$185,680 $156,549 $0 $342,229
============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $25,864 $18,631 $44,495
Interest-bearing 137,357 111,394 248,751
----------------------------------------------------------------------------
Total deposits 163,221 130,025 293,246
Short-term borrowings 286 2,689 2,975
Long-term debt 49 0 49
Accrued interest payable 590 489 1,079
Other liabilities 443 997 1,440
----------------------------------------------------------------------------
Total liabilities 164,589 134,200 298,789
----------------------------------------------------------------------------
Stockholders' Equity
Common stock 10,995 1,829 8,003 20,827
Surplus 4,026 3,059 (7,085) 0
Retained Earnings 5,857 16,386 (918) 21,325
Accumulated other comprehensive
income, net 213 1,075 1,288
----------------------------------------------------------------------------
21,091 22,349 0 43,440
----------------------------------------------------------------------------
$185,680 $156,549 $0 $342,229
============================================================================
</TABLE>
See Notes to Pro Forma Combined Financial Information.
<PAGE>
Pro Forma Combined Statement of Income
The following unaudited pro forma combined statement of income for the
nine months ended September 30, 1998 presents the combined statement of income
of the Company and UCB assuming that the Company and UCB were combined at the
beginning of that period presented on a pooling of interests accounting basis.
This unaudited pro forma combined statement of income should be read in
conjunction with the consolidated historical financial statements of both the
Company and UCB, including the respective notes thereto, included in the
Registration Statement.
ATLANTIC FINANCIAL CORP.
PRO FORMA COMBINED STATEMENT OF INCOME
Nine Months Ended September 30, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
MACB UCB ADJUSTMENTS COMBINED
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $8,861 $5,861 $ - - $14,722
Interest on investment securities:
Taxable 1,597 1,477 - - 3,074
Tax exempt 205 736 - - 941
Interest on federal funds sold 426 285 - - 711
---------------------------------------------------------------------
Total interest income 11,089 8,359 - - 19,448
---------------------------------------------------------------------
Interest expense:
Interest on deposits 4,674 3,692 - - 8,366
Interest on long-term debt 1 - - - - 1
Interest on short-term borrowings 7 31 - - 38
---------------------------------------------------------------------
Total interest expense 4,682 3,723 - - 8,405
---------------------------------------------------------------------
Net interest income 6,407 4,636 - - 11,043
Provision for loan losses 313 62 - - 375
---------------------------------------------------------------------
Net interest income after provision
for loan losses 6,094 4,574 - - 10,668
Non-interest income:
Service charges and fees 567 551 - - 1,118
Gain (loss) on sale of securities 1 1 - - 2
Other 233 148 - - 381
---------------------------------------------------------------------
Total other income 801 700 - - 1,501
---------------------------------------------------------------------
Non-interest expenses:
Salaries and employee benefits 2,464 1,671 - - 4,135
Occupancy expense 441 198 - - 639
Equipment 644 232 - - 876
Other operating expense 1,284 1,027 - - 2,311
---------------------------------------------------------------------
Total other expense 4,833 3,128 - - 7,961
---------------------------------------------------------------------
Income before income taxes 2,062 2,146 - - 4,208
Income taxes 658 533 - - 1,191
---------------------------------------------------------------------
Net income $1,404 $1,613 $ - - $3,017
=====================================================================
Per Share Data:
Net income,basic $0.64 $0.88 $0.72
Net income, diluted $0.61 $0.87 $0.71
Cash dividends $0.00 $0.35 $0.00
Basic weighted average shares outstanding 2,195,238 1,829,209 4,161,638
Diluted weighted average shares outstanding 2,293,123 1,844,712 4,276,188
</TABLE>
See Notes to Pro Forma Combined Financial Information.
<PAGE>
Notes to Pro Forma Combined Financial Information
(1) The pro forma combined information presented is not necessarily
indicative of the results of operations or the financial position that
would have resulted had the Merger been consummated at the beginning of
the periods indicated, nor is it necessarily indicative of the results
of operations in future periods or the future financial position of the
combined entities.
(2) It is assumed that the Merger will be accounted for on a pooling of
interests accounting basis and, accordingly, the related pro forma
adjustments have been calculated using the exchange ratio, whereby the
Company will issue 1.075 shares of Company Common Stock for each share
of UCB Common stock.
(3) Per share data has been computed based on the combined historical
income applicable to common shareholders of the Company and UCB using
the historical weighted average shares outstanding, adjusted to
equivalent shares of Company Common Stock, of the Company and UCB,
adjusted after the exchange as of the earliest periods presented.
(4) Information was appropriately adjusted to reflect the Merger for (i)
the issuance of shares of Company Common Stock and (ii) the elimination
of surplus to reflect this issuance of Company Common Stock with a
$5.00 par value.
<PAGE>
(c) Exhibits.
Exhibit No. Description
2.1 Agreement and Plan of Reorganization between
Mid-Atlantic Community BankGroup, Inc. and
United Community Bankshares, Inc., dated as
of July 8, 1998, filed as Exhibit 2.1 to the
Registration Statement on Form S-4 (File No.
333-62997), dated September 4, 1998,
incorporated herein by reference.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
ATLANTIC FINANCIAL CORP.
Dated: February 12, 1999 By: /s/ Kenneth E. Smith
-------------------------------
Kenneth E. Smith
Executive Vice President and
Chief Financial Officer
<PAGE>
INDEX TO EXHIBITS
No. Description
2.1 Agreement and Plan of Reorganization between Mid-Atlantic
Community BankGroup, Inc. and United Community Bankshares,
Inc., dated as of July 8, 1998, filed as Exhibit 2.1 to the
Registration Statement on Form S-4 (File No. 333-62997), dated
September 4, 1998, incorporated herein by reference.
