UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 0-21285
ATLANTIC FINANCIAL CORP.
Virginia 54-1809409
(State or other jurisdiction (IRS Employer ID number)
of incorporation)
737 J. Clyde Morris Boulevard,
Newport News, Virginia 23601
(Address of principal offices) (Zip Code)
Registrant's telephone number including area code (757)595-7020
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of Each Class on which registered
Common stock, $5 par value NASDAQ Stock Market
Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days.
Yes X No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. __X__
Registrant's revenues for the fiscal year ended December 31, 1998 $28,345,507
------------
The aggregate market value (based on a sale price of the stock of $16.50) of
Atlantic Financial Corp. voting stock held by non-affiliates as of March 29,
1999 was $59,316,032.
As of March 29, 1999, Atlantic Financial Corp. has 4,189,385 shares of Common
Stock $5 Par Value outstanding.
The Proxy Statement of the annual meeting of shareholders to be held April 27,
1999 is incorporated by reference in Part III of this Form 10-KSB.
<PAGE>
Form 10-KSB Cross-Reference Index
Companies have been encouraged by the Securities and Exchange Commission (SEC)
to combine their Annual Report to Shareholders and Form 10-KSB Annual Report
into a single document. This Form 10-KSB Annual Report incorporates by reference
certain information contained in the Annual Report to Shareholders, as is
reflected in the following Cross-Reference Index. However, only those sections
of the Annual Report to Shareholders referred to in the Cross Reference Index
below are to be deemed "filed" with the SEC as part of this Form 10-KSB Annual
Report.
Page
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Part I
Item 1. Business............................................................2
Item 2. Properties..........................................................2
Item 3. Legal Proceedings................................................None
Item 4. Submission to Matters to a Vote of Security Holders..............None
Part II
Item 5. Market for Common Equity and Related Shareholder Matters............2
Item 6. Management's Discussion and Analysis.............................5-19
Item 7. Financial Statements............................................21-44
Item 8. Changes In & Disagreements With Accountants on
Accounting and Financial Disclosure.....................None
Part III
Item 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance With Section 16(a)
of the Exchange Act (1)
Item 10. Executive Compensation. (1)
Item 11. Security Ownership of Certain Beneficial Owners and Management. (1)
Item 12. Certain Relationships and Related Transactions. (1)
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits (2)
(b) Reports on Form 8-K (2)
- - ----------------
(1) This information is omitted pursuant to Instruction G of Form 10-KSB
since the Registrant intends to file with the Commission a definitive
Proxy Statement, pursuant to Regulation 14A, not later than 120 days
after December 31, 1998.
(2) A list of Exhibits and Reports on Form 8-K was filed separately. Copies
of any Exhibits not contained herein may be obtained by writing to
Kenneth E. Smith, Secretary, Atlantic Financial Corp., 737 J. Clyde
Morris Boulevard, Newport News, VA 23601.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Atlantic Financial Corp.
(Registrant)
/s/ W. J. Farinholt 3/30/99
-----------------------------------
W. J. Farinholt / Date
President/CEO
/s/ Kenneth E. Smith 3/30/99
-----------------------------------
Kenneth E. Smith / Date
Executive Vice President &
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Joseph A. Lombard, Jr. 3/30/99 /s/ W. J. Farinholt 3/30/99
- - ----------------------------------- ------------------------------
JOSEPH A. LOMBARD, JR. / Date W. J. FARINHOLT / Date
Chairman of the Board President, CEO, Director
/s/ J. Philip Bain, Jr. 3/30/99 /s/ Charles F. Dawson 3/30/99
- - ----------------------------------- ------------------------------
WILLIAM D. FARY / Date CHARLES F. DAWSON / Date
Director Director
/s/ Robert D. Foster 3/30/99 /s/ Harry M. Healy 3/30/99
- - ----------------------------------- ------------------------------
ROBERT D. FOSTER / Date HARRY M. HEALY / Date
Director Director
/s/ Thomas Z. Wilke 3/30/99 /s/ Winifred O. Pearce 3/30/99
- - ----------------------------------- ------------------------------
THOMAS Z. WILKE / Date WINIFRED O. PEARCE / Date
Director Chief Operating Officer, Director
<PAGE>
GREETINGS TO FELLOW SHAREHOLDERS:
We are pleased to present the first Annual Report for Atlantic Financial Corp.
(the Company). Although this is technically the first, we are a Company rich in
history! One of the members of our financial family, the Bank of Sussex and
Surry, began banking operations in 1902 and has been a vital participant in its
community ever since. The official origin of the Company was December 1, 1998
when Mid-Atlantic Community BankGroup and United Community Bankshares
consummated a merger of equals and simultaneous name change. The merger resulted
in a Company with total assets of $360.3 million, placing it among the top
fifteen banking organizations headquartered in Virginia. On a combined basis,
the Company exhibited strong growth in total resources reaching its current
level through a $45.0 million increase (14.3%) over 1997's total assets of
$315.3 million.
The year, 1998, was a satisfying and also challenging one. Rather than being
intimidated by the consolidation in the banking industry, we participated in it.
Our merger, described above, expanded our geographical spread throughout
Southeastern Virginia, stretching from the Middle Peninsula across the Peninsula
and over to the Southside. While this "business marriage" was a critical step
for our future, the daunting task of managing a merger of equals has required
much energy. We brought the strengths of two companies together and have begun
to accent and expand their influences over the combined entity. We have already
begun providing data processing for all subsidiary banks in one data center on
the same software system. This will provide uniformity in management information
systems and improved financial reporting. Further, it will provide management
the tools to make swift, informed decisions and strengthen the Company's
tactical position as a leader in its market.
Pre-tax net income declined in 1998 to $5.1 million from $5.4 million in 1997.
After-tax net income for 1998 of $3.7 million represented a 9.8% decrease from
1997. This translated into an $0.86 per share, assuming dilution, in 1998 versus
$1.00 per share in 1997. This 14% decrease was affected somewhat by the expanded
average primary number of shares outstanding, increasing from 4,055,268 December
31, 1997 to 4,270,957 December 31, 1998.
Shareholder value as reflected in December 31, 1998 book value per share was
$10.35 per share, compared to $9.70 at year-end 1997. Additionally, net income
represented a return on average equity of 8.89% compared to 11.32% in 1997.
1998 Major Accomplishments:
* Installed and implemented check imaging system at Peninsula Trust Bank.
* Opened two new full service banking offices at Peninsula Trust Bank.
* Completed franchise building purchase of 50% interest in Johnson Mortgage
Co, LLC, with nine months operations producing 27% return on investment.
* Converted Automated Teller Machine (ATM) processing in Peninsula Trust
Bank to "in-house", enhancing cost control, customer service, and employee
efficiency.
Service to our customers, employees, and you, our shareholders, can produce an
environment where the needs of each are met fully. We thank you for your
continued support and earnestly solicit your business and your suggestions.
Sincerely,
W. J. Farinholt Joseph A. Lombard, Jr., DDS
President & CEO Chairman of the Board
1
<PAGE>
DESCRIPTION OF BUSINESS
Atlantic Financial Corp. (the "Company") is the parent bank holding company for
Peninsula Trust Bank, Incorporated (PTB), The Bank of Franklin (BOF) and the
Bank of Sussex and Surry (BSS), (the "Banks"). PTB, BOF and BSS are Virginia
chartered banks that offer a full range of banking services, principally to
individuals and small to medium size businesses in their respective market
areas.
Peninsula Trust Bank, headquartered in Gloucester, Virginia, operates seven
full-service banking offices located in Gloucester, Williamsburg, Charles City
County, Newport News, Glenns and Mattaponi, Virginia. Incorporated in Virginia
in 1988, PTB is organized under the Virginia Banking Act as amended and
commenced business as a commercial bank on July 20, 1989. Peninsula Trust Bank's
operations are directly affected by the monetary and banking policies of various
regulatory agencies, including the Board of Governors of the Federal Reserve
System and the Bureau of Financial Institutions of the Virginia State Corporate
Commission. The Bank is insured by the Federal Deposit Insurance Corporation and
is subject to regulation, supervision and examination by various regulatory
authorities. PTB offers a broad range of financial services including a variety
of loan and deposit services, personal lines of credit, equity lines, credit
cards and merchant accounts. PTB had 124 full-time equivalent employees on
December 31, 1998.
The Bank of Franklin, headquartered in Franklin, Virginia, operates five
full-service banking offices located in Franklin, Suffolk, Courtland and
Newsoms, Virginia. BOF was organized and chartered under the laws of the
Commonwealth of Virginia on July 8, 1970 and commenced operations on February 4,
1971. BOF is a State nonmember bank. The Bank is insured by the Federal Deposit
Insurance Corporation and is subject to regulation, supervision and examination
by various regulatory authorities. BOF provides a wide range of financial
services, principally to individuals and to small and medium size business,
including individual and commercial demand, savings, and time deposit accounts,
ATM services, sales of US Savings bonds, collection items and official checks.
BOF had 51 full-time equivalent employees on December 31, 1998.
The Bank of Sussex and Surry, headquartered in Wakefield, operates three
full-service banking offices in Wakefield, Ivor and Surry, Virginia. BSS was
organized and chartered under the laws of the Commonwealth of Virginia on April
12, 1902 and commenced operations on July 31, 1902. BSS is a State nonmember
bank. The Bank is insured by the Federal Deposit Insurance Corporation and is
subject to regulation, supervision and examination by various regulatory
authorities. BSS provides a wide range of financial services, principally to
individuals and to small and medium size business, including individual and
commercial demand, savings, and time deposit accounts, ATM services, sales of US
Savings bonds, collection items and official checks. BSS also offers a wide
array of real estate products including a long-term fixed rate mortgage product
that is sold in a secondary market. BSS is authorized to provide trust services,
but does not currently do so. BSS had 26 full-time equivalent employees on
December 31, 1998.
The Company's primary corporate mission is to maximize its sustainable earnings
while being a responsible business that maintains an image of trust and
competence in rendering high quality financial services targeting the business
and professional markets and, at the same time, serving the retail market,
through the efforts of fairly treated employees. None of the Company's employees
are represented by any collective bargaining unit and the Company considers
relations with its employees to be good.
The banking industry is competitive in the Company's market area. There are
approximately 11 banks with local deposits as of June 30, 1998 of $2.6 billion,
within the primary trade areas of its subsidiary banks.
PROPERTIES
The principal office of Peninsula Trust Bank is located at 7171 George
Washington Memorial Highway, Gloucester, Virginia. At December 31, 1998, PTB
conducted business from seven locations, all of which are owned. The Company's
Data Processing Center is housed in the Peninsula Trust Bank Glenns office.
The principal office of the Bank of Franklin is located at 100 East Fourth
Avenue, Franklin, Virginia. At December 31, 1998, BOF conducted business from
five locations, four of which are owned and one of which is leased.
The principal office of the Bank of Sussex and Surry is located at 205 Railroad
Avenue, Wakefield, Virginia. At December 31, 1998, BSS conducted business from
three locations, all of which are owned. BSS also owns property located on 535
County Drive, Wakefield, Virginia, on which it owns a stand-alone ATM facility.
The Operations Center, including the proof department and item processing for
BOF and BSS is housed in leased space in Courtland, Virginia.
2
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is only one class of equity securities outstanding, common stock, with a
par value of $5.00 per share. The capital stock is registered pursuant to the
Securities and Exchange Act of 1934, Section 12(g) of the Act. As of December
31, 1998, there were 1863 holders of record of the Company's common stock.
The following table sets forth, for the quarters indicated, the high and low
closing prices for AFC Common Stock on the Nasdaq SmallCap Market.
High Low
---- ---
1998
Fourth Quarter...................... $19.50 $15.75
Third Quarter....................... 21.50 18.00
Second Quarter...................... 24.00 20.00
First Quarter....................... 23.00 16.25
1997
Fourth Quarter...................... $16.00 $12.00
Third Quarter....................... 12.75 11.50
Second Quarter...................... 13.00 11.50
First Quarter....................... 13.00 11.50
1996
Fourth Quarter...................... 13.00 11.75
Third Quarter....................... 12.44 11.19
Second Quarter...................... 12.50 11.00
First Quarter....................... 11.75 9.25
3
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At and for the Year Ended December 31,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Interest income...................... $26,263 $23,738 $21,071 $17,684 $13,849
Interest expense..................... 11,372 10,125 9,108 7,630 5,019
------ ------ ----- ----- -----
Net interest income.................. 14,891 13,613 11,963 10,054 8,830
Provision for loan losses............ 477 476 481 471 441
Noninterest income................... 2,082 1,716 1,501 1,220 1,101
Noninterest expense.................. 11,386 9,433 8,117 7,075 6,060
------ ----- ----- ----- -----
Income before income taxes........... 5,110 5,420 4,866 3,728 3,430
Income taxes........................ 1,448 1,360 1,409 990 962
----- ----- ----- --- ---
Net income........................... $3,662 $4,060 $3,457 $2,738 $ 2,468
====== ====== ====== ====== =======
PER SHARE DATA: (1)
Net income, basic.................... 0.88 1.02 0.90 0.78 0.77
Net income, diluted.................. 0.86 1.00 0.88 0.77 0.77
Cash dividends....................... 0.34 0.25 0.13 0.06 0.00
Basic Weighted average shares
Outstanding......................... 4,162,044 3,979,027 3,855,066 3,515,042 3,190,562
Diluted weighted average shares
Outstanding......................... 4,270,957 4,055,268 3,917,372 3,555,152 3,215,978
Book value at period end............ 10.35 9.70 8.67 8.06 7.64
BALANCE SHEET DATA:
Total Assets......................... $360,303 $315,257 $286,312 $251,591 $201,864
Loans, net........................... 207,733 185,690 167,932 135,737 115,512
Investment securities................ 94,206 83,493 83,687 82,658 59,044
Deposits............................. 312,310 271,928 250,311 218,329 176,040
Shareholders' equity................. 43,129 40,309 33,411 31,088 23,917
PERFORMANCE RATIOS:
Net interest margin(2)............... 5.04% 5.17% 5.15% 5.04% 5.11%
Return on average assets............. 1.10% 1.37% 1.32% 1.24% 1.33%
Return on average equity............. 8.89% 11.32% 10.85% 10.20% 10.87%
Efficiency ratio(3).................. 64.64% 59.46% 57.71% 60.55% 58.16%
ASSET QUALITY RATIOS:
Allowance for loan losses to period
end loans........................ 1.15% 1.29% 1.36% 1.53% 1.62%
Allowance for loan losses to
nonperforming assets............. 2.71x 2.83x 4.57x 3.52x 1.78x
Nonperforming assets to period end
loans and foreclosed properties.. 0.42% 0.45% 0.31% 0.44% 0.91%
Net charge-offs to average loans..... 0.24% 0.20% 0.18% 0.37% 0.19%
CAPITAL AND LIQUIDITY RATIOS:
Leverage............................. 11.64% 12.49% 11.77% 12.28% N/C
Risk Based Capital Ratios:
Tier 1 capital................... 16.67% 18.56% 16.64% 19.14% N/C
Total capital.................... 17.82% 19.73% 17.81% 20.41% N/C
Average loans to average deposits.... 69.77% 70.35% 67.98% 66.97% 65.62%
</TABLE>
- - ---------------
(1) Amounts have been restated to reflect a two-for-one stock split of MACB
in March 1998.
(2) Net interest margin is calculated as fully taxable equivalent net
interest income divided by average earning assets and represents the
Bank's net yield on its earning assets.
(3) Efficiency ratio is computed by dividing non-interest expense less
foreclosed property expense by the sum of fully taxable equivalent net
interest income and non-interest income, net of securities gains or
losses.
N/C Items not calculated.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of Atlantic Financial Corp. (the
"Company") as of the dates and for the periods indicated. This discussion should
be read in conjunction with the Selected Financial Data, 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 wholly-owned banking subsidiaries, Peninsula Trust Bank ("PTB"), The Bank of
Franklin ("BOF") and The Bank of Sussex and Surry ("BSS"). Contributions from
the Company's 50% membership interest in Johnson Mortgage Co. LLC ("JMC") are
also reflected in the financial results. The Company's existence originated
during the third quarter of 1996 as Mid-Atlantic Community BankGroup, Inc.
("MACB"); however, PTB was the Company's only subsidiary, representing more than
99% of the Company's activities for 1996 and 1997. Effective December 1, 1998,
the merger of MACB and United Community Bankshares ("UCB") was consummated.
Therefore, comparative discussions of consolidated financials reflects the
merger of MACB and UCB.
Overview
Net income of $3.7 million in 1998, was a 9.81% decrease from 1997 net income of
$4.1 million. On a pre-tax basis, net income for the current period was $5.1
million compared to $5.4 million. Despite the reduction in pre-tax income,
income tax expense was higher in 1998 due to $278,000 in merger related expenses
which are not deductible for income tax calculations. Fully diluted earnings per
share were $0.86 in 1998 compared to $1.00 in 1997. Excluding the one time
merger related expenses, the 1998 per share figure was $0.93. Profitability as
measured by return on average stockholders' equity was 8.89% in 1998 compared to
11.32% in 1997.
Much of the consideration in the merger of UCB into MACB involved a comparison
of asset growth between the two companies. UCB's two subsidiary banks were older
and reflected more moderate asset growth while having accumulated substantial
capital levels. MACB's subsidiary bank (a de novo in 1989) had demonstrated
consistent growth levels beyond the ability to augment capital through internal
generation. Therefore, MACB and previously PTB had borne the expense of multiple
stock offerings since 1989. The merger, thus, offered the ability for UCB to
leverage its capital and allow PTB to continue its rapid asset growth with no
anticipated need to return to the market for raising additional capital.
A meaningful measure of resource efficiency is the Company's return on average
assets (ROA). This measure was 1.10% for 1998 compared to 1.37% for 1997. Both
of these figures compare favorably to an industry wide benchmark of 1.00%,
particularly in light of the Company's strong asset growth and commitment to
branch expansion, as well as the merger related expenses and upgrade investments
in the computer technology area.
Results of Operations
The Company's banking subsidiaries operate by attracting deposits from the
general public and employing such deposit funds in the purchase of investment
securities and the making of commercial, consumer, and residential construction
and permanent mortgage real estate loans. Revenues are derived principally from
interest on loans and investments. The Company's major expense is interest paid
on deposits. Results of operations depend primarily on the level of net interest
income, which is the interest and fees earned on loans plus investment interest
minus interest paid on deposits and short-term borrowings. Thus, net interest
income is reflective of yields received in interest-earning assets and the rates
paid on interest-bearing liabilities.
Net Interest Income
Total interest and fee income from loans and investments for 1998 was $26.3
million compared to $23.7 million in 1997, a 11.0% increase. This was
accomplished through an increase in total average earning assets from $275.2
million for 1997 to $308.4 million for 1998. As a percentage of average total
assets, the earning assets component was relatively constant, declining slightly
from 93.08% in 1997 to 92.99% in 1998. Total interest expense increased $1.2
million (12.9%) in 1998 to a total of $11.4 million.
Net interest income (tax equivalent interest income less interest expense)
increased $1.3 million (9.3%) in 1998. The net interest margin ratio (tax
equivalent net interest income expressed as a percentage of average earning
assets) declined to 5.04% in 1998 from 5.17% in 1997. The banking industry, as a
whole, is forecasting tighter or shrinking interest margins. This is due to
steadily rising competition for sources of funds from such nonbank competition
as credit unions and mutual funds. With interest rates in the bank deposits
arena at historically low levels, depositors are aggressively seeking
alternatives and not allowing banks to effectively reprice downward their
greatest resource for funding. However, borrowers are demanding the benefits of
a falling rate environment, thus, reducing yields on loans. Competition for
consumer loans, particularly vehicle and mortgage related (equity line) products
continues to be impacted by nonbank players also.
5
<PAGE>
Added complexity of this competition is that it is being conducted on an uneven
playing field in that banks and credit unions have dissimilar income tax
liabilities. Banks bear substantially greater tax burdens than do credit unions.
This has resulted in intense pressure on competitive interest rates. The
challenge for Bank management, therefore, is to expand its search for
noninterest income and other efficiencies in its operations.
Non-interest Income
Total non-interest income in 1998 was $2.1 million a 23.5% increase over $1.7
million the previous year. The primary source of non-interest income in prior
years has been service charges and fees related to deposit accounts. All service
fees are under review for the possibility of upward adjustment. The Company has
expanded its network of automated teller machines (ATM) and should experience
increased revenues from foreign card use at its ATMs. The Company will continue
its efforts to control what customers perceive as nuisance charges to maximize
its competitive position, although the ability to maintain consistent profit
levels will require greater contributions from non-interest income to offset
future pressure on net interest income. The consummation of the Company's
purchase of 50% interest in JMC has paid immediate dividends, contributing
$134,500 to net income in the first nine months of the Company's ownership. This
new venture will enable the Company to expand its service to bank loan customers
by providing an efficient outlet through which they can seek long term fixed
rate products. An improved base of product offerings will enhance the Company's
ability to create, expand, and sustain broader and more tightly woven customer
relationships. It also positions the Company to take advantage of the burgeoning
refinancing market. The Company also has entered into a contract with UVEST to
begin offering, later in 1999, limited investment products (fixed and variable
rate annuities) throughout its banking offices.
Non-interest Expense
Total non-interest expense totaled $11.4 million in 1998, up from 1997's $9.4
million. Included in this increase are the one time merger related expenses of
$278,000 discussed above. Depreciation expense of fixed assets increased
significantly due to the following reasons: (1) PTB implemented a new image
processing system for its item capture and check processing activities, (2) PTB
opened two new banking offices, (3) PTB moved its Newport News banking office
from a temporary facility to a permanent site, (4) UCB converted both of its
subsidiary banks' data processing system to the PTB processing center requiring
substantial upgrading in computer hardware and telecommunications connectivity.
Additionally, one time installation related expenses associated with the fixed
asset expansion above further contributed to the overall increase. The two new
banking offices also increased salary and benefits expense in advance of
increased revenue generation.
Financial Condition
Another year of quality growth occurred as the Company saw total assets increase
to $360.3 million which represented a $45.0 million increase, or 14.3% over
year-end 1997. The primary source of this growth was an increase in total
deposits of $40.4 million (14.9%). Employment of these new resources was
accomplished through increases in the loan portfolio and investment securities
account of $22.0 million (11.8%) and $10.7 million (12.8%), respectively. Loan
demand was stable throughout 1998, although not as strong as previous years.
Provision / Allowance for Loan Losses & Asset Quality
During 1998 the Company provided $477,000 to the reserve for loan losses. This
represents an increase of $1,250 over 1997. At year-end 1998 the reserve equaled
$2.4 million, a sound 1.15% of outstanding loans. Non-performing assets at
year-end 1998 totaled $893,000. All other delinquencies on which interest is
still accruing are considered at manageable levels with more than adequate
coverage in the reserve for loan losses described above. Net charge-offs for
1998 were $483,000 compared to $367,000 in 1997. Credit decisions continue to be
based on the borrower's cash flow, the value of underlying collateral, and the
integrity of the borrower. The economy, both nationally and locally, has enjoyed
an extended recovery/growth cycle. Yet personal and small business bankruptcies
have reflected a disturbing growth trend. Although the Bank has not been
materially "victimized" by this bankruptcy trend, management is substantially
more attentive to underwriting standards and the importance of a meaningful loss
reserve.
6
<PAGE>
Capital Resources and Liquidity
Capital growth was again supported through internal generation in the form of
retained earnings. The increase in capital resulted in a capital to total assets
ratio at year-end 1998 of 12.0%, compared to 12.8% December 31, 1997. This level
is considered an ample reserve to support continued asset growth for the
immediate future and to provide a buffer against unforeseeable downturns in
business and economic cycles and is substantially above regulatory prescribed
minimum recommended levels. Management's target for the capital/assets ratio is
9.0%; therefore, significant leveraging of current capital funds is a primary
goal.
Liquidity is provided through several sources. The most readily convertible to
cash is "Federal funds sold," or the overnight sale of excess reserves to other
banks. The Company has adopted policy and procedure guidelines to comply with
Regulation F of the Board of Governors of the Federal Reserve System regarding
interbank liabilities risk, limiting the Company's exposure to credit risk in
its dealing with correspondent banks. Sales of Fed funds averaged $18.7 million
during 1998, up 56.4% from the $11.9 million average of 1997. The increase was
due in part to call activity in the investment portfolio. Also, Management
deliberately permitted the Fed funds level to increase as the merger transaction
progressed during the fourth quarter of 1998, while it was re-evaluating an
overall asset liability management (ALM) plan. Management will target an average
Fed funds sales level of $12.5 million for 1999. Additional liquidity exists
within the investment account where $4.5 million matures within ninety days.
Also $6.9 million of callable bonds is projected to be called within three
months and another $7.3 million is projected to be called in three to twelve
months. The Company also maintains deposit relationships with several
correspondent banks which include commitments through various lines of credit
for short-term borrowing needs. The Company's ability to satisfy credit demands,
routine deposit withdrawals, and other corporate needs is considered adequate.
Management is not aware of any known trends, demands, events, commitments, or
uncertainties that either will result or reasonably might result in a material
decrease in liquidity.
Future Plans
The Company owns two parcels in the southern end of Gloucester County at
Gloucester Point. The Company plans to begin construction on a new full service
banking office on the parcels in the second half of 1999, subject to regulatory
approval. An opening is targeted for early 2000.
The Company has also developed informal strategic plans for the immediate and
near future. These include approaches to continued ability to compete in the
face of consolidation of the financial services industry and the resultant
massive size of some of the Company's competitors. In this vein, the Company
will continue to explore all avenues of expansion including other mergers
similar to the one consummated in 1998, as well as possible acquisitions or de
novo expansion.
The Company plans to establish some level of internet presence before the end of
1999.
Effects of Inflation and Changing Prices
The consolidated financial statements and notes thereto presented herein were
prepared in accordance with generally accepted accounting principles (GAAP),
which require the measurements of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased costs of the Company's operations. Unlike industrial
companies, nearly all of the assets and liabilities of the Company are monetary
in nature. Money is the Company's primary raw material. As a result, interest
rates have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates are affected by inflation, but the
timing and magnitude of the changes may not coincide with changes in the
consumer price index. Management actively monitors interest rate sensitivity, as
illustrated by the Gap Analysis, in order to minimize the effects of
inflationary trends on interest rates. Other areas of non-interest expenses may
be more directly affected by inflation.
7
<PAGE>
Average Balances, Interest Income and Expenses, Average Yields and Rates
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Securities:
Taxable................ $62,687 $4,158 6.63% $56,828 $3,950 6.95% $55,292 $3,726 6.74%
Tax exempt (1)......... 26,822 1,911 7.12% 26,389 1,791 6.79% 26,829 1,961 7.31%
------ ----- ----- ------ ----- ----- ------ ----- -----
Total securities ..... 89,509 6,069 6.78% 83,212 5,741 6.90% 82,121 5,687 6.92%
Federal funds sold ........ 18,660 997 5.34% 11,931 666 5.58% 7,855 436 5.56%
Loans, net (2) ............ 200,238 19,847 9.91% 180,011 17,940 9.97% 155,020 15,614 10.07%
------- ------ - ----- ------- ------ - ----- ------- ------ ------
Total earning assets . 308,407 26,913 8.73% 275,154 24,347 8.85% 244,996 21,737 8.87%
Less: allowance for loan
losses...................... (2,520) (2,450) (2,235)
Total non-earning assets...... 25,782 22,897 19,890
------ ------ ------
Total assets ................. $ 331,669 $295,601 $262,651
========= ======== ========
Liabilities & Stockholders' equity:
Interest bearing liabilities:
Checking..................... $45,301 $1,363 3.01% $39,171 $1,245 3.18% $37,940 $1,162 3.06%
Savings and money market
deposits................. 48,163 1,521 3.16% 46,879 1,479 3.15% 42,648 1,426 3.34%
Other time.................. 153,045 8,435 5.51% 134,881 7,331 5.44% 116,336 6,469 5.56%
------- ----- ----- ------- -------- ----- -- ------- -- ----- -----
Total interest bearing
deposits................. 246,509 11,319 4.59% 220,931 10,055 4.55% 196,924 9,057 4.60%
Short-term borrowings....... 1,098 53 4.83% 1,382 70 5.07% 1,140 54 4.74%
----- -- ----- ----- -- ----- ----- -- -----
Total interest-bearing
liabilities................... 247,607 11,372 4.59% 222,313 10,125 4.55% 198,064 9,111 4.60%
Noninterest-bearing liabilities:
Demand deposits............. 40,498 34,940 31,098
Other non-interest bearing
liabilities................. 2,367 2,487 1,627
----- ----- -----
Total liabilities............. 290,472 259,740 230,789
Stockholders' equity.......... 41,197 35,861 31,862
------ ------ ------
Total liabilities and
stockholders' equity........ $331,669 $295,601 $262,651
======== ======== ========
Net Interest Income........... $15,541 $14,222 $12,626
======= ======= =======
Interest rate spread (3)...... 4.13% 4.30% 4.27%
Net Interest margin (4)....... 5.04% 5.17% 5.15%
</TABLE>
- - ---------------
(1) Income and yields are reported on a tax equivalent basis assuming a
federal tax rate of 34%.
(2) For the purposes of these calculations, nonaccruing loans are included
in the daily average loan amounts outstanding.
(3) Interest spread is the average yield earned on earning assets,
calculated on a fully taxable equivalent basis, less the average rate
incurred on interest-bearing liabilities.
(4) Net interest margin is the net interest income, calculated on a fully
taxable basis assuming a federal tax rate of 34%, expressed as a
percentage of average earning assets.
8
<PAGE>
Volume and Rate Analysis
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
---------------------- ---------------------
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Securities:
Taxable......................... $376 ($168) $208 $105 $119 $224
Tax-exempt...................... 30 90 120 (32) (138) (170)
Loans (net)........................ 1,997 (90) 1,907 2,479 (153) 2,326
Federal funds sold................. 358 (27) 331 228 2 230
--- ---- --- --- - ---
Total interest income........... 2,761 (195) 2,566 2,780 (170) 2,610
----- ----- ----- ----- ----- -----
INTEREST PAID ON:
Checking........................ 179 (61) 118 38 45 83
Savings and money market accounts 38 4 42 124 (71) 53
Time deposits................... 1,008 96 1,104 997 (135) 862
Short-term borrowings.............. (14) (3) (17) 12 4 16
---- --- ---- --- - --
Total interest expense.......... 1,211 36 1,247 1,171 (157) 1,014
----- -- ----- ----- ----- -----
Net interest income........ $1,550 ($231) $1,319 $1,609 ($13) $1,596
====== ====== ====== ====== ===== ======
</TABLE>
Market Risk and Interest Sensitivity Analysis
The Company's primary component of market risk is interest rate volatility. The
Company's net interest income, the primary component of its net income, is
subject to substantial risk due to changes in interest rates or changes in
market yield curves, particularly if there is a substantial variation in the
timing between the repricing of the Company's assets and the liabilities which
fund them. The Company seeks to manage this risk by monitoring and controlling
the variation in repricing intervals between its assets and liabilities. To a
lesser extent, the Company also monitors its interest rate sensitivity by
analyzing the estimated changes in market value of its assets and liabilities
assuming various interest rate scenarios. There are a variety of factors which
influence the repricing characteristics and market values of any given asset or
liability. The matching of the repricing characteristics of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice,
either by its contractual terms or based upon certain assumptions made by
management, within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets
anticipated to mature or reprice within a specific time period and the amount of
interest-bearing liabilities anticipated to mature or reprice within that same
time period. A gap is considered positive when the amount of interest rate
sensitive assets maturing or repricing within a specific time frame exceeds the
amount of interest rate sensitive liabilities maturing or repricing within that
same time frame. Conversely, a gap is considered negative when the reverse
relationship exists between interest rate sensitive assets and liabilities. In a
rising interest rate environment, an institution with a negative gap would
generally be expected, absent the effects of other factors, to experience a
greater increase in the costs of its liabilities relative to the yield of its
assets and, thus, a decrease in the institution's net interest income. An
institution with a positive gap would generally be expected to experience the
opposite results. Conversely, during a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while a
positive gap would tend to adversely affect net interest income. Management
monitors interest rate sensitivity so that adjustments in the asset and
liability mix, when deemed appropriate, can be made on a timely manner.
The Company uses earnings simulations, duration, and gap analysis to analyze and
project future interest rate risk. The investment portfolio, specifically, is
analyzed as to interest rate risk as well as call and extension risk. These
three elements combined will have a direct bearing on long term portfolio
profitability, both in terms of price change and, importantly, future yield. The
amount of interest rate risk and call and extension risk contained in the
portfolio will either stabilize or destabilize future Company earnings if
overall interest rates change. The best mathematical measurements of interest
rate risk and call and extension risk are effective modified duration (EMD) and
convexity, especially in today's environment with so many bonds containing
direct or indirect call options.
9
<PAGE>
Since many types of bonds are callable or can vary in average life as rates
change, the Company considers what effect this could have on market value, and
thus, potential earnings. Duration and Modified Duration are used without
negative convexity and, therefore, are not as accurate predictors of price
change when dealing with bonds that can have variable principal payouts
("callables", "mortgages"). Negative convexity is used in conjunction with EMD
and is useful when there is a chance of more than one average life or workout
date (maturity/call date). It reflects the fact that with these type bonds,
market prices will almost always decrease in value more than they increase given
the same rate shift up and down. EMD and convexity, when used together, provide
a close approximation of market price changes per 1% moves in interest rates.
Negative convexity usually works against the bondholder in both higher and lower
rate scenarios.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998 that are
anticipated by the Company, using certain assumptions based on its historical
experience and other data available to management, to reprice or mature in each
of the future time periods shown. Except as stated below, the amount of assets
and liabilities shown which reprice or mature during a particular period was
determined in accordance with the earlier of the term to repricing or the
contractual terms of the asset or liability. Prepayment assumptions have not
been applied in the table in estimating the repricing of the Company's
mortgage-backed securities, but are studied monthly in making investment
decisions and managing interest rate risk. The estimated rates of prepayment
assumed are based upon the current coupon rates and their relationship to the
current interest rate environment. Other assumptions included in the investment
portfolio are projected redemption dates of current investments that have
callable features allowing the issuer of the investment to call or redeem the
issue prior to its contractual maturity.
Interest Sensitivity Analysis(1)
<TABLE>
<CAPTION>
Maturing or Repricing In:
----------------------------------------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
------- ---- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal funds sold............... $29,524 $ - $ - $ - $ 29,524
Investment securities (1)........ 4,927 3,702 28,888 54,826 92,343
Loans (2)(3)..................... 54,323 27,548 82,602 45,593 210,066
------ ------ ------ ------ -------
Total interest-earning
Assets....................... $ 88,774 $ 31,250 $ 111,490 $ 100,419 $ 331,933
======== ======== ========= ========= =========
Interest Bearing Liabilities:
Deposits:
Interest bearing demand....... 16,206 - 19,251 - 35,457
MMDAs and other savings....... 31,732 - 30,985 - 62,717
Time deposits $100,000
and over.................... 9,051 15,797 11,460 - 36,308
Other time deposits........... 24,768 55,384 48,385 - 128,537
Other borrowed money.............. 1,546 24 19 - 1,589
----- -- -- -----
Total interest-bearing
Liabilities................. $ 83,303 $71,205 $ 110,100 $ - $ 264,608
======== ======= ========= ====== =========
Period gap........................... $ 5,471 $(39,955) $ 1,390 $ 100,419 $ 67,325
Cumulative gap....................... $ 5,471 $(34,484) $(33,094) $67,325
Cumulative gap as a percent of total
earning assets.................... 1.65% (10.39%) (9.97%) 20.28%
</TABLE>
- - ---------------
(1) The amounts shown for securities do not reflect the unrealized gain on
available for sale securities, which was approximately $1,863,000 at
December 31, 1998.
(2) the amount shown for loans have not been reduced by the allowance for
loan losses or unearned income, which were approximately $2,424,000 and
$590,000, respectively, at December 31, 1998.
(3) The amounts shown for loans do not include nonaccrual loans, which were
approximately $681,000 at December 31, 1998.
Management's 1999 target ratio for the 0-365 day cumulative gap is +/- 10% in
1999. The Company manages the interest rate risks by monitoring the balances,
rates, call features and maturities of rate sensitive assets and liabilities.
10
<PAGE>
Securities
The Company's securities portfolio serves several purposes. Portions of the
portfolio are held as investments, while the remaining portions are used to
assist the Company in liquidity and asset liability management.
In June, 1993, the Financial Accounting Standards Board adopted FASB 115, which
changes the manner in which financial institutions classify and account for
their investment securities for fiscal years beginning after December 15, 1993.
In response to this rule change, as of January 1, 1994, the Company revised its
investment securities policy and divided its investment securities portfolio
into two components, (i) securities held to maturity and (ii) securities
available for sale. Securities are classified as securities held to maturity
when management has the intent and the Company has the ability at the time of
purchase to hold the securities to maturity. Securities held to maturity are
carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as securities available for sale. Unrealized gains and losses on securities
available for sale are recognized as direct increases or decreases in a separate
component of shareholders' equity. Securities available for sale include
securities that may be sold in response to changes in market interest rates,
changes in the security's prepayment risk, increases in loan demand, general
liquidity needs and other similar factors. The Company's recent purchases of
investment securities have generally been limited to securities of high credit
quality with short to medium term maturities.
The following tables summarize the book value of the Company's investment
securities at the dates indicated.
Securities Portfolio
<TABLE>
<CAPTION>
December 31,
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury Securities $ 877 $ 886 $ 632 $ 629 $ 534 $ 530
U.S. Government and federal
agencies 25,917 26,157 27,504 27,553 38,230 37,886
States and political subdivisions 28,596 29,237 22,612 22,985 24,547 24,677
Mortgage-backed securities 15,148 15,207 9,779 9,773 4,829 4,795
Corporate debt obligations 3,091 3,135 3,780 3,807 4,128 4,133
Collateralized mortgage obligations 21 21 57 57 116 116
Restricted stocks 698 698 1,034 1,034 342 342
Other securities 4,069 4,940 10 756 361 882
-------- -------- ---- --- -------- ------
Total available-for-sale 78,417 80,281 65,408 66,594 73,087 73,361
-------- ------ ------ ------ ------ -------
HELD-TO-MATURITY
U.S. Government and federal
agencies 4,718 4,755 7,764 7,761 5,428 5,342
States and political subdivisions 6,493 6,680 6,453 6,595 4,797 4,755
Mortgage-backed securities 2,715 2,738 2,573 2,589 -- --
Other securities -- -- 109 109 100 100
------ ------ ------- ------- ------- -------
Total held-to-maturity 13,926 14,173 16,899 17,054 10,325 10,197
-------- ------ ------ ------ ------ ------
Total securities $92,343 $94,454 $82,307 $83,648 $83,412 $83,558
======= ======= ======= ======= ======= =======
</TABLE>
The book value and weighted average yield of the Company's investment securities
at December 31, 1998, by contractual maturity, are reflected in the following
tables. Actual maturities will differ from contractual maturities because
certain borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
11
<PAGE>
Investment Portfolio - Maturity and Yields
(Dollars in thousands)
<TABLE>
<CAPTION>
Over 10
1 Year 1 to 5 5 to 10 Years &
------ ------ ------- Equity
or Less Years Years Securities Total
------- ----- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
MATURITY DISTRIBUTION:
U.S. Agency securities:
Amortized cost 2,398 11,904 11,822 4,510 30,634
Fair value 2,408 12,058 11,946 4,500 30,912
Weighted average yield 5.92% 5.92% 6.78% 6.84% 6.39%
U.S. Treasury securities:
Amortized cost 100 - 777 - 877
Fair value 101 - 785 - 886
Weighted average yield 6.01% 0.00% 5.92% 0.00% 5.93%
State and Political Subdivisions:
Amortized cost 2,258 13,077 15,900 3,854 35,089
Fair value 2,276 13,402 16,347 3,893 35,918
Weighted average yield 7.40% 7.31% 7.97% 8.10% 7.42%
Other Securities:
Amortized cost 571 2,640 1,902 20,630 25,743
Fair value 577 2,676 2,579 20,906 26,738
Weighted average yield 7.76% 6.24% 6.02% 7.26% 7.07%
Total Securities (1):
Amortized cost 5,327 27,621 30,401 28,994 92,343
Fair value 5,362 28,136 31,657 29,299 94,454
Weighted average yield 6.74% 6.61% 7.34% 7.30% 7.07%
</TABLE>
(1) Yields on tax exempt securities are computed on a tax equivalent basis.
The following table summarizes the Company's loan portfolio for the periods
indicated.
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Real estate mortgage:
Commercial.................................... $48,788 $40,233 $33,786 $ 22,482 $20,811
Residential (1-4 family)...................... 52,632 49,746 45,924 41,201 36,064
Home equity................................... 15,939 13,165 11,435 9,488 7,007
Construction 13,935 8,596 9,219 9,077 7,397
Agricultural.................................. 3,044 2,485 2,894 2,791 2,678
Commercial......................................... 30,105 28,734 24,565 17,180 14,098
Agricultural 6,068 7,045 6,437 5,594 4,516
Installment........................................ 39,564 38,097 36,006 29,813 23,698
All other.......................................... 672 617 522 717 392
--- --- --- --- ---
Total loans........................................ 210,747 188,718 170,788 138,343 116,661
Less: unearned income............................. (590) (598) (535) (489) (436)
Less: allowance for loan losses................... (2,424) (2,430) (2,321) (2,386) (1,883)
------ ------ ------ ------ ------
Total net loans............................... $207,733 $185,690 $ 167,932 $ 135,468 $114,342
======== ======== ========= ========= ========
</TABLE>
12
<PAGE>
Loan Portfolio by Percentage
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate mortgage:
Commercial.................................... 23.15% 21.32% 19.78% 16.25% 17.84%
Residential (1-4 family)...................... 24.99% 26.35% 26.89% 29.78% 30.91%
Home equity................................... 7.56% 6.98% 6.70% 6.86% 6.01%
Construction.................................. 6.61% 4.55% 5.40% 6.56% 6.34%
Agricultural.................................. 1.44% 1.32% 1.69% 2.02% 2.30%
Commercial......................................... 14.28% 15.23% 14.38% 12.42% 12.08%
Agricultural....................................... 2.88% 3.73% 3.77% 4.04% 3.87%
Installment loans.................................. 18.77% 20.19% 21.08% 21.55% 20.31%
All other.......................................... 0.32% 0.33% 0.31% 0.52% 0.34%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
</TABLE>
Remaining Maturities of Selected Loans
December 31, 1998
Commercial, financial Real estate -
and Agricultural Construction
---------------- ------------
(Dollars in Thousands)
Within 1 year $16,856 $ 12,415
Variable Rate:
Over one year through five years $ 3,647 $ 290
Over five years $ 1,628 $ 86
Fixed Rate:
Over one year through five years $13,021 $ 680
Over five years $ 2,822 $ 464
The following table summarizes non-performing assets for the periods indicated.
Non-Performing Assets
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans........................................ $ 681 $ 482 $ 372 $ 413 $678
Real estate owned........................................ 212 377 165 188 382
Restructured loans....................................... - - - - - - - - - -
--- --- --- --- ---
Total non-performing assets $893 $859 $537 $601 $1,060
==== ==== ==== ==== ======
Loans past due 90 or more days and accruing interest $559 $196 $587 $257 $152
==== ==== ==== ==== ====
Non-performing loans to total loans, at period end 0.32% 0.26% 0.22% 0.30% 0.58%
Non-performing assets to period end assets 0.25% 0.27% 0.19% 0.24% 0.53%
Non-performing assets to total loans and other
real estate owned 0.42% 0.45% 0.31% 0.44% 0.91%
</TABLE>
As to the nonaccrual loans at December 31, 1998 referred to above, approximately
$35,815 of interest income would have been recorded during such period if the
loan had been current and the interest thereon had been accrued.
The provision for loan losses totaled $477,000, $476,000 and $481,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. In the opinion of
management, the provision charged to operations has been sufficient to absorb
the current year's potential net loan losses while continuing to increase the
allowance for loan losses as the Company's loan portfolio increases.
13
<PAGE>
The following table summarizes changes in the allowance for loan losses.
Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $2,430 $ 2,321 $2,116 $1,883 $1,522
Charge-offs:
Commercial........................................ 191 202 141 180 70
Real estate....................................... 45 8 84 22 121
Installment and consumer loans 350 312 190 215 133
--- --- --- --- ---
Total loans charged-off 586 522 415 417 324
--- --- --- --- ---
Recoveries:
Commercial........................................ 14 25 18 19 92
Real estate....................................... -- 32 15 48 25
Installment and consumer loans 89 98 106 112 92
------- ------- ------- ------ ------
Total loan recoveries 103 155 139 179 209
------- ------- ------- ------ ------
Net charge-offs 483 367 276 238 115
Provision charged to operations 477 476 481 471 476
--- --- --- --- ---
$ 2,424 $ 2,430 $ 2,321 $2,116 $1,883
======= ======= ======= ====== ======
Ratio of net charge-offs to average
loans outstanding during year 0.24% 0.20% 0.18% 0.37% 0.19%
Ratio of allowance for loan losses
to total loans outstanding
at year-end 1.15% 1.29% 1.36% 1.53% 1.62%
</TABLE>
For each period presented, the provision for loan losses charged to operations
is based on management's judgment after taking into consideration all factors
connected with the collectibility of the existing portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and value of the portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operations include internally generated loan review reports, previous
loan loss experience with the borrower, the status of past due interest and
principal payments on the loan, the quality of financial information supplied by
the borrower and the general financial condition of the borrower.
A breakdown of the allowance for loan losses is based primarily upon those
factors discussed above in computing the allowance as a whole. Because all of
these factors are subject to change, the breakdown is not necessarily indicative
of the category for determining future loan losses.
Allocation of the Allowance for Loan Losses
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgages:
Commercial............................. $ 505 $ 367 $ 345 $ 322 $ 280
Residential............................ 248 211 202 204 164
Home equity............................ 75 63 42 41 34
Agricultural........................... 10 12 14 14 11
Construction........................... 100 83 82 70 66
Commercial............................... 1,233 1,459 1,037 946 841
Installment loans........................ 253 235 599 519 487
--- --- --- --- ---
Total $ 2,424 $ 2,430 $ 2,321 $ 2,116 $ 1,883
======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
The following table is a summary of average deposits and average rates paid.
Average Deposits and Average Rates Paid
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts......
$40,498 0.00% $34,940 0.00% $ 31,098 0.00%
Interest bearing accounts:
Interest checking 45,301 3.01% 39,171 3.18% 37,940 3.06%
Savings and money
market accounts 48,163 3.16% 46,879 3.15% 42,648 3.34%
Time deposits................... 153,045 5.51% 134,881 5.44% 116,336 5.56%
------- ------- -------
Total interest-
bearing 246,509 4.59% 220,931 4.55% 196,924 4.60%
------- ------- -------
Total deposits..................... $287,007 $255,871 $228,022
======== ======== ========
</TABLE>
The following table is a summary of time deposits of $100,000 or more by
remaining maturities at December 31, 1998.
Maturities of Time Deposits of $100,000 and Over
Amount Percent
------ -------
(Dollars in Thousands)
Three months or less................ $ 9,051 24.93%
Three to six months................. 5,639 15.53%
Six to twelve months................ 10,158 27.98%
Over twelve months.................. 11,460 31.56%
------ ------
Total.................................. $36,308 100.0%
======= ======
To the extent that deposits grow faster than loans, the Company will use these
excess funds for investment securities and other earning assets. Management will
seek to control the growth of deposits in any new branches, as it does in its
current operations, through interest rate management and marketing.
The following table shows the Company's risk-based capital ratios and
shareholders' equity to total assets at December 31, 1998, 1997 and 1996.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
Regulatory
Minimum December 31,
------- ------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Capital Ratios:
Risk-based capital:
Tier 1 4.00% 16.67% 18.56% 16.64%
Total 8.00% 17.82% 19.73% 17.81%
Leverage 4.00% 11.64% 12.49% 11.77%
Stockholders' equity to total assets n/a 11.97% 12.79% 11.67%
</TABLE>
15
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company has not determined whether to adopt the new statement
early. The Statement will require the Company to recognize derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Because the Company does not use derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on the
Company's earnings or financial position.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." FASB No. 65, as amended, requires that, after securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed security as a trading security. This
Statement further amends Statement No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
This Statement is effective beginning in 1999.
Year 2000 Issue
The Company 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 Company 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 Company 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 micro-controllers 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.
16
<PAGE>
Based on the assessment described above, the Company's mainframe hardware (an
IBM AS-400) and banking software are currently Y2K compliant. However, testing
was 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, Jack Henry
& Associates (JHA) has completed their testing of the software and distributed
the software release to provide for Y2K compliance. However, JHA 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. Members of the Federal Reserve System, FDIC, and OCC met JHA
management to discuss and review the process of User Group Testing. The
regulatory authorities, while unable to issue an approval of the specific JHA
plan, did specify that User Group Testing was an acceptable method for testing
Y2K readiness. The Company was one of the users selected for the user group
testing. This test was conducted in December 1998. Total 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
was less than $10,000. Considerable planning went into the writing of test
scripts to assess the impact of the century date change on the processing of
transactions that affected date sensitive data fields as well as interest
accruals. These transactions were processed on a mainframe on which the system
date had been advanced to January 01, 2000. Normal daily processing was
conducted throughout the first quarter of 2000. All test transactions were
considered successful as related to Y2K. It is also important to note that JHA
Liberty Banking System received an ITAA*2000 certification from the Information
Technology Association of America indicating it meets the information technology
industry's best software development practices for addressing the Year 2000
issue.
Two of the affiliate banks, BOF and BSS, were operating non-Y2K ready core data
processing systems prior to the merger of UCB and MACB. These two banks were
converted to the JHA Liberty product discussed above and are processed in the
Company's centralized data center. For these two banks there was more
substantial expense associated with Y2K readiness preparation. These accumulated
historical costs approximated $100,000, bringing the total for the Company to
approximately $125,000.
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. During the first quarter of
1999, the Company is having Y2K updates installed in each of its ATMs based on
each respective vendor's recommendation.
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 earnings
performance. It is anticipated that the total future costs directly associated
with the Y2K project will not exceed $250,000 (approximately 6.25% of projected
1999 net income).
The Company has implemented a process by which all significant loan and deposit
customers have been 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. Cash expenditures are not expected to have a large material
effect on the Company's consolidated financial statements. The Company will
evaluate before June 30, 1999, the loss of income that may result from increased
liquidity in the form of above normal levels of cash and increased volumes of
lower yielding overnight federal funds sold. The following tables present the
Company's overall progress of its mission critical applications.
17
<PAGE>
Year 2000 Plan - Planned Number of Mission Critical Applications In Each Phase
<TABLE>
<CAPTION>
Year 2000 Plan
- - --------------------------------------------------------------------------------------------------------------
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
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- - --------------------------------------------------------------------------------------------------------------
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
- - --------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 an internal Y2K committee comprised of Senior Management, other
officers, and staff under the direction of the Company's Executive Vice
President and Chief Financial Officer. The committee meets monthly and
subsequently reports on its activities to the Board of Directors. The Board
passed a resolution in 1998 committing all of the financial and human resources
necessary to enable the Company to satisfactorily achieve Y2K readiness and to
conduct normal operations beyond the century date change with minimal disruption
to either the quantity or quality of customer service.
The Company is developing contingency plans to address risks associated with Y2K
issues. These plans include remediation contingency plans, Y2K business
resumption contingency plans, and event management plans. Remediation
contingency covers the actions that may be required if the current approach to
remediating a mission critical application is falling behind schedule or may not
be completed when required. The Company has substantially completed its
remediation contingency plans. The Company already had in place a documented and
tested disaster recovery plan. This plan is being expanded and enhanced to
incorporate the elements of the Y2K challenge. The Company will substantially
complete and implement its business resumption contingency plan by June 30,
1999. The plan, currently being developed, will identify core business processes
and detail each step in these processes for identification of alternate methods
and means of completing such steps in the event of failure of current systems.
Business impact analysis is being accomplished through the use of risk analysis
worksheets to asses among other things the probability of certain failures, the
expected warning time, the consequences of such failure, and the weight that
should be applied to system component failure in the overall operation of a
specific system or department. An example of a core business process is taking a
deposit. Every step of this process is being flowcharted to establish
rudimentary, manual alternatives in the event of a failure of internal computer
systems, loss of electrical power, or loss of telecommunication lines. Business
resumption may also be dependent on backup or saved information from prior to
year-end 1999. Therefore, all computer processing during December, 1999 will be
amended to include changes in backup save routines, printing hardcopy reports
normally only saved to optical disks, rotation of backup media to name a few.
The Company has begun direct communication with customers to minimize
unwarranted public alarm that could cause serious problems for financial
institutions.
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 started November 30, 1998 and conclude on March 31, 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 or to explore alternative solutions with existing vendors. Management
has not determined that any core customer data base applications will fail to be
Y2K ready.
18
<PAGE>
Worst-case analysis
Until the year 2000 event actually occurs and for a period thereafter, there can
be no assurance that there will no problems related to the year 2000. Worst-case
scenarios would indicate that if Y2K issues are not adequately addressed by the
Company as well as third parties, the Company could face, among other things,
business disruptions, operational problems, financial losses, legal liability
and similar risks, and the Company's business, results of operations and
financial position could be materially adversely affected. The Company's credit
risks associated with borrowers may increase to the extent borrowers fail to
prepare for Y2K in ways that impact their cash flow and capacity to repay. As a
result there may increases in the Company's problem loans, non-performing
assets, and credit losses in future years. Additionally the Company may be
subject to increased liquidity risks associated with excessive cash withdrawals
and/or abnormally high draws against borrowers' lines of credit. It is not
possible to quantify the potential impact of any such risks or losses at this
time. Temporary closings of individual offices could materialize, but would do
so only under the allowances provided by the banking regulatory authorities.
Bank customers should note that FDIC deposits are considered safe.
Forward Looking Statements
The foregoing year 2000 discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements, including, without limitation, anticipated costs, the dates by which
the Company expects to complete remediation and testing of systems and
contingency planning, and the impact of the redeployment of existing staff, are
based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third-party vendors 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
The foregoing Year 2000 discussion constitutes a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
19
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors
Atlantic Financial Corp. and Subsidiaries
Newport News, Virginia
We have audited the accompanying consolidated balance sheet of
Atlantic Financial Corp. and Subsidiaries as of December 31, 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the year ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. We did not audit
the combined financial statements of The Bank of Franklin and The Bank of Sussex
and Surry which statements reflect total assets and revenue constituting 45.4%
and 42.9%, respectively in 1998, and 49.5% and 46.1%, respectively in 1997, of
the related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for the combined financial statements of The Bank of
Franklin and The Bank of Sussex and Surry is based solely on the report of the
other auditors. In addition, the financial statements of Mid-Atlantic Community
BankGroup, Inc. for the year ended December 31, 1997 were audited by other
auditors whose report of other auditors dated January 16, 1998, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audit and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Atlantic Financial
Corp. and Subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 21, 1999
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Boards of Directors and Stockholder
The Bank of Franklin and The Bank of Sussex & Surry
We have audited the accompanying combined balance sheets of The Bank of Franklin
and The Bank of Sussex & Surry and their subsidiaries as of December 31, 1998
and 1997, and the related combined statements of income, stockholders' equity,
and cash flows for the years then ended. These combined financial statements are
the responsibility of the Banks' management. Our responsibility is to express an
opinion on these combined 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 combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of The Bank of Franklin
and The Bank of Sussex & Surry and their subsidiaries as of December 31, 1998
and 1997, 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.
Norfolk, Virginia
February 16, 1999
21
<PAGE>
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
December 31,
Assets 1998 1997
<S> <C> <C>
Cash and due from banks $ 11 781 814 $ 13 321 926
Federal funds sold 29 524 045 19 228 281
Interest-bearing deposits in other banks - - 99 362
Securities available for sale, at fair value 80 280 723 66 594 130
Securities held to maturity, at amortized cost, fair
value of $14,173,261 and $17,053,337, respectively 13 925 750 16 898 903
Loans, net 207 733 355 185 689 729
Bank premises and equipment 10 702 950 7 851 284
Accrued interest receivable 2 981 581 2 801 392
Other real estate 212 343 377 413
Intangibles, net 1 095 665 668 211
Other assets 2 065 095 1 727 099
----------------- -----------------
Total assets $ 360 303 321 $ 315 257 730
================= =================
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand $ 49 291 165 $ 39 618 513
Interest-bearing 263 018 804 232 309 036
----------------- -----------------
Total deposits $ 312 309 969 $ 271 927 549
Short-term borrowings 1 589 387 631 496
Accrued interest payable 1 086 407 898 722
Other liabilities 2 188 501 1 491 633
Commitments and contingent liabilities - - - -
----------------- -----------------
Total liabilities $ 317 174 264 $ 274 949 400
----------------- -----------------
Stockholders' Equity
Preferred stock; $1 par value per share; authorized 1,000,000
shares; no shares issued and outstanding $ - - $ - -
Common stock; $5 par value per share; authorized 20,000,000
shares; issued and outstanding 4,168,941 and 3,060,232 shares,
respectively 20 844 705 15 301 160
Stock options 6 843 7 380
Surplus - - 4 350 512
Retained earnings 21 047 709 19 865 902
Accumulated other comprehensive income 1 229 800 783 376
----------------- -----------------
Total stockholders' equity $ 43 129 057 $ 40 308 330
----------------- -----------------
Total liabilities and stockholders' equity $ 360 303 321 $ 315 257 730
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
Consolidated Statements of Income
For Each of the Two Years Ended December 31, 1998
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
<S> <C> <C>
Interest Income
Loans $ 19 847 465 $ 17 940 305
Interest on investment securities:
Taxable interest income 4 157 889 3 950 302
Tax-exempt interest income 1 261 394 1 181 635
Interest on Federal funds sold 996 657 666 122
----------------- -----------------
Total interest income $ 26 263 405 $ 23 738 364
----------------- -----------------
Interest Expense
Deposits $ 11 318 748 $ 10 067 016
Short-term borrowings 53 290 58 078
----------------- -----------------
Total interest expense $ 11 372 038 $ 10 125 094
----------------- -----------------
Net interest income $ 14 891 367 $ 13 613 270
Provision for Loan Losses 477 000 475 750
----------------- -----------------
Net interest income after
provision for loan losses $ 14 414 367 $ 13 137 520
----------------- -----------------
Other Income
Service charges on deposit accounts $ 1 590 058 $ 1 500 711
Gain on sale of available for sale securities 8 035 18 094
Other operating income 484 009 197 312
----------------- -----------------
Total other income $ 2 082 102 $ 1 716 117
----------------- -----------------
Other Expenses
Salaries and benefits $ 5 628 535 $ 5 007 383
Occupancy expense 910 118 756 151
Equipment and data processing 1 527 006 1 166 626
Other operating expenses 3 321 013 2 503 617
----------------- -----------------
Total other expenses $ 11 386 672 $ 9 433 777
----------------- -----------------
Income before income taxes $ 5 109 797 $ 5 419 860
Income Tax Expense 1 447 679 1 359 433
----------------- -----------------
Net income $ 3 662 118 $ 4 060 427
================= =================
Earnings Per Share, basic $ 0.88 $ 1.02
================= =================
Earnings Per Share, assuming dilution $ 0.86 $ 1.00
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
Consolidated Statements of Cash Flows
For Each of the Two Years Ended December 31, 1998
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 3 662 118 $ 4 060 427
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1 001 324 597 613
Deferred tax (benefit) 153 758 (134 668)
Provision for loan losses 477 000 475 750
Net loss on other real estate 90 178 - -
Net (gain) loss on sale of bank premises and equipment 85 689 (250)
(Gain) realized on available for sale securities (8 035) (18 094)
Accretion of discounts and amortization of premiums, net 73 297 39 924
Changes in assets and liabilities:
(Increase) in accrued interest receivable (180 189) (85 697)
(Increase) in other assets (960 127) (677 890)
Increase in accrued interest payable 187 685 102 521
Increase (decrease) in other liabilities 170 006 (190 768)
------------------ ----------------
Net cash provided by operating activities $ 4 752 704 4 168 868
------------------ ----------------
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale $ 1 534 505 $ 13 819 493
Proceeds from calls and maturities of securities available for sale 19 723 444 6 510 184
Purchases of securities available for sale (34 293 371) (15 867 461)
Proceeds from calls and maturities of securities held to maturity 10 166 843 1 252 000
Purchases of securities held to maturity (7 200 208) (4 093 196)
Net (increase) in loans (22 754 545) (18 414 946)
Purchases of bank premises and equipment (3 765 274) (1 524 853)
Proceeds from sale of bank premises and equipment 3 258 250
Proceeds from sale of other real estate 308 811 - -
------------------ ----------------
Net cash (used in) investing activities $ (36 276 537) $ (18 318 529)
------------------- ----------------
Cash Flows from Financing Activities
Net increase in demand deposit accounts, interest-
bearing demand deposits and savings accounts $ 40 382 420 $ 21 618 323
Net increase in short-term borrowings 957 891 6 776
Proceeds from sale of stock 20 963 3 347 835
Acquisition of common stock (11 018) - -
Dividends paid (1 170 133) (803 138)
------------------- ---------------
Net cash provided by financing activities $ 40 180 123 $ 24 169 796
------------------- ----------------
Increase in cash and cash equivalents $ 8 656 290 $ 10 020 135
Cash and Cash Equivalents
Beginning of year 32 649 569 22 629 434
------------------ ---------------
End of year $ 41 305 859 $ 32 649 569
================== ===============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 11 184 353 $ 10 022 573
================== ===============
Income taxes $ 1 618 000 $ 1 777 469
================== ===============
Supplemental Disclosure of Noncash Financing Activities,
purchase of an investment interest in Johnson Mortgage
Company, LLC through issuance of common stock $ 250 000 $ --
================== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
For Each of the Two Years Ended December 31, 1998
<TABLE>
<CAPTION>
Common Stock
Stock Options Surplus
------ ------- -------
<S> <C> <C> <C>
Balance, January 1, 1997 $ 14 553 660 $ 7 380 $ 1 750 177
Comprehensive income:
Net income - - - - - -
Other comprehensive income:
Unrealized holding gains on securities available for
sale arising during the period net of tax of $316,785 - - - - - -
Less reclassification adjustment net of tax of $(6,152) - - - - - -
Other comprehensive income, net of tax - - - - - -
Total comprehensive income - - - - - -
Sale of common stock 747 500 - - 2 600 335
Cash dividends - - - - - -
------------- ------------ --------------
Balance, December 31, 1997 $ 15 301 160 $ 7 380 $ 4 350 512
Comprehensive income:
Net income - - - - - -
Other comprehensive income:
Unrealized holding gains on securities available for
sale arising during the period net of tax of $232,708 - - - - - -
Less reclassification adjustment net of tax of
$(2,732) - - - - - -
Other comprehensive income, net of tax - - - - - -
Total comprehensive income - - - - - -
Stock split effected in form of 100% stock dividend 5 469 165 - - (4 350 512)
Issuance of common stock for interest in L.L.C. 56 170 - - - -
Exercise of stock options 21 500 (537) - -
Purchase of common stock (3 290) - - - -
Cash dividends - - - - - -
------------- ------------ --------------
Balance, December 31, 1998 $ 20 844 705 $ 6 843 $ - -
============= ============ ==============
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive Comprehensive
Earnings Income Income Total
-------- ------------- ------------- -----
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ 16 919 446 $ 180 382 $ 33 411 045
Comprehensive income:
Net income 4 060 427 - - $ 4 060 427 4 060 427
Other comprehensive income:
Unrealized holding gains on securities available for
sale arising during the period net of tax of $316,785 - - - - 614 936 - -
Less reclassification adjustment net of tax of $(6,152) - - - - (11 942) - -
--------------
Other comprehensive income, net of tax - - 602 994 $ 602 994 602 994
--------------
Total comprehensive income - - - - $ 4 663 421 - -
Sale of common stock ==============
Cash dividends - - - - 3 347 835
(1 113 971) - - (1 113 971)
--------------- ------------- ---------------
Balance, December 31, 1997 $ 19 865 902 $ 783 376 $ 40 308 330
Comprehensive income:
Net income 3 662 118 - - $ 3 662 118 3 662 118
Other comprehensive income:
Unrealized holding gains on securities available for
sale arising during the period net of tax of $232,708 - - - - 451 727 - -
Less reclassification adjustment net of tax of
$(2,732) - - - - (5 303) - -
--------------
Other comprehensive income, net of tax - - 446 424 $ 446 424 446 424
--------------
Total comprehensive income - - - - $ 4 108 542 - -
==============
Stock split effected in form of 100% stock dividend (1 118 653) - - - -
Issuance of common stock for interest in L.L.C. 193 830 - - 250 000
Exercise of stock options - - - - 20 963
Purchase of common stock (7 728) - - (11 018)
Cash dividends (1 547 760) - - (1 547 760)
-------------- ------------- --------------
Balance, December 31, 1998 $ 21 047 709 $ 1 229 800 $ 43 129 057
============== ============= ==============
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
Note 1. Summary of Significant Accounting Policies
General
The accompanying consolidated financial statements include
the accounts of Atlantic Financial Corp. (AFC) and its
wholly-owned subsidiaries, Peninsula Trust Bank, Inc.
(PTB), The Bank of Franklin (BOF) and The Bank of Sussex
and Surry (BSS). PTB, BOF and BSS are commercial banks
offering lending and deposit services to individual and
commercial customers with an emphasis on those services
traditionally associated with independent community banks.
These entities are collectively referred to herein as the
Company. The Company primarily serves the Gloucester,
Charles City, Newport News, Williamsburg and the western
Tidewater areas of Virginia. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
Business Combination
On December 1, 1998, Mid-Atlantic Community BankGroup, Inc.
(MACB), and United Community Bankshares, Inc. (UCB) became
affiliated pursuant to an Agreement and Plan of
Reorganization (the Agreement) dated July 8, 1998. UCB was
a bank holding company which wholly owned the stock of BOF
and BSS. In conjunction with the merger, UCB was dissolved.
The terms of the Agreement provided for, among other
provisions, that each outstanding share of UCB common stock
be exchanged for 1.075 shares of MACB common stock. The
name of MACB was changed to AFC immediately after the
completion of the merger. See Note 2 for additional
discussion of the transaction.
Basis of Presentation
The accounting and reporting policies of the Company are in
accordance with generally accepted accounting principles
and conform to general practices within the banking
industry. The more significant of these policies are
summarized below.
Risks and Uncertainties
In its normal course of business, the Company encounters
two significant types of risk: economic and regulatory.
There are three main components of economic risk: interest
rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice more rapidly
or on a different basis than its interest-earning assets.
Credit risk is the risk of default on the Company's loan
portfolio that results from the borrowers' inability or
unwillingness to make contractually required payments.
Market risk reflects changes in the value of collateral
underlying loans receivable and the valuation of real
estate held by the Company.
The determination of the allowance for loan losses and the
valuation of real estate are based on estimates that are
particularly susceptible to significant changes in the
economic environment and market conditions. Management
believes that, as of December 31, 1998, the allowance for
loan losses and the valuation of real estate are adequate
based on information currently available. A worsening or
protracted economic decline or substantial increase in
interest rates, would increase the likelihood of losses due
to credit and market risks and could create the need for
substantial increases to the allowance for loan losses.
The Company is subject to the regulations of various
regulatory agencies which can change significantly from
year to year. In addition, the Company undergoes periodic
examinations by regulatory agencies which may subject it to
further changes based on the regulators' judgements about
information available to them at the time of their
examinations.
Securities
Investments in equity securities that have readily
determinable fair values and all investments in debt
securities are classified in three categories based on
management's intent and accounted for as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Company has both the intent and ability
to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general
economic conditions. These securities are carried at
cost adjusted for amortization of premium and accretion
of discount, computed by the interest method over their
contractual lives.
27
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
b. Securities Available for Sale
Securities classified as available for sale are those
debt and equity securities that the Company intends to
hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on
various factors, including significant movements in
interest rates, changes in the maturity mix of the
Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar
factors. Securities available for sale are carried at
fair value. Unrealized gains or losses are reported as a
separate component of other comprehensive income, net of
the related deferred tax effect. Realized gains or
losses, determined on the basis of the amortized cost of
specific securities sold, are included in earnings.
c. Trading Securities
Trading securities, which are generally held for the
short term in anticipation of market gains, are carried
at fair value. Realized and unrealized gains and losses
on trading account assets are included in interest
income on trading account securities. The Company held
no assets classified as trading securities at December
31, 1998 or 1997.
Loans
Loans are shown on the balance sheets net of unearned
discounts and the allowance for loan losses.
Interest is computed by methods which result in level rates of
return on principal. Loans are charged off when in the opinion
of management they are deemed to be uncollectible after taking
into consideration such factors as the current financial
condition of the customer and the underlying collateral and
guarantees.
Impairment of loans that have been separately identified for
evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that
is, if repayment of those loans is expected to be provided
solely by the underlying collateral) and for which management
has determined foreclosure is probable, the measure of
impairment of those loans is to be based on the fair value of
the collateral.
The Company considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These
loans are not subject to the above impairment provisions. A
loan is considered impaired which it is probable that the
Company will be unable to collect all principal and interest
amounts according to the contractual terms of the loan
agreement. Factors involved in determining impairment include,
but are not limited to, expected future cash flows, financial
condition of the borrower, and the current economic
conditions. A performing loan may be considered impaired, if
the factors above indicate a need for impairment. A loan on
nonaccrual status may not be impaired if in the process of
collection or there is an insignificant shortfall in payment.
An insignificant delay of less than 30 days or a shortfall of
less than 5% of the required principal and interest payment
generally does not indicate an impairment situation, if in
management's judgment the loan will be paid in full. Loans
that meet the regulatory definitions of doubtful or loss
generally qualify as an impaired loan. Charge-offs for
impaired loans occur when the loan, or portion of the loan is
determined to be uncollectible, as is the case for all loans.
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest
income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest
payments received on such loans are applied as a reduction of
the loan principal balance. Interest income on other
nonaccrual loans is recognized only to the extent of interest
payments received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which,
in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the reserve is
based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for
impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which
is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowances relating to impaired
loans are charged or credited to the provision for loan
losses. Because of uncertainties inherent in the estimation
process, management's estimate of credit losses inherent in
the loan portfolio and the related allowance may change in the
near term.
28
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Premises and equipment are
depreciated over their estimated useful lives; leasehold
improvements are amortized over the lives of the respective
leases or the estimated useful life of the leasehold
improvements, whichever is less. Depreciation and amortization
are recorded on the straight-line method.
Costs of maintenance and repairs are charged to expenses as
incurred. Costs of replacing structural parts of major units
are considered individually and are expensed or capitalized as
the facts dictate.
Other Real Estate
Foreclosed properties are recorded at the lower of the
outstanding loan balance at the time of foreclosure or the
estimated fair value less estimated costs to sell.
Intangible Assets
Intangible assets relate to the purchase of a branch by BOF in
1995, the 1998 branch acquisition by PTB, and the 1998
purchase of an investment in a mortgage company by AFC. All
are amortized over fifteen years using the straight-line
method. Amortization expense was $176,663 and $16,566 for the
years ended December 31, 1998 and 1997, respectively.
Income Tax
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences, operating loss carryforwards, and tax credit
carryforwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or
all of the deferred assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
federal funds sold.
Advertising Costs
The Company follows the policy of charging the production
costs of advertising to expense as incurred.
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, disclosure of contingent
assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." Statement 128
replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of FASB
No. 130, "Reporting Comprehensive Income." FASB No. 130
establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption
of this statement had no impact on the Company's net income or
stockholders' equity. FASB No. 130 requires other
comprehensive income to include unrealized gains (losses) on
available for sale securities, which prior to adoption were
reported separately in stockholders' equity. The December 31,
1997 financial statements have been reclassified to conform to
the requirements of FASB No. 130.
29
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
Note 2. Business Combination
On December 1, 1998, the Company effected a business combination
with UCB by exchanging 1,965,741 shares of its common stock for
all of the common stock of UCB. Immediately following the merger,
UCB was dissolved. The combination has been accounted for as a
pooling of interests and, accordingly, all prior financial
statements have been restated to include UCB. The results of
operations of the separate companies for periods prior to the
combination are summarized as follows:
<TABLE>
<CAPTION>
Net Interest
Income Net Income
------------ ----------
(Thousands)
Nine months ended September 30, 1998
<S> <C> <C>
MACB $ 6 407 $ 1 404
UCB 4 636 1 613
Year ended December 31, 1997
MACB $ 7 552 $ 1 830
UCB 6 061 2 230
</TABLE>
Note 3. Joint Venture
On March 31, 1998, the Company consummated an agreement to
acquire a 50% membership interest in Johnson Mortgage Company,
L.L.C., which is the successor to Johnson Mortgage Company of
Newport News. Half of the purchase price was paid in cash and the
other half was paid in shares of the Company's common stock, for
a total purchase price of $500,000. This resulted in the issuance
of 11,234 additional shares of common stock.
Note 4. Cash and Due From Banks
The Company is required to maintain reserve balances with the
Federal Reserve Bank. For the final weekly reporting period in
the years ended December 31, 1998 and 1997, the aggregate amounts
of daily average required balances were approximately $1,610,000
and $1,015,000, respectively.
Note 5. Securities
Securities available for sale at December 31, 1998, consist of
the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U. S. Treasury
securities $ 877 040 $ 8 772 $ - - $ 885 812
U. S. Government
and federal agencies 25 916 936 321 448 (81 875) 26 156 509
State and local
governments 28 595 951 695 946 (54 683) 29 237 214
Mortgage-backed
securities 15 147 817 96 892 (37 390) 15 207 319
Corporate debt
obligations 3 091 639 49 396 (6 284) 3 134 751
Collateralized
mortgage
obligations 20 852 63 - - 20 915
Restricted stocks 698 500 - - - - 698 500
Other securities 4 068 645 880 908 (9 850) 4 939 703
---------------- ---------------- --------------- ----------------
$ 78 417 380 $ 2 053 425 $ (190 082) $ 80 280 723
================ ================ =============== ================
</TABLE>
30
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
Securities available for sale at December 31, 1997, consist of
the following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U. S. Treasury
securities $ 1 695 369 $ 569 $ (5 845) $ 1 690 093
U. S. Government
and federal agencies 26 440 440 199 395 (147 859) 26 491 976
State and local
governments 22 611 790 462 593 (89 873) 22 984 510
Mortgage-backed
securities 9 778 874 47 055 (52 823) 9 773 106
Corporate debt
obligations 3 780 313 29 070 (2 778) 3 806 605
Collateralized mortgage
obligations 56 942 - - (3) 56 939
Restricted stocks 1 034 650 - - - - 1 034 650
Other securities 10 006 746 245 - - 756 251
---------------- ---------------- -------------- ----------------
$ 65 408 384 $ 1 484 927 $ (299 181) $ 66 594 130
================ ================ =============== ================
</TABLE>
Securities held to maturity at December 31, 1998, consist of the
following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U. S. Government
and federal agencies $ 4 717 751 $ 40 853 $ (3 750) $ 4 754 854
State and local
governments 6 492 832 199 004 (11 486) 6 680 350
Mortgage-backed
securities 2 715 167 22 954 (64) 2 738 057
---------------- ---------------- --------------- ----------------
$ 13 925 750 $ 262 811 $ (15 300) $ 14 173 261
================ ================ =============== ================
</TABLE>
Securities held to maturity at December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U. S. Government
and federal agencies $ 7 764 123 $ 22 758 $ (26 361) $ 7 760 520
State and local
governments 6 452 614 143 038 (1 046) 6 594 606
Mortgage-backed
securities 2 572 976 16 060 - - 2 589 036
Other 109 190 - - (15) 109 175
---------------- ---------------- --------------- ----------------
$ 16 898 903 $ 181 856 $ (27 422) $ 17 053 337
================ ================ =============== ================
</TABLE>
31
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
The schedule below reflects the maturities of securities. The
classification of mortgage-backed securities was based on
expected maturities, while contractual maturities were used for
other debt securities. Expected maturities differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Available for Sale:
Due in one year or less $ 4 461 276 $ 4 492 143
Due after one year through five years 24 230 369 24 679 489
Due after five years through ten years 26 130 179 26 559 428
Due after ten years 18 828 411 18 911 460
Other 4 767 145 5 638 203
---------------- ----------------
$ 78 417 380 $ 80 280 723
================ ================
Amortized Fair
Cost Value
Held to Maturity:
Due in one year or less $ 870 018 $ 874 453
Due after one year through five years 2 888 892 2 946 393
Due after five years through ten years 4 268 572 4 414 659
Due after ten years 5 898 268 5 937 756
---------------- ----------------
$ 13 925 750 $ 14 173 261
================ ================
</TABLE>
There were no sales of securities from the held to maturity
category.
Proceeds from sales of securities available for sale during 1998
and 1997 were $1,534,505 and $13,819,493. Gross realized gains of
$16,051 and $36,324 and gross realized losses of $8,016 and
$18,230 were recognized on those sales.
At December 31, 1998 and 1997, approximately $12,851,000 and
$12,710,000, respectively, of those securities were pledged to
secure deposits of the U.S. Government, the Commonwealth of
Virginia, and repurchase agreements.
Note 6. Loans
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------- --------------
(Dollars in Thousands)
<S> <C> <C>
Commercial $ 30 105 $ 28 734
Agriculture 6 068 7 045
Real estate mortgage:
Construction 13 935 8 596
Residential (1-4 family) 52 632 49 746
Home equity lines 15 939 13 165
Commercial 48 788 40 233
Agricultural 3 044 2 485
Loans to individuals for household,
family and other consumer expenditures 39 564 38 097
All other loans 672 617
-------------- --------------
$ 210 747 $ 188 718
Less unearned income (590) (598)
Less allowance for loan losses (2 424) (2 430)
$ 207 733 $ 185 690
============== ==============
</TABLE>
32
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Note 7. Allowance For Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Balance at beginning of year $ 2 430 143 $ 2 320 972
Provision for loan losses 477 000 475 750
Recoveries 109 868 166 378
Charge-offs (592 751) (532 957)
-------------- --------------
Balance at end of year $ 2 424 260 $ 2 430 143
============== ==============
</TABLE>
Information about impaired loans as of and for the year ended
December 31, 1998 is as follows:
Impaired loans $ 257 944
Allowance provided for impaired loans,
included in the allowance for loan losses - -
Average balance in impaired loans 64 486
Interest income recognized 8 095
The Company had no impaired loans as of December 31, 1997.
Nonaccrual loans excluded from impaired loan disclosure under
FASB No. 114 amounted to $423,718 and $482,181 at December 31,
1998 and 1997, respectively. If interest on these loans had been
accrued, such income would have been $35,815 and $49,162 at
December 31, 1998 and 1997, respectively.
Note 8. Related Party Transactions
Officers, directors and their affiliates had borrowings of
$3,223,014 and $3,373,016 at December 31, 1998 and 1997,
respectively. New advances to directors and officers totaled
$1,455,807 and repayments totaled $1,605,809 in the year ended
December 31, 1998.
These transactions occurred in the ordinary course of business on
substantially the same terms as those prevailing at the time for
comparable transactions with unrelated persons.
Note 9. Premises and Equipment
Major classifications of premises and equipment are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Building and improvements $ 5 654 544 $ 4 283 855
Furniture and equipment 5 786 710 4 261 887
Land 3 348 659 2 781 142
Construction in progress 111 155 367 016
Leasehold improvements 29 657 - -
------------- -------------
$ 14 930 725 $ 11 693 900
Accumulated depreciation (4 227 775) (3 842 616)
------------- -------------
$ 10 702 950 $ 7 851 284
============= =============
</TABLE>
For the years ended December 31, 1998 and 1997, depreciation
expense was $824,661 and $581,047, respectively.
33
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Note 10. Deposits
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was $36,308,184 and $25,487,745 in 1998
and 1997, respectively.
At December 31, 1998, the scheduled maturities on certificates of
deposit are as follows:
1999 $ 106 377 699
2000 41 102 796
2001 4 720 363
2002 3 013 338
2003 and thereafter 9 630 715
------------------
$ 164 844 911
==================
Note 11. Employee Benefit Plans
AFC maintains two qualified profit sharing plans under 401(k) of
the Internal Revenue Code. The first plan existed prior to the
business combination explained in Note 2. Under the plan,
employees may elect to defer up to 15% of their salary, subject
to Internal Revenue Service limits. The plan is available to
substantially all employees of PTB. The Bank may make
discretionary matching contributions. The Bank's contributions
for 1998 and 1997 totaled $35,160 and $19,893, respectively. The
plan may be amended or terminated at any time by the Board of
Directors. Contributions to the plan are included in salaries and
employee benefits.
The second plan also existed prior to the business combination
and covers substantially all employees of BOF and BSS 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. Employees may
contribute up to 15% of their salaries, and the Banks match
50% of the first 6% of employee contributions. The plan
provides for a required contribution of 3% of net income.
Additional contributions can be made by the Banks at the
discretion of the Board of Directors. Prior to the formation
of this plan, each of the Banks had qualified retirement plans
for the future benefit of their employees. During 1998, BOF
and BSS contributed $42,000 and $27,600, respectively, to the
plan for eligible participants.
The BOF defined contribution plan was restated, and the BSS
defined benefit plan terminated, subject to regulatory
approvals. Accordingly, substantially all BOF and BSS
employees rolled over their balances into the plan, which was
in turn assumed by AFC. During 1997, BOF contributed $31,250
to the plan for eligible participants.
34
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Information about the BSS defined benefit plan follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Change in Benefit Obligation
Benefit obligation, beginning $ 803 401 $ 614 540
Service cost - - 50 276
Interest cost 217 779 42 845
Actuarial loss - - 100 259
Benefits paid (713 506) (4 519)
Impact of settlement/curtailments (307 674) - -
------------ ------------
Benefit obligation, ending $ - - $ 803 401
============ ============
Change in Plan Assets
Fair value of plan assets, beginning $ 688 614 $ 510 525
Actual return on plan assets 24 892 122 816
Employer contributions - - 59 792
Benefits paid (713 506) (4 519)
------------ ------------
Fair value of plan assets, ending $ - - $ 688 614
============ ============
Deferred Asset (Gain) $ - - $ (87 252)
============ ============
Funded status $ - - $ (114 787)
Unrecognized net actual loss - - 27 958
Unrecognized net obligation at transition - - 84 326
Unrecognized prior service cost - - (57 402)
------------ ------------
Accrued benefit cost included in other liabilities $ - - $ (59 905)
============ ============
Components of Net Periodic Benefit Cost
Service cost $ - - $ 50 276
Interest cost 217 779 42 845
Expected return on plan assets (24 892) (35 564)
Amortization of prior service cost (57 402) (3 588)
Amortization of net obligation at transition 84 326 5 394
Recognized net actuarial loss 27 958 - -
Settlement/curtailment (gain) (307 674) - -
------------ -------------
Net periodic benefit cost $ (59 905) $ 59 363
============ =============
Weighted-Average Assumptions as of December 31
Discount rate 7.00% 7.00%
Expected return on plan assets 7.00% 7.00%
Rate of compensation increase 5.00% 5.00%
</TABLE>
35
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Note 12. Income Taxes
Net deferred tax assets (liabilities) consist of the following as
of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 123 542 $ 184 392
Allowance for loan losses 249 826 306 796
Other 65 781 81 192
------------ ------------
$ 439 149 $ 572 380
------------ ------------
Deferred tax liabilities:
Unrealized gain on available for sale securities $ 633 543 $ 403 560
Fixed assets 147 575 133 231
Other 28 949 22 766
------------ ------------
$ 810 067 $ 559 557
------------ ------------
$ (370 918) $ 12 823
============ ============
</TABLE>
The provision for income taxes charged to operations for the years
ended December 31, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current tax expense $ 1 293 921 $ 1 494 101
Deferred tax expense (benefit) 153 758 (134 668)
------------ ------------
$ 1 447 679 $ 1 359 433
============ ============
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the U.S. Federal income tax rate to pretax
income for the years ended December 31, 1998 and 1997, due to the
following:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Income tax at statutory rate $ 1 737 331 $ 1 842 752
Increase (decrease) resulting from:
Tax-exempt income (424 056) (396 948)
Merger expenses 94 782 - -
Other 39 622 (86 371)
$ 1 447 679 $ 1 359 433
============= ==============
</TABLE>
36
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Note 13. 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. Weighted
average number of shares for all years reported have been
restated giving effect to stock splits and the business
combination explained in Note 2. Potential dilutive common stock
had no effect on income available to common stockholders.
<TABLE>
<CAPTION>
1998 1997
----------------------------- ----------------------------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic earnings
per share 4 162 044 $ .88 3 979 027 $ 1.02
=========== ===========
Effect of dilutive
securities:
Stock options 108 913 76 241
--------------- --------------
Diluted earnings
per share 4 270 957 $ .86 4 055 268 $ 1.00
=============== =========== ============== ===========
</TABLE>
Note 14. Commitments and Contingent Liabilities
BOF is a member of the Federal Home Loan Bank of Atlanta (FHLB).
As such, the Bank may borrow funds based on criteria established
by the FHLB. As of December 31, 1998, BOF could borrow
approximately $6,500,000, if collateral acceptable to FHLB was
provided. In addition, federal funds arrangement with other
institutions provide an additional $7,280,000 of short-term
borrowing capacity. The Bank had not drawn on the lines of credit
at December 31, 1998.
BSS is also a member of the FHLB. As of December 31, 1998, the
Bank could borrow approximately $6,500,000, if collateral
acceptable to the FHLB was provided. In addition, federal funds
arrangement with other institutions provide an additional
$11,591,000 of short-term borrowing capacity. The Bank had not
drawn on these lines of credit at December 31, 1998.
The Company is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the
Year 2000 Issue, and is developing a remediation plan to resolve
the Issue. The Issue is whether computer systems will properly
recognize date-sensitive information when the year changes to
2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The
Company is heavily dependent on computer processing in the
conduct of its business activities. Failure of these systems
could have a significant impact on the Company's operations.
In the normal course of business there are outstanding various
commitments and contingent liabilities, which are not reflected
in the accompanying financial statements. Management does not
anticipate any material losses as a result of these transactions.
See Note 17 with respect to financial instruments with
off-balance-sheet risk.
37
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Note 15. Stock Compensation Plans
At December 31, 1998, the Company has three stock-based
compensation plans which are described below. Grants under these
plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been
recognized for grants under these stock option plans. Had
compensation cost for the stock-based plans been determined based
on the grant date fair values of awards (the method described in
FASB Statement No. 123), reported net income and earnings per
common share would have been adjusted to the pro forma amounts
shown below:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net income:
As reported $ 3 662 118 $ 4 060 427
Pro forma $ 3 662 118 $ 3 869 039
Basic earnings per share:
As reported $ .88 $ 1.02
Pro forma $ .88 $ .97
Diluted earnings per share:
As reported $ .86 $ 1.00
Pro forma $ .86 $ .95
</TABLE>
The Company has a fixed stock option plan under which it may
grant options to certain key employees of BOF and BSS to purchase
the Company's common stock. All options under this plan 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 Company also has a fixed stock option plan for key employees
of PTB. The employee incentive stock option plan provides for
granting options to allow key employees to purchase the Company's
common stock. The stock options give the holder the right, over a
ten-year period, to acquire the Company's common stock. Options,
when granted under this plan, will have an exercise price equal
to the greater of the stock's fair market value or 100% of the
book value per share of all of the Company's common stock at the
date of the grant. The Company has reserved up to a maximum of
100,000 shares of unissued common stock for issuance under this
employee incentive stock option plan.
Also, the Company has a nonemployee directors' stock option plan
that allowed the directors of PTB to purchase options during
August 1990. A total of 59,044 were sold at a price of $.125.
Each option entitles the owner thereof to purchase one share of
common stock for $4.875. These options expire during August 2000.
A summary of the activity in the stock option plans follow:
<TABLE>
<CAPTION>
1998 1997
------------------------ ---------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 177 086 $ 7.51 136 044 $ 6.55
Granted - - - - 41 042 10.70
Exercised 4 300 4.88 - - - -
Forfeited - - - - - - - -
--------------- --------------
Outstanding at end of year 172 786 7.58 177 086 7.51
=============== ==============
Exercisable at end of year 172 786 177 086
Weighted-average fair value
per option of options granted
during the year $ - - $ 9.70
=========== ===========
</TABLE>
38
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
The fair value of each grant is estimated at the grant date using
the Black-Scholes option-pricing model with the following
assumptions for 1997: dividend rate of 1.00%; risk-free interest
rate of 6.96%; price volatility of 34.68%; and expected lives of
10 years.
A further summary about the options outstanding at December
31, 1998 is as follows:
<TABLE>
<CAPTION>
Options Outstanding
and Exercisable
------------------------
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life Price
-------------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
$ 4.875 54 744 2 $ 4.875
5.00 8 000 2 5.00
5.625 20 000 3 5.625
8.00 - 8.25 44 000 6 8.01
11.25 5 000 7 11.25
12.50 7 000 8 12.50
9.61 34 042 9 9.61
</TABLE>
All options have been restated for both years giving
retroactive effect to the two for one stock split in 1998
and the business combination discussed in Note 2.
Note 16. Restrictions on Transfers to Parent
Transfers of funds from the banking subsidiaries to the Parent
Company in the form of loans, advances and cash dividends, are
restricted by federal and state regulatory authorities. As of
December 31, 1998 the aggregate amount of unrestricted funds
which could be transferred from the banking subsidiaries to the
Parent Company without prior regulatory approval totaled
$5,095,984 or 11.8% of the consolidated net assets.
Note 17. Financial Instruments With Off-Balance-Sheet Risk
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit 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 balance sheet. The contract amounts of those
instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments
for commitments to extend credit and standby letters of credit is
represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet
instruments.
A summary of the contract or notional amount of the Company's
exposure to off-balance-sheet risk as of December 31, 1998 and
1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $ 24 039 $ 34 056
Standby letters of credit $ 3 445 $ 3 177
</TABLE>
39
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public
and private borrowing arrangements, including commercial paper,
bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The
Company holds property, inventory and bank deposits as collateral
supporting those commitments for which collateral is deemed
necessary. The extent of collateral held for those commitments at
December 31, 1998, varies from 0 percent to 100 percent.
The Company maintains its cash accounts in other commercial
banks. The amount on deposit with correspondent institutions at
December 31, 1998, exceeded the insurance limits of the Federal
Deposit Insurance Corporation by $3,067,794.
Note 18. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Securities
For securities held for investment purposes, fair values
are based on quoted market prices or dealer quotes.
Loan Receivables
For certain homogeneous categories of loans, such as some
residential mortgages, and other consumer loans, fair value
is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the
current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining maturities.
Deposits
The fair values disclosed for deposits (for example,
checking, savings and money market accounts) are equal to
the amount payable on demand at the reporting date. The
fair values disclosed for time deposits are estimated using
the rates currently paid for deposits of similar size and
remaining maturities.
Other Borrowed Funds
Fair values of other borrowings are estimated using the
discounted cash flow analyses based on the Company's
current incremental borrowing rates for similar types of
borrowing arrangements.
Off-Balance-Sheet Financial Instruments
Commitments to extend credit were evaluated and fair value
was estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of
the counterparties. The fair value of standby letters of
credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at
the reporting date. The carrying amount of treasury, tax
and loan deposits approximates the fair value.
40
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
The carrying amounts and fair values of financial instruments as
of December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 11 782 $ 11 782 $ 13 421 $ 13 421
Federal funds sold 29 524 29 524 19 228 19 228
Securities 94 206 94 454 83 493 83 647
Loans, net 207 733 226 786 185 690 185 714
-------------- -------------- -------------- -------------
$ 343 245 $ 362 546 $ 301 832 $ 302 010
============== ============== ============== =============
Financial liabilities:
Deposits $ 312 310 $ 317 852 $ 271 928 $ 270 966
Short-term borrowings 1 589 1 602 631 631
-------------- -------------- -------------- -------------
$ 313 899 $ 319 454 $ 272 559 $ 271 597
============== ============== ============== =============
</TABLE>
Note 19. Regulatory Matters
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company
must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum ratios (set
forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital to average assets. Management believes, as of
December 31, 1998, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998 the most recent notification from the
Federal Reserve Bank categorized the Company as well capitalized
under the regulatory framework for prompt corrective action. To
be categorized as well capitalized the Company must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the table. There have been no conditions
or events since that notification that management believes have
changed the institution's capital adequacy category.
41
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
The regulatory framework for prompt corrective action is
applicable only to banks and not to bank holding companies and
their nonbank subsidiaries. The actual and required capital
amounts and ratios are as follows:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 43 612 17.8% =>$ 19 577 => 8.0% N/A
PTB $ 18 304 12.9% =>$ 11 315 => 8.0% =>$ 14 144 => 10.0%
BOF $ 9 782 15.9% =>$ 4 918 => 8.0% =>$ 6 147 => 10.0%
BSS $ 9 931 23.9% =>$ 3 320 => 8.0% =>$ 4 151 => 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 40 804 16.7% =>$ 9 789 => 4.0% N/A
PTB $ 16 919 12.0% =>$ 5 658 => 4.0% =>$ 8 486 => 6.0%
BOF $ 9 155 14.9% =>$ 2 459 => 4.0% =>$ 3 688 => 6.0%
BSS $ 9 144 22.0% =>$ 1 660 => 4.0% =>$ 2 490 => 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 40 804 11.6% =>$ 14 027 => 4.0% N/A
PTB $ 16 919 8.9% =>$ 7 631 => 4.0% =>$ 9 539 => 5.0%
BOF $ 9 155 9.8% =>$ 3 752 => 4.0% =>$ 4 690 => 5.0%
BSS $ 9 144 13.8% =>$ 2 644 => 4.0% =>$ 3 305 => 5.0%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 41 005 19.7% =>$ 16 629 => 8.0% N/A
PTB $ 17 274 15.6% =>$ 8 874 => 8.0% =>$ 11 093 => 10.0%
BOF $ 9 761 16.7% =>$ 4 674 => 8.0% =>$ 5 843 => 10.0%
BSS $ 10 696 27.8% =>$ 3 078 => 8.0% =>$ 3 848 => 10.0%
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 38 575 18.6% =>$ 8 315 => 4.0% N/A
PTB $ 15 950 14.4% =>$ 4 437 => 4.0% =>$ 6 656 => 6.0%
BOF $ 9 081 15.5% =>$ 2 337 => 4.0% =>$ 3 506 => 6.0%
BSS $ 10 270 26.7% =>$ 1 539 => 4.0% =>$ 2 309 => 6.0%
Tier 1 Capital (to
Average Assets):
Consolidated $ 38 575 12.5% =>$ 12 356 => 4.0% N/A
PTB $ 15 950 10.2% =>$ 6 255 => 4.0% =>$ 7 819 => 5.0%
BOF $ 9 081 10.4% =>$ 3 508 => 4.0% =>$ 4 385 => 5.0%
BSS $ 10 270 15.8% =>$ 2 593 => 4.0% =>$ 3 241 => 5.0%
</TABLE>
42
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Note 20. Parent Company Only Financial Statements
ATLANTIC FINANCIAL CORP.
(Parent Company Only)
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Assets
Cash and due from banks $ 3 057 944 $ 3 280 486
Securities available for sale 383 515 100 000
Investment in subsidiaries 37 209 677 36 751 573
Bank premises and equipment 19 432 63 115
Intangibles, net 332 450 - -
Due from subsidiaries 2 997 626 546 916
Other assets 131 889 113 156
-------------- ---------------
Total assets $ 44 132 533 $ 40 855 246
============== ===============
Liabilities and Stockholders' Equity
Liabilities
Dividends payable $ 924 543 $ 546 916
Other liabilities 78 933 - -
--------------- ---------------
Total liabilities $ 1 003 476 $ 546 916
--------------- ---------------
Stockholders' Equity
Preferred stock $ - - $ - -
Common stock 20 844 705 15 301 160
Stock options 6 843 7 380
Surplus - - 4 350 512
Retained earnings 21 047 709 19 865 902
Accumulated other comprehensive
income, net 1 229 800 783 376
--------------- ---------------
Total stockholders' equity $ 43 129 057 $ 40 308 330
---------------- ---------------
Total liabilities and
stockholders' equity $ 44 132 533 $ 40 855 246
=============== ===============
</TABLE>
43
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
ATLANTIC FINANCIAL CORP.
(Parent Company Only)
Statements of Income
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Income
Dividends from subsidiaries $ 4 153 067 $ 1 396 203
Interest from subsidiaries 86 521 - -
Other income 466 902 152 874
Gain on sale of securities - - 800
--------------- ---------------
$ 4 706 490 $ 1 549 877
--------------- ---------------
Expenses
Stockholder expenses $ 64 835 $ 30 695
Merger expenses 278 770 - -
Professional fees 112 219 64 172
Insurance 49 907 34 163
Printing and postage 30 523 5 505
Directors' fees 38 751 35 000
Miscellaneous 207 495 34 038
--------------- ---------------
$ 782 500 $ 203 573
--------------- ---------------
Net income before income tax
benefit and undistributed
equity in subsidiaries $ 3 923 990 $ 1 346 304
Income tax benefit (4 254) (16 328)
---------------- ----------------
Net income before undistributed earnings
of subsidiaries and equity investments $ 3 928 244 $ 1 362 632
Undistributed (distributed) equity in subsidiaries (266 126) 2 697 795
--------------- ---------------
Net income $ 3 662 118 $ 4 060 427
=============== ===============
</TABLE>
44
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
ATLANTIC FINANCIAL CORP.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 3 662 118 $ 4 060 427
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 17 500 - -
Depreciation 65 353 4 304
Gain on sale of securities - - (800)
Distributed (undistributed) earnings of subsidiaries 266 126 (2 697 795)
Undistributed earnings of equity investments (133 465) - -
(Increase) in due from subsidiaries (2 450 710) (309 683)
(Increase) in other assets (18 733) (126 794)
Increase (decrease) in other liabilities 8 933 (381 469)
--------------- ----------------
Net cash provided by operating activities $ 1 487 122 $ 548 190
--------------- ---------------
Cash Flows from Investing Activities
Purchase of securities available for sale $ (250 000) $ (100 000)
Proceeds from sale of securities available for sale - - 351 800
Purchase of premises and equipment (299 476) (67 419)
---------------- ----------------
Net cash provided by (used in) investing activities $ (549 476) $ 184 381
---------------- ---------------
Cash Flows from Financing Activities
Cash dividends paid $ (1 170 133) $ (803 138)
Issuance of common stock 20 963 3 347 835
Acquisition of common stock (11 018) - -
---------------- ---------------
Net cash provided by (used in) financing activities $ (1 160 188) $ 2 544 697
---------------- ---------------
Increase (decrease) in cash and cash equivalents $ (222 542) $ 3 277 268
Cash and Cash Equivalents
Beginning 3 280 486 3 218
---------------- ---------------
Ending $ 3 057 944 $ 3 280 486
=============== ===============
Supplemental Schedule of Noncash Investing Activities,
contribution of premises and equipment to capital of a
subsidiary bank $ 277 806 $ - -
=============== ===============
</TABLE>
45
<PAGE>
Item 13.
(a) Exhibits
Exhibit No. Document
3.1 Amended and Restated Articles of Incorporation of Atlantic
Financial Corp.
3.2 Bylaws of Atlantic Financial Corp.
10.1 Mid-Atlantic Community BankGroup, Inc. 1998 Incentive Plan,
incorporated by reference to Exhibit 10.3 of the Registrant's
Registration Statement on Form S-4, Registration No.
333-62997, filed September 4, 1998.
10.2 Employment Agreement, dated as of December 1, 1998, between
Atlantic Financial Corp. and William J. Farinholt.
10.3 Employment Agreement, dated as of December 1, 1998, between
Atlantic Financial Corp. and Wenifred O. Pearce.
10.4 Employment Agreement, dated as of December 1, 1998, between
Atlantic Financial Corp. and Kenneth E. Smith.
10.5 Employment Agreement, dated as of December 1, 1998, between
Atlantic Financial Corp. and D. Eugene Brittle.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K
On December 16, 1998, the Company filed a Current Report on Form 8-K
dated December 1, 1998 to disclose, under Item 2, the consummation of the
Company's merger with United Community Bankshares, Inc.
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ATLANTIC FINANCIAL CORP.
ARTICLE I
NAME
The name of the corporation is Atlantic Financial Corp.
ARTICLE II
CAPITAL STOCK
Paragraph A. The aggregate number of shares of stock which the
Corporation shall have the authority to issue and the par value per share are as
follows:
Number of
Class Shares Par Value
----- --------- ---------
Common Stock 20,000,000 $5.00
Preferred Stock 1,000,000 $1.00
Paragraph B. No holders of any class of stock of the Corporation shall
have any preemptive or other preferential right to purchase or subscribe to (i)
any shares of any class of stock of the Corporation, whether now or hereafter
authorized, (ii) any warrants, rights or options to purchase any such stock, or
(iii) any obligations convertible into any such stock or into warrants, rights
or options to purchase any such stock.
Paragraph C. The holders of the Common Stock shall, to the exclusion of
the holders of any other class of stock of the Corporation, have the sole and
full power to vote for the election of directors and for all other purposes
without limitation except only as otherwise provided in any articles of
amendment applicable to any series of Preferred Stock, and as otherwise
expressly provided by the then existing statutes of Virginia. The holders of the
Common Stock shall have one vote for each share of Common Stock held by them.
Except as may be set forth in any articles of amendment applicable to shares of
Preferred Stock, the holders of the Common Stock shall be entitled to receive
the net assets of the Corporation upon dissolution.
Paragraph D. Authority is expressly vested in the Board of Directors to
divide the Preferred Stock into and issue the same in series and, to the fullest
extent permitted by law, to fix and determine the preferences, limitations and
relative rights of the shares of any series so established, and to provide for
the issuance thereof.
<PAGE>
Prior to the issuance of any share of a series of Preferred Stock, the
Board of Directors shall establish such series by adopting a resolution setting
forth the designation and number of shares of the series and the preferences,
limitations and relative rights thereof, and the Corporation shall file with the
State Corporation Commission articles of amendment as required by law, and the
State Corporation Commission shall have issued a certificate of amendment.
ARTICLE III
INDEMNIFICATION AND LIMITS ON LIABILITY
OF DIRECTORS AND OFFICERS
Paragraph A. To the full extent permitted by the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended,
each Director and officer shall be indemnified by the Corporation against
liabilities, fines penalties and claims imposed upon or asserted against him
(including amounts paid in settlement) by reason of having been such Director or
officer, whether or not then continuing so to be, and against all expenses
(including counsel fees) reasonably incurred by him in connection therewith,
except in relation to matters as to which he shall have been finally adjudged
liable by reason of his willful misconduct or a knowing violation of criminal
law in the performance of his duty as such Director of officer. The
determination that the indemnification under this Paragraph A is permissible
shall be made as provided by law. The right of indemnification hereby provided
shall not be exclusive of any other rights to which any Director or officer may
be entitled.
Paragraph B. To the full extent permitted by the Virginia Stock
Corporation Act, as it exists on the date hereof or may hereafter be amended, in
any proceeding brought by a shareholder of the Corporation in the right of the
Corporation or brought by or on behalf of shareholders of the Corporation, a
director or officer of the Corporation shall not be liable in any monetary
amount for damages arising out of or resulting from a single transaction,
occurrence or course of conduct, provided that the elimination of liability
herein set forth shall not be applicable if the Director or officer engaged in
willful misconduct or a knowing violation of the criminal law or of any federal
or state securities law.
Paragraph C. The Board of Directors is hereby empowered, by a majority
vote of a quorum of disinterested Directors, to indemnify or contract in advance
to indemnify any person not specified in Paragraph A of this Article against
liabilities, fines, penalties and claims imposed upon or asserted against him
(including amounts paid in settlement) by reason of having been an employee,
agent or consultant of the Corporation, whether or not then continuing so to be,
and against all expenses (including counsel fees) reasonably incurred by him in
connection therewith, to the same extent as if such person were specified as one
to whom indemnification is granted in Paragraph A of this Article.
Paragraph D. Every reference in this Article to Director, officer,
employee, agent or consultant shall include (i) every Director, officer,
employee, agent or consultant of the Corporation or any corporation the majority
of the voting stock of which is owned directly or indirectly by the Corporation,
(ii) every former Director, officer, employee, agent or consultant of the
Corporation, (iii) every person who may have served at the request of or on
behalf of the Corporation as a Director, officer, employee, agent, consultant or
trustee of another corporation, partnership, joint venture, trust or other
entity, and (iv) in all of such cases, his executors and administrators.
<PAGE>
Paragraph E. The provisions of this Article shall be applicable from
and after its adoption even though some or all of the underlying conduct or
events relating to such a proceeding may have occurred before such adoption. No
amendment, modification or repeal of this Article shall diminish the rights
provided hereunder to any person arising from conduct or events occurring before
the adoption of such amendment, modification or repeal.
Paragraph F. In the event there has been a change in the composition of
a majority of the Board of Directors after the date of the alleged act or
omission with respect to which indemnification is claimed, any determination as
to indemnification and advancements of expenses with respect to any claim for
indemnification made pursuant to Paragraph A of this Article shall be made by
special legal counsel agreed upon by the Board of Directors and the proposed
indemnitee. If the Board of Directors and the proposed indemnitee are unable to
agree upon such special legal counsel, the Board of Directors and the proposed
indemnitee each shall select a nominee, and the nominees shall select such
special legal counsel.
ARTICLE IV
DIRECTORS
Paragraph A. Except as otherwise fixed by any articles of amendment
adopted by the Board of Directors pursuant to Paragraph D of Article II relating
to the rights of the holders of any Series of Preferred Stock to elect
additional directors under specified circumstances, the number of the directors
of the Corporation shall be fixed from time to time by or pursuant to the Bylaws
of the Corporation.
Paragraph B. The directors, other than those who may be elected by the
holders of any series of Preferred Stock, shall be classified, with respect to
the time for which they severally hold office, into three classes, as nearly
equal in number as possible, with each class to hold office until its successor
is elected and qualified. At each annual meeting of the stockholders of the
Corporation, the successors of the class of directors whose term expires at that
meeting shall be elected to hold office for a term expiring the annual meeting
of stockholders held in the third year following the year of their election.
Paragraph C. Except as otherwise fixed by any articles of amendment
adopted by the Board of Directors pursuant to Paragraph D of Article II relating
to the rights of the holders of any series of Preferred Stock to elect directors
under specified circumstances, newly created directorships resulting from any
increase in the number of directors and any vacancies on the Board of Directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled only by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the class of director in which
the new directorship was created or the vacancy occurred and until such
director's successor shall have been elected and qualified. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
Paragraph D. Advance notice of stockholder nominations for the election
of directors shall be given in the manner provided in the Bylaws of the
Corporation.
<PAGE>
ARTICLE V
BYLAW AMENDMENTS
The Board of Directors shall have power to make, alter, amend and
repeal the Bylaws of the Corporation except so far as any of the Bylaws of the
Corporation adopted by the stockholders shall otherwise provide. Any Bylaws made
by the directors under the powers conferred hereby may be altered, amended or
repealed by the directors or by the stockholders.
ARTICLE VI
SPECIAL VOTING PROVISIONS
Paragraph A. An amendment to the Articles of Incorporation of the
Corporation shall be approved if:
1. A majority of the votes entitled to be cast by each voting
group entitled to vote on such action are cast in favor of
such action; and,
2. Unless such action shall have been approved by at least
two-thirds of the directors, holders of more than two-thirds
of the issued and outstanding shares of the Corporation's
Common Stock vote in favor of such action.
Paragraph B. Any director may be removed from office with or without
cause, but only if holders of more than seventy percent (70%) of the issued and
outstanding shares of Common Stock vote in favor of such action.
Paragraph C. Any merger or share exchange to which the Corporation is a
party or any direct or indirect sale, lease, exchange or other disposition of
all or substantially all of the Corporation's property, otherwise than in the
usual and regular course of business, shall be approved if:
1. A majority of the votes entitled to be cast by each voting
group entitled to vote on such action are cast in favor of
such action; and,
2. Unless such action shall have been approved by at least
two-thirds of the directors, at least two-thirds of the issued
and outstanding shares of the Corporation's Common Stock vote
in favor of such action.
This Paragraph C shall not affect the power of the Board of Directors
to condition its submission of any plan of merger, share exchange or direct or
indirect sale, lease, exchange or other disposition of all or substantially all
of the Corporation's property, otherwise than in the usual and regular course of
business, on any basis, including the requirement of a greater vote.
Exhibit 3.2
BYLAWS
OF
ATLANTIC FINANCIAL CORP.
ARTICLE I
Shareholder Matters
Section 1.1. Annual Meetings.
A. The annual meeting of the shareholders of the Corporation shall
be held at such a place as may be decided by, the Board of Directors on a date
during the month of April, May and June of each and every year, the exact date,
place and hour to be fixed by the Board of Directors.
B. At the annual meeting of the shareholders of the Corporation,
Directors shall be elected and reports of the affairs of the Corporation shall
be received and considered. Any other business may be transacted which is within
the powers of the shareholders, except that, if any shareholder shall bring new
business before the annual meeting, the shareholder must give advance notice as
set forth in Section 1.6 of these Bylaws.
C. The Board of Directors may designate any place, either within
or without the Commonwealth of Virginia, as the place of meeting for any annual
meeting or for any special meeting. If no place is designated by the Board, the
place of meeting shall be the principal office of the Corporation.
Section 1.2. Special Meetings. A special meeting of the
shareholders may be called for any purpose or purposes whatsoever at any time,
by the President, the Chairman of the Board of Directors, the Board of Directors
or by holders of at least twenty-five percent of the issued and outstanding
shares of Common Stock.
Section 1.3. Notice of Meetings. Notice of the time and place of
every annual meeting or special meeting shall be mailed to each Shareholder of
record entitled to vote at the meeting at his address as it appears on the
records of the Corporation not less than ten (10) nor more than sixty (60) days
before the date of such meeting (except as a different time may be specified by
law).
Section 1.4. Quorum. A majority of the votes entitled to be cast on
a matter by a voting group constitutes a quorum of such voting group for action
on such matter. If there is not a quorum at the time for which a meeting shall
have been called, the meeting may be adjourned from time to time by a majority
of the shareholders present or represented by proxy without notice, other than
by announcement at the meeting, until there is a quorum.
Section 1.5. Voting. Except as the Articles of Incorporation
otherwise provide, at any meeting of the shareholders, each outstanding share,
regardless of class, is entitled to one vote on each matter voted on at a
shareholders' meeting.
Section 1.6. Notice of Shareholder Business. At an annual meeting
of the shareholders of the Corporation, only such business shall be conducted as
shall have been properly brought
<PAGE>
before the meeting. To be brought before an annual meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise bought before the meeting
by or at the direction of the Board of Directors, or (c) otherwise properly
brought before the meeting by a shareholder. For business to be properly brought
before an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation, not less than sixty (60)
days nor more than ninety (90) days prior to the date of the scheduled annual
meeting, regardless of any postponements, deferrals or adjournments of that
meeting to a later date; provided, however, that in the event that less than
seventy (70) days' notice or prior public disclosure of the date of the
scheduled annual meeting is given or made, notice by a shareholder, to be
timely, must be so received not later than the close of business on the tenth
(10th) day following the earlier of the day on which such notice of the date of
the scheduled annual meeting was mailed or the day on which such public
disclosure was made. A shareholder's notice to the Secretary of the Corporation
shall set forth as to each matter the shareholder proposes to bring before the
annual meeting (a) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (b) the name and address, as they appear on the Corporation's
books of the shareholder proposing such business and of any other person or
entity who is the record or beneficial owner of any shares of the Corporation
and who, to the knowledge of the shareholder proposing such business, supports
such proposal, (c) the class and number of shares of the Corporation which are
beneficially owned and owned of record by the shareholder proposing such
business on the date of his notice to the Corporation and the number of shares
so owned by any person or entity who, to the knowledge of the shareholder
proposing such business, supports such proposal and (d) any material interest
(financial or other) of such shareholder in such proposal. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
Section 1.6. The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 1.6. and if
the Chairman should so determine, the Chairman shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
Section 1.7. Order of Business. All meetings of shareholders shall
be conducted in accordance with such rules as are prescribed by the Chairman of
the meeting and the Chairman shall determine the order of business at all
meetings of the shareholders.
Section 1.8. Inspectors. The Board of Directors, in advance of any
meeting of shareholders, may, but shall not be required to, appoint one or more
inspectors to act at such meeting or any adjournment thereof. If any of the
inspectors so appointed shall fail to appear or act, the Chairman of the meeting
may appoint one or more inspectors. The inspectors shall determine the number of
shares of capital stock of the Corporation outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the results, and do such acts as are proper to conduct the election or
vote with fairness to all shareholders. On request of the Chairman of the
meeting, the inspectors shall make a report of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as an inspector of an
election of directors. Inspectors need not be shareholders.
<PAGE>
ARTICLE II
Directors
Section 2.1. General Powers. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors and,
except as otherwise expressly provided by law or by the Articles of
Incorporation, or by these Bylaws, all of the powers of the Corporation shall be
exercised by or under the authority of said Board of Directors.
Section 2.2. Number and Qualification. The Board of Directors shall
consist of fourteen (14) Directors.
Section 2.3. Election of Directors. The Directors shall be elected
at the annual meeting of shareholders, and shall hold their offices until their
successors are elected in accordance with the Articles of Incorporation.
Nominations for the election of Directors shall be given in the manner provided
in Section 2.5.
Section 2.4. Honorary and Advisory Directors. The Board may appoint
to the position of Honorary Director or the position of Advisory Director such
person or persons as it deems appropriate. Honorary Directors shall not be
entitled to receive notice of or to attend meetings of the Board. Advisory
Directors shall be entitled only to notice of meetings of Advisory or other
Boards of the Corporation to which they shall be appointed. Honorary and
Advisory Directors shall receive such compensation as may be authorized by the
Board of Directors for attendance at meetings of Advisory or other Boards to
which such Advisory or Honorary Directors are appointed.
Section 2.5. Nominations. (a) Only persons who are nominated in
accordance with the procedures set forth in this Section 2.5 shall be eligible
for election as Directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made by or at the direction of the Board of
Directors, or by any shareholder of the Corporation entitled to vote for the
election of Directors who complies with the notice procedures set forth in this
Section 2.5. Such nominations, other than those made by or at the direction of
the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice shall be
delivered to or mailed and received at the principal executive offices of the
Corporations not less than sixty (60) days nor more than ninety (90) days prior
to the date of the scheduled annual meeting, regardless of postponements,
deferrals, or adjournments of that meeting to a later date; provided, however,
in the event that less than seventy (70) days' notice or prior public disclosure
of the date of the meeting is given or made, notice by the shareholder to be
timely must be so received not later than the close of business on the 10th day
following the earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on which such public disclosure
was made. Such shareholder's notice shall set forth (a) as to each person whom
the shareholder proposes to nominate for election as a Director, (1) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the Corporation which are beneficially owned by such person and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended; and (b) as to the shareholder giving the notice (i) the name and
address of such shareholder and of any other person or entity who is the record
or beneficial owner of shares of the Corporation and who, to the knowledge of
the shareholder giving notice, supports such nominee(s) and (ii) the class and
number of shares of the Corporation which are beneficially owned and owned of
record by such shareholder and by any other person or entity who is the
<PAGE>
record or beneficial owner of shares of the Corporation and who, to the
knowledge of the shareholder giving the notice, supports such nominee(s). At the
request of the Board of Directors any person nominated by the Board of Directors
for election as a Director shall furnish to the Secretary of the Corporation the
information required to be set forth in a shareholder's notice of nomination
which pertains to the nominee. No person shall be eligible for election as a
Director of the Corporation unless nominated in accordance with the procedures
set forth in this Section 2.5. The Chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the Bylaws, and if the Chairman
should so determine, the Chairman shall so declare to the meeting and the
defective nomination shall be disregarded.
(b) (1) In the first five annual elections of Directors, after
the Effective Date, nominations for election to the Board of Directors made by
the Board of Directors shall be made in the manner described in Section
2.5(b)(2) unless seventy-five percent (75%) of the full Board of Directors
otherwise agrees.
(2) If a Director whose term expires at an annual meeting is an
MACB Nominee and he is not nominated for re-election, the Directors who are MACB
Nominees shall designate a successor who shall be nominated for election to the
Board of Directors by the Board of Directors. If a Director whose term expires
at an annual meeting is a UCB Nominee and he is not nominated for re-election,
the Directors who are UCB Nominees shall designate a successor who shall be
nominated for election to the Board of Directors by the Board of Directors.
(c) Unless seventy-five percent (75%) of the full Board of
Directors otherwise agrees, if a vacancy arises from the resignation, death or
removal of a Director, before the annual meeting of shareholders in the year
2004, the vacancy shall be filled by an individual designated by the MACB
Nominees (if the vacant seat was held by an MACB Nominee) or by the UCB Nominees
(if the vacant seat was held by a UCB Nominee).
(d) The terms "MACB Nominee" and "UCB Nominee" shall have the
meanings specified in Section 1.1(d) and 1.1(e) of the Agreement and Plan of
Reorganization between United Community Bankshares, Inc. and Mid-Atlantic
Community BankGroup, Inc., dated July __, 1998.
Section 2.7. Meetings of Directors. Meetings of the Board of
Directors shall be held at places within or without the Commonwealth of Virginia
and at times fixed by resolution of the Board of Directors, or upon call of the
Chairman of the Board of Directors or the President. The Secretary, or officer
performing his duties, shall give at least twenty-four (24) hours' notice by
telegraph, letter, telephone or in person, of all meetings of the Directors;
provided, that notice need not be given of regular meetings held at times and
places fixed by resolution of the Board. Regular meetings of the Board of
Directors shall be held at least six times in every calendar year. Meetings may
be held at any time without notice if all of the Directors are present, or if
those not present waive notice either before or after the meeting. Neither the
business to be transacted nor the purpose of any annual or special meeting of
the Board of Directors need be specified in the notice or waiver of notice of
such meeting.
Section 2.8. Quorum. A majority of the members of the Board of
Directors shall constitute a quorum.
Section 2.9. Compensation. The Board of Directors shall fix the
compensation of the Directors.
<PAGE>
Section 2.10. Committees. The Board of Directors may create
committees and appoint members of committees in accordance with Virginia law.
There may be an Executive Committee and such committee may exercise the
authority of the Board of Directors to the fullest extent permitted by law.
ARTICLE III
Officers
Section 3.1. Election. The Officers of the Corporation shall
consist of the Chairman of the Board of Directors, one or more Vice Chairmen of
the Board of Directors, the President, one or more Executive or Senior Vice
Presidents, a Chief Financial Officer, one or more additional Vice Presidents, a
Secretary, one or more Assistant Secretaries, and such other officers as may be
elected as provided in Section 3.3 of this Article. All Officers shall be
elected by the Board of Directors, and shall hold office until their successors
are elected and qualify. Vacancies may be filled at any meeting of the Board of
Directors. Subject to any applicable provision of Virginia law, more than one
office may be combined in the same person as the Board of Directors may
determine.
Section 3.2. Removal of Officers. Subject to Article V, any Officer
of the Corporation may be summarily removed with or without cause, at any time,
by a resolution passed by affirmative vote of a majority of all of the
Directors; provided that any such removal shall not affect an Officer's right to
any compensation to which he is entitled under any employment contract between
such officer and the Corporation.
Section 3.3. Other Officers. Other Officers may from time to time
be appointed by the Board of Directors, and such Officers shall hold office for
such term as may be designated by the said Board of Directors.
Section 3.4. Chairman of the Board. The Chairman of the Board shall
be the senior Officer of the Corporation, and shall preside at all meetings of
the Directors and all meetings of the shareholders. The Chairman of the Board
shall appoint all standing committees and temporary committees and shall be a
member ex officio of all standing committees and shall have all other powers and
duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 3.5. Vice Chairman of the Board. In the absence or
disability of the Chairman of the Board, the Vice Chairman of the Board shall
preside at all meetings of the Directors and all meetings of the Shareholders.
If there shall be more than one Vice Chairman, the duties of the Vice Chairman
shall be discharged by a Vice Chairman who is not a full time employee of the
Corporation.
Section 3.6. President. The President shall be the Chief Executive
Officer of the Corporation. In the absence or disability of the Chairman of the
Board and the Vice Chairman of the Board, the President shall preside at all
meetings of the Directors and at meetings of the shareholders and in the absence
or disability of the Chairman of the Board and the Vice Chairman of the Board
the duties and responsibilities of such office shall devolve upon the President.
The President shall have such other powers and duties as may be prescribed by
the Chairman of the Board of Directors, the Board of Directors or by the Bylaws.
<PAGE>
Section 3.7. Chief Operating Officer. Subject to the authority
granted to the Chief Executive Officer, the Chief Operating Officer shall have
general supervision over the day-to-day operations of the Corporation and shall
perform such other duties as may be prescribed from time to time by the Board of
Directors or the Chief Executive Officer.
Section 3.8. Chief Financial Officer. The Chief Financial Officer
shall, subject to the direction of the Chief Executive Officer, have general
custody of all the property, funds and securities of the Corporation and shall
have general supervision of the collection and disbursement of funds of the
Corporation. He shall provide for the keeping of proper records of all
transactions of the Corporation and shall perform such other duties as may be
assigned to him by the Chief Executive Officer.
Section 3.9. Vice Presidents. Executive Vice Presidents, Senior
Vice Presidents and Vice Presidents shall perform such duties as may be
prescribed for them from time to time by the Chief Executive Officer or the
Board of Directors.
Section 3.10. Secretary. The Secretary shall have the duties and
responsibilities prescribed by law for the secretary of a Virginia corporation.
Section 3.11. Surety Bonds. All Officers and employees who shall
have charge or possession of money, securities or property of the Corporation
must, before entering upon their duties, be covered by a bond with a surety
company approved by the Board of Directors and state and federal authorities.
The costs of such bond shall be borne by the Corporation.
ARTICLE IV
Capital Stock
Section 4.1. Issues of Certificate of Stock. Certificates of
capital stock shall be in such form as may be prescribed by law and by the Board
of Directors. All certificates shall be signed by the President and by the
Secretary or an Assistant Secretary, or by any other two Officers authorized by
resolution of the Board of Directors.
Section 4.2. Transfer of Stock. The stock of the corporation shall
be transferable or assignable on the books of the Corporation by the holders in
person or by attorney on surrender of the certificate or certificates for such
shares duly endorsed, and, if sought to be transferred by attorney, accompanied
by a written power of attorney to have such stock transferred on the books of
the Corporation.
Section 4.3. Restrictions on Transfer of Stock. Any restrictions
that may be imposed by law, by the Articles of Incorporation or Bylaws of the
Corporation, or by an agreement among shareholders of the Corporation, shall be
noted conspicuously on the front or back of all certificates representing shares
of stock of the Corporation.
Section 4.4. Lost, Destroyed or Mutilated Certificates. The holder
of stock of the Corporation shall immediately notify the Corporation of any
loss, destruction, or mutilation of the certificate therefor, and the
Corporation may in its discretion cause one or more new certificates for the
same aggregate number of shares to be issued to such Stockholder upon the
surrender of the mutilated certificate, or upon satisfactory proof of such loss
or destruction accompanied by the deposit of a bond in such form and amount and
with such surety as the Corporation may require.
<PAGE>
Section 4.5. Holder of Record. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder thereof
in fact and shall not be bound to recognize any equitable or other claim to or
interest in such shares of stock on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise expressly
provided by law.
Section 4.6. Record Date. The Board of Directors shall fix in
advance the record date in order to make a determination of shareholders for any
purpose, including the determination of shareholders entitled to notice of or to
vote at any shareholders' meeting or entitled to payment of any dividend or
distribution to shareholders. Such record date shall not be more than seventy
(70) days prior to the date on which the particular action requiring such
determination of shareholders is to be taken.
Section 4.7. Control Share Acquisitions. Article 14.1 of the
Virginia Stock Corporation Act shall not apply to the Corporation.
ARTICLE V
Amendments and Special Voting Provisions
Section 5.1. Voting Generally. Except as otherwise provided by law
or as set forth in this Article V, the Board of Directors shall act by majority
vote at any duly held meeting at which a quorum is present.
Section 5.2. Special Voting Requirements. The affirmative vote of
at least sixty percent (60%) of the entire Board of Directors shall be required
to:
(a) Amend these Bylaws;
(b) Submit to the shareholders any plan of merger or share exchange
or any proposal to dissolve the Corporation or to sell, lease, exchange or
otherwise dispose of all or substantially all of the Corporation's property,
otherwise than in the usual and regular course of business;
(c) Submit to the shareholders any proposal to change the name of
the Corporation;
(d) Cause The Bank of Franklin or The Bank of Sussex and Surry or
Peninsula Trust Bank, Incorporated to change its name or amend its articles of
incorporation or bylaws;
(e) Cause The Bank of Franklin or The Bank of Sussex and Surry or
Peninsula Trust Bank, Incorporated to appoint, remove or transfer its Chief
Executive Officer;
(f) Dispose of any of the stock of The Bank of Franklin or The Bank
of Sussex and Surry or Peninsula Trust Bank, Incorporated or cause any of such
banks to dissolve or enter into a plan of merger or share exchange or to sell,
lease, exchange or otherwise dispose of all or substantially all of its
property, otherwise than in the usual and regular cause of business.
(g) Appoint, remove or transfer the Corporation's Chief Executive
Officer, Chief Operating Officer or any Executive Vice President.
<PAGE>
Section 5.3. Subsidiary Bank Directors. (a) The Directors of The
Bank of Franklin, The Bank of Sussex and Surry and Peninsula Trust Bank,
Incorporated (each a "Bank" and collectively the "Banks") each shall nominate
individuals for election to their respective Boards each year.
(b) The Corporation shall not remove any Director of a Bank or
refuse to vote its shares of any of such Bank's common stock in favor of the
election of those nominated in accordance with Section 5.3(a) unless (i) a
Director of one of such Banks violates a code of conduct that is generally
applicable to Directors of the Corporation and its subsidiaries, (ii) the
Corporation's Board of Directors determines that such a Bank is experiencing
business, financial or regulatory difficulties and, as a result, the Corporation
determines that a change in the Board of Directors of such Bank is necessary or
advisable in order to protect the Corporation or its investment in such Bank or
(iii) a director of one of such Banks acts in a manner inconsistent with his
fiduciary duty to such Bank.
ARTICLE VI
Miscellaneous Provisions
Section 6.1. Seal. The seal of the Corporation shall be circular in
shape with the name of the Corporation around the circumference thereof, and the
word "SEAL" in the center thereof.
Section 6.2. Examination of the Books and Records. The books and
records of account of the Corporation, the minutes of the proceedings of the
shareholders, the Board and Committees appointed by the Board of Directors and
the records of the shareholders showing the names and addresses of all
shareholders and the number of shares held by each, shall be subject to
inspection during the normal business hours by any person who is a duly
qualified Director of the Corporation at the time he makes such inspection.
Shareholders shall have such rights to inspect records of the Corporation as are
prescribed by applicable law.
Section 6.3. Checks, Notes and Drafts. Checks, notes, drafts, and
other orders for the payment of money shall be signed by such persons as the
Board of Directors from time to time may authorize.
Section 6.4. Amendments to ByLaws. These Bylaws may be altered,
amended or repealed in accordance with the Articles of Incorporation.
Section 6.5. Voting of Stock Held. Unless otherwise provided by
resolution of the Board of Directors, the Chairman of the Board of Directors,
the President or any Executive Vice President may from time to time appoint an
attorney or attorneys as agent or agents of the Corporation to cast in the name
of the Corporation the votes which the Corporation may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose stock or
securities may be held by the Corporation, at meetings of the holders of the
stock or other securities of such other corporation, or to consent in writing to
any action by any such other corporation; and such Officers may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed on behalf of the
Corporation and under its corporate seal, or otherwise, such written proxies,
consents, waivers, or other instruments as may be necessary or proper in the
premises; or any of such Officers may himself attend any meeting of the holders
of stock or other securities of any such other corporation and there vote or
exercise any or all other powers of the Corporation as the holder of such stock
or other securities of such other corporation.
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of December 1998, by and
between Atlantic Financial Corp., a Virginia corporation, (the "Corporation"),
and William J. Farinholt (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting
President and Chief Executive Officer of the Corporation and, as such, is a key
executive officer of the Corporation whose continued dedication, availability,
advice and counsel to the Corporation is deemed important to the Board of
Directors of the Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on November 30, 2003,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. RENEWAL TERM: This Agreement shall be extended for an additional
year annually following the original term unless either party notifies the other
in writing at least three (3) months prior to the end of the original term, or
the end of any additional one-year term, that the Agreement shall not be
extended beyond its current term.
3. EXECUTIVE DUTIES: The Executive agrees to accept and perform the
managerial duties and responsibilities of President and Chief Executive Officer
of the Corporation and agrees to devote his time and attention on a full-time
basis to the discharge of such duties
<PAGE>
and responsibilities of an executive nature as may be assigned him by the Board
of Directors of the Corporation, including general responsibility for the
business of the Corporation. As President and Chief Executive Officer, the
Executive shall have the duties set forth for such officer in the Corporation's
Bylaws. The Executive also shall serve as a director and as President of
Peninsula Trust Bank, Incorporated. The Executive may accept any elective or
appointed positions or offices with any duly recognized associations or
organizations whose activities or purposes are closely related to the banking
business or purposes are closely related to the banking business or service to
which would generate good will for the Corporation and its subsidiaries.
4. COMPENSATION: (a) The Corporation agrees to pay Executive, and
Executive agrees to accept, as compensation for all services rendered by him to
the Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Sixty Thousand Dollars ($160,000.00),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. On or
before the first anniversary of this Agreement and for each year thereafter, the
Corporation agrees to review the Executive's base salary and to consider
implementing increases to such base salary as may be warranted based upon the
performance of the Executive and the performance of the Corporation and
comparable data related to similarly sized institutions as may be available;
however, such base salary shall not be reduced below the previous year's base
salary without the specific written agreement by the Executive.
(b) Executive shall receive only such bonuses as the Board of
Directors, in its discretion, decides to pay to Executive.
(c) The Executive shall be entitled to four weeks vacation which
shall be without loss of pay. Attendance at meetings or conventions of banking
associations or organizations shall not be charged against the Executive's
annual vacation entitlement.
(d) The Executive shall be paid all normal directors' fees, other
than committee meeting fees, for service on the Board of Directors of the
Corporation, and shall not be paid any fees in connection with service as a
director of any subsidiary of the Corporation unless otherwise determined by the
Board of Directors of the Corporation.
(e) During the term of this Agreement, Corporation shall provide the
Executive with an appropriate automobile as determined by the Board of Directors
of the Corporation.
(f) The Corporation will pay the Executive's country club initiation
fee and dues on such basis as may be determined by the Board of Directors of the
Corporation from time to time.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS
EXPENSES AND MOVING EXPENSES: (a) During the term of employment under this
Agreement, Executive shall be entitled to participate in any pension, group
insurance, hospitalization, deferred compensation or other benefit, bonus or
incentive plans of the Corporation presently in effect (including, without
limitation, the Corporation's stock option plans) or hereafter adopted by the
Corporation and generally available to any employees of senior executive status,
and, additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
(b) The Corporation shall promptly reimburse the Executive, upon
presentation of adequate substantiation, including receipts, for the reasonable
travel, entertainment, lodging and other business expenses incurred by the
Executive, including, without limitation, those expenses
<PAGE>
incurred by the Executive and his spouse in attending trade and professional
association conventions, meetings and other related functions attended by other
bank executives and their spouses.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for the greater of ninety (90)
consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Corporation, the Corporation may
terminate this Agreement without further or additional compensation payment
being due the Executive from the Corporation pursuant to this Agreement, except
benefits accrued through the date of such termination under employee benefit
plans of the Corporation. These benefits shall include long-term disability and
other insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's salary from the Corporation
at the rate in effect at the time of Executive's death for a period of three (3)
months from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days written notice to the Executive. The
Executive may resign for Good Reason (as hereafter defined) at any time by
giving not less than thirty (30) days written notice to the Corporation. If the
Corporation terminates the Executive's employment without Cause or the Executive
resigns for Good Reason before or after a Change of Control (as hereafter
defined), then in either event:
(i) The Executive shall be paid for the remainder of the
then current term of this Agreement or for a period of one year from the date of
termination, whichever is greater, at such times as payment was theretofore
made, the salary required under Section 4(a) that the Executive would have been
entitled to receive during the remainder of the then current term of this
Agreement had such termination not occurred (and the Corporation shall continue
such payments to Executive's estate if Executive dies before all such payments
have been made); and
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program.
(b) Notwithstanding the foregoing, all such payments and benefits
under Section 8(a) otherwise continuing for periods after the Executive's
termination of employment shall cease to be paid, and the Corporation shall have
no further obligation due with respect thereto, in the event the Executive
engages in "Competition" or makes any "Unauthorized Disclosure of Confidential
Information". For purposes hereof:
-57-
<PAGE>
(i) "Competition" means the Executive's engaging during the
one (1) year period following termination of employment, without the written
consent of the Board of Directors of the Corporation or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or any
other individual or representative capacity (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in, or entering into services or
providing advice pertaining to, any banking, lending or other financial activity
that the Corporation or any of its affiliates actively engages in within five
(5) miles of any branch of the Corporation or any of its subsidiaries at the
time of Executive's termination of employment, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Corporation or any of its
affiliates for the purpose of competing with the products or services provided
by the Corporation or any of its affiliates, or
(C) employing or soliciting for employment any
employees of the Corporation or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information"
means the disclosure of information in violation of Section 19 of this
Agreement.
(c) For purposes of this Agreement, "Good Reason" shall mean:
(i) Prior to a Change of Control (as hereafter defined) the
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date hereof, or (B)
result in the Executive having significantly less authority and/or
responsibility than he has on the date hereof, without his express written
consent;
(ii) After a Change of Control (as hereafter defined) the
assignment of a title or duties that are not commensurate with Executive's
seniority and experience;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof;
(v) The relocation of the Executive to any other primary
place of employment which requires him to move his residence, without the
Executive's express written consent to such relocation;
(vi) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 11(b) hereof;
(vii) The failure of the shareholders of the Corporation to
elect the Executive as a director of the Corporation; or
(viii) A material breach of this Agreement by the Corporation.
<PAGE>
(d) Resignation by the Executive for Good Reason shall be
communicated by a written Notice of Resignation to the Corporation. A "Notice of
Resignation" shall mean a notice which shall indicate the specific provision(s)
in this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for a resignation for Good Reason.
(e) If within thirty (30) days after any Notice of Resignation is
given the Corporation notifies the Executive that a dispute exists concerning
the resignation for Good Reason and that it is requesting arbitration pursuant
to Section 18, the Corporation shall continue to pay the Executive his full
salary and benefits as described in Sections 4(a) and 5(a), as and when due and
payable, at least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then (y) all sums paid by the Corporation to the
Executive, including but not limited to the cost to the Corporation of providing
the Executive such fringe benefits, from the date of such resignation to the
date of the resolution of such dispute, less (z) any sums otherwise owed by the
Corporation to the Executive shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
9. RESIGNATION - TERMINATION FOR CAUSE: (a) The Corporation's Board
of Directors may terminate the Executive's employment for cause at any time.
Cause shall be defined as the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses that have no
material detrimental effect on the Corporation) or final cease-and-desist order,
or a material breach of any provision of this Employment Agreement.
Notwithstanding the foregoing, the Corporation shall notify and counsel
the Executive as to the nature of any instance of "cause" described above within
30 days of the Corporation's discovery of such neglect or misconduct and shall
provide a reasonable probationary and cure period from the date of such notice
and counseling, but this provision shall only apply to the first occurrence of
any such circumstances and the Corporation in good faith may immediately
terminate the Executive for such continued or additional instance of "cause"
following the initial notice and counseling.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
If within thirty (30) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by
<PAGE>
the Corporation is challenged by the Executive and the termination is ultimately
determined to be justified, then all sums paid by the Corporation to the
Executive pursuant to this Section 9(b), plus the cost to the Corporation of
providing the Executive such fringe benefits from the date of such termination
to the date of the resolution of such dispute, shall be promptly repaid by the
Executive to the Corporation with interest at the rate charged from time to time
by the Corporation, to its most substantial customers for unsecured lines of
credit. Should it ultimately be determined that a termination by the Corporation
pursuant Section 9(a) was not justified, then the Executive shall be entitled to
retain all sums paid to him pending the resolution of such dispute and he shall
be entitled to receive, in addition, the payments and other benefits provided
for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within thirty (30) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise
voluntarily terminates his employment by the Corporation, or his employment by
the Corporation's wholly owned subsidiary, Peninsula Trust Bank, Incorporated,
at any time (except a termination for Good Reason pursuant to Section 8 hereof),
or if the Corporation rightfully terminates the Executive's employment for
Cause, this Agreement shall terminate upon the date of such resignation or
termination of employment for Cause, and (subject to Section 9(b)) the
Corporation thereafter shall have no obligation to make any further payments
under this Agreement, provided that the Executive shall be entitled to receive
any benefits, insured or otherwise, that he would otherwise be eligible to
receive under any benefit plans of the Corporation or any affiliate of the
Corporation.
10. CHANGE OF CONTROL: (a) At any time within one hundred eighty
(180) days after a Change of Control, the Executive may resign without Good
Reason and on or before the Executive's last day of employment with the
Corporation (in addition to all other payments to which the Executive is
entitled under this Agreement) the Corporation shall pay to the Executive a cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to $200,000, provided that, at the option of the Executive, the
cash amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the twelve (12) months succeeding the date of
termination, payable on the first day of each such month; provided, however, if
Executive dies before all payments to which he is entitled under this Section
10(a) have been made, then such payments he did not receive shall be made to his
estate. If the Executive resigns for Good Reason at any time after a Change of
Control, Section 8(a) shall control.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors; (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a sale of assets, a contested election, or any combination of these
events, the persons who were directors of the Corporation before the first of
such events cease to constitute a majority of the Corporation's Board, or any
successor's board, within two years of the last of such transactions; or (iii)
the shareholders of the Corporation approve (x) a merger, consolidation or other
business combination of the Corporation with any other "person" or "group" (as
defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) or affiliate thereof, other than a merger or consolidation that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock of the
<PAGE>
surviving entity or a parent or affiliate thereof) more than fifty percent (50%)
of the outstanding common stock of the Corporation or such surviving entity or a
parent or affiliate thereof outstanding immediately after such merger,
consolidation or other business combination, or (y) a plan of complete
liquidation of the Corporation or an agreement for the sale or disposition by
the Corporation of all or substantially all of the Corporation's assets, or (iv)
any other event or circumstance which is not covered by the foregoing
subsections but which the Board of Directors of the Corporation determines to
affect control of the Corporation and with respect to which the Board of
Directors adopts a resolution that the event or circumstance constitutes a
Change of Control for purposes of this Agreement. The date of a Change of
Control is the date on which an event described in items (i) through (iv) above
occurs.
(b) If the Executive resigns pursuant to Section 10(a) or if his
employment terminates pursuant to Section 8(a) after a Change of Control, all
stock options granted to the Executive under any of the Corporation's stock
option plans shall become immediately exercisable with respect to all the shares
covered thereby regardless of whether such options are otherwise exercisable and
Executive shall have thirty (30) days after the date of his resignation to
exercise such stock options
11. CERTAIN OBLIGATIONS - SUCCESSORS: (a) The Corporation's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against him or anyone else. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Except as expressly provided in Sections
8(d) and 9(b), each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whosoever may be entitled thereto, for any
reason whatsoever. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.
(b) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the Corporation to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation described in Section 8(a). As used in this
Agreement, "Corporation" shall mean Atlantic Financial Corp. and any successor
to its respective business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 11(b) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
12. LIMITATION OF BENEFITS: If the independent accountants serving
as auditors for the Corporation on the date of a Change of Control (or the
Internal Revenue Service upon examination of the tax returns of the Corporation
or the Executive) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits
contingent on a Change of Control, constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on the Executive under Section 4999 of the Code (the "Excise Tax"), then the
payments scheduled under this Agreement shall be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be
<PAGE>
nondeductible and subject to the Excise Tax. The Executive may designate which
payments or benefits will be reduced.
13. NOTICES: For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or five days after it is mailed
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive: 10848 Harcum Road
Gloucester, Virginia 23061
If to the Corporation: 7171 George Washington Memorial Highway
P.O. Box 1310, U.S. Route 17
Gloucester, Virginia 23061-1310
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability
of any provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Executive should die while any amounts would still be payable to
him hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
<PAGE>
18. ARBITRATION: Any dispute, controversy or claim arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Richmond, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgement may be entered on the arbitrator's
award in any court having jurisdiction. Unless otherwise provided in the rules
of the American Arbitration Association, the arbitrators shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees and expenses of the parties, as well as the
arbitrator's fees and expenses, in such proportions as the arbitrators deem
just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or disclosed to the general public, or which gives to the Corporation
an opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or administrative law judge issued after the
Executive and his legal counsel urge that the aforementioned confidentiality be
preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
EXECUTIVE
ATTEST: ____________________ __________________________________
William J. Farinholt
ATLANTIC FINANCIAL CORP.
ATTEST: ____________________ By: _____________________________
AUTHORIZED OFFICER
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of December 1998, by and
between Atlantic Financial Corp., a Virginia corporation, (the "Corporation"),
and Wenifred O. Pearce (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting Vice
Chairman and Chief Operating Officer of the Corporation and, as such, is a key
executive officer of the Corporation whose continued dedication, availability,
advice and counsel to the Corporation is deemed important to the Board of
Directors of the Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on November 30, 2003,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. RENEWAL TERM: This Agreement shall be extended for an additional
year annually following the original term unless either party notifies the other
in writing at least fifteen (15) months prior to the end of the original term,
or the end of any additional one-year term, that the Agreement shall not be
extended beyond its current term.
<PAGE>
3. EXECUTIVE DUTIES: The Executive agrees to accept and perform the
managerial duties and responsibilities of director, Vice Chairman and Chief
Operating Officer of the Corporation and agrees to devote his time and attention
on a full-time basis to the discharge of such duties and responsibilities of an
executive nature as may be assigned him by the Board of Directors of the
Corporation or the Chief Executive Officer, including , subject to the authority
of the Chief Executive Officer, primary responsibility for all non-interest
income activities, human resources and personnel (provided that the Executive
shall not hire or discharge any officer of the Corporation without the prior
approval of the Chief Executive Officer) and strategic planning (including
budgeting, expansion, branch locations and branch acquisitions). As Vice
Chairman and Chief Operating Officer, the Executive shall have the duties set
forth for such officer in the Corporation's Bylaws. The Executive also shall
serve as a director and as Vice Chairman of the Bank of Franklin or its
successor. The Executive may accept any elective or appointed positions or
offices with any duly recognized associations or organizations whose activities
or purposes are closely related to the banking business or purposes are closely
related to the banking business or service to which would generate good will for
the Corporation and its subsidiaries.
4. COMPENSATION: (a) The Corporation agrees to pay Executive, and
Executive agrees to accept, as compensation for all services rendered by him to
the Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Fifty Thousand Dollars ($150,000.00),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. On or
before the first anniversary of this Agreement and for each year thereafter, the
Corporation agrees to review the Executive's base salary and to consider
implementing increases to such base salary as may be warranted based upon the
performance of the Executive and the performance of the Corporation and
comparable data related to similarly sized institutions as may be available;
however, such base salary shall not be reduced below the previous year's base
salary without the specific written agreement by the Executive.
(b) Executive shall receive only such bonuses as the Board of
Directors, in its discretion, decides to pay to Executive.
(c) The Executive shall be entitled to four weeks vacation which
shall be without loss of pay. Attendance at meetings or conventions of banking
associations or organizations shall not be charged against the Executive's
annual vacation entitlement.
(d) The Executive shall be paid all normal directors' fees, other
than committee meeting fees, for service on the Board of Directors of the
Corporation, and shall not be paid any fees in connection with service as a
director of any subsidiary of the Corporation unless otherwise determined by the
Board of Directors of the Corporation.
(e) On or before August 1, 2001, the Corporation shall grant the
Executive an option to purchase under the Corporation's 1998 Incentive Plan
common stock of the Corporation with a fair market value at the time of grant
equal to One Hundred Sixty-Seven Percent (167%) of the Executive's annual salary
at the date of grant at a per share exercise price which does not exceed 100%
(or any higher amount required under IRC Section 422) of the fair market value
per share of such common stock at the date of grant. Such option shall be an
incentive stock option and shall vest as rapidly as is consistent with incentive
stock option treatment. In addition, the Executive shall be considered for stock
option grants whenever the Corporation's Chief Executive Officer is considered
and the stock option to be granted to the Executive pursuant to this Section
4(e) shall be disregarded when the Executive is so considered for additional
stock option grants.
<PAGE>
(f) The Salary Continuation Plan Agreement provided by The Bank of
Franklin for the Executive's benefit will be continued as specified under the
terms of such Agreement, except as otherwise agreed in writing by the Executive.
(g) The Corporation will pay the Executive's country club initiation
fee and dues on such basis as may be determined by the Board of Directors of the
Corporation from time to time.
(h) During the term of this Agreement, the Corporation shall provide
the Executive with an appropriate automobile as determined by the Board of
Directors of the Corporation.
(i) If the Executive moves his personal residence to the Newport
News, Virginia area, the Corporation will pay all reasonable expenses incurred
by Executive in connection with such move, including reimbursement of any
reasonable and customary real estate commission incurred in connection with the
sale of his present personal residence.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS
EXPENSES AND MOVING EXPENSES: (a) During the term of employment under this
Agreement, Executive shall be entitled to participate in any pension, group
insurance, hospitalization, deferred compensation or other benefit, bonus or
incentive plans of the Corporation presently in effect (including, without
limitation, the Corporation's stock option plans) or hereafter adopted by the
Corporation and generally available to any employees of senior executive status,
and, additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
(b) The Corporation shall promptly reimburse the Executive, upon
presentation of adequate substantiation, including receipts, for the reasonable
travel, entertainment, lodging and other business expenses incurred by the
Executive, including, without limitation, those expenses incurred by the
Executive and his spouse in attending trade and professional association
conventions, meetings and other related functions attended by other bank
executives and their spouses.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for the greater of ninety (90)
consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Corporation, the Corporation may
terminate this Agreement without further or additional compensation payment
being due the Executive from the Corporation pursuant to this Agreement, except
benefits accrued through the date of such termination under employee benefit
plans of the Corporation. These benefits shall include long-term disability and
other insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's salary from the Corporation
at the rate in effect at the time of Executive's death for a period of three (3)
months from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days
<PAGE>
written notice to the Executive. The Executive may resign for Good Reason (as
hereafter defined) at any time by giving not less than thirty (30) days written
notice to the Corporation. If the Corporation terminates the Executive's
employment without Cause or the Executive resigns for Good Reason before or
after a Change of Control (as hereafter defined), then in either event:
(i) The Executive shall be paid for the remainder of the
then current term of this Agreement or for a period of one year from the date of
termination, whichever is greater, at such times as payment was theretofore
made, the salary required under Section 4(a) that the Executive would have been
entitled to receive during the remainder of the then current term of this
Agreement had such termination not occurred (and the Corporation shall continue
such payments to Executive's estate if Executive dies before all such payments
have been made); and
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program.
(b) Notwithstanding the foregoing, all such payments and benefits
under Section 8(a) otherwise continuing for periods after the Executive's
termination of employment shall cease to be paid, and the Corporation shall have
no further obligation due with respect thereto, in the event the Executive
engages in "Competition" or makes any "Unauthorized Disclosure of Confidential
Information". For purposes hereof:
(i) "Competition" means the Executive's engaging during the
one (1) year period following termination of employment, without the written
consent of the Board of Directors of the Corporation or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or any
other individual or representative capacity (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in, or entering into services or
providing advice pertaining to, any banking, lending or other financial activity
that the Corporation or any of its affiliates actively engages in within five
(5) miles of any branch of the Corporation or any of its subsidiaries at the
time of Executive's termination of employment, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Corporation or any of its
affiliates for the purpose of competing with the products or services provided
by the Corporation or any of its affiliates, or
(C) employing or soliciting for employment any
employees of the Corporation or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information"
means the disclosure of information in violation of Section 19 of this
Agreement.
(c) For purposes of this Agreement, "Good Reason" shall mean:
<PAGE>
(i) Prior to a Change of Control (as hereafter defined) the
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date hereof, or (B)
result in the Executive having significantly less authority and/or
responsibility than he has on the date hereof, without his express written
consent;
(ii) After a Change of Control (as hereafter defined) the
assignment of a title or duties that are not commensurate with Executive's
seniority and experience;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof;
(v) The relocation of the Executive to any other primary
place of employment which requires him to move his residence, without the
Executive's express written consent to such relocation; or
(vi) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 11(b) hereof;
(vii) The failure of the shareholders of the Corporation to
elect the Executive as a director of the Corporation; or
(viii) A material breach of this Agreement by the Corporation.
(d) Resignation by the Executive for Good Reason shall be
communicated by a written Notice of Resignation to the Corporation. A "Notice of
Resignation" shall mean a notice which shall indicate the specific provision(s)
in this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for a resignation for Good Reason.
(e) If within thirty (30) days after any Notice of Resignation is
given the Corporation notifies the Executive that a dispute exists concerning
the resignation for Good Reason and that it is requesting arbitration pursuant
to Section 18, the Corporation shall continue to pay the Executive his full
salary and benefits as described in Sections 4(a) and 5(a), as and when due and
payable, at least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then all sums paid by the Corporation to the Executive,
including but not limited to the cost to the Corporation of providing the
Executive such fringe benefits, from the date of such resignation to the date of
the resolution of such dispute, less (z) any sums otherwise owed by the
Corporation to the Executive shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
<PAGE>
9. RESIGNATION - TERMINATION FOR CAUSE: (a) The Corporation's Board
of Directors may terminate the Executive's employment for cause at any time.
"Cause" shall be defined as the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses that have no
material detrimental effect on the Corporation) or final cease-and-desist order,
or a material breach of any provision of this Employment Agreement.
Notwithstanding the foregoing, the Corporation shall notify and counsel
the Executive as to the nature of any instance of "cause" described above within
30 days of the Corporation's discovery of such neglect or misconduct and shall
provide a reasonable probationary and cure period from the date of such notice
and counseling, but this provision shall only apply to the first occurrence of
any such circumstances and the Corporation in good faith may immediately
terminate the Executive for such continued or additional instance of "cause"
following the initial notice and counseling.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
If within thirty (30) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by the Corporation is challenged by the Executive and the
termination is ultimately determined to be justified, then all sums paid by the
Corporation to the Executive pursuant to this Section 9(b), plus the cost to the
Corporation of providing the Executive such fringe benefits from the date of
such termination to the date of the resolution of such dispute, shall be
promptly repaid by the Executive to the Corporation with interest at the rate
charged from time to time by the Corporation, to its most substantial customers
for unsecured lines of credit. Should it ultimately be determined that a
termination by the Corporation pursuant Section 9(a) was not justified, then the
Executive shall be entitled to retain all sums paid to him pending the
resolution of such dispute and he shall be entitled to receive, in addition, the
payments and other benefits provided for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within thirty (30) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise
voluntarily terminates his employment by the Corporation, or his employment by
the Corporation's wholly owned subsidiary, The Bank of Franklin, at any time
(except a termination for Good Reason pursuant to Section 8 hereof), or if the
Corporation rightfully terminates the Executive's employment for Cause, this
Agreement shall terminate upon the date of such resignation or termination of
employment for Cause, and (subject to Section 9(b)) the Corporation thereafter
shall have no obligation to make any further payments under this Agreement,
provided that the Executive shall be entitled to receive any benefits, insured
or otherwise, that he would otherwise be eligible to receive under any benefit
plans of the Corporation or any affiliate of the Corporation.
<PAGE>
10. CHANGE OF CONTROL: (a) At any time within one hundred eighty
(180) days after a Change of Control, the Executive may resign without Good
Reason and on or before the Executive's last day of employment with the
Corporation (in addition to all other payments to which the Executive is
entitled under this Agreement) the Corporation shall pay to the Executive a cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to $200,000, provided that, at the option of the Executive, the
cash amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the twelve (12) months succeeding the date of
termination, payable on the first day of each such month; provided, however, if
Executive dies before all payments to which he is entitled under this Section
10(a) have been made, then such payments he did not receive shall be made to his
estate. If the Executive resigns for Good Reason at any time after a Change of
Control, Section 8(a) shall control.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors; (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a sale of assets, a contested election, or any combination of these
events, the persons who were directors of the Corporation before the first of
such events cease to constitute a majority of the Corporation's Board, or any
successor's board, within two years of the last of such transactions; (iii) the
shareholders of the Corporation approve (x) a merger, consolidation or other
business combination of the Corporation with any other "person" or "group" (as
defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) or affiliate thereof, other than a merger or consolidation that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock of the surviving entity or a parent or
affiliate thereof) more than fifty percent (50%) of the outstanding common stock
of the Corporation or such surviving entity or a parent or affiliate thereof
outstanding immediately after such merger, consolidation or other business
combination, or (y) a plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation of all or substantially
all of the Corporation's assets, or (iv) any other event or circumstance which
is not covered by the foregoing subsections but which the Board of Directors of
the Corporation determines to affect control of the Corporation and with respect
to which the Board of Directors adopts a resolution that the event or
circumstance constitutes a Change of Control for purposes of this Agreement. The
date of a Change of Control is the date on which an event described in items (i)
through (iv) above occurs.
(b) If the Executive resigns pursuant to Section 10(a) or if his
employment terminates pursuant to Section 8(a) after a Change of Control, all
stock options granted to the Executive under any of the Corporation's stock
option plans shall become immediately exercisable with respect to all the shares
covered thereby regardless of whether such options are otherwise exercisable and
Executive shall have thirty (30) days after the date of his resignation to
exercise such stock options
11. CERTAIN OBLIGATIONS - SUCCESSORS: (a) The Corporation's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against him or anyone else. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Except as expressly provided in Sections
8(d)
<PAGE>
and 9(b), each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whosoever may be entitled thereto, for any
reason whatsoever. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.
(b) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the Corporation to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation described in Section 8(a). As used in this
Agreement, "Corporation" shall mean Atlantic Financial Corp. and any successor
to its respective business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 11(b) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
12. LIMITATION OF BENEFITS: If the independent accountants serving
as auditors for the Corporation on the date of a Change of Control (or the
Internal Revenue Service upon examination of the tax returns of the Corporation
or the Executive) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits
contingent on a Change of Control, constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on the Executive under Section 4999 of the Code (the "Excise Tax"), then the
payments scheduled under this Agreement shall be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be nondeductible and subject to the Excise Tax. The Executive may designate
which payments or benefits will be reduced.
13. NOTICES: For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or five days after it is mailed
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive: 120 Gillette Court
Franklin, Virginia 23851
With a copy to: James J. Wheaton
Willcox & Savage, P.C.
1800 NationsBank Center
Norfolk, Virginia 23510
If to the Corporation: 7171 George Washington Memorial Highway
P.O. Box 1310, U.S. Route 17
Gloucester, Virginia 23061-1310
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
<PAGE>
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability
of any provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Executive should die while any amounts would still be payable to
him hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Norfolk, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgement may be entered on the arbitrator's
award in any court having jurisdiction. Unless otherwise provided in the rules
of the American Arbitration Association, the arbitrators shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees and expenses of the parties, as well as the
arbitrator's fees and expenses, in such proportions as the arbitrators deem
just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or
<PAGE>
disclosed to the general public, or which gives to the Corporation an
opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or administrative law judge issued after the
Executive and his legal counsel urge that the aforementioned confidentiality be
preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
EXECUTIVE
ATTEST: ____________________ __________________________________
Wenifred O. Pearce
ATLANTIC FINANCIAL CORP.
ATTEST: ____________________ By: _____________________________
AUTHORIZED OFFICER
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of December 1998, by and
between Atlantic Financial Corp., a Virginia corporation, (the "Corporation"),
and Kenneth E. Smith (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting
Executive Vice President and Chief Financial Officer of the Corporation and, as
such, is a key executive officer of the Corporation whose continued dedication,
availability, advice and counsel to the Corporation is deemed important to the
Board of Directors of the Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on November 30, 2003,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. RENEWAL TERM: This Agreement shall be extended for an additional
year annually following the original term unless either party notifies the other
in writing at least three (3) months prior to the end of the original term, or
the end of any additional one-year term, that the Agreement shall not be
extended beyond its current term.
3. EXECUTIVE DUTIES: The Executive agrees to accept and perform the
managerial duties and responsibilities of Executive Vice President and Chief
Financial Officer of
<PAGE>
the Corporation and agrees to devote his time and attention on a full-time basis
to the discharge of such duties and responsibilities of an executive nature as
may be assigned him by the Board of Directors or the Chief Executive Officer of
the Corporation, including, subject to the authority of the Chief Executive
Officer, primary responsibility for financial statements, reports to
governmental agencies, data processing and investment portfolio management. As
Executive Vice President and Chief Financial Officer, the Executive shall have
the duties set forth for such officer in the Corporation's Bylaws. The Executive
also shall serve as a director and as Chief Financial Officer of Peninsula Trust
Bank, Incorporated. The Executive may accept any elective or appointed positions
or offices with any duly recognized associations or organizations whose
activities or purposes are closely related to the banking business or purposes
are closely related to the banking business or service to which would generate
good will for the Corporation and its subsidiaries.
4. COMPENSATION: (a) The Corporation agrees to pay Executive, and
Executive agrees to accept, as compensation for all services rendered by him to
the Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Twenty Five Thousand Dollars
($125,000.00), which shall be payable in monthly, semi-monthly or bi-weekly
installments in conformity with Corporation's policy relating to salaried
employees. On or before the first anniversary of this Agreement and for each
year thereafter, the Corporation agrees to review the Executive's base salary
and to consider implementing increases to such base salary as may be warranted
based upon the performance of the Executive and the performance of the
Corporation and comparable data related to similarly sized institutions as may
be available; however, such base salary shall not be reduced below the previous
year's base salary without the specific written agreement by the Executive.
(b) Executive shall receive only such bonuses as the Board of
Directors, in its discretion, decides to pay to Executive.
(c) The Executive shall be entitled to four weeks vacation which
shall be without loss of pay. Attendance at meetings or conventions of banking
associations or organizations shall not be charged against the Executive's
annual vacation entitlement.
(d) The Executive shall be paid all normal directors' fees for
service on the Board of Directors of Peninsula Trust Bank, Incorporated, or its
successor.
(e) During the term of this Agreement, Corporation shall provide the
Executive with an appropriate automobile as determined by the Board of Directors
of the Corporation.
(f) The Corporation will pay the Executive's country club initiation
fees and dues on such basis as may be determined by the Board of Directors of
the Corporation from time to time.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS
EXPENSES AND MOVING EXPENSES: (a) During the term of employment under this
Agreement, Executive shall be entitled to participate in any pension, group
insurance, hospitalization, deferred compensation or other benefit, bonus or
incentive plans of the Corporation presently in effect (including, without
limitation, the Corporation's stock option plans) or hereafter adopted by the
Corporation and generally available to any employees of senior executive status,
and, additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
<PAGE>
(b) The Corporation shall promptly reimburse the Executive, upon
presentation of adequate substantiation, including receipts, for the reasonable
travel, entertainment, lodging and other business expenses incurred by the
Executive, including, without limitation, those expenses incurred by the
Executive and his spouse in attending trade and professional association
conventions, meetings and other related functions attended by other bank
executives and their spouses.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for the greater of ninety (90)
consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Corporation, the Corporation may
terminate this Agreement without further or additional compensation payment
being due the Executive from the Corporation pursuant to this Agreement, except
benefits accrued through the date of such termination under employee benefit
plans of the Corporation. These benefits shall include long-term disability and
other insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's salary from the Corporation
at the rate in effect at the time of Executive's death for a period of three (3)
months from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days written notice to the Executive. The
Executive may resign for Good Reason (as hereafter defined) at any time by
giving not less than thirty (30) days written notice to the Corporation. If the
Corporation terminates the Executive's employment without Cause or the Executive
resigns for Good Reason before or after a Change of Control (as hereafter
defined), then in either event:
(i) The Executive shall be paid for the remainder of the
then current term of this Agreement or for a period of one year from the date of
termination, whichever is greater, at such times as payment was theretofore
made, the salary required under Section 4(a) that the Executive would have been
entitled to receive during the remainder of the then current term of this
Agreement had such termination not occurred (and the Corporation shall continue
such payments to Executive's estate if Executive dies before all such payments
have been made); and
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program.
(b) Notwithstanding the foregoing, all such payments and benefits
under Section 8(a) otherwise continuing for periods after the Executive's
termination of employment shall cease to be paid, and the Corporation shall have
no further obligation due with respect thereto, in the event
<PAGE>
the Executive engages in "Competition" or makes any "Unauthorized Disclosure of
Confidential Information". For purposes hereof:
(i) "Competition" means the Executive's engaging during the
one (1) year period following termination of employment, without the written
consent of the Board of Directors of the Corporation or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or any
other individual or representative capacity (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in, or entering into services or
providing advice pertaining to, any banking, lending or other financial activity
that the Corporation or any of its affiliates actively engages in within ten
(10) miles of any branch of the Corporation or any of its subsidiaries at the
time of Executive's termination of employment, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Corporation or any of its
affiliates for the purpose of competing with the products or services provided
by the Corporation or any of its affiliates, or
(C) employing or soliciting for employment any
employees of the Corporation or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information"
means the disclosure of information in violation of Section 19 of this
Agreement.
(c) For purposes of this Agreement, "Good Reason" shall mean:
(i) Prior to a Change of Control (as hereafter defined) the
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date hereof, or (B)
result in the Executive having significantly less authority and/or
responsibility than he has on the date hereof, without his express written
consent;
(ii) After a Change of Control (as hereafter defined) the
assignment of a title or duties that are not commensurate with Executive's
seniority and experience;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof;
(v) The relocation of the Executive to any other primary
place of employment which requires him to move his residence, without the
Executive's express written consent to such relocation;
(vi) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 11(b) hereof; or
(vii) A material breach of this Agreement by the Corporation.
<PAGE>
(d) Resignation by the Executive for Good Reason shall be
communicated by a written Notice of Resignation to the Corporation. A "Notice of
Resignation" shall mean a notice which shall indicate the specific provision(s)
in this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for a resignation for Good Reason.
(e) If within thirty (30) days after any Notice of Resignation is
given the Corporation notifies the Executive that a dispute exists concerning
the resignation for Good Reason and that it is requesting arbitration pursuant
to Section 18, the Corporation shall continue to pay the Executive his full
salary and benefits as described in Sections 4(a) and 5(a), as and when due and
payable, at least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then (y) all sums paid by the Corporation to the
Executive, including but not limited to the cost to the Corporation of providing
the Executive such fringe benefits, from the date of such resignation to the
date of the resolution of such dispute, less (z) any sums otherwise owed by the
Corporation to the Executive shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
9. RESIGNATION - TERMINATION FOR CAUSE: (a) The Corporation's Board
of Directors may terminate the Executive's employment for cause at any time.
Cause shall be defined as the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses that have no
material detrimental effect on the Corporation) or final cease-and-desist order,
or a material breach of any provision of this Employment Agreement.
Notwithstanding the foregoing, the Corporation shall notify and counsel
the Executive as to the nature of any instance of "cause" described above within
30 days of the Corporation's discovery of such neglect or misconduct and shall
provide a reasonable probationary and cure period from the date of such notice
and counseling, but this provision shall only apply to the first occurrence of
any such circumstances and the Corporation in good faith may immediately
terminate the Executive for such continued or additional instance of "cause"
following the initial notice and counseling.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
If within thirty (30) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by
<PAGE>
the Corporation is challenged by the Executive and the termination is ultimately
determined to be justified, then all sums paid by the Corporation to the
Executive pursuant to this Section 9(b), plus the cost to the Corporation of
providing the Executive such fringe benefits from the date of such termination
to the date of the resolution of such dispute, shall be promptly repaid by the
Executive to the Corporation with interest at the rate charged from time to time
by the Corporation, to its most substantial customers for unsecured lines of
credit. Should it ultimately be determined that a termination by the Corporation
pursuant Section 9(a) was not justified, then the Executive shall be entitled to
retain all sums paid to him pending the resolution of such dispute and he shall
be entitled to receive, in addition, the payments and other benefits provided
for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within thirty (30) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise
voluntarily terminates his employment by the Corporation, or his employment by
the Corporation's wholly owned subsidiary, Peninsula Trust Bank, Incorporated,
at any time (except a termination for Good Reason pursuant to Section 8 hereof),
or if the Corporation rightfully terminates the Executive's employment for
Cause, this Agreement shall terminate upon the date of such resignation or
termination of employment for Cause, and (subject to Section 9(b)) the
Corporation thereafter shall have no obligation to make any further payments
under this Agreement, provided that the Executive shall be entitled to receive
any benefits, insured or otherwise, that he would otherwise be eligible to
receive under any benefit plans of the Corporation or any affiliate of the
Corporation.
10. CHANGE OF CONTROL: (a) At any time within one hundred eighty
(180) days after a Change of Control, the Executive may resign without Good
Reason and on or before the Executive's last day of employment with the
Corporation (in addition to all other payments to which the Executive is
entitled under this Agreement) the Corporation shall pay to the Executive a cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to $200,000, provided that, at the option of the Executive, the
cash amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the twelve (12) months succeeding the date of
termination, payable on the first day of each such month; provided, however, if
Executive dies before all payments to which he is entitled under this Section
10(a) have been made, then such payments he did not receive shall be made to his
estate. If the Executive resigns for Good Reason at any time after a Change of
Control, Section 8(a) shall control.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors; (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a sale of assets, a contested election, or any combination of these
events, the persons who were directors of the Corporation before the first of
such events cease to constitute a majority of the Corporation's Board, or any
successor's board, within two years of the last of such transactions; or (iii)
the shareholders of the Corporation approve (x) a merger, consolidation or other
business combination of the Corporation with any other "person" or "group" (as
defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) or affiliate thereof, other than a merger or consolidation that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock
<PAGE>
of the surviving entity or a parent or affiliate thereof) more than fifty
percent (50%) of the outstanding common stock of the Corporation or such
surviving entity or a parent or affiliate thereof outstanding immediately after
such merger, consolidation or other business combination, or (y) a plan of
complete liquidation of the Corporation or an agreement for the sale or
disposition by the Corporation of all or substantially all of the Corporation's
assets, or (iv) any other event or circumstance which is not covered by the
foregoing subsections but which the Board of Directors of the Corporation
determines to affect control of the Corporation and with respect to which the
Board of Directors adopts a resolution that the event or circumstance
constitutes a Change of Control for purposes of this Agreement. The date of a
Change of Control is the date on which an event described in items (i) through
(iv) above occurs.
(b) If the Executive resigns pursuant to Section 10(a) or if his
employment terminates pursuant to Section 8(a) after a Change of Control, all
stock options granted to the Executive under any of the Corporation's stock
option plans shall become immediately exercisable with respect to all the shares
covered thereby regardless of whether such options are otherwise exercisable and
Executive shall have thirty (30) days after the date of his resignation to
exercise such stock options
11. CERTAIN OBLIGATIONS - SUCCESSORS: (a) The Corporation's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against him or anyone else. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Except as expressly provided in Sections
8(d) and 9(b), each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whosoever may be entitled thereto, for any
reason whatsoever. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.
(b) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the Corporation to obtain such agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to the compensation described in Section 8(a). As used in this
Agreement, "Corporation" shall mean Atlantic Financial Corp. and any successor
to its respective business and/or assets as aforesaid which executes and
delivers the agreement provided for in this Section 11(b) or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law.
12. LIMITATION OF BENEFITS: If the independent accountants serving
as auditors for the Corporation on the date of a Change of Control (or the
Internal Revenue Service upon examination of the tax returns of the Corporation
or the Executive) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits
contingent on a Change of Control, constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on the Executive under Section 4999 of the Code (the "Excise Tax"), then the
payments scheduled under this Agreement shall be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be
<PAGE>
nondeductible and subject to the Excise Tax. The Executive may designate which
payments or benefits will be reduced.
13. NOTICES: For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or five days after it is mailed
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed as follows:
If to the Executive: 7083 Tracey Court
Gloucester, Virginia 23061
If to the Corporation: 7171 George Washington Memorial Highway
P.O. Box 1310, U.S. Route 17
Gloucester, Virginia 23061-1310
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability
of any provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Executive should die while any amounts would still be payable to
him hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a
<PAGE>
panel of three arbitrators, in Richmond, Virginia in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then in
effect. The Corporation shall pay all administrative fees associated with such
arbitration. Judgement may be entered on the arbitrator's award in any court
having jurisdiction. Unless otherwise provided in the rules of the American
Arbitration Association, the arbitrators shall, in their award, allocate between
the parties the costs of arbitration, which shall include reasonable attorneys'
fees and expenses of the parties, as well as the arbitrator's fees and expenses,
in such proportions as the arbitrators deem just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or disclosed to the general public, or which gives to the Corporation
an opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or administrative law judge issued after the
Executive and his legal counsel urge that the aforementioned confidentiality be
preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
EXECUTIVE
ATTEST: ____________________ __________________________________
Kenneth E. Smith
ATLANTIC FINANCIAL CORP.
ATTEST: ____________________ By: ______________________________
AUTHORIZED OFFICER
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of December 1998, by and
between Atlantic Financial Corp., a Virginia corporation, (the "Corporation"),
and D. Eugene Brittle (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to retain the services of Executive on
the terms and conditions set forth herein and, for purpose of effecting the
same, the Board of Directors of the Corporation has approved this Employment
Agreement and authorized its execution and delivery on the Corporation's behalf
to the Executive; and
WHEREAS, the Executive is presently the duly elected and acting
Executive Vice President of the Corporation and President and Chief Executive
Officer of The Bank of Sussex and Surry, as such, is a key executive officer of
the Corporation whose continued dedication, availability, advice and counsel to
the Corporation is deemed important to the Board of Directors of the
Corporation, the Corporation and its stockholders;
WHEREAS, the services of the Executive, his experience and knowledge of
the affairs of the Corporation, and his reputation and contacts in the industry
are extremely valuable to the Corporation; and
WHEREAS, the Corporation wishes to attract and retain such
well-qualified executives and it is in the best interests of the Corporation and
of the Executive to secure the continued services of the Executive; and
WHEREAS, the Corporation considers the establishment and maintenance of
a sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Corporation
and its stockholders;
NOW, THEREFORE, to assure the Corporation of the Executive's continued
dedication, the availability of his advice and counsel to the Board of Directors
of the Corporation, and to induce the Executive to remain and continue in the
employ of the Corporation and for other good and valuable consideration, the
receipt and adequacy whereof each party hereby acknowledges, the Corporation and
the Executive hereby agrees as follows:
1. EMPLOYMENT: The Corporation agrees to, and does hereby, employ
Executive, and Executive agrees to, and does hereby, accept such employment, for
the period beginning as of the date hereof and ending on November 30, 2003,
which period of employment may be extended or terminated only upon the terms and
conditions hereinafter set forth.
2. RENEWAL TERM: This Agreement shall be extended for an additional
year annually following the original term unless either party notifies the other
in writing at least three (3) months prior to the end of the original term, or
the end of any additional one-year term, that the Agreement shall not be
extended beyond its current term.
3. EXECUTIVE DUTIES: The Executive agrees to accept and perform the
managerial duties and responsibilities of Executive Vice President of the
Corporation and agrees
<PAGE>
to devote his time and attention on a full-time basis to the discharge of such
duties and responsibilities of an executive nature as may be assigned him by the
Board of Directors of the Corporation or the Chief Executive Officer. As
Executive Vice President, the Executive shall have the duties set forth for such
officer in the Corporation's Bylaws. The Executive also shall serve as a
director and as President and Chief Executive Officer of The Bank of Sussex and
Surry or its successor. The Executive may accept any elective or appointed
positions or offices with any duly recognized associations or organizations
whose activities or purposes are closely related to the banking business or
purposes are closely related to the banking business or service to which would
generate good will for the Corporation and its subsidiaries.
4. COMPENSATION: (a) The Corporation agrees to pay Executive, and
Executive agrees to accept, as compensation for all services rendered by him to
the Corporation during the period of his employment under this Agreement, base
salary at the annual rate of One Hundred Fifteen Thousand Dollars ($115,000.00),
which shall be payable in monthly, semi-monthly or bi-weekly installments in
conformity with Corporation's policy relating to salaried employees. On or
before the first anniversary of this Agreement and for each year thereafter, the
Corporation agrees to review the Executive's base salary and to consider
implementing increases to such base salary as may be warranted based upon the
performance of the Executive and the performance of the Corporation and
comparable data related to similarly sized institutions as may be available;
however, such base salary shall not be reduced below the previous year's base
salary without the specific written agreement by the Executive.
(b) Executive shall receive only such bonuses as the Board of
Directors, in its discretion, decides to pay to Executive.
(c) The Executive shall be entitled to four weeks vacation which
shall be without loss of pay. Attendance at meetings or conventions of banking
associations or organizations shall not be charged against the Executive's
annual vacation entitlement.
(d) The Executive shall be paid all normal directors' fees for
service on the Board of Directors of The Bank of Sussex and Surry or its
successor.
(e) On or before August 1, 2001, the Corporation shall grant the
Executive an option to purchase under the Corporation's 1998 Incentive Plan
common stock of the Corporation with a fair market value at the time of grant
equal to One Hundred Sixty-Seven Percent (167%) of the Executive's annual salary
at the date of grant at a per share exercise price which does not exceed 100%
(or any higher amount required under IRC Section 422) of the fair market value
per share of such common stock at the date of grant. Such option shall be an
incentive stock option and shall vest as rapidly as is consistent with incentive
option treatment. In addition, the Executive shall be considered for stock
option grants whenever the Corporation's Chief Executive Officer is considered
and the stock option to be granted to the Executive pursuant to this Section
4(e) shall be disregarded when the Executive is so considered for additional
stock option grants.
(f) The Corporation will pay the Executive's country club initiation
fee and dues on such basis as may be determined by the Board of Directors of the
Corporation from time to time.
(g) During the term of this Agreement, the Corporation shall provide
the Executive with an appropriate automobile as determined by the Board of
Directors of the Corporation.
(h) If the Executive is required to move his personal residence to
any place other than the Wakefield, Virginia area, the Corporation will pay all
reasonable expenses incurred by Executive in connection with such move,
including the reimbursement of any reasonable and
<PAGE>
customary real estate commission incurred in connection with the sale of his
present personal residence.
5. PARTICIPATION IN BENEFIT PLANS, REIMBURSEMENT OF BUSINESS
EXPENSES AND MOVING EXPENSES: (a) During the term of employment under this
Agreement, Executive shall be entitled to participate in any pension, group
insurance, hospitalization, deferred compensation or other benefit, bonus or
incentive plans of the Corporation presently in effect (including, without
limitation, the Corporation's stock option plans) or hereafter adopted by the
Corporation and generally available to any employees of senior executive status,
and, additionally, Executive shall be entitled to have the use of Corporation's
facilities and executive benefits as are customarily made available by the
Corporation to its executive officers.
(b) The Corporation shall promptly reimburse the Executive, upon
presentation of adequate substantiation, including receipts, for the reasonable
travel, entertainment, lodging and other business expenses incurred by the
Executive, including, without limitation, those expenses incurred by the
Executive and his spouse in attending trade and professional association
conventions, meetings and other related functions attended by other bank
executives and their spouses.
6. ILLNESS: In the event Executive is unable to perform his duties
under this Agreement on a full-time basis for the greater of ninety (90)
consecutive calendar days or the longest waiting period under any long term
disability insurance contract or program provided to him as an employee as a
result of incapacity due to mental or physical illness or disability as
determined by a physician selected by the Corporation, the Corporation may
terminate this Agreement without further or additional compensation payment
being due the Executive from the Corporation pursuant to this Agreement, except
benefits accrued through the date of such termination under employee benefit
plans of the Corporation. These benefits shall include long-term disability and
other insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so provided.
7. DEATH: In the event of Executive's death during the term of this
Agreement, his estate, legal representatives or named beneficiaries (as directed
by Executive in writing) shall be paid Executive's salary from the Corporation
at the rate in effect at the time of Executive's death for a period of three (3)
months from the date of Executive's death.
8. TERMINATION WITHOUT CAUSE/RESIGNATION FOR GOOD REASON: (a)
Notwithstanding the provisions of Section 1 hereof, the Board of Directors of
the Corporation may, without Cause (as hereafter defined), terminate the
Executive's employment under this Agreement at any time in any lawful manner by
giving not less than thirty (30) days written notice to the Executive. The
Executive may resign for Good Reason (as hereafter defined) at any time by
giving not less than thirty (30) days written notice to the Corporation. If the
Corporation terminates the Executive's employment without Cause or the Executive
resigns for Good Reason before or after a Change of Control (as hereafter
defined), then in either event:
(i) The Executive shall be paid for the remainder of the
then current term of this Agreement or for a period of one year from the date of
termination, whichever is greater, at such times as payment was theretofore
made, the salary required under Section 4(a) that the Executive would have been
entitled to receive during the remainder of the then current term of this
Agreement had such termination not occurred (and the Corporation shall continue
such payments to Executive's estate if Executive dies before all such payments
have been made); and
<PAGE>
(ii) The Corporation shall maintain in full force and effect
for the continued benefit of the Executive for the remainder of the then current
term of this Agreement, all employee benefit plans and programs or arrangements
in which the Executive was entitled to participate immediately prior to such
termination, provided that continued participation is possible under the general
terms and provisions of such plans and programs. In the event that Executive's
participation in any such plan or program is barred, the Corporation shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such plans and program.
(b) Notwithstanding the foregoing, all such payments and benefits
under Section 8(a) otherwise continuing for periods after the Executive's
termination of employment shall cease to be paid, and the Corporation shall have
no further obligation due with respect thereto, in the event the Executive
engages in "Competition" or makes any "Unauthorized Disclosure of Confidential
Information". For purposes hereof:
(i) "Competition" means the Executive's engaging during the
one (1) year period following termination of employment, without the written
consent of the Board of Directors of the Corporation or a person authorized
thereby, in an activity as an officer, a director, an employee, a partner, a
more than one percent shareholder or other owner, an agent, a consultant, or any
other individual or representative capacity (unless the Executive's duties,
responsibilities and activities, including supervisory activities, for or on
behalf of such activity, are not related in any way to such competitive
activity) if it involves:
(A) engaging in, or entering into services or
providing advice pertaining to, any banking, lending or other financial activity
that the Corporation or any of its affiliates actively engages in within five
(5) miles of any branch of the Corporation or any of its subsidiaries at the
time of Executive's termination of employment, or
(B) soliciting or contacting, either directly or
indirectly, any of the customers or clients of the Corporation or any of its
affiliates for the purpose of competing with the products or services provided
by the Corporation or any of its affiliates, or
(C) employing or soliciting for employment any
employees of the Corporation or any of its affiliates.
(ii) "Unauthorized Disclosure of Confidential Information"
means the disclosure of information in violation of Section 19 of this
Agreement.
(c) For purposes of this Agreement, "Good Reason" shall mean:
(i) Prior to a Change of Control (as hereafter defined) the
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date hereof, or (B)
result in the Executive having significantly less authority and/or
responsibility than he has on the date hereof, without his express written
consent;
(ii) After a Change of Control (as hereafter defined) the
assignment of a title or duties that are not commensurate with Executive's
seniority and experience;
(iii) A reduction by the Corporation of the Executive's base
salary, as the same may have been increased from time to time;
<PAGE>
(iv) The failure of the Corporation to provide the Executive
with substantially the same fringe benefits (including paid vacations) that were
provided to him immediately prior to the date hereof;
(v) The relocation of the Executive to any other primary
place of employment which requires him to move his residence, without the
Executive's express written consent to such relocation;
(vi) The failure of the Corporation to obtain the assumption
of and agreement to perform this Agreement by any successor as contemplated in
Section 11(b) hereof;
(vii) The merger of The Bank of Franklin and The Bank of
Sussex and Surry or the merger of all the Corporation's bank subsidiaries into a
single bank, unless, in each case, the Executive is made the Chief Executive
Officer of the surviving bank.; or
(viii) A material breach of this Agreement by the Corporation.
(d) Resignation by the Executive for Good Reason shall be
communicated by a written Notice of Resignation to the Corporation. A "Notice of
Resignation" shall mean a notice which shall indicate the specific provision(s)
in this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for a resignation for Good Reason.
(e) If within thirty (30) days after any Notice of Resignation is
given the Corporation notifies the Executive that a dispute exists concerning
the resignation for Good Reason and that it is requesting arbitration pursuant
to Section 18, the Corporation shall continue to pay the Executive his full
salary and benefits as described in Sections 4(a) and 5(a), as and when due and
payable, at least until such time as a final decision is reached by the panel of
arbitrators. If Good Reason for termination by the Executive is ultimately
determined not to exist, then (y) all sums paid by the Corporation to the
Executive, including but not limited to the cost to the Corporation of providing
the Executive such fringe benefits, from the date of such resignation to the
date of the resolution of such dispute, less (z) any sums otherwise owed by the
Corporation the Executive shall be promptly repaid by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit.
A failure by the Corporation to notify the Executive that a dispute
exists concerning the resignation for Good Reason within thirty (30) days after
any Notice of Resignation is given shall constitute a final waiver by the
Corporation of its right to contest either that such resignation was for Good
Reason or its obligations to the Executive under Section 8(a) hereof.
9. RESIGNATION - TERMINATION FOR CAUSE: (a) The Corporation's Board
of Directors may terminate the Executive's employment for cause at any time.
Cause shall be defined as the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses that have no
material detrimental effect on the Corporation) or final cease-and-desist order,
or a material breach of any provision of this Employment Agreement.
Notwithstanding the foregoing, the Corporation shall notify and counsel
the Executive as to the nature of any instance of cause described above within
30 days of the Corporation's discovery of such neglect or misconduct and shall
provide a reasonable probationary and cure
<PAGE>
period from the date of such notice and counseling, but this provision shall
only apply to the first occurrence of any such circumstances and the Corporation
in good faith may immediately terminate the Executive for such continued or
additional instance of cause following the initial notice and counseling.
(b) Termination of the Executive's employment by the Corporation for
Cause pursuant to Section 9(a) shall be communicated by written Notice of
Termination to the Executive. A "Notice of Termination" shall mean a notice
which shall indicate the specific termination provision(s) in this Agreement
relied upon and shall set forth with particularity the facts and circumstances
claimed to provide a basis for termination of employment for Cause under the
provision so indicated.
If within thirty (30) days after any Notice of Termination is given the
Executive notifies the Corporation that a dispute exists concerning the
termination for Cause and that he is requesting arbitration pursuant to Section
18, the Corporation shall continue to pay the Executive his full salary and
benefits as described in Sections 4 and 5, as and when due and payable, at least
until such time as a final decision is reached by the panel of arbitrators. If a
termination for Cause by the Corporation is challenged by the Executive and the
termination is ultimately determined to be justified, then all sums paid by the
Corporation to the Executive pursuant to this Section 9(b), plus the cost to the
Corporation of providing the Executive such fringe benefits from the date of
such termination to the date of the resolution of such dispute, shall be
promptly repaid by the Executive to the Corporation with interest at the rate
charged from time to time by the Corporation, to its most substantial customers
for unsecured lines of credit. Should it ultimately be determined that a
termination by the Corporation pursuant Section 9(a) was not justified, then the
Executive shall be entitled to retain all sums paid to him pending the
resolution of such dispute and he shall be entitled to receive, in addition, the
payments and other benefits provided for in Section 8(a).
A failure by the Executive to notify the Corporation that a dispute
exists concerning the termination for Cause within thirty (30) days after the
Notice of Termination is given shall constitute a final waiver by the Executive
of his right to contest that such termination was for Cause.
(c) In the event that Executive resigns from or otherwise
voluntarily terminates his employment by the Corporation, or his employment by
the Corporation's wholly owned subsidiary, Bank of Sussex and Surry (or its
successor), at any time (except a termination for Good Reason pursuant to
Section 8 hereof), or if the Corporation rightfully terminates the Executive's
employment for Cause, this Agreement shall terminate upon the date of such
resignation or termination of employment for Cause, and (subject to Section
9(b)) the Corporation thereafter shall have no obligation to make any further
payments under this Agreement, provided that the Executive shall be entitled to
receive any benefits, insured or otherwise, that he would otherwise be eligible
to receive under any benefit plans of the Corporation or any affiliate of the
Corporation.
10. CHANGE OF CONTROL: (a) At any time within one hundred eighty
(180) days after a Change of Control, the Executive may resign without Good
Reason and on or before the Executive's last day of employment with the
Corporation (in addition to all other payments to which the Executive is
entitled under this Agreement) the Corporation shall pay to the Executive a cash
amount (subject to any applicable payroll or other taxes required to be
withheld) equal to $200,000, provided that, at the option of the Executive, the
cash amount required to be paid hereby shall be paid by the Corporation in equal
monthly installments over the twelve (12) months succeeding the date of
termination, payable on the first day of each such month; provided, however, if
Executive dies before all payments to which he is entitled under this Section
10(a) have
<PAGE>
been made, then such payments he did not receive shall be made to his estate. If
the Executive resigns for Good Reason at any time after a Change of Control,
Section 8(a) shall control.
For purposes of this Agreement, a Change of Control occurs if, after
the date of this Agreement, (i) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934 (but excluding any group
of which the Executive is a member), becomes the owner or beneficial owner of
Corporation securities having 20% or more of the combined voting power of the
then outstanding Corporation securities that may be cast for the election of the
Corporation's directors; (ii) as the direct or indirect result of, or in
connection with, a tender or exchange offer, a merger or other business
combination, a sale of assets, a contested election, or any combination of these
events, the persons who were directors of the Corporation before the first of
such events cease to constitute a majority of the Corporation's Board, or any
successor's board, within two years of the last of such transactions; or (iii)
the shareholders of the Corporation approve (x) a merger, consolidation or other
business combination of the Corporation with any other "person" or "group" (as
defined in or pursuant to Sections 13(d) and 14(d) of the Securities Exchange
Act of 1934) or affiliate thereof, other than a merger or consolidation that
would result in the outstanding common stock of the Corporation immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into common stock of the surviving entity or a parent or
affiliate thereof) more than fifty percent (50%) of the outstanding common stock
of the Corporation or such surviving entity or a parent or affiliate thereof
outstanding immediately after such merger, consolidation or other business
combination, or (y) a plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation of all or substantially
all of the Corporation's assets, or (iv) any other event or circumstance which
is not covered by the foregoing subsections but which the Board of Directors of
the Corporation determines to affect control of the Corporation and with respect
to which the Board of Directors adopts a resolution that the event or
circumstance constitutes a Change of Control for purposes of this Agreement. The
date of a Change of Control is the date on which an event described in items (i)
through (iv) above occurs.
(b) If the Executive resigns pursuant to Section 10(a) or if his
employment terminates pursuant to Section 8(a) after a Change of Control, all
stock options granted to the Executive under any of the Corporation's stock
option plans shall become immediately exercisable with respect to all the shares
covered thereby regardless of whether such options are otherwise exercisable and
Executive shall have thirty (30) days after the date of his resignation to
exercise such stock options
11. CERTAIN OBLIGATIONS - SUCCESSORS: (a) The Corporation's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may have
against him or anyone else. All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Except as expressly provided in Sections
8(d) and 9(b), each and every payment made hereunder by the Corporation shall be
final and the Corporation will not seek to recover all or any part of such
payment from the Executive or from whosoever may be entitled thereto, for any
reason whatsoever. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.
(b) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Corporation, or either
one of them, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of the
<PAGE>
Corporation to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to the compensation described in Section 8(a). As used in this Agreement,
"Corporation" shall mean Atlantic Financial Corp. and any successor to its
respective business and/or assets as aforesaid which executes and delivers the
agreement provided for in this Section 11(b) or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
12. LIMITATION OF BENEFITS: If the independent accountants serving
as auditors for the Corporation on the date of a Change of Control (or the
Internal Revenue Service upon examination of the tax returns of the Corporation
or the Executive) determine that some or all of the payments or benefits
scheduled under this Agreement, as well as any other payments or benefits
contingent on a Change of Control, constitute an "excess parachute payment"
within the meaning of Section 280G of the Internal Revenue Code of 1986, as
amended (the Code) and any regulations thereunder, thereby resulting in a loss
of an income tax deduction by the Corporation or the imposition of an excise tax
on the Executive under Section 4999 of the Code (the "Excise Tax"), then the
payments scheduled under this Agreement shall be reduced to one dollar less than
the maximum amount which may be paid without causing any such payment or benefit
to be nondeductible and subject to the Excise Tax. The Executive may designate
which payments or benefits will be reduced.
13. NOTICES: For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
With a copy to: James J. Wheaton
Willcox & Savage, P.C.
1800 NationsBank Center
Norfolk, Virginia 23510
If to the Corporation: 7171 George Washington Memorial Highway
P.O. Box 1310, U.S. Route 17
Gloucester, Virginia 23061-1310
or at such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. MODIFICATION - WAIVERS - APPLICABLE LAW: No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing, signed by the Executive and on behalf of
the Corporation by such officer as may be specifically designated by the Board
of Directors of the Corporation. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provision or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this
<PAGE>
Agreement. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Virginia.
15. INVALIDITY - ENFORCEABILITY: The invalidity or unenforceability
of any provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
16. SUCCESSOR RIGHTS: This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Executive should die while any amounts would still be payable to
him hereunder, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to his devisee, legatee or other
designee or, if there is no such designee, to his estate.
17. HEADINGS: Descriptive headings contained in this Agreement are
for convenience only and shall not control or affect the meaning or construction
of any provision hereof.
18. ARBITRATION: Any dispute, controversy or claim arising under or
in connection with this Agreement shall be settled exclusively by arbitration,
conducted before a panel of three arbitrators, in Richmond, Virginia in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect. The Corporation shall pay all administrative fees
associated with such arbitration. Judgement may be entered on the arbitrator's
award in any court having jurisdiction. Unless otherwise provided in the rules
of the American Arbitration Association, the arbitrators shall, in their award,
allocate between the parties the costs of arbitration, which shall include
reasonable attorneys' fees and expenses of the parties, as well as the
arbitrator's fees and expenses, in such proportions as the arbitrators deem
just.
19. CONFIDENTIALITY: The Executive acknowledges that the Corporation
may disclose certain confidential information to the Executive during the term
of this Agreement to enable him to perform his duties hereunder. The Executive
hereby covenants and agrees that he will not, without the prior written consent
of the Corporation, during the term of this Agreement or at any time thereafter,
disclose or permit to be disclosed to any third party by any method whatsoever
any of the confidential information of the Corporation. For purposes of this
Agreement, "confidential information" shall include, but not be limited to, any
and all records, notes, memoranda, data, ideas, processes, methods, techniques,
systems, formulas, patents, models, devices, programs, computer software,
writings, research, personnel information, customer information, the
Corporation's financial information, plans, or any other information of whatever
nature in the possession or control of the Corporation which has not been
published or disclosed to the general public, or which gives to the Corporation
an opportunity to obtain an advantage over competitors who do not know of or use
it. The Executive further agrees that if his employment hereunder is terminated
for any reason, he will leave with the Corporation and will not take originals
or copies of any and all records, papers, programs, computer software and
documents and all matter of whatever nature which bears secret or confidential
information of the Corporation.
The foregoing paragraph shall not be applicable if and to the extent
the Executive is required to testify in a judicial or regulatory proceeding
pursuant to an order of a judge or
<PAGE>
administrative law judge issued after the Executive and his legal counsel urge
that the aforementioned confidentiality be preserved.
The foregoing covenants will not prohibit the Executive from disclosing
confidential or other information to other employees of the Corporation or any
third parties to the extent that such disclosure is necessary to the performance
of his duties under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date first above written.
EXECUTIVE
ATTEST: ____________________ __________________________________
D. Eugene Brittle
ATLANTIC FINANCIAL CORP.
ATTEST: ____________________ By: ______________________________
AUTHORIZED OFFICER
Exhibit 21
Subsidiaries of Atlantic Financial Corp.
The Bank of Franklin
(Virginia-chartered bank incorporated in 1970)
The Bank of Sussex and Surry
(Virginia-chartered bank incorporated in 1902)
Peninsula Trust Bank, Incorporated
(Virginia-chartered bank incorporated in 1988)
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