SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2000
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-21285
-------
ATLANTIC FINANCIAL CORP
(Exact Name of Registrant as Specified in its Charter)
VIRGINIA 54-1809409
- ------------------------------------- -------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
737 J. Clyde Morris Boulevard
Newport News, Virginia 23601
----------------------------------------
(Address of Principal Executive Offices)
(757) 595-7020
--------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
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 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
the past 90 days. Yes X . No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 2000.
Common stock, $5 par value--4,178,985
-------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
ATLANTIC FINANCIAL CORP Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets--
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income--
Three months ended March 31, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity--
Three months ended March 31, 2000 and 1999 5 - 6
Consolidated Statements of Cash Flows--
Three months ended March 31, 2000 and 1999 7
Notes to Consolidated Financial Statements 8 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18 - 19
Part II. Other Information: 20
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ATLANTIC FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
ASSETS: 2000 1999
---------- ----------
<S> <C> <C>
Cash and due from banks $ 13,808 $ 17,486
Interest-bearing deposits in other banks 1,573 1,653
Securities available for sale 98,908 89,729
Securities held to maturity (fair value of
$9,452 and $9,786, respectively) 9,676 9,987
Federal funds sold 21,553 22,577
Loans, net 222,259 223,513
Premises and equipment 10,270 10,481
Other real estate owned 224 550
Accrued interest receivable 2,932 3,004
Intangibles, net 1,002 1,023
Other assets 3,268 3,306
---------- ----------
TOTAL ASSETS $ 385,473 $ 383,309
========== ==========
LIABILITIES:
Deposits
Non-interest bearing $ 52,893 $ 52,026
Interest-bearing 284,153 283,020
---------- ----------
TOTAL DEPOSITS 337,046 335,046
Short-term borrowings 1,815 2,976
Accrued interest payable 1,543 1,195
Other liabilities 1,647 1,054
---------- ----------
TOTAL LIABILITIES 342,051 340,271
---------- ----------
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 4,178,985 and 4,191,185
shares, respectively 20,895 20,956
Stock Options 3 3
Retained earnings 23,996 23,438
Accumulated other comprehensive
income, net (1,472) (1,359)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 43,422 43,038
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 385,473 $ 383,309
========== ==========
</TABLE>
Notes to financial statements are an integral part of these statements.
3
<PAGE>
ATLANTIC FINANCIAL CORP
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
(Unaudited)
Three Months Ended
& Year-to-Date
March 31,
2000 1999
---- ----
INTEREST INCOME:
Loans and Fees $ 5420 $ 5071
Federal Funds Sold 300 299
Interest on Deposits at Other Banks 15 6
Investment Securities 1649 1371
------- -------
Total Interest Income 7384 6747
INTEREST EXPENSE:
Interest on deposits 3172 2957
Interest on federal funds purchased
and other borrowings 21 16
------- -------
Total Interest Expense 3193 2973
------- -------
Net Interest Income 4191 3702
PROVISION FOR LOAN
AND LEASE LOSSES 70 72
------- -------
Net Interest Income After
Provision for Loan
and Lease Losses 4121 3702
OTHER INCOME:
Service Charges & Fees 443 439
Gain (loss) on sale of other real estate (48) --
Other income 130 116
------- -------
Total Other Income 525 555
OTHER EXPENSES:
Salaries & Employee Benefits 1721 1531
Occupancy Expenses 250 230
Furniture & Equipment Expenses 455 442
Other Operating Expenses 651 700
------- -------
Total Other Expenses 3077 2903
------- -------
Income Before Income Taxes 1569 1354
Applicable Income Taxes 422 356
------- -------
Net Income $ 1147 $ 998
======= =======
Earnings Per Share, Basic .27 .24
======= =======
Earnings Per Share, Assuming
Dilution .27 .23
======= =======
Notes to financial statements are an integral part of these statements.
4
<PAGE>
ATLANTIC FINANCIAL CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 2000
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Retained Comprehensive Comprehensive
Stock Options Surplus Earnings Income Income Total
----- ------- ------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 $20,956 $3 - - $23,438 ($1,359) $43,038
Comprehensive Income:
Net Income - - - - - - 1,147 - - $1,147 1,147
Other comprehensive income:
Unrealized holding gains (losses) on
securities available for sale arising
during the period net of tax of $58 (113) - -
----
Other comprehensive income, net of tax - - - - - - - - (113) (113) (113)
----
Total comprehensive income - - - - - - - - $1,034 - -
======
Exercise of stock options 18 - - - - - - - - 18
Purchase of common stock (79) - - - - (128) - - (207)
Cash dividends - - - - - - (461) - - (461)
--- --- --- ----- --- ----
Balance, March 31, 2000 $20,895 $3 $- - $23,996 ($1,472) $43,422
=================================================== =======
</TABLE>
Notes to financial statements are an integral part of these statements.
5
<PAGE>
ATLANTIC FINANCIAL CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 1999
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Retained Comprehensive Comprehensive
Stock Options Surplus Earnings Income Income Total
----- ------- ------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $20,845 $6 - - $21,048 $1,230 $43,129
Comprehensive Income:
Net Income - - - - - - 998 - - $ 998 998
Other comprehensive income:
Unrealized holding gains (losses) on
securities available for sale arising
during the period, net of tax of $153 (298) - -
-----
Other comprehensive income, net of tax - - - - - - - - (298) (298) (298)
-----
Total comprehensive income - - - - - - - - $ 700 - -
=======
Exercise of stock options 102 (2) - - - - - - 100
Cash dividends - - - - - - (377) - - (377)
--- --- --- ----- --- ----
Balance, March 31, 1999 $20,947 $4 $ - - $21,669 ($932) $43,552
==================================================== =======
</TABLE>
Notes to financial statements are an integral part of these statements.
6
<PAGE>
ATLANTIC FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,147 $ 998
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 329 316
Provision for loan losses 70 72
Amortization of premiums, net 15 24
Loss on sale of other real estate 48 - -
Changes in operating assets and liabilities:
Decrease in accrued interest receivable 25 110
Decrease in other assets 143 1
Increase in accrued interest payable 348 69
Increase in other liabilities 593 249
----------- ----------
Net Cash Provided by Operating Activities $ 2,718 $ 1,839
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans 1,184 (5,195)
Purchase of securities available for sale (11,792) (11,506)
Proceeds from sales of securities available for sale - - 502
Proceeds from calls and maturities of securities available for sale 2,428 5,469
Proceeds from calls and maturities of securities held to maturity 310 2,737
Purchase of premises and equipment (97) (268)
Proceeds from sales of other real esate 278 - -
----------- ----------
Net Cash (Used In) Investing Activities ($ 7,689) ($ 8,261)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits $ 2,000 $ 9,864
Issuance of common stock 18 100
Repurchase of common stock (207) - -
Net increase (decrease) in short-term borrowings (1,161) 371
Cash dividends paid (461) (884)
----------- ----------
Net Cash Provided by Financing Activities $ 189 $ 9,451
----------- ----------
Net Increase In Cash and Cash Equivalents ($ 4,782) 3,029
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 41,716 41,306
----------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 36,934 $ 44,335
=========== ==========
</TABLE>
Notes to financial statements are an integral part of these statements.
7
<PAGE>
ATLANTIC FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The consolidated statements include the accounts of Atlantic Financial
Corp and its subsidiaries, Peninsula Trust Bank, Inc. (PTB) and United
Community Bank (UCB). All significant intercompany balances and
transactions have been eliminated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial positions as of March 31, 2000 and December
31, 1999, and the results of operations and cash flows for the three
months ended March 31, 2000 and 1999.
The results of operations for the three months ended March 31, 2000 and
1999 are not necessarily indicative of the results to be expected for the
full year.
2. Investment Securities
Amortized cost and carrying amount (estimated fair value) of securities
available for sale are summarized as follows:
<TABLE>
<CAPTION>
March 31, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---------------------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Treasury Securities 852 -- (1) 851
US Government and federal agencies 28,988 3 (1,069) 27,922
States and local governments 31,002 66 (761) 30,307
Mortgage-backed securities 27,331 4 (906) 26,429
Corporate debt obligations 4,799 -- (178) 4,621
Collateralized mortgage obligations 2,839 -- (49) 2,790
Restricted stocks 1,209 -- -- 1,209
Other securities 4,119 1,004 (344) 4,779
--------- --------- ---------- --------
$ 101,139 $ 1,077 $ (3,308) $ 98,908
========= ========= ========== ========
</TABLE>
Amortized cost and carrying amount (estimated fair value) of securities held
to maturity are summarized as follows:
<TABLE>
<CAPTION>
March 31, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---------------------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Government and federal agencies 2,343 -- (98) 2,245
States and local governments 5,503 5 (70) 5,438
Mortgage-backed securities 1,830 -- (61) 1,769
-------- ----- -------- --------
$ 9,676 $ 5 $ (229) $ 9,452
======== ===== ======== ========
</TABLE>
8
<PAGE>
ATLANTIC FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Securities available for sale at December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
------------------------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Treasury Securities 857 1 (3) 855
US Government and federal agencies 27,392 8 (1,126) 26,274
State and local governments 30,278 100 (706) 29,672
Mortgage-backed securities 22,289 -- (889) 21,400
Corporate debt obligations 4,149 -- (119) 4,030
Collateralized mortgage obligations 1,780 -- (30) 1,750
Restricted stocks 1,205 -- -- 1,205
Other securities 3,839 791 (87) 4,543
----------- -------- ---------- --------
$ 91,789 $ 900 $ (2,960) $ 89,729
=========== ======== ========== ========
</TABLE>
Securities held to maturity at December 31, 1999 consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
------------------------------------------------------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
US Government and federal agencies 2,593 -- (102) 2,491
State and local governments 5,549 14 (55) 5,508
Mortgage-backed securities 1,845 -- (58) 1,787
-------- ------- -------- --------
$ 9,987 $ 14 $ (215) $ 9,786
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
---- ----
(In Thousands of Dollars)
<S> <C> <C>
Gross proceeds from sales of securities -- 502
========== ==========
Gross Gains on Sale of Securities -- --
Gross Losses on Sale of Securities -- --
---------- ----------
Net Securities Gains (Losses) -- --
========== ==========
</TABLE>
9
<PAGE>
ATLANTIC FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. Loans
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
(In Thousands of Dollars)
<S> <C> <C>
Commercial (except those secured by real estate) 31,026 31,824
Agriculture (except those secured by real estate) 3,896 5,066
Real estate mortgage:
Construction and land development 17,517 15,995
Residential (1-4 family) 57,266 57,089
Home equity lines 17,266 16,663
Commercial 57,037 58,064
Agricultural 4,756 5,067
Loans to individuals for household,
family and other consumer expenditures 36,220 36,497
All other loans 431 475
----------- -----------
225,415 226,740
Less unearned income (541) (564)
----------- -----------
Less allowance for loan losses (2,615) (2,663)
----------- -----------
Loans, net $222,259 $223,513
=========== ===========
</TABLE>
The following schedule summarizes the changes in the allowance for loan and
lease losses:
<TABLE>
<CAPTION>
Three Months Three Months
Ending Ending
March 31, March 31, December 31,
2000 1999 1999
---------- ---------- ----------
(In Thousands of Dollars)
<S> <C> <C> <C>
Balance at beginning of year 2,663 2,424 2,424
Provision for loan losses 70 72 505
Recoveries 36 150 257
Charge-offs (154) (91) (523)
---------- ---------- ----------
Balance at end of period $ 2,615 $ 2,555 $ 2,663
========== ========== ==========
</TABLE>
Nonperforming assets consist of the following:
March 31, December 31,
2000 1999
-------- -------
(In Thousands of Dollars)
Nonaccrual Loans $ 1,277 $ 632
Restructured Loans -- --
-------- -------
Nonperforming Loans 1,277 632
Foreclosed Properties 224 550
-------- -------
Nonperforming Assets $ 1,501 $ 1,182
======== =======
10
<PAGE>
Total loans past due 90 days or more and still accruing were $836 on March 31,
2000 and $622 on December 31, 1999.
11
<PAGE>
ATLANTIC FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
4. Earnings Per Share
The following shows the weighted average number of shares used in computing
earnings per share and the effect on weighted average number of shares of
diluted potential common stock income available to common shareholders.
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
-------------- --------------
Per Share Per Share
Shares Amount Shares Amount
--------- ------ ------ ------
<S> <C> <C> <C> <C>
Basic Earnings Per Share 4,186,310 $ .27 4,181,930 $ .24
Effect of dilutive securities:
Nonemployee directors' stock options 14,775 24,269
Employee incentive stock options 47,584 59,500
--------- ---------
Diluted Earnings Per Share 4,248,669 $ .27 4,265,699 $ .23
========= ======= ========= =======
</TABLE>
5. Capital Requirements
A comparison of the Company's capital as of March 31, 2000 with the minimum
requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier I Risk-based Capital 17.26% 4.00 %
Total Risk-based Capital 18.29% 8.00 %
Leverage Ratio 11.60% 4.00 %
12
<PAGE>
Forward-Looking Statements
- --------------------------
Certain information contained in this discussion may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally identified by phrases such as
"the Company expects," "the Company believes" or words of similar import. Such
forward-looking statements involve known and unknown risks including, but not
limited to, changes in general economic and business conditions, interest rate
fluctuations, competition within and from outside the banking industry, new
products and services in the banking industry, risk inherent in making loans
such as repayment risks and fluctuating collateral values, problems with
technology utilized by the Company, changing trends in customer profiles and
changes in laws and regulations applicable to the Company. Although the Company
believes that its expectations with respect to the forward-looking statements
are based upon reliable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results,
performance or achievements of the Company will not differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of Atlantic Financial Corp (the
"Company") as of the dates and for the periods indicated. This discussion should
be read in conjunction with the Company's Consolidated Financial Statements and
the Notes thereto and other financial data appearing elsewhere in this report.
Results of Operations
Earnings
- --------
Net income for the quarter ended March 31, 2000 totaled $1,147,000, compared to
$998,000 for the same period in 1999. This performance not only represented an
impressive 14.9% increase in absolute dollars, but also represented $.27 per
share compared to $.23 per share for the same period in 1999, a 17.4% increase.
Both of these performance measures were historical highs for the Company. Return
on average total assets for the current quarter equaled 1.21% on an annualized
basis, which compared favorably to the 1.11% level for the same period in 1999.
Net interest income for the first quarter 2000 (tax equivalent interest income
less interest expense) totaled $4.4 million (a 10.0% increase over the first
quarter 1999). The net interest margin (tax equivalent net interest income
expressed as a percentage of average earning assets) increased from 4.76% in the
first quarter 1999 to 4.96% in the first quarter 2000. The average yield on
interest earning assets increased 25 basis points during a time when the average
rate on interest bearing liabilities increased only 3 basis points. As a result,
the 8.88% increase in interest income for the first quarter 2000 more than
compensated for the 7.40% increase in interest expense for the same period. The
Company's balance sheet is asset sensitive as related to its interest
sensitivity position. That is to say that its assets re-price more quickly than
its liabilities. During the past fifteen months, the Federal Reserve Board
increased short-term interest rates 125 basis points in five separate rate
adjustments. The Company enjoyed more rapid increase in interest income than the
corresponding increase in interest expense during this period.
Non-interest expense for the first quarter 2000 totaled $3.1 million, compared
to $2.9 million in the first quarter 1999, a 6.0% increase. This is a positive
trend relative to the 10.0% increase in net interest income discussed above.
Additionally, as discussed in the Form 10-QSB of March 31, 1999, the $2.9
million figure equaled a 20.8% increase over the same period in 1998. This trend
demonstrates the Company's ability to more efficiently control expenses in this
area after several growth initiatives (merger and branch openings) and
technology advancements in 1998.
13
<PAGE>
Non-interest income for the current quarter increased 3.2% over the same quarter
in 1998. As discussed in previous Form 10QSB and 10KSB reports, the Company has
taken certain initiatives to expand non-interest opportunities. These have
included offering mortgage and investment services. Earnings contributions from
these initiatives have not reached significant levels, but are expected to
improve gradually. The investment services area produced net income of $28,000.
The mortgage banking affiliate recorded a net loss of $25,000 due reduced
production in the refinance area as interest rates have risen.
Financial Condition
The Company experienced a flat balance sheet during the first quarter 2000, with
total assets increasing $2.2 million, or 0.6% over December 31, 1999.
Historically, the first quarter has less growth than any other quarters, due in
part to a segment of the deposit base reflecting cyclical growth in the fourth
quarter followed by balance shrinkage during the first quarter. This condition
was compounded this quarter by intense competitive pressure on certificate of
deposit (CD) interest rates. Some of this pressure has driven rates higher than
management considers prudent within the Company's balance sheet strategy and has
resulted in moderate run-off of maturing CDs. Minimal growth was funded with new
interest bearing deposits, which reflected a $1.1 million, or 0.4% increase, for
the three months ending March 31, 2000. The Company is actively exploring
alternative funding sources. Special attention will be given to price and
duration volatility as it relates to overall asset liability management, overall
liquidity and preserving the stability of the net interest margin.
Loan demand softened during the first quarter, evidenced by net loans decreasing
$1.3 million, or 0.6%, from December 31, 1999. Competition for loans intensified
primarily relative to pricing as all banks in the Company's trade area were
experiencing similar moderation in overall loan demand. The Company has been
reluctant to match all competitor pricing bids when the credit quality does not
match the pricing structure. This reluctance is particularly acute in the face
of the intense competition for deposits noted above and the associated funding
challenges. The underwriting practices of the Company continue to emphasize the
relationship between risk and rate in pricing considerations, rather than
responding to pressures from competitor pricing. Also, as noted above, current
pressure on funding sources will cause the Company to be more selective in loan
approvals, attempting to maximize yield and credit quality.
The Company maintained its practice during the first quarter of selling Federal
funds, having sold continuously on a daily basis in amounts averaging $21.3
million, 5.62% of average total assets. These figures compare to $26.0 million
and 7.22%, respectively, for the first quarter 1999. The quarter-end balance of
$21.6 million represented a $1.0 million (or 4.54%) decrease from December 31,
1999.
The level of the investment account increased approximately $8.9 million (8.89%)
during the first quarter 2000, ending the period at $108.6 million or 28.17% of
total assets. The portfolio was used to absorb some of the excess Y2K liquidity
that built up during the fourth quarter 1999. The portfolio is comprised of 1%
US Treasuries, 56% US government agencies, mortgage-backed securities and
collateralized mortgage obligations, 33% state, county and municipal governments
and 10% other debt and equity securities.
The Financial Accounting Standards Board (FASB) Statement 115 stipulated the way
in which banks must classify and account for their securities portfolio,
beginning with the first quarter of 1994. Securities are classified as
Investment Securities when management has both the intent and the ability at the
time of purchase to hold the securities until maturity. Investment Securities
are carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities that are held for an indefinite period of time are
classified as Securities Available for Sale and are marked to market at each
financial reporting date, or at each month-end. Securities Available for Sale
include securities that may be sold in response to changes in interest rates,
changes in the security's prepayment risk, increases in loan demand, general
liquidity needs and other similar factors. Management utilizes several tools for
the measurement of three
14
<PAGE>
critical elements in portfolio performance: interest rate risk, call and/or
extension risk and maturity distribution. With better tools to monitor duration,
long-term earnings performance of the portfolio is expected to demonstrate
improved stability over varying interest rate cycles. These parameters will also
draw a tighter relationship between EMD and bond convexity. Convexity measures
the percentage amount of portfolio price appreciation if interest rates fall 1%
relative to the percentage of price depreciation if interest rates rise 1%. The
more a bond declines relative to its depreciation, the higher the negative
convexity and, consequently, the more potential call and extension risk that
bond is likely to have. Relative to the current EMD, management is targeting an
overall portfolio negative convexity of not more than .70. Currently, the
portfolio's negative convexity is slightly below this target level.
Deposits represent 98.5% of total liabilities of the Company, including
non-interest bearing checking accounts which represent 15.7% of total deposits
on March 31, 2000. Short-term borrowings of $1.8 million reflected a $1.2
million (39.0%) decline from December 31, 1999. The decrease was represented
primarily ($.9 million) by a reduction in retail repurchase agreements
(securities sold under agreements to repurchase). The decline is considered
cyclical and of no concern.
Provision / Allowance for Loan Losses & Asset Quality
- -----------------------------------------------------
Asset quality continues to be sound with problem credits considered to be at
satisfactory and manageable levels. Total loans past due 30 days or more equaled
$4.6 million (2.06% of total outstandings). Included in the 30 day total are
$836,000, which are 90 days or more past due and still accruing interest.
Non-accrual loans totaled $1.3 million at March 31, 2000, which represented
0.57% of total outstanding loans and 48.83% of the loan loss reserve. Foreclosed
properties totaled $225,000 at March 31, 2000, with potential losses expected to
be minimal. Trends in this area are relatively stable during the past three
months.
During the first quarter of 2000, the Company expensed $70,000 as provision for
possible loan losses. This amount was added to the Allowance for Loan and Lease
Losses (ALLL), while gross charge-offs for the quarter were $154,000 and total
recoveries were $36,000.
The provision reflects management's assessment of the adequacy of the ALLL to
absorb losses inherent in the loan portfolio due to deterioration of borrowers'
financial condition or changes in overall risk profile. Overall risk profile
considers several factors, as appropriate, such as historical credit loss
experience, current economic conditions, the composition of the total loan
portfolio and assessments of individual credits within specific loan types.
The ALLL equaled $2.62 million March 31, 2000, comfortably above the Company's
general target of 1.10% of total outstanding loans. Additionally, the Company's
use of a documented system for internal loan classifications more accurately
identifies ongoing credit risk imbedded within the loan portfolio.
Classifications are assigned a risk rating with a corresponding percentage of
the current balance considered in the ALLL depending on the severity of the
risk. The results of the self classification system are compared to the ALLL
each month and indicate that the ALLL is sufficient to safeguard the Company in
light of known or identified potential loan loss risks.
The Company has two defaulted investment securities for which no interest is
being accrued. The bonds were originally issued by an Industrial Development
Authority (IDA) with a "Support Agreement" included from the municipality for
whom the IDA was formed. The municipality has indicated that it will honor its
commitment upon completion of the IDA selling all of the assets of the project
for which the bonds were originally issued. It is anticipated that this will
return all principal plus interest at the bond's stated coupon rate through the
date of payment by the municipality, with no loss. No reserve has been
established by the Company; however, the combined outstanding balance of the two
securities ($151,000 as of March 31, 2000) has been carried in a non-accruing
status since the fourth quarter 1999.
15
<PAGE>
Capital and Liquidity
- ---------------------
Equity capital at March 31, 2000 totaled $43.4 million, representing 11.3% of
total assets compared to $43.0 million as of December 31, 1999. Exclusive of
adjustments for unrealized gains/losses on securities classified as available
for sale, total equity equaled $44.9 million or 11.6% of total assets, compared
to $44.4 million at December 31, 1999. This level is adequate to support both
current operations, as well as asset growth to a level in excess of $500 million
without external augmentation.
Pursuant to the Company's Share Repurchase Plan, the Company purchased 15,800
shares during the current quarter for a total of $206,100. Since the Plan's
adoption in 1999, 21,900 shares totaling $305,844 have been repurchased. The
Plan provides for up to 100,000 shares to be repurchased. The Plan is intended
to improve the market efficiency for trading smaller denominations of shares and
also improve long-term earnings per share performance. The Company finds the
current market value of its stock perplexing, with the banking sector as a group
experiencing downward pressure on stock prices. However, it is also proving to
be an opportune time for repurchasing shares.
Liquidity is provided by both excess funds in the form of Federal funds sold and
access to the Federal funds market through the purchase of Federal funds from
correspondent banks. The Company maintains deposit relationships with several
correspondent banks that include commitments through various lines of credit for
short-term borrowing needs. Federal funds sold equaled 17.6% of total demand
deposits at March 31, 2000. The Company, through two of its subsidiary banks, is
a member of the Federal Home Loan Bank of Atlanta. This membership affords the
Company various credit vehicles. The level of balance sheet liquidity and
available credit facilities is considered adequate to meet anticipated deposit
withdrawals and expected loan demand from normal operations. With the described
external sources of liquidity available, the Company plans in the near future to
employ a higher percentage of internal liquidity in acquiring slightly longer
term assets (primarily investment securities) with greater call protection in an
effort to enhance long-term interest earnings.
Future Plans
- ------------
The Company continues to explore branch expansion opportunities for its banking
operations; however, it has secured only one site for such growth. That site is
located on U. S. Route 17 in Gloucester Point, Virginia. A definitive schedule
has not been formalized for this site.
The Company continues its research and development efforts associated with
developing an internet presence. E-banking, as with other forms of E-commerce,
continues to proliferate as to customer acceptance and, indeed, customer demand.
The Company plans to offer a complete product line including, but not limited
to, internal transactions and third party bill paying. The Company is moving
cautiously, exploring not only product functionality, but with equally intense
attention to security for the customer and the Company.
The Company plans to dissolve the previous joint venture relationship between
PTB and a local real estate title agency due to less-than-desirable title
insurance activity from the arrangement. PTB will then enter into a similar
agreement as its sister bank (UCB) through the Virginia Bankers Association.
This move is designed to enhance non-interest fee income for PTB.
Interactive voice response (IVR), a form of telephone banking, has been
available to PTB customers for several years. Management anticipates this new
customer service to be implemented at UCB by the end of the second quarter 2000.
16
<PAGE>
Year 2000 Issue
The Company performed considerable testing and planning for the century date
change prior to December 31, 1999. Actual expenses associated with this effort
approximated $200,000 in 1999. The diminished production and efficiency through
the diverted attention of staff members who would otherwise have been conducting
normal banking operations is difficult to quantify. However, it clearly had a
negative impact. The effort proved successful, with the coming and passing of
year-end and the New Year, creating no material interruptions in normal
activities. The Company continues to maintain an active 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. Certain other key dates in the year 2000 are identified as posing
potential Y2K date sensitive risks. As of the printing of this report, the
Company has processed two month-end dates, including the February 29, 2000 leap
year date, with no material disruptions. Minor glitches have been identified and
communicated with appropriate personnel as well as vendors, if applicable. No
material negative customer impact has been identified. Additional costs or
expenses associated with the Y2K issue are expected to be minimal.
17
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Interest Sensitivity Analysis
- ---------------------------------------------
An important component of both earnings performance and liquidity is management
of interest rate sensitivity. The Company's primary component of market risk is
interest rate volatility. Net interest income, the Company's primary component
of 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 re-pricing of the Company's assets and the
liabilities which fund them. Interest rate sensitivity reflects the potential
effect on net interest income of a movement in market interest rates. The
Company seeks to manage this risk by monitoring and controlling the variation in
re-pricing 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 re-pricing
characteristics and market values of any given asset or liability. The matching
of the re-pricing 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 re-price, 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 re-price within a specific time
period and the amount of interest-bearing liabilities anticipated to mature or
re-price within that same time period. A gap is considered positive when the
amount of interest rate sensitive assets maturing or re-pricing within a
specific time frame exceeds the amount of interest rate sensitive liabilities
maturing or re-pricing 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.
Because 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 Company's present value
change in equity associated with changes in asset value under various interest
rate scenarios as of March 31, 2000.
18
<PAGE>
The table reflects the impact on asset and liability values related to 100 and
200 basis-point (i.e., 1% and 2%) changes in market interest rates. The
Company's balance sheet structure displays a more advantageous position in a
moderately rising interest environment. This picture is validated by the
Company's improvement in net interest income discussed above during the most
recent period of rising interest rates.
<TABLE>
<CAPTION>
Current
Minus 200 pts. Minus 100 pts. Fair Value Plus 100 pts. Plus 200 pts.
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities 108,536,406 105,751,577 102,761,225 99,164,582 94,992,476
Market value change 5,775,181 2,990,352 (3,596,643) (7,768,749)
Loans Receivable 232,541,223 230,791,111 229,041,000 227,290,889 225,540,777
Market value change 3,500,223 1,750,111 (1,750,111) (3,500,223)
Total rate sensitive assets 341,077,629 336,542,688 331,802,225 326,455,471 320,533,253
Other assets 58,333,260 56,817,501 55,301,742 53,785,983 52,270,224
- ----------------------------------------------------------------------------------------------------------------------
Total assets 399,410,889 393,360,189 387,103,967 380,241,454 372,803,478
- ----------------------------------------------------------------------------------------------------------------------
Deposits
Rate sensitive 219,420,070 217,146,325 214,872,580 212,860,007 210,847,434
Market value change (4,547,490) (2,273,745) 2,012,573 4,025,146
Non rate sensitive 137,370,850 133,881,085 130,391,321 126,901,556 123,411,792
Market value change (6,979,529) (3,489,764) 3,489,764 6,979,529
- ----------------------- -------------- -------------- -------------- --------------
Total liabilities 356,790,920 351,027,410 345,263,901 339,761,563 334,259,225
- ----------------------------------------------------------------------------------------------------------------------
Present Value Equity 42,619,969 42,332,779 41,840,066 40,479,891 38,544,252
- -------------------- -------------- -------------- -------------- -------------- --------------
Total Liabilities & Equity 399,410,889 393,360,189 387,103,967 380,241,454 372,803,478
- -------------------------- -------------- -------------- -------------- -------------- --------------
Market Value Change (2,251,615) (1,023,046) 155,583 (264,296)
Percentage Change -5.28% -2.42% 0.38% -0.69%
</TABLE>
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (filed electronically only).
(b) Reports on Form 8-K - None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ATLANTIC FINANCIAL CORP
Date: May 15, 2000 BY /s/ W. J. Farinholt
--------------------------------
W. J. Farinholt, President & CEO
Date: May 15, 2000 BY /s/ Kenneth E. Smith
--------------------------------
Kenneth E. Smith, Exec. Vice President
& Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q FOR ATLANTIC FINANCIAL CORP FOR THE PERIOD ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL
STATEMENTS AND OTHER INFORMATION CONTAINED IN THE FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,808
<INT-BEARING-DEPOSITS> 1,573
<FED-FUNDS-SOLD> 21,553
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 98,908
<INVESTMENTS-CARRYING> 9,676
<INVESTMENTS-MARKET> 9,452
<LOANS> 222,259
<ALLOWANCE> 2,615
<TOTAL-ASSETS> 385,473
<DEPOSITS> 337,046
<SHORT-TERM> 1,815
<LIABILITIES-OTHER> 3,190
<LONG-TERM> 0
0
0
<COMMON> 20,898
<OTHER-SE> 22,524
<TOTAL-LIABILITIES-AND-EQUITY> 385,473
<INTEREST-LOAN> 5,420
<INTEREST-INVEST> 1,949
<INTEREST-OTHER> 15
<INTEREST-TOTAL> 7,384
<INTEREST-DEPOSIT> 3,172
<INTEREST-EXPENSE> 3,193
<INTEREST-INCOME-NET> 4,191
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,077
<INCOME-PRETAX> 1,569
<INCOME-PRE-EXTRAORDINARY> 1,569
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,147
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 4.96
<LOANS-NON> 1,277
<LOANS-PAST> 836
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,663
<CHARGE-OFFS> 154
<RECOVERIES> 36
<ALLOWANCE-CLOSE> 2,615
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,615
</TABLE>
