Filed Pursuant to Rule 424B3
File Number 333-47602
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
Dear Fellow Shareholders:
We cordially invite you to attend a special meeting of shareholders of
Atlantic Financial to be held in the Junior Ballroom of the Omni Hotel located
at 1000 Omni Boulevard, Newport News, Virginia on Thursday, December 14, 2000 at
7:00 p.m.
The purpose of the meeting will be to consider and vote on the merger
of Atlantic Financial with F&M National Corporation, a bank holding company
headquartered in Winchester, Virginia. If shareholders approve the merger,
Atlantic Financial will merge into F&M and Atlantic Financial's two subsidiary
banks, Peninsula Trust Bank and United Community Bank, will operate together as
"F&M Bank-Atlantic" after the merger.
As a result of the merger, you will receive 0.753 shares of F&M common
stock for each share of Atlantic Financial common stock you own. In general, you
will not recognize federal income tax gain or loss for the F&M common stock you
receive.
On October 30, 2000, the closing price of F&M stock was $25.125. If
this were the F&M stock price at the time of the merger, you would have received
F&M stock that had an equivalent per share value of approximately $18.91 for
each Atlantic Financial share held. The closing price of Atlantic Financial
common stock on October 30, 2000 was $18.50. These prices will fluctuate between
now and the merger.
The merger cannot be completed unless holders of at least a majority of
the shares of Atlantic Financial common stock approve the merger agreement. If
approved, we anticipate the merger will occur in early January 2001.
This proxy statement/prospectus provides you with detailed information
about the proposed merger. We encourage you to read this entire document
carefully. You can also obtain more information about F&M and Atlantic Financial
in documents each has filed with the Securities and Exchange Commission.
Your Board of Directors has approved the merger and believes it is in
the best interests of Atlantic Financial and you, our shareholders. Accordingly,
the Board unanimously recommends that you vote "FOR" the merger.
We hope you can attend the special meeting. Whether or not you plan to
attend, please complete, sign and date the enclosed proxy card and return it
promptly in the enclosed envelope. If you do not return your card or vote in
person, the effect will be a vote against approval of the merger. You can revoke
your proxy by writing to Atlantic Financial's Secretary any time before the
meeting or by attending the meeting and voting in person.
We look forward to seeing you at the meeting.
Sincerely yours,
/s/ William J. Farinholt
William J. Farinholt
President and Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved the F&M common stock to be issued in the
merger or determined if this proxy statement/prospectus is accurate or complete.
Any representation to the contrary is a criminal offense. The shares of F&M
stock to be issued in the merger are not savings or deposit accounts or other
obligations of any bank or savings association and are not insured by the
Federal Deposit Insurance Corporation or any other governmental agency.
This proxy statement/prospectus is dated October 31, 2000 and is first
being mailed to shareholders on November 2, 2000.
ADDITIONAL INFORMATION
Important business and financial information about F&M and Atlantic
Financial is incorporated in this proxy statement/prospectus from other
documents that are not included or delivered with this proxy
statement/prospectus. You may obtain copies of these documents without charge by
requesting them in writing or by telephone from the appropriate company at one
of the following addresses:
F&M National Corporation Atlantic Financial Corp
P.O. Box 2800 737 J. Clyde Morris Boulevard
9 Court Square Newport News, Virginia 23601
Winchester, Virginia 22604 Telephone: (757) 595-7020
Telephone: (540) 665-4240 Attention: Secretary
Attention: Secretary
If you would like to request any documents, please do so by December 8,
2000 in order to receive them before the special meeting.
See "Where You Can Find More Information" that begins on page 39.
ATLANTIC FINANCIAL CORP
Newport News, Virginia
_________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 14, 2000
_________________________
A special meeting of shareholders of Atlantic Financial Corp ("Atlantic
Financial") will be held on Thursday, December 14, 2000 at 7:00 p.m. in the
Junior Ballroom of the Omni Hotel located at 1000 Omni Boulevard, Newport News,
Virginia for the following purposes:
1. To approve the Agreement and Plan of Reorganization, dated as of
July 5, 2000, by and between F&M National Corporation ("F&M") and Atlantic
Financial and a related Plan of Merger, providing for the merger of Atlantic
Financial with F&M upon the terms and conditions therein, including, among other
things, that each issued and outstanding share of Atlantic Financial common
stock will be exchanged for 0.753 shares of F&M common stock, with cash being
paid instead of issuing fractional shares. The merger agreement is enclosed as
Appendix I to the accompanying proxy statement/prospectus.
2. To transact such other business as may properly come before the
special meeting or any adjournments or postponements of the meeting.
The Board of Directors has fixed October 26, 2000, as the record date
for the special meeting. Only holders of record of Atlantic Financial common
stock at the close of business on that date are entitled to receive notice of
and to vote at the special meeting or any adjournments or postponements of the
meeting.
Each Atlantic Financial shareholder has the right to dissent from the
merger and seek an appraisal of the fair market value of his or her shares,
provided the proper procedures of Article 15 of Title 13.1 of the Virginia State
Corporation Act are followed. A copy of Article 15 is attached as Appendix VI to
this proxy statement/prospectus.
By Order of the Board of Directors
/s/ Kenneth E. Smith
Kenneth E. Smith
Executive Vice President and Secretary
October 31, 2000
Please mark, sign, date and return your proxy promptly, whether or not
you plan to attend the special meeting.
The Board of Directors of Atlantic Financial unanimously recommends
that shareholders vote for the merger agreement.
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE MERGER......................................................................... 1
SUMMARY ...................................................................................................... 3
THE SPECIAL MEETING............................................................................................ 10
THE MERGER..................................................................................................... 11
Terms of the Merger................................................................................... 11
Background of and Reasons for the Merger.............................................................. 12
Opinion of Financial Advisor.......................................................................... 13
Effective Date........................................................................................ 18
Surrender of Stock Certificates....................................................................... 18
Representations and Warranties; Conditions to the Merger.............................................. 18
Regulatory Approvals.................................................................................. 19
Business Pending the Merger........................................................................... 19
No Solicitation; Board Action......................................................................... 20
Waiver, Amendment and Termination..................................................................... 20
Option Agreement...................................................................................... 21
Resales of F&M Common Stock........................................................................... 22
Accounting Treatment.................................................................................. 22
Interests of Certain Persons in the Merger............................................................ 23
Material Federal Income Tax Consequences.............................................................. 24
Dissenters' Rights.................................................................................... 25
Certain Differences in Rights of Shareholders......................................................... 26
Expenses of the Merger................................................................................ 27
Cautionary Statement Concerning Forward-Looking Statements............................................ 27
MARKET PRICES AND DIVIDENDS.................................................................................... 28
ATLANTIC FINANCIAL CORP........................................................................................ 30
Business.............................................................................................. 30
Competition........................................................................................... 30
Security Ownership of Management...................................................................... 30
BUSINESS OF F&M NATIONAL CORPORATION........................................................................... 31
History and Business.................................................................................. 31
F&M's Acquisition Program............................................................................. 32
COMPARATIVE RIGHTS OF SHAREHOLDERS............................................................................. 32
DESCRIPTION OF F&M CAPITAL STOCK............................................................................... 37
LEGAL MATTERS.................................................................................................. 38
EXPERTS........................................................................................................ 38
OTHER MATTERS.................................................................................................. 38
SHAREHOLDER PROPOSALS.......................................................................................... 38
WHERE YOU CAN FIND MORE INFORMATION............................................................................ 39
APPENDICES
I Agreement and Plan of Reorganization and Plan of Merger
II Stock Option Agreement
III Opinion of Davenport & Company LLC
IV Atlantic Financial's 1999 Annual Report to Shareholders
V Atlantic Financial's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000
VI Article 15 of the Virginia Stock Corporation Act Relating to
Dissenters' Rights
i
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why is Atlantic Financial merging with F&M?
A: Both the Atlantic Financial board and the F&M board believe the merger
is in the best interests of their respective companies and will provide
significant benefits to you, and their customers and employees. The
boards' believe the merger will permit the combined operations of
Atlantic Financial and F&M to be better positioned to be a stronger
competitor in the rapidly changing and consolidating financial services
industry in Virginia. To review the background and reasons for the
merger in greater detail, see pages 12 and 13.
Q: What will I receive in the merger?
A: You will receive 0.753 shares of F&M common stock in exchange for each
share of Atlantic Financial common stock you hold.
On October 30, 2000, the closing price of F&M common stock was $25.125.
If this were the F&M stock price at the time of the merger, you would
have received F&M stock that had an equivalent per share value of
approximately $18.91 for each Atlantic Financial share held. The
closing price of Atlantic Financial common stock on October 30, 2000
was $18.50. The value of the shares of F&M common stock you will
receive with the merger will fluctuate with the market price of F&M
common stock.
Q: What are the tax consequences of the merger to me?
A: We expect that the exchange of shares by you generally will be tax-free
to you for federal income tax purposes. You will, however, have to pay
taxes on cash received for fractional shares. To review the tax
consequences to you in greater detail, see pages 24 and 25.
Your tax consequences will depend on your personal situation. You
should consult your tax advisor for a full understanding of the tax
consequences of the merger to you.
Q: Will I receive dividends after the merger?
A: For more than 57 consecutive years, F&M has paid dividends to its
shareholders. Atlantic Financial has also paid cash dividends on its
common stock since 1994. F&M currently pays a quarterly dividend of
$0.25 per share. F&M expects that it will continue to pay at least this
amount in quarterly dividends. After the merger, the F&M board will use
its discretion to decide whether and when to declare dividends and in
what amount.
Q: What am I being asked to vote upon?
A: You are being asked to approve the merger agreement. The merger
agreement provides for the acquisition by F&M of Atlantic Financial,
and for the exchange of each of your shares of Atlantic Financial
common stock for 0.753 shares of F&M common stock. After the
transaction, Peninsula Trust Bank and United Community Bank will
operate together as a separate banking subsidiary of F&M under the name
of "F&M Bank-Atlantic." Approval of the merger requires the affirmative
vote of at least a majority of the shareholders of Atlantic Financial
common stock.
The Atlantic Financial board approved and adopted the merger agreement
and recommends voting for the approval of the merger agreement.
1
Q: What should I do now?
A: Just indicate on your proxy card how you want to vote, and sign and
mail it in the enclosed envelope as soon as possible, so that your
shares will be represented at the meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be voted in favor of the merger. If you do not
sign and send in your proxy or you abstain or if you do not vote in
person, it will have the effect of a vote against the merger.
The special meeting will take place at 7:00 p.m. on Thursday, December
14, 2000. You may attend the meeting and vote your shares in person,
rather than voting by proxy. In addition, you may withdraw your proxy
up to and including the day of the meeting by following the directions
on pages 10 and 11 and either change your vote or attend the meeting
and vote in person. If you hold your shares in "street name" you will
need additional documents from your broker in order to vote your shares
in person at the special meeting.
Q: If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: Your broker will vote your shares of Atlantic Financial common stock
only if you provide instructions on
how to vote. You should instruct your broker how to vote your shares
following the directions your broker provides. If you do not provide
instructions to your broker, your shares will not be voted and this
will have the effect of voting against the merger.
Q: When is the merger expected to be completed?
A: We are working to complete the merger in early January 2001.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed we will send you written instructions
for exchanging your Atlantic Financial common stock certificates for
F&M common stock certificates.
Q: May I dissent from the merger and seek an appraisal of the fair value
of my shares?
A: Yes. If you choose to dissent from the merger, you are entitled to
appraisal of your common shares under Virginia law. To exercise your
appraisal rights you must comply with the procedures in Article 15 of
Title 13.1 of the Virginia Stock Corporation Act. If you do not comply
with these procedures you will lose your appraisal rights. We have
attached a copy of the relevant portions of the Virginia Stock
Corporation Act for dissenting shareholders as Appendix VI of this
proxy statement/prospectus. See also "Dissenters' Rights" on page 25.
If you seek appraisal rights, the appraised value of your shares may be
more or less than the consideration to be paid by F&M in the merger.
Q: Who can help answer your questions?
A: If you want additional copies of this document, or if you want to ask
any questions about the merger, you should contact:
Kenneth E. Smith
Executive Vice President and Secretary
Atlantic Financial Corp
737 J. Clyde Morris Boulevard
Newport News, Virginia 23601
Telephone: (757) 595-7020
2
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the merger more fully, and for a more complete
description of the legal terms of the merger, you should read carefully this
entire document and the documents to which we refer you. See "Where You Can Find
More Information" on page 39.
Exchange Ratio is 0.753 Shares of F&M Common Stock for each Atlantic Financial
Share (page 11)
As a result of the merger, you will receive 0.753 shares of F&M common
stock for each share of Atlantic Financial common stock you own. On October 30,
2000, the closing price of F&M common stock was $25.125 and the closing price of
Atlantic Financial common stock was $18.50. If the merger had occurred on that
date, you would have received F&M stock that had an equivalent per share value
of approximately $18.91 for each Atlantic Financial share held. The value of F&M
shares which you will receive in the merger will fluctuate with the market value
of F&M common stock. F&M common stock is traded on the New York Stock Exchange
under the symbol "FMN".
No Federal Income Tax on Shares Received in Merger (page 24)
We expect that you will not recognize any gain or loss for federal
income tax purposes as a result of the merger, except with respect to cash
received instead of any fractional share. LeClair Ryan, counsel to F&M, will
issue a legal opinion to this effect, the form of which we have included as an
exhibit to the registration statement filed with the Securities and Exchange
Commission for the shares to be issued in the merger.
Tax matters are complicated, and tax results may vary among
shareholders. We urge you to consult with your own tax advisor to understand
fully how the merger will affect you.
F&M Dividend Policy Following the Merger
F&M currently pays quarterly dividends of $0.25 per share of common
stock. F&M expects that it will continue to pay at least this amount in
quarterly dividends after the merger, but may change that policy based on
business conditions, F&M's financial condition and earnings or other factors.
F&M anticipates declaring a dividend to its shareholders of record in
December 2000. Because we expect that the merger will occur in January 2001, the
F&M dividend, if declared and paid, will not be paid on shares of F&M common
stock issued in the merger to Atlantic Financial's shareholders. However,
Atlantic Financial anticipates that it will pay a dividend of $0.12 per share to
its shareholders in mid- to late December 2000.
Atlantic Financial Board Recommends Shareholder Approval (page 11)
The Atlantic Financial board approved the merger and the merger
agreement. The board believes that the merger is fair to you and in your best
interests. The Atlantic Financial board recommends that you vote "FOR" approval
of the merger. The Atlantic Financial board believes that, as a result of the
merger, Atlantic Financial shareholders will have less business and financial
risk and will have greater liquidity in their shares.
Exchange Ratio Fair to Shareholders, According to Investment Bank (page 13)
Davenport & Company LLC has given an opinion to the Atlantic Financial
board that the exchange ratio is fair from a financial point of view to Atlantic
Financial shareholders. A copy of the fairness opinion, setting forth the
information reviewed, assumptions made and matters considered, is attached to
this proxy statement/prospectus as Appendix III. We encourage you to read the
opinion carefully. If the merger is completed, Davenport & Company LLC will
receive a fee equal to approximately $100,000 in exchange for its advice and for
providing its fairness opinion.
3
Dissenters' Rights (page 25)
If you file a demand for appraisal before the vote on the merger, and
do not vote for the merger, you may have the right to obtain a cash payment for
the "fair value" of your shares of Atlantic Financial common stock, excluding
any element of value arising from the merger. To exercise these rights, you must
comply with the procedural requirements of Article 15 of Title 13.1 of the
Virginia Stock Corporation Act, which we have attached to this proxy
statement/prospectus as Appendix VI. The "fair value" of Atlantic Financial
common stock would be determined in judicial proceedings, and we cannot predict
what the results would be. Failure to take any of the steps required under
Article 15 may result in a loss of dissenter's rights.
Meeting to be Held December 14, 2000 (page 10)
The special shareholders' meeting will be held on Thursday, December
14, 2000 at 7:00 p.m. in the Junior Ballroom of the Omni Hotel located at 1000
Omni Boulevard, Newport News, Virginia.
The Companies (pages 30 and 31)
F&M National Corporation
9 Court Square
Winchester, Virginia 22601
(540) 665-4200
F&M is a multi-bank holding company headquartered in Winchester,
Virginia. F&M has eight banking affiliates in Virginia, one bank affiliate in
West Virginia and one bank affiliate in Maryland which serve the Shenandoah
Valley, Allegheny and Bath counties, Northern, Central and Southside Virginia,
the eastern panhandle of West Virginia and the counties of Montgomery and Prince
George's in Maryland.
Atlantic Financial Corp
737 J. Clyde Morris Boulevard
Newport News, Virginia 23601
(757) 595-7020
Atlantic Financial is a multi-bank holding company headquartered in
Newport News, Virginia that operates 15 banking offices in Southeastern Virginia
through its two banking subsidiaries -- Peninsula Trust Bank and United
Community Bank.
The Merger (page 11)
The merger agreement provides for Atlantic Financial merging into F&M.
After the merger, Atlantic Financial's banking subsidiaries, Peninsula Trust
Bank and United Community Bank, will operate together as a separate banking
subsidiary of F&M under the name "F&M Bank-Atlantic." The merger agreement and
the related plan of merger are attached to this proxy statement/prospectus as
Appendix I. We encourage you to read the merger agreement, as it is the legal
document that governs the merger.
Majority Shareholder Vote Required (page 10)
Approval of the merger requires the affirmative vote of at least a
majority of votes entitled to be cast by the outstanding shares of Atlantic
Financial common stock. Your failure to vote will have the effect of a vote
against approval of the merger. Certain directors and executive officers of
Atlantic Financial own about 12.28% of the shares entitled to vote at the
meeting, and we expect them to vote their shares in favor of the merger.
Brokers who hold shares of Atlantic Financial common stock as nominees
will not have authority to vote such shares with respect to the merger unless
shareholders provide voting instructions.
The merger does not require the approval of F&M's shareholders.
4
Record Date Set at October 26, 2000; One Vote Per Share of Atlantic Financial
Stock (page 18)
You are entitled to vote at the special meeting if you owned shares of
Atlantic Financial common stock at the close of business on October 26, 2000. On
October 26, 2000, there were 1,564 shares of Atlantic Financial common stock
outstanding.
You will have one vote at the meeting for each share you owned on
October 26, 2000.
Monetary Benefits to Management in the Merger (page 23)
When considering the recommendation of the Atlantic Financial board,
you should be aware that some Atlantic Financial directors and officers have
interests in the merger that differ from, or are in addition to, the interests
of other Atlantic Financial shareholders. These interests exist because of
rights under current employment agreements that certain executive officers of
Atlantic Financial have and because of rights these officers may have upon
entering into employment agreements with F&M.
Each of Atlantic Financial's President and Chief Executive Officer,
William J. Farinholt, Vice Chairman and Chief Operating Officer, Wenifred O.
Pearce, Executive Vice President and Chief Financial Officer, Kenneth E. Smith,
and Executive Vice President, D. Eugene Brittle, has been offered a three-year
employment agreement with F&M. The F&M agreements would provide the executive
officers with the same levels of salary compensation as exists under their
current employment agreements with Atlantic Financial. If the officers agree to
enter into employment agreements with F&M, the F&M agreements will supersede the
existing employment agreements and change of control arrangements the executive
officers have with Atlantic Financial. In the event that an officer does not
accept an employment agreement as offered by F&M, his rights in connection with
the merger will be governed by his existing employment agreement and change of
control provisions in that agreement.
The employment agreements for Messrs. Farinholt, Pearce, Smith and
Brittle also would provide for annual bonuses, subject to the discretion of the
boards of F&M and the continuing bank, F&M Bank-Atlantic. In connection with the
offer of an employment agreement, each of the named executive officers has been
offered an agreement that may provide severance payments and other benefits if
there is a change in control of F&M. See "Interests of Certain Persons in the
Merger" on page 23.
Also, one current director of Atlantic Financial will become a director
of F&M after the merger is completed, and all of the directors of Atlantic
Financial will become the directors of F&M Bank-Atlantic. Directors of Peninsula
Trust Bank and United Community Bank will be offered a position on F&M Bank-
Atlantic's advisory board.
The Atlantic Financial board was aware of these and other interests and
considered them before approving and adopting the merger agreement.
Conditions that Must Be Satisfied for the Merger to Occur (page 18)
The following conditions must be met for us to complete the merger:
. approval of the merger by Atlantic Financial shareholders;
. approval from the New York Stock Exchange for the listing of the F&M
common stock to be issued;
. the continuing effectiveness of F&M's registration statement filed
with the Securities and Exchange Commission;
. receipt by F&M of a letter from its accountants stating that the
merger qualifies for pooling of interests accounting treatment; and
. receipt of a legal opinion concerning the tax consequences of the
merger.
5
We cannot complete the merger unless we obtain the approval of the
Board of Governors of the Federal Reserve System and the Virginia State
Corporation Commission. On October 20, 2000, applications were filed with the
Federal Reserve and the Virginia State Corporation Commission. While we cannot
predict whether or when we will obtain all required regulatory approvals, we see
no reason why the approvals will not be obtained in a timely manner.
Unless prohibited by law, either Atlantic Financial or F&M could elect
to waive a condition that has not been satisfied and complete the merger anyway.
Termination of the Merger Agreement (page 20)
We can agree to terminate the merger agreement at any time without
completing the merger. Either company may also terminate the merger agreement in
the following circumstances:
. the merger is not completed on or before March 10, 2001 or
. if any event occurs which renders impossible, in a material way, the
satisfaction by one company of one or more of the conditions
described above, unless the other company waives such satisfaction.
Option Agreement (page 21)
To induce F&M to agree to the merger, and to discourage other companies
from acquiring Atlantic Financial, F&M was granted an irrevocable option to
purchase from Atlantic Financial up to 829,468 shares of Atlantic Financial
common stock at a price of $15.00 per share. F&M may exercise the option only if
another party attempts to acquire control of Atlantic Financial. As of the date
of this proxy statement/prospectus, we do not believe that has occurred. The
stock option agreement is attached to this proxy statement/prospectus as
Appendix II.
Merger to Take Place in Early January 2001 (page 18)
The merger will become effective at the date and time stated on the
certificate of merger issued by the Virginia State Corporation Commission. We
anticipate the merger will take place during the first week of January 2001.
Distribution of Stock Certificates (page 18)
After the merger, you will need to exchange your Atlantic Financial
stock certificates for certificates representing F&M common stock. F&M will have
its exchange agent mail to you instructions on how to exchange your shares.
After turning in your certificates to the exchange agent, you will be mailed
certificates representing shares of F&M common stock.
F&M to Use Pooling of Interest Accounting Treatment (page 24)
We expect that the merger will be accounted for as a pooling of
interests. This will enhance future earnings of F&M by avoiding the creation of
goodwill relating to the merger and enable F&M to also avoid charges against
future earnings resulting from amortizing goodwill. This accounting method also
means that after the merger F&M will report financial results as if Atlantic
Financial had always been combined with F&M.
Listing of F&M Stock
F&M will list the shares of its common stock to be issued in the merger
on the New York Stock Exchange.
Market Price Information
Shares of F&M common stock are traded on the New York Stock Exchange
under the symbol "FMN" and shares of Atlantic Financial common stock are traded
on the Nasdaq SmallCap Market under the symbol "AFIC". On July 5, 2000, the last
trading day before the public announcement of the merger, F&M common stock
closed at $22.375 per share and Atlantic Financial common stock closed at $13.75
per share. Based on the exchange ratio, 0.753, the pro forma equivalent
6
per share value of the Atlantic Financial common stock on July 5, 2000 was equal
to approximately $16.85 per share. On October 30, 2000, F&M common stock closed
at $25.125 per share and Atlantic Financial common stock closed at $18.50 per
share. The pro forma equivalent per share value of the Atlantic Financial common
stock on October 30, 2000 was approximately $18.91 per share.
Recent Financial Developments
F&M. For the three months ended September 30, 2000, net income for F&M
was $12.6 million or $.51 per share, assuming dilution, compared to $11.1
million, or $.44 per share, assuming dilution, for the same period in 1999. At
September 30, 2000, F&M had total assets of $3.53 billion, an increase of 14.6%
over the $3.08 billion in total assets at September 30, 1999. Total loans at
September 30, 2000 increased to $2.03 billion, up 8.4% from the $1.87 billion in
total loans at September 30, 1999. Deposits at September 30, 2000 increased to
$2.98 billion, up from $2.59 billion at September 30, 1999.
Atlantic Financial. For the three months ended September 30, 2000, net
income for Atlantic Financial was $1.13 million or $.27 per share, assuming
dilution, compared to $1.03 million, or $.24 per share, assuming dilution, for
the same period in 1999. At September 30, 2000, Atlantic Financial had total
assets of $390.4 million, an increase of 6.7% over the $365.9 million in total
assets at September 30, 1999. Total loans at September 30, 2000 increased to
$231.7 million, up 3.6% from the $223.7 million in total loans at September 30,
1999. Deposits at September 30, 2000 increased to $340.5 million, up from $318.9
million at September 30, 1999.
Comparative Per Share Information
The following table shows information about our earnings per share,
cash dividends per share and book value per share, and similar information
reflecting the merger which we refer to as "pro forma" information. In
presenting the comparative pro forma information for certain time periods, we
assumed that we had been affiliated throughout those periods.
We also assumed that we will treat our companies as if they had
always been combined for accounting and financial reporting purposes, a method
known as "pooling of interests" accounting. The information listed as "pro forma
equivalent" was obtained by multiplying the pro forma amounts by the 0.753
exchange ratio.
We expect that we will incur reorganization and restructuring expenses
as a result of the merger. We also anticipate that the merger will provide F&M
and Atlantic Financial with financial benefits that include reduced operating
expenses and the opportunity to earn more revenue. The pro forma information,
while helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, does not attempt to predict or suggest
future results.
The information in the following table is based on the historical
financial information that F&M and Atlantic Financial have presented in their
Securities and Exchange Commission filings. The amounts previously reported by
F&M in quarterly and annual reports for the periods presented have been
retroactively restated to reflect the acquisition of The State Bank of
Alleghenies on January 3, 2000, accounted for as a pooling of interests. We have
incorporated this material into this proxy statement/prospectus by reference.
See "Where You Can Find More Information" on page 39.
7
Six months
ended Year ended
June 30, December 31,
--------------------------------------
2000 1999 1998 1997
---- ---- ---- ----
Earnings Per Common Share
Basic:
Atlantic Financial historical............... $ 0.58 $ 0.94 $ 0.88 $ 1.02
F&M historical.............................. 0.92 1.72 1.55 1.44
Pro forma combined.......................... 0.90 1.67 1.51 1.43
Atlantic Financial pro forma equivalent..... 0.68 1.26 1.14 1.08
Diluted:
Atlantic Financial historical............... $ 0.57 $ 0.92 $ 0.86 $ 1.00
F&M historical.............................. 0.92 1.71 1.54 1.42
Pro forma combined.......................... 0.90 1.65 1.49 1.41
Atlantic Financial pro forma equivalent..... 0.68 1.24 1.12 1.07
Cash Dividends Declared
Per Common Share
Atlantic Financial historical............... $ 0.230 $ 0.38 $ 0.37 $ 0.25
F&M historical.............................. 0.485 0.90 0.76 0.73
Pro forma combined.......................... 0.485 0.90 0.76 0.73
Atlantic Financial pro forma equivalent..... 0.365 0.68 0.57 0.55
June 30, December 31,
2000 1999
---- ----
Book Value Per Common Share
Atlantic Financial historical............... $ 10.49 $ 10.27
F&M historical.............................. 12.80 12.36
Pro forma combined.......................... 12.93 12.50
Atlantic Financial pro forma equivalent..... 9.74 9.41
8
Selected Financial Data
We are providing the following information to help you analyze the
financial aspects of the merger. We derived this information from audited
financial statements for 1995 through 1999 and unaudited financial statements
for the six months ended June 30, 2000 and 1999. This information is only a
summary, and you should read it in conjunction with the historical financial
statements and the related notes contained in the annual and quarterly reports
and other documents that F&M and Atlantic Financial have filed with the
Securities and Exchange Commission. See "Where You Can Find More Information" on
page 39. The amounts previously reported by F&M in quarterly and annual reports
for the periods presented have been retroactively restated to reflect the
acquisition of The State Bank of the Alleghenies on January 3, 2000, accounted
for as a pooling of interests. You should not rely on the six month information
as being indicative of results expected for the entire year.
F&M - HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands, except for per share amounts)
Six Months Ended
June 30, Year Ended December 31,
------------------------- ----------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Net interest
income........................ $ 67,893 $ 64,501 $ 131,764 $ 125,085 $ 118,098 $ 109,784 $ 103,265
Net income...................... 22,918 22,016 43,002 38,938 35,774 33,764 29,298
Diluted earnings
per share..................... 0.92 0.87 1.71 1.54 1.42 1.34 1.17
Cash dividends
per share..................... 0.485 0.43 0.90 0.76 0.73 0.69 0.61
Book value
per share..................... 12.80 12.73 12.36 12.77 11.79 10.93 10.41
Total assets.................... 3,288,541 3,075,721 3,098,167 3,100,117 2,875,438 2,642,237 2,513,120
Shareholders'
equity........................ 318,109 308,731 307,682 311,948 287,948 266,844 252,120
ATLANTIC FINANCIAL - HISTORICAL FINANCIAL INFORMATION
(Dollars in thousands, except for per share amounts)
Six Months Ended
June 30, Year Ended December 31,
------------------------- ---------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
Net interest
income........................ $ 8,538 $ 7,748 $ 15,957 $ 14,891 $ 13,613 $ 11,963 $ 10,054
Net income...................... 2,414 1,959 3,940 3,662 4,060 3,457 2,738
Diluted earnings
per share..................... 0.57 0.46 0.92 0.86 1.00 0.88 0.77
Cash dividends
per share..................... 0.23 0.18 0.38 0.37 0.25 0.13 0.06
Book value
per share..................... 10.49 10.25 10.27 10.35 9.70 8.67 8.06
Total assets.................... 387,301 374,340 383,309 360,303 315,257 286,312 251,591
Shareholders'
equity........................ 43,738 42,970 43,038 43,129 40,309 33,411 31,088
9
THE SPECIAL MEETING
Date, Place and Time
We are furnishing this proxy statement/prospectus and the enclosed form
of proxy to you in connection with the solicitation of proxies by the board of
directors of Atlantic Financial for use at a special meeting of shareholders of
Atlantic Financial. The special meeting will be held in the Junior Ballroom of
the Omni Hotel located at 1000 Omni Boulevard, Newport News, Virginia on
Thursday, December 14, 2000 at 7:00 p.m.
Purpose of the Special Meeting
The purpose of the special meeting is to consider and vote upon the
Agreement and Plan of Reorganization, dated as of July 5, 2000, by and between
F&M and Atlantic Financial, and a related Plan of Merger. The merger agreement
is attached to this proxy statement/prospectus as Appendix I and is incorporated
in this document by this reference.
Record Date
Only shareholders of record at the close of business on October 26,
2000, the record date, are entitled to notice of and to vote at the special
meeting or any adjournment thereof. At the close of business on October 26,
2000, there were 4,178,785 shares of Atlantic Financial common stock issued and
outstanding held by approximately 1,564 shareholders of record.
Vote Required
Each share of Atlantic Financial common stock outstanding on October
26, 2000, entitles the holder to cast one vote upon each matter properly
submitted at the special meeting. Approval of the merger requires the
affirmative vote of the holders of at least a majority of the shares of Atlantic
Financial common stock outstanding as of October 26, 2000, in person or by
proxy.
Brokers who hold shares of Atlantic Financial common stock as nominees
will not have discretionary authority to vote such shares in the absence of
instructions from the beneficial owners of those shares. Any shares of Atlantic
Financial common stock for which a broker has submitted an executed proxy but
for which the beneficial owner of the shares has not given instructions on
voting to such broker are referred to as "broker non-votes." This is important
because abstentions and broker non-votes will be counted for purposes of
establishing the presence of a quorum at the meeting and also will be counted
and will have the effect of a vote against the proposal to approve the merger.
Because approval of the merger requires the affirmative vote of at
least a majority of the votes entitled to be cast by the outstanding shares of
Atlantic Financial common stock, abstentions and broker non-votes will have the
same effect as a vote against approval of the merger agreement. Accordingly, the
Atlantic Financial board urges you to complete, date and sign the accompanying
proxy and return it promptly in the enclosed envelope.
As of September 30, 2000, directors and executive officers of Atlantic
Financial and their affiliates, beneficially owned an aggregate of 511,972
shares of Atlantic Financial common stock, or 12.28% of the shares of Atlantic
Financial common stock outstanding on that date. We currently expect that all
directors and executive officers of Atlantic Financial will vote their shares of
Atlantic Financial common stock in favor of the merger.
Voting and Revocation of Proxies
A form of proxy is enclosed with this proxy statement/prospectus. You
are requested to complete, date and sign the form of proxy and return it
promptly to Atlantic Financial in the enclosed envelope. If a proxy is properly
executed and returned in time for voting, it will be voted in accordance with
the instructions indicated on the proxy. If a proxy is signed and returned
without indicating any voting instructions, shares of Atlantic
10
Financial common stock represented by the proxy will be voted "FOR" the merger
and in the discretion of the individuals named as proxies as to any other matter
that may come before the special meeting or any adjournment or postponement
thereof including, among other things, a motion to adjourn or postpone the
special meeting to another time and/or place, for the purpose of soliciting
additional proxies or otherwise. No proxy which is voted against the merger will
be voted in favor of any such adjournment or postponement.
A proxy may be revoked at any time before it is voted. You may revoke a
proxy by giving written notice of revocation to Atlantic Financial, by executing
and delivering a substitute proxy to Atlantic Financial or by attending the
special meeting and voting in person. If you wish to revoke a proxy by written
notice, please mail the notice so that it is received on or before December 13,
2000, to Secretary, Atlantic Financial Corp, 737 J. Clyde Morris Boulevard,
Newport News, Virginia 23601.
If you hold your shares in street name, you will need additional
information from your broker in order to vote your shares in person at the
meeting.
Solicitation of Proxies
Atlantic Financial will bear the costs of this solicitation of proxies.
Solicitations may be made by mail, telephone, telegraph or personally by
directors, officers and employees at Atlantic Financial, none of whom will
receive additional compensation for performing such services. F&M will pay all
of the expenses of printing and mailing of this proxy statement/prospectus.
Recommendation
The board of directors of Atlantic Financial has approved the merger
agreement and the transactions contemplated thereby. The Atlantic Financial
board believes that the proposed transaction is fair to and in the best
interests of Atlantic Financial and its shareholders. The Atlantic Financial
board unanimously recommends that you vote "FOR" approval of the merger.
THE MERGER
The following is a summary description of the material aspects of the
merger. This description does not purport to be complete and is qualified in its
entirety by reference to the appendices attached to this proxy
statement/prospectus, including the merger agreement and the plan of merger,
which are attached as Appendix I to this proxy statement/prospectus. We urge you
to read the appendices in their entirety.
Terms of the Merger
The merger agreement provides for the exchange of each outstanding
share of Atlantic Financial common stock for 0.753 shares of F&M common stock.
This is the "exchange ratio." After the merger, F&M will serve as the parent
bank holding company for the consolidated banking operations of Peninsula Trust
Bank and United Community Bank, which together will continue to carry on their
banking business in substantially the same manner as before the merger under the
name "F&M Bank-Atlantic."
No fractional shares of F&M common stock will be issued. Rather, cash,
without interest, will be paid instead of any fractional share interest based on
the average closing price of F&M common stock. The exchange ratio will be
adjusted to reflect any stock split, stock dividend, recapitalization or similar
transaction with respect to F&M common stock.
Shareholders of Atlantic Financial are entitled to exercise their
dissenters' rights with respect to the merger. See "-- Dissenters' Rights."
11
Background of and Reasons for the Merger
Background of the Merger. During the past several years, there have
been significant developments in the banking and financial services industries.
These developments have included increased emphasis and dependence on
technology, specialization of products and services, increased competition from
other financial institutions, increased competition from other less regulated
financial service institutions, and a trend toward consolidation. To address the
changing financial and regulatory landscape, and as part of its ongoing
strategic planning process, Atlantic Financial's board periodically reviewed the
operational and financial performance of the company and sought to enhance the
income growth opportunities available to Atlantic Financial.
In response to these issues, Atlantic Financial's board considered
various growth alternatives, including de novo branch expansion and the possible
acquisition of former branches of state banks that have been acquired by
out-of-state bank holding companies in recent years. The board also analyzed the
possibilities of merging with similarly situated bank holding companies or
selling Atlantic Financial. During this time, Atlantic Financial held
discussions with United Community Bankshares, Inc., a bank holding company based
in Franklin, Virginia, with whom it ultimately merged in December 1998. Atlantic
Financial also explored the possibility of separate business combinations with
three other larger banking organizations, one of which was F&M.
The Atlantic Financial board recognized during its strategic planning
sessions that Atlantic Financial could possibly sell to a larger banking
organization at a premium over the current market price. However, the board
ultimately decided not to pursue such a transaction. The board concluded that,
while a sale of control might maximize short-term shareholder value, it was
likely that Atlantic Financial would be able to sustain its historical growth
rate for the next several years and remaining independent could lead to greater
benefits and shareholder value over the longer term. Following additional
analysis of these issues, Atlantic Financial negotiated a merger agreement with
United Community Bankshares and completed the merger in December 1998.
In April 2000, F&M and Atlantic Financial reopened preliminary
discussions about a possible affiliation of the two companies. On April 14,
2000, William J. Farinholt, President and Chief Executive Officer of Atlantic
Financial, met with Alfred B. Whitt, President and Chief Executive Officer of
F&M, to discuss the compatibility of F&M's and Atlantic Financial's operating
philosophies and explore possible terms of a merger between F&M and Atlantic
Financial. After that meeting, the Atlantic Financial board held discussions
about possibly affiliating with F&M, and the discussions included the practical
difficulties of Atlantic Financial's remaining independent and continuing to be
able to compete with large regional bank holding companies and other financial
service institutions, including challenges presented by increasing technology
costs and costs associated with offering non-deposit products and services. In
late May 2000, F&M and Atlantic Financial continued discussions that included
the structure of an affiliation, possible board of directors' composition,
management structure, computer systems and future growth plans. Atlantic
Financial engaged Davenport & Company LLC to prepare a financial analysis of a
possible affiliation.
By mid-June 2000, the respective management of F&M and Atlantic
Financial had reached agreement, subject to their respective boards' approval,
on the structure of a merger of the two companies and on all key issues
involving management.
At a July 3, 2000 board of directors meeting, representatives of
Davenport presented a financial analysis of the merger and rendered an oral
opinion to Atlantic Financial that the merger is fair from a financial point of
view. Counsel was also present at the meeting and reviewed the merger agreement
with the board of directors. Atlantic Financial's board of directors approved
the merger. The merger agreement was executed and delivered on July 5, 2000.
Atlantic Financial's Reasons for the Merger. In deciding to enter into
the merger agreement, the Atlantic Financial board considered a number of
factors. The board did not assign any relative or specific weights to the
factors considered. The principal factors that led the board to approve the
merger were:
. the operation of Atlantic Financial as a separate banking subsidiary
of F&M;
12
. the opportunities for growth and diversification through an
affiliation with F&M, a well-capitalized institution with a broader
geographical market area;
. the expanded products and services, including Internet banking,
insurance, and trust services, that Atlantic Financial will be able
to offer its customers as a result of affiliating with F&M;
. the terms of the merger agreement and past practices by F&M in
mergers and other affiliations with respect to the retention of
valued employees and continued contributions in the best interests
of the communities served by F&M's subsidiary and affiliated banks;
. the compatibility of F&M's and Atlantic Financial's operating
philosophies, and the similar value that F&M holds with respect to
its customers, employees and the communities that it serves;
. the current and prospective economic and competitive environment
facing the banking industry generally, and Atlantic Financial in
particular, including the continued pace of consolidation in the
industry, the perceived importance of operational scale in enhancing
efficiency and profitability and remaining competitive over the long
term, and the benefits of increased geographic diversification;
. the appointment by F&M of one of Atlantic Financial's directors to
its board of directors upon the closing of the merger;
. the opinion of Davenport to Atlantic Financial's board that the
exchange ratio is fair from a financial point of view to Atlantic
Financial's shareholders; and
. the expectation that the merger will be tax-free for federal income
tax purposes to Atlantic Financial and its shareholders, except for
cash paid instead of fractional shares.
Other material factors considered were the financial condition and
history of performance of F&M, and the compatibility of the managements of the
two organizations. The Atlantic Financial board believes that the addition of
the resources that F&M will provide to Atlantic Financial will enable Atlantic
Financial to provide a wider and improved array of financial services to
consumers and businesses and to achieve added flexibility in dealing with the
changing competitive environment in their market areas.
The Atlantic Financial board has concluded that the terms of the merger
agreement, which were determined on the basis of arms-length negotiations, are
fair to Atlantic Financial's shareholders. As explained below, this conclusion
is supported by the opinion of an independent financial advisor. In establishing
the exchange ratio, the Atlantic Financial board also considered the exchange
ratio in relation to the market value and earnings per share of F&M's common
stock and Atlantic Financial's common stock, as well as information concerning
the financial condition, results of operations and the prospects of F&M and
Atlantic Financial.
The board of directors of Atlantic Financial believes that the merger
is in the best interests of Atlantic Financial and its shareholders. Atlantic
Financial's directors have all committed to vote shares under their control in
favor of the merger to the extent of their fiduciary ability.
The Atlantic Financial board unanimously recommends that you vote "FOR"
approval of the merger agreement.
Opinion of Financial Advisor
Atlantic Financial retained Davenport & Company LLC to act as its
financial advisor in connection with its evaluation of potential merger partners
and to render a written opinion to Atlantic Financial's board of directors as to
the fairness, from a financial point of view, of the consideration to be paid to
Atlantic Financial's shareholders in accordance with the merger agreement. In
requesting Davenport's advice and opinion, no restrictions or limitations were
imposed by Atlantic Financial upon Davenport with respect to the investigations
made or the procedures followed by Davenport in rendering its opinion. On July
3, 2000, Davenport delivered its opinion to the effect that as of the date of
such opinion, and based upon and subject to the assumptions, limitations and
qualifications in the opinion, the consideration to be paid to the Atlantic
Financial shareholders pursuant to the merger agreement was
13
fair to the shareholders of Atlantic Financial from a financial point of view.
Davenport subsequently updated its opinion to the date of this proxy
statement/prospectus.
The full text of Davenport's opinion dated October 31, 2000, which
describes, among other things, the assumptions made, matters considered and the
limitations on the review undertaken by Davenport, is attached to this proxy
statement/prospectus as Appendix II. The summary of the Davenport opinion set
forth below is qualified in its entirety by reference to the full text of the
opinion. We urge you to read the opinion carefully and in its entirety.
The Davenport opinion is directed only to the fairness of the merger
consideration, from a financial point of view, to be paid to the Atlantic
Financial shareholders and does not constitute a recommendation to any Atlantic
Financial shareholder as to how such shareholder should vote at the special
meeting. Davenport was not retained as an advisor or agent to Atlantic Financial
shareholders or any other person, other than as an advisor to the Atlantic
Financial board.
Davenport is a regional investment banking firm. As part of its
investment banking business, Davenport is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Davenport was selected by Atlantic Financial to act as its financial advisor
because of Davenport's expertise in valuing and advising financial institutions
in merger and acquisition transactions and because Davenport was familiar with
Atlantic Financial and its business.
In arriving at its opinion, Davenport, among other things:
. reviewed the merger agreement;
. reviewed this proxy statement/prospectus;
. reviewed certain publicly available financial statements and other
information of Atlantic Financial and F&M;
. reviewed certain internal financial statements and other information
and operating data of Atlantic Financial provided by its management;
. reviewed certain publicly available forward looking information for
F&M;
. reviewed the reported prices and trading activity for Atlantic
Financial common stock and F&M common stock;
. held discussions with members of Atlantic Financial's management
regarding past and current business operations, financial condition,
results of regulatory examinations, the merger and the business and
future prospects of Atlantic Financial;
. compared the results of operations and market value of Atlantic
Financial and F&M with similar information for certain other
publicly traded companies which it deemed to be relevant;
. compared the financial terms of the merger with the financial terms
of certain other mergers and acquisitions of financial institutions
in recent years;
. took into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as
well as its experience in securities valuations and knowledge of the
commercial banking industry generally; and
. conducted such other studies, analyses and investigations and
considered such other information as it deemed appropriate.
14
In rendering its opinion, Davenport assumed and relied upon the
accuracy, completeness and fairness of all of the financial and other
information that was available to it from public sources, that was provided to
it by Atlantic Financial or their representatives, F&M or their representatives,
or that was otherwise reviewed by it. Davenport did not independently verify any
of the information reviewed by it. Davenport is not an expert in the evaluation
of loan portfolios for the purpose of assessing the adequacy of the allowance
for losses, and assumed that such allowances, for each of the companies, are in
the aggregate, adequate to cover such losses. Davenport did not review any
individual credit files nor made any independent evaluation, appraisal or
physical inspection of the assets or individual properties of Atlantic Financial
or F&M, nor was Davenport furnished with such evaluation or appraisal. The
Davenport opinion is necessarily based on economic, market, financial and other
conditions as they existed on, and on the information made available to
Davenport as of, the date of the Davenport opinion.
The Davenport opinion is just one of the many factors taken into
consideration by Atlantic Financial's board of directors in determining to
approve the merger agreement. See " -- Atlantic Financial's Reasons for the
Merger." The Davenport opinion does not address the relative merits of the
merger as compared to any alternative business strategies that might exist for
Atlantic Financial, nor does it address the effect of any other business
combination in which Atlantic Financial might engage.
In connection with rendering its opinion, Davenport performed a variety
of financial analyses. The following is a summary of the material analyses
presented to the Atlantic Financial board of directors at its July 3, 2000
meeting.
Transaction Summary. Davenport reviewed the terms of the proposed
merger including the aggregate transaction value. As is more specifically set
forth in the merger agreement, upon consummation of the merger, each outstanding
share of the common stock of Atlantic Financial, except for any dissenting
shares, will be entitled to receive consideration of 0.753 shares of F&M stock
per share of Atlantic Financial common stock. See " --Terms of the Merger." This
conversion ratio resulted in an implied total transaction value of approximately
$65.8 million, using F&M's closing stock price of $21.00 on June 30, 2000. Based
on the implied total transaction value Davenport calculated the premium over
Atlantic Financial's closing price as of June 30, 2000 to be 23.5%, the price to
last twelve months earnings per share to be 16.4x, the price to book value to be
1.52x, the price to deposits to be 19.5% and the price to assets to be 17.1%.
Analysis of Certain Other Publicly Traded Companies. To provide
contextual data and comparative market information, Davenport compared selected
financial information for Atlantic Financial to the corresponding information of
certain other Virginia community banks whose securities are publicly traded
(collectively, the "Comparable Companies"). The Comparable Companies were chosen
because they possess general business, operating and financial characteristics
representative of companies in the region and the industry in which Atlantic
Financial and F&M operate. The Comparable Companies were: C&F Financial
Corporation, Chesapeake Financial Shares, Inc., Community Bankshares, Inc.,
Eastern Virginia Bankshares, Inc., Independent Community Bankshares, Inc., James
River Bankshares, Inc., Old Point Financial Corporation, Southern Financial
Bancorp, Inc. and Virginia Commonwealth Financial Corp. Such data and ratios
included each company's most recent Stock Price, Asset Size, Book Value, Price
to Book Value, 1999 Earnings per Share, Last Twelve Months Earnings per Share,
Price to Earnings ratios and Dividend Yield.
Market information used in the ratios provided below is as of June 30,
2000. "LTM" is the Last Twelve Months ended March 31, 2000. The following table
summarizes the relevant data items.
Comparable Companies
---------------------------
Atlantic
Financial Low High Median
--------- ---- ---- ------
Asset Size (millions).............. $ 385 $ 203 $ 488 $ 392
Price to Book Value................ 1.23x 0.99x 1.77x 1.31x
Price to 1999 Earnings............. 13.9x 8.2x 11.7x 9.2x
Price to LTM Earnings.............. 13.3x 8.5x 12.7x 10.1x
Dividend Yield..................... 3.8% 2.2% 5.0% 3.7%
15
Comparable Transaction Analysis. Davenport analyzed the transaction
details of 15 community bank acquisition transactions announced from March, 1999
to June, 2000 in Virginia, Maryland, North Carolina, West Virginia and Tennessee
with the selling institutions having between $140 million and $8.2 billion in
assets (the "Comparable Transactions"). The deal sizes of the Comparable
Transactions ranged from $21.7 million to $1.9 billion. The data available from
the Comparable Transactions provided a range of multiples and ratios including
Price to LTM Earnings, Price to Book Value, Price to Assets and Premium to
Market Price. The Atlantic Financial market price is as of June 30, 2000. These
multiples for the Comparable Transactions and the implied multiples for Atlantic
Financial based on the proposed merger are summarized in the table below.
Comparable Transactions
-------------------------------------------
Atlantic
Financial Low High Average
--------- --- ---- -------
Price to LTM EPS................... 16.4x 12.8x 31.3x 21.6x
Price to Book Value................ 1.52x 1.01x 3.57x 2.38x
Price to Assets.................... 17.1% 11.7% 35.8% 24.2%
Premium to Market Price............ 23.5% 2.9% 69.8% 31.9%
Discounted Dividend Analysis. Davenport performed a discounted
dividend analysis to estimate a range of present values per share of Atlantic
Financial stock assuming Atlantic Financial continued to operate as a
stand-alone entity. This range was determined by adding (1) the present value of
the estimated future dividend stream that Atlantic Financial could generate and
(2) the present value of the "terminal value" of Atlantic Financial stock at
December 31, 2004.
In conducting this analysis, Davenport used Atlantic Financial's
financial projections for 2000 and, in conjunction with Atlantic Financial,
generated financial projections for 2001 through 2004. The primary assumptions
used in the projections were: total assets growing 10.0% in 2000, 9.0% in 2001,
8% in 2002, and 7.0% in 2003 and 2004; a net interest margin of 5.0% for all
five years; and an efficiency ratio of 61.0% in 2000, 60.0% in 2001, 59.0% in
2002, 58.0% in 2003, and 57.0% in 2004. Dividends were assumed to be 42.0% of
net income in 2000 through 2004, growing from $0.48 per share in 2000 to $0.73
per share in 2004. Davenport calculated a terminal value at the end of the
forecast period by applying price to earnings multiples ranging from 10.0x to
14.0x to the 2004 projected net income. To convert the projected dividends and
terminal value to a current value, Davenport used discount rates ranging from
10.0% to 14.0%. Based upon the above assumptions, the stand-alone value of
Atlantic Financial common stock ranged from $11.10 to $17.44 per share, as shown
in the following table.
Discount Terminal P/E Multiple
-----------------------------------------------------------
Rate 10.0x 11.0x 12.0x 13.0x 14.0x
---- ----- ----- ----- ----- -----
10%....... $13.10 $14.18 $15.27 $16.35 $17.44
11%....... $12.56 $13.60 $14.63 $15.67 $16.71
12%....... $12.05 $13.04 $14.03 $15.02 $16.01
13%....... $11.56 $12.51 $13.46 $14.40 $15.35
14%....... $11.10 $12.01 $12.91 $13.82 $14.73
Sensitivity Analysis. Davenport performed a sensitivity analysis on
the per share stock price of Atlantic Financial and F&M by making assumptions
about Atlantic Financial's future growth, profitability and stock price and
discounting the future stock prices at the end of five years to the present.
Davenport used a range of earnings and dividend growth rates similar to those
used in the financial projection prepared in conjunction with the discounted
dividend analysis in order evaluate the impact on the present values of each
company's stock price. The key assumptions used in the present value matrix
were: an earnings and dividends growth rate ranging from 6.0% to 10.0%; a
terminal P/E multiple ranging from 10.0x to 14.0x; and a discount rate ranging
from 10.0% to 14.0%. The analysis provided a range of per share values for the
Atlantic Financial stock from a low of $8.94 to a high of $17.45 and a range of
values for F&M stock from a low of $14.63 to a high of $28.30.
16
Atlantic Financial
------------------
Growth Rate........................ 6.0% 7.0% 8.0% 9.0% 10.0%
Terminal P/E Multiple.............. 10.0x 11.0x 12.0x 13.0x 14.0x
Discount Rate...................... 14.0% 13.0% 12.0% 11.0% 10.0%
- ----------------------------------------------------------------------------------------------------------------------
Present Value...................... $8.94 $10.67 $12.64 $14.89 $17.45
F&M
----
Growth Rate........................ 6.0% 7.0% 8.0% 9.0% 10.0%
Terminal P/E Multiple.............. 10.0x 11.0x 12.0x 13.0x 14.0x
Discount Rate...................... 14.0% 13.0% 12.0% 11.0% 10.0%
- ----------------------------------------------------------------------------------------------------------------------
Present Value...................... $14.63 $17.40 $20.57 $24.18 $28.30
Contribution Analysis. Davenport reviewed the relative contributions to be
made by Atlantic Financial and F&M to the combined institution based on data at
and for the twelve months ended March 31, 2000. The market value data is as of
June 30, 2000. Davenport compared such contributions to the pro forma ownership
stake that Atlantic Financial shareholders would have in the combined
institution. This information is presented in the following table.
Atlantic Financial F&M
------------------ ---
2000E Net Income.................... 10% 90%
1999A Net Income.................... 9% 91%
Book Value.......................... 12% 88%
Loans, net.......................... 10% 90%
Deposits............................ 11% 89%
Total Assets........................ 11% 89%
Market Value........................ 9% 91%
Post-Merger Ownership............... 11% 89%
The summary set forth above does not purport to be a complete description
of the analyses performed by Davenport, but describes, in summary form, the
principal elements of the presentation made by Davenport to the Atlantic
Financial board of directors on July 3, 2000. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses conducted by Davenport
was carried out in order to provide a different perspective on the transaction
and add to the total mix of information available. Davenport did not form a
conclusion as to whether any individual analysis, considered in isolation,
supported or failed to support an opinion as to fairness from a financial point
of view. Rather, in reaching its conclusion, Davenport considered the results of
the analyses in light of each other and ultimately reached its opinion based on
the results of all analyses taken as a whole. Davenport did not place particular
reliance or weight on any individual analysis, but instead concluded that its
analyses, taken as a whole, supported its determination. Accordingly,
notwithstanding the separate factors summarized above, Davenport believes that
its analyses must be considered as a whole and that selecting portions of its
analysis and the factors considered by it, without considering all analyses and
factors, could create an incomplete or misleading view of the evaluation process
underlying its opinion. In performing its analyses, Davenport made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters. The analyses performed by Davenport are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter dated July 3, 2000 between
Atlantic Financial and Davenport, Atlantic Financial paid Davenport a fee of
$50,000 upon the execution of the engagement letter and is obligated to pay an
additional fee of $50,000 upon consummation of the merger. Atlantic Financial
has also agreed to indemnify Davenport and certain related persons against
certain liabilities in connection with its engagement, including liabilities
under the federal securities laws. The terms of the fee arrangement with
Davenport, which Davenport and Atlantic Financial believe are customary in
transactions of this nature, were negotiated at arm's
17
length between Atlantic Financial and Davenport and the Atlantic Financial board
was aware of such arrangement, including the fact that a significant portion of
the aggregate fee payable to Davenport is contingent upon consummation of the
merger. In the past, Davenport has provided investment banking services to
Atlantic Financial for which services Davenport received customary fees.
Effective Date
If the merger is approved by the shareholders of Atlantic Financial, all
required governmental and other consents are obtained and the other conditions
to the merger are satisfied or waived, the merger will be consummated and made
effective on the date and at the time indicated on the certificate of merger
issued by the Virginia State Corporation Commission pursuant to the Virginia
Stock Corporation Act. See "-- Representations and Warranties; Conditions to the
Merger."
It is anticipated that the merger will occur during the first week of
January 2001.
Surrender of Stock Certificates
As soon as practicable after the merger, F&M will cause American Stock
Transfer & Trust Company, its exchange agent, to mail to you a letter of
transmittal and instructions for use to surrender the certificates representing
shares of Atlantic Financial common stock in exchange for certificates
representing shares of F&M common stock.
Atlantic Financial shareholders should not send in their certificates until
they receive such instructions.
Promptly after surrender of one or more certificates for Atlantic Financial
common stock, together with a properly completed letter of transmittal, you will
receive a certificate or certificates representing the number of shares of F&M
common stock to which you are entitled and, where applicable, a check for the
amount payable in cash instead of issuing a fractional share. Lost, stolen,
mutilated or destroyed certificates will be treated in accordance with the
existing procedures of F&M.
After the merger, you will be entitled to vote the number of shares of F&M
common stock into which your Atlantic Financial common stock has been converted,
regardless of whether you have surrendered your Atlantic Financial certificates.
The merger agreement provides, however, that no dividend or distribution payable
to the holders of record of F&M common stock at or as of any time after the
effective date of the merger will be paid to the holder of any Atlantic
Financial certificate until such holder physically surrenders such certificate,
promptly after which time all such dividends or distributions will be paid,
without interest.
Representations and Warranties; Conditions to the Merger
The merger agreement contains representations and warranties by F&M and
Atlantic Financial, including representations and warranties with respect to
their individual organizations, authorizations to enter into the merger
agreement, capitalization, financial statements and pending and threatened
litigation. These representations and warranties, except as otherwise provided
in the merger agreement, will not survive the effective date of the merger.
The obligations of F&M and Atlantic Financial to consummate the merger are
subject to the following conditions, among others:
. approval and adoption of the merger agreement by the shareholders of
Atlantic Financial;
. receipt of all necessary regulatory approvals not conditioned or
restricted in a manner that, in the judgment of the boards of
directors of F&M or Atlantic Financial, materially adversely affects
the economic or business benefits of the merger so as to render
inadvisable or unduly burdensome consummation of the merger;
18
. the absence of certain actual or threatened proceedings before a court
or other governmental body relating to the merger;
. receipt of a fairness opinion from Davenport & Company LLC; and
. the receipt of an opinion of LeClair Ryan, A Professional Corporation,
counsel to F&M, as to certain federal income tax consequences of the
merger.
Also, under the terms of the merger agreement, F&M agreed that, following
the merger, it will indemnify those persons associated with Atlantic Financial
who are entitled to indemnification as of the effective date of the merger.
In addition, each company's obligation to effect the merger, unless waived,
is subject to:
. performance by the other company of its obligations under the merger
agreement;
. the accuracy, in all material respects, of the representations and
warranties of the other company contained in the merger agreement; and
. the receipt of certain opinions and certificates from the other
company.
Regulatory Approvals
The merger cannot occur without its approval by the Board of Governors of
the Federal Reserve System and the Virginia State Corporation Commission. On
October 20, 2000, applications were filed with the Federal Reserve and the
Virginia State Corporation Commission. The applications were accepted but no
approvals have been obtained.
While we cannot predict whether or when we will obtain all required
regulatory approvals, we see no reason why the approvals will not be obtained in
a timely manner. However, there can be no assurance that the necessary approvals
will be obtained, or that any approval will not be conditioned in a manner which
makes consummation of the merger, in the judgment of the board of directors of
F&M or Atlantic Financial, inadvisable or unduly burdensome.
Business Pending the Merger
Until the merger, Atlantic Financial has agreed to conduct its operations
only in the ordinary and usual course, consistent with past practice, and to use
its best efforts to maintain its business organizations, employees and business
relationships and retain the services of its officers and key employees.
In addition, and except with the prior consent of F&M, until the effective
date of the merger Atlantic Financial may not:
. take any action, engage in any transactions or enter into any
agreements which would adversely affect or delay in any material
respect the ability of F&M or Atlantic Financial to obtain the
necessary approvals, consents or waivers required to effect the merger
or to perform its covenants and agreements on a timely basis;
. issue any capital stock, except upon exercise of warrants or options
issued pursuant to existing employee benefits plans, programs or
arrangements or effect any stock split or otherwise change its
capitalization;
. enter into or amend any written employment or severance agreement or
similar arrangement with any of its directors, officers or employees,
or grant any salary or wage increase or increase any
19
employee compensation, except for normal individual increases to
employees made in the ordinary course of business consistent with past
practice;
. enter into or amend, except as required by law, any employee benefit,
incentive or welfare arrangement, or any related trust agreement,
relating to any of its directors, officers or employees;
. incur any obligation or liability, make any pledge, or encumber any of
its assets, nor dispose of any of its assets in any other manner,
except in the ordinary course of business and for adequate value, or
as otherwise permitted in the merger agreement;
. change its lending, investment, asset/liability management or other
material banking policies in any material respect, except as may be
required by law;
. amend its articles of incorporation or bylaws;
. declare or pay dividends on its capital stock, except that Atlantic
Financial may pay its regular quarterly cash dividends of $0.12 per
share pending the effectiveness of the merger; or
. take any action that would cause any of its representations and
warranties in the merger agreement to become untrue.
Pending consummation of the merger, F&M has agreed that F&M and its
subsidiary banks will operate their respective businesses in the ordinary course
and use their best efforts to preserve their respective properties, business and
customer and employee relationships.
No Solicitation; Board Action
Atlantic Financial has agreed not to solicit or encourage inquiries or
proposals with respect to, furnish any information relating to, or participate
in any negotiations regarding any merger, consolidation, share exchange, joint
venture, business combination or similar transaction involving Atlantic
Financial, or any purchase of all or any material portion of the assets of
Atlantic Financial.
Notwithstanding the non-solicitation provision described above, the
Atlantic Financial board may furnish information to, or enter into discussions
or negotiations with, any person or entity that makes an unsolicited, written
bona fide proposal regarding a transaction described above if, and only to the
extent that:
. the Atlantic Financial board concludes in good faith, after
consultation with and based upon the advice of outside counsel, that
it is required to furnish such information or enter into such
discussions or negotiations in order to comply with its fiduciary
duties to shareholders under applicable law;
. prior to taking such action, Atlantic Financial receives from such
person or entity an executed confidentiality agreement; and
. the Atlantic Financial board concludes in good faith that the proposal
regarding the transaction contains an offer of consideration that is
superior to the consideration set forth in the merger agreement.
Waiver, Amendment and Termination
At any time on or before the effective date of the merger, any term or
condition of the merger, except for the general conditions set forth in Section
5.1(a)-(d) of the merger agreement, may be waived by the party which is entitled
to the benefits thereof, without shareholder approval, to the extent permitted
under applicable law. The merger agreement may be amended at any time before the
merger by agreement of the parties whether before or after the special meeting,
except that the exchange ratio will not be changed after approval of the merger
agreement by the Atlantic Financial shareholders. Any material change in a
material term of the merger
20
agreement would require a resolicitation of Atlantic Financial's shareholders.
Such a material change would include, but not be limited to, a change in the tax
consequences to Atlantic Financial's shareholders.
The merger agreement may be terminated at any time before the merger,
whether before or after the approval of the merger by the shareholders of
Atlantic Financial:
. by mutual consent of Atlantic Financial and F&M;
. unilaterally by Atlantic Financial or F&M, if the merger has not
occurred on or before March 10, 2001, except that the party whose
failure to perform any obligation under the merger agreement is the
cause of the delay may not terminate the merger based upon the delay;
or
. unilaterally by Atlantic Financial or F&M if the satisfaction in any
material respect of one or more conditions to the obligation of that
party is rendered impossible of satisfaction.
In the event of termination, the merger agreement will become null and void,
except that certain provisions thereof relating to expenses and confidentiality
of information exchanged between the parties will survive any such termination.
Option Agreement
The option agreement was entered into as a condition to F&M's willingness
to enter into the merger agreement and is intended to increase the probability
of the merger. Exercise of the option by F&M may make the acquisition of
Atlantic Financial or a significant interest in it more expensive to any
prospective acquiror other than F&M, even if such an acquisition would be
beneficial to you. The existence of the F&M option is intended to make it less
likely that a prospective acquiror, other than F&M, will seek a business
combination with Atlantic Financial. The following is a brief summary of the
option agreement and is qualified in its entirety by reference to the option
agreement, a copy of which is attached to this proxy statement/prospectus as
Appendix II and incorporated by reference herein.
The option agreement permits the exercise by F&M of an option to acquire up
to 829,468 shares of Atlantic Financial common stock at a price of $15.00 per
share, subject to adjustment upon the occurrence of certain events described
below. The shares subject to the option represent approximately 19.9% of the
outstanding shares of Atlantic Financial common stock as of the date of the
option agreement, July 5, 2000.
F&M may exercise its option, in whole or in part, at any time or from time
to time, upon or after the occurrence of a "purchase event." As used in the
option agreement, a "purchase event" occurs when:
. Atlantic Financial enters into an agreement with a person (other than
F&M or its affiliates) to:
. acquire, merge or consolidate with, or enter into any similar
transaction with Atlantic Financial,
. purchase, lease or otherwise acquire all or substantially all of
the assets of Atlantic Financial, or
. purchase or otherwise acquire (including by way of merger,
consolidation, share exchange or any similar transaction)
securities representing more than 10% of the voting power of
Atlantic Financial;
. any person acquires beneficial ownership of more than 20% of the
outstanding shares of Atlantic Financial common stock; or
. a bona fide proposal is made by any person (other than F&M or its
affiliates) by public announcement or written communication that is or
becomes the subject of public disclosure to acquire, merge or
consolidate with, or enter into any similar transaction with Atlantic
Financial, and
21
following such proposal the shareholders of Atlantic Financial vote
not to approve the merger agreement.
Atlantic Financial is required to notify F&M upon the occurrence of a
transaction, offer or event giving rise to a purchase event. In the event F&M
wishes to exercise the option, it must send Atlantic Financial written notice
specifying (a) the total number of shares it will purchase and (b) the place and
date not earlier than three business days nor later than 60 business days after
the date on which such notice is given for the closing of the purchase. If prior
notification to, or approval of, any federal or state regulatory agency is
required, F&M will promptly file the required notice or application for approval
and the period of time that otherwise would run pursuant to such notice period
will run instead from the date on which the last required notification period
has expired or has been terminated or such approvals have been obtained and any
requisite waiting period has passed.
F&M's option will expire and terminate, to the extent not previously
exercised, upon the earlier of:
. the effective date of the merger;
. the date on which the merger agreement is terminated, other than a
termination based upon a material breach by Atlantic Financial of any
covenant in the merger agreement or the failure of Atlantic Financial
to obtain shareholder approval of the transactions contemplated by the
merger agreement by the vote required by applicable law, in either
case following the occurrence of a purchase event; or
. 12 months after the merger agreement is terminated based upon a
material breach by Atlantic Financial of certain specified covenants
or the failure of Atlantic Financial to obtain shareholder approval of
the transactions contemplated by the merger agreement by the vote
required under applicable law, in either case following the occurrence
of a purchase event.
If Atlantic Financial's capitalization changes by reason of stock dividend,
split-up merger, recapitalization, combination, exchange of shares or the like,
the number of shares subject to the option and the purchase price per share
thereof will be adjusted so that the economic value of the option remains
unaltered.
Resales of F&M Common Stock
All shares of F&M common stock received by you in connection with the
merger will be freely transferable, except that F&M common stock received by
persons who are deemed to be "affiliates" of Atlantic Financial for purposes of
Rule 145 under the Securities Act of 1933. To the best knowledge of Atlantic
Financial and F&M, the only persons who may be deemed to be affiliates of
Atlantic Financial subject to these limitations are the directors and executive
officers of Atlantic Financial.
Accounting Treatment
We anticipate that the merger will be accounted for as a pooling of
interests for accounting and financial reporting purposes. Under this method of
accounting, recorded assets and liabilities of F&M and Atlantic Financial are
carried forward at their previously recorded amounts, income of the combined
corporations will include income of F&M and Atlantic Financial for the entire
fiscal year in which the merger occurs, and the reported income of the separate
corporations for prior periods will be combined. No recognition of goodwill in
the combination is required of any party to the merger.
For the merger to qualify as a pooling of interests, it must satisfy a
number of conditions including that substantially all of the Atlantic Financial
common stock be exchanged for F&M common stock. If any of the conditions to
pooling of interests accounting is not satisfied, then the merger would not
qualify for pooling of interests accounting treatment, and a condition to the
obligation of F&M to consummate the merger would not be satisfied. Each of F&M
and Atlantic Financial have agreed that they will use their respective best
efforts to ensure that the merger will qualify for pooling of interests
accounting treatment. In addition, certain affiliates of F&M and Atlantic
Financial have agreed that they will not sell any F&M common stock or Atlantic
Financial
22
common stock within 30 days before the effective date of the merger, nor sell
any F&M common stock until such time as F&M has published financial results
covering at least 30 days of the combined operations of F&M and Atlantic
Financial after the merger.
Interests of Certain Persons in the Merger
As discussed below, certain members of Atlantic Financial's management, as
well as certain members of the Atlantic Financial board of directors, have
interests in the merger in addition to their interests as shareholders of
Atlantic Financial. In each case, the Atlantic Financial board was aware of
these potential interests, and considered them, among other matters, in
approving the merger agreement and the transactions contemplated thereby.
Indemnification. F&M has generally agreed to indemnify, the officers and
directors of Atlantic Financial against certain liabilities arising before the
effective date of the merger. F&M also has agreed to provide directors' and
officers' liability insurance for the present officers and directors of Atlantic
Financial for a period of three years after the merger.
Directors. One current director of Atlantic Financial will become a
director of F&M after the merger is completed. All of the directors of Atlantic
Financial will become the directors of F&M Bank-Atlantic. Directors of Peninsula
Trust Bank and United Community Bank will be offered a position on F&M Bank-
Atlantic's advisory board.
Stock Options. Certain officers and employees of Atlantic Financial hold
stock options under Atlantic Financial's stock incentive plan to acquire
aggregate of 110,042 shares of Atlantic Financial common stock at exercise
prices ranging from $5.625 to $12.50 per share. Such options, to the extent not
exercised before the merger, will be converted into options to acquire shares of
F&M common stock, appropriately adjusted to reflect the exchange ratio.
Agreements with Management. In connection with the merger, F&M has offered
employment agreements to four senior executives of Atlantic Financial: William
J. Farinholt, Wenifred O. Pearce, Kenneth E. Smith and D. Eugene Brittle. The
F&M agreements would provide the executive officers with the same levels of
salary compensation as exists under their current employment agreements with
Atlantic Financial. If the officers agree to enter into employment agreements
with F&M, the F&M agreements will supersede the existing employment agreements
and change of control arrangements the officers have with Atlantic Financial. In
the event that an executive officer does not accept an employment agreement as
offered by F&M, his rights in connection with the merger will be governed by his
existing employment agreement and change of control provisions in that
agreement.
The employment agreements further provide that the senior executive will
receive, on the same basis as other similarly situated officers of F&M, employee
pension and welfare benefits and group employee benefits such as vacation, group
disability and health, dental, and life and accident insurance. According to the
terms of the agreements, for each senior executive:
. if his employment is terminated for any reason, other than termination
by F&M or F&M Bank-Atlantic without cause (as that term is defined in
the agreements) or by the executive for good reason (as that term is
defined in the agreements), he will be entitled to salary and benefits
for the remainder of the term of the agreement, or one year, whichever
is greater; and
. if F&M or F&M Bank-Atlantic terminates the agreement for cause, he
would not be entitled to any further compensation or benefits.
If an officer enters into an F&M employment agreement, the officer will
agree to comply with certain noncompetition and nonsolicitation provisions. The
provisions are in effect during the term of the agreement, as well as after a
senior executive's employment is terminated, for a period of one year with
respect to the noncompetition provisions, and for a period of three years with
respect to the nonsolicitation provisions. If the
23
senior executive does not comply with these provisions, he may have to refund
the amounts paid to him during and after the breach of the provisions.
In connection with F&M's offer of an employment agreement, F&M also has
offered each of the named executive officers a change in control agreement on
terms similar to those in effect for certain of the senior executive officers of
F&M's subsidiary banks. The change in control agreements will become binding
employment contracts after a change in control (as that term is defined in the
agreements) of F&M and will provide for continued employment for three years on
terms equivalent to the terms of employment existing before the change in
control of F&M. In the event of a termination of employment during this three
year period without cause (as that term is defined in the agreements) or by the
officer for good reason (as that term is defined in the agreements) or during a
90 day period immediately following the first anniversary of the date on which
the change in control occurred, the officer will be paid in one lump sum an
amount equal to 1.5 times the sum of (a) his annual base salary, and (b) the
highest annual bonus paid or payable for the two most recently completed years.
In addition, the executive is entitled to continued employee welfare benefits
for three years after the termination date. The change in control agreement will
be entered into only if the executive officer has accepted and agreed to the
employment agreement offered by F&M.
Employee and Benefit Plans. As soon as administratively practicable
following the merger, employees of Peninsula Trust Bank and United Community
Bank who continue on as employees of F&M Bank-Atlantic will be entitled to
participate in the F&M pension, health and welfare benefit and similar plans on
the same terms and conditions as employees of F&M. These employees of Peninsula
Trust Bank and United Community Bank will receive credit for their years of
service to those banks for participation and vesting purposes only.
Material Federal Income Tax Consequences
The following is a discussion of all material federal income tax
consequences of the merger under the Internal Revenue Code to Atlantic Financial
shareholders who receive F&M common stock solely in exchange for Atlantic
Financial common stock and cash instead of fractional shares. The discussion
does not deal with all aspects of federal taxation that may be relevant to
particular Atlantic Financial shareholders. Certain tax consequences of the
merger may vary depending upon the particular circumstances of each Atlantic
Financial shareholder and other factors.
You are urged to consult with your tax advisor to determine the particular
tax consequences of the merger to you.
This summary is based on current law and the advice of LeClair Ryan, A
Professional Corporation, legal counsel to F&M. The advice in this summary is
based on, among other things, certain customary assumptions and representations
relating to certain facts and circumstances of, and the intentions of the
parties to, the merger. Neither F&M nor Atlantic Financial has requested a
ruling from the Internal Revenue Service in connection with the merger. To meet
a condition to consummation of the merger, F&M and Atlantic Financial will
receive from LeClair Ryan, an opinion as to certain federal income tax
consequences of the merger. Such opinion is not binding on the Internal Revenue
Service.
In the opinion of counsel, the merger will constitute a tax-free
reorganization under Section 368(a) of the Internal Revenue Code, if consummated
in the manner set forth in the merger agreement. Accordingly, among other
things, in the opinion of such counsel:
. the merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code;
. no gain or loss will be recognized by F&M or Atlantic Financial as a
result of the merger;
. no gain or loss will be recognized by a Atlantic Financial shareholder
to the extent he receives F&M common stock solely in exchange for his
Atlantic Financial common stock pursuant to the merger;
24
. the tax basis of the F&M common stock received by each Atlantic
Financial shareholder will be the same as the tax basis of the
Atlantic Financial common stock surrendered in exchange therefor; and
. the holding period for each share of F&M common stock received by each
Atlantic Financial shareholder in exchange for Atlantic Financial
common stock will include the period for which such shareholder held
the Atlantic Financial common stock exchanged therefor, provided such
Atlantic Financial common stock is a capital asset in the hands of
such holder at the effective date.
Any cash received by you instead of fractional shares could result in
taxable income to you. The receipt of such cash will generally be treated as a
sale or exchange of the stock resulting in capital gain or loss measured by the
difference between the cash received and an allocable portion of the basis of
the stock relinquished. The receipt of such cash may be treated as a dividend
and taxed as ordinary income in certain limited situations.
Dissenters' Rights
A shareholder of Atlantic Financial common stock who objects to the merger
and who complies with provisions of Article 15 of Title 13.1 of the Virginia
Stock Corporation Act ("Article 15") may demand the right to receive a cash
payment, if the merger is consummated, for the fair value of his or her stock
immediately before the effective date of the merger, exclusive of any
appreciation or depreciation in anticipation of the merger unless such exclusion
would be inequitable. In order to receive payment, a dissenting shareholder must
deliver to Atlantic Financial before the vote is taken at the special meeting a
written notice of intent to demand payment for his or her shares if the merger
is effectuated and must not vote his or her shares in favor of the merger. The
intent to demand payment should be delivered to Kenneth E. Smith, Executive Vice
President and Secretary, Atlantic Financial Corp, 737 J. Clyde Morris Boulevard,
Newport News, Virginia 23601.
A vote against the merger will not itself constitute written notice and a
failure to vote will not constitute a timely written notice of intent to demand
payment.
A shareholder of record of Atlantic Financial common stock may assert
dissenters' rights as to fewer than all the shares registered in his or her name
only if the shareholder dissents with respect to all shares beneficially owned
by any one person and notifies Atlantic Financial in writing of the name and
address of each person on whose behalf he asserts dissenters' rights. The rights
of such a partial dissenter are determined as if the shares as to which he
dissents and his other shares were registered in the names of different
shareholders. A beneficial shareholder of Atlantic Financial common stock may
assert dissenters' rights as to shares held on his behalf by a shareholder of
record only if:
. he submits to Atlantic Financial the record shareholder's written
consent to the dissent not later than the time when the beneficial
shareholder asserts dissenters' rights, and
. he dissents with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
Within 10 days after the effective date of the merger, Atlantic Financial
is required to deliver a notice in writing to each dissenting shareholder who
has filed an intent to demand payment and who has not voted such shares in favor
of the merger. The notice will:
. state where the demand for payment is to be sent and where and when
stock certificates will be deposited;
. supply a form for demanding payment;
. set a date by which Atlantic Financial must receive the payment
demand; and
. be accompanied by a copy of Article 15.
25
A dissenting shareholder who is sent a dissenter's notice must submit the
payment demand and deposit his or her stock certificates in accordance with the
terms of, and within the time frames set forth in, the dissenter's notice. As a
part of the payment demand, the dissenting shareholder must certify whether he
or she acquired beneficial ownership of the shares before or after the date of
the first public announcement of the terms of the proposed merger, July 6, 2000.
Atlantic Financial will specify that date in the dissenter's notice.
Except with respect to shares acquired after July 6, 2000, Atlantic
Financial will pay a dissenting shareholder the amount Atlantic Financial
estimates to be the fair value of his or her shares, plus accrued interest. This
payment will be made within 30 days of receipt of the dissenting shareholder's
payment demand. As to shares acquired after July 6, 2000, Atlantic Financial is
only obligated to estimate the fair value of the shares, plus accrued interest,
and to offer to pay this amount to the dissenting shareholder conditioned upon
the dissenting shareholder's agreement to accept it in full satisfaction of his
or her claim.
If a dissenting shareholder believes that the amount paid or offered by
Atlantic Financial is less than the fair value of his or her shares, or that the
interest due is incorrectly calculated, that dissenting shareholder may notify
Atlantic Financial of his or her own estimate of the fair value of his shares
and amount of interest due and demand payment of such estimate, less any amount
already received by the dissenting shareholder. The dissenting shareholder must
notify Atlantic Financial of the estimate and demand within 30 days after the
date Atlantic Financial makes or offers to make payment to the dissenting
shareholder.
Within 60 days after receiving the estimate and demand, Atlantic Financial
must either commence a proceeding in the appropriate circuit court to determine
the fair value of the dissenting shareholder's shares and accrued interest, or
Atlantic Financial must pay each dissenting shareholder whose demand remains
unsettled the amount demanded. If a proceeding is commenced, the court must
determine all costs of the proceeding and must assess those costs against
Atlantic Financial, except that the court may assess costs against all or some
of the dissenting shareholders to the extent the court finds that the dissenting
shareholders did not act in good faith in demanding payment of the estimate and
demand.
The above discussion is a summary of the material provisions of Article 15.
You are strongly encouraged to review carefully the full text of Article 15,
which is included as Appendix V to this proxy statement/prospectus. The
provisions of Article 15 are technical and complex, and a shareholder failing to
comply strictly with them may forfeit his or her dissenting shareholder's
rights. Any shareholder who intends to dissent from the merger should review the
full text of those provisions carefully and also should consult with his or her
attorney. No further notice of the events giving rise to dissenters' rights or
any steps associated therewith will be furnished to you, except as indicated
above or otherwise required by law.
Any dissenting shareholder who perfects his right to be paid the fair value
of his or her shares will recognize gain or loss, if any, for federal income tax
purposes upon the receipt of cash for his or her shares. The amount of gain or
loss and its character as ordinary or capital gain or loss will be determined in
accordance with applicable provisions of the Internal Revenue Code. See "--
Material Federal Income Tax Consequences."
Certain Differences in Rights of Shareholders
Both F&M and Atlantic Financial are corporations subject to the provisions
of the Virginia Stock Corporation Act. Your shareholder rights are presently
governed by Atlantic Financial's articles of incorporation and bylaws. Upon
consummation of the merger and your becoming a shareholder of F&M, your
shareholder rights will be governed by the articles of incorporation and bylaws
of F&M.
There are no material differences between the rights of a Atlantic
Financial shareholder under Atlantic Financial's articles of incorporation and
bylaws, on the one hand, and the rights of an F&M shareholder under the articles
of incorporation and bylaws of F&M, on the other hand, except as disclosed in
the section "Comparative Rights of Shareholders" on page 32.
26
Expenses of the Merger
In general, whether or not the merger is consummated, Atlantic Financial
and F&M will pay their own expenses incident to preparing, entering into and
carrying out the merger agreement, and preparing and filing the registration
statement of which this proxy statement/prospectus is a part. F&M and Atlantic
Financial will, however, share equally the expenses of printing and mailing this
proxy statement/prospectus.
In addition, if either party willfully and materially breaches the merger
agreement, that party must pay the costs associated with this transaction
incurred by the non-breaching party. If the merger agreement is terminated by
Atlantic Financial because it is not approved by Atlantic Financial
shareholders, Atlantic Financial must pay 50% of F&M's costs in this
transaction, up to $50,000.
Cautionary Statement Concerning Forward-Looking Statements
This proxy statement/prospectus, including information included or
incorporated by reference in this proxy statement/prospectus, contains certain
forward-looking statements with respect to the financial condition, results of
operations, plans, objectives, future performance and businesses of each of F&M
and Atlantic Financial. These forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among
others, the following possibilities:
. competitive pressure in the banking industry increases significantly;
. changes in the interest rate environment reduce margins;
. general economic conditions, either nationally or regionally, are less
favorable than expected, resulting in, among other things, a
deterioration in credit quality;
. expected cost savings from this merger or other previously announced
or completed mergers may not be fully realized;
. the loss of deposits, revenue or customers following this or other
previously announced or completed mergers may be greater than
anticipated;
. the costs of integrating the businesses of F&M and its merger partners
may be greater than expected;
. changes occur in the regulatory environment;
. changes occur in business conditions and inflation; and
. changes occur in the securities markets.
27
MARKET PRICES AND DIVIDENDS
Market Prices
F&M common stock is listed and traded on the NYSE under the symbol "FMN."
Atlantic Financial common stock is quoted on the Nasdaq SmallCap Market under
the symbol "AFIC."
The following tables provide the high and low closing sales prices for F&M
common stock on the NYSE and Atlantic Financial common stock on the Nasdaq
SmallCap Market for the periods indicated.
F&M
---
Closing Sales Prices
------------------------------------------------------------------------------
2000 1999 1998
---------------------- ----------------------- ------------------------
High Low High Low High Low
---- --- ---- --- ---- ---
1st Quarter............................ $ 27.25 $ 22.13 $ 30.00 $ 23.87 $ 36.25 $ 31.75
2nd Quarter............................ 24.82 21.00 33.18 23.93 34.31 32.00
3rd Quarter............................ 25.00 21.75 33.50 26.00 31.56 26.13
4th Quarter (through October 30)....... 25.18 22.56 30.12 26.50 31.69 25.06
The closing price of F&M common stock on the NYSE on July 5, 2000, the last
full trading day preceding the public announcement of the proposed merger, was
$22.375 per share. The closing price of F&M common stock on the NYSE on October
30, 2000, the latest practicable date before the date of this proxy
statement/prospectus was $25.125 per share.
Atlantic Financial
------------------
Closing Sales Prices
------------------------------------------------------------------------------
2000 1999 1998
---------------------- ----------------------- ------------------------
High Low High Low High Low
---- --- ---- --- ---- ---
1st Quarter............................ $ 15.38 $ 8.16 $ 19.00 $ 15.25 $ 23.00 $ 16.25
2nd Quarter ........................... 14.25 8.16 18.00 14.75 24.00 20.00
3rd Quarter............................ 19.50 12.63 19.00 15.50 21.50 18.00
4th Quarter (through October 30)....... 18.50 16.56 18.25 14.63 19.50 15.75
The closing price of Atlantic Financial common stock on the Nasdaq SmallCap
Market on July 5, 2000, the last full trading day preceding the public
announcement of the proposed merger, was $13.75 per share. The closing price of
Atlantic Financial common stock on the Nasdaq SmallCap Market on October 30,
2000, the latest practicable date before the date of this proxy
statement/prospectus was $18.50 per share.
As of September 30, 2000, there were 9,406 record holders of F&M common
stock. As of October 26, 2000, the record date, there were approximately 1,564
holders of record of Atlantic Financial common stock.
28
Dividends
The tables below reflect the cash dividends declared per share during each
quarter on F&M common stock and Atlantic Financial common stock for the periods
indicated. F&M or F&M Bank-Winchester has paid regular cash dividends for more
than 57 consecutive years. Atlantic Financial has paid regular cash dividends
annually since 1994 and then quarterly since 1998.
The amounts shown for F&M have not been restated and adjusted to reflect
the acquisition of The State Bank of Alleghenies on January 3, 2000, accounted
for as a pooling of interests.
F&M
---
2000 1999 1998
---- ---- ----
1st Quarter............................................ $0.235 $0.195 $0.185
2nd Quarter............................................ 0.250 0.235 0.185
3rd Quarter............................................ 0.250 0.235 0.195
4th Quarter............................................ -- 0.235 0.195
Atlantic Financial
------------------
2000 1999 1998
---- ---- ----
1st Quarter............................................ $0.11 $0.09 (1)
2nd Quarter............................................ 0.12 0.09 --
3rd Quarter............................................ 0.12 0.09 (1)
4th Quarter............................................ -- 0.11 $0.09 (1)
__________________
(1) Atlantic Financial and United Community Bankshares, Inc. merged on December
1, 1998. Prior to the merger, Atlantic Financial declared a cash dividend
for its shareholders in the amount of $0.25 per share in the fourth quarter
of 1998. In addition, United Community declared cash dividends for its
shareholders in the amounts of $0.17 and $0.18 per share in the first
quarter and third quarter, respectively, of 1998.
F&M and Atlantic Financial are legal entities separate and distinct from
their subsidiaries, and their revenues depend primarily on the payment of
dividends from their subsidiary banks. F&M's and Atlantic Financial's subsidiary
banks are subject to certain legal restrictions on the amount of dividends they
are permitted to pay to F&M and Atlantic Financial. For example, a Virginia
chartered bank, of which there are eight within the F&M system and two are under
Atlantic Financial, is prohibited from paying a dividend that would impair its
paid-in capital. In addition, the Virginia State Corporation Commission may
limit the payment by any Virginia chartered bank if it determines that the
limitation is in the public interest and is necessary to ensure the bank's
financial soundness.
Under current federal law, insured depository institutions such as F&M's
and Atlantic Financial's bank subsidiaries are prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, the institution would become "undercapitalized." Based on F&M's
and Atlantic Financial's subsidiary banks' current financial condition, F&M and
Atlantic Financial do not expect that this provision will have any impact on its
ability to obtain dividends from its insured depository institution
subsidiaries.
As a result of these legal restrictions, there can be no assurance that
dividends would be paid in the future by F&M's and Atlantic Financial's bank
subsidiaries. The final determination of the timing, amount and payment of
dividends on each of F&M common stock and Atlantic Financial common stock is at
the discretion of their respective boards of directors and will depend upon the
earnings of the bank holding company and its subsidiaries, principally its
subsidiary banks, the financial condition of the bank holding company and other
factors, including general economic conditions and applicable governmental
regulations and policies.
29
ATLANTIC FINANCIAL CORP
Business
Atlantic Financial was organized in 1989 as Peninsula Trust Bank. Atlantic
Financial now serves as the parent holding company for Peninsula Trust Bank and
United Community Bank, which together operate 15 full-service banking offices in
southeastern Virginia. Atlantic Financial also owns a 51% membership interest in
Johnson Mortgage Company, LLC, which is engaged in the mortgage brokerage
business. At September 30, 2000, Atlantic Financial employed 186 full-time and
40 part-time employees.
As of September 30, 2000, Atlantic Financial had total consolidated assets
of approximately $390.4 million, total consolidated deposits thorough its
banking subsidiaries of approximately $340.5 million, and consolidated
shareholder's equity of $45.2 million.
Additional business and financial information relating to Atlantic
Financial is included in Atlantic Financial's 1999 Annual Report to Shareholders
and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
copies of which are attached to this proxy statement/prospectus as Appendices IV
and V. The audited financial statements of Atlantic Financial as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999 are included in Atlantic Financial's 1999 Annual Report to Shareholders.
See "Where You Can Find More Information" on page 39.
Competition
In attracting deposits and making loans, Atlantic Financial encounters
competition from other institutions, including larger commercial banking
organizations, credit unions, other financial institutions and non-bank
financial service companies serving Atlantic Financial's service area.
Competitors include major financial companies whose substantially greater
resources may afford them a marketplace advantage by enabling them to maintain
numerous banking locations and mount extensive promotional and advertising
campaigns. Because of the deregulation of the financial service industry and the
absence of interest rate controls on deposits, Atlantic Financial anticipates
that it will face continuing competition from all of these institutions in the
future. Additional changes in the financial services industry, including rapid
technology changes, may act as a catalyst for further basic structural change
within the financial services industry and may result in additional competition.
Security Ownership of Management
The following table provides, as of September 30, 2000, certain information
with respect to the beneficial ownership of shares of Atlantic Financial common
stock by each director of Atlantic Financial, by certain named executive
officers of Atlantic Financial and by all directors and executive officers of
Atlantic Financial as a group. Beneficial ownership includes shares, if any,
held in the name of the spouse, minor children or other relatives of a director
living in such person's home, as well as shares, if any, held in the name of
another person under an arrangement whereby the director or executive officer
can vest title in himself at once or at some future time. No one is known to be
the beneficial owner of more than five percent of the outstanding shares of
Atlantic Financial common stock.
30
Number Percent
Name of Shares (1) of Class (%)
---- ------------- ------------
J. Philip Bain, Jr. 77,000 1.84
D. Eugene Brittle 8,664 *
Charles F. Dawson 10,962 *
William J. Farinholt 74,529 1.77
Robert D. Foster 80,842 1.93
Harry M. Healy 29,000 *
Joseph A. Lombard, Jr., DDS 53,236 1.27
Hersey M. Mason, Jr. 69,148 1.66
Wenifred O. Pearce 9,970 *
Harvey G. Pope 9,547 *
William B. Savedge 29,719 *
Kenneth E. Smith 39,560 *
Marion G. Smith 5,924 *
J. D. Spivey 6,221 *
F. Bruce Stewart 5,841 *
J. Russell West 70,492 1.68
Thomas Z. Wilke 19,440 *
All directors and executive officers as
a group (16 persons) 594,171 13.95
_____________________
* Percentage of ownership is less than one percent of the outstanding shares
of Atlantic Financial common stock.
(1) Amounts disclosed include shares of Atlantic Financial common stock
issuable upon the exercise of stock options exercisable within 60 days of
September 30, 2000.
BUSINESS OF F&M NATIONAL CORPORATION
History and Business
F&M was formed in 1969 to serve as the parent holding company of its then
sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired twenty banks, which expanded its market area and
increased its market share in Virginia, Maryland and West Virginia. F&M has
eight banking affiliates in Virginia, one bank affiliate in West Virginia and
one bank affiliate in Maryland. F&M offers a full range of banking services
principally to individuals and small and middle-market businesses in the
Shenandoah Valley, Allegheny and Bath counties, northern, central and southern
Virginia, the eastern panhandle of West Virginia and the counties of Montgomery
and Prince George's in Maryland.
F&M's subsidiary banks are community-oriented and offer services
customarily provided by full-service banks, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services and safe deposit boxes. Lending is focused on
individuals and small and middle-market businesses in the local market regions
of the subsidiary banks. F&M has consolidated the operations of the trust
departments of its subsidiary banks in Virginia in F&M Trust Company. F&M offers
insurance services through its subsidiaries, F&M-Shomo & Lineweaver and F&M-J.V.
Arthur, and offers annuities and brokerage services through F&M Financial
Services, Inc. F&M also operates F&M Mortgage Services, Inc. which engages in
residential mortgage origination and servicing.
F&M has maintained its community orientation by allowing its subsidiary
banks latitude to tailor products and services to meet community and customer
needs. While F&M has preserved the autonomy of its subsidiary banks, it has
established system-wide policies governing, among other things, lending
practices, credit analysis and approval procedures, as well as guidelines for
deposit pricing and investment portfolio management. In addition, F&M has
established a centralized loan review team that regularly performs a detailed,
on-site review
31
and analysis of each subsidiary bank's loan portfolio to ensure the consistent
application of credit policies and procedures system-wide. One or more senior
holding company officers serve on the board of directors of each subsidiary bank
to monitor operations and to serve as a liaison to F&M.
At September 30, 2000, F&M had total consolidated assets of approximately
$3.5 billion, total consolidated deposits through its banking subsidiaries of
approximately $3.0 billion and consolidated shareholders' equity of
approximately $327.2 million.
F&M's Acquisition Program
F&M has expanded its market area and increased its market share through
both internal growth and strategic acquisitions. Since 1988, F&M has acquired
approximately $1.6 billion in assets through 16 bank acquisitions.
On August 23, 2000, F&M entered into an agreement for the acquisition of
Community Bankshares of Maryland, Inc., a bank holding company headquartered
Bowie, Maryland. The acquisition of Community Bankshares of Maryland is subject
to the approval of shareholders of Community Bankshares and the appropriate
regulatory agencies and is expected to close in January 2001. The acquisition of
Community Bankshares is expected to be accounted for as a pooling of interests
for financial reporting purposes and provides for a tax-free exchange of 0.75
shares of F&M common stock for each common share of Community Bankshares of
Maryland. As of September 30, 2000, Community Bankshares had total consolidated
assets of approximately $79.1 million and total consolidated deposits through
its banking subsidiary of approximately $64.1 million. F&M has filed a
registration statement on Form S-4 to register with the Securities and Exchange
Commission the F&M common stock to be issued to Community Bankshares
shareholders in connection with that transaction. You may obtain a copy of that
filing from either F&M or the SEC. See "Where You Can Find More Information" on
page 39.
Management believes there are additional opportunities to acquire financial
institutions or to acquire assets and deposits that will allow F&M to enter new
markets or increase market share in existing markets. Management intends to
pursue acquisition opportunities in strategic markets where its managerial,
operational and capital resources will enhance the performance of acquired
institutions and may, after the date of this proxy statement/prospectus, enter
into agreements to acquire one or more financial institutions. There can be no
assurance that F&M will be able to successfully effect any additional
acquisition activity, or that any such acquisition activity will have a positive
effect on the value of shares of F&M common stock.
For additional information about F&M's business, see "Where You Can Find
More Information" on page 39.
COMPARATIVE RIGHTS OF SHAREHOLDERS
General
F&M and Atlantic Financial are corporations subject to the provisions of
the Virginia Stock Corporation Act (the "Virginia SCA"). Your rights as a
shareholder of Atlantic Financial are governed by Atlantic Financial's articles
of incorporation and bylaws and by the Virginia SCA. Upon consummation of the
merger, you will become a shareholder of F&M, and as such your shareholder
rights will then be governed by the articles of incorporation and bylaws of F&M
and by the Virginia SCA.
The following is a summary of the material differences in the rights of
shareholders of Atlantic Financial and F&M. This summary is qualified in its
entirety by reference to the articles of incorporation and bylaws of F&M and
Atlantic Financial and to the Virginia SCA.
32
Authorized Capital Stock
F&M. F&M is authorized to issue 30,900,000 shares of common stock, par
value $2.00 per share, of which 24,759,882 shares were issued and outstanding as
of September 30, 2000, and 5,000,000 shares of serial preferred stock, without
par value, of which no shares were issued and outstanding as of September 30,
2000. F&M's articles of incorporation authorize the F&M board, without
shareholder approval, to fix the preferences, limitations and relative rights of
the preferred stock and to establish series of such preferred stock and
determine the variations between each series. If any shares of preferred stock
were issued, the rights of holders of F&M common stock would be subject to the
rights and preferences conferred to holders of such preferred stock. See
"Description of F&M Capital Stock" on page 37 for additional information.
Atlantic Financial. Atlantic Financial is authorized to issue
20,000,000 shares of common stock, par value $5.00 per share, of which 4,178,785
shares were issued and outstanding as of September 30, 2000, and 1,000,000
shares of preferred stock, par value $1.00 per share, none of which have been
issued.
Dividend Rights
The holders of F&M and Atlantic Financial common stock are entitled to
share ratably in dividends when and as declared by their respective board of
directors out of legally available funds. One of the principal sources of income
to F&M and Atlantic Financial is dividends from their subsidiary banks. F&M's
and Atlantic Financial's articles of incorporation permit their boards to issue
preferred stock with terms set by their boards, which terms may include the
right to receive dividends ahead of the holders of their common stock. Neither
F&M nor Atlantic Financial has shares of preferred stock presently outstanding.
For a description of certain restrictions on the payment of dividends
by banks and bank holding companies, see "Market Prices and Dividends" on page
28.
Voting Rights
The holders of both F&M and Atlantic Financial common stock have one
vote for each share held on any matter presented for consideration at a
shareholder meeting. Neither the holders of F&M nor Atlantic Financial common
stock are entitled to cumulative voting in the election of directors.
Directors and Classes of Directors
F&M. All of F&M's directors are elected each year. Currently, the F&M
board consists of 10 directors. There is no provision relating to the removal of
directors in either F&M's or Atlantic Financial's articles of incorporation.
Accordingly, the removal of directors is governed by the Virginia SCA which
provides that shareholders may remove directors with or without cause if the
number of votes cast to remove him constitutes a majority of the outstanding
shares of common stock.
Atlantic Financial. The Atlantic Financial board is divided into three
classes, with directors serving staggered three-year terms. Currently, the
Atlantic Financial board consists of 14 directors. Under Atlantic Financial's
articles of incorporation, directors may be removed, with or without cause, only
by the affirmative vote of the holders of more than of 70% of the issued and
outstanding shares of common stock.
Anti-Takeover Provisions
Certain provisions of the Virginia SCA and the articles of
incorporation and bylaws of F&M and Atlantic Financial may discourage an attempt
to acquire control of F&M or Atlantic Financial that a majority of either
corporation's shareholders determined was in their best interests. These
provisions also may render the removal of one or all directors more difficult or
deter or delay corporate changes of control that the F&M board or the Atlantic
Financial board did not approve.
33
Authorized Preferred Stock. The articles of incorporation of both F&M
and Atlantic Financial authorize the issuance of preferred stock. The F&M and
Atlantic Financial boards may, subject to applicable law and the rules of the
NYSE, authorize the issuance of preferred stock at such times, for such purposes
and for such consideration as it may deem advisable without further shareholder
approval. The issuance of preferred stock under certain circumstances may have
the effect of discouraging an attempt by a third party to acquire control of F&M
or Atlantic Financial by, for example, authorizing the issuance of a series of
preferred stock with rights and preferences designed to impede the proposed
transaction.
Supermajority Voting Provisions. The Virginia SCA provides that,
unless a corporation's articles of incorporation provide for a higher or lower
vote, certain significant corporate actions must be approved by the affirmative
vote of the holders of more than two-thirds of the votes entitled to be cast on
the matter. Corporate actions requiring a two-thirds vote include:
. amendments to a corporation's articles of incorporation,
. adoption of plans of merger or exchange,
. sales of all or substantially all of a corporation's assets other
than in the ordinary course of business and
. adoption of plans of dissolution.
The Virginia SCA provides that a corporation's articles may either increase the
vote required to approve those actions or may decrease the required vote to not
less than a majority of the votes entitled to be cast.
The articles of incorporation of each of F&M and Atlantic Financial
provide that the actions set out above must be approved by a vote of a majority
of all votes entitled to be cast on such transactions by each voting group
entitled to vote on the transaction, provided that the transaction has been
approved and recommended by at least two-thirds of the directors in office at
the time of such approval and recommendation. If the transaction is not so
approved and recommended, then the transaction must be approved by the vote of
80% or more of all votes entitled to be cast on such transactions by each voting
group entitled to vote on the transaction.
These provisions could tend to make the acquisition of either F&M or
Atlantic Financial more difficult to accomplish without the cooperation or
favorable recommendation of either the F&M or Atlantic Financial board, as the
case may be.
Shareholder Meetings. Shareholders of both F&M may not request that a
special meeting of shareholders be called, while shareholders owning 25% or more
of the issued and outstanding shares of Atlantic Financial may call a special
meeting of shareholders.
Virginia Anti-Takeover Statutes. Virginia has two anti-takeover
statutes in force, the Affiliated Transaction Statute and the Control Share
Acquisitions Statute.
Affiliated Transactions. The Virginia SCA contains provisions
governing "affiliated transactions." These include various transactions such as
mergers, share exchanges, sales, leases, or other dispositions of material
assets, issuances of securities, dissolutions, and similar transactions with an
"interested shareholder." An interested shareholder is generally the beneficial
owner of more than 10% of any class of a corporation's outstanding voting
shares. During the three years following the date a shareholder becomes an
interested shareholder, any affiliated transaction with the interested
shareholder must be approved by both a majority of the "disinterested directors"
(those directors who were directors before the interested shareholder became an
interested shareholder or who were recommended for election by a majority of
disinterested directors) and by the affirmative vote of the holders of two-
thirds of the corporation's voting shares other than shares beneficially owned
by the interested shareholder. These requirements do not apply to affiliated
transactions if, among other things, a majority of the disinterested directors
approve the interested shareholder's acquisition of voting shares making such a
person an interested shareholder
34
before such acquisition. Beginning three years after the shareholder becomes an
interested shareholder, the corporation may engage in an affiliated transaction
with the interested shareholder if:
. the transaction is approved by the holders of two-thirds of the
corporation's voting shares, other than shares beneficially owned by
the interested shareholder,
. the affiliated transaction has been approved by a majority of the
disinterested directors, or
. subject to certain additional requirements, in the affiliated
transaction the holders of each class or series of voting shares
will receive consideration meeting specified fair price and other
requirements designed to ensure that all shareholders receive fair
and equivalent consideration, regardless of when they tendered
their shares.
Control Share Acquisitions. Under the Virginia SCA's control share
acquisitions law, voting rights of shares of stock of a Virginia corporation
acquired by an acquiring person or other entity at ownership levels of 20%, 33
1/3%, and 50% of the outstanding shares may, under certain circumstances, be
denied. The voting rights may be denied:
. unless conferred by a special shareholder vote of a majority of
the outstanding shares entitled to vote for directors, other than
shares held by the acquiring person and officers and directors of
the corporation, or
. among other exceptions, such acquisition of shares is made
pursuant to a merger agreement with the corporation or the
corporation's articles of incorporation or by-laws permit the
acquisition of such shares before the acquiring person's
acquisition thereof.
If authorized in the corporation's articles of incorporation or by-laws,
the statute also permits the corporation to redeem the acquired shares at the
average per share price paid for them if the voting rights are not approved or
if the acquiring person does not file a "control share acquisition statement"
with the corporation within sixty days of the last acquisition of such shares.
If voting rights are approved for control shares comprising more than 50% of the
corporation's outstanding stock, objecting shareholders may have the right to
have their shares repurchased by the corporation for "fair value."
The provisions of the Affiliated Transactions Statute and the Control Share
Acquisition Statute are only applicable to public corporations that have more
than 300 shareholders. Corporations may provide in their articles of
incorporation or bylaws to opt-out of the Control Share Acquisition Statute.
Atlantic Financial has opted out of the statute, but F&M has not.
Rights of Dissent and Appraisal
Under the Virginia SCA, a shareholder of a Virginia corporation is
entitled to dissent from, and to receive payment of the "fair value" of his or
her shares in the event of, any of the following corporation transactions:
. completion of a merger to which the corporation is a party, provided
that either (a) shareholder approval is required for the merger
pursuant to the Virginia SCA or the corporation's articles of
incorporation and the shareholder is entitled to vote or (b) the
corporation is a subsidiary being merged with its parent pursuant to a
particular Virginia SCA provision for such transactions;
. completion of a plan of merger in which the corporation is the party
whose shares will be acquired, provided that the shareholder is
entitled to vote on the plan;
. completion of the sale or exchange of all or substantially all the
property of the corporation, if the shareholder is entitled to vote on
the transaction or the transaction is in furtherance of a dissolution
on which the shareholder is entitled to vote, and provided that the
transaction is neither (a) a
35
transaction pursuant to court order nor (b) a transaction for cash
pursuant to a plan by which all or substantially all of the net
proceeds will be distributed to shareholders within one year; or
. any corporate action taken pursuant to a shareholder vote, to the
extent that the articles of incorporation, the bylaws, or a resolution
of the board of directors provides that voting and nonvoting
shareholders are entitled to dissent and obtain payment for their
shares.
With respect to corporations such as F&M that have a class or series of
shares either listed on a national securities exchange or the Nasdaq National
Market or held by more than 2,000 record shareholders, dissenters' rights are
not available to the holders of such shares by reason of a merger, share
exchange or sale or exchange of property unless:
. unlike the F&M articles, the articles of incorporation of the
corporation issuing such shares provided otherwise;
. in the case of a merger or share exchange, unlike the merger, the
holders of such shares are required to accept anything other than
(a) cash, (b) shares in another corporation that are either listed
on a national securities exchange or held by more than 2,000
record shareholders or (c) a combination of cash and such shares;
or
. the transaction is with a shareholder who owns more than 10 percent of
a class of shares and has not been approved by a majority of the
directors unaffiliated with such shareholder.
A shareholder who has the right to object to a transaction and receive
payment of the "fair value" of his or her shares must follow specific procedural
requirements as set forth in the Virginia SCA in order to maintain such right
and obtain such payment.
Holders of Atlantic Financial common stock have appraisal rights in
connection with the merger.
Director and Officer Exculpation
The Virginia SCA provides that in any proceeding brought by or in the right
of a corporation or brought by or on behalf of shareholders of the corporation,
the damages assessed against an officer or director arising out of a single
transaction, occurrence or course of conduct may not exceed the lesser of (a)
the monetary amount, including the elimination of liability, specified in the
articles of incorporation or, if approved by the shareholders, in the bylaws as
a limitation on or elimination of the liability of the officer or director, or
(b) the greater of (1) $100,000 or (2) the amount of cash compensation received
by the officer or director from the corporation during the twelve months
immediately preceding the act or omission for which liability was imposed. The
liability of an officer or director is not limited under the Virginia SCA or a
corporation's articles of incorporation and bylaws if the officer or director
engaged in willful misconduct or a knowing violation of the criminal law or of
any federal or state securities law.
The articles of incorporation of F&M provide that to the full extent that
the Virginia SCA permits the limitation or elimination of the liability of
directors or officers, a director or officer of F&M is not be liable to F&M or
its shareholders for monetary damages in excess of one dollar. There is a
similar provision in the articles of incorporation of Atlantic Financial.
Indemnification
The articles of incorporation of F&M provide that to the full extent
permitted by the Virginia SCA and any other applicable law, F&M is required to
indemnify a director or officer of F&M who is or was a party to any proceeding
by reason of the fact that he is or was such a director or officer or is or was
serving at the request of the corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. There is a similar provision in the
articles of incorporation of Atlantic Financial.
36
Each of the F&M and Atlantic Financial boards of directors is
empowered, by majority vote of a quorum of disinterested directors, to contract
in advance to indemnify any director or officer.
DESCRIPTION OF F&M CAPITAL STOCK
F&M is authorized to issue 30,900,000 shares of common stock, par
value $2.00 per share, and 5,000,000 shares of serial preferred stock, without
par value, which may be issued in series with such powers, designations, and
rights as may be established from time to time by its board of directors. On
September 30, 2000, F&M had issued and outstanding 24,759,882 shares of F&M
common stock held by 9,406 shareholders of record. All outstanding shares of F&M
common stock are fully paid and nonassessable. No shares of preferred stock have
been issued.
Common Stock
Holders of shares of F&M common stock are entitled to receive
dividends when and as declared by the board of directors out of funds legally
available therefor. F&M's ability to pay dividends is dependent upon its
earnings and financial condition and certain legal requirements. Specifically,
the Federal Reserve has stated that bank holding companies should not pay
dividends except out of current earnings and unless the prospective rate of
earnings retention by the company appears consistent with its capital needs,
asset quality and overall financial condition. In addition, Virginia law
precludes any distribution to shareholders if, after giving it effect, (a) F&M
would not be able to pay its debts as they become due in the usual course of
business, or (b) F&M's total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if F&M were to be dissolved at
the time of the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the distribution. Upon the liquidation, dissolution or winding up of
F&M, whether voluntary or involuntary, holders of F&M common stock are entitled
to share ratably, after satisfaction in full of all liabilities, in all
remaining assets of F&M available for distribution. The dividend and liquidation
rights of F&M common stock are subject to the rights of any preferred stock that
may be issued and outstanding.
Holders of F&M common stock are entitled to one vote per share on all
matters submitted to shareholders. There are no cumulative voting rights in the
election of directors or preemptive rights to purchase additional shares of any
class of F&M's capital stock. Holders of F&M common stock have no conversion or
redemption rights. The shares of F&M common stock presently outstanding are, and
those shares of F&M common stock to be issued in connection with the merger will
be when issued, fully paid and nonassessable.
Preferred Stock
The board of directors of F&M is empowered to authorize the issuance,
in one or more series, of shares of preferred stock at such times, for such
purposes and for such consideration as it may deem advisable without shareholder
approval. The F&M board is also authorized to fix the designations, voting,
conversion, preference and other relative rights, qualifications and limitations
of any such series of preferred stock.
The F&M board of directors, without shareholder approval, may
authorize the issuance of one or more series of preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of F&M common stock and, under certain circumstances, discourage an attempt by
others to gain control of F&M.
The creation and issuance of any series of preferred stock, and the
relative rights, designations and preferences of such series, if and when
established, will depend upon, among other things, the future capital needs of
F&M, then existing market conditions and other factors that, in the judgment of
the F&M board, might warrant the issuance of preferred stock.
37
LEGAL MATTERS
The validity of the shares of F&M common stock to be issued in
connection with the merger passed upon for F&M by LeClair Ryan, A Professional
Corporation, Richmond, Virginia. LeClair Ryan also will deliver an opinion to
F&M and Atlantic Financial concerning certain federal income tax consequences of
the merger. See "The Merger -- Material Federal Income Tax Consequences" on page
24.
Certain matters relating to the merger will be passed upon for
Atlantic Financial by Williams Mullen Clark & Dobbins, Richmond, Virginia.
EXPERTS
The consolidated financial statements of F&M incorporated in this
proxy statement/prospectus by reference to F&M's Annual Report on Form 10-K for
the year ended December 31, 1999 have been so incorporated in reliance upon the
report of Yount, Hyde & Barbour, P.C., independent certified public accountants,
incorporated by reference herein, and upon the authority of such firm as experts
in auditing and accounting.
The consolidated financial statements of Atlantic Financial
incorporated in this proxy statement/prospectus by reference to Atlantic
Financial's 1999 Annual Report to Shareholders and included as Appendix IV have
been so incorporated in reliance upon the report of Yount, Hyde & Barbour, P.C.,
independent certified public accountants, incorporated by reference herein, and
upon the authority of such firm as experts in auditing and accounting.
OTHER MATTERS
The Atlantic Financial board does not intend to bring any matter
before the special meeting other than as specifically set forth in the notice of
special meeting of shareholders, nor does it know of any matter to be brought
before the special meeting by others. If, however, any other matters properly
come before the special meeting, it is the intention of each of the proxyholders
to vote such proxy in accordance with the decision of a majority of the Atlantic
Financial board of directors.
SHAREHOLDER PROPOSALS
Under the regulations of the Securities and Exchange Commission, any
shareholder desiring to make a proposal to be acted upon at the 2001 annual
meeting of shareholders must cause such proposal to be received, in proper form,
at Atlantic Financial's principal executive offices at 737 J. Clyde Morris
Boulevard, Newport News, Virginia 23601, no later than December 1, 2000, in
order for the proposal to be considered for inclusion in Atlantic Financial's
proxy statement for that meeting. In the event that the merger is not completed,
Atlantic Financial presently anticipates holding the 2001 annual meeting of
shareholders on April 24, 2001.
Atlantic Financial's bylaws also prescribe the procedure a shareholder
must follow to nominate directors or to bring other business before
shareholders' meetings. For a shareholder to nominate a candidate for director
at the 2001 annual meeting of shareholders, notice of nomination must be
received by the Secretary of Atlantic Financial not less than 60 days and not
more than 90 days prior to the date of the 2001 annual meeting. The notice must
describe various matters regarding the nominee and the shareholder giving the
notice. For a shareholder to bring other business before the 2001 annual meeting
of shareholders, notice must be received by the Secretary of Atlantic Financial
not less than 60 days and not more than 90 days prior to the date of the 2001
annual meeting. The notice must include a description of the proposed business,
the reasons therefor, and other specified matters. Any shareholder may obtain a
copy of Atlantic Financial's bylaws, without charge, upon written request to the
Secretary of Atlantic Financial. Based upon an anticipated date of April 24,
2001 for the 2001 annual meeting of shareholders, Atlantic Financial must
receive any notice of nomination or other business no later than February 23,
2001 and no earlier than January 24, 2001.
38
WHERE YOU CAN FIND MORE INFORMATION
F&M and Atlantic Financial file reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information that F&M and Atlantic Financial
file at the SEC's public reference rooms in Washington, D.C., New York, New York
and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Information on F&M and Atlantic
Financial is also available to the public through the SEC's website at
"http://www.sec.gov." Reports, proxy statements and other information about F&M
and Atlantic Financial are also available to the public from commercial document
retrieval services and, for F&M, also should be available for inspection at the
offices of the New York Stock Exchange.
F&M has filed a registration statement on Form S-4 to register with
the SEC the shares of F&M common stock to be issued to you in the merger. This
document is a part of the registration statement and constitutes a prospectus of
F&M and a proxy statement of Atlantic Financial for the special meeting. As
allowed by SEC rules, this document does not contain all the information that
shareholders can find in the registration statement or the exhibits to the
registration statement.
The SEC allows F&M and Atlantic Financial to "incorporate by
reference" information into this proxy statement/prospectus, which means that
the companies can disclose important information to you by referring you to
another document filed separately with the SEC. The information incorporated by
reference is deemed to be a part of this proxy statement/prospectus, except for
any information superseded by information contained directly in this proxy
statement/prospectus.
This proxy statement/prospectus incorporates by reference the
documents set forth below that F&M and Atlantic Financial have previously filed
with the SEC. These documents contain important business information about F&M
and Atlantic Financial.
F&M's SEC Filings (File No. 0-05929) Period
Annual Report on Form 10-K......................................... Year ended December 31, 1999
Quarterly Reports on Form 10-Q..................................... Quarters ended March 31 and June 30, 2000
Current Reports on Form 8-K........................................ Dated January 3, January 13, July 12, and
August 23, 2000
Atlantic Financial's SEC Filings
(File No. 0-21285) Period
Annual Report on Form 10-KSB....................................... Year ended December 31, 1999
Quarterly Reports on Form 10-Q..................................... Quarters ended March 31 and June 30, 2000
F&M and Atlantic Financial also incorporate by reference additional
documents that either may file with the SEC between the date of this document
and the date of the special meeting. These include periodic reports, such as
annual reports, quarterly reports and current reports, as well as proxy
statements.
F&M has supplied all information contained or incorporated by
reference in this document relating to F&M and Atlantic Financial has supplied
all such information relating to Atlantic Financial.
Atlantic Financial may have sent you some of the documents
incorporated by reference by Atlantic Financial, but you can obtain any of them
through Atlantic Financial or the SEC or the SEC's
39
website stated above. Documents incorporated by reference by F&M and Atlantic
Financial are available through the SEC or the SEC's website or from F&M without
charge, excluding all exhibits unless specifically incorporated by reference as
an exhibit to this document. You may obtain documents incorporated by reference
in this document by requesting them in writing or by telephone from F&M or
Atlantic Financial at the following addresses:
F&M NATIONAL CORPORATION
P. O. Box 2800
9 Court Square
Winchester, Virginia 22604
Telephone: (540) 665-4240
Attention: Secretary
ATLANTIC FINANCIAL CORP
737 J. Clyde Morris Boulevard
Newport News, Virginia 23601
Telephone: (757) 595-7020
Attention: Secretary
If you would like to request documents from either F&M or Atlantic
Financial, please do so by December 8, 2000 in order to receive timely delivery
of the documents before the special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote your shares at the special
meeting. F&M and Atlantic Financial have not authorized anyone to provide you
with information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated October 31, 2000.
You should not assume that the information contained in this proxy
statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this proxy statement/prospectus to shareholders nor the
issuance of F&M common stock in the merger creates any implication to the
contrary.
40
Appendix I
========================
Agreement and Plan of Reorganization
and
Plan of Merger
========================
TABLE OF CONTENTS
Page
----
ARTICLE 1. THE MERGER AND RELATED MATTERS................................................. I-1
1.1 The Merger........................................................................ I-1
1.2 Conversion of AFC Stock........................................................... I-1
1.3 Board of Directors of AFC Subsidiaries; Officers and Employees.................... I-2
1.4 AFC Stock Options................................................................. I-2
1.5 Closing; The Effective Date....................................................... I-3
1.6 Articles of Incorporation and Bylaws.............................................. I-3
1.7 Merger of Subsidiaries............................................................ I-3
1.8 Dissenting Shares................................................................. I-3
1.9 Definitions....................................................................... I-3
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF AFC.......................................... I-4
2.1 Organization, Standing and Power of AFC........................................... I-4
2.2 Organization, Standing and Power of the AFC Subsidiaries.......................... I-4
2.3 Authorized and Effective Agreements............................................... I-5
2.4 Capital Structure................................................................. I-5
2.5 Rights............................................................................ I-5
2.6 Financial Statements; Books and Records; Minute Books............................. I-6
2.7 Absence of Material Changes and Events............................................ I-6
2.8 Absence of Undisclosed Liabilities................................................ I-6
2.9 Legal Proceedings; Compliance with Laws........................................... I-7
2.10 Tax Matters....................................................................... I-7
2.11 Property.......................................................................... I-7
2.12 Employee Benefit Plans............................................................ I-8
2.13 Insurance......................................................................... I-9
2.14 Loans; Allowance for Loan Losses.................................................. I-9
2.15 Environmental Matters............................................................. I-10
2.16 Takeover Laws..................................................................... I-11
2.17 Brokers........................................................................... I-11
2.18 Securities Reports................................................................ I-11
2.19 Tax Treatment; Accounting Treatment............................................... I-12
2.20 Statements True and Correct....................................................... I-12
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF F&M.......................................... I-12
3.1 Organization, Standing and Power.................................................. I-12
3.2 Organization, Standing and Power of F&M Subsidiaries.............................. I-12
3.3 Authorized and Effective Agreement................................................ I-13
3.4 Capital Structure................................................................. I-13
3.5 Financial Statements; Books and Records; Minute Books............................. I-13
3.6 Absence of Material Changes or Events............................................. I-14
3.7 Absence of Undisclosed Liabilities................................................ I-14
-i-
Page
----
3.8 Legal Proceedings; Compliance with Laws........................................... I-14
3.9 Tax Matters....................................................................... I-14
3.10 Employee Benefit Plans............................................................ I-15
3.11 Insurance......................................................................... I-15
3.12 Allowance for Loan Losses......................................................... I-15
3.13 Environmental Matters............................................................. I-15
3.14 Securities Reports................................................................ I-16
3.15 Tax Treatment; Accounting Treatment............................................... I-16
3.16 Statements True and Correct....................................................... I-16
ARTICLE 4. COVENANTS AND AGREEMENTS....................................................... I-16
4.1 Reasonable Best Efforts........................................................... I-16
4.2 Access to Information; Notice of Certain Matters, Confidentiality................. I-16
4.3 Registration Statement; Shareholder Approval...................................... I-17
4.4 Operation of the Business of AFC.................................................. I-18
4.5 Operation of the Business of F&M.................................................. I-19
4.6 Dividends......................................................................... I-19
4.7 No Solicitation of Other Offers................................................... I-19
4.8 Regulatory Filings................................................................ I-20
4.9 Public Announcements.............................................................. I-20
4.10 Accounting Treatment.............................................................. I-20
4.11 Affiliate Agreements.............................................................. I-20
4.12 Benefit Plans; Certain Officer Agreements......................................... I-20
4.13 NYSE Listing...................................................................... I-21
4.14 Indemnification................................................................... I-21
4.15 Stock Option Agreement............................................................ I-21
ARTICLE 5. CONDITIONS TO THE MERGER....................................................... I-21
5.1 General Conditions................................................................ I-21
5.2 Conditions to Obligations of F&M.................................................. I-22
5.3 Conditions to Obligations of AFC.................................................. I-23
ARTICLE 6. TERMINATION.................................................................... I-24
6.1 Termination....................................................................... I-24
6.2 Effect of Termination............................................................. I-25
6.3 Survival of Representations, Warranties and Covenants............................. I-25
6.4 Fees and Expenses................................................................. I-25
ARTICLE 7. GENERAL PROVISIONS............................................................. I-26
7.1 Entire Agreement.................................................................. I-26
7.2 Binding Effect; No Third-Party Rights............................................. I-26
-ii-
Page
----
7.3 Waiver and Amendment.............................................................. I-26
7.4 Governing Law..................................................................... I-26
7.5 Notices........................................................................... I-26
7.6 Counterparts...................................................................... I-27
7.7 Severability...................................................................... I-27
EXHIBIT A -- Plan of Merger
-iii-
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of July 5, 2000, by and between F&M NATIONAL CORPORATION, a
Virginia corporation ("F&M"), and ATLANTIC FINANCIAL CORP., a Virginia
corporation ("AFC").
WITNESSETH:
WHEREAS, the respective Boards of Directors of F&M and AFC have approved
the affiliation of their companies through the merger of AFC with and into F&M
pursuant to and subject to the terms and conditions of this Agreement and the
Plan of Merger in the form attached hereto as Exhibit A (the "Plan of Merger");
and
WHEREAS, the parties desire to provide for certain conditions,
representations, warranties and agreements in connection with the transactions
contemplated hereby.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements set forth herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE 1
The Merger and Related Matters
1.1 The Merger
At the Effective Date, as defined in Section 1.5 hereof, AFC shall be
merged with and into F&M pursuant to the Plan of Merger attached hereto as
Exhibit A and made a part hereof (the "Merger"). The separate corporate
existence of AFC shall thereupon cease, and F&M will survive and continue to
exist as a Virginia corporation. From and after the Effective Date, the Merger
shall have the effect set forth in Section 13.1-721 of the Virginia Stock
Corporation Act (the "VSCA").
1.2 Conversion of AFC Stock
(a) At the Effective Date, by virtue of the Merger and without any action
on the part of the holders thereof, each share of common stock, par value $5.00
per share, of AFC ("AFC Common Stock") issued and outstanding immediately prior
to the Effective Date (other than Dissenting Shares as defined in Section 1.8)
shall cease to be outstanding and shall be converted into and exchanged for
0.753 shares of common stock, par value $2.00 per share, of F&M ("F&M Common
Stock") pursuant to the terms and conditions set forth in this Agreement and the
Plan of Merger (the "Exchange Ratio").
I-1
(b) F&M will issue cash in lieu of fractional shares to the holders of AFC
Common Stock on the basis of the Average Closing Price of F&M Common Stock. As
used herein, "Average Closing Price" shall mean the average closing price of F&M
Common Stock as reported by the New York Stock Exchange (the "NYSE") Composite
Transactions reporting system for each of the ten consecutive NYSE trading days
ending on the fifth trading day prior to the Effective Date.
(c) In the event F&M changes (or establishes a record date for changing)
the number of shares of F&M Common Stock issued and outstanding prior to the
Effective Date as a result of a stock split, stock dividend, recapitalization or
similar transaction with respect to the outstanding F&M Common Stock and the
record date therefor shall be prior to the Effective Date, appropriate and
proportional adjustments will be made to the Exchange Ratio.
1.3 Board of Directors of AFC Subsidiaries; Officers and Employees
(a) Upon consummation of the Merger, F&M shall cause one member of the
Board of Directors of AFC, designated by the Board of Directors of AFC prior to
the Effective Date and subject to the approval of F&M, to become a member of the
Board of Directors of F&M.
(b) At the Effective Date, the Board of Directors of the surviving
corporation in the merger of Peninsula Bank and Trust, Incorporated ("Peninsula
Trust") and United Community Bank ("UCB"), each a Virginia corporation and
subsidiary of AFC (as existing on and after the effective date of such merger,
the "Continuing Bank"), as contemplated by Section 1.7 hereof, shall consist of
all the current directors of AFC. All current directors of Peninsula Trust and
UCB as of the date hereof will be offered a position on the Continuing Bank's
Advisory Board.
(c) The officers and employees of the Continuing Bank will be approved by
F&M prior to the Merger.
1.4 AFC Stock Options
From and after the Effective Date, all employee stock options to purchase
shares of AFC Common Stock (each, a "AFC Stock Option"), that are then
outstanding and unexercised, shall be converted into and become options to
purchase shares of F&M Common Stock, and F&M shall assume each such AFC Stock
Option in accordance with the terms of the plan and agreement by which it is
evidenced; provided, however, that from and after the Effective Date (i) each
such AFC Stock Option assumed by F&M may be exercised solely to purchase shares
of F&M Common Stock, (ii) the number of shares of F&M Common Stock purchasable
upon exercise of such AFC Stock Option shall be equal to the number of shares of
AFC Common Stock that were purchasable under such AFC Stock Option immediately
prior to the Effective Date multiplied by the Exchange Ratio and rounding down
to the nearest whole share, and (iii) the per share exercise price under each
such AFC Stock Option shall be adjusted by dividing the per share exercise price
of each such AFC Stock Option by the Exchange Ratio, and rounding up to the
nearest cent. The terms of each AFC Stock Option shall, in accordance with its
terms, be subject to further adjustment as appropriate to reflect any stock
split, stock dividend,
I-2
recapitalization or other similar transaction with respect to F&M Common Stock
on or subsequent to the Effective Date. Notwithstanding the foregoing, each AFC
Stock Option which is intended to be an "incentive stock option" (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")) shall
be adjusted in accordance with the requirements of Section 424 of the Code.
1.5 Closing; The Effective Date
The Merger shall become effective on the date and at the time shown on the
Certificate of Merger issued by the Virginia State Corporation Commission
effecting the Merger (the "Effective Date"). Subject to the satisfaction or
waiver of the conditions set forth in Article V, the parties shall use their
reasonable best efforts to cause the Effective Date to occur on or before
January 2, 2001 or on such other date as the parties may agree in writing. All
documents required by this Agreement to be delivered at or prior to the
Effective Date will exchanged by the parties at the closing of the Merger (the
"Merger Closing"), which shall be held on or before the Effective Date. At or
after the Merger Closing, F&M and AFC shall execute and deliver to the Virginia
State Corporation Commission Articles of Merger containing the Plan of Merger.
1.6 Articles of Incorporation and Bylaws
The articles of incorporation and by-laws of F&M immediately after the
Merger shall be those of F&M as in effect immediately prior to the Effective
Date.
1.7 Merger of Subsidiaries
AFC shall take such actions, and shall cause Peninsula Trust and UCB to
take such actions, as may be required in order to effect, prior to the Effective
Time, the merger of UCB with and into Peninsula Trust or, in the alternative,
Peninsula Trust with and into UCB. The name of the Continuing Bank will be "F&M
Bank-Atlantic". In the event that any such actions shall be taken and the Merger
shall not be consummated for any reason other than a breach of this Agreement by
AFC, F&M shall reimburse AFC for all legal and regulatory costs incurred by AFC
with respect to such actions.
1.8 Dissenting Shares
Shareholders of AFC shall have the right to demand and receive payment of
the fair value of their shares of AFC Common Stock pursuant to the provisions of
VSCA Section 13.1-729 et seq. (the "Dissenting Shares").
1.9 Definitions
Any term defined in this Agreement and the Plan of Merger shall have the
meaning ascribed to it for purposes of this Agreement. In addition:
I-3
(a) The term "Knowledge" means the knowledge, after due inquiry, of any
"Executive Officer" of such party, as such term is defined in Regulation O (12
C.F.R. 215).
(b) The term "Material Adverse Effect" means, with respect to a party, any
effect that (i) has or is reasonably likely to have a material and adverse
effect upon the financial position, results of operations or business of the
party and its subsidiaries, taken as a whole, or (ii) would materially impair
the party's ability to perform its obligations under this Agreement or otherwise
materially threaten or materially impede the consummation of the Merger;
provided that Material Adverse Effect shall not be deemed to include the impact
of (a) changes in banking and similar laws of general applicability or
interpretations thereof by courts or governmental authorities, or (b) changes in
generally accepted accounting principles or regulatory requirements applicable
to financial institutions.
(c) The term "Previously Disclosed" shall mean information set forth in a
schedule (a "Disclosure Schedule", which shall be arranged in sections
corresponding to the sections of this Agreement) from one party to the other
party delivered and dated not later than 5:00 p.m. on July 24, 2000, setting
forth, among other things, items the disclosure of which is necessary or
appropriate in relation to any or all of such party's representations and
warranties and covenants and agreements. Any matter included, whether aggregated
or not, in the AFC Financial Statements or the F&M Financial Statements, as the
case may be, shall be deemed to be Previously Disclosed.
ARTICLE 2
Representations and Warranties of AFC
AFC represents and warrants to F&M as follows:
2.1 Organization, Standing and Power of AFC
AFC is a Virginia corporation duly organized, validly existing and in good
standing under the laws of Virginia. AFC has the corporate power and authority
to carry on its business in Virginia as now conducted and to own and operate its
assets, properties and business; and AFC has the corporate power and authority
to execute, deliver and perform its obligations under this Agreement and the
Stock Option Agreement of even date herewith by and between AFC and F&M, a copy
of which is attached hereto as Exhibit B (the "Option Agreement"), and to
consummate the transactions contemplated hereby and thereby. AFC is duly
registered as a bank holding company under the Bank Holding Company Act of 1956.
2.2 Organization, Standing and Power of the AFC Subsidiaries
Each subsidiary of AFC is identified on its Disclosure Schedule (the "AFC
Subsidiaries" and, collectively with AFC, the "AFC Companies") is a duly
organized corporation, validly existing and in good standing under applicable
laws. Each AFC Subsidiary (i) has full corporate power and authority to carry on
its business as now conducted and (ii) is duly qualified to do business in the
states where its ownership or leasing of property or the conduct of its business
I-4
requires such qualification and where the failure to so qualify would have a
Material Adverse Effect on AFC on a consolidated basis. The outstanding shares
of capital stock of each of the AFC Subsidiaries are validly issued and
outstanding, fully paid and nonassessable and all such shares are directly or
indirectly owned by AFC free and clear of all liens, claims and encumbrances or
preemptive rights of any person.
2.3 Authorized and Effective Agreements
(a) Subject to receipt of the approval of the shareholders of AFC of this
Agreement and the Plan of Merger, this Agreement, the Plan of Merger and the
Option Agreement and the transactions contemplated hereby and thereby have been
authorized by all necessary corporate action on the part of AFC on or prior to
the date hereof. This Agreement, the Plan of Merger and the Option Agreement are
valid and legally binding obligations of AFC, enforceable against AFC in
accordance with their respective terms (except as enforceability may be limited
by applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws affecting the enforcement of rights of creditors or
by general principles of equity).
(b) Neither the execution and delivery of this Agreement, the Plan of
Merger and the Option Agreement, nor the consummation of the transactions
contemplated herein or therein, nor compliance by AFC with any of the provisions
hereof or thereof will: (i) conflict with or result in a breach of any provision
of the Articles of Incorporation or Bylaws of AFC; (ii) except as Previously
----------
Disclosed in its Disclosure Schedule, constitute or result in the breach of any
- ---------
term, condition or provision of, or constitute a default under, or give rise to
any right of termination, cancellation or acceleration with respect to, or
result in the creation of any lien, charge or encumbrance upon, any property or
asset of AFC pursuant to any (A) note, bond, mortgage, indenture, or (B) any
material license, agreement or other instrument or obligation, to which AFC is a
party or by which it or any of its properties or assets may be bound, or (iii)
subject to the receipt of all required regulatory and shareholder approvals,
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to AFC.
2.4 Capital Structure
The authorized capital stock of AFC consists of 20,000,000 shares of common
stock, par value $5.00 per share, of which 4,168,185 shares are issued and
outstanding as of this date. All outstanding shares of AFC Common Stock have
been duly authorized and validly issued, are fully paid and nonassessable and
have not been issued in violation of the preemptive rights of any person. As of
the date hereof, there are options held by employees of AFC that represent
rights to purchase a total of 120,642 shares of AFC Common Stock.
2.5 Rights
As of the date of this Agreement, there are not any shares of capital stock
of AFC reserved for issuance, or any outstanding or authorized options,
warrants, rights, agreements, convertible or exchangeable securities, or other
commitments, contingent or otherwise, relating to its capital stock pursuant to
which AFC is or may become obligated to issue shares of capital
I-5
stock or any securities convertible into, exchangeable for, or evidencing the
right to subscribe for, any shares of its capital stock (collectively,
"Rights"), except as contemplated by the Option Agreement and as Previously
----------
Disclosed in its Disclosure Schedule (which shall include copies of the stock
- ---------
option plans and individual stock option agreements pursuant to which employees
of AFC may exercise stock options).
2.6 Financial Statements; Books and Records; Minute Books
The AFC Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the consolidated financial position of AFC
as of the dates indicated and the consolidated results of operations, changes in
stockholders' equity and statements of cash flows for the periods or as of the
dates set forth therein (subject, in the case of unaudited interim statements,
to normal recurring audit adjustments that are not material in amount or effect)
in conformity with generally accepted accounting principles applicable to
financial institutions applied on a consistent basis. The books and records of
the AFC Companies fairly reflect in all material respects the transactions to
which they are a party or by which their properties are subject or bound. Such
books and records have been properly kept and maintained and are in compliance
in all material respects with all applicable legal and accounting requirements.
The minute books of the AFC Companies contain accurate records of all corporate
actions of their respective shareholders and Boards of Directors (including
committees of its Board of Directors). The AFC Financial Statements shall mean
(i) the consolidated balance sheets of AFC as of December 31, 1999 and 1998 and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years ended December 31, 1999, 1998 and 1997
(including related notes and schedules, if any) and (ii) the consolidated
balance sheets of AFC and related consolidated statements of income and
stockholders' equity (including related notes and schedules, if any) with
respect to quarterly periods ended subsequent to December 31, 1999.
2.7 Absence of Material Changes and Events
Since March 31, 2000 and except as Previously Disclosed in its Disclosure
--------------------
Schedule, there has not been any change in the financial condition or results of
operations of AFC or the AFC Subsidiaries which, individually or in the
aggregate, has had or is reasonably likely to have a Material Adverse Effect.
2.8 Absence of Undisclosed Liabilities
AFC has not incurred any liability (contingent or otherwise) that is
material to AFC on a consolidated basis or that, when combined with all similar
liabilities, would be material to AFC on a consolidated basis, except as
Previously Disclosed in its Disclosure Schedule or as disclosed in the AFC
- --------------------
Financial Statements and except for liabilities incurred in the ordinary course
of business consistent with past practice since the date of the most recent AFC
Financial Statements.
I-6
2.9 Legal Proceedings; Compliance with Laws
Except as Previously Disclosed in its Disclosure Schedule, there are no
--------------------
actions, suits or proceedings instituted or pending or, to the Knowledge of AFC,
threatened against any of the AFC Companies or against any property, asset,
interest or right of the AFC Companies, or against any officer, director or
employee of the AFC Companies that would, if determined adversely to AFC or any
AFC Subsidiary, have a Material Adverse Effect on AFC on a consolidated basis.
To the Knowledge of AFC, the AFC Companies have complied in all material
respects with all laws, ordinances, requirements, regulations or orders
applicable to its business (including environmental laws, ordinances,
requirements, regulations or orders).
2.10 Tax Matters
The AFC Companies have filed all federal, state and local tax returns and
reports ("Tax Returns") required to be filed, and all such Tax Returns were
correct and complete in all material respects. All Taxes (as defined below) owed
by the AFC Companies have been paid, are reflected as a liability in the AFC
Financial Statements, or are being contested in good faith and have been
Previously Disclosed in its Disclosure Schedule. Except as Previously
- --------------------
Disclosed, no tax return or report of the AFC Companies is under examination by
any taxing authority or the subject of any administrative or judicial
proceeding, and no unpaid tax deficiency has been asserted against the AFC
Companies by any taxing authority. As used herein, "Taxes" mean all taxes,
charges, fees, levies or other assessments, including, without limitation, all
income, gross receipts, sales, use, ad valorem, goods and services, capital,
transfer, franchise, profits, license, withholding, payroll, employment,
employer health, excise, estimated, severance, stamp, occupation, property or
other taxes, custom duties, fees, assessments or chargers of any kind
whatsoever, together with any interest and any penalties, additions to tax or
additional amounts imposed by any taxing authority.
2.11 Property
Except as Previously Disclosed in its Disclosure Schedule or reserved
--------------------
against in the AFC Financial Statements, the AFC Companies have good and
marketable title free and clear of all material liens, encumbrances, charges,
defaults or equitable interests to all of the properties and assets, real and
personal, reflected in the balance sheet included in the AFC Financial
Statements as of March 31, 2000 or acquired after such date. To the Knowledge of
AFC, all buildings, and all fixtures, equipment, and other property and assets
that are material to its business, held under leases or subleases, are held
under valid instruments enforceable in accordance with their respective terms,
subject to bankruptcy, insolvency, reorganization, moratorium and similar laws.
To the Knowledge of AFC, the buildings, structures, and appurtenances owned,
leased, or occupied by the AFC Companies are in good operating condition and in
a state of good maintenance and repair and comply with applicable zoning and
other municipal laws and regulations, and there are no latent defects therein.
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2.12 Employee Benefit Plans
(a) AFC has Previously Disclosed in its Disclosure Schedule all employee
--------------------
benefit plans and programs, including without limitation: (i) all retirement,
savings and other pension plans; (ii) all health, severance, insurance,
disability and other employee welfare plans; and (iii) all employment, vacation
and other similar plans, all bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance and other employee
benefit plans, programs or arrangements, and all employment or compensation
arrangements, in each case for the benefit of or relating to current and former
employees of AFC (collectively, the "AFC Benefit Plans").
(b) None of the AFC Benefit Plans is a "multi-employer plan" as defined in
section 3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
(c) Except as Previously Disclosed in its Disclosure Schedule, all AFC
--------------------
Benefit Plans are in compliance in all material respects with applicable laws
and regulations, and AFC has administered the AFC Benefit Plans in accordance
with applicable laws and regulations in all material respects.
(d) Each AFC Benefit Plan that is intended to be qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended (the "Code") has been
determined by the Internal Revenue Service to be so qualified, as reflected in a
current favorable determination letter.
(e) AFC has made available to F&M copies of all AFC Benefit Plans and,
where applicable, summary plan descriptions, and annual reports required to be
filed within the last three years pursuant to ERISA or the Code with respect to
the AFC Benefit Plans.
(f) To the knowledge of AFC, AFC has not engaged in any prohibited
transactions, as defined in Code section 4975 or ERISA section 406, with respect
to any AFC Employee Benefit Plan that is a pension plan as defined in Section
3(2) of ERISA.
(g) There are no actions, suits, investigations or claims pending,
threatened or anticipated (other than routine claims for benefits) with respect
to any AFC Benefit Plans.
(h) No compensation or benefit that is or will be payable in connection
with the transactions contemplated by this Agreement will be characterized as an
"excess parachute payment" within the meaning of Code section 280G. Except as
Previously Disclosed in its Disclosure Schedule, no AFC Benefit Plan contains
- --------------------
any provision which would give rise to any severance, termination or other
payments or liabilities as a result of the transactions contemplated by this
Agreement.
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(i) AFC has not established and does not maintain a welfare plan, as
defined in ERISA section 3(1), that provides benefits to an employee at the
expense of AFC after a termination of employment, except as required by the
Consolidated Omnibus Budget Reconciliation Act of 1985.
2.13 Insurance
Each of the AFC Companies currently maintains insurance in amounts
reasonably necessary for its operations and, to the Knowledge of AFC, similar in
scope and coverage to that maintained by other entities similarly situated.
Since January 1, 2000, none of the AFC Companies has received any notice of a
premium increase or cancellation or a failure to renew with respect to any
insurance policy or bond and, within the last three fiscal years, none of the
AFC Companies has been refused any insurance coverage sought or applied for, and
AFC has no reason to believe that existing insurance coverage cannot be renewed
as and when the same shall expire upon terms and conditions as favorable as
those presently in effect, other than possible increases in premiums or
unavailability of coverage that do not result from any extraordinary loss
experience on the part of the AFC Companies.
2.14 Loans; Allowance for Loan Losses
(a) Except as Previously Disclosed in its Disclosure Schedule, to the
--------------------
Knowledge of AFC each loan reflected as an asset in the AFC Financial Statements
(i) is evidenced by notes, agreements or evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected, (iii)
is the legal, valid and binding obligation of the obligor and any guarantor,
enforceable in accordance with its terms, subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles, and no defense,
offset or counterclaim has been asserted with respect to any such loan which if
successful could have a Material Adverse Effect, and (iv) in all material
respects was made in accordance with AFC's standard loan policies.
(b) AFC has Previously Disclosed in its Disclosure Schedule the aggregate
--------------------
amounts as of a recent date of all loans, losses, advances, credit enhancements,
other extensions of credit, commitments and interest-bearing assets of the AFC
Companies that have been classified by any bank examiner (whether regulatory or
internal) as "Other Loans Specially Mentioned," "Special Mention,"
"Substandard," "Doubtful," "Loss," "Classified" or words of similar import, and
AFC shall promptly on a periodic basis inform F&M of any such classification
arrived at any time after the date hereof.
(c) The real property classified as other real estate owned ("OREO")
included in non-performing assets is carried net of reserve at the lower of cost
or market value based on independent appraisals.
(d) The allowance for loan losses reflected on the statements of financial
condition included in the AFC Financial Statements, as of their respective
dates, is adequate in all material
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respects under the requirements of generally accepted accounting principles and
regulatory accounting principles to provide for reasonably anticipated losses on
outstanding loans.
2.15 Environmental Matters
(a) Except as Previously Disclosed in its Disclosure Schedule, the AFC
--------------------
Companies are in substantial compliance with all Environmental Laws (as defined
below). AFC has not received any communication alleging that AFC is not in such
compliance and there are no present circumstances that would prevent or
interfere with the continuation of such compliance.
(b) AFC has not received notice of pending, and are not aware of any
threatened, legal, administrative, arbitral or other proceedings, asserting
Environmental Claims (as defined below) or other claims, causes of action or
governmental investigations of any nature, seeking to impose, or that could
result in the imposition of, any material liability arising under any
Environmental Laws upon (i) AFC, (ii) any person or entity whose liability for
any Environmental Claim AFC has or may have retained either contractually or by
operation of law, (iii) any real or personal property owned or leased by AFC, or
any real or personal property which AFC has been, or is, judged to have managed
or to have supervised or to have participated in the management of, or (iv) any
real or personal property in which AFC holds a security interest securing a loan
recorded on the books of AFC. AFC is not subject to any agreement, order,
judgment, decree or memorandum by or with any court, governmental authority,
regulatory agency or third party imposing any such liability.
(c) With respect to all real and personal property owned or leased by AFC,
or all real and personal property which AFC has been, or is, judged to have
managed or to have supervised or to have participated in the management of, AFC
will promptly provide F&M with access to copies of any environmental audits,
analyses and surveys that have been prepared relating to such properties (a list
of which will be Previously Disclosed in its Disclosure Schedule). The AFC
--------------------
Companies are in compliance in all material respects with all recommendations
contained in any such environmental audits, analyses and surveys.
(d) There are no past or present actions, activities, circumstances,
conditions, events or incidents that could reasonably form the basis of any
Environmental Claim or other claim or action or governmental investigation that
could result in the imposition of any liability arising under any Environmental
Laws against AFC or against any person or entity whose liability for any
Environmental Claim AFC has or may have retained or assumed either contractually
or by operation of law.
(e) For purposes of this Agreement, the following terms shall have the
following meanings:
(1) "Environmental Claim" means any written notice from any
governmental authority or third party alleging potential liability
(including, without limitation, potential liability for investigatory
costs, clean-up, governmental response costs, natural resources damages,
property damages, personal injuries or penalties) arising out of, based
upon, or
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resulting from the presence, or release into the environment, of any
Materials of Environmental Concern.
(2) "Environmental Laws" means all applicable federal, state and
local laws and regulations, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, that relate
to pollution or protection of human health or the environment.
(3) "Materials of Environmental Concern" means pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products
and any other materials regulated under Environmental Laws.
2.16 Takeover Laws
AFC has taken all action necessary to exempt this Agreement, the Stock
Option Agreement and the transactions contemplated hereby and thereby from the
requirements of any "control share," "fair price," "affiliate transaction" or
other anti-takeover laws and regulations of any state, including without
limitation Sections 13.1-725 through 13.1-728 of the VSCA (because a majority of
AFC's disinterested directors approved such transactions for such purposes prior
to any "determination date" with respect to F&M) and Sections 13.1-728.1 through
13.1-728.9 of the VSCA.
2.17 Brokers
Other than the financial advisory services performed for AFC by Davenport &
Company LLC (on terms disclosed to F&M), neither AFC nor any of its
subsidiaries, nor any of their respective officers, directors or employees has
employed any broker, finder or financial advisor or incurred any liability for
any fees or commissions in connection with transactions contemplated by this
Agreement.
2.18 Securities Reports
AFC has filed with the Securities and Exchange Commission (the "SEC") all
required forms, reports and documents required under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). AFC's Annual Report on Form 10-KSB for
the year ended December 31, 1999, and all other reports, definitive proxy
statements or documents filed or to be filed by it subsequent to December 31,
1999 under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form
filed, or to be filed, with the SEC (i) complied or will comply in all material
respects as to form with the applicable requirements under the Exchange Act and
(ii) did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they were
made, not misleading.
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2.19 Tax Treatment; Accounting Treatment
As of the date hereof, AFC is aware of no reason why the Merger will fail
to qualify as a tax-free reorganization under Section 368(a) of the Code or may
not be accounted for as "pooling of interests" under generally accepted
accounting principles.
2.20 Statements True and Correct
When the Registration Statement on Form S-4 (the "Registration Statement")
to be filed by F&M with the SEC shall become effective, and at all times
subsequent thereto up to and including the AFC shareholders' meeting called to
vote upon the Merger, such Registration Statement and all amendments or
supplements thereto, with respect to all information set forth therein furnished
by AFC relating to AFC, (i) shall comply in all material respects with the
applicable provisions of the federal and state securities laws, and (ii) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they are made, not
misleading.
ARTICLE 3
Representations and Warranties of F&M
F&M represents and warrants to AFC as follows:
3.1 Organization, Standing and Power
F&M is a corporation duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia. F&M has the corporate power and
authority to carry on its business as now conducted and to own and operate its
assets, properties and business; and F&M has the corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. F&M is duly registered as a
bank holding company under the Bank Holding Company Act of 1956.
3.2 Organization, Standing and Power of F&M Subsidiaries
Each subsidiary of F&M (the "F&M Subsidiaries" and, collectively with F&M,
the "F&M Companies") is a duly organized corporation, validly existing and in
good standing in their respective states of incorporation. Each F&M Subsidiary
(i) has full corporate power and authority to carry on its business as now
conducted and (ii) is duly qualified to do business in the states where its
ownership or leasing of property or the conduct of its business requires such
qualification and where the failure to so qualify would have a material adverse
effect on F&M on a consolidated basis. The outstanding shares of capital stock
of each of the F&M Subsidiaries are validly issued and outstanding, fully paid
and nonassessable and all such shares are directly or indirectly owned by F&M
free and clear of all liens, claims and encumbrances or preemptive rights of any
person.
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3.3 Authorized and Effective Agreement
(a) This Agreement and the Plan of Merger and the transactions
contemplated hereby and thereby have been authorized by all necessary corporate
action on the part of F&M. This Agreement and the Plan of Merger are valid and
legally binding obligations of F&M, enforceable against it in accordance with
their respective terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws affecting the enforcement of rights of creditors or by general
principles of equity).
(b) Neither the execution and delivery of this Agreement, the consummation
of the transactions contemplated herein, nor compliance by F&M with any of the
provisions hereof will: (i) conflict with or result in a breach of any provision
of the Articles of Incorporation or Bylaws of F&M or any F&M Subsidiary; (ii)
constitute or result in the breach of any term, condition or provision of, or
constitute a default under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of any
lien, charge or encumbrance upon, any property or asset of F&M or any F&M
Subsidiary pursuant to any note, bond, mortgage, indenture, license, agreement
or other instrument or obligation that would have a Material Adverse Effect F&M,
or (iii) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to F&M or any F&M Subsidiary.
3.4 Capital Structure
The authorized capital stock of F&M consists of: (i) 5,000,000 shares of
preferred stock, no par value per share, of which none are issued and
outstanding; and (ii) 30,900,000 shares of common stock, par value $2.00 per
share, of which 24,857,526 shares were issued and outstanding on May 31, 2000.
All outstanding shares of F&M Common Stock have been duly issued and are validly
outstanding, fully paid and nonassessable and have not been issued in violation
of the preemptive rights of any person. The shares of F&M Common Stock to be
issued in exchange for shares of AFC Common Stock upon consummation of the
Merger will have been duly authorized and, when issued in accordance with the
terms of this Agreement, will be validly issued, fully paid and nonassessable,
will not be issued in violation of the preemptive rights of any person, and will
be duly registered under the applicable federal and state securities laws.
3.5 Financial Statements; Books and Records; Minute Books
The F&M Financial Statements (as defined below) fairly present or will
fairly present, as the case may be, the consolidated financial position of F&M
as of the dates indicated and the consolidated results of operations, changes in
shareholders' equity and statements of cash flows for the periods or as of the
dates set forth therein (subject, in the case of unaudited interim statements,
to normal recurring audit adjustments that are not material in amount or effect)
in conformity with generally accepted accounting principles applicable to
financial institutions applied on a consistent basis. The books and records of
the F&M Companies fairly reflect in all
I-13
material respects the transactions to which each company is a party or by which
its properties are subject or bound. Such books and records have been properly
kept and maintained and are in compliance in all material respects with all
applicable legal and accounting requirements. The minute books of the F&M
Companies contain accurate records of all corporate actions of their respective
shareholders and Boards of Directors (including committees of its Board of
Directors). The F&M Financial Statements shall mean (i) the consolidated balance
sheets of F&M as of December 31, 1999 and 1998 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years ended December 31, 1999, 1998 and 1997 (including related notes and
schedules, if any) and (ii) the consolidated balance sheets of F&M and related
consolidated statements of income, shareholders' equity and cash flows
(including related notes and schedules, if any) with respect to quarterly
periods ended subsequent to December 31, 1999.
3.6 Absence of Material Changes or Events
Since March 31, 2000, there has not been any change in the financial
condition or results of operations of F&M or the F&M Subsidiaries which,
individually or in the aggregate, has had or is reasonably likely to have a
Material Adverse Effect.
3.7 Absence of Undisclosed Liabilities
Neither F&M nor any F&M Subsidiary has any liability (contingent or
otherwise) that is material to F&M on a consolidated basis or that, when
combined with all similar liabilities, would be material to F&M on a
consolidated basis, except as disclosed in the F&M Financial Statements and
except for liabilities incurred in the ordinary course of business consistent
with past practice since the date of the most recent F&M Financial Statements.
3.8 Legal Proceedings; Compliance with Laws
There are no actions, suits or proceedings instituted or pending or, to the
Knowledge of F&M, threatened against any of the F&M Companies or against any
property, asset, interest or right of any of the F&M Companies or against any
officer, director or employee of any of the F&M Companies that would, if
determined adversely to F&M or any F&M Subsidiary, have a Material Adverse
Effect on F&M on a consolidated basis. To the Knowledge of F&M, the F&M
Companies have complied in all material respects with all laws, ordinances,
requirements, regulations or orders applicable to their respective businesses
(including environmental laws, ordinances, requirements, regulations or orders).
3.9 Tax Matters
The F&M Companies have filed all Tax Returns required to be filed, and all
such Tax Returns were correct and complete in all material respects. All Taxes
owed by the F&M Companies have been paid, are reflected as a liability in the
F&M Financial Statements, or are being contested in good faith and have been
Previously Disclosed in its Disclosure Schedule. Except as Previously
Disclosed, no tax return or report of the F&M Companies is under
I-14
examination by any taxing authority or the subject of any administrative or
judicial proceeding, and no unpaid tax deficiency has been asserted against the
F&M Companies by any taxing authority.
3.10 Employee Benefit Plans
(a) All F&M employee benefit plans are in compliance with the applicable
terms of ERISA and the Code and any other applicable laws, rules and
regulations, the breach or violation of which could result in a material
liability to F&M on a consolidated basis.
(b) No F&M employee benefit plan subject to ERISA that is a defined
benefit pension plan has any "unfunded current liability," as that term is
defined in Section 302(d)(8)(A) of ERISA, and the present fair market value of
the assets of any such plan exceeds the plan's 'benefit liabilities,' as that
term is defined in Section 4001(a)(16) of ERISA, when determined under actuarial
factors that would apply if the plan was terminated in accordance with all
applicable legal requirements.
3.11 Insurance
Each of the F&M Companies currently maintains insurance in amounts
reasonably necessary for its operations and, to the Knowledge of F&M, similar in
scope and coverage to that maintained by other entities similarly situated.
Since January 1, 2000, none of the F&M Companies has received any notice of a
premium increase or cancellation or a failure to renew with respect to any
insurance policy or bond and, within the last three fiscal years, none of the
F&M Companies has been refused any insurance coverage sought or applied for, and
F&M has no reason to believe that existing insurance coverage cannot be renewed
as and when the same shall expire upon terms and conditions as favorable as
those presently in effect, other than possible increases in premiums or
unavailability of coverage that do not result from any extraordinary loss
experience on the part of the F&M Companies.
3.12 Allowance for Loan Losses
The allowance for loan losses reflected on the balance sheets included in
the F&M Financial Statements, as of their respective dates, is adequate in all
material respects under the requirements of generally accepted accounting
principles and regulatory accounting principles to provide for reasonably
anticipated losses on outstanding loans.
3.13 Environmental Matters
To the Knowledge of F&M, the F&M Companies are in substantial compliance
with all Environmental Laws. None of the F&M Companies has received any
communication alleging that F&M or any F&M Subsidiary is not in such compliance
and, to the Knowledge of F&M, there are no present circumstances that would
prevent or interfere with the continuation of such compliance.
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3.14 Securities Reports
F&M has filed with the SEC all required forms, reports and documents
required under the Exchange Act. F&M's Annual Report on Form 10-K for the year
ended December 31, 1999, and all other reports, definitive proxy statements or
documents filed or to be filed by it subsequent to December 31, 1999 under
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, in the form filed, or to
be filed, with the SEC (i) complied or will comply in all material respects as
to form with the applicable requirements under the Exchange Act and (ii) did not
and will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
3.14 Tax Treatment; Accounting Treatment
As of the date hereof, F&M is aware of no reason why the Merger will fail
to qualify as a tax-free reorganization under Section 368(a) of the Code or may
not be accounted for as "pooling of interests" under generally accepted
accounting principles.
3.15 Statements True and Correct
When the Registration Statement to be filed by F&M with the SEC shall
become effective, and at all times subsequent thereto up to and including the
AFC shareholders' meeting called to consider and vote on the approval of the
Merger, such Registration Statement and all amendments or supplements thereto,
with respect to all information set forth therein furnished by F&M relating to
F&M (i) shall comply in all material respects with the applicable provisions of
the federal and state securities laws, and (ii) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading.
ARTICLE 4
Covenants and Agreements
4.1 Reasonable Best Efforts
Subject to the terms and conditions of this Agreement, F&M and AFC agree to
use their reasonable best efforts in good faith to take, or cause to be taken,
all actions, and to do, or cause to be done, all things necessary or desirable,
or advisable under applicable laws, so as to permit consummation of the Merger
as promptly as practicable and shall cooperate fully with the other party hereto
to that end.
4.2 Access to Information; Notice of Certain Matters; Confidentiality
(a) F&M and AFC each will keep the other advised of all material
developments relevant to its business and to consummation of the transactions
contemplated herein. F&M and
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AFC each may make or cause to be made such further investigation of the
operational, financial and legal condition of the other as such party reasonably
deems necessary or advisable in connection with the Merger, provided, however,
that such investigation shall not interfere unnecessarily with normal
operations. F&M and AFC agree to furnish the other and the other's advisors with
such financial data and other information with respect to its business and
properties as such other party shall from time to time reasonably request. No
investigation pursuant to this Section 4.2 shall affect or be deemed to modify
any representation or warranty made by, or the conditions to the obligations to
consummate the Merger of, such party hereto.
(b) F&M and AFC shall give prompt notice to the other of any fact, event
or circumstance known to it that (i) is reasonably likely, individually or taken
together with all other facts, events and circumstances known to it, to result
in any Material Adverse Effect with respect to it or (ii) would cause or
constitute a material breach of any of its representations, warranties,
covenants or agreements contained herein.
(c) Each party shall, and shall cause each of its directors, officers,
attorneys and advisors, to maintain the confidentiality of all information
obtained in such investigation which is not otherwise publicly disclosed by the
other party, such undertaking with respect to confidentiality to survive any
termination of this Agreement. In the event of the termination of this
Agreement, each party shall return to the furnishing party or, at the request of
the furnishing party, destroy and certify the destruction of all confidential
information previously furnished in connection with the transactions
contemplated by this Agreement.
4.3 Registration Statement; Shareholder Approval
(a) F&M and AFC agree to cooperate in the preparation of the Registration
Statement to be filed by F&M with the SEC in connection with the issuance of F&M
Common Stock in the Merger (including the proxy statement and prospectus and
other proxy solicitation materials of F&M and AFC constituting a part thereof
(the "Proxy Statement") and all related documents). F&M and AFC agree to use
all reasonable efforts to cause the Registration Statement to be declared
effective under the Securities Act of 1933, as amended (the "Securities Act"),
as promptly as reasonably practicable after filing thereof. F&M shall also take
any action required to be taken under state securities or "Blue Sky" laws in
connection with the issuance of F&M Common Stock pursuant to the Merger.
(b) AFC shall submit this Agreement and the Plan of Merger to its
shareholders at a special meeting to be held as promptly as practicable after
the Registration Statement is declared effective for the purpose of approving
the Merger. The Board of Directors of AFC shall recommend such approval, and
AFC shall take all reasonable lawful action to solicit such approval by its
shareholders; provided, however, that if the Board of Directors of AFC shall
have reasonably determined in good faith (after consultation with its counsel)
that such recommendation is reasonably likely to constitute a breach of its
fiduciary duties to the shareholders of AFC, then the Board of Directors of AFC
shall not be obligated to recommend the approval of this Agreement and Plan of
Merger.
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4.4 Operation of the Business of AFC
AFC agrees that, except as expressly permitted by this Agreement or
otherwise consented to or approved in writing by F&M, during the period from the
date hereof to the Effective Date:
(a) AFC will conduct its operations only in the ordinary and usual course
of business consistent with past practice (subject, in any event, to the
provisions of paragraph (c) below) and will use its best efforts to keep
available the services of its officers and employees and maintain satisfactory
relationships with customers, suppliers, employees and others having business
relationships with them.
(b) AFC shall not take any action, engage in any transactions or enter
into any agreement which would adversely affect or delay in any material respect
the ability of F&M or AFC to obtain any necessary approvals, consents or waivers
of any governmental authority or third party required for the transactions
contemplated hereby or to perform its covenants and agreements on a timely basis
under this Agreement.
(c) AFC will not:
(1) Other than pursuant to stock options Previously Disclosed in its
--------------------
Disclosure Schedule and currently outstanding as of the date hereof: (i)
issue, sell or otherwise permit to become outstanding, or authorize the
creation of, any additional shares of capital stock, any stock appreciation
rights or any Rights; (ii) enter into any agreement with respect to the
foregoing; or (iii) permit any additional shares of capital stock to become
subject to new grants of employee stock options, stock appreciation rights,
or similar stock-based employee rights;
(2) Enter into or amend any written employment agreement, severance
or similar agreements or arrangements with any of its directors, officers
or employees, or grant any salary or wage increase or increase any employee
benefit (including incentive or bonus payments), except for normal
individual increases in compensation to employees in the ordinary course of
business consistent with past practice;
(3) Enter into or amend (except as may be required by applicable law)
any pension, retirement, stock option, stock purchase, savings, profit
sharing, deferred compensation, consulting, bonus, group insurance or other
employee benefit, incentive, welfare contract, plan or arrangement, or any
trust agreement related thereto, in respect of any directors, officers or
employees, including without limitation taking any action that accelerates
the vesting or exercise of any benefits payable thereunder;
(4) Incur any obligation or liability (whether absolute or
contingent, excluding suits instituted against it), make any pledge, or
encumber any of its assets, nor dispose of any of its assets in any other
manner, except in the ordinary course of its business and for adequate
value, or as otherwise specifically permitted in this Agreement;
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(5) Change its lending, investment, asset/liability management or
other material banking policies in any material respect, except as may be
required by applicable law;
(6) Alter, amend or repeal its bylaws or articles of incorporation;
(7) Take any other action which would make any representation or
warranty in Article 2 hereof untrue; or
(8) Agree or commit to do anything prohibited by this Section 4.4.
4.5 Operation of the Business of F&M
F&M agrees that, except as expressly permitted by this Agreement or
otherwise consented to or approved in writing by AFC, during the period from the
date hereof to the Effective Date:
(a) F&M will and will cause each of the F&M Subsidiaries to conduct their
respective operations only in the ordinary and usual course of business
consistent with past practice and will use its best efforts to preserve intact
their respective business organizations, keep available the services of their
officers and employees and maintain satisfactory relationships with customers,
suppliers, employees and others having business relationships with them.
(b) F&M shall not, and shall not permit any of the F&M Subsidiaries to,
take any action, engage in any transactions or enter into any agreement which
would adversely affect or delay in any material respect the ability of F&M or
AFC to obtain any necessary approvals, consents or waivers of any governmental
authority or third party required for the transactions contemplated hereby or to
perform its covenants and agreements on a timely basis under this Agreement.
4.6 Dividends
F&M agrees that prior to the Effective Date AFC may declare and pay its
regular quarterly cash dividend in an amount not to exceed $0.12 per share.
4.7 No Solicitation of Other Offers
Without the prior written consent of F&M, AFC shall not, and shall cause
its officers, directors, agents, advisors and affiliates not to, solicit or
encourage inquiries or proposals with respect to, furnish any information
relating to, or participate in any negotiations or discussions concerning, an
Acquisition Transaction (as hereinafter defined); provided, however, that
nothing contained in this Section 4.7 shall prohibit the Board of Directors of
AFC from furnishing information to, or entering into discussions or negotiations
with, any person or entity that makes an unsolicited, written bona fide proposal
regarding an Acquisition Transaction if, and only to the extent that (i) the
Board of Directors of AFC concludes in good
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faith, after consultation with and based upon the written advice of outside
counsel, that the failure to furnish such information or enter into such
discussions or negotiations would likely constitute a breach of its fiduciary
duties to shareholders under applicable law, (ii) prior to taking such action,
AFC receives from such person or entity an executed confidentiality agreement,
and (iii) the Board of Directors of AFC concludes in good faith that the
proposal regarding the Acquisition Transaction contains an offer of
consideration that is superior to the consideration set forth herein. AFC shall
immediately notify F&M orally and in writing of its receipt of any such proposal
or inquiry, of the material terms and conditions thereof, and of the identity of
the person making such proposal or inquiry. For purposes of this Agreement,
"Acquisition Transaction" means any merger, consolidation, share exchange, joint
venture, business combination or similar transaction involving AFC or any
purchase of all or any material portion of the assets of AFC.
4.8 Regulatory Filings
F&M and AFC shall use their reasonable best efforts to prepare and file as
soon as practicable after the date hereof all required applications for
regulatory approval of the Merger. F&M shall use its best efforts to obtain
prompt approval of each required application.
4.9 Public Announcements
Each party will consult with the other before issuing any press release or
otherwise making any public statements with respect to the Merger and shall not
issue any such press release or make any such public statement prior to such
consultations, except as may be required by law.
4.10 Accounting Treatment
F&M and AFC shall each use their best efforts to ensure that the Merger
qualifies for pooling-of-interests accounting treatment.
4.11 Affiliate Agreements
AFC has identified to F&M all persons who were, as of the date hereof,
directors or executive officers of AFC (the "Affiliates"). AFC has delivered a
written letter agreement in the form of Exhibit C hereto from each Affiliate.
4.12 Benefit Plans; Certain Officer Agreements
(a) Upon consummation of the Merger, as soon as administratively
practicable, employees of AFC shall be entitled to participate in the F&M
pension, health and welfare benefit and similar plans on the same terms and
conditions as employees of the F&M Companies, giving effect to years of service
for purposes of eligibility to participate, eligibility for benefits, and
vesting with AFC as if such service were with F&M and limiting preexisting
condition exclusions in accordance with the Health Insurance Portability and
Accountability Act of 1996.
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(b) F&M shall offer employment and severance agreements to those AFC
employees as have been Previously Disclosed by F&M on substantially the same
terms as Previously Disclosed by F&M prior to the date hereof.
4.13 NYSE Listing
F&M shall use its reasonable best efforts to list, as of the Effective
Date, on the NYSE upon official notice of issuance, the shares of F&M Common
Stock to be issued in the Merger.
4.14 Indemnification
Following the Effective Date and for a period of six years thereafter, F&M
shall indemnify, defend and hold harmless any person who has rights to
indemnification from AFC, to the same extent and on the same conditions as such
person is entitled to indemnification pursuant to applicable law and AFC's
Articles of Incorporation or Bylaws, as in effect on the date of this Agreement,
to the extent legally permitted to do so with respect to matters occurring on or
prior to the Effective Date. Without limiting the foregoing, in any case in
which corporate approval may be required to effectuate any indemnification, F&M
shall direct, if the party to be indemnified elects, that the determination of
permissibility of indemnification shall be made by independent counsel mutually
agreed upon between F&M and the indemnified party. F&M shall use its reasonable
best efforts to maintain AFC's existing directors' and officers' liability
policy, or some other policy, including F&M's existing policy, providing at
least comparable coverage, covering persons who are currently covered by such
insurance of AFC for a period of three years after the Effective Date on terms
no less favorable than those in effect on the date hereof.
4.15 Stock Option Agreement
AFC shall grant to F&M an option to acquire such number of shares of AFC
Common Stock that would equate to 19.9% of the issued and outstanding common
stock of AFC as of the date hereof, all in accordance with the Option Agreement.
ARTICLE 5
Conditions to the Merger
5.1 General Conditions
The respective obligations of each of F&M and AFC to effect the Merger
shall be subject to the fulfillment or waiver at or prior to the Effective Date
of the following conditions:
(a) Corporate Action. All corporate action necessary to authorize the
execution, delivery and performance of this Agreement and consummation of the
transactions contemplated hereby shall have been duly and validly taken,
including without limitation the approval of the shareholders of AFC.
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(b) Registration Statement; NYSE Listing. The Registration Statement shall
have been declared effective under the Securities Act, and F&M shall received
all state securities laws or "blue sky" permits and other authorizations or
there shall be exemptions from registration requirements necessary to issue F&M
Common Stock in connection with the Merger, and neither the Registration
Statement nor any such permit or authorization shall be subject to a stop order
or any threatened stop order of the SEC or any state securities commissioner.
The shares of F&M Common Stock to be issued in connection with the Merger shall
have been approved for listing on the New York Stock Exchange.
(c) Regulatory Approvals. F&M and AFC shall have received all regulatory
approvals required in connection with the transactions contemplated by this
Agreement, all notice periods and waiting periods required after the granting of
any such approvals shall have passed, and all such approvals shall be in effect;
provided, however, that no such approvals shall have imposed any condition or
requirement which, in the reasonable opinion of the Boards of Directors of F&M
or AFC, would so materially adversely impact the economic or business benefits
of the transactions contemplated by this Agreement as to render consummation of
the Merger inadvisable or unduly burdensome.
(d) Tax Opinion. F&M and AFC shall have received the opinion of LeClair
Ryan, A Professional Corporation, counsel to F&M, in form and substance
satisfactory to F&M and AFC and dated as of the Effective Date to the effect
that the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code and that no gain or loss will be recognized by the
shareholders of AFC to the extent they receive F&M Common Stock solely in
exchange for their AFC Common Stock in the Merger. In rendering its opinions,
such counsel may rely upon representations contained in certificates of officers
of F&M, AFC and others.
(e) Opinions of Counsel. AFC shall have delivered to F&M and F&M shall
have delivered to AFC opinions of counsel, dated as of the Effective Date, as to
such matters as they may each reasonably request with respect to the
transactions contemplated by this Agreement and in a form reasonably acceptable
to each of them.
(f) Legal Proceedings. Neither F&M nor AFC shall be subject to any order,
decree or injunction of a court or agency of competent jurisdiction which
enjoins or prohibits the consummation of the Merger.
5.2 Conditions to Obligations of F&M
The obligations of F&M to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties of
AFC set forth in Article 2 shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on the Effective Date,
except (i) for any such representations and warranties made as of a specified
date, which shall be true and correct as of such date, (ii) as expressly
contemplated by this Agreement, or (iii) for representations and warranties the
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inaccuracies of which relate to matters that, individually or in the aggregate,
do not materially adversely affect the Merger and the other transactions
contemplated by this Agreement.
(b) Performance of Obligations. AFC shall have performed in all material
respects all obligations required to be performed by it under this Agreement
prior to the Effective Date.
(c) Officers' Certificate. AFC shall have delivered to F&M a certificate,
dated the Effective Date and signed by its Chairman or President, to the effect
that the conditions set forth in Sections 5.1(a), 5.2(a) and 5.2(b) have been
satisfied.
(d) Accountants' Letter. F&M shall have received a letter, dated as of
the Effective Date, from Yount, Hyde & Barbour, P.C., satisfactory in form and
substance to F&M, that the Merger will qualify for pooling-of-interests
accounting treatment.
(d) Employment and Severance Agreements. William J. Farinholt shall have
entered into an employment agreement and a severance agreement, effective as of
the Effective Date, with F&M in substantially the same form and on substantially
the same terms as Previously Disclosed by F&M prior to the date hereof.
5.3 Conditions to Obligations of AFC
The obligations of AFC to effect the Merger shall be subject to the
fulfillment or waiver at or prior to the Effective Date of the following
additional conditions:
(a) Representations and Warranties. The representations and warranties of
F&M set forth in Article 3 shall be true and correct as of the date of this
Agreement and as of the Effective Date as though made on the Effective Date,
except (i) for any such representations and warranties made as of a specified
date, which shall be true and correct as of such date, (ii) as expressly
contemplated by this Agreement, or (iii) for representations and warranties the
inaccuracies of which relate to matters that, individually or in the aggregate,
do not materially adversely affect the Merger and the other transactions
contemplated by this Agreement.
(b) Performance of Obligations. F&M shall have performed in all material
respects all obligations required to be performed by it under this Agreement
prior to the Effective Date.
(c) Officers' Certificate. F&M shall have delivered to AFC a certificate,
dated the Effective Date and signed by its Chairman or President, to the effect
that the conditions set forth in Sections 5.1(a), 5.1(b), 5.1(c), 5.3(a) and
5.3(b) have been satisfied.
(d) Investment Banking Letter. AFC shall have received an updated
fairness opinion from Davenport & Company LLC, financial advisor to AFC,
addressed to AFC and dated on or about the date the Proxy Statement is mailed to
shareholders of AFC, to the effect that the terms of the Merger are fair to the
shareholders of AFC from a financial point of view.
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ARTICLE 6
Termination
6.1 Termination
This Agreement and the Plan of Merger may be terminated at any time before
the Effective Date, whether before or after approval thereof by the shareholders
of AFC at the AFC Meeting, as provided below:
(a) Mutual Consent. By the mutual consent in writing of F&M and AFC.
(b) Closing Delay. At the election of either party, evidenced by written
notice, if the Effective Date shall not have occurred on or before March 10,
2001, or such later date as shall have been agreed to in writing by the parties;
provided, however, that the right to terminate under this Section 6.1(b) shall
not be available to either party whose failure to perform an obligation
hereunder has been the cause of, or has resulted in, the failure of the
Effective Date to occur on or before such date.
(c) Conditions to F&M Performance Not Met. By F&M upon delivery of
written notice of termination to AFC if any event occurs which renders
impossible the satisfaction in any material respect of one or more of the
conditions to the obligations of F&M to effect the Merger set forth in Sections
5.1 and 5.2, and such noncompliance is not waived by F&M.
(d) Conditions to AFC Performance Not Met. By AFC upon delivery of
written notice of termination to F&M if any event occurs which renders
impossible the satisfaction in any material respect of one or more of the
conditions to the obligations of AFC to effect the Merger set forth in Sections
5.1 and 5.3, and such noncompliance is not waived by AFC.
(e) Due Diligence Review of AFC. By F&M in writing at any time prior to
July 31, 2000 if F&M determines in its sole good faith judgment that the
financial condition, business or prospects of AFC are materially adversely
different from what was reasonably expected by F&M after the performance of its
due diligence prior to the execution of this Agreement; provided that F&M shall
inform AFC upon such termination of the reasons for F&M's determination and,
provided further, that this Section 6.1(e) shall not limit in any way the due
diligence investigation of AFC which F&M may perform or otherwise affect any
other rights which F&M has after the date hereof and after July 31, 2000, under
the terms of this Agreement.
(f) Due Diligence Review of F&M. By AFC in writing at any time prior to
July 31, 2000, if AFC determines in its sole good faith judgment that the
financial condition, business or prospects of F&M are materially adversely
different from what was reasonably expected by AFC after the performance of its
due diligence prior to the execution of this Agreement; provided that AFC shall
inform F&M upon such termination of the reasons for AFC's determination and,
provided further, that this Section 6.1(f) shall not limit in any way the due
diligence investigation
I-24
of F&M which AFC may perform or otherwise affect any other rights which AFC has
after the date hereof and after July 31, 2000, under the terms of this
Agreement.
6.2 Effect of Termination
In the event this Agreement is terminated pursuant to Section 6.1 hereof,
both this Agreement and the Plan of Merger shall become void and have no effect,
except that (i) the provisions hereof relating to confidentiality, press
releases and expenses set forth in Sections 4.2, 4.9 and 6.4, respectively,
shall survive any such termination and (ii) a termination pursuant to 6.1(c) or
6.1(d) hereof shall not relieve the breaching party from liability for an
uncured intentional breach of any provision of this Agreement giving rise to
such termination.
6.3 Survival of Representations, Warranties and Covenants
All representations, warranties and covenants in this Agreement and the
Plan of Merger shall not survive the Effective Date and shall be terminated and
extinguished at the Effective Date. From and after the Effective Date, the
parties hereto shall have no liability to the other on account of any breach of
any of those representations, warranties and covenants; provided, however, that
the foregoing clause shall not (i) apply to agreements of the parties which by
their terms are intended to be performed after the Effective Date, and (ii)
shall not relieve any person for liability for fraud, deception or intentional
misrepresentation.
6.4 Fees and Expenses
(a) Except as provided below, each of the parties shall bear and pay all
costs and expenses incurred by it in connection with the transactions
contemplated herein, including fees and expenses of its own financial
consultants, accountants and counsel, except that printing expenses shall be
shared equally between F&M and AFC.
(b) Notwithstanding any provision in this Agreement to the contrary, if
for any reason the Merger is not approved by AFC's shareholders at the AFC
Meeting or any adjournment thereof, then AFC shall reimburse F&M for one-half of
its reasonable out-of-pocket and other expenses incurred by F&M in connection
with entering into this Agreement and the transactions contemplated hereunder,
provided that the maximum amount that AFC shall be responsible to F&M under this
Section 6.4(b) shall be limited to $50,000.
(c) If this Agreement is terminated by F&M or AFC because of a willful and
material breach by the other of any representation, warranty, covenant,
undertaking or restriction set forth herein, and provided that the terminating
party shall not have been in breach (in any material respect) of any
representation and warranty, covenant, undertaking or restriction contained
herein, then the breaching party shall reimburse the other party for all
reasonable out-of-pocket expenses incurred by it in connection with the
transactions contemplated by this Agreement and the enforcement of its rights
hereunder.
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(d) Final settlement with respect to the reimbursement of such fees and
expenses by the parties shall be made within thirty days after the termination
of this Agreement.
ARTICLE 7
General Provisions
7.1 Entire Agreement
This Agreement contains the entire agreement among F&M and AFC with respect
to the Merger and the related transactions and supersedes all prior arrangements
or understandings with respect thereto.
7.2 Binding Effect; No Third Party Rights
This Agreement shall bind F&M and AFC and their respective successors and
assigns. Other than Section 4.14, nothing in this Agreement is intended to
confer upon any person, other than the parties hereto or their respective
successors, any rights or remedies under or by reason of this Agreement.
7.3 Waiver and Amendment
Any term or provision of this Agreement may be waived in writing at any
time by the party that is, or whose shareholders are, entitled to the benefits
thereof, and this Agreement may be amended or supplemented by a written
instrument duly executed by the parties hereto at any time, whether before or
after the later of the date of the AFC Meeting, except statutory requirements
and requisite approvals of shareholders and regulatory authorities.
7.4 Governing Law
This Agreement shall be governed by, and construed in accordance with, the
laws of the Commonwealth of Virginia without regard to the conflict of law
principles thereof.
7.5 Notices
All notices or other communications that are required or permitted
hereunder shall be in writing and sufficient if delivered personally or sent by
registered or certified mail, postage prepaid, addressed as follows:
If to F&M:
Alfred B. Whitt
F&M National Corporation
9 Court Square
P. O. Box 2800
Winchester, Virginia 22604
Tele: (540) 665-4282
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Copy to:
George P. Whitley, Esquire
LeClair Ryan, A Professional Corporation
707 East Main Street; 11th Floor
Richmond, Virginia 23219
Tele: (804) 783-2003
If to AFC:
William J. Farinholt
Atlantic Financial Corp.
737 J. Clyde Morris Boulevard
Newport News, Virginia 23061
Tele: (757) 595-7020
Copy to:
Wayne A. Whitham, Jr., Esquire
Williams, Mullen, Christian & Dobbins
1021 East Cary Street
P.O. Box 1320
Richmond, Virginia 23210-1320
Tele: (804) 783-6473
7.6 Counterparts
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but such counterparts together shall constitute one and
the same agreement.
7.7 Severability
In the event that any provision of this Agreement shall be held invalid or
unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any other provisions hereof. Any provision
of this Agreement held invalid or unenforceable only in part or degree shall
remain in full force and effect to the extent not held invalid or unenforceable.
Further, the parties agree that a court of competent jurisdiction may reform any
provision of this Agreement held invalid or unenforceable so as to reflect the
intended agreement of the parties hereto.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the date first written above.
F&M NATIONAL CORPORATION
By: /s/ Alfred B. Whitt
---------------------------------------
Alfred B. Whitt
Vice Chairman, President and
Chief Executive Officer
ATLANTIC FINANCIAL CORP.
By: /s/ William J. Farinholt
---------------------------------------
William J. Farinholt
President and Chief Executive Officer
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EXHIBIT A
To the Agreement and
Plan of Reorganization
PLAN OF MERGER
BETWEEN
F&M NATIONAL CORPORATION
AND
ATLANTIC FINANCIAL CORP.
Pursuant to this Plan of Merger ("Plan of Merger"), Atlantic Financial
Corp., a Virginia corporation ("AFC"), shall merge with and into F&M National
Corporation, a Virginia corporation ("F&M").
ARTICLE I
Terms of the Merger
1.1 The Merger
Subject to the terms and conditions of the Agreement and Plan of
Reorganization, dated as of July 5, 2000, by and between F&M and AFC (the
"Agreement"), at the Effective Date AFC shall be merged with and into F&M (the
"Merger") in accordance with the provisions of Virginia law and with the effect
specified in Section 13.1-721 of the Virginia Stock Corporation Act. F&M shall
be the surviving corporation of the Merger, and its name shall remain F&M (F&M
as existing on and after the Effective Date is sometimes referred to as the
"Surviving Corporation"). The Merger shall become effective on such date and
time as may be determined in accordance with Section 1.5 of the Agreement (the
"Effective Date").
1.2 Articles of Incorporation and Bylaws
The Articles of Incorporation and Bylaws of F&M in effect immediately prior
to the consummation of the Merger shall remain in effect following the Effective
Date until otherwise amended or repealed.
ARTICLE II
Manner of Converting Shares
2.1 Conversion of Shares
Upon and by reason of the Merger becoming effective, no cash shall be
allocated to the shareholders of AFC and stock shall be issued and allocated as
follows:
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(a) At the Effective Date, by virtue of the Merger and without any action
on the part of the holders thereof, each share of common stock, par value $5.00
per share, of AFC ("AFC Common Stock") issued and outstanding immediately prior
to the Effective Date shall cease to be outstanding and shall be converted into
and exchanged for 0.753 shares of common stock, par value $2.00 per share, of
F&M ("F&M Common Stock") pursuant to the terms and conditions set forth in the
Agreement and this Plan of Merger (the "Exchange Ratio").
(b) Each holder of a certificate representing shares of AFC Common Stock
upon the surrender of his AFC stock certificates to the Exchange Agent (as
defined in Section 2.2), duly endorsed for transfer in accordance with Section
2.2 below, will be entitled to receive in exchange therefor a certificate or
certificates representing the number of whole shares of F&M Common Stock that
his shares shall be converted into pursuant to the Exchange Ratio. Each such
holder of AFC Common Stock shall have the right to receive the consideration
described in this Section 2.1 and Section 2.3 upon the surrender of such
certificate in accordance with Section 2.2.
(c) In the event F&M changes (or establishes a record date for changing)
the number of shares of F&M Common Stock issued and outstanding prior to the
Effective Date as a result of a stock split, stock dividend, recapitalization or
similar transaction with respect to the outstanding F&M Common Stock and the
record date therefor shall be prior to the Effective Date, appropriate and
proportional adjustments will be made to the Exchange Ratio.
(d) From and after the Effective Date, all employee stock options to
purchase shares of AFC Common Stock (each, a "AFC Stock Option"), that are then
outstanding and unexercised, shall be converted into and become options to
purchase shares of F&M Common Stock, and F&M shall assume each such AFC Stock
Option in accordance with the terms of the plan and agreement by which it is
evidenced; provided, however, that from and after the Effective Date (i) each
such AFC Stock Option assumed by F&M may be exercised solely to purchase shares
of F&M Common Stock, (ii) the number of shares of F&M Common Stock purchasable
upon exercise of such AFC Stock Option shall be equal to the number of shares of
AFC Common Stock that were purchasable under such AFC Stock Option immediately
prior to the Effective Date multiplied by the Exchange Ratio and rounding down
to the nearest whole share, and (iii) the per share exercise price under each
such AFC Stock Option shall be adjusted by dividing the per share exercise price
of each such AFC Stock Option by the Exchange Ratio, and rounding up to the
nearest cent. The terms of each AFC Stock Option shall, in accordance with its
terms, be subject to further adjustment as appropriate to reflect any stock
split, stock dividend, recapitalization or other similar transaction with
respect to F&M Common Stock on or subsequent to the Effective Date. It is
intended that the foregoing assumption shall be effected in a manner that is
consistent with the requirements of Section 424 of the Internal Revenue Code of
1986, as amended (the "Code") as to any AFC Stock Option that is an "incentive
stock option" (as defined in Section 422 of the Code).
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2.2 Manner of Exchange of AFC Common Stock Certificates
As promptly as practicable after the Effective Date, F&M shall cause
American Stock Transfer & Trust Company, acting as the exchange agent ("Exchange
Agent"), to send to each former holder of record of AFC Common Stock immediately
prior to the Effective Date transmittal materials for use in exchanging such
shareholder's certificates of AFC Common Stock for the consideration set forth
in Section 2.1 above. Any dividends paid on any shares of F&M Common Stock that
such shareholder shall be entitled to receive prior to the delivery to the
Exchange Agent of such shareholder's certificates representing all of such
shareholder's shares of AFC Common Stock, will be delivered to such shareholder
only upon delivery to the Exchange Agent of the certificates representing all of
such shares (or indemnity satisfactory to F&M and the Exchange Agent, in their
judgment, if any of such certificates are lost, stolen or destroyed). No
interest will be paid on any such dividends to which the holder of such shares
shall be entitled to receive upon such delivery.
2.3 No Fractional Shares
No certificates or scrip for fractional shares of F&M Common Stock will be
issued. In lieu thereof, F&M will pay the value of such fractional shares in
cash on the basis of the Average Closing Price of F&M Common Stock. As used
herein, "Average Closing Price" shall mean the average closing price of F&M
Common Stock as reported on the New York Stock Exchange for each of the ten
consecutive trading days ending on the fifth trading day prior to the Effective
Date.
2.4 Dividends
No dividend or other distribution payable to the holders of record of F&M
Common Stock at or as of any time after the Effective Date shall be paid to the
holder of any certificate representing shares of AFC Common Stock issued and
outstanding at the Effective Date until such holder physically surrenders such
certificate for exchange as provided in Section 2.2 of this Plan of Merger,
promptly after which time all such dividends or distributions shall be paid
(without interest).
2.5 Rights of Dissenting Shareholders
Shareholders of AFC who object to the Merger will be entitled to the rights
and remedies set forth in Sections 13.1-729 through 13.1-741 of the Act.
ARTICLE III
Conditions Precedent
The obligations of F&M and AFC to effect the Merger as herein provided
shall be subject to satisfaction, unless duly waived, of the conditions set
forth in the Agreement.
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ARTICLE IV
Termination
This Plan of Merger may be terminated at any time prior to the Effective
Date by the parties hereto as provided in Article 6 of the Agreement.
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Appendix II
==================
Stock Option Agreement
==================
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of July 5, 2000 (the "Option
Agreement"), by and between ATLANTIC FINANCIAL CORP., a Virginia corporation
("AFC"), and F&M NATIONAL CORPORATION, a Virginia corporation ("F&M").
WITNESSETH
WHEREAS, the Boards of Directors of the parties hereto approved an
Agreement and Plan of Reorganization (the "Reorganization Agreement") and have
adopted a related Plan of Merger, dated as of the date hereof (together referred
to herein as the "Merger Agreements"), whereby AFC shall become a wholly-owned
subsidiary of F&M through the exchange of each outstanding share of common stock
of AFC for shares of common stock of F&M (the "Merger"); and
WHEREAS, as a condition to and as consideration for F&M's entry into the
Merger Agreements and to induce such entry, AFC has agreed to grant to F&M the
option set forth herein to acquire authorized but unissued shares of AFC Common
Stock.
NOW, THEREFORE, in consideration of the premises herein contained, the
parties agree as follows:
1. Definitions
Capitalized terms used but not defined herein and defined in the Merger
Agreements shall have the same meanings as in the Merger Agreements.
2. Grant of Option
Subject to the terms and conditions set forth herein, AFC hereby grants to
F&M an option (the "Option") to acquire up to 829,468 shares of AFC Common Stock
at a price of $15.00 per share (the "Exercise Price") in exchange for the
consideration provided in Section 4 hereof; provided, however, that in the event
AFC issues or agrees to issue any shares of AFC Common Stock (other than as
permitted under the Merger Agreements) at a price less than $15.00 per share (as
adjusted pursuant to Section 6 hereof), the Exercise Price shall be equal to
such lesser price. Notwithstanding anything else in this Option Agreement to
the contrary, the number of shares of AFC Common Stock subject to the Option
shall be reduced if and to the extent necessary so that the number of shares for
which this Option is exercisable shall not exceed 19.9% of the issued and
outstanding shares of AFC Common Stock, before giving effect to the exercise of
the Option. The number of shares of AFC Common Stock that may be received upon
the exercise of the Option is subject to adjustment as set forth herein.
II-1
3. Exercise of Option
(a) Subject to compliance with applicable law and regulation, F&M may
exercise the Option, in whole or part, at any time or from time to time if a
Purchase Event (as defined below) shall have occurred and be continuing.
(b) AFC shall notify F&M promptly in writing of the occurrence of any
transaction, offer or event giving rise to a Purchase Event. If more than one
of the transactions, offers or events giving rise to a Purchase Event is
undertaken or effected by the same person or occurs at the same time, then all
such transactions, offers and events shall give rise only to one Purchase Event,
which Purchase Event shall be deemed continuing for all purposes hereof until
all such transactions are terminated or abandoned by such person and all such
events have ceased or ended.
(c) In the event that F&M wishes to exercise the Option, it shall send AFC
a written notice (the date of which being herein referred to as the "Notice
Date") specifying (i) the total number of shares it will acquire pursuant to
such exercise, and (ii) a place and date not earlier than three business days
nor later than 60 business days from the Notice Date for the closing of such
transaction (the "Closing Date"); provided that if prior notification to or
approval of any federal or state regulatory agency is required in connection
with such acquisition, F&M shall promptly file the required notice or
application for approval and shall expeditiously process the same and the period
of time that otherwise would run pursuant to this sentence shall run instead
from the date on which any required notification period has expired or been
terminated or such approval has been obtained and any requisite waiting period
shall have passed.
(d) The Option shall expire and terminate, to the extent not previously
exercised, upon the earlier of: (i) the Effective Time of the Merger; (ii) upon
termination of the Merger Agreements in accordance with the provisions thereof,
other than a termination based upon, following or in connection with either (A)
a material breach by AFC of a Specified Covenant (as defined below) or (B) the
failure of AFC to obtain shareholder approval of the Merger Agreements by the
vote required under applicable law, in the case that either (A) or (B) follow
the occurrence of a Purchase Event; or (iii) 12 months after termination of the
Merger Agreements based upon a material breach by AFC of a Specified Covenant or
the failure of AFC to obtain shareholder approval of the Merger Agreements by
the vote required under applicable law, in either case following the occurrence
of a Purchase Event.
(e) As used herein, a "Purchase Event" shall mean any of the following
events or transactions occurring after the date hereof:
(1) AFC, without having received F&M's prior written consent, shall
have entered into an agreement with any person to (i) acquire, merge or
consolidate, or enter into any similar transaction, with AFC, (ii)
purchase, lease or otherwise acquire all or substantially all of the assets
of AFC, or (iii) purchase or otherwise acquire directly from AFC securities
representing 10% or more of the voting power of AFC;
II-2
(2) any person shall have acquired beneficial ownership or the right
to acquire beneficial ownership of 20% or more of the outstanding shares of
AFC Common Stock after the date hereof (the term "beneficial ownership" for
purposes of this Option Agreement having the meaning assigned thereto in
Section 13(d) of the Exchange Act and the regulations promulgated
thereunder); or
(3) any person shall have made a bona fide proposal to AFC by public
announcement or written communication that is or becomes the subject of
public disclosure to acquire AFC by merger, share exchange, consolidation,
purchase of all or substantially all of its assets or any other similar
transaction, and following such bona fide proposal the Board of Directors
of AFC shall have recommended that the shareholders of AFC approve or
accept such proposal and not the Merger Agreements.
(f) As used herein, "Specified Covenant" means any covenant or agreement
contained in the Merger Agreements.
4. Payment and Delivery of Certificates
(a) At the Closing Date, F&M shall tender certified funds in an amount
equal to the aggregate Exercise Price for the number of shares with respect to
which F&M is exercising the Option.
(b) At such closing, AFC shall deliver to F&M a certificate or
certificates representing the number of shares of AFC Common Stock exchanged for
the Exercise Price and F&M shall deliver to AFC a letter agreeing that F&M will
not offer to sell or otherwise dispose of such shares in violation of applicable
law or the provisions of this Option Agreement.
(c) Certificates for AFC Common Stock delivered at a closing hereunder may
be endorsed with a restrictive legend which shall read substantially as follows:
"The transfer of the shares represented by this
Certificate is subject to certain provisions of an agreement
between the registered holder hereof and Atlantic Financial
Corp. and to resale restrictions arising under the
Securities Act of 1933, as amended, a copy of which
agreement is on file at the principal office of Atlantic
Financial Corp. A copy of such agreement will be provided to
the holder thereof without charge upon receipt by Atlantic
Financial Corp. of a written request."
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if F&M shall have delivered to
AFC a copy of a letter from
II-3
the staff of the SEC, or an opinion of counsel, in form and substance
satisfactory to AFC, to the effect that such legend is not required
for purposes of the Securities Act.
5. Representations
AFC hereby represents, warrants and covenants to F&M as follows:
(a) AFC shall at all times maintain sufficient authorized but unissued
shares of AFC Common Stock so that the Option may be exercised without
authorization of additional shares of AFC Common Stock.
(b) The shares to be issued upon due exercise, in whole or in part, of the
Option, when paid for as provided herein, will be duly authorized, validly
issued, fully paid and nonassessable.
6. Adjustment Upon Changes in Capitalization
In the event of any change in AFC Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, exchanges of
shares or the like, the type and number of shares subject to the Option, and the
purchase price per share, as the case may be, shall be adjusted appropriately.
In the event that any additional shares of AFC Common Stock are issued or
otherwise become outstanding after the date of this Option Agreement (other than
pursuant to this Option Agreement or pursuant to the exercise of warrants or
options to acquire shares of AFC Common Stock outstanding as of the date of the
Merger Agreements or that may be issued after the date of the Merger Agreements
without constituting a breach thereof), the number of shares of AFC Common Stock
subject to the Option shall be adjusted so that, after such issuance, it equals
19.9% of the number of shares of AFC Common Stock then issued and outstanding
without giving effect to any shares subject or issued pursuant to the Option or
any shares issued pursuant to the exercise of options to acquire shares of AFC
Common Stock outstanding as of the date of the Merger Agreements or that may be
issued after the date of the Merger Agreements without constituting a breach
thereof. Nothing contained in this Section 6 shall be deemed to authorize AFC
to breach any provision of the Merger Agreements.
7. Registration Rights
AFC shall, if requested by F&M, as expeditiously as possible file a
registration statement on a form of general use under the Securities Act if
necessary in order to permit the sale or other disposition of the shares of AFC
Common Stock that are acquired upon exercise of the Option in accordance with
the intended method of sale or other disposition requested by F&M. F&M shall
provide all information reasonably requested by AFC for inclusion in any
registration statement to be filed hereunder. AFC will use its best efforts to
cause such registration statement first to become effective and then to remain
effective for such period not in excess of 270 days from the date on which such
registration statement first becomes effective as may be reasonably necessary to
effect such sales or other dispositions. The first
II-4
registration effected under this Section 7 shall be at AFC's expense except for
underwriting commissions and the fees and disbursements of F&M's counsel
attributable to the registration of such AFC Common Stock. A second registration
statement may be requested hereunder at F&M's expense. In no event shall AFC be
required to effect more than two registrations hereunder. The filing of any
registration statement hereunder may be delayed for such period of time as may
reasonably be required to facilitate any public distribution by AFC of AFC
Common Stock. If requested by F&M, in connection with any such registration, AFC
will become a party to any underwriting agreement relating to the sale of such
shares, but only to the extent of obligating itself in respect of
representations, warranties, indemnities and other agreements customarily
included in such underwriting agreements. Upon receiving any request from F&M or
an assignee of F&M under this Section 7, AFC agrees to send a copy thereof to
F&M and to any assignee of F&M known to AFC, in each case by promptly mailing
the same, postage prepaid, to the address of record of the persons entitled to
receive such copies.
8. Severability
If any term, provision, covenant or restriction contained in this Option
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Option
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Option Agreement will not permit the holder to
acquire the full number of shares of AFC Common Stock provided in Section 2
hereof (as adjusted pursuant to Section 6 hereof), it is the express intention
of AFC to allow the holder to acquire, or to require AFC to repurchase, to the
extent permitted under applicable law and without having to borrow funds or
otherwise raise capital to the extent that AFC would thereafter not be
considered a "well-capitalized" institution under federal banking laws, such
number of shares as may be necessary to comply with such court or regulatory
agency's determination of the permissible number of shares, without any
amendment or modification hereof.
9. Miscellaneous
(a) Expenses. Except as otherwise provided herein, each of the parties
--------
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel.
(b) Entire Agreement. Except as otherwise expressly provided herein, this
----------------
Option Agreement contains the entire agreement between the parties with respect
to the transactions contemplated hereunder and supersedes all prior arrangements
or understandings with respect thereto, written or oral. The terms and
conditions of this Option Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and assigns. Nothing in
this Option Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto and their respective successors and
assigns, any rights, remedies,
II-5
obligations or liabilities under or by reason of this Option Agreement, except
as expressly provided herein.
(c) Assignment. Neither of the parties hereto may assign any of its
----------
rights or obligations under this Option Agreement or the Option created
hereunder to any other person, without the express written consent of the other
party, except that F&M may assign in whole or in part the Option and other
benefits and obligations hereunder without limitation to any of its wholly-owned
subsidiaries, and F&M may assign in whole or in part the Option and other
benefits and obligations hereunder without limitation in the event a Purchase
Event shall have occurred and F&M shall have delivered to AFC a copy of a letter
from the staff of the SEC, or an opinion of counsel, in form and substance
reasonably satisfactory to AFC, to the effect that such assignment will not
violate the requirements of the Securities Act; provided that prior to any such
assignment, F&M shall give written notice of the proposed assignment to AFC, and
within 48 hours of such notice of a bona fide proposed assignment, AFC may
purchase the Option at a price and on other terms at least as favorable to F&M
as that set forth in the notice of assignment.
(d) Notices. All notices or other communications that are required or
-------
permitted hereunder shall be in writing and sufficient if delivered in the
manner and to the address provided for in or pursuant to Section 7.5 of the
Reorganization Agreement.
(e) Counterparts. This Option Agreement may be executed in any number of
------------
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
(f) Specific Performance. The parties agree that damages would be an
--------------------
inadequate remedy for a breach of the provisions of this Option Agreement by
either party hereto and that this Option Agreement may be enforced by either
party hereto through injunctive or other equitable relief.
(g) Governing Law. This Option Agreement shall be governed by and
-------------
construed in accordance with the laws of the Commonwealth of Virginia, without
regard to the conflicts of laws principles thereof.
II-6
IN WITNESS WHEREOF, each of the parties hereto has executed this Option
Agreement as of the day and year first written above.
ATLANTIC FINANCIAL CORP.
By: /s/ William J. Farinholt
-------------------------------------
William J. Farinholt
President and Chief Executive Officer
F&M NATIONAL CORPORATION
By: /s/ Alfred B. Whitt
-------------------------------------
Alfred B. Whitt
President and Chief Executive Officer
II-7
Appendix III
================
Opinion of Davenport & Company LLC
================
[LETTERHEAD OF DAVENPORT & COMPANY LLC]
October 31, 2000
The Board of Directors
Atlantic Financial Corporation
PO Box 1310
Gloucester, Virginia 23061-1310
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of Atlantic Financial Corporation (the "Company")
of the stock consideration in the merger (the "Merger") of F&M National
Corporation ("F&M") with the Company, pursuant to the Merger Agreement dated as
of July 5, 2000 (the "Agreement"). As is more specifically set forth in the
Agreement, upon consummation of the Merger (the "Closing Date"), each
outstanding share of the common stock of the Company, except for any dissenting
shares, will be entitled to receive consideration of 0.753 shares of F&M common
stock for each share of the Company's common stock.
Davenport & Company LLC, as part of its investment banking business is
regularly engaged in the valuation of closely held businesses and their
securities in connection with mergers, acquisitions, underwritings, sales and
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and various other purposes. Davenport has acted
as financial advisor to the Board of Directors of Atlantic Financial in
connection with the transaction described above. We are familiar with Atlantic
Financial having provided certain investment banking services to Atlantic
Financial in the past. In arriving at our opinion, we have, among other things:
In arriving at our opinion, we have reviewed, analyzed and relied upon material
bearing upon the financial and operating condition of the Company and the
Merger, including among other things, the following:
(i) Reviewed the Merger Agreement and the exhibits thereto;
(ii) Reviewed the proxy statement/prospectus;
Reviewed certain historical financial and other information
concerning the Company for the five years ended December 31, 1999
and for the quarter ended March 31, 2000;
(iii) Reviewed certain publicly available financial statements and other
information of Atlantic Financial and F&M;
Reviewed the historical transactions in, and stock prices of, the
common stock of the Company;
(iv) Reviewed certain internal financial statements and other information
and operating data of Atlantic Financial provided by its management
Held discussions with senior management of the Company with respect
to its past and current financial performance, financial condition
and future prospects;
(v) reviewed certain publicly available forward looking information
for F&M;
Analyzed certain publicly available information of other companies
that we deemed comparable or otherwise relevant to our inquiry, and
compared the Company from a financial point of view with certain of
these companies;
The Board of Directors
Atlantic Financial Corporation
October 31, 2000
Page 2
(vi) Reviewed the reported prices and trading activity for Atlantic
Financial common stock and F&M common stock;
Reviewed the financial terms of certain recent business combinations
that we deemed comparable or otherwise relevant to our inquiry; and
(vii) held discussions with members of Atlantic Financial's management
regarding past and current business operations, financial condition,
results of regulatory examinations, the Merger and the business and
future prospects of Atlantic Financial;
Conducted such other financial studies, analyses and investigations
and reviewed such other information as we deemed appropriate to
enable us to render our opinion.
(viii) compared the results of operations and market value of Atlantic
Financial and F&M with similar information for certain other
publicly traded companies which we deemed to be relevant;
(ix) compared the financial terms of the merger with the financial terms
of certain other mergers and acquisitions of financial institutions
in recent years;
(x) taken into account our assessment of general economic, market and
financial conditions and our experience in other transactions, as
well as our experience in securities valuations and knowledge of the
commercial banking industry generally; and
(xi) conducted such other studies, analyses and investigations and
considered such other information as we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied upon
and assumed the accuracy and completeness of all of the financial and other
information provided to us or publicly available and we have not assumed any
responsibility for independently verifying the accuracy or completeness of any
such information. We are not experts in the evaluation of loan portfolios for
the purpose of assessing the adequacy of the allowance for losses, and assumed
that such allowances, for each of the companies, are in the aggregate, adequate
to cover such losses. Davenport did not review any individual credit files nor
make any independent evaluation, appraisal or physical inspection of the assets
or individual properties of Atlantic Financial or F&M, nor was Davenport
furnished with such evaluation or appraisal. We have also assumed that the
Merger and the other transactions contemplated by the Agreement will be
consummated as described in the Agreement. Our opinion is necessarily based upon
conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and financial position and results of operations of the Company;
(ii) the assets and liabilities of the Company; and (iii) the nature and terms
of certain other merger transactions. We also have taken into account our
assessment of general economic, market and financial conditions and our
experience in other transactions, as well as our experience in securities
valuation generally. Our opinion is necessarily based upon conditions as they
exist and can be evaluated on the date hereof and the information made available
to us through the date hereof. Based upon and subject to the foregoing, it is
our opinion that, as of the date hereof, the Stock Consideration pursuant to the
Agreement is fair, from a financial point of view, to the shareholders of the
Company.
This letter is provided to the Board of Directors of the Company in
connection with and for the purposes of its evaluation of the Merger. This
opinion does not address the merits of the underlying decision by the Company to
engage in the Merger, and does not constitute a recommendation to any
shareholder of the Company as to how such shareholder should vote with respect
to the Merger.
Our opinion expressed herein was prepared solely for the Board of Directors
of Atlantic Financial in connection with and for the purposes of its evaluation
of the Merger. This opinion does not address the merits of the underlying
decision by Atlantic Financial to engage in the Merger, and does not constitute
a recommendation to any shareholder of Atlantic Financial as to how such
shareholder should vote with respect to the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be received by the shareholders of Atlantic
Financial pursuant to the Agreement is fair, from a financial point of view, to
the shareholders of Atlantic Financial.
Sincerely,
DAVENPORT & COMPANY LLC
By:/s/ Robert F. Mizell, CFA
---------------------------
Robert F. Mizell, CFA
Senior Vice President
Appendix IV
=========================
ATLANTIC FINANCIAL CORP'S
1999 ANNUAL REPORT TO SHAREHOLDERS
=========================
Atlantic
Financial
Corp
[LOGO]
1999 ANNUAL REPORT
AND FORM 10KSB
Greetings to fellow shareholders:
- --------------------------------------------------------------------------------
Atlantic Financial Corp's (the "Company") first full year of operations after
the merger of Mid-Atlantic Community BankGroup and United Community Bankshares
was both rewarding and challenging. Financial results for the Company included
asset growth of $23.0 million (6.4%) over 1998. Pre-tax net income increased in
1999 to $5.3 million from $5.1 million in 1998. After-tax net income for 1999 of
$3.9 million represented a 7.6% increase from 1998. This translated into $.92
per share, diluted, in 1999 versus $.86 per share in 1998.
It has been said that there is no progress without change, but not all change is
progress. This past year was ushered in with planned and desired change,
unplanned but anticipated change, as well as planned, but unwanted change. The
December 1998 merger (above) included many expected and planned for changes
associated with improving the efficiency of internal operations.
We brought the strengths of two holding companies together and have begun to
accent and expand their respective influences over the combined entity. In
August 1999, two of the Company's subsidiaries, The Bank of Franklin ("BOF") and
The Bank of Sussex and Surry ("BSS"), were merged under the name of United
Community Bank ("UCB"). This combination has already demonstrated enhanced
efficiencies in several backroom operations in the check processing and
bookkeeping areas. Having already implemented uniform data processing, common
policies have been adopted for most operational areas. Developing uniform
procedures in the future will further insure consistent customer service
throughout the Company and improve employee efficiency.
We reported to you last year that we signed a contract with UVEST to expand our
product line to include limited securities brokerage services. We began offering
these services in the fourth quarter of 1999 through our entire fifteen office
network, as well as the offices of our mortgage affiliate Johnson Mortgage Co.,
LLC. We are quite encouraged by the initial reception to the offering of these
alternative financial products by our core customer base. We also expect to
attract new banking customers through this product line and to enhance
non-interest income.
Y2K! The century date change was change for which no one had a choice. It would
occur whether planned for or not. To describe it as "much ado about nothing"
would be grossly inaccurate. While no catastrophic occurrences were documented
throughout the world, many hours of testing and planning were the reason. Your
Company spent approximately $200,000 in this effort. But this dollar amount does
not adequately quantify the negative impact on overall personnel performance,
including substantial hours of overtime. Many staff members were actively
involved in the Y2K planning effort, while continuing to maintain routine
banking responsibilities. Indeed, even the Board of Directors had a significant
amount of their attention claimed by the event planning. The end result was a
smooth New Year's weekend with only minor glitches associated with date
sensitive issues. The Y2K effort will continue throughout the coming year, but
with only a core group of employees, greatly reduced in size.
Disaster! Every company includes disaster recovery as part of its business plan.
To ignore such a grave possibility could be professional suicide. There is no
better test for disaster recovery than a legitimate disaster. HOWEVER, no one
would ever volunteer to participate in an actual disaster. Hurricane Floyd
ripped up the Atlantic Coast in September 1999, pounding North Carolina and
Virginia with record breaking rainfall and flooding that resulted in personal
and corporate calamity. As the nation watched, businesses and individuals tried
to put their lives back together. The city of Franklin was the most severely
affected in the Company's trade area, suffering flood levels of four to eight
feet for a period of more than a week. Sound disaster recovery planning
benefited the Company with minor operational disruption.
The Company's Franklin office remains closed, having seen the entire first floor
of the branch destroyed by floodwaters. Management expects to reopen the branch
in the second quarter of 2000. The Company was one of only a few Franklin
businesses with flood insurance coverage. In addition, the Courtland Operations
Center was victimized by severed data communication lines for approximately two
weeks. The Company used its Glenns Operations Center to perform check
processing, normally accomplished in the Courtland Center. Staff proved to be up
to the challenge, but clearly, was somewhat hampered in overall efficiency. We
are grateful for the hard work and sacrifice offered by a dedicated team of
employees.
Change! We experienced it and we are better for it. But, as with the price of a
college education today, our growth through change included a substantial cost.
This presented a special challenge in the face of a stock market mentality that
fled from more traditional investments to pursue the glamorous "tech" stocks.
The banking sector as a group has suffered severe pressure on stock values, with
earnings multiples declining 25-50%. Little can be done to direct the market's
attitude toward the banking sector. The Company is, however, aggressively
pursuing steps to enhance earnings to position itself among the elite financial
institutions.
The directors approved a share repurchase plan on January 27, 1999, authorizing
the repurchase of up to 100,000 shares of common stock. In 1999, the Company
purchased 6,100 shares at a price of $99,744. Through March 15, 2000, 14,600
additional shares have been repurchased for $189,300. The long-term impact
should be positive, both in terms of an accretive effect on earnings per share
and investment community confidence in the Company's stock.
We thank you for your continued support and earnestly solicit your business and
your suggestions.
Sincerely,
/s/ W. J. Farinholt /s/ J Lombard
W. J. Farinholt Joseph A. Lombard, Jr., DDS
President & CEO Chairman of the Board
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
Atlantic Financial Corp ("AFC") is the parent bank holding company for Peninsula
Trust Bank, Incorporated ("PTB") and United Community Bank ("UCB") (the
"Banks"). PTB and UCB 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. The Company owns a 51% membership interest in
Johnson Mortgage Company, LLC ("JMC"). JMC is a Virginia limited liability
company organized in March 1997. On April 1, 1998, the Company purchased a 50%
interest in JMC and subsequently, on April 1, 1999, purchased an additional 1%
interest. JMC is engaged in the mortgage brokerage business in which it
originates, closes and immediately sells mortgage loans and related servicing
rights to permanent investors.
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. PTB was organized and
chartered under the laws of the Commonwealth of Virginia on March 14, 1989 and
commenced operations 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 Corporation Commission.
The Bank is insured by the Federal Deposit Insurance Corporation and is subject
to regulation, supervision and examination by various regulatory authorities.
PTB is a member of the Federal Reserve Bank of Richmond and The Federal Home
Loan Bank of Atlanta. 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 116 full-time equivalent employees
on December 31, 1999.
United Community Bank, headquartered in Franklin, Virginia, is the successor to
The Bank of Franklin ("BOF") and The Bank of Sussex and Surry ("BSS"), which
were merged effective August 27, 1999. UCB operates eight full-service banking
offices located in Franklin, Suffolk, Courtland, Newsoms, Wakefield, Ivor and
Surry, 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. BSS was organized and chartered under the laws of the Commonwealth of
Virginia on April 12, 1902 and commenced operations on July 31, 1902.
The successor UCB 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. UCB is a member of The Federal
Home Loan Bank of Atlanta. UCB has applied for and expects to become a member of
the Federal Reserve System through the Federal Reserve Bank of Richmond, placing
it under the same federal regulatory supervision as PTB. UCB 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. UCB also offers a wide array of real estate products including
a long-term fixed rate mortgage product that is sold in a secondary market. UCB
is authorized to provide trust services, but does not currently do so. UCB had
78 full-time equivalent employees on December 31, 1999.
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 18 banks and 4 savings banks with local deposits as of June 30,
1999 of $2.0 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, 1999, PTB
conducted business from seven locations, all of which are owned. The Company's
Data Processing Center is housed in the same building as PTB's Glenns branch
office.
The principal office of United Community Bank is located at 100 East Fourth
Avenue, Franklin, Virginia. At December 31, 1999, UCB conducted business from
eight locations, seven of which are owned and one of which is leased. UCB 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 UCB is housed in leased space in Courtland,
Virginia.
The principal office of Johnson Mortgage Company is located at 739 Thimble
Shoals Boulevard, Newport News, Virginia. At December 31, 1999, JMC conducted
business from six locations, all of which are leased. JMC leases office space
from PTB in Gloucester and Williamsburg, Virginia and from UCB in Franklin,
Virginia.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER 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, 1999, there were 1,736 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
- --------------------------------------------------------------------------------
1999
Fourth Quarter $ 18.25 $ 14.63
Third Quarter 19.00 15.50
Second Quarter 18.00 14.75
First Quarter 19.00 15.25
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
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
At and for the Year Ended December 31,
(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS STATEMENT DATA:
Interest income $ 28,221 $ 26,263 $ 23,738 $ 21,071 $ 17,684
Interest expense 12,264 11,372 10,125 9,108 7,630
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income 15,957 14,891 13,613 11,963 10,054
Provision for loan losses 505 477 476 481 471
Noninterest income 2,203 2,082 1,716 1,501 1,220
Noninterest expense 12,376 11,386 9,433 8,117 7,075
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,279 5,110 5,420 4,866 3,728
Income taxes 1,339 1,448 1,360 1,409 990
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,940 $ 3,662 $ 4,060 $ 3,457 $ 2,738
===================================================================================================================================
PER SHARE DATA: (1)
Net income, basic $ 0.94 $ 0.88 $ 1.02 $ 0.90 $ 0.78
Net income, diluted 0.92 0.86 1.00 0.88 0.77
Cash dividends $0.38 $ 0.37 $ 0.25 $ 0.13 $ 0.06
Basic weighted average shares
Outstanding 4,188,319 4,162,044 3,979,027 3,855,066 3,515,042
Diluted weighted average shares
Outstanding 4,268,871 4,270,957 4,055,268 3,917,372 3,555,152
Book value at period end $ 10.27 $ 10.35 $ 9.70 $8.67 $ 8.06
BALANCE SHEET DATA:
Total Assets $ 383,309 $ 360,303 $ 315,257 $ 286,312 $ 251,591
Loans, net 223,513 207,733 185,690 167,932 135,737
Investment securities 99,716 93,923 83,493 83,687 82,658
Deposits 335,046 312,310 271,928 250,311 218,329
Stockholders' equity $ 43,038 $ 43,129 $ 40,309 $ 33,411 $ 31,088
PERFORMANCE RATIOS:
Net interest margin(2) 4.85% 5.04% 5.17% 5.15% 5.04%
Return on average assets 1.07% 1.10% 1.37% 1.32% 1.24%
Return on average equity 9.05% 8.89% 11.32% 10.85% 10.20%
Dividend payout 40.41% 38.64% 24.51% 14.44% 7.69%
Efficiency ratio(3) 65.37% 64.64% 59.46% 57.71% 60.55%
ASSET QUALITY RATIOS:
Allowance for loan losses to period
End loans 1.18% 1.15% 1.29% 1.36% 1.53%
Allowance for loan losses to
Nonperforming assets 2.25x 2.71x 2.83x 4.57x 3.52x
Nonperforming assets to period end
Loans and foreclosed properties 0.52% 0.42% 0.45% 0.31% 0.44%
Net charge-offs to average loans 0.12% 0.24% 0.20% 0.18% 0.37%
CAPITAL AND LIQUIDITY RATIOS:
Leverage 11.41% 11.64% 12.49% 11.77% 12.28%
Risk Based Capital Ratios:
Tier 1 capital 16.99% 16.67% 18.56% 16.64% 19.14%
Total capital 18.04% 17.82% 19.73% 17.81% 20.41%
Average loans to average deposits 68.69% 69.77% 70.35% 67.98% 66.97%
(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 Company'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.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
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.
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 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 and United Community
Bank, the successor of the merger of The Bank of Franklin and The Bank of Sussex
and Surry. Contributions from the Company's 51% membership interest in Johnson
Mortgage Co. LLC 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
was consummated and therefore, comparative discussions of consolidated
financials reflect the merger.
Overview
Net income of $3.9 million in 1999, was a 7.6% increase from 1998 net income of
$3.7 million. On a pre-tax basis, net income for the current period was $5.3
million compared to $5.1 million. Earnings per share (EPS) on a fully diluted
basis were $.92 in 1999 compared to $.86 in 1998. Profitability as measured by
return on average stockholders' equity was 9.05% in 1999 compared to 8.89% in
1998. Certain unusual and non-recurring expenses associated with Y2K
preparedness and the flood of September 1999, yielded less than desired
earnings. Additionally, some expenses related to the December 1998 merger were
not reflected until 1999. These combined expenses approximated $400,000, or 10%
of net income. The taxable effect equaled $.06 per share or 6.5% of total
diluted EPS.
A meaningful measure of resource efficiency is the Company's return on average
assets (ROA). This measure was 1.07% for 1999 compared to 1.10% for 1998. Both
of these figures compare favorably to an industry wide benchmark of 1.00%.
Results of Operations
The Company's commercial banking subsidiaries continue to represent the majority
of overall operations. They 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. Other sources of revenue include
non-interest income from such things as service charges on deposit accounts and
safe deposit box rentals. In the non-banking arena, JMC weathered the negative
effect of rising interest rates on mortgage production represented by
refinancing activities. JMC was able to maintain stable levels of production
from purchase money mortgages, even when the refinance market collapsed due to
unattractive rates. This actually represented an increase in purchase money
production and allowed JMC to preserve profitability (discussed below), more
than adequately covering fixed overhead costs.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
Net Interest Income
Total interest and fee income from loans and investments for 1999 was $28.2
million compared to $26.3 million in 1998, a 7.5% increase. This was
accomplished through an increase in total average earning assets from $308.4
million for 1998 to $343.7 million for 1999. As a percentage of average total
assets, the earning assets component was relatively constant, declining slightly
from 92.99% in 1998 to 92.96% in 1999. Total interest expense increased $0.9
million (7.8%) in 1999 to a total of $12.3 million.
Net interest income (tax equivalent interest income less interest expense)
increased $1.1 million (7.2%) in 1999. The net interest margin ratio (tax
equivalent net interest income expressed as a percentage of average earning
assets) declined to 4.85% in 1999 from 5.04% in 1998. Multiple factors
contributed to this decline. While cost of funds declined 14 basis points, yield
on earning assets declined 32 basis points. On the deposit side, the Company had
many renewing certificates of deposit (CDs) during the year which should have
repriced downward by as many as 140 basis points. However, in order to retain
the CDs (and related accounts in the relationship), the Company was forced, in
many cases, to reduce the cost of funds by as little as 50 basis points. The
decline in asset yields was two-fold. First, higher coupon bonds with "call"
features were called with re-investment opportunities at lower yields. Second,
three year and five year adjustable rate mortgage (ARMs) loans that re-priced in
1999 did so at predominantly lower yields. The Company typically experiences
asset re-pricing in a one-to-one relationship with bank related market rates.
However, deposit rates' relationship to general banking market rates is more
cloudy and not as typically one-to-one.
The banking industry, as a whole, continues to experience shrinking interest
margins. Competition for sources of funds from an ever-expanding cadre of non-
bank players remains intense. The stock market experienced record breaking
surges in both value and activity. The pursuit of these attractive yields has
resulted in a shift of depositor mentality, causing them to squeeze levels of
liquid funds (checking and savings account balances) to lower levels. CD
customers have also aggressively sought financial product alternatives, forcing
banks to bid more aggressively for these funds. As reported in previous
communications, the Company included as part of its Y2K liquidity planning a
promotional CD program that included premium interest rates. Competition for
consumer loans, particularly vehicle and mortgage related (equity line) products
continues to be impacted by non-bank players also, resulting in downward
pressure on pricing tactics.
Non-interest Income
Total non-interest income in 1999 was $2.2 million a 5.8% increase over $2.1
million the previous year. The primary source of non-interest income in prior
years has been service charges and fees related to deposit accounts. Service
fees are continually under review for the possibility of upward adjustment. The
Company adjusted fees associated with the use of its automated teller machines
(ATMs) 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 51% interest in JMC continued to pay
dividends, contributing $106,000 to net income in 1999. The Company also
conducts certain investment brokerage services through its contractual
relationship with UVEST. Activities from this relationship commenced in the
fourth quarter of 1999 and did not contribute any income in 1999. A developing
book of business is expected to deliver earnings contributions in 2000.
Non-interest Expense
Total non-interest expense totaled $12.4 million in 1999, up from 1998's $11.4
million (or an 8.7% increase). Two encouraging points of note are: first, the
rate of increase compares favorably to a 20.7% increase between 1997 and 1998;
second, the 1999 amount includes several items of a non-recurring nature.
Between 1997 and 1998, the Company experienced a substantial increase in the
purchase of capitalized fixed assets. The purchases were associated with
computer software conversions, the opening of two new bank branches, relocating
another branch, and the purchase of real estate for future expansion. The
software purchases were part of overall Y2K preparedness as well as an effort to
improve customer service and employee efficiency in the areas of ATM processing,
check processing, statement rendering, and research. The total fixed asset
increase was $2.9 million, with varying depreciable lives and significant
installation costs, plus increases in depreciation and maintenance expenses.
Between 1998 and 1999, the $1.0 million increase reflected approximately
$400,000 in unusual and non-recurring expenses. Primary components of this
amount were merger-related expenses approximating $100,000, Y2K expenses
approximating $200,000, and flood related expenses from Hurricane Floyd in
excess of $50,000. Not only was the 1999 increase more appropriate relative to a
growing operation, but the unusual nature of 40% of the increase, points
favorably to future earnings through stabilizing non-interest expense.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
Financial Condition
The Company experienced a year of moderate growth as total assets increased to
$383.3 million, representing a $23.0 million increase, or 6.4% over year-end
1998. The primary source of this growth was an increase in total deposits of
$22.7 million (7.3%). Employment of these new resources was accomplished through
increases in the loan portfolio and investment securities account of $15.8
million (7.6%) and $5.8 million (6.2%), respectively. Loan demand was stable
throughout 1999, although not as strong as in previous years.
Provision / Allowance for Loan Losses & Asset Quality
During 1999 the Company provided $505,000 to the allowance for loan and lease
losses (ALLL). This represents an increase of $28,000 over 1998. At year-end
1999 the reserve equaled $2.7 million, a sound 1.18% of outstanding loans.
Non-performing assets at year-end totaled $1,182,000. All other delinquencies on
which interest is still accruing are considered at manageable levels with more
than adequate coverage through the ALLL. Net charge-offs for 1999 were $266,000
compared to $483,000 in 1998. 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 Company has not been
materially "victimized" by this bankruptcy trend, management continues to focus
its attention toward strengthening underwriting standards and the importance of
a meaningful loss reserve.
The Company uses a formalized loan review program and credit risk rating system
designed to provide an early recognition and warning vehicle for more accurate
and timely evaluation of the adequacy of the ALLL. This documented system of
internal loan classifications identifies ongoing credit risk embedded within the
loan portfolio. Credit reviews are based primarily on an analysis of borrowers'
cash flows, with pledged collateral values and values of non-pledged borrower
assets considered only as a secondary source of repayment. Management's overall
credit review process assessed Y2K compliance/preparedness by borrowers. No
material Y2K related consequences have been identified with any borrowers.
Utilizing the results of this system to test the adequacy of the ALLL also
indicates that the ALLL is sufficient to safeguard the Company in light of known
or identified potential loan loss risks.
Capital Resources and Liquidity
Capital, in the form of cash stockholders' equity (Total Stockholders' Equity,
before adjustments for unrealized gains or losses on AFS securities as described
below), was $44.4 million at December 31, 1999 compared to $41.9 million at
year-end 1998, a 6.0% increase. 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 1999 of 11.2%, compared to 12.0% at
December 31, 1998. Cash dividends of $.38 per share were paid in 1999 compared
to $.37 in 1998. The 1998 amount includes a special merger related dividend.
The current level of capital 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 8.5%; 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 relationships with correspondent banks. Sales of Fed funds averaged $22.6
million during 1999, up 21.2% from the $18.7 million average of 1998. The
increase was a deliberate part of the Company's Y2K liquidity plan. Also,
Management will target an average Fed funds sales level of $15 million for 2000.
Additional liquidity exists within the investment account where $4.0 million
matures within ninety days and another $6.3 million matures between ninety days
and one year. The Company also maintains deposit relationships with several
correspondent banks that include commitments through various lines of credit for
short-term borrowing needs. The Company, through its subsidiary banks, is a
member of the Federal Home Loan Bank of Atlanta. This membership affords the
Company various credit vehicles. 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.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
Future Plans
The Company owns two parcels of property in the southern end of Gloucester
County at Gloucester Point. This property was purchased for future branch
expansion. However, resources required for the merger described above, Y2K
preparedness and the assimilation of the two new branches opened in 1998, have
resulted in a temporary delay in the plans for the Gloucester Point office.
The Company is continuing its research and development efforts associated with
developing an internet presence. E-banking, as with other forms of E-commerce,
continues to be at the forefront of customer inquiries as yesterday's
conveniences become today's necessities. The Company plans a full product
offering for E-banking including internal transactions and third party bill
paying.
Interactive voice response ("IVR"), a form of telephone banking, has been
available to PTB customers for several years. This new customer service will be
made available to UCB customers during the first half of 2000.
Year 2000 Issue
The Company performed considerable testing and planning for the century date
change prior to December 31, 1999. Actual expenses associated with effort
approximated $200,000 in 1999. The diminished production and efficiency through
the diverted attention of staff members who would otherwise be 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.
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 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, If any, 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.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
Average Balances, Interest Income
and Expenses, Average Yields and Rates
- --------------------------------------------------------------------------------
Year Ended December 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
Interest earning assets:
Securities:
Taxable $ 70,525 $ 4,577 6.49% $ 62,687 $ 4,158 6.63% $ 56,828 $ 3,950 6.95%
Tax exempt (1) 28,042 2,045 7.29% 26,822 1,911 7.12% 26,389 1,791 6.79%
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 98,567 6,622 6.72% 89,509 6,069 6.78% 83,212 5,741 6.90%
Federal funds sold 22,609 1,071 4.74% 18,660 997 5.34% 11,831 666 5.58%
Deposits at other banks 1,514 76 5.02% -- -- -- -- -- --
Loans, net (2) 221,007 21,148 9.57% 200,238 19,847 9.91% 180,011 17,940 9.97%
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 343,697 28,917 8.41% 308,407 26,913 8.73% 275,155 24,347 8.85%
Less: allowance for
loan losses (2,603) (2,520) (2,450)
Total non-earning assets 28,628 25,782 22,897
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 369,722 $ 331,669 $ 295,601
===================================================================================================================================
Liabilities & Stockholders' equity:
Interest bearing liabilities:
Checking $ 34,918 $ 898 2.57% $ 45,301 $ 1,363 3.01% $ 39,171 $ 1,245 3.18%
Savings and money
market deposits 64,139 2,056 3.21% 48,163 1,521 3.16% 46,879 1,479 3.15%
Other time 174,059 9,200 5.29% 153,045 8,435 5.51% 134,881 7,331 5.44%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 273,116 12,154 4.45% 246,509 11,319 4.59% 220,931 10,055 4.55%
Short-term borrowings 2,250 110 4.89% 1,098 53 4.83% 1,382 70 5.07%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 275,366 12,264 4.45% 247,607 11,372 4.59% 222,313 10,125 4.55%
Noninterest-bearing liabilities:
Demand deposits 48,629 40,498 34,940
Other non-interest bearing
liabilities 2,180 2,367 2,487
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 326,175 290,472 259,740
Stockholders' equity 43,547 41,197 35,861
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 369,722 $ 331,669 $ 295,601
===================================================================================================================================
Net Interest Income $16,653 $ 15,541 $ 14,222
Interest rate spread (3) 3.96% 4.14% 4.30%
Net Interest margin (4) 4.85% 5.04% 5.17%
(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 not 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.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
Volume and Rate Analysis
- --------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
Increase Increase
(Dollars in Thousands) Volume Rate (Decrease) Volume Rate (Decrease)
- --------------------------------------------------------------------------------------------------
Interest Earned On:
Securities:
Taxable $ 504 $ (85) $ 419 $ 376 $ (168) $ 208
Tax-exempt 88 46 134 30 90 120
Loans (net) 1,944 (643) 1,301 1,997 (90) 1,907
Interest bearing deposits in
other banks 76 -- 76 -- -- --
Federal funds sold 158 (84) 74 358 (27) 331
- --------------------------------------------------------------------------------------------------
Total interest income 2,770 (766) 2,004 2,761 (195) 2,566
- --------------------------------------------------------------------------------------------------
Interest Paid On:
Deposits:
Checking (284) (181) (465) 179 (61) 118
Savings and money
market accounts 511 24 535 38 4 42
Time deposits 1,079 (314) 765 1,008 96 1,104
Short-term borrowings 56 1 57 (14) (3) (17)
- --------------------------------------------------------------------------------------------------
Total interest expense 1,362 (470) 892 1,211 36 1,247
- --------------------------------------------------------------------------------------------------
Net interest income $ 1,408 $ (296) $ 1,112 $ 1,550 $ (231) $ 1,319
==================================================================================================
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 in 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.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
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, 1999 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
Maturing or Repricing In:
- --------------------------------------------------------------------------------------------------
Within 90-365 1-5 Over
(Dollars in Thousands) 90 Days Days Years 5 Years Total
- --------------------------------------------------------------------------------------------------
Interest Earning Assets:
Federal funds sold $ 22,577 $ -- $ -- $ -- $ 22,577
Investment securities (1) 8,595 4,568 29,623 56,645 99,431
Loans (2)(3) 68,156 17,075 88,750 52,126 226,107
- --------------------------------------------------------------------------------------------------
Total interest-earning
Assets $ 99,328 $ 21,643 $ 118,373 $ 108,771 $ 348,116
==================================================================================================
Interest Bearing Liabilities:
Deposits:
Interest bearing demand 17,011 -- 19,970 -- 36,981
MMDAs and other savings 34,063 -- 32,728 -- 66,791
Time deposits $100,000
and over 9,255 21,449 8,213 -- 38,917
Other time deposits 24,280 75,260 40,792 -- 140,332
Other borrowed money 1,518 13 1,445 -- 2,976
- --------------------------------------------------------------------------------------------------
Total interest-bearing
Liabilities $ 86,127 $ 96,722 $ 103,148 $ -- $ 285,997
==================================================================================================
Period gap $ 13,201 $ (75,079) $ 15,226 $ 108,771 $ 62,119
Cumulative gap $ 13,201 $ (61,878) $ (46,652) $ 62,119
Cumulative gap as a percent
of total earning assets 3.79% (17.78%) (13.40%) 17.84%
(1) The amounts shown for securities do not include nonaccrual debt securities,
which were approximately $285,000 at December 31, 1999.
(2) The amounts shown for loans have not been reduced by the allowance for loan
losses or unearned income, which totaled approximately $2,663,000 and
$564,000, respectively, at December 31, 1999.
(3) The amounts shown for loans do not include nonaccrual loans, which were
approximately $632,000 at December 31, 1999.
Management's target ratio for the 0-365 day cumulative gap is +/- 10% in 2000.
The Company manages the interest rate risks by monitoring the balances, rates,
call features and maturities of rate sensitive assets and liabilities.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
Securities
The Company's securities portfolio serves several purposes. Portions of the
portfolio are held as investments, while the remaining portions are used to
assist the Company in liquidity and asset liability management.
In June, 1993, the Financial Accounting Standards Board adopted FASB 115, which
changes the manner in which financial institutions classify and account for
their investment securities for fiscal years beginning after December 15, 1993.
In response to this rule change, as of January 1, 1994, the Company revised its
investment securities policy and divided its investment securities portfolio
into two components, (i) securities held to maturity and (ii) securities
available for sale. The new investment securities policy resulted in a
classification at December 31, 1994 of $8.7 million of investment securities to
securities available for sale. The remaining $4.3 million of investment
securities were classified as held to maturity. This classification had no
material effect on the Company's financial condition or results of operations in
the year ended December 31, 1994. Management elected in December 1995 to
classify the entire portfolio as available for sale. In July 1997, Management
performed an extensive earnings and liquidity review of the investment
portfolio. This analysis resulted in a reclassification of previously available
for sale bonds totaling $5.9 million as held to maturity, none of which
reflected any unrealized loss at the time of transfer.
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 stockholders' 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
December 31,
- -------------------------------------------------------------------------------------------------------------
1999 1998 1997
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------
Available For Sale:
U.S. Treasury Securities $ 857 $ 855 $ 877 $ 886 $ 632 $ 629
U.S. Government and federal
agencies 27,392 26,274 25,917 26,156 27,504 27,553
State and local governments 30,278 29,672 28,596 29,237 22,612 22,985
Mortgage-backed securities 22,289 21,400 15,148 15,207 9,779 9,773
Corporate debt obligations 4,149 4,030 3,091 3,135 3,780 3,807
Collateralized mortgage obligations 1,780 1,750 21 21 57 57
Restricted stocks 1,205 1,205 591 591 1,034 1,034
Other securities 3,839 4,543 3,893 4,764 10 756
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale 91,789 89,729 78,134 79,997 65,408 66,594
- -------------------------------------------------------------------------------------------------------------
Held To Maturity:
U.S. Government and federal
agencies 2,593 2,491 4,718 4,755 7,764 7,761
States and political subdivisions 5,549 5,508 6,493 6,680 6,562 6,704
Mortgage-backed securities 1,845 1,787 2,715 2,738 2,573 2,589
- -------------------------------------------------------------------------------------------------------------
Total held-to-maturity 9,987 9,786 13,926 14,173 16,899 17,054
- -------------------------------------------------------------------------------------------------------------
Total securities $ 101,776 $ 99,515 $ 92,060 $ 94,170 $ 82,307 $ 83,648
=============================================================================================================
The book value and weighted average yield of the Company's investment securities
at December 31, 1999, 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.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
Investment Portfolio - Maturity and Yields
Over 10
Years &
1 Year 1 to 5 5 to 10 Equity
or Less Years Years Securities Total
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------
Maturity Distribution:
U.S. Agency securities:
Amortized cost 8,718 7,391 6,465 7,411 29,985
Fair value 8,555 7,259 6,177 6,774 28,765
Weighted average yield 5.84% 6.27% 6.71% 6.66% 6.34%
U.S. Treasury securities:
Amortized cost -- 100 757 -- 857
Fair value -- 99 756 -- 855
Weighted average yield 0.00% 5.01% 5.47% 0.00% 5.42%
State and Political Subdivisions (1):
Amortized cost 645 18,430 11,518 5,233 35,826
Fair value 646 18,383 11,225 4,926 35,180
Weighted average yield 4.00% 7.02% 7.04% 7.53% 7.05%
Other Securities:
Amortized cost 960 4,660 1,879 27,608 35,107
Fair value 956 4,528 1,845 27,386 34,715
Weighted average yield 5.90% 6.04% 7.20% 6.55% 6.50%
Total Securities:
Amortized cost 10,322 30,581 20,619 40,252 101,775
Fair value 10,157 30,269 20,003 39,086 99,515
Weighted average yield 5.73% 6.68% 6.89% 8.21% 6.64%
(1) The amounts shown include nonaccrual debt securities, which were
approximately $285,000 at December 31, 1999.
Effects of Inflation
Interest rates are affected by inflation, but the timing and magnitude of the
changes may not coincide with changes in the consumer price index. Management
actively monitors interest rate sensitivity, as illustrated by the Gap Analysis,
in order to minimize the effects of inflationary trends on interest rates. Other
areas of non-interest expenses may be more directly affected by inflation.
The following table summarizes the Company's loan portfolio for the periods
indicated.
Loan Portfolio
December 31,
- --------------------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------
Real estate mortgage:
Commercial $ 58,064 $ 48,788 $ 40,233 $ 33,786 $ 22,482
Residential (1-4 family) 57,089 52,662 49,746 45,924 41,201
Home equity lines 16,663 15,939 13,165 11,435 9,488
Construction and land development 15,995 13,935 8,596 9,219 9,077
Agricultural 5,067 3,044 2,485 2,894 2,791
Commercial 31,824 30,105 28,734 24,565 17,180
Agricultural 5,066 6,068 7,045 6,437 5,594
Installment 36,497 39,564 38,097 36,006 29,813
All other 475 672 617 522 717
- --------------------------------------------------------------------------------------------
Total loans 226,740 210,777 188,718 170,788 138,343
Less: unearned income (564) (590) (598) (535) (489)
Less: allowance for loan losses (2,663) (2,424) (2,430) (2,321) (2,386)
- --------------------------------------------------------------------------------------------
Total net loans $ 223,513 $ 207,733 $ 185,690 $ 167,932 $ 135,468
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
Loan Portfolio by Percentage
December 31,
- ---------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
Real estate mortgage:
Commercial 25.61% 23.15% 21.32% 19.78% 16.25%
Residential (1-4 family) 25.18% 24.99% 26.35% 28.89% 29.78%
Home equity lines 7.35% 7.56% 6.98% 6.70% 6.86%
Construction and land development 7.05% 6.61% 4.55% 5.40% 6.56%
Agricultural 2.23% 1.44% 1.32% 1.69% 2.02%
Commercial 14.04% 14.28% 15.23% 14.38% 12.42%
Agricultural 2.23% 2.88% 3.73% 3.77% 4.04%
Installment loans 16.10% 18.77% 20.19% 21.08% 21.55%
All other 0.21% 0.32% 0.33% 0.31% 0.52%
- ---------------------------------------------------------------------------------------------
100.00% 100.00% 100.00% 100.00% 100.00%
Remaining Maturities of Selected Loans
December 31, 1999
- --------------------------------------------------------------------------------------------
Commercial, financial Real estate-
(Dollars in Thousands) and Agricultural Construction
- --------------------------------------------------------------------------------------------
Within 1 year $ 16,952 $ 12,744
Variable Rate:
Over one year through five years $ 2,522 $ 2,470
Over five years $ 2,166 $ 323
Fixed Rate:
Over one year through five years $ 13,261 $ 103
Over five years $ 1,989 $ 355
The following table summarizes non-performing assets for the periods indicated.
Non-Performing Assets
December 31,
- --------------------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------
Non-accrual loans $ 632 $ 681 $ 482 $ 372 $ 413
Real estate owned 550 212 377 165 188
Restructured loans -- -- -- -- --
- --------------------------------------------------------------------------------------------
Total non-performing assets $1,182 $ 893 $ 859 $ 537 $ 601
============================================================================================
Loans past due 90 or more days and
accruing interest $ 622 $ 559 $ 196 $ 587 $ 257
- --------------------------------------------------------------------------------------------
Non-performing loans to total loans,
at period end 0.28% 0.32% 0.26% 0.22% 0.30%
Non-performing assets to period
end assets 0.31% 0.25% 0.27% 0.19% 0.24%
Non-performing assets to total
loans and other real estate owned 0.52% 0.42% 0.45% 0.31% 0.44%
As to the nonaccrual loans at December 31, 1999 referred to above, approximately
$65,450 of interest income would have been recorded during such period if the
loan had been current and the interest thereon had been accrued.
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 outstanding balance of $285,000 has
been carried in a non-accruing status since the fourth quarter 1999.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
The provision for loan losses totaled $505,000, $477,000 and $476,000 for the
years ended December 31, 1999, 1998 and 1997, 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.
The following table summarizes changes in the allowance for loan losses.
Allowance for Loan Losses
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Balance at beginning of period $2,424 $2,430 $2,321 $2,116 $1,883
Charge-offs:
Commercial 81 193 206 141 180
Real estate 51 46 8 84 22
Installment and consumer loans 391 354 319 190 215
- -----------------------------------------------------------------------------------------------------
Total loans charged-off 523 593 533 415 417
- -----------------------------------------------------------------------------------------------------
Recoveries:
Commercial 32 15 27 18 19
Real estate 8 -- 34 15 48
Installment and consumer loans 217 95 105 106 112
- -----------------------------------------------------------------------------------------------------
Total loan recoveries 257 110 166 139 179
- -----------------------------------------------------------------------------------------------------
Net charge-offs 266 483 367 276 238
Provision charged to operations 505 477 476 481 471
- -----------------------------------------------------------------------------------------------------
$2,663 $2,424 $2,430 $2,321 $2,116
=====================================================================================================
Ratio of net charge-offs to average
loans outstanding during year 0.12 % 0.24% 0.20% 0.18% 0.37%
Ratio of allowance for loan losses to
total loans outstanding at year-end 1.18 % 1.15% 1.29% 1.36% 1.53%
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. The following table contains
a column summarizing the loan portfolio composition for reference purposes.
Allocation of the Allowance for Loan Losses
Year Ended December 31,
- --------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
Mortgages:
Commercial $ 557 $ 505 $ 367 $ 345 $ 322
Residential 266 248 211 202 204
Home equity 271 75 63 42 41
Agricultural 13 10 12 14 14
Construction 123 100 83 82 70
Commercial 1,106 1,233 1,459 1,037 946
Installment loans 327 253 235 599 519
- --------------------------------------------------------------------------------
Total $2,663 $2,424 $2,430 $2,321 $2,116
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
The following table is a summary of average deposits and average rates paid.
Average Deposits and Average Rates Paid
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
Average Average Average Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------------
Non-interest bearing accounts $ 48,629 0.00% $ 40,498 0.00% $ 34,940 0.00%
Interest bearing accounts:
Interest checking 34,918 2.57% 45,301 3.01% 39,171 3.18%
Savings and money
market accounts 64,139 3.21% 48,163 3.16% 46,879 3.15%
Time deposits 174,059 5.29% 153,045 5.51% 134,881 5.44%
- ----------------------------------------------------------------------------------------------------
Total interest-bearing 273,116 4.45% 246,509 4.59% 220,931 4.55%
- ----------------------------------------------------------------------------------------------------
Total deposits $321,745 $287,007 $255,871
====================================================================================================
The following table is a summary of time deposits of $100,000 or more by
remaining maturities at December 31, 1999.
Maturities of Time Deposits of $100,000 and Over
(Dollars in Thousands) Amount Percent
- --------------------------------------------------------------------------------
Three months or less $ 9,255 23.78%
Three to six months 11,400 29.29%
Six to twelve months 10,049 25.82%
Over twelve months 8,213 21.11%
- --------------------------------------------------------------------------------
Total $ 38,917 100.0%
================================================================================
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
stockholders' equity to total assets at December 31, 1999, 1998 and 1997.
Analysis of Capital
Regulatory December 31,
Minimum 1999 1998 1997
- --------------------------------------------------------------------------------
Capital Ratios:
Risk-based capital:
Tier 1 4.00% 16.99% 16.67% 18.56%
Total 8.00% 18.04% 17.82% 19.73%
Leverage 4.00% 11.41% 11.64% 12.49%
Stockholders' equity to total assets n/a 11.23% 11.97% 12.79%
- --------------------------------------------------------------------------------
Atlantic Financial Corp
[LOGO OF YOUNT,HYDE & BARBOUR, P.C.]
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Directors
Atlantic Financial Corp and Subsidiaries
Newport News, Virginia
We have audited the accompanying consolidated balance sheets of Atlantic
Financial Corp. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1999 and 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 audits. 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 46.1% of
revenue 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 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 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 audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
February 2, 2000
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
[LOGO OF GOODMAN & COMPANY, L.L.P.]
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT ACCOUNTANTS
The Boards of Directors and Stockholder
The Bank of Franklin and The Bank of Sussex & Surry
We have audited the combined balance sheets of The Bank of Franklin and The Bank
of Sussex & Surry and their subsidiaries as of December 31, 1998, and the
related combined statements of income, stockholders' equity, and cash flows for
the years ended December 31, 1998 and 1997. 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 combined financial position of The Bank of
Franklin and The Bank of Sussex & Surry and their subsidiaries as of December
31, 1998, and the results of their operations and their cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ GOODMAN & COMPANY, L.L.P.
Norfolk, Virginia
February 16, 1999
- --------------------------------------------------------------------------------
Atlantic Financial Corp
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, 1999 and 1998
1999 1998
- -------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 17,486,679 $ 11,781,814
Federal funds sold 22,577,095 29,524,045
Interest-bearing deposits in other banks 1,652,787 --
Securities available for sale 89,728,927 79,997,208
Securities held to maturity (fair value of
$9,786,124 in 1999 and $14,173,261 in 1998) 9,986,681 13,925,750
Loans, net of allowance for loan losses of $2,662,655
in 1999 and $2,424,260 in 1998 223,513,033 207,733,355
Premises and equipment 10,480,890 10,702,950
Accrued interest receivable 3,004,116 2,981,581
Other real estate 549,928 212,343
Intangibles, net 1,022,851 1,095,665
Other assets 3,305,971 2,348,610
- -------------------------------------------------------------------------------------------
Total assets $ 383,308,958 $ 360,303,321
===========================================================================================
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest-bearing $ 52,025,801 $ 49,291,165
Interest-bearing 283,020,298 263,018,804
- -------------------------------------------------------------------------------------------
Total deposits $ 335,046,099 $ 312,309,969
Short-term borrowings 2,975,679 1,589,387
Accrued interest payable 1,195,053 1,086,407
Other liabilities 1,054,129 2,188,501
Commitments and contingent liabilities -- --
- -------------------------------------------------------------------------------------------
Total liabilities $ 340,270,960 $ 317,174,264
- -------------------------------------------------------------------------------------------
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 4,191,185
and 4,168,941 shares, respectively 20,955,925 20,844,705
Stock options 3,300 6,843
Retained earnings 23,438,166 21,047,709
Accumulated other comprehensive income (loss) (1,359,393) 1,229,800
- -------------------------------------------------------------------------------------------
Total stockholders' equity $ 43,037,998 $ 43,129,057
- -------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 383,308,958 $ 360,303,321
===========================================================================================
See Notes To Consolidated Financial Statements.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
For Each of the Three Years Ended December 31, 1999
Years Ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Interest and Dividend Income
Loans, including fees $21,147,837 $19,847,465 $17,940,305
Interest on investment securities:
Taxable interest and dividend income 4,576,816 4,157,889 3,950,302
Tax-exempt interest income 1,349,640 1,261,394 1,181,635
Interest on deposits at other banks 76,200 -- --
Interest on federal funds sold 1,070,699 996,657 666,122
- ---------------------------------------------------------------------------------------------------
Total interest and dividend income $28,221,192 $26,263,405 $23,738,364
- ---------------------------------------------------------------------------------------------------
Interest Expense
Deposits $12,153,605 $11,318,748 $10,067,016
Short-term borrowings 110,179 53,290 58,078
- ---------------------------------------------------------------------------------------------------
Total interest expense $12,263,784 $11,372,038 $10,125,094
- ---------------------------------------------------------------------------------------------------
Net interest income $15,957,408 $14,891,367 $13,613,270
Provision for Loan Losses 504,500 477,000 475,750
- ---------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses $15,452,908 $14,414,367 $13,137,520
- ---------------------------------------------------------------------------------------------------
Other Income
Service charges on deposit accounts $ 1,749,401 $ 1,590,058 $ 1,500,711
Net gain on sale of available for sale securities 979 8,035 18,094
Other operating income 453,049 484,009 197,312
- ---------------------------------------------------------------------------------------------------
Total other income $ 2,203,429 $ 2,082,102 $ 1,716,117
- ---------------------------------------------------------------------------------------------------
Other Expenses
Salaries and benefits $ 6,580,588 $ 5,628,535 $ 5,007,383
Occupancy expense 942,651 910,118 756,151
Equipment and data processing 1,905,295 1,527,006 1,166,626
Other operating expenses 2,947,931 3,321,013 2,503,617
- ---------------------------------------------------------------------------------------------------
Total other expenses $12,376,465 $11,386,672 $ 9,433,777
- ---------------------------------------------------------------------------------------------------
Income before income taxes $ 5,279,872 $ 5,109,797 $ 5,419,860
Income Tax Expense 1,339,497 1,447,679 1,359,433
- ---------------------------------------------------------------------------------------------------
Net income $ 3,940,375 $ 3,662,118 $ 4,060,427
===================================================================================================
Earnings Per Share, basic $ 0.94 $ 0.88 $ 1.02
===================================================================================================
Earnings Per Share, assuming dilution $ 0.92 $ 0.86 $ 1.00
===================================================================================================
See Notes To Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
For Each of the Three Years Ended December 31, 1999
Years Ended December 31,
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 3,940,375 $ 3,662,118 $ 4,060,427
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,280,373 1,001,324 597,613
Deferred tax (benefit) (60,942) 153,758 (134,668)
Provision for loan losses 504,500 477,000 475,750
Provision for loss on other real estate 46,464 -- --
Net (gain) loss on other real estate (13,759) 90,178 --
Net (gain) loss on sale of bank premises and equipment (958) 85,689 (250)
(Gain) realized on available for sale securities (979) (8,035) (18,094)
Accretion of discounts and amortization of premiums, net 105,744 73,297 39,924
Changes in assets and liabilities:
(Increase) in accrued interest receivable (22,535) (180,189) (85,697)
(Increase) in other assets (267,420) (960,127) (677,890)
Increase in accrued interest payable 108,646 187,685 102,521
Increase (decrease) in other liabilities (122,850) 170,006 (190,768)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 5,496,659 $ 4,752,704 $ 4,168,868
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale $ 1,971,469 $ 1,534,505 $ 13,819,493
Proceeds from calls and maturities of securities available for sale 14,581,064 19,723,444 6,510,184
Purchases of securities available for sale (30,309,897) (34,293,371) (15,867,461)
Proceeds from calls and maturities of securities held to maturity 3,936,920 10,166,843 1,252,000
Purchases of securities held to maturity -- (7,200,208) (4,093,196)
Net (increase) in loans (16,721,606) (22,754,545) (18,414,946)
Purchases of bank premises and equipment (840,135) (3,765,274) (1,524,853)
Proceeds from sale of bank premises and equipment 958 3,258 250
Proceeds from sale of other real estate 78,602 308,811 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities $(27,302,625) $(36,276,537) $(18,318,529)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase in demand deposit accounts, interest-
bearing demand deposits and savings accounts $ 22,736,130 $ 40,382,420 $ 21,618,323
Net increase in short-term borrowings 1,386,292 957,891 6,776
Proceeds from sale of stock 249,992 20,963 3,347,835
Acquisition of common stock (99,744) (11,018) --
Dividends paid (2,056,002) (1,170,133) (803,138)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 22,216,668 $ 40,180,123 $ 24,169,796
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents $ 410,702 $ 8,656,290 $ 10,020,135
Cash and Cash Equivalents
Beginning of year 41,305,859 32,649,569 22,629,434
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 41,716,561 $ 41,305,859 $ 32,649,569
====================================================================================================================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 12,155,138 $ 11,184,353 $ 10,022,573
====================================================================================================================================
Income taxes $ 1,183,400 $ 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 $ --
====================================================================================================================================
Unrealized gain (loss) on securities available for sale $ (3,923,020) $ 677,597 $ 913,627
====================================================================================================================================
Loan balances transferred to foreclosed properties $ 437,428 $ 233,919 $ --
====================================================================================================================================
See Notes To Consolidated Financial Statements.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For Each of the Three Years Ended December 31, 1999
Accumulated
Other
Common Stock Retained Comprehensive Comprehensive
Stock Options Surplus Earnings Income (Loss) Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1997 $14,553,660 $ 7,380 $ 1,750,177 $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 747,500 -- 2,600,335 -- -- 3,347,835
Cash dividends -- -- -- (1,113,971) -- (1,113,971)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $15,301,160 $ 7,380 $ 4,350,512 $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 the form
of a 100% dividend 5,469,165 -- (4,350,512) (1,118,653) -- --
Issuance of common stock
for interest in L.L.C. 56,170 -- -- 193,830 -- 250,000
Exercise of stock options 21,500 (537) -- -- -- 20,963
Purchase of common stock (3,290) -- -- (7,728) -- (11,018)
Cash dividends -- -- -- (1,547,760) -- (1,547,760)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $20,844,705 $ 6,843 $ -- $21,047,709 $ 1,229,800 $43,129,057
Comprehensive income:
Net income $ -- $ -- $ -- $ 3,940,375 $ -- $ 3,940,375 $ 3,940,375
Other comprehensive income:
Unrealized holding gains on
securities available for sale
arising during the period net
of tax of $(1,333,494) -- -- -- -- -- (2,588,547) --
Less reclassification adjustment
net of tax of $(333) -- -- -- -- -- (646) --
------------
Other comprehensive income,
net of tax -- -- -- -- (2,589,193) (2,589,193) (2,589,193)
------------
Total comprehensive income -- -- -- -- -- $ 1,351,182 --
============
Exercise of stock options 141,720 (3,543) -- 111,815 -- 249,992
Purchase of common stock (30,500) -- -- (69,244) -- (99,744)
Cash dividends -- -- -- (1,592,489) -- (1,592,489)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $20,955,925 $ 3,300 $ -- $23,438,166 $(1,359,393) $43,037,998
====================================================================================================================================
See Notes To Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business
The accompanying consolidated financial statements include the accounts of
Atlantic Financial Corp. (AFC) and its wholly-owned subsidiaries, Peninsula
Trust Bank, Inc. (PTB) and United Community Bank (UCB). PTB and UCB 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. became affiliated pursuant to an Agreement and Plan
of Reorganization (the Agreement) dated July 8, 1998. United Community
Bankshares, Inc. was a bank holding company which wholly owned the stock of BOF
and BSS. In conjunction with the merger, United Community Bankshares, Inc. was
dissolved. The terms of the Agreement provided for, among other provisions, that
each outstanding share of United Community Bankshares, Inc. 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.
United Community Bankshares, Inc. was formed on August 27, 1999 through the
merger of Bank of Franklin (BOF) and Bank of Sussex and Surry (BSS).
Basis of Presentation and Consolidation
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.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate and deferred tax assets.
Securities
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as "available for sale" and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans. The
ability of the Company's debtors to honor their contracts is dependent upon the
real estate and general economic conditions in the Company's market area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for the allowance for loan losses and any
deferred fees or costs on originated loans. Interest income is accrued on the
unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Installment loans are typically charged off no later than
180 days past due. In all cases, loans are placed on nonaccrual or charged-off
at an earlier date if collection of principal or interest is considered
doubtful.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
All interest accrued but not collected for loans that are placed on nonaccrual
or charged-off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractural terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent. Large groups of smaller
balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and
residential loans for impairment disclosures.
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
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at the lesser of the loan balance outstanding or the fair
value at the date of foreclosure, establishing a new cost basis. Subsequent to
foreclosure, valuations are periodically performed by management and the assets
are carried at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation are included
in other operating expenses.
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 $84,742, $72,496 and $50,826 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Income Tax
Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash and cash
equivalents include cash and balances due from banks and federal funds sold, all
of which mature within 90 days.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
Advertising Costs
The Company follows the policy of charging the costs of advertising to expense
as incurred. Advertising expense of $375,945, $276,550 and $307,001 were
incurred in 1999, 1998 and 1997, respectively.
Earnings Per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options, and are determined using the treasury method. See
Note 13 for detail of basic and diluted earnings per share. Weighted average
shares for all years have been restated to give effect to the 100% stock
dividend in 1998 prior to the business combination explained in Note 7.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 2000. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. Because the
Company does not use these derivative instruments and strategies, management
does not expect the adoption of this Statement to have any effect on earnings or
financial position.
NOTE 2: BUSINESS COMBINATION
On December 1, 1998, the Company effected a business combination with United
Community Bankshares, Inc., by exchanging 1,965,741 shares of its common stock
for all of the common stock of United Community Bankshares, Inc. Immediately
following the merger, United Community Bankshares, Inc. was dissolved. The
combination has been accounted for as a pooling of interests and, accordingly,
all prior financial statements have been restated to include United Community
Bankshares, Inc. The results of operations of the separate companies for periods
prior to the combination are summarized as follows:
Net Interest
Income Net Income
- --------------------------------------------------------------------------------
(Dollars in Thousands)
Nine months ended September 30, 1998
MACB $ 6,407 $ 1,404
United Community Bankshares, Inc. 4,636 1,613
Year ended December 31, 1997
MACB $ 7,552 $ 1,830
United Community Bankshares, Inc. 6,061 2,230
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. (JMC), 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. An additional 1%
membership interest was purchased April 1, 1999 for $17,600. The Company does
not exercise any management control over JMC; therefore, the Company's ownership
is recorded using the equity method of accounting.
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, 1999
and 1998, the aggregate amounts of daily average required balances were
approximately $2,084,000 and $1,610,000, respectively.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
NOTE 5: SECURITIES
The amortized cost and fair values of securities, with gross unrealized gains
and losses, follows:
December 31, 1999
- --------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------------
Securities available for sale
U. S. Treasury securities $ 857,263 $ 684 $ (3,057) $ 854,890
U. S. Government
and federal agencies 27,392,180 8,089 (1,126,287) 26,273,982
State and local governments 30,277,885 100,295 (706,237) 29,671,943
Mortgage-backed securities 22,289,215 -- (888,783) 21,400,432
Corporate debt obligations 4,148,809 -- (118,524) 4,030,285
Collateralized mortgage obligations 1,779,586 -- (29,899) 1,749,687
Restricted stocks 1,204,700 -- -- 1,204,700
Other securities 3,838,975 791,533 (87,500) 4,543,008
- --------------------------------------------------------------------------------------------------------------
Total securities available for sale $91,788,613 $ 900,601 $(2,960,287) $89,728,927
- --------------------------------------------------------------------------------------------------------------
Securities held to maturity
U. S. Government
and federal agencies $ 2,592,973 $ -- $ (102,296) $ 2,490,677
State and local governments 5,548,487 14,967 (55,112) 5,508,342
Mortgage-backed securities 1,845,221 -- (58,116) 1,787,105
Total securities held to maturity $ 9,986,681 $ 14,967 $ (215,524) $ 9,786,124
==============================================================================================================
December 31, 1998
- --------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- --------------------------------------------------------------------------------------------------------------
Securities available for sale
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 591,000 -- -- 591,000
Other securities 3,892,630 880,908 (9,850) 4,763,688
- --------------------------------------------------------------------------------------------------------------
Total securities available for sale $78,133,865 $ 2,053,425 $ (190,082) $79,997,208
- --------------------------------------------------------------------------------------------------------------
Securities held to maturity
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
- --------------------------------------------------------------------------------------------------------------
Total securities held to maturity $13,925,750 $ 262,811 $ (15,300) $14,173,261
==============================================================================================================
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
The amortized cost and fair value of securities by contractual maturity at
December 31, 1999 follows:
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------------------------------
Within 1 year $ 9,363,676 $ 9,231,944 $ 849,971 $ 817,560
1 to 5 years 24,905,761 24,633,888 3,257,681 3,261,675
5 to 10 years 16,561,244 16,014,957 2,579,053 2,539,092
Over 10 years 11,845,456 10,950,311 1,454,755 1,380,692
- -------------------------------------------------------------------------------------------------------
$62,676,137 $60,831,100 $ 8,141,460 $ 7,999,019
Collateralized mortgage obligations 1,779,586 1,749,687 -- --
Mortgage-backed securities 22,289,215 21,400,432 1,845,221 1,787,105
Equity and other securities 5,043,675 5,747,708 -- --
- -------------------------------------------------------------------------------------------------------
$91,788,613 $89,728,927 $ 9,986,681 $ 9,786,124
=======================================================================================================
For the years ended December 31, 1999, 1998 and 1997, proceeds from sales of
securities available for sale were $1,971,469, $1,534,505 and $13,819,493,
respectively. Gross realized gains of $2,403, $16,051 and $36,324 and gross
realized losses of $1,424, $8,016 and $18,230 were recognized on those sales,
respectively. The tax provision applicable to these net realized gains amounted
to $333, $2,732 and $6,152, respectively.
At December 31, 1999 and 1998, approximately $21,193,877 and $12,851,000,
respectively, of securities were pledged to secure deposits of the U.S.
Government, the Commonwealth of Virginia, and repurchase agreements.
NOTE 6: LOANS
A summary of the balances of loans follows:
December 31,
1999 1998
- -----------------------------------------------------------------------------------------
(Dollars in Thousands)
Real estate mortgage:
Construction and land development $ 15,995 $ 13,935
Residential (1-4 family) 57,089 52,632
Home equity lines 16,663 15,939
Commercial 58,064 48,788
Agricultural 5,067 3,044
Commercial (except those secured by real estate) 31,824 30,105
Agriculture (except those secured by real estate) 5,066 6,068
Loans to individuals for household,
family and other consumer expenditures 36,497 39,564
All other loans 475 672
- -----------------------------------------------------------------------------------------
$226,740 $210,747
Less unearned income (564) (590)
Less allowance for loan losses (2,663) (2,424)
- -----------------------------------------------------------------------------------------
Loans, net $223,513 $207,733
=========================================================================================
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
NOTE 7: ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
Years Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Balance at beginning of year $ 2,424,260 $ 2,430,143 $ 2,320,972
Provision for loan losses 504,500 477,000 475,750
Recoveries 256,805 109,868 166,378
Charge-offs (522,910) (592,751) (532,957)
- --------------------------------------------------------------------------------
Balance at end of year $ 2,662,655 $ 2,424,260 $ 2,430,143
================================================================================
The following is a summary of information pertaining to impaired loans:
December 31,
1999 1998
- --------------------------------------------------------------------------------
Impaired loans without a valuation allowance $ 152,874 $ 257,944
Impaired loans with a valuation allowance -- --
- --------------------------------------------------------------------------------
Total impaired loans $ 152,874 $ 257,944
================================================================================
There were no valuation allowances related to impaired loans at December 31,
1999 and 1998.
December 31,
1999 1998
- -------------------------------------------------------------------------------------------------
Average investment in impaired loans $ 104,801 $ 64,486
=================================================================================================
Interest income recognized on impaired loans $ 13,807 $ 8,095
=================================================================================================
Interest income recognized on a cash basis on impaired loans $ 13,807 $ 8,095
=================================================================================================
The Company had no impaired loans in 1997.
No additional funds were committed to be advanced in connection with impaired
loans.
Nonaccrual loans excluded from impaired loan disclosure under FASB No. 114
amounted to $479,807, $423,718 and $482,181 at December 31, 1999, 1998 and 1997,
respectively. If interest on these loans had been accrued, such income would
have been $61,779, $35,815 and $49,162 at December 31, 1999, 1998 and 1997,
respectively.
NOTE 8: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Banks have granted loans to principal
officers and directors and their affiliates of $2,489,569 and $2,876,237 at
December 31, 1999 and 1998, respectively. During the year ended December 31,
1999, total principal additions were $949,547 and total principal payments were
$1,336,215.
Deposits from related parties held by the Banks at December 31, 1999 amounted to
$7,093,462.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
NOTE 9: PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises and equipment
follows:
December 31,
1999 1998
- --------------------------------------------------------------------------------
Building and improvements $ 5,874,615 $ 5,654,544
Furniture and equipment 6,266,290 5,786,710
Land 3,380,361 3,348,659
Construction in progress 59,719 111,155
Leasehold improvements 74,874 29,657
================================================================================
$ 15,655,859 $ 14,930,725
Accumulated depreciation (5,174,969) (4,227,775)
================================================================================
$ 10,480,890 $ 10,702,950
================================================================================
For the years ended December 31, 1999, 1998 and 1997, respectively, depreciation
expense was $1,050,731, $824,661 and $581,047, respectively.
NOTE 10: DEPOSITS
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $38,917,269 and $36,308,184 in 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities on certificates of deposit are as
follows:
2000 $ 130,245,490
2001 30,924,495
2002 5,524,283
2003 8,501,417
2004 and thereafter 4,053,164
=================================================
$ 179,248,849
=================================================
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 who have completed one year of service. The
Bank may make discretionary matching contributions. The Bank's contributions for
1999, 1998 and 1997 totaled $69,031, $35,160 and $19,893, respectively. In
addition, during 1999, PTB contributed $60,000 to the plan to be allocated to
all employees eligible to participate. 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 UCB 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 Bank matches 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 Bank at the
discretion of the Board of Directors. The Bank's contributions for 1999 and 1998
totaled $74,699 and $69,600, respectively.
The BOF defined contribution plan was restated, and the BSS defined benefit plan
terminated. Accordingly, substantially all BOF and BSS employees rolled over
their balances into the plan, which was in turn assumed by AFC.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
Information about the BSS defined benefit plan follows:
1998 1997
- --------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation, beginning $ 803,401 $ 614,540
Service cost -- 50,276
Interest cost 217,779 42,845
Actuarial cost -- 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 actuarial 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%
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
NOTE 12: INCOME TAXES
The components of the net deferred tax asset (liability), included in other
assets (other liabilities), are as follows:
December 31,
1999 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Deferred loan fees $ 62,693 $ 123,542
Unrealized loss on available for sale securities 700,293 --
Allowance for loan losses 312,574 249,826
Allowance for other real estate owned 29,800 --
Deferred compensation 67,392 58,477
Other 28,433 7,304
- --------------------------------------------------------------------------------
$ 1,201,185 $ 439,149
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Unrealized gain on available for sale securities $ -- $ 633,543
Fixed assets 107,670 147,575
Premium on purchased deposits 42,578 --
Other 27,077 28,949
- --------------------------------------------------------------------------------
$ 177,325 $ 810,067
- --------------------------------------------------------------------------------
$ 1,023,860 $ (370,918)
================================================================================
Allocation of federal income taxes between current and deferred portions is as
follows:
Years Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Current tax expense $ 1,400,439 $ 1,293,921 $ 1,494,101
Deferred tax expense (benefit) (60,942) 153,758 (134,668)
- --------------------------------------------------------------------------------
$ 1,339,497 $ 1,447,679 $ 1,359,433
================================================================================
The reasons for the differences between the amount of income tax determined by
applying the U.S. Federal income tax rate to pretax income and the income tax
provision are summarized as follows:
Years Ended December 31,
1999 1998 1997
- --------------------------------------------------------------------------------
Income tax at statutory rate $ 1,795,156 $ 1,737,331 $ 1,842,752
Increase (decrease) resulting from:
Tax-exempt income (450,041) (424,056) (396,948)
Merger expenses -- 94,782 --
Other (5,618) 39,622 (86,371)
- --------------------------------------------------------------------------------
$ 1,339,497 $ 1,447,679 $ 1,359,433
================================================================================
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 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 the stock split and the business
combination explained in Note 2. Potential dilutive common stock had no effect
on income available to common stockholders.
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Per Share Per Share Per Share
Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------
Basic earnings
per share 4,188,319 $0.94 4,162,044 $0.88 3,979,027 $1.02
----- ----- -----
Effect of dilutive securities:
Stock options 80,552 108,913 76,241
------ ------- ------
Diluted earnings per share 4,268,871 $0.92 4,270,957 $0.86 4,055,268 $1.00
--------- ----- --------- ----- --------- -----
NOTE 14: COMMITMENTS AND CONTINGENT LIABILITIES
PTB has federal funds arrangements with other institutions, which provide
$9,000,000 of short-term borrowing capacity. There were no amounts drawn on
these lines at December 31, 1999 or 1998.
UCB 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, 1999, UCB could borrow approximately $15,788,900 subject to collateral
acceptable to FHLB. As of December 31, 1999, $1,439,286 was borrowed from FHLB
and secured by securities with a book value of $1,751,022. The Bank had not
drawn on the line at December 31, 1998.
UCB also has federal funds arrangements with other institutions, which provide
an additional $13,282,525 of short-term borrowing capacity. There were no
amounts drawn from these lines at December 31, 1999 or 1998.
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 18 with respect to financial instruments with off-balance-sheet risk.
NOTE 15: STOCK COMPENSATION PLANS
At December 31, 1999, 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. There were no
options granted during 1999 and 1998. 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) for options granted in 1997, reported net
income, basic earnings per share and diluted earnings per share would have been
adjusted to $3,770,670, $ .95 and $ .93, respectively.
The Company has a fixed stock option plan under which it may grant options to
certain key employees of UCB 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
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
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 July 31,
2000.
A summary of the activity in the stock option plans follow:
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 172,786 $ 7.58 177,086 $ 7.51 136,044 $ 6.55
Granted -- -- -- -- 41,042 10.70
Exercised 28,344 4.88 4,300 4.88 -- --
Outstanding at end of year 144,442 7.65 172,786 7.58 177,086 7.51
- ---------------------------------------------------------------------------------------------------------
Exercisable at end of year 144,442 172,786 177,086
Weighted-average fair value
per option of options granted
during the year $ -- $ -- $ 7.06
===========================================================================================================
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, 1999 is as
follows:
Options Outstanding
and Exercisable
- --------------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Contractual Range of Number Exercise
Life Exercise Price Outstanding Price
- --------------------------------------------------------------------------------
.67 $ 4.875 26,400 $ 4.875
.67 5.00 8,000 5.00
1.67 5.625 20,000 5.625
5 8.00-8.25 44,000 8.01
6 11.25 5,000 11.25
7.25 12.50 7,000 12.50
7.25 9.61 34,042 9.61
All options have been restated giving retroactive effect to the two for one
stock split in 1998 and the business combination discussed in Note 2.
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
NOTE 16: DEFERRED COMPENSATION
UCB has entered into deferred compensation agreements with certain key
employees, which provide benefits payable at age 65. The present value of the
estimated liability is being accrued over the remaining years to the date when
the employees are first eligible for the benefits. The deferred compensation
charged to expense totaled $47,638 and $1,105 for the years ended December 31,
1999 and 1998, respectively. There was no deferred compensation expense for the
year ended December 31, 1997.
NOTE 17: 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, 1999 the aggregate amount of
unrestricted funds which could be transferred from the banking subsidiaries to
the Parent Company without prior regulatory approval totaled $5,886,456 or 13.7%
of the consolidated net assets.
NOTE 18: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to credit related 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. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheet.
The Company's exposure to credit loss is represented by the contractual amounts
of these instruments. The Company follows the same credit policies in making
commitments as it does for on-balance-sheet instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
1999 1998
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit $ 45,212 $ 24,039
Standby letters of credit $ 3,538 $ 3,445
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 amount of collateral obtained, if deemed
necessary by the Company, is based on management's credit evaluation of the
customer. Unfunded commitments under commercial lines of credit, revolving
credit lines and overdraft protection agreements are commitments for possible
future extensions of credit to existing customers. These lines of credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Company is committed.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support public and private borrowing
arrangements. 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 collateral supporting those commitments if deemed necessary.
The Company maintains its cash accounts in other commercial banks. The amount on
deposit with correspondent institutions at December 31, 1999, exceeded the
insurance limits of the Federal Deposit Insurance Corporation by $5,640,371.
NOTE 19: 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:
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
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 variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. Fair values for
certain mortgage loans (e.g., one-to-four family residential), credit card
loans, and other consumer loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions adjusted for
differences in loan characteristics. Fair values for other loans (e.g.,
commercial real estate and investment property mortgage loans, commercial and
industrial loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. Fair values for non-performing loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.
Deposits
The fair values disclosed for demand deposits (e.g., interest and non-interest
checking, savings and certain types of money market accounts) are, by
definition, equal to the amounts payable on demand at the reporting date (i.e,
their carrying amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
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.
Accrued Interest
The carrying amounts of accrued interest approximates fair value.
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.
The estimated fair value and related carrying amounts of the Company's financial
instruments are as follows:
December 31,
- ------------------------------------------------------------------------------------
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
Financial assets:
Cash and due from banks $ 17,487 $ 17,487 $ 11,782 $ 11,782
Federal funds sold 22,577 22,577 29,524 29,524
Interest-bearing deposits in other banks 1,653 1,653 -- --
Securities 99,716 99,515 93,923 94,170
Loans, net 223,513 223,963 207,733 226,786
Accrued interest receivable 3,004 3,004 2,982 2,982
Financial liabilities:
Deposits $335,046 $335,244 $312,310 $317,852
Short-term borrowings 2,976 2,909 1,589 1,602
Accrued interest payable 1,195 1,195 1,086 1,086
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
NOTE 20: REGULATORY MATTERS
The Company (on a consolidated basis) and the Banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Banks must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weighting, and other factors. Prompt
corrective actions are not applicable to Bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the
Company and the Banks met all capital adequacy requirements to which they are
subject.
As of December 31, 1999, the most recent notification from the Federal Reserve
Bank categorized the Banks as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, an
institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following tables. There are no conditions or
events since the notification that management believes have changed the Banks'
category. The Company's and the Banks' actual capital amounts and the ratios as
of December 31, 1999 and 1998 are also presented in the table.
Minimum
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirement Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
(Amount in Thousands)
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
(more than (more than
Consolidated $ 46,038 18.0% or equal to)$ 20,418 or equal to)8.0% N/A
(more than (more than (more than (more than
PTB $ 20,142 12.8% or equal to)$ 12,540 or equal to)8.0% or equal to)$ 15,675 or equal to)10.0%
(more than (more than (more than (more than
UCB $ 21,542 20.2% or equal to) 8,517 or equal to)8.0% or equal to)$ 10,647 or equal to)10.0%
Tier 1 Capital (to Risk
Weighted Assets):
(more than (more than
Consolidated $ 43,374 17.0% or equal to)$ 10,209 or equal to)4.0% N/A
(more than (more than (more than (more than
PTB $ 18,629 11.9% or equal to)$ 6,270 or equal to)4.0% or equal to)$ 9,405 or equal to) 6.0%
(more than (more than (more than (more than
UCB $ 20,041 18.8% or equal to)$ 4,259 or equal to)4.0% or equal to)$ 6,388 or equal to) 6.0%
Tier 1 Capital (to
Average Assets):
(more than (more than
Consolidated $ 43,374 11.4% or equal to)$ 15,211 or equal to)4.0% N/A
(more than (more than (more than (more than
PTB $ 18,629 8.7% or equal to)$ 8,577 or equal to)4.0% or equal to)$ 10,721 or equal to)5.0%
(more than (more than (more than (more than
UCB $ 20,041 12.2% or equal to)$ 6,593 or equal to)4.0% or equal to)$ 8,241 or equal to)5.0%
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
(more than (more than
Consolidated $ 43,612 17.8% or equal to)$ 19,577 or equal to)8.0% N/A
(more than (more than (more than (more than
PTB $ 18,304 12.9% or equal to)$ 11,315 or equal to)8.0% or equal to)$ 14,144 or equal to)10.0%
(more than (more than (more than (more than
UCB $ 19,713 19.1% or equal to)$ 8,238 or equal to)8.0% or equal to)$ 10,298 or equal to)10.0%
Tier 1 Capital (to Risk
Weighted Assets):
(more than (more than
Consolidated $ 40,804 16.7% or equal to)$ 9,789 or equal to)4.0% N/A
(more than (more than (more than (more than
PTB $ 16,919 12.0% or equal to)$ 5,658 or equal to)4.0% or equal to)$ 8,486 or equal to)6.0%
(more than (more than (more than (more than
UCB $ 18,299 17.8% or equal to)$ 4,119 or equal to)4.0% or equal to)$ 6,178 or equal to)6.0%
Tier 1 Capital (to
Average Assets):
(more than (more than
Consolidated $ 40,804 11.6% or equal to)$ 14,027 or equal to)4.0% N/A
(more than (more than (more than (more than
PTB $ 16,919 8.9% or equal to)$ 7,631 or equal to)4.0% or equal to)$ 9,539 or equal to)5.0%
(more than (more than (more than (more than
UCB $ 18,299 11.4% or equal to)$ 6,396 or equal to)4.0% or equal to)$ 7,995 or equal to)5.0%
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
NOTE 21: PARENT COMPANY ONLY FINANCIAL STATEMENTS
ATLANTIC FINANCIAL CORP
(Parent Company Only)
Balance Sheets
December 31,
1999 1998
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 4,368,635 $ 3,057,944
Securities available for sale -- 383,515
Investment in subsidiaries 38,084,314 37,209,677
Bank premises and equipment 128,490 19,432
Intangibles, net 320,470 332,450
Due from subsidiaries -- 2,997,626
Other assets 681,513 131,889
- --------------------------------------------------------------------------------
Total assets $ 43,583,422 $ 44,132,533
================================================================================
Liabilities and Stockholders' Equity
Liabilities
Dividends payable $ 461,030 $ 924,543
Other liabilities 84,394 78,933
- --------------------------------------------------------------------------------
Total liabilities $ 545,424 $ 1,003,476
- --------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock $ -- $ --
Common stock 20,955,925 20,844,705
Stock options 3,300 6,843
Retained earnings 23,438,166 21,047,709
Accumulated other comprehensive income (loss) (1,359,393) 1,229,800
- --------------------------------------------------------------------------------
Total stockholders' equity $ 43,037,998 $ 43,129,057
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 43,583,422 $ 44,132,533
================================================================================
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
ATLANTIC FINANCIAL CORP
(Parent Company Only)
Statements of Income
Years Ended December 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Income
Dividends from subsidiaries $ 1,131,458 $ 4,153,067 $ 1,396,203
Interest from subsidiaries 22,272 86,521 --
Other income 522,010 466,902 152,874
Gain on sale of securities -- -- 800
- -----------------------------------------------------------------------------------------------
$ 1,675,740 $ 4,706,490 $ 1,549,877
- -----------------------------------------------------------------------------------------------
Expenses
Salaries and benefits $ 972,752 $ -- $ --
Stockholder expenses 50,372 64,835 30,695
Merger expenses -- 278,770 --
Professional fees 192,452 112,219 64,172
Insurance 23,910 49,907 34,163
Printing and postage 17,086 30,523 5,505
Directors' fees 76,673 38,751 35,000
Miscellaneous 156,882 207,495 34,038
- -----------------------------------------------------------------------------------------------
$ 1,490,127 $ 782,500 $ 203,573
- -----------------------------------------------------------------------------------------------
Net income before income tax
benefit and undistributed
equity in subsidiaries $ 185,613 $ 3,923,990 $ 1,346,304
Income tax benefit (299,975) (4,254) (16,328)
- -----------------------------------------------------------------------------------------------
Net income before undistributed
earnings of subsidiaries $ 485,588 $ 3,928,244 $ 1,362,632
Undistributed (distributed) equity in subsidiaries 3,454,787 (266,126) 2,697,795
- -----------------------------------------------------------------------------------------------
Net income $ 3,940,375 $ 3,662,118 $ 4,060,427
===============================================================================================
- --------------------------------------------------------------------------------
Atlantic Financial Corp
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31, 1999, 1998 and 1997
ATLANTIC FINANCIAL CORP.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 3,940,375 $ 3,662,118 $ 4,060,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 23,908 17,500 --
Depreciation 16,988 65,353 4,304
Gain on sale of securities -- -- (800)
Distributed (undistributed) earnings of subsidiaries (3,454,787) 266,126 (2,697,795)
(Undistributed) earnings of equity investments (105,987) (133,465) --
Deferred tax provision 2,840 -- --
(Increase) decrease in due from subsidiaries 2,997,626 (2,450,710) (309,683)
(Increase) in other assets (163,845) (18,733) (126,794)
Increase (decrease) in other liabilities 2,621 78,933 (381,469)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 3,259,739 $ 1,487,122 $ 548,190
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Purchase of interest in L.L.C. $ (17,600) $ (250,000) $ --
Purchase of securities available for sale -- -- (100,000)
Proceeds from sale of securities available for sale 100,000 -- 351,800
Purchase of premises and equipment (125,694) (299,476) (67,419)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ (43,294) $ (549,476) $ 184,381
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Cash dividends paid $(2,056,002) $(1,170,133) $ (803,138)
Issuance of common stock 249,992 20,963 3,347,835
Acquisition of common stock (99,744) (11,018) --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities $(1,905,754) $(1,160,188) $ 2,544,697
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents $ 1,310,691 $ (222,542) $ 3,277,268
Cash and Cash Equivalents
Beginning 3,057,944 3,280,486 3,218
- -------------------------------------------------------------------------------------------------------------------
Ending $ 4,368,635 $ 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 $ --
===================================================================================================================
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB
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, 1999
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, 1999: $30,423,642
The aggregate market value (based on a sale price of the stock of $14.00) of
Atlantic Financial Corp voting stock held by non-affiliates as of March 15, 2000
was $50,226,386.
As of March 15, 2000, Atlantic Financial Corp has 4,177,585 shares of Common
Stock $5 Par Value outstanding.
The Proxy Statement of the annual meeting of shareholders to be held April 25,
2000 is incorporated by reference in Part III of this Form 10-KSB.
- --------------------------------------------------------------------------------
Atlantic Financial Corp
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
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 Stockholder Matters........3
Item 6. Management's Discussion and Analysis.........................5-16
Item 7. Financial Statements........................................17-39
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, 1999.
(2) A list of Exhibits 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.
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 W. J. Farinholt, Kenneth E. Smith,
(Registrant) President and Executive Vice President and
Chief Executive Officer 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.
Joseph A. Lombard, Jr. W. J. Farinholt, Kenneth E. Smith, A Majority of the Directors of the Registrant
Chairman of the Board President and Executive Vice President and whose names appear on page 42.
Chief Executive Officer Chief Financial Officer
- --------------------------------------------------------------------------------
ATLANTIC FINANCIAL CORP BOARD OF DIRECTORS
- -----------------------------------------------------------------------------------------------------------
Joseph A. Lombard, Jr., DDS - Chairman J. Philip Bain, Jr. Harvey G. Pope
Owner Partner Consultant
Lombard, Luckam & Smith T.L. Bain, L.P. Morven Peanut Shellers
Retired Owner
J. Russell West - Vice Chairman Charles F. Dawson Hancock Peanut Co.
Owner Partner
Ivor Furniture Company Bay Design Group, PC William B. Savedge
Vice President
William J. Farinholt Robert D. Foster Manry Rawls Insurance Corp.
President & CEO President
Atlantic Financial Corp Tre-Suz-Ann Development J. D. Spivey
President & CEO Foster Management Company Retired Vice President
Peninsula Trust Bank Southampton Tractor Co., Inc.
Harry M. Healy
Wenifred O. Pearce Retired President F. Bruce Stewart
Vice Chairman Bailey Amusement Company Attorney-at-Law
Chief Operating Officer Stewart & Stewart
Atlantic Financial Corp Hersey M. Mason, Jr.
Vice Chairman President & CEO Thomas Z. Wilke
United Community Bank Mason Realty, Inc. Agent
State Farm Insurance
ATLANTIC FINANCIAL CORP OFFICERS
- -----------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS OFFICERS Pamela T. Ailsworth
Assistant Vice President
William J. Farinholt Diana K. Giles Internal Auditor
President & CEO Sr. Vice President
MIS Officer Dennis S. Wilt
Wenifred O. Pearce Assistant Vice President
Vice Chairman Michelle D. Ammons Investment Officer
Chief Operating Officer Vice President
Human Resources Officer
Kenneth E. Smith
Executive Vice President David C. Bonner, Jr.
Chief Financial Officer Vice President
Corporate Secretary Director of Internal Audit
D. Eugene Brittle Kathleen C. Healy
Executive Vice President Vice President
Controller
ATLANTIC FINANCIAL CORP EMPLOYEES
- -----------------------------------------------------------------------------------------------------------
D. Jeanne F. Burton Patricia A. Parks
Thayer E. Coven Christophor P. Rowe
Ilonka G. D'Azevedo Julie C. Soles
Ami S. Leaman Jason E. Turner
Amy E. Mitchem
- --------------------------------------------------------------------------------
42 Atlantic Financial Corp
PENINSULA TRUST BANK, INC. BOARD OF DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph A. Lombard, Jr., DDS - Chairman Robert D. Foster Hersey M. Mason, Jr
Owner President President & CEO
Lombard, Luckam & Smith Tre-Suz-Ann Development Mason Realty, Inc.
Foster Management Company
Charles F. Bristow Henry C. Rowe, MD
Farmer & Hauling Harry M. Healy Medical Director
Retired President Riverside Hayes Medical Center
John R. Curtis Bailey Amusement Company
Retired Regional Director Kenneth E. Smith
FDIC Jeanne P. Hockaday Executive Vice President
President Chief Financial Officer
Charles F. Dawson Coldwell Banker Atlantic Financial Corp
Partner Virginia Country Real Estate Peninsula Trust Bank, Inc.
Bay Design Group, PC
David Holland Marion G. Smith
William J. Farinholt Owner Retired President
President & CEO David Holland's Law Group, L.L.C. Whitley Peanut Company
Atlantic Financial Corp
Peninsula Trust Bank George A. Marston, Jr. Thomas Z. Wilke
Retired Owner Agent
William D. Fary Oakland Farm State Farm Insurance
Owner
Bill Fary Ford, Inc.
UNITED COMMUNITY BANK BOARD OF DIRECTORS
- ------------------------------------------------------------------------------------------------------------------------------------
J. Russell West - Chairman Hunter Darden, Jr. Durwood V. Scott
Owner Retired Farmer Owner and President
Ivor Furniture Company Scott & Associates, Inc. Realtors
A. Meredith Felts, Sr.
Wenifred O. Pearce - Vice Chairman Retired Farmer Marion G. Smith
Vice Chairman & COO Retired President
Atlantic Financial Corp Robert D. Foster Whitley Peanut Company
President
Jack P. Bain Tre-Suz-Ann Development J.D. Spivey
Private Investor Foster Management Company Retired Vice President
Southampton Tractor Co., Inc.
J. Philip Bain, Jr. Charles F. Kingery
Partner Retired Pharmacist F. Bruce Stewart
T.L. Bain, L.P. Former Owner Attorney-at-Law
Parker Drug Co. Stewart & Stewart
Jack Beale
Retired Farmer James H. Lee, III Larry Whitley
President Self employed
D. Eugene Brittle James H. Lee and Sons, Inc. Farmer
President & CEO
United Community Bank William B. Savedge Wesley F. Wills
Vice President Retired President
Gurney B. Cowling, Jr. Manry Rawls Insurance Corp. Bristow Insurance Agency & Realty Corp.
Vice President & Secretary
Cowling Bros.
- ------------------------------------------------------------------------------------------------------------------------------------
1999 Annual Report And Form 10KSB 43
PENINSULA TRUST BANK, INC. LOCAL COMMUNITY BOARD -- WILLIAMSBURG
- ---------------------------------------------------------------------------------------------------------------------
Lawrence G. Fowler - Chairman Jerry B. Hedgepeth Sidney E. Sheldon
Retired Banker Retired Builder President
Sheldon Wood Products, Inc.
James H. Bennett Jack P. Kirtland
Senior Real Estate Manager Retired Investor Stuart D. Spirn
Dominion Land Management Co. Attorney-at-Law
John P. Lowenhaupt Spirn, Tarley, Robinson & Tarley
Hugh W. Dear Partner
President Witt, Mares & Company, PLC Nancy S. Walker
Hugh Dear & Assoc., Inc. Office Manager
Carol A. Mann David G. Walker, DDS
Gregory H. Granger Owner
President The Mann Group
Williamsburg Paralegal, Inc.
Richard K. Phillips
C. Allen Haden President
Agent The Sportman's Grille
Allstate Insurance
PENINSULA TRUST BANK INC. LOCAL COMMUNITY BOARD -- CHARLES CITY
- ---------------------------------------------------------------------------------------------------------------------
Audrey D. Holmes - Chairman B. Randolph Boyd Thomas C. Evelyn
Attorney-at-Law Commonwealth Attorney President
Charles City County Charles City Forest Products
David L. Adams Partner
President Randolph Boyd, Sherry & Vaughan Linwood A. Johnson
Providence Forge Service Center, Inc. Owner
John W. Canaday Johnson's Logging
Byron M. Adkins, Sr. Retired
Director of Social Services J.W. Canaday Trucking, Inc. Thomas R. Williams
Charles City County Clerk of Court
Preston B. Cotman Charles City County
Treasurer
W.T. Cotman & Sons Logging John B. Powers
Retired Banker
Citizens & Farmers
PENINSULA TRUST BANK LOCAL COMMUNITY BOARD -- NEWPORT NEWS
- --------------------------------------------------------------------------------------------------------------------
Thomas R. Tucker - Chairman J. Morris Johnson McKinley L. Price, DDS
President President Dentist
First Financial Consulting Corp Johnson Mortgage Company McKinley L. Price, DDS, P.C.
Svein J. Lassen Gina Fitzhugh Wilson
Robert L. Bailey Attorney/Shareholder Owner/Principal Broker
Sr. Vice President - Lending Jones, Blechman, Woltz & Kelly Fitzhugh-Wilson Real Estate
Peninsula Trust Bank
Frederick B. Malvin, CPA
Stephen P. Bolduc, MD Partner
Pediatrician Malvin, Riggins & Co., P.C.
Jon D. Coenen, Jr. Gary Minter
Vice President President
Coenen & Associates Pomoco Lincoln Mercury of Newport News
- --------------------------------------------------------------------------------
44
PENINSULA TRUST BANK OFFICERS
_____________________________________________________________________________________________________________________
EXECUTIVE OFFICERS NEWPORT NEWS OFFICE ADMINISTRATIVE OFFICERS
William J. Farinholt Margaret C. Cooper Robert L. Bailey
President & CEO Vice President Sr. Vice President
Loan Officer Lending
Kenneth E. Smith
Executive Vice President Jerry B. Copes Stephanie F. Hunt
Chief Financial Officer Vice President Sr. Vice President
Chief Operating Officer Loan Officer Branch/Loan Administration
Kathleen C. Healy Mary E. Kenerley Michelle D. Ammons
Sr. Vice President Vice President Vice President
Chief Accounting Officer Loan Officer Human Resources Officer
Corporate Secretary
Jeffrey A. Mercer Anita H. Foster
GLOUCESTER OFFICE Branch Manager Vice President
Operations Officer
Michael O. Martin Deborah T. Bollinger
Vice President Assistant Branch Manager Lee P. Koob
Loan Officer Vice President
GLENNS OFFICE Loan Review
Charles W. Sutton
Vice President Sherry S. Grantham R. Randall Gilliam
Loan Officer Vice President Assistant Vice President
Loan Officer Compliance/Security Officer
Richard E. Goode
Assistant Vice President Connie S. Birdsall Linda H. Healy
Loan Officer Assistant Vice President Assistant Vice President
Branch Manager Loan Administration
Michelle R. Bell
Loan Officer Vicky L. McKinney Martha W. Soles
Assistant Branch Manager Assistant Vice President
Debbie S. Burke
Branch Manager MATTAPONI OFFICE Jeanie Lynn Strang
Assistant Vice President
WILLIAMSBURG OFFICE G. Henry Haupt, Jr. Branch Administration
Vice President
Edith Moore Loan Officer Joyce S. Blymyer
Branch Manager Loan Documentation Officer
Dianne C. Robbins
Liza T. Painter Branch Manager Elizabeth H. Rainier
Assistant Branch Manager Accounting Officer
Betty H. Lowney
CHARLES CITY OFFICE Assistant Branch Manager
Carolyn D. Copland KINGSMILL OFFICE
Branch Manager
Clara L. Jeter
Peggy M. Cress Branch Manager
Assistant Branch Manager
Carol A. Costello
Assistant Branch Manager
_____________________________________________________________________________________________________________________
1999 Annual Report and Form 10KSB 45
PENINSULA TRUST BANK EMPLOYEES
- ------------------------------------------------------------------------------------------------------------------------------------
Paula G. Armistead Lori W. Wilson Betty H. Lowney
Head Teller-Gloucester Head Teller-Newport News Asst. Br. Mgr/Head Teller- Mattaponi
Liza T. Painter Vicky L. McKinney Carol Costello
Asst. Br. Mgr/Head Teller - Williamsburg Asst. Br. Mgr/Head Teller - Glenns Asst. Br. Mgr/Head Teller - Kingsmill
Sandra C. Tate
Head Teller-Charles City
GLOUCESTER EMPLOYEES NEWPORT NEWS EMPLOYEES ADMINISTRATIVE EMPLOYEES
Sheri Lynn Baker Patricia S. Goslee R. Michele Bohannon
Belinda K. Bishop Julian A. Johnson Stacy M. Brooks
Ethel B. Bluett Tammy J. Manning Jean H. Camacho
Regina P. Burrier Silvia Perdomo Donna K. Chriscoe
Renee A. Corbin Patsy A. Richey Christine M. Craft
Cynthia S. Dunn Patricia H. Shelton Kathleen Freudenberg
Arlene P. Grant Stephanie A. Walter Melanie T. Grenier
Rachael E. Harrell Jeanette K. Walters Sharon J. Heaton
Burma W. Hart Emily W. Waltrip Melissa E. Hosmer
Valerie L. Haydon Elizabeth C. Jackson
Catherine M. Hogge GLENNS EMPLOYEES Denise D. Kelley
Phyllis E. Hyde Jan S. Marshall
Sarah M. Kelly Bonnie S. Bunting Brenda C. Maul
Jennifer L. Lawson Crystal M. Eastwood Rose T. Miller
Dawn F. Lewis Iris M. Henry Phyllis C. Noland
Sara M. Newland Christina H. Jessie Jennifer M. Reed
Laura H. Phillips Karen E. Jones William S. Ridolfi
Michele L. Rhea Barbara A. Martin Bonnie P. Robbins
April N. Rising Karen B. Mitchem Stephanie T. Slay
Heather L. Smith Dawn M. Smith
Kelly L. Smith MATTAPONI EMPLOYEES Denise K. Whitney
Peggy Ingram Smith Jennifer B. Winder
Theresa D. Townsend Sandra M. Altice
Vicki D. Williams Brandy A. Cox
Kimberley W. Davis
WILLIAMSBURG EMPLOYEES Latesha Ferguson
Marie H. Norman
Emma M. Apolonio Mable D. Otto
Susan E. DiBlasi Jerry Pumo
Tara L. Evans
Tiffany R. Fox KINGSMILL EMPLOYEES
Sandra R. Gray
Kristin L. Hunley Laura G. Aase
Catherine Q. Williams Minnie Frances Eder
Loretta H. Quesenberry
CHARLES CITY EMPLOYEES Katherine A. Schregardus
Elsie B. Whitfield
Judith P. Adkins
Sandra W. Bradby
Charlene M. Cline
David P. Gershman
Mark A. Hennaman
Jessica C. Howard
Kenyatta C. Jones
____________________________________________________________________________________________________________________________________
46 ATLANTIC FINANCIAL CORP
UNITED COMMUNITY BANK OFFICERS
- --------------------------------------------------------------------------------
EXECUTIVE OFFICERS COLLEGE DRIVE IVOR
D. Eugene Brittle Dinah M. Babb H. Massey Joyner
President & CEO Branch Manager Vice President/Branch Manager
OFFICERS COURTLAND Wilma S. Bishop
Assistant Cashier
FRANKLIN James H. O'Berry
Vice President WAKEFIELD
Kyle R. Purvis, Jr.
Sr. Vice President Judy S. Saunders Douglas A. Chesson
Asst. Branch Manager Sr. Vice President/Cashier
Lauren P. Harper
Vice President NEWSOMS John C. Beahm
Assistant Vice President
Katherine B. Perry Sherry V. Pope
Vice President Branch Manager Annette B. Haywood
Asst. Branch Manager
G. Ronald West HOLLAND
Vice President OPERATIONS
Debra K. Warren
Kendall L. Edwards Asst. Branch Manager Tammy B. Lowe
Assistant Vice President Operations Manager
Branch Manager SURRY
Jeri S. Daniel
Vivian W. Goodwyn James M. Seay, III Assistant Manager
Loan Processor Manager Vice President/Branch Manager
UNITED COMMUNITY BANK EMPLOYEES
- --------------------------------------------------------------------------------
Irene B. Ralford Kelly L. King Sandra W. Snipes
Head Teller - Franklin Head Teller - Courtland Head Teller - Holland
Atelia A. Elliot Mary Ann Edwards A'lean S. Page
Head Teller - College Drive Head Teller - Newsoms Vault Teller - Ivor
Lucille C. Turner
Vault Teller - Surry
FRANKLIN NEWSOMS IVOR
Keith E. Boyce Mildred B. Drake Joan B. Cook
Linda J. Drake Dolores M. McLane Janet M. Felts
Patsy P. Fowler Everett Porter, Sr. Rebecca L. Turner
Nancy K. Lee Marlene Warren
Alice Faye Rapp HOLLAND
Jasmine J. Ricks SURRY
Renee H. Scott Susan N. Morris
Helen Faye Spivey Veronica T. Hamlin
Paul E. Thompson WAKEFIELD Marsha H. Jacob
Joyce H. Wilmot Debra A. Shipley
James B. Adkins
COLLEGE DRIVE Ellen F. Berryman OPERATIONS
Faye B. Cook
Kathleen F. Arrowood Grace M. Gardner Phyllis A. Artis
Stephanie M. Babb Dorothy J. Hobbs Frances R. Bryant
Joe L. Benn Earl W. Holt Rojeana L. Butler
Danielle B. Caulder Mabel G. Johnson Julie Ann Cook
Taylor M. Harper Jennifer L. Keene Linda L. Cooper
Jamie L. Holloman Christina M. Newsome Donna R. Edwards
Melissa G. Leathers Jacqueline P. O'Berry Cecilia Everett
Shauna J. Moses Suzanne S. Rogers Dianne B. Fowler
Donna J. Scott Rita K. Hill
COURTLAND Mary G. Mason
Jessica A. Miller
Lynda L. Elder Glenn A. Stroud
Patricia B. Mason Lisha Wolfe
- --------------------------------------------------------------------------------
1999 Annual Report and Form 10KSB 47
GENERAL INFORMATION
________________________________________________________________________________
CORPORATE HEADQUARTERS 737 J. Clyde Morris Boulevard Shands Shopping Center
Newport News, Virginia 23601 22736 Main Street
Atlantic Financial Corp 757-591-2746 Courtland, Virginia 23837
737 J. Clyde Morris Boulevard 757-653-2833
Newport News, Virginia 23601
757-595-7020 14833 George Washington Memorial
Highway 22334 General Thomas Highway
OPERATIONS CENTER-- Saluda, Virginia 23149 Newsoms, Virginia 23874
DATA PROCESSING 804-758-5800 757-654-6210
14833 George Washington Memorial
Highway Route 33 6617 Holland Road
P.O. Box 416 P.O. Box 436 Suffolk, Virginia 23437
Saluda, Virginia 23149 Mattaponi, Virginia 23110 757-657-6455
804-693-0628 804-785-4000
205 Railroad Avenue
100 McLaws Circle P.O. Box 10
MAIN OFFICE-- Williamsburg, Virginia 23185 Wakefield, Virginia 23888
PENINSULA TRUST BANK 757-564-8700 757-899-2501
Peninsula Trust Bank, Inc.
7171 George Washington Memorial MAIN OFFICE-- 8314 Main Street
Highway UNITED COMMUNITY BANK P.O. Box 287
P.O. Box 1310 Ivor, Virginia 23866
Gloucester, Virginia 23061-1310 United Community Bank 757-859-6211
804-693-0628 100 East Fourth Avenue
P.O. Box 594
BRANCH OFFICE LOCATIONS-- Franklin, Virginia 23851 270 Colonial Trail East
PENINSULA TRUST BANK 757-562-5184 P.O. Box 208
Surry, Virginia 23883
1031 Richmond Road BRANCH OFFICE LOCATIONS-- 757-294-3200
Williamsburg, Virginia 23185 UNITED COMMUNITY BANK
757-220-1252
201 College Drive
Franklin, Virginia 23851
10000 Courthouse Road 757-562-3441
Charles City, Virginia 23030
804-829-2434
ANNUAL MEETING STOCK TRANSFER AGENT
The 2000 Annual Meeting of Shareholders will be held at 7:00 American Stock Transfer and Trust Company serves as AFC's transfer
p.m. on Tuesday, April 25, 2000 at the Mariners Museum at 100 agent. Shareholders requiring information on stock transfer
Museum Drive, Newport News, Virginia. requirements, lost certificates, dividends and other stockholder
matters should contact:
COMMON STOCK
American Stock Transfer
Atlantic Financial Corp's common stock is traded on the 40 Wall Street
NASDAQ SmallCap Market under the symbol AFIC. New York, NY 10005
800-937-5499
INVESTOR RELATIONS
Atlantic Financial Corp's Annual Report and Form 10-KSB, Shareholder inquires may also be directed to R. Michele Bohannon
Quarterly Reports and other corporate publications are at the Glenns Office of Peninsula Trust Bank.
available to shareholders on request, without charge, by
writing:
Kenneth E. Smith
Chief Financial Officer
Atlantic Financial Corp
737 J. Clyde Morris Boulevard
Newport News, Virginia 23601
- --------------------------------------------------------------------------------
48 Atlantic Financial Corp
Atlantic Financial Corp
737 J. Clyde Morris Boulevard
Newport News, Virginia 23601
757-595-7020
Appendix V
========================
ATLANTIC FINANCIAL CORP
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
========================
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 June 30, 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 June 30, 2000.
Common stock, $5 par value--4,168,185
-------------------------------------
INDEX
ATLANTIC FINANCIAL CORP Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets--
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income--
Six months ended June 30, 2000 and 1999 4
Three months ended June 30, 2000 and 1999
Consolidated Statements of Stockholders' Equity--
Six months ended June 30, 2000 and 1999 5 - 6
Consolidated Statements of Cash Flows--
Six months ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16 - 17
Part II. Other Information: 18 - 19
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
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
Signatures
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ATLANTIC FINANCIAL CORP
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
(Unaudited)
June 30, December 31,
ASSETS: 2000 1999
------------- -------------
Cash and due from banks $ 14 111 $ 17 486
Interest-bearing deposits in other banks 1 885 1 653
Securities available for sale 99 232 89 729
Securities held to maturity (fair value of
$9,373 and $9,786, respectively) 9 609 9 987
Federal funds sold 16 351 22 577
Loans, net 227 694 223 513
Premises and equipment 10 044 10 481
Other real estate owned 246 550
Accrued interest receivable 3 153 3 004
Intangibles, net 980 1 023
Other assets 3 996 3 306
--------- ---------
TOTAL ASSETS $ 387 301 $ 383 309
========= =========
LIABILITIES:
Deposits
Non-interest bearing $ 55 694 $ 52 026
Interest-bearing 283 161 283 020
--------- ---------
TOTAL DEPOSITS 338 855 335 046
Short-term borrowings 1 918 2 976
Accrued interest payable 1 243 1 195
Other liabilities 1 547 1 054
--------- ---------
TOTAL LIABILITIES 343 563 340 271
--------- ---------
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 4,168,185 and 4,191,185
shares, respectively 20 841 20 956
Stock options 1 3
Retained earnings 24 531 23 438
Accumulated other comprehensive
income, net (1 635) (1 359)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 43 738 43 038
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 387 301 $ 383 309
========= =========
Notes to financial statements are an integral part of these statements.
3
ATLANTIC FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
INTEREST INCOME:
Loans and Fees $ 5 526 $ 5 244 $ 10 946 $ 10 323
Federal Funds Sold 242 290 543 590
Interest on Deposits at Other Banks 27 20 41 26
Investment Securities 1 764 1 458 3 413 2 828
---------- ---------- ---------- ----------
Total Interest Income 7 559 7 012 14 943 13 767
INTEREST EXPENSE:
Interest on deposits 3 188 3 020 6 360 5 977
Interest on federal funds purchased
and other borrowings 24 26 45 42
---------- ---------- ---------- ----------
Total Interest Expense 3 212 3 046 6 405 6 019
---------- ---------- ---------- ----------
Net Interest Income 4 347 3 966 8 538 7 748
PROVISION FOR LOAN
AND LEASE LOSSES 130 137 200 209
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan
and Lease Losses 4 217 3 829 8 338 7 539
OTHER INCOME:
Service Charges & Fees 488 408 931 846
Securities Gains (Losses) 5 1 5 1
Other income 131 107 261 215
---------- ---------- ---------- ----------
Total Other Income 624 516 1 197 1 062
OTHER EXPENSES:
Salaries & Employee Benefits 1 720 1 606 3 441 3 136
Occupancy Expenses 243 238 493 469
Furniture & Equipment Expenses 469 439 924 830
Other Operating Expenses 649 766 1 348 1 516
---------- ---------- ---------- ----------
Total Other Expenses 3 081 3 049 6 206 5 951
---------- ---------- ---------- ----------
Income Before Income Taxes 1 760 1 296 3 329 2 650
Applicable Income Taxes 493 335 915 691
---------- ---------- ---------- ----------
Net Income $ 1 267 $ 961 $ 2 414 $ 1 959
========== ========== ========== ==========
Earnings Per Share, Basic .31 .23 .58 .47
========== ========== ========== ==========
Earnings Per Share, Assuming
Dilution .30 .23 .57 .46
========== ========== ========== ==========
Notes to financial statements are an integral part of these statements.
4
ATLANTIC FINANCIAL CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 2000
(In Thousands of Dollars)
(Unaudited)
Accumulated
Other
Common Stock Retained Comprehensive Comprehensive
Stock Options Surplus Earnings Income Income Total
----- ------- ------- -------- ------ ------ -----
Balance, January 1, 2000 $20 956 $3 - - $23 438 ($1 359) $43 038
Comprehensive Income:
Net Income - - - - - - 2 414 - - $2 414 2 414
Other comprehensive income:
Unrealized holding gains (losses) on
securities available for sale arising
during the period, net of tax of $94 (276) - -
------
Other comprehensive income, net of tax - - - - - - - - (276) (276) (276)
------
Total comprehensive income - - - - - - - - $2 138 - -
======
Exercise of stock options 119 (2) - - - - - - 117
Purchase of common stock (234) - - - - (359) - - (593)
Cash dividends - - - - - - (962) - - (962)
------- --- ------ ------- ------ -------
Balance, June 30, 2000 $20 841 $1 $ - - $24 531 ($1 635) $43 738
=================================================== =======
Notes to financial statements are an integral part of these statements.
5
ATLANTIC FINANCIAL CORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 1999
(In Thousands of Dollars)
(Unaudited)
Accumulated
Other
Common Stock Retained Comprehensive Comprehensive
Stock Options Surplus Earnings Income Income Total
----- ------- ------- -------- ------ ------ -----
Balance, January 1, 1999 $20 845 $6 - - $21 048 $1 230 $43 129
Comprehensive Income:
Net Income - - - - - - 1 959 - - $1 959 1 959
Other comprehensive income:
Unrealized holding gains (losses) on
securities available for sale arising
during the period, net of tax of $153
(1 452) - -
------
Other comprehensive income, net of tax - - - - - - - - (1 452) (1 452) (1 452)
------
Total comprehensive income - - - - - - - - $ 507 - -
======
Exercise of stock options 127 (2) - - - - - - 125
Purchase of common stock (11) - - - - (26) - - (37)
Cash dividends - - - - - - (754) - - (754)
--- --- --- ----- --- ---
Balance, June 30, 1999 $20 961 $4 $ - - $22 227 ($222) $42 970
================================================== =======
Notes to financial statements are an integral part of these statements.
6
ATLANTIC FINANCIAL CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
Six Months Ended
June 30,
-----------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2 414 $ 1 959
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 654 337
Provision for loan losses 200 209
Amortization of premiums, net 34 47
(Gain) loss on sale of securities available for sale (5) (1)
(Gain) loss on sale of other real estate 28 (14)
(Gain) loss on sale of premises and equipment - - (1)
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable (149) 36
Decrease (increase) in other assets (548) 327
Increase in accrued interest payable 48 27
Increase in other liabilities 453 334
--------- ---------
Net Cash Provided by Operating Activities $ 3 129 $ 3 260
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in loans (4 458) (13 073)
Purchase of securities available for sale (17 424) (23 779)
Proceeds from sales of securities available for sale 427 1 619
Proceeds from calls and maturities of securities available for sale 7 049 10 376
Proceeds from calls and maturities of securities held to maturity 376 3 114
Purchase of premises and equipment (174) (323)
Proceeds from sales of premises and equipment - - 1
Proceeds from sales of other real estate 353 79
--------- ---------
Net Cash (Used In) Investing Activities ($13 851) ($21 986)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits $ 3 809 $ 13 936
Issuance of common stock 117 127
Repurchase of common stock (593) (36)
Proceeds from long-term debt - - 1 550
Net increase (decrease) in short-term borrowings (1 058) (439)
Cash dividends paid (922) (1 302)
--------- ---------
Net Cash Provided by Financing Activities $ 1 353 $ 13 836
--------- ---------
Net Increase In Cash and Cash Equivalents ($ 9 369) ($ 4 890)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 41 716 41,306
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 32 347 $ 36 416
========= =========
Notes to financial statements are an integral part of these statements.
7
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 June 30, 2000 and December
31, 1999, and the results of operations and cash flows for the six months
ended June 30, 2000 and 1999.
The results of operations for the six months ended June 30, 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:
June 30, 2000
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---------------------------------------------------
(In Thousands of Dollars)
US Treasury Securities 100 -- (1) 99
US Government and federal agencies 28 821 10 (1 235) 27 596
States and local governments 31 619 65 (745) 30 939
Mortgage-backed securities 28 073 16 (836) 27 253
Corporate debt obligations 4 548 -- (227) 4 321
Collateralized mortgage obligations 2 837 2 (45) 2 794
Restricted stocks 1 205 -- -- 1 205
Other securities 4 507 957 (439) 5 025
--------- --------- ---------- --------
$ 101 710 $ 1 050 $ (3 528) $ 99 232
========= ========= ========== ========
Amortized cost and carrying amount (estimated fair value) of securities
held to maturity are summarized as follows:
June 30, 2000
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
----------------------------------------------------
(In Thousands of Dollars)
US Government and federal agencies 2 343 -- (113) 2 230
States and local governments 5 503 5 (72) 5 436
Mortgage-backed securities 1 763 -- (56) 1 707
-------- ----- -------- --------
$ 9 609 $ 5 $ (240) $ 9 373
======== ===== ======== ========
8
<BR>
ATLANTIC FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
Securities available for sale at December 31, 1999 consist of the
following:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
---------------------------------------------------
(In Thousands of Dollars)
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
========= ======= ========== ========
Securities held to maturity at December 31, 1999 consist of the following:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
--------------------------------------------------
(In Thousands of Dollars)
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
======== ======= ======== ========
Six Months Ended
June 30,
-----------------------------
2000 1999
--------- ---------
(In Thousands of Dollars)
Gross proceeds from sales of securities 422 1 619
========= =========
Gross Gains on Sale of Securities 5 3
Gross Losses on Sale of Securities -- 3
--------- ---------
Net Securities Gains (Losses) 5 --
========= =========
9
ATLANTIC FINANCIAL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Unaudited)
3. Loans
Major classifications of loans are as follows:
June 30, December 31,
2000 1999
----------- -----------
(In Thousands of Dollars)
Commercial (except those secured by real estate) 32 076 31 824
Agriculture (except those secured by real estate) 5 988 5 066
Real estate mortgage:
Construction and land development 18 176 15 995
Residential (1-4 family) 57 620 57 089
Home equity lines 17 453 16 663
Commercial 58 220 58 064
Agricultural 4 711 5 067
Loans to individuals for household,
family and other consumer expenditures 36 006 36 497
All other loans 609 475
----------- -----------
230 859 226 740
Less unearned income (537) (564)
----------- -----------
Less allowance for loan losses (2 628) (2 663)
----------- -----------
Loans, net $227 694 $223 513
=========== ===========
The following schedule summarizes the changes in the allowance for loan
and lease losses:
Six Months Six Months
Ended Ended
June 30, June 30, December 31,
2000 1999 1999
-------- -------- --------
(In Thousands of Dollars)
Balance at beginning of year 2 663 2 424 2 424
Provision for loan losses 200 209 505
Recoveries 98 181 257
Charge-offs (333) (198) (523)
-------- -------- --------
Balance at end of period $ 2 628 $ 2 616 $ 2 663
======== ======== ========
Nonperforming assets consist of the following:
June 30, December 31,
2000 1999
-------- -------
(In Thousands of Dollars)
Nonaccrual Loans 1 606 632
Restructured Loans -- --
-------- -------
Nonperforming Loans 1 606 632
Foreclosed Properties 246 550
-------- -------
Nonperforming Assets $ 1 852 $ 1 182
======== =======
Total loans past due 90 days or more and still accruing were $755 on June
30, 2000 and $622 on December 31, 1999.
10
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.
June 30, 2000 June 30, 1999
------------- -------------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic Earnings Per Share 4 184 622 $ .58 4 185 685 $ .47
Effect of dilutive securities:
Nonemployee directors' stock options 10 606 20 796
Employee incentive stock options 41 119 59 500
--------- ---------
Diluted Earnings Per Share 4 236 347 $ .57 4 265 981 $ .46
========= ======= ========= =======
5. Capital Requirements
A comparison of the Company's capital as of June 30, 2000 with the minimum
requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier I Risk-based Capital 17.02% 4.00 %
Total Risk-based Capital 18.03% 8.00 %
Leverage Ratio 11.81% 4.00 %
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
- ---------------------------
Certain information contained in this report 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.
General
- --------
The following discussion 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.
The consolidated financial statements include the accounts of the Company and
its wholly-owned banking subsidiaries, Peninsula Trust Bank and United Community
Bank, the successor of the merger of The Bank of Franklin and The Bank of Sussex
and Surry. Contributions from the Company's 51% membership interest in Johnson
Mortgage Co. LLC are also reflected in the financial results.
In July 2000, the Company signed a definitive agreement to affiliate with F&M
National Corporation of Winchester, Virginia. Additional information on this
affiliation appears in Part II, Item 5, below.
Results of Operations
Earnings
- ---------
Quarterly performance comparison
--------------------------------
Net income for the second quarter ended June 30, 2000 totaled $1,267,000,
compared to $961,000 for the same period in 1999. This performance not only
represented an impressive 31.8% increase in absolute dollars, but, expressed as
earnings per share (EPS), also represented $.30 compared to $.23 for the same
period in 1999, a 30.4% increase. Both of these performance measures were
historical highs for the Company. Return on average total assets (ROA) for the
current quarter equaled 1.34% on an annualized basis, which compared favorably
to the 1.05% level for the same period in 1999. Sequential quarter comparison
was also favorable as the current quarter displayed a 10.5% increase in dollars,
11.1% increase in EPS, and 10.7% increase in ROA compared to the first quarter
of this year.
Net interest income (tax equivalent interest income less interest expense) for
the second quarter 2000 totaled $4.3 million (a 9.6% increase over the second
quarter 1999 and a 3.7% increase over the first quarter 2000). The largest
contributor to the improved net interest earnings was interest income from
investment activities, which demonstrated a 15.0% increase over the second
quarter 1999. The Company continued its efforts to invest the excess liquid
funds accumulated as a part of Year 2000
12
(Y2K) liquidity planning during 1999. The net interest margin (tax equivalent
net interest income expressed as a percentage of average earning assets)
increased from 4.77% in the second quarter 1999 to 5.13% in the second quarter
2000, continuing a positive trend evidenced by the 4.96% reported for the first
quarter of 2000. The average yield on interest earning assets increased 48 basis
points during a time when the average rate on interest bearing liabilities
increased only 19 basis points. As a result, the 7.80% increase in interest
income for the second quarter 2000 more than compensated for the 5.45% increase
in interest expense for the same period. The Company's balance sheet continues
to be asset sensitive as related to its interest sensitivity position; that is,
its assets re-price more quickly than its liabilities. Since June 1, 1999 the
Federal Reserve Board has increased short-term interest rates 175 basis points
in six separate rate adjustments. The Company enjoyed more rapid increase in
interest income than the corresponding increase in interest expense during this
period.
Non-interest income for the current quarter increased 20.9% over the same
quarter in 1999. As discussed in its Annual Reports on Form 10-KSB and Quarterly
Reports on Form 10-QSB and 10-Q for previous periods, the Company has taken
certain initiatives to expand non-interest opportunities. These initiatives have
included offering mortgage and investment services. The Company has performed
extensive review of its services, particularly in the areas of ATM activities
and deposit account overdraft charges. Various increase adjustments have been
made in these areas to more closely cover associated operational costs, as well
as reflect pricing of competitor institutions. Service charges on deposit
accounts demonstrated a 19.8% increase for the current quarter compared to the
second quarter 1999, while other miscellaneous income (primarily other customer
service fees) increased 22.4% for the same comparative interim period.
Non-interest expense for the second quarter 2000 totaled $3.1 million, compared
to $3.0 million in the second quarter 1999, a 1.1% increase. This result is a
positive trend relative to the 9.6% increase in net interest income discussed
above. Additionally, as discussed in the Company's Quarterly Report on Form
10-QSB for the period ended June 30, 1999, the $3.0 million figure equaled a
17.4% 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. Other miscellaneous expenses reflected a decrease of 15.2%
when comparing the second quarters of 2000 and 1999.
Six month, year to date comparative performance
-----------------------------------------------
For the six months ended June 30, 2000, net income of $2.4 million constituted
an EPS of $.57, fully diluted, representing impressive 23.2% and 23.9%
increases, respectively, over these same measures for the corresponding period
in 1999. The improving total net income continues to be a story of balanced
performance throughout the income statement. A 6.4% increase in interest expense
was adequately offset by an 8.5% interest income increase, resulting in a 10.2%
improvement of net interest income. A 12.7% improvement in non-interest income
was impressive in the face of a 4.3% increase in non-interest expense. Improved
performance was also evidenced by the 1.27% ROA for the current period compared
to 1.08% for the same period in 1999.
Improvement in net interest income for the current six months mirrored the
quarterly analysis discussed above. Investment activities demonstrated a 16.1%
increase over the same period in 1999. Overnight and short-term maturing
investments were employed in longer term higher yielding securities, enhancing
the overall yield of the investment portfolio. Interest income on loans moved
more in step with cost of funds interest expense reflecting 6.0% and 6.4%
increases, respectively. The net interest margin grew from 4.82% for the period
ended June 30, 1999 to 5.04% for the current period end.
Non-interest income year to date, similar to the second quarter's analysis
above, reflected an improvement that was driven by increased service charges on
deposit accounts, other customer fees, and fees from investment services. The
investment services area produced year-to-date net income of $75,000, while the
mortgage banking affiliate recorded a modest year-to-date net loss of $34,000
due to reduced production in the refinance area as interest rates have risen.
13
The modest increase in non-interest expense was the result of management's
restrictive and even reduction-minded practices over all areas of overhead
expenses.
Effects of Inflation
- ---------------------
Interest rates are affected by inflation, but the timing and magnitude of the
changes may not coincide with changes in the consumer price index. Management
actively monitors interest rate sensitivity, utilizing multiple tools such as
Gap Analysis in order to minimize the effects of inflationary trends on interest
rates. Other areas of non-interest expenses such as personnel costs, costs of
computer hardware and software, and even fuel costs may be more directly
affected by inflation. There have been no material inflationary effects during
the past three years.
Financial Condition
The Company experienced a flat balance sheet during the first half of 2000, with
total assets increasing $4.0 million, or 1.0% 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. The second
quarter saw continuation of 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
non-interest bearing deposits, which reflected a $3.7 million, or 7.1%, increase
for the six months ending June 30, 2000.
Loan demand increased moderately during the first six months, evidenced by net
loans increasing $4.2 million, or 1.9%, 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 during the second quarter its practice of selling Federal
funds, having sold continuously on a daily basis in amounts averaging $15.4
million, or 4.07% of average total assets. These figures compare to $24.0
million and 6.52%, respectively, for the second quarter 1999. The quarter-end
balance of $16.4 million represented a $6.2 million (or 27.6%) decrease from
December 31, 1999.
The level of the investment account increased approximately $9.1 million (9.2%)
during the first six months of 2000, ending the period at $108.8 million or
28.1% of total assets. The portfolio was used to absorb some of the excess Y2K
liquidity that built up during 1999. The portfolio is comprised of less than 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
14
of three 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 effective modified
duration (EMD) and bond convexity. Convexity measures the percentage amount of
portfolio price appreciation if interest rates fall 1% relative to the
percentage of price depreciation if interest rates rise 1%. The more 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 98.6% of total liabilities of the Company, including
non-interest bearing checking accounts, which represent 16.4% of total deposits
on June 30, 2000. Short-term borrowings of $1.9 million reflected a $1.1 million
(35.6%) decline from December 31, 1999. The decrease was represented primarily
($.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
$4.9 million (2.1% of total outstandings). Included in the 30 day total are
$755,000, which are 90 days or more past due and still accruing interest.
Non-accrual loans totaled $1.6 million at June 30, 2000, which represented 0.7%
of total outstanding loans and 61.1% of the loan loss reserve. Foreclosed
properties totaled $246,000 at June 30, 2000, with potential losses expected to
be minimal. Trends in this area have been relatively stable during the past six
months.
During the second quarter of 2000, the Company expensed $130,000 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 $179,000 and
total recoveries were $63,000.
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 $2.6 million June 30, 2000, or 1.14% 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, reviewed by Senior Management, and reported to
the Board of Directors. The June 30, 2000 evaluation indicates 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
which 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 June 30, 2000) has been carried in a non-accruing
status since the fourth quarter 1999.
15
Capital and Liquidity
- ----------------------
Equity capital at June 30, 2000 totaled $43.7 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 $45.4 million or 11.7% 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 31,000
shares during the current quarter for a total of $386,900. Since this Plan's
adoption in 1999, 52,900 shares totaling $692,744 have been repurchased. The
Plan originally provided for up to 100,000 shares to be repurchased in an amount
not to exceed $2,000,000. Pursuant to the announced plan of merger with F&M
National Corporation, the Share Repurchase Plan has been suspended and will be
terminated during the third quarter, with no further shares being repurchased.
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 13.3% of total demand
deposits at June 30, 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, during the first half of
2000, employed 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
- -------------
As stated above, the Company has signed a definitive agreement ("the agreement")
with F&M National Corporation. The transaction is expected to close no later
than the first quarter of 2001.
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 plans to merge its two subsidiary banks into one bank before the end
of the current year. This will allow for full implementation of telephone
banking and image processing throughout all of its banking offices, whereas
these services are currently offered only throughout the offices of PTB.
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 that 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 that influence the re-pricing
characteristics and market values of any given asset or liability. The matching
of the re-pricing characteristics of assets
16
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 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 this type of bonds,
market prices will almost always decrease in value more than they increase given
the same rate of 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.
Certain information regarding the Company's present value change in equity
associated with changes in asset values under various interest rate scenarios as
of March 31, 2000 was presented in the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2000. There have been no material changes in that
information.
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 during the most recent period of
rising interest rates, as discussed above.
17
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
On April 25, 2000, the Annual Meeting of Shareholders was held to
vote on the following matters: to elect five directors for a term of
three years each and to ratify the appointment by the Board of
Directors of the firm of Yount, Hyde & Barbour, P.C. as the Company's
independent, external auditors for the year ending December 31, 2000.
A total of 3,044,678 shares were voted, which represented 72.9% of
the 4,177,585 outstanding as of the record date of March 15, 2000.
The results of the votes on these matters were as follows:
(1) Election of Directors
For Withheld
--- --------
Harry M. Healy 3,005,879 38,799
Hersey M. Mason, Jr. 3,004,306 40,372
William B. Savedge 3,003,479 41,199
Marion G. Smith 3,005,266 39,412
F. Bruce Stewart 3,008,379 36,299
(2) Ratification of Accountants / External Auditors
For Against Withheld
--- ------- --------
3,000,990 1,030 42,658
Item 5. Other Information
On July 6, 2000, the Company announced the signing of a definitive
agreement for the affiliation of the Company and F&M National
Corporation of Winchester, Virginia. Under the terms of the
agreement, F&M will exchange 0.753 shares of its common stock for
each share of Atlantic stock.
The transaction is expected to be completed no later than the first
quarter of 2001. The matter requires the approval of various
regulatory agencies and the shareholders of the Company and
satisfaction of other standard conditions. The transaction is
intended to qualify as a tax-free exchange and be accounted for as a
pooling of interests. The Company's two bank subsidiaries, Peninsula
Trust Bank and United Community Bank, will be combined and will be
operated as a separate banking subsidiary of F&M under the name of
F&M Bank-Atlantic.
F&M National Corporation is a multi-bank holding company
headquartered in Winchester, Virginia, with assets in excess of $3.2
billion at March 31, 2000, and 128 banking offices.
18
An acquisition of $310 million in deposits and 15 locations was
announced on May 4, 2000 and is scheduled to close in the third
quarter of 2000. F&M currently operates ten banking affiliates in
Virginia, West Virginia and Maryland and offers insurance and
financial services through two subsidiaries. F&M also operates F&M
Trust Company. F&M's common stock is listed on the New York Stock
Exchange under the symbol "FMN."
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
19
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: August 14, 2000 BY /s/ W. J. Farinholt
------------------------------------
W. J. Farinholt, President & CEO
Date: August 14, 2000 BY /s/ Kenneth E. Smith
------------------------------------
Kenneth E. Smith, Exec. Vice President
& Chief Financial Officer
20
Appendix VI
================
Article 15 of the Virginia Stock Corporation Act
Relating to Dissenters' Rights
================
ARTICLE 15.
DISSENTERS' RIGHTS
(S)13.1-729. Definitions.--In this article:
"Corporation" means the issuer of the shares held by a dissenter before the
corporate action, except that (i) with respect to a merger, "corporation" means
the surviving domestic or foreign corporation or limited liability company by
merger of that issuer, and (ii) with respect to a share exchange, "corporation"
means the acquiring corporation by share exchange, rather than the issuer, if
the plan of share exchange places the responsibility for dissenters' rights on
the acquiring corporation.
"Dissenter" means a shareholder who is entitled to dissent from corporate
action under (S) 13.1-730 and who exercises that right when and in the manner
required by (S)13.1-732 through (S)13.1-739.
"Fair value," with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which the
dissenter objects, excluding any appreciation or depreciation in anticipation of
the corporate action unless exclusion would be inequitable.
"Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at a rate that is fair and equitable
under all the circumstances.
"Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the extent
of the rights granted by a nominee certificate on file with a corporation.
"Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
"Shareholder" means the record shareholder or the beneficial shareholder.
(S)13.1-730. Right to Dissent.--A. A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
1. Consummation of a plan of merger to which the corporation is a party (i)
if shareholder approval is required for the merger by (S)13.1-718 or the
articles of incorporation and the shareholder is entitled to vote on the merger
or (ii) if the corporation is a subsidiary that is merged with its parent under
(S)13.1-719;
VI-1
2. Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
3. Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation if the shareholder was entitled to vote on the sale
or exchange or if the sale or exchange was in furtherance of a dissolution on
which the shareholder was entitled to vote, provided that such dissenter's
rights shall not apply in the case of (i) a sale or exchange pursuant to court
order, or (ii) a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
4. Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
B. A shareholder entitled to dissent and obtain payment for his shares
under this article may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
C. Notwithstanding any other provision of this article, with respect to a
plan of merger or share exchange or a sale or exchange of property there shall
be no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were (i)
listed on a national securities exchange or on the National Association of
Securities Dealers Automated Securities System (NASDAQ) or (ii) held by at least
2,000 record shareholders, unless in either case:
1. The articles of incorporation of the corporation issuing such shares
provide otherwise;
2. In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for such shares anything except:
a. Cash;
b. Shares or membership interests, or shares or membership interests and
cash in lieu of fractional shares (i) of the surviving or acquiring
corporation or limited liability company or (ii) of any other corporation
or limited liability company which, at the record date fixed to determine
the shareholders entitled to receive notice of and to vote at the meeting
at which the plan of merger or share exchange is to be acted on, were
either listed subject to notice of issuance on a national securities
exchange or held of record by at least 2,000 record shareholders or
members; or
VI-2
c. A combination of cash and shares or membership interests as set
forth in subdivisions 2a and 2b of this subsection; or
3. The transaction to be voted on is an "affiliated transaction" and is not
approved by a majority of "disinterested directors" as such terms are defined in
(S)13.1-725.
D. The right of a dissenting shareholder to obtain payment of the fair
value of his shares shall terminate upon the occurrence of any one of the
following events:
1. The proposed corporate action is abandoned or rescinded;
2. A court having jurisdiction permanently enjoins or sets aside the
corporate action; or
3. His demand for payment is withdrawn with the written consent of the
corporation.
E. Notwithstanding any other provision of this article, no shareholder of a
corporation located in a county having a county manager form of government and
which is exempt from income taxation under (S) 501 (c) or (S) 528 of the
Internal Revenue Code and no part of whose income inures or may inure to the
benefit of any private share holder or individual shall be entitled to dissent
and obtain payment for his shares under this article.
(S)13.1-731. Dissent by Nominees and Beneficial Owners.--A. A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
B. A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
1. He submits to the corporation the record shareholder's written consent
to the dissent not later than the time the beneficial shareholder asserts
dissenters' rights; and
2. He does so with respect to all shares of which he is the beneficial
shareholder or over which he has power to direct the vote.
(S)13.1-732. Notice of Dissenters' Rights.--A. If proposed corporate action
creating dissenters' rights under (S) 13.1-730 is submitted to a vote at a
shareholders' meeting, the meeting notice shall state that shareholders are or
may be entitled to assert dissenters' rights under this article and be
accompanied by a copy of this article.
VI-3
B. If corporate action creating dissenters' rights under (S)13.1-730 is
taken without a vote of shareholders, the corporation, during the ten-day period
after the effectuation of such corporate action, shall notify in writing all
record shareholders entitled to assert dissenters' rights that the action was
taken and send them the dissenters' notice described in (S)13.1-734.
(S)13.1-733. Notice of Intent to Demand Payment.--A. If proposed corporate
action creating dissenters' rights under (S)13.1-730 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters' rights (i)
shall deliver to the corporation before the vote is taken written notice of his
intent to demand payment for his shares if the proposed action is effectuated
and (ii) shall not vote such shares in favor of the proposed action.
B. A shareholder who does not satisfy the requirements of subsection A of
this section is not entitled to payment for his shares under this article.
(S)13.1-734. Dissenters' Notice.--A. If proposed corporate action creating
dissenters' rights under (S)13.1-730 is authorized at a shareholders' meeting,
the corporation, during the ten-day period after the effectuation of such
corporate action, shall deliver a dissenters' notice in writing to all
shareholders who satisfied the requirements of (S)13.1-733.
B. The dissenters' notice shall:
1. State where the payment demand shall be sent and where and when
certificates for certificated shares shall be deposited;
2. Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
3. Supply a form for demanding payment that includes the date of the first
announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether or not he acquired beneficial ownership of the shares before or
after that date;
4. Set a date by which the corporation must receive the payment demand,
which date may not be fewer than thirty nor more than sixty days after the date
of delivery of the dissenters' notice; and
5. Be accompanied by a copy of this article.
(S)13.1-735. Duty to Demand Payment.--A. A shareholder sent a dissenters'
notice described in (S)13.1-734 shall demand payment, certify that he acquired
beneficial-ownership of the shares before or after the date required to be set
forth in the dissenters' notice pursuant to paragraph 3 of subsection B of (S)
13.1-734, and, in the case of certificated shares, deposit his certificates in
accordance with the terms of the notice.
VI-4
B. The shareholder who deposits his shares pursuant to subsection A of this
section retains all other rights of a shareholder except to the extent that
these rights are canceled or modified by the taking of the proposed corporate
action.
C. A shareholder who does not demand payment and deposits his share
certificates where required each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this article.
(S)13.1-736. Share Restrictions.--A. The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received.
B. The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder except to the extent that these
rights are canceled or modified by the taking of the proposed corporate action.
(S)13.1-737. Payment.--A. Except as provided in (S)13.1-738, within thirty
days after receipt of a payment demand made pursuant to (S)13.1-735, the
corporation shall pay the dissenter the amount the corporation estimates to be
the fair value of his shares, plus accrued interest. The obligation of the
corporation under this paragraph may be enforced (i) by the circuit court in the
city or county where the corporation's principal office is located, or, if none
in this Commonwealth, where its registered office is located or (ii) at the
election of any dissenter residing or having its principal office in the
Commonwealth, by the circuit court in the city or county where the dissenter
resides or has its principal office. The court shall dispose of the complaint on
an expedited basis.
B. The payment shall be accompanied by:
1. The corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the effective date of the corporate action
creating dissenters' rights, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest available interim
financial statements, if any;
2. An explanation of how the corporation estimated the fair value of the
shares and of how the interest was calculated;
3. A statement of the dissenters' right to demand payment under (S)13.1-
739; and
4. A copy of this article.
(S)13.1-738. After-Acquired Shares.--A. A corporation may elect to withhold
payment required by (S) 13.1-737 from a dissenter unless he was the beneficial
owner of the shares on the date of the first publication by news media or the
first announcement to shareholders generally, whichever is earlier, of the terms
of the proposed corporate action, as set forth in the dissenters' notice.
VI-5
B. To the extent the corporation elects to withhold payment under
subsection A of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares, plus accrued interest, and shall
offer to pay this amount of each dissenter who agrees to accept it in full
satisfaction of his demand. The corporation shall send with its offer an
explanation of how it estimated the fair value of the shares and of how the
interest was calculated, and a statement of the dissenter's right to demand
payment under (S)13.1-739.
(S)13.1-739. Procedure if Shareholder Dissatisfied with Payment or Offer.--
A. A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and the amount of interest due, and demand payment of
his estimate (less any payment under (S) 13.1-737), or reject the corporation's
offer under (S) 13.1-738 and demand payment of the fair value of his shares and
interest due, if the dissenter believes that the amount paid under (S)13.1-737
or offered under (S) 13.1-738 is less than the fair value of his shares or that
the interest due is incorrectly calculated.
B. A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection A of this
section within thirty days after the corporation made or offered payment for his
shares.
(S)13.1-740. Court Action.--A. If a demand for payment under (S)13.1-739
remains unsettled, the corporation shall commence a proceeding within sixty days
after receiving the payment demand and petition the circuit court in the city or
county described in subsection B of this section to determine the fair value of
the shares and accrued interest. If the corporation does not commence the
proceeding within the sixty-day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
B. The corporation shall commence the proceeding in the city or county
where its principal office is located, or, if none in this Commonwealth, where
its registered office is located. If the corporation is a foreign corporation
without a registered office in this Commonwealth, it shall commence the
proceeding in the city or county in this Commonwealth were the registered office
of the domestic corporation merged with or whose shares were acquired by the
foreign corporation was located.
C. The corporation shall make all dissenters, whether or not residents of
this Commonwealth, whose demands remain unsettled parties to the proceeding as
in an action against their shares and all parties shall be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
D. The corporation may join as a party to the proceeding any shareholder
who claims to be a dissenter but who has not, in the opinion of the corporation,
complied with the provisions of this article. If the court determines that such
shareholder has not complied with the provisions of this article, he shall be
dismissed as a party.
VI-6
E. The jurisdiction of the court in which the proceeding is commenced under
subsection B of this section is plenary and exclusive. The court may appoint one
or more persons as appraisers to receive evidence and recommend a decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
F. Each dissenter made a party to the proceeding is entitled to judgment
(i) for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation or (ii) for
the fair value, plus accrued interest, of his after-acquired shares for which
the corporation elected to withhold payment under (S)13.1-738.
(S)13.1-741. Court Costs and Counsel Fees.--A. The court in an appraisal
proceeding commenced under (S)13.1-740 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters did not act in good faith in demanding payment under (S)13.1-739.
B. The court may also assess the reasonable fees and expenses of experts,
excluding those of counsel, for the respective parties, in amounts the court
finds equitable:
1. Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of (S) 13.1-732 through (S) 1 3.1-739; or
2. Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed did not act in good faith with respect to the rights provided by this
article.
C. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
D. In a proceeding commenced under subsection A of (S) 13.1-737 the court
shall assess the costs against the corporation, except that the court may assess
costs against all or some of the dissenters who are parties to the proceedings,
in amounts the court finds equitable, to the extent the court finds that such
parties did not act in good faith in instituting the proceeding.
VI-7