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
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
30