As filed with the Securities and Exchange Commission on April 21, 1997.
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
(Name of small business issuer in its charter)
Virginia 6022 54-1809409
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
7171 George Washington Memorial Highway
Gloucester, Virginia 23061
(804) 693-0628
(Address and telephone number of registrant's principal executive offices
and place of business)
W. J. Farinholt
President/Chief Executive Officer
Mid-Atlantic Community Bankgroup, Inc.
7171 George Washington Memorial Highway
Gloucester, Virginia 23061
(804) 693-0628
(Name, address and telephone number of agent for service)
Copies of Communications to:
R. Brian Ball, Esquire Carr L. Kinder, III, Esquire
Wayne A. Whitham, Jr., Esquire Hunton & Williams
Williams, Mullen, Christian & Dobbins 951 East Byrd Street
1021 East Cary Street, 16th Floor Richmond, Virginia 23219
Richmond, Virginia 23219 (804) 788-8200
(804) 643-1991
Approximate date of proposed sale to the public: As soon as practicable
after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ____________
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
=============================== ====================== ====================== ==================== =================
Title of Each Class of Amount Proposed Maximum Proposed Maximum
Securities to to be Offering Price Aggregate Amount of
be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee
=============================== ====================== ====================== ==================== =================
Common Stock,
par value $5.00 per share 149,500 Shares $25.625 $3,830,937.50 $1,160.89
=============================== ====================== ====================== ==================== =================
(1) Includes 19,500 shares that the Underwriters has the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) based on the average of the high and low prices
for the Common Stock reported on the Nasdaq SmallCap Market on April 18,
1997.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
Mid-Atlantic Community BankGroup, Inc.
CROSS REFERENCE SHEET
Pursuant to Item 501 of Regulation S-B
Showing Heading or Location in Prospectus of Information
Required by Items in Part I of Form SB-2
Item in Form SB-2 Location in Prospectus
----------------- ----------------------
1. Forepart of the Registration Statement and Facing Page; Cross Reference Sheet; Outside Front
Outside Front Cover Page of Prospectus Cover Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Page
Prospectus
3. Summary Information and Risk Factors Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page; Underwriting
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Underwriting
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters and Management
Control Persons
11. Security Ownership of Certain Beneficial Owners Management
and Management
12. Description of Securities Outside Front Cover Page; Description of Capital
Stock
13. Interests of Named Experts and Counsel Legal Opinions; Experts
14. Disclosure of Commission Position on Description of Capital Stock
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Management
16. Description of Business Prospectus Summary; The Company; Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Transactions Management
20. Market for Common Equity and Related Stockholder Market for Common Stock; Dividend Information
Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants on Not Applicable
Accounting and Financial Disclosure
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED APRIL __, 1997, SUBJECT TO COMPLETION
PROSPECTUS
130,000 Shares
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Common Stock
Mid-Atlantic Community BankGroup, Inc. (the "Company"), the holding
company for Peninsula Trust Bank, Incorporated, is hereby offering for sale
130,000 shares of its Common Stock, $5.00 par value per share (the "Common
Stock"). The Common Stock is traded on the Nasdaq SmallCap Market under the
symbol MABG, but there has been limited trading volume to date. On ____________,
1997 the closing quotation for the Common Stock was $___ bid -- $___ offered and
the last reported sale price for the Common Stock on such date was $___. See
"Market for Common Stock". See "Underwriting" for a discussion of the factors
considered in determining the public offering price.
See "Risk Factors" on page 5 for certain information that should be
considered by prospective investors.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER
GOVERNMENTAL AGENCY HAS APPROVED, DISAPPROVED, PASSED UPON,
RECOMMENDED OR ENDORSED THE ACCURACY OR ADEQUACY
OF THIS OFFERING CIRCULAR OR THE MERITS OF THIS
OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR
DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE COMPANY
INSURANCE FUND OF THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY.
--------------------
Price to Underwriting Proceeds to
Public Discount (1) the Company(2)
Per Share................. $ $ $
Total (3)................. $ $ $
- -------------------
(1) Payable to the Underwriter. The Company has agreed to indemnify the
Underwriter against certain civil liabilities.
(2) Before deducting offering expenses payable by the Company estimated at
$_____.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
19,500 additional shares of Common Stock on the same terms and conditions
set forth above solely to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, total
Underwriting Discount and total Proceeds to the Company will be $___, $___
and $___, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
It is expected that delivery of certificates for shares of Common Stock will be
made at the offices of Davenport & Company LLC, in Richmond, Virginia, on or
about _________, 1997.
DAVENPORT & COMPANY LLC
The date of this Prospectus is May __, 1997.
[place on back of front cover]
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Market Area
[MAP]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OVERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ SMALLCAP MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
-2-
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated herein by reference. Unless otherwise indicated, the information
contained in this Prospectus assumes (i) an offering price of $_________, and
(ii) that the Underwriter's overallotment option is not exercised. The Company
Mid-Atlantic Community BankGroup, Inc., a Virginia corporation (the
"Company"), is the holding company for Peninsula Trust Bank, Incorporated, a
Virginia-chartered commercial bank (the "Bank") that commenced operations on
July 20, 1989. The Company and the Bank are headquartered at the same location
in Gloucester, Virginia. The Company has experienced consistent growth since
1989. At December 31, 1996 the Company had $136.4 million in assets, $120.5
million in deposits and $14.4 million in stockholders' equity. In 1996 the
Company's net income was $1.5 million, compared to $1.0 million in 1995 and
$752,000 in 1994.
The Company's market area is in the Peninsula Region of Virginia, which
lies east of Richmond, north of the James River and south of the Rappahannock
River. The Bank currently operates five full-service banking offices, including
the main office in Gloucester County and branch offices in Williamsburg, Charles
City County, Newport News and Glenns (northern Gloucester County). The Glenns
location opened on January 30, 1997 and also houses the Bank's Operations
Center. The Bank is a community-oriented bank that provides a broad range of
banking services to small- and medium-sized businesses and individuals, with
extended lobby hours and drive-in windows at each location. The Bank strives to
provide its customers with the breadth of products comparable to a regional
bank, while maintaining the quick response and high level of service of a
community bank. The Bank's lending activities include commercial, real estate
and consumer loans.
The Company's business strategy is to maintain the Bank as a leading
community bank in the Peninsula Region of Virginia by building a strong local
ownership base in each community it serves and by further developing a
community-based branch banking network. The Bank's identity as a
community-oriented bank also defines its strategy for growth. Management
believes that the general trend toward consolidation of the banking industry in
the Bank's market area has created a niche for community-based lenders
emphasizing smaller loans and customer service. To exploit this niche,
management intends to continue to develop its community-based branch banking
network in the Peninsula Region. The Company plans to establish a branch office
in Hampton, Virginia, which lies immediately to the east of Newport News, and is
currently evaluating available sites.
The Offering
Shares offered...................... 130,000 shares of Common Stock(1).
Common Stock outstanding............ 944,333 shares at March 31, 1997, and
1,074,333 shares after completion of
this offering (1).
Use of proceeds..................... General corporate purposes, including
new branches and to support future
growth in deposits and assets. See "Use
of Proceeds."
Market Area......................... The Bank operates in the Peninsula
Region of Virginia with two offices in
Gloucester County, and one office in
each of Charles City County and the
Cities of Williamsburg and Newport News.
Nasdaq SmallCap Market Symbol....... MABG
Dividends........................... The Company currently pays annual
dividends. The Company paid dividends
of $.25 per share in 1997, $.12 per
share in 1996, $.10 per share in 1995
and $.06 per share in 1994. See
"Description of Capital Stock-Common
Stock" and "Business-Supervision and
Regulation".
- -------------------
(1) If the Underwriter's overallotment option is exercised in full, 149,500
shares will be offered and Common Stock outstanding after the Offering will
be 1,093,833 shares.
-3-
SUMMARY CONSOLIDATED FINANCIAL DATA
The following Summary Consolidated Financial Data and ratios for the
Company have been derived from information included elsewhere in this
Prospectus. See the Company's financial statements, including footnotes thereto,
which are set forth elsewhere in this Prospectus and are an integral part of the
information presented.
At and for the year ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share data)
EARNINGS STATEMENT DATA:
Interest income.............. $10,653 $8,224 $5,651 $3,829 $2,930
Interest expense............. 4,359 3,469 2,120 1,624 1,540
------- ------ ------ ------ ------
Net interest income.......... 6,294 4,755 3,531 2,205 1,390
Provision for loan losses.... 380 288 258 255 122
Other income................. 624 477 358 290 202
Other expenses............... 4,191 3,496 2,481 1,838 1,246
Income taxes................. 813 425 398 66 12
------- ------ ------ ------ ------
Net income (loss)............ $ 1,534 $1,023 $ 752 $ 336 $ 212
======= ====== ====== ====== ======
PER SHARE DATA:
Net income................... 1.57 1.29 1.20 .57 .45
Weighted average shares outstanding... 975,486 794,376 624,789 592,735 476,798
Book value at period end..... 15.28 14.12 12.01 10.89 10.31
Total shares outstanding..... 944,333 944,333 657,978 582,628 582,628
Cash dividends............... .12 .10 .06 - -
BALANCE SHEET DATA:
Total assets................. $136,434 $108,314 $80,332 $58,792 $40,775
Loans, net................... 90,978 69,556 53,604 39,571 23,337
Investment securities........ 27,297 24,793 12,958 10,769 9,888
Deposits..................... 120,485 94,115 71,524 51,930 34,512
Borrowings................... 43 55 67 77 -
Shareholders' equity......... 14,432 13,335 7,900 6,345 6,009
PERFORMANCE RATIOS:
Net interest margin(1)....... 5.72% 5.51% 5.59% 4.97% 4.34%
Return on average assets..... 1.30% 1.11% 1.10% .69% .61%
Return on average equity..... 10.91% 10.38% 10.84% 5.06% 4.52%
Efficiency ratio(2).......... 60.21% 66.81% 63.81% 74.67% 78.34%
Dividend pay-out ratio....... 7.39% 6.43% 4.65% - -
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans.......... 1.21% 1.23% 1.31% 1.20% 1.11%
Allowance for loan losses to
nonaccrual loans(3)........ 5.85x 6.32x 28.52x 9.45x -
Nonperforming assets to period end
loans and foreclosed properties... .21% .19% .05% .13% .00%
Net charge-offs to average loans .16% .22% .06% .12% .23%
CAPITAL AND LIQUIDITY RATIOS:
Leverage..................... 11.41% 12.79% 10.81% 11.65% 15.28%
Risk Based Capital Ratios:
Tier 1 capital........... 15.00% 18.28% 14.54% 17.60% -
Total capital............ 12.17% 19.47% 15.80% 18.80% -
Average loans to average
deposits.................... 79.10% 74.68% 75.94% 76.20% 67.62%
- --------------------
(1) Net interest margin is calculated as tax equivalent net interest income
divided by average earning assets and represents the Bank's net yield on its
earning assets.
(2) Computed by dividing non-interest expense by the sum of net interest income
and non-interest income, net of securities gains or losses.
(3) The Bank had no nonaccrual loans at December 31, 1992.
-4-
RISK FACTORS
Prospective investors should consider carefully, in addition to the
other information contained in this Prospectus, the following risk factors
before purchasing shares of the Common Stock offered hereby. This Prospectus
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate" or "continue" or the negative
thereof or other comparable terminology. The Company cautions readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause the
Company's actual results in 1997 and beyond to differ materially from those
expressed in any forward-looking statements made herein.
Dependence on Key Personnel. The Company is substantially dependent
upon the services of William J. Farinholt, President and Chief Executive Officer
of the Company and the Bank, and Kenneth E. Smith, Executive Vice President and
Chief Financial Officer of the Company and the Bank. The loss of the services of
Mr. Farinholt or Mr. Smith could have a material adverse effect upon the future
prospects of the Company. The Company has entered into employment agreements
with Mr. Farinholt and Mr. Smith. See "Management."
Continued Growth. The Company has experienced rapid growth since the
Company commenced operations as a state chartered bank in July, 1989. Although
the Company expects to continue growing in the future, there can be no assurance
that the recent rate of growth can be maintained. The Bank is a relatively new
financial institution in a highly competitive market with a loan portfolio
developed over the last eight years. In addition, continued growth will be
dependent in part on management's ability to supervise the Company's personnel
and operations in an efficient and productive manner consistent with its past
practices.
Competition. The Company encounters strong competition from numerous
financial institutions within its primary service area, including many large
banks that operate in the Peninsula Region of Virginia. By virtue of their large
capital bases, such banks have substantially greater lending limits than the
Company and perform certain services for their customers, such as trust
services, that the Company does not currently offer. In addition to commercial
banks, the Company competes with other financial institutions, such as savings
and loan associations, finance companies, credit unions, money market funds,
stock brokerage firms, insurance companies and other financial service
organizations. Many of the financial organizations in competition with the
Company have greater financial resources and loan capacities than the Company
and are able to offer similar services at lower costs. The Company cannot
accurately predict the effect of competition on its ability to further penetrate
its current and prospective markets. See "Business."
Economic Conditions and Related Uncertainties. The Company's primary
service area is limited to the Peninsula Region of Virginia. Declines in
economic activity or increased unemployment in this area could have an adverse
effect on the business and prospects of the Company. More generally, commercial
banking is affected by general economic and political conditions and by
governmental monetary and fiscal policies. Conditions such as inflation,
recession, unemployment, volatile interest rates, tight money supply, and other
factors beyond the Company's control may adversely affect the financial
performance of the Company.
Government Regulations. The banking industry is subject to extensive
governmental supervision, regulation and control, which has materially affected
the business of the Company and other financial institutions in the past and is
likely to do so in the future. Regulations affecting the banking industry may be
changed at any time, and the interpretation of those regulations by examining
authorities of the banking industry is also subject to change. There can be no
assurance that future changes in legislation, administrative regulations or
governmental policy will not adversely affect the banking industry and the
business of the Company. See "Business-Supervision and Regulation."
Payment of Dividends. The Company or the Bank has paid an annual cash
dividend since 1994. The Company currently intends to continue to pay an annual
dividend. However, there can be no assurance that the Company's results of
operations will continue to permit the payment of dividends. The ability of the
Company to pay cash dividends also is subject to both federal and state banking
regulations. See "Dividend Information."
-5-
Determination of Offering Price. The offering price of the Common Stock
has been determined by negotiation between the Company and the Underwriter based
on certain factors including the current market for the Common Stock, an
evaluation of assets, earnings and other established criteria of value, as well
as the comparisons of the relationships between market prices and book values of
other banking institutions deemed comparable by the Underwriter. Such decision
will not be solely based upon the actual trading market for the Common Stock;
accordingly, there can be no assurance that the Common Stock may be resold at or
above the offering price. See "Underwriting."
Limited Trading Market. The Common Stock of the Bank or the Company has
been quoted on the Nasdaq SmallCap Market continuously since September 1995 and
trading volume has averaged approximately 1,000 shares per week. There can be no
assurance that an active trading market will develop or, if developed, will be
sustained following the Offering.
THE COMPANY
The Bank was organized on April 4, 1988 and commenced business on July
20, 1989, with initial capital of $3.3 million. The Company, which was formed to
be the Bank's holding company, acquired all of the outstanding capital stock of
the Bank pursuant to a plan of share exchange, on August 15, 1996.
The Company's market area is in the Peninsula Region of Virginia, which
lies east of Richmond, north of the James River and south of the Rappahannock
River. The principal office of the Company and the Bank is in Gloucester,
Virginia. In addition to the main office in Gloucester County, the Bank
currently operates branch offices in Williamsburg, Charles City County, Newport
News and Glenns (northern Gloucester County). The opening dates of the branch
offices were as follows: Williamsburg, November 1992; Charles City County, April
1994; Newport News, June 1995; and Glenns, January 1997. Each branch office is a
full-service facility offering a full range of deposit and loan products, and
each is equipped with an ATM. There are extended lobby hours and drive-in
windows at all locations. The Bank plans to open a branch office in Hampton,
Virginia, to complement its Newport News office, and is currently evaluating
available sites, although there can be no assurance that this branch will be
opened in accordance with the Company's current plan.
At June 30, 1996 the Bank held approximately 23.0% of bank deposits in
Gloucester County, approximately 8.1% of the bank deposits in Williamsburg and
1.0% of the bank deposits in Newport News. The Company is the only depository
institution with an office in Charles City County. Deposits in the Charles City
County branch office totaled $10.3 million at December 31, 1996.
The Bank is a community-oriented bank that provides a broad range of
banking services to small and medium-sized businesses and individuals. The Bank
strives to provide its customers with products and services comparable to those
offered by regional banks, while focusing on the enhanced customer service that
smaller customers often do not receive at larger banks. The Bank's lending
activities include commercial, real estate and consumer loans.
The Bank has become a leading community bank in the Peninsula Region of
Virginia by building a strong local ownership base and by developing a
community-based branch banking network. The Bank has experienced significant
growth since opening. At December 31, 1996, the Company had $136.4 million in
assets, $120.4 million in deposits and $91.0 million in net loans. Management
believes that the current banking environment favors community-based lenders
emphasizing smaller loans. Accordingly, the Bank has developed a full range of
loan products and deposit products for small and medium-sized businesses and
individuals. The Bank's loan portfolio at December 31, 1996, consists of 66%
real estate loans, 11% commercial loans and 23% installment loans. The Bank's
real estate loans include residential real estate loans and home equity lines,
construction loans and commercial mortgage loans. See "Business-Lending
Activities."
The Company's senior management has an average of 26 years of banking
experience and has been with the Company since its inception as a state
chartered bank. The Company believes it has hired and retained experienced
employees whose banking backgrounds have helped the Company deliver excellent
customer service and develop and retain a highly trained professional staff.
At December 31, 1996, the Company's total capital, which included no
subordinated debt or debentures, was $14.4 million or 10.58% of total assets.
-6-
The Company and the Bank are subject to regulation by the Board of
Governors of the Federal Reserve (the "Federal Reserve") and the Bureau of
Financial Institutions of the SCC. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to a maximum of $100,000 for
each insured depositor.
The Company's principal executive offices are located at 7171 George
Washington Memorial Highway, Gloucester, Virginia 23061. The telephone number at
that location is (804) 693-0628.
USE OF PROCEEDS
The Company intends to use the net proceeds from the shares of Common
Stock offered hereby (estimated at $________, after deduction of the
underwriting discount and other expenses of the offering of approximately
$________) for general corporate purposes, including financing the opening of
future branches and to support the growth of assets and deposits. Additional
capital is expected to allow the Company to grow internally and through new
branches to support greater loan and deposit volumes. Any proceeds received by
the Company upon the exercise of the Underwriter's over-allotment option will
also be used for general corporate purposes and for financing future growth.
MARKET FOR COMMON STOCK
The Common Stock of the Company or the Bank has been quoted on the
Nasdaq SmallCap Market continuously since September 20, 1995. There has been
limited trading volume in the Common Stock, with trading volume averaging
approximately 1,000 shares per week since September 1995. During the period
September 20, 1995 to August 14, 1996 the Bank's Common Stock traded under the
symbol "PNTB". Since the consummation of a plan of share exchange on August 15,
1996 pursuant to which the Company became the Bank's holding company, the
Company's Common Stock has traded under the symbol "MABG". Prior to September
20, 1995 the Common Stock traded sporadically in the over-the-counter market,
and such trades may not have accurately reflected the fair market value of the
Common Stock. On December 31, 1996, the Company had 903 shareholders of record.
The following table sets forth the high and low sales prices of the
Common Stock for the period January 1, 1995 to April 18, 1997.
High Low
1997
Second Quarter (through April 18)......... $ 25.625 $ 25.625
First Quarter............................. 26.00 23.00
1996
Fourth Quarter............................ $26.00 $21.00
Third Quarter............................. 25.00 20.00
Second Quarter............................ 25.00 22.00
First Quarter............................. 23.50 18.50
1995
Fourth Quarter............................ $21.50 $19.00
Third Quarter............................. 22.00 17.00
Second Quarter............................ 17.50 16.50
First Quarter............................. 17.00 16.00
-7-
DIVIDEND INFORMATION
The Company or the Bank has paid annual dividends as follows: $.25 per
share in 1997; $.12 per share in 1996; $.10 per share in 1995; and $.06 per
share in 1994. No dividends were paid by the Bank prior to 1994. The Company
currently intends to continue to pay annual cash dividends on the Common Stock.
However, the payment of dividends is at the discretion of the Board of
Directors, and is subject to various state and federal regulatory limitations
and is dependent upon the overall performance and capital requirements of the
Company. Holders of Common Stock are entitled to receive such dividends as are
declared by the Company's Board of Directors. See "Description of Capital
Stock-Common Stock" and "Business-Supervision and Regulation."
CAPITALIZATION
The following table sets forth the capitalization and book value per
share of the Company at December 31, 1996, and as adjusted as of that date for
the issuance of the shares of Common Stock offered hereby. The information below
should be read in conjunction with the detailed information and financial
statements, and the notes related thereto, included in this Prospectus.
At December 31, 1996
-----------------------------------------------------
Actual Adjustments(1) As Adjusted
Stockholders' equity:
Common Stock, $5.00 par value;
10,000,000 shares authorized;
944,333 shares issued; 1,074,333
shares issued, as adjusted........................... $4,721,665 $650,000 $5,371,665
Organizers' stock options................................. 7,380 7,380
Capital surplus........................................... 6,693,925
Retained earnings......................................... 3,170,029 3,170,029
Unrealized loss on securities available for sale.......... (161,409) (161,409)
--------- -------- ---------
Total stockholders' equity................................ $14,431,590 $ $
=========== ======== =========
- ---------------
(1) Adjustments due to offering.
-8-
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 the Company as of
the dates and for the periods indicated. This discussion should be read in
conjunction with the Summary Financial Data, the Company's Consolidated
Financial Statements and the Notes thereto, and other financial data appearing
elsewhere in this Prospectus.
The consolidated financial statements include the financial information
of the Company and the Bank. As a result of a share exchange completed in
August, 1996, the Company became the parent corporation of the Bank; however,
the Bank represents more than 99.0% of the Company's activities. Therefore,
comparative discussions of consolidated versus non-consolidated financial
statements is appropriate.
Overview
After organizing in 1988 and opening in July 1989, the Bank has posted
consistent increases in assets, deposits, and profitability. The Bank's asset
growth has exceeded 25% in each of its seven full years of operation. Earnings
of $1.5 million in 1996 represented the seventh consecutive year of increased
income. Asset growth also evidenced strong performance. In 1996 the Company's
total assets increased to $136.4 million which represented a $28.1 million
increase, or 25.9% over year-end 1995. The primary source of this growth was an
increase in total deposits of $26.4 million (28.1%). Employment of these new
resources was accomplished through increases in the loan portfolio and
investment securities account of $21.4 million (30.8%) and $2.5 million (10.1%),
respectively. Loan demand was strong throughout 1996. Growth in interest bearing
demand deposits (NOW and Money Market accounts) was the primary contributor to
the Company's 47.5% increase in deposits during the year. These transaction
accounts had a year end balance of $26.0 million.
The Company had net income of $1.5 million in 1996, a 49.9% increase
over 1995 net income of $1.0 million. On a pre-tax basis, net income for 1996
was $2.3 million, a 62.1% increase over 1995 pre-tax income of $1.4 million. A
common measure of a bank's performance is return on average total assets
("ROA"). The Company's ROA for 1996 was 1.3%, a 17% increase over the Company's
1995 ROA of 1.1%. The Company believes that this increase represents a
continuation of the Company's trend of improving earnings every year since
opening, both in absolute dollars and in the ROA ratio. The improvement in the
ROA has facilitated an increasing return on average equity ("ROE"), despite a
conservative leverage ratio. In 1996 the Company's ROE was 10.9%, compared to
10.4% in 1995.
Results of Operations
The Company's sole subsidiary, the Bank, operates 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.
Net Interest Income
Net interest income represents the principal source of earnings for the
Company. Net interest income equals the amount by which interest income exceeds
interest expense. Earning assets consist primarily of loans and securities,
while deposits represent the major portion of interest-bearing liabilities.
Changes in the volume and mix of interest-earning assets and interest-bearing
liabilities, as well as their respective yields and rates, have a significant
impact on the level of net interest income. Net interest margin is calculated as
tax-equivalent net interest income divided by average earning assets and
represents the Company's net yield on its earning assets.
The following table presents the average balances of total
interest-earning assets and total interest-bearing liabilities for the periods
indicated, showing the average distribution of assets, liabilities,
stockholders' equity, and the related income, expense, and corresponding
weighted average yields and costs. The average balances used for the purposes of
these tables and other statistical disclosures were calculated by using the
daily average balances.
-9-
Average Balances, Interest Income and Expenses, Average Yields and Rates(1)
Year Ended December 31,
----------------------------------------------------------------------------------------------
1996 1995 1994
----------- ----------- ------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(Dollars in Thousands)
Assets:
Interest earning assets:
Federal funds sold.......... $4,153 $231 5.56% $ 6,445 $ 378 5.87% $ 3,546 $ 144 4.06%
Securities: (2)...........
Obligations of
U.S. Treasury............. 61 5 8.20% - - - - - -
U.S. government agencies
and corporations....... 17,930 1,291 7.20% 13,642 894 6.55% 9,049 521 5.76%
Other securities ........ 6,562 437 6.66% 4,551 299 6.57% 3,614 200 5.53%
------ ------ ------- ------ ------- ------
Total securities....... 24,553 1,733 7.06% 18,193 1,193 6.56% 12,663 721 5.70%
Loans ................... 81,323 8,689 10.68% 61,703 6,653 10.78% 46,905 4,786 10.20%
------ ------ ------- ------ ------- ------
Total interest-earning assets. 110,029 10,653 9.68% 86,341 8,224 9.53% 63,114 5,651 8.95%
Noninterest-earning assets:
Cash and due from banks..... 3,797 2,721 2,832
Other assets................ 5,526 4,301 3,134
Less: allowance for loan (985) (796) (599)
losses......................
Deferred loan fees.......... (431) (375) (335)
-------- ------- -------
Total noninterest-earning
assets................... 7,907 5,851 5,032
-------- ------- -------
Total assets.................. $117,936 $92,192 $68,146
======== ======= =======
Liabilities and
shareholders' equity:
Interest bearing liabilities:
Deposits:
Interest bearing demand.. $ 21,471 $ 690 3.21% $ 16,600 $ 523 3.15% $18,373 $ 586 3.19%
Savings.................. 10,710 357 3.33% 9,018 303 3.36% 7,936 266 3.35%
Other time............... 57,115 3,301 5.78% 45,302 2,632 5.81% 26,735 1,260 4.74%
------ ------ ------- ------ ------- ------
Total interest bearing
deposits................. 89,296 4,348 4.87% 70,920 3,458 4.88% 53,044 2,112 3.98%
Short-term borrowings....... 233 9 3.86% 197 8 4.06% 125 4 3.20%
Long-term debt.............. 50 3 6.00% 61 3 4.92% 72 4 5.56%
------ ------ ------- ------ ------- ------
Total interest-bearing 89,579 4,360 4.87% 71,178 3,469 4.87% 53,241 2,120 3.98%
liabilities...................
Noninterest-bearing
liabilities:
Demand deposits............. 13,514 10,132 7,485
Other liabilities........... 785 1,017 481
-------- ------- -------
Total noninterest-bearing
liabilities................. 14,299 11,149 7,966
-------- ------- -------
Total liabilities............. 103,878 82,327 61,207
Shareholders' equity.......... 14,058 9,865 6,939
-------- ------- -------
Total liabilities and
shareholders' equity........ $117,936 $92,192 $68,146
======== ======= =======
Interest spread (3)........... 4.81% 4.66% 4.97%
Net interest income/net
interest margin (4)......... 5.72% 5.51% 5.59%
- --------------
(1) Income and yields are computed on a tax-equivalent basis.
(2) Includes investment securities and securities available for sale. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Securities."
(3) Interest spread is the average yield earned on earning assets less the
average rate incurred on interest-bearing liabilities. (4) Net interest
margin is tax equivalent net interest income expressed as a percentage
of average earning assets.
Total interest and fee income from loans and investments for 1996 was
$10.7 million compared to $8.2 million in 1995, a 29.5% increase. This was
accomplished through an increase in average total earning assets from $86.3
million for 1995 to $110.0 million for 1996. As a percentage of average total
assets, earning assets remained relatively constant, declining slightly from
93.7% in 1995 to 93.3% in 1996. Total interest expense increased $890,600
(25.7%) in 1996 to a total of $4.4 million.
-10-
Net interest income increased by $1.5 million (32.4%) in 1996. The net
interest margin increased in 1996 to 5.72% from 5.51% in 1995. Expected pressure
on the net interest margin during 1995 occurred throughout the first half of the
year, as a result of downward repricing of loans and aggressive pricing of
deposits in anticipation of loan demand from the Newport News branch, which
opened in mid-1995. Pressure on the net interest margin stabilized in July 1995
and improved steadily during the balance of 1995 and 1996 as a result of
improved yields in its loan portfolio, as a significant volume of three year
balloon mortgage loans repriced during the second half of 1995 and 1996,
resulting rate increases ranging from 50 to 150 basis points. The Company also
enjoyed an increased average yield on its investment portfolio of approximately
50 basis points in 1996.
Net interest income is affected by changes in both average interest
rates and average volumes of interest earning assets and interest-bearing
liabilities. The following table sets forth the amounts of the total change in
interest income that can be attributed to changes in the volume of
interest-bearing assets and liabilities, and the amount of the change that can
be attributed to changes in interest rates. The amount of change not solely due
to rate or volume changes was allocated between the change due to rate and the
change due to volume based on the relative size of the rate and volume changes.
Volume and Rate Analysis
Year Ended December 31,
-------------------------------------------------------------------------------
1996 Compared to 1995 1995 Compared to 1994
---------------------- ---------------------
Change Due To: Change Due To:
-------------- --------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
Interest Income:
Federal funds sold.................... $ (134) $ (13) $(147) $ 118 $ 116 $ 234
Securities(1):
U.S. Treasury Obligations.......... 5 5
Obligations of U.S. government
agencies and corporations....... 281 116 397 264 109 373
Other.............................. 132 6 138 26 73 99
-------- ------- ------ ------ ------ ------
Total securities................. 418 122 540 290 182 472
Loans................................. 647 1,389 2,036 1,510 357 1,867
-------- ------- ------ ------ ------ ------
Total interest income.............. 931 1,498 2,429 1,918 655 2,573
Interest Expense:
Deposits:
Interest bearing demand............ 153 14 167 (57) (6) (63)
Savings............................ 57 (3) 54 36 1 37
Other time......................... 174 495 669 875 497 1,372
-------- ------- ------ ------ ------ ------
Total deposits................... 384 506 890 854 492 1,346
Short-term borrowing.................. - 1 1 2 2 4
Long-term debt........................ - - - (1) - (1)
--------- ------- ------ ------ ------ ------
Total interest expense............. 384 507 891 855 494 1,349
--------- ------- ------ ------ ------ ------
Increase (decrease) in net interest
income.............................. $547 $991 $1,538 $1,063 $161 $1,224
===== ===== ======= ====== ===== ======
- --------------
(1) Net interest margin is tax equivalent net interest income expressed as a
percentage of average earning assets.
-11-
Interest Sensitivity
An important element of both earnings performance and the maintenance
of sufficient liquidity is management of the interest sensitivity gap. The
interest sensitivity gap is the difference between interest sensitive assets and
interest sensitive liabilities that mature or reprice in a specific time
interval. The gap can be managed by repricing assets or liabilities, by selling
securities or loans held for sale, by replacing an asset or liability at
maturity or by adjusting the interest rate during the life of an asset or
liability. Matching the amounts of assets and liabilities repricing in the same
time interval helps to mitigate the impact on net interest income of rapid
changes in market interest rates.
The Company evaluates interest sensitivity risk and then formulates
plans regarding asset generation and pricing, funding sources and pricing, and
off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based on management's outlook regarding future interest rate
movements, the state of the regional and national economy, and other financial
and business risk factors.
The following table illustrates the interest sensitivity gap position
of the Company at December 31, 1996. It summarizes the contractual repayment
terms or nearest repricing dates of the Company's interest-earning assets and
interest-bearing liabilities. This table presents a position that existed at one
particular day. This position changes continually and is not necessarily
indicative of the Company's position at any other time.
Interest Sensitivity Analysis(1)
Maturing or Repricing In:
----------------------------------------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
------- ---- ----- ------- -----
(Dollars in Thousands)
Interest Earning Assets:
Federal funds sold............... $ 5,364 $ - $ - $ - $ 5,364
Investment securities............ 120 30 2,404 24,744 27,298
Loans............................ 36,464 2,437 52,327 1,344 92,572
------ ----- ------ ----- ------
Total interest-earning assets. $41,948 $2,467 $54,731 $26,088 $125,234
======= ====== ======= ======= ========
Interest Bearing Liabilities:
Deposits:
Interest bearing demand
deposits(2).................. - - 14,576 - 14,576
MMDAs and other savings...... 26,362 - - - 26,362
Time deposits $100,000
and over................... 2,232 4,053 3,132 - 9,417
Other time deposits.......... 12,102 19,987 22,909 - 54,998
Other borrowed money............. 356 9 30 - 395
------ ----- ------ ----- ------
Total interest-bearing
liabilities................ $41,052 $24,049 $40,647 $ - $105,748
======= ======= ======= ========= ========
Period gap.......................... $ 896 $(21,582) $14,084 $26,088 $ 19,486
Cumulative gap...................... $ 896 $(20,686) $ (6,602) $19,486
Cumulative gap as a percent of total
earning assets................... 0.72% (16.52%) (5.27%) 15.56%
- ---------------
(1) The amounts shown for loans have not been reduced by the allowance for
loan losses or unearned income, which were approximately $1.1 million
and $483,000, respectively, at December 31, 1996.
(2) The Company has found that interest bearing demand deposits are not
sensitive to changes in interest rates and, therefore, has placed such
deposits in the one to five years category.
The Bank had $20.7 million more in liabilities than assets that
repriced within one year and was, therefore, in a liability-sensitive or
negative gap position for this interval at December 31, 1996. Positive gaps can
affect earnings adversely in a period of declining rates, while negative gaps
can adversely impact earnings in a period of rising rates. The Bank manages
interest rate risks by monitoring the balances, rates and maturities of rate
sensitive assets and liabilities. Management considers the level described above
for the one year interval to
-12-
be slightly outside of an acceptable range. A mitigating factor, however, is
that included in this interval are money market deposit accounts and other
savings deposits which, while repricable on an immediate basis, have
demonstrated less actual sensitivity to various interest rates changes than both
time certificates of deposit and interest sensitive assets. Management has
altered its investment strategy for the immediate future with purchases aimed at
reducing the average maturity of the Company's investment portfolio.
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.
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
shareholders' equity. Securities available for sale include securities that may
be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, general liquidity needs
and other similar factors. The Company's recent purchases of investment
securities have generally been limited to securities of high credit quality with
short to medium term maturities.
The following tables summarize the book value of the Company's
investment securities at the dates indicated.
Securities Portfolio
December 31,
------------------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
U.S. Treasury securities........................... $ 535 $ - $ -
U. S. government agencies and corporations......... 15,651 12,967 6,798
State and local governments........................ 7,467 5,860 3,527
Mortgage-backed securities......................... 3,195 5,613 2,644
Other securities................................... 343 289 213
Corporate stocks................................... 351 - -
Unrealized gain (loss) on securities available
for sale......................................... (245) 63 (223)
----- ------ -------
Total securities.......................... $ 27,297 $24,792 $12,959
======== ======= =======
-13-
The book value and weighted average yield of the Company's investment
securities at December 31, 1996, by contractual maturity, are reflected in the
following table. 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.
Amount and Average Yield of Investment Securities
Amount Average Yield
------ -------------
(Dollars in Thousands)
Due in one year or less.................. $ 149 6.76%
Due after one year through five years.... 1,901 5.64
Due after five years through ten years... 10,750 7.15
Due after ten years...................... 14,048 7.53
Federal Reserve Bank stock............... 343 6.00
Marketable equity securities ............ 351 7.73
-------
Total securities...................... $27,542 7.23%
Loan Portfolio
The Company is an active lender with a loan portfolio that includes
commercial and residential mortgages, commercial loans, consumer installment
loans, real estate construction loans and home equity loans. See
"Business-Lending Activities." The Company's lending activity extends to
individuals and small and medium-sized businesses within its primary service
area which is predominately the Peninsula Region of Virginia. Consistent with
its focus on providing community-based financial services, the Company does not
attempt to diversify its loan portfolio geographically by making significant
amounts of loans to borrowers outside of its primary service area.
Net loans consist of total loans minus unearned income and the
allowance for loan losses. Net loans were $91.0 million at December 31, 1996, an
increase of $21.4 million from December 31, 1995. At December 31, 1995, net
loans were $69.6 million, which was an increase over 1994 of approximately $16.0
million.
The following table summarizes the Company's loan portfolio for the
periods indicated.
Loan Portfolio
December 31,
-----------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Commercial mortgage........................................... $19,622 $10,581 $ 8,377
Residential mortgage.......................................... 25,056 21,609 17,560
Home equity................................................... 9,318 7,742 5,871
Construction.................................................. 6,915 6,806 6,024
Commercial.................................................... 10,292 6,534 4,057
Installment................................................... 20,848 16,854 12,391
All other..................................................... 522 717 392
--- --- ---
Total loans................................................. 92,573 70,843 54,672
Less: unearned income........................................ 483 421 355
Less: allowance for loan losses.............................. 1,112 866 713
----- --- ---
Loans, net.................................................. $90,978 $69,556 $53,604
======= ======= =======
-14-
Asset Quality
There were no loans at December 31, 1996, 1995 or 1994, 90 days or more
past due that were not on nonaccrual status or adequately secured and in the
process of collection. The Company discontinues accrual of interest when
reasonable doubt exists about the full and timely collection of interest or
principal. When a loan is placed on nonaccrual status, all interest previously
accrued but not collected is reversed against current period interest income.
Income on such loans is then recognized only to the extent that cash is received
and where the future collection of principal is probable. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans have
demonstrated a new period of improved performance and are estimated to be fully
collectible as to both principal and interest.
There were no restructured loans at December 31, 1996, 1995, or 1994.
Restructured loans are defined as those loans on which concessions in terms have
been granted because of a borrower's financial difficulty.
The following table summarizes non-performing assets for the periods
indicated.
Non-Performing Assets
December 31,
--------------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis.............. $190 $137 $25
Loans contractually past due 90 days or more as to
interest or principal payments (not included in
non-accrual loans above)............................. 88 71 35
Loans restructured and in compliance with modified terms
(not included in non-accrual loans or loans
contractually past due 90 days or more above)........ - - -
Other real estate owned................................. - - -
--- --- ---
Total................................................ $278 $208 $60
==== ==== ===
As to the nonaccrual loans at December 31, 1996 referred to above,
approximately $9,200 of interest income would have been recorded during such
period if the loans had been current and the interest thereon had been accrued.
During 1996 the Company provided $380,000 to the reserve for loan
losses. This represents an increase of $92,000 over 1995. At year-end 1996 the
allowance equaled $1.1 million, or 1.2% of outstanding loans. Loans past due 30
days or more and still accruing interest totaled $2.1 million (2.3% of
outstanding loans) compared to 1.6% at December 31, 1995. Non-performing loans
at year-end 1996 totaled $190,000. Net charge-offs for 1996 were $134,000
compared to $135,000 in 1995. Credit decisions continue to be based on the
borrower's cash flow, the value of underlying collateral, and the integrity of
the borrower. 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.
-15-
An analysis of the allowance for loan losses, including charge-off
activity is presented in the following table.
Allowance for Loan Losses
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
Balance at beginning of period....................... $866 $713 $482
Charge-offs:
Commercial mortgage............................... - - -
Residential mortgage.............................. 9 15 -
Real estate construction.......................... - - -
Home equity....................................... - - -
Commercial........................................ 134 13 5
Installment and all other consumer loans.......... 18 142 35
--- --- ---
Total charge-offs.................................... 161 170 40
--- --- ---
Recoveries on previous loan losses:
Commercial mortgage............................... - - -
Residential mortgage.............................. - - -
Real estate construction.......................... - - -
Home equity....................................... - - -
Commercial........................................ 12 4 -
Installment and all other consumer loans.......... 15 31 13
Total recoveries..................................... 27 35 13
--- --- ---
Net charge-offs...................................... 134 135 27
Provision charged to operations...................... 380 288 258
--- --- ---
Balance at end of period............................. $1,112 $866 $713
====== ==== ====
Net charge-offs as a percent of average loans........ .16% .22% .06%
Total allowance as a percent of loans outstanding at
period end......................................... 1.21% 1.23% 1.31%
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 Company's 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.
Allocation of the Allowance for Loan Losses
A breakdown of the allowance for loan losses is provided in the
following table. However, such a breakdown has not historically been maintained
by the Company and management does not believe that the allowance can be
fragmented by category with a degree of precision that would be useful to
investors. Due to the relatively small amounts of net loan losses over the past
three years, the breakdown of the allowance for loan losses is based primarily
upon those factors discussed above in computing the allowance for loan losses as
a whole. Because all of these factors are subject to change, the breakdown is
not necessarily indicative of the character of future loan losses. The entire
amount of the allowance is available to absorb losses in any category. The
allowance is allocated below based primarily on the relative percent of loan
losses in each category, which represents the expected and provided for inherent
losses in the portfolio. In 1997, the Company intends to implement a loan review
process, which will be performed by an individual not involved in the Company's
lending operations. The objective of the loan review process will be to assign
every loan a credit quality rating,
-16-
thereby enabling management to better assess the risk of loss within the
Company's loan portfolio and to create a more accurate relationship between the
allowance for loan losses and categories of loans.
Year Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------ -------------------------
Percentage Percentage Percentage
of Total of Total of Total
Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- -----
(Dollars in thousands)
Residential mortgage............. $ 13 21% $ 9 15% $ 8 15%
Commercial mortgage.............. 133 27 103 30 88 32
Real estate construction......... 56 10 43 11 36 11
Home equity...................... 20 8 18 10 11 11
Commercial....................... 500 11 390 9 320 8
Installment and other 390 23 303 25 250 23
--- -- --- -- --- --
consumer loans.................
Total......................... $1,112 100% $866 100% $713 100%
====== ==== ====
Non-interest Income
Total non-interest income in 1996 was $624,000, a 30.8% increase over
the previous year. The primary source of non-interest income is service charges
and fees related to deposit accounts. Certain fees were increased in the second
half of 1996, but their beneficial impact was not material for the year. All
service fees are reviewed frequently for the possibility of upward adjustment.
The Company, however, strives to charge consistently lower service fees than its
competition.
Non-interest Expense
Total non-interest expense of $4.2 million in 1996 represented a 20.0%
increase over $3.5 million in 1995. The impact of staff increases for the
Company's fifth branch office began late in the fourth quarter of 1996, but will
have a more significant effect in 1997. The 1996 increase compared well with the
40.9% increase between 1994 and 1995. The primary cause for increase continues
to be personnel expenses. Other personnel related expenses include furniture,
fixtures and computer equipment related to increasing numbers of employees late
in the fourth quarter of 1996. The increase from 1994 to 1995 was associated
with opening the Bank's fourth office in June 1995. With no new offices opened
until late 1996, non-interest expense grew at a lesser rate than total assets,
an indication of operational efficiencies. The extended hours of operation
offered by the Bank have required and will continue to require expensive
staffing. However, the Company believes that its commitment to customer service
has enabled it to compete effectively against larger statewide and regional
banks.
Deposits
The Company's primary source of funds is deposit accounts, which
include demand deposits, savings and money market accounts and other time
deposits. The Company's deposits are provided by individuals and businesses
located within the communities served.
As shown below, average total deposits grew by 26.8% during 1996 from
$81.1 million to $102.8 million. Total deposits were $120.5 million at December
31, 1996, $94.1 million at December 31, 1995 and $71.5 million at December 31,
1994. The average aggregate interest rate paid on deposits was 4.23% in 1996,
compared to 4.27% for 1995 and 3.50% for 1994.
-17-
The following table is a summary of average deposits and average rates
paid.
Average Deposits and Average Rates Paid
Year Ended December 31,
--------------------------------------------------------------------------------
1996 1995 1994
----- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(Dollars in Thousands)
Non-interest bearing demand deposits $13,514 - $10,132 - $ 7,485 -
Interest bearing demand deposits... 21,471 3.21% 16,600 3.15% 18,373 3.19%
Savings deposits................... 10,710 3.33% 9,018 3.36% 7,936 3.35%
Time deposits...................... 57,115 5.78% 45,302 5.81% 26,735 4.74%
------ ------ ------
Total (weighted average rate)... $102,810 4.23% $81,052 4.27% $60,529 3.50%
The following table is a summary of time deposits of $100,000 or more
by remaining maturities at December 31, 1996.
Maturities of Time Deposits of $100,000 and Over
Amount Percent
------ -------
(Dollars in Thousands)
Three months or less................... $2,232 23.7%
Three to six months.................... 1,057 11.2%
Six to twelve months................... 2,996 31.8%
Over twelve months..................... 3,132 33.3%
----- -----
Total..................................... $9,417 100.0%
====== ======
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.
Capital Resources and Liquidity
An assessment of the Company's capital adequacy depends on a number of
factors such as asset quality, liquidity, earnings performance and changing
competitive conditions and economic forces. The Company seeks to maintain a
strong capital base to support its growth and expansion activities, to provide
stability to current operations and to promote public confidence.
The Company's capital position continues to exceed regulatory minimums.
The primary indicators relied on by the Federal Reserve and other bank
regulators in measuring strength of capital position are the Tier 1 Capital,
Total Capital and Leverage ratios. Tier 1 Capital consists of common and
qualifying preferred stockholders' equity less goodwill. Total Capital consists
of Tier 1 Capital, qualifying subordinated debt and a portion of the allowance
for loan losses. Risk-based capital ratios are calculated with reference to
risk-weighted assets which consist of both on and off-balance sheet risks. See
"Business-Supervision and Regulation--Capital."
-18-
The following table shows the Company's risk-based capital ratios
and shareholders' equity to total assets at December 31, 1996 and 1995.
Analysis of Capital
Regulatory
Minimum December 31,
--------------------
1996 1995
---- ----
Capital Ratios:
Risk-based capital:
Tier 1 4.00% 12.17% 18.28%
Total 8.00 15.00 19.47
Leverage 4.00 11.41 12.79
Shareholders' equity to total assets n/a 10.58 12.31
Liquidity is provided through several sources. The source most readily
convertible to cash is "Federal funds sold," or the overnight sale of excess
reserves to other banks. The Company has adopted policy and procedure guidelines
to comply with Regulation F of the Board of Governors of the Federal Reserve
System regarding interbank liabilities risk, limiting the Company's exposure to
credit risk in its dealing with correspondent banks. Sales of Federal funds
averaged $4.2 million during 1996, down 34.4% from the $6.4 million average of
1995. Additional liquidity exists within the Company's investment account where
$120,000 of securities mature within ninety days and $4.8 million of securities
are callable within three months. The Company also maintains confirmed lines of
credit with its primary correspondent banks to purchase Federal funds in amounts
up to $5.4 million. 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.
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.
BUSINESS
General
The Company is chartered under the laws of the Commonwealth of Virginia
and headquartered in Gloucester, Virginia. The Company is the holding company
for the Bank, which operates five full-service banking offices in Gloucester,
Charles City County, Williamsburg, Newport News and Glenns (northern Gloucester
County). The Bank opened for business in 1989 and at December 31, 1996, the
Company had grown to $136.4 million in assets, $120.5 million in deposits and
$14.4 million in stockholders' equity.
The Bank is a community-oriented bank that provides a broad range of
banking services to small and medium sized businesses and individuals located
within its market area. These services include free consumer checking accounts,
commercial checking accounts, savings programs, money market accounts,
certificates of deposit, safe deposit facilities and automated teller
facilities. Lending services include a variety of commercial, real estate, term
and installment loans and consumer loan programs. Business lending emphasizes
local companies seeking credit for working capital and the purchase of
equipment, and on a term basis for physical facilities. Real estate lending
emphasizes single family residential activity and includes home improvement
loans, construction lending, and home equity lines of credit. The Bank also
offers credit cards and related services to both individual and merchant
accounts.
-19-
The Bank offers a wide range of deposit accounts, including individual
and commercial demand accounts, statement savings, interest checking and money
market savings accounts, and fixed rate, fixed term certificates. Each of the
Bank's offices offer extended lobby and drive-in hours and a 24 hour ATM. The
Bank also offers traveler's checks, cashier's checks and money orders, U.S.
savings bonds and withholding tax depository services.
The Bank strives to provide its customers with the breadth of products
and services comparable to a regional bank, while maintaining the quick response
and high level of service of a community bank. To implement this strategy, the
Company maintains an experienced, highly-trained professional staff. Senior
management has an average of 26 years of banking experience.
The Company intends to strengthen the Bank's position as a leading
community bank in the Peninsula Region of Virginia by building a strong local
ownership base and by further developing a community-based branch banking
network. The Bank's identity as a community-oriented bank also defines its
strategy for growth. Management believes that the general trend toward
consolidation of the banking industry in the Bank's market area has created a
niche for community-based lenders emphasizing smaller loans. To exploit this
niche, management intends to continue to develop its community-based branch
banking network in the Peninsula Region.
The Company had 903 shareholders of record as of December 31, 1996,
approximately 95% of whom reside in Virginia.
Market Area
The Company's market area is in the Peninsula Region of Virginia, which
lies east of Richmond, north of the James River and south of the Rappahannock
River. The principal office of the Company and the Bank is in Gloucester,
Virginia, while the Bank has branch offices in Glenns (northern Gloucester
County), Charles City County and the cities of Newport News and Williamsburg.
Gloucester County is primarily a residential area with a work force
commuting to other cities and counties. The seafood industry and farming are the
primary local industries. The company's offices in Gloucester County also draw
customers from the adjacent counties of Mathews, Middlesex and King & Queen.
The market area served by the Bank's Williamsburg branch office has
been identified as primarily the City of Williamsburg and James City and York
Counties. The City of Williamsburg is comprised of approximately nine square
miles and is bordered by York County to the north and east and James City County
to the south and west. The population of Williamsburg was approximately _______
as of 199_, with approximately ______ people in the general trade area of the
branch.
The Bank's Charles City County branch office primarily serves that
county. In addition, this branch attracts business from the New Kent County
market. Both of these communities are rural in nature. The Bank is the only
financial institution operating in Charles City County.
The Newport News office opened in 1995. Newport News, which lies to the
southeast of Williamsburg, has a population of approximately 175,000 and is
dominated by the ship building, technology and manufacturing industries.
Future Plans
The Company plans to begin construction of a permanent building for its
Newport News branch office during the first half of 1997. The branch will be
located at the corner of Thimble Shoals Boulevard and J. Clyde Morris Boulevard
near the entrance to the Oyster Point Industrial Park. The Company acquired the
land for its permanent Newport News branch site in 1996 at a cost of
approximately $620,000. Construction costs for the branch building are expected
to be approximately $850,000. The current operations for the Newport News branch
are conducted in rented office space, with a lease that has an expiration of
October 1998.
The Company plans to establish a branch office in Hampton, Virginia to
complement its Newport News office and is currently evaluating available sites.
Hampton lies immediately to the east of Newport News. Although plans are
incomplete and subject to change, it is the Company's desire to open a branch
office in Hampton, Virginia in the second half of 1998. There can be no
assurance that the Company will be able to open this branch in accordance with
its current plans.
-20-
Lending Activities
The Bank's lending efforts are directed primarily to making loans to
individuals and businesses in its market area. Consistent with its focus on
providing community banking services, the Bank has not attempted to diversify
its loan portfolio geographically by making significant amounts of loans to
borrowers outside its primary market area. The Bank's legal lending limit was
approximately $2.2 million at December 31, 1996. The Bank had approximately
$13.0 million in loan commitments outstanding at December 31, 1996.
Commercial Business Lending. The Bank's commercial loans are made
primarily to service, retail and wholesale businesses for a variety of purposes,
including short-term working capital loans, term loans and equipment financing
loans. Pricing of commercial business loans is tied to the prevailing prime
interest rate, at a factor over prime. Pricing decisions in individual cases are
based on perceived credit risk and anticipated administrative costs. To the
extent permissible, pricing on commercial loans also takes into account any
depository relationship between the borrower and the Bank which, in many cases,
can provide for a stable lending and depository relationship. Commercial loans
were $10.3 million, or 11.1% of total loans at December 31, 1996.
Commercial business loans generally have a higher degree of risk than
residential mortgage loans, but also offer commensurately higher yields.
Although the Bank typically looks to the borrower's cash flow as the principal
source of repayment for such loans, the large majority of the Company's
commercial loans are secured by assets, such as real estate, accounts
receivable, inventory, and other forms of collateral. Real estate is the
predominant type of collateral for the Bank's business loans. In addition, the
Bank's commercial loans are generally personally guaranteed by the principals of
the business.
Commercial Mortgage and Construction Lending. Commercial mortgage loans
were $19.6 million, or 21.2% of total loans at December 31, 1996, compared to
$10.6 million or 14.9% of total loans at December 31, 1995. In recent years
larger banks in the Company's market area have demonstrated less interest in
commercial mortgage lending, which has led to increased opportunities for the
Company to originate loans of this type. The increase in commercial mortgage
loans in 1996 was not a result of a deliberate strategy to seek additional
credits in this category. The Bank operates under strict guidelines associated
with commercial mortgages. Loans of $250,000 or greater require full certified
commercial appraisals, complete with environmental impact studies. Loans must
not exceed 75% of appraised value. The Company's commercial mortgage loans are
predominantly owner-occupied properties and are not for speculative purposes. In
general, the Bank does not originate permanent mortgage loans or construction
loans on income producing properties such as apartments, shopping centers,
hotels or office buildings that are not owner-occupied.
At December 31, 1996, real estate construction loans comprised $6.9
million, or 7.5%, of total loans. The majority of construction loans are for
one-family residences that are either pre-sold or contract homes with permanent
financing pre-arranged. The Bank's construction loans for residential purposes
are limited to situations where the borrower has a pre-approved take-out
commitment for permanent financing. The Bank also obtains a first lien on the
security property as collateral for its construction loans. The Bank primarily
limits its lending activities to borrowers with demonstrated financial strength
and makes speculative construction loans only on a limited basis to local
builders. As a result of the Bank's strict underwriting standards, the Company
has experienced modest losses involving its construction loan portfolio.
Commercial mortgage and construction lending entail significant
additional risk as compared with residential mortgage lending. Commercial
mortgage and construction loans can involve larger loan balances concentrated
with single borrowers or groups of related borrowers. Construction loans involve
additional risks attributable to the fact that loan funds are advanced upon the
security of the home under construction, which is of uncertain value prior to
the completion of construction. Thus, it is more difficult to evaluate
accurately the total loan funds required to complete a project and related
loan-to-value ratios. To minimize risks associated with construction lending,
the Bank limits loan amounts to 80% of appraised value on pre-sold homes in
addition to its usual credit analysis of its borrowers. The Bank also obtains a
first lien on the property as security for its construction loans. In addition,
the payment experience on loans secured by income producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject, to a greater extent, to adverse conditions in
the real estate market or the economy generally.
-21-
Residential Mortgage Lending. The Company's residential real estate
loan portfolio, which includes home equity lines, comprised approximately $34.4
million, or 37.1%, of total loans at December 31, 1996. The residential mortgage
loans made by the Bank have a fixed interest rate for no more than 36 months and
are limited to single family, owner-occupied residences within the Bank's market
area. Additionally, residential mortgage loans are not made for principal
amounts exceeding 80% of the appraised value of the underlying real estate.
Consumer Lending. The Bank currently offers most types of consumer time
and installment loans, including automobile loans and consumer credit through
its Visa and Mastercard programs and its overdraft protection program. At
December 31, 1996, the Company's installment loans comprised approximately $20.9
million, or 22.5%, of the total loan portfolio. The performance of the consumer
loan portfolio is directly tied to and dependent upon the general economic
conditions in the Company's market area.
Credit Policies and Loan Administration. The Bank has adopted a
comprehensive lending policy which includes underwriting standards for all types
of loans and pricing guidelines. The Bank's policy specifies "permitted" loans,
as well as "undesirable and prohibited" loans. Collateral requirements and
maturity limits also are addressed. In an effort to manage risk, all credit
decisions are made according to prescribed lending authorities for each loan
officer and the Loan Committee of the Board of Directors. These lending
authorities are approved by the full Board.
The Bank's loan approval policies provide for various levels of officer
lending authority. When the aggregate outstanding loans to a single borrower
exceed an individual officer's lending authority the loan request must be
approved by an officer with a higher lending limit or by the Loan Committee of
the Board. The Bank has assigned a lending limit for the Committee. Loans which
would exceed the committee's assigned limit also must be approved by the Board
of Directors.
The Loan Committee of the Board of Directors meets monthly unless more
frequent meetings are necessary. Mr. Farinholt, who also serves as the Bank's
Senior Lending Officer, is not a member of the Loan Committee. Mr. Smith, whose
primary responsibilities do not include loan origination, is a member of the
Loan Committee.
To promote the Company's business, the Bank has local boards associated
with its branch offices in Williamsburg, Newport News and Charles City County.
Each local board has a local loan committee. The Williamsburg, Newport News and
Charles City local loan committees have the authority to approve real estate
loans up to $350,000, $400,000 and $250,000, respectively. Lesser lending limits
apply to loans that are unsecured or secured by collateral other than real
estate. Either Mr. Farinholt or Mr. Smith attends each local board meeting at
which local loan committee actions are reviewed, but neither is a member of any
local loan committee. Loans approved by the local loan committees, within their
respective lending limits, are reviewed, but are not normally re-approved by the
Loan Committee of the Board of Directors.
All loans to a particular borrower are reviewed each time the borrower
requests a renewal or extension of any loan or requests an additional loan. All
lines of credit are reviewed prior to renewal.
Competition
In its market area, the Company is subject to intense competition from
a number of local, regional and superregional banking organizations, along with
other financial institutions and companies that offer financial services, such
as savings and loan associations, credit unions, industrial loan associations,
securities firms, insurance companies, small loan companies, finance companies,
mortgage companies and other financial service enterprises. Competition among
financial institutions is based upon interest rates offered on deposit accounts,
interest rates charged on loans and other credit and service charges, the
quality of services rendered, the convenience of banking facilities and, in the
case of loans to larger borrowers, relative lending limits. Many of the
financial organizations in competition with the Company have much greater
financial resources and larger branch networks than the Company. Certain of
these institutions have significantly higher lending limits than the Bank and
may provide various services for their customers, such as trust services, which
the Bank does not presently offer to customers. In addition, there can be no
assurance that additional financial institutions, with substantially greater
resources than the Company, will not establish operations in the Bank's service
area.
-22-
The Company is one of 11 banking institutions with offices in
Gloucester County, Williamsburg or Newport News. It is the only depository
institution with a branch office in Charles City County. At June 30, 1996, the
Bank held approximately 23.0% of the total bank deposits in Gloucester County,
100% in Charles City County and approximately 8.1% and 1.0%, respectively, in
the cities of Williamsburg and Newport News.
The Bank has enjoyed an excellent response from the communities in
which it has opened offices. Management feels this success is due to many
factors, including modern and well located branch offices, extended lobby hours,
Saturday lobby hours, and ATMs which are actively utilized by both customers and
non-customers of the Bank. The Bank pays competitive interest rates on its
deposits.
Employees
As of December 31, 1996, the Company employed a total of 99 individuals
on a full-time basis, including its three executive officers, and nine
individuals on a part-time basis. None of the Company's employees is represented
by a union or covered by a collective bargaining agreement. Management considers
employee relations to be good.
Properties
The Company's headquarters is located at 7171 George Washington
Memorial Highway. The property was purchased by the Company at a cost of
$255,000. The total capitalized cost of the building and land improvements is
$680,000.
The Williamsburg branch office is located at 1031 Richmond Road. The
total capitalized cost of the building and land improvements is approximately
$610,000.
The Charles City County branch office is located at 10000 Courthouse
Road on approximately 1.7 acres in Charles City County. The property was
purchased by the Company at a cost of $27,000. The total capitalized cost of the
building and land improvements is approximately $663,000.
The Newport News branch office is located in the Newport Square
Shopping Center across from the Oyster Point Industrial Park. The branch office
was leased and was already equipped for bank operations. The Company has leased
the office for a term of three and one half years. The Company plans to begin
construction of a permanent building for its Newport News branch office during
the first half of 1997. The branch will be located at the corner of Thimble
Shoals Boulevard and J. Clyde Morris Boulevard near the entrance to the Oyster
Point Industrial Park. The Company acquired the land for its permanent Newport
News branch site in 1996 at a cost of approximately $620,000. Construction costs
for the branch building are expected to be approximately $850,000.
In January 1997, the Company opened a fifth branch office at Glenns
(northern Gloucester County). The office is on a 43 acre site that the Bank
acquired in 1996 at a cost of $312,000. Building improvements for the Glenns
branch office totaled approximately $1.2 million. The 43 acre site has been
subdivided and the Company intends to market the portion of the property that is
not used for Bank branch operations.
Legal Proceedings
The Company is a party to various legal proceedings from time to time
in the ordinary course of business. Based upon information currently available,
management believes that such legal proceedings, if determined adversely to the
Company, would not have a material adverse effect on the Company's business,
financial position or results of operations.
Supervision and Regulation
The discussion below is only a summary of the principal laws and
regulations that comprise the regulatory framework applicable to the Company and
the Bank. The descriptions of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, do not purport
to be complete and are qualified in their entirety by reference to applicable
laws and regulations.
-23-
As a bank holding company, The Company is subject to regulation under
the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the
examination and reporting requirements of the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). Under the BHCA, a bank holding
company may not directly or indirectly acquire ownership or control of more than
5% of the voting shares or substantially all of the assets of any additional
bank or merge or consolidate with another bank holding company without the prior
approval of the Federal Reserve Board. The BHCA also generally limits the
activities of a bank holding company to that of banking, managing or controlling
banks, or any other activity which is determined to be so closely related to
banking or to managing or controlling banks that an exception is allowed for
those activities.
As a state-chartered bank, the Bank is subject to regulation,
supervision and examination by the Virginia State Corporation Commission's
Bureau of Financial Institutions (the "Virginia SCC"). The Bank is also subject
to regulation, supervision and examination by the Federal Reserve Board and the
Federal Deposit Insurance Corporation (the "FDIC"). State and federal law also
govern the activities in which the Bank may engage, the investments it may make
and the aggregate amount of loans that may be granted to one borrower. Various
consumer and compliance laws and regulations also affect the Bank's operations.
The earnings of the Bank, and therefore the earnings of the Company,
are affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including those referred to above. The following description summarizes some of
the state and federal laws to which the Company and the Bank are subject.
The Virginia SCC and the Federal Reserve Bank of Richmond conduct
regular examinations of the Bank, reviewing such matters as the adequacy of loan
loss reserves, quality of loans and investments, management practices,
compliance with laws, and other aspects of their operations. In addition to
these regular examinations, the Bank must furnish the Virginia SCC and the
Federal Reserve with periodic reports containing a full and accurate statement
of its affairs. Supervision, regulation and examination of banks by these
agencies are intended primarily for the protection of depositors rather than
shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of the Bank are insured by the FDIC up to the limits set forth under
applicable law. The deposits of the Bank are subject to the deposit insurance
assessments of the Bank Insurance Fund ("BIF") of the FDIC.
For the semi-annual period beginning January 1, 1997, the assessments
imposed on all FDIC deposits for deposit insurance have an effective rate
ranging from 0 to 27 basis points per $100 of insured deposits, depending on the
institution's capital position and other supervisory factors. However, because
the legislation enacted in 1996 requires that both Savings Association Insurance
Fund ("SAIF") insured and BIF-insured deposits pay a pro rata portion of the
interest due on the obligations issued by the Financing Corporation ("FICO"),
the FDIC is assessing BIF-insured deposits an additional 1.30 basis points per
$100 of deposits to cover those obligations.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances that could result in termination of deposit insurance of the Bank.
-24-
Capital. The Federal Reserve Board has issued risk-based and leverage
capital guidelines applicable to banking organizations they supervise. Under the
risk-based capital requirements, the Company and the Banks are each generally
required to maintain a minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters of
credit), of 8%. At least half of the total capital is to be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles ("Tier 1 capital"). The remainder may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital"). At December 31,
1996, the Company's Tier 1 capital and total capital ratios were 12.17% and
15.00%, respectively, and the Tier 1 and total capital ratios for the Bank were
also 12.17% and 15.00%, respectively.
In addition, each of the Federal bank regulatory agencies have
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for banks and bank
holding companies that meet certain specified criteria. All other banks and bank
holding companies will generally be required to maintain a leverage ratio of at
least 100 to 200 basis points above the stated minimum. The Company's leverage
ratio at December 31, 1996 was 11.41%, and the Bank's leverage ratio was also
11.41%.
The risk-based capital standards of the Federal Reserve Board
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The Federal Reserve Board also has
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so otherwise. In addition, the "cross-guarantee" provisions of Federal
law require insured depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated by either the SAIF or
the BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provision if it determines that a waiver is in the
best interests of the SAIF or the BIF or both. The FDIC's claim for
reimbursement is superior to claims of shareholders of the insured depository
institution or its holding company but is subordinate to claims of depositors,
secured creditors and holders of subordinated debt (other than affiliates) of
the commonly controlled insured depository institution.
The Federal banking agencies also have broad powers under current
Federal law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon whether the
institution in question is well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized,
as defined by the law. As of December 31, 1996, the Company and the Bank were
classified as well-capitalized.
State regulatory authorities also have broad enforcement powers over
the Bank, including the power to impose fines and other civil and criminal
penalties, and to appoint a receiver in order to conserve the assets of any such
institution for the benefit of depositors and other creditors.
Payment of Dividends. The Company is a legal entity separate and
distinct from the Bank. Virtually all of the revenues of the Company result from
dividends paid to the Company by the Bank. The Bank also is subject to state
laws that limit the amount of dividends it can pay. In addition, both the
Company and the Bank are subject to various general regulatory policies relating
to the payment of dividends, including requirements to maintain adequate capital
above regulatory minimums. The Federal Reserve Board has indicated that banking
organizations should generally pay dividends only if (1) the organization's net
income available to common shareholders over the past year has been sufficient
to fund fully the dividends and (2) the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and
overall financial
-25-
condition. The Company does not expect that any of these laws, regulations or
policies will materially impact the ability of the Bank to pay dividends.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are also applicable to the Bank. The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial
institution's efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors. These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility. To the best knowledge of the Bank, it is meeting
its obligations under the CRA. The Bank's CRA rating is "satisfactory".
Interstate Banking and Branching. Current Federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state will be
authorized to merge with a bank headquartered in another state, as long as
neither of the states has opted out of such interstate merger authority prior to
such date. States are authorized to enact laws permitting such interstate bank
merger transactions prior to June 1, 1997, as well as authorizing a bank to
establish "de novo" interstate branches. Virginia has enacted early "opt in"
laws, permitting interstate bank merger transactions. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the state
where a bank headquartered in that state could have established or acquired
branches under applicable Federal or state law.
Economic and Monetary Polices. The operations of the Company are
affected not only by general economic conditions, but also by the economic and
monetary policies of various regulatory authorities. In particular, the Federal
Reserve regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
MANAGEMENT
Board of Directors
There are 14 members of the Company's Board of Directors. The following
table sets forth the name, age, year first elected as a director, principal
occupation and beneficial ownership of Common Stock as of December 31, 1996, for
each Director.
-26-
Shares Beneficially
Owned (1 & 2)
-------------
Principal Occupation Director
Name (age) & Position with Company Since No. %
---------- ----------------------- ----- --- ----
Charles F. Bristow Farmer-Gloucester 1988 4,500 .48
(74) Director
John R. Curtis Banking Consultant, Retired Regional 1989 2,800 .30
(65) Director of FDIC-Richmond
Director
Charles F. Dawson Partner, Bay Design Group P.C.-Saluda 1988 5,095 .54
(55) Director
W. J. Farinholt President and CEO, Mid-Atlantic 1988 36,246 3.77
(50) Community BankGroup, Incorporated
Director
William D. Fary Owner, Bill Fary Ford-Gloucester 1988 11,250 1.19
(67) Director
Robert D. Foster President, Tre-Suz-Ann 1988 41,843 4.42
(54) Development/Foster Management; VP,
Foster Realty-Gloucester
Director
Harry M. Healy Retired President, Bailey 1988 14,300 1.51
(63) Amusements-Gloucester
Director
Jeanne P. Hockaday President, Coldwell Banker 1990 4,200 .44
(49) Virginia Country Realty-Gloucester
Director
Joseph A. Lombard, Jr., DDS Owner/Dentist, Lombard, Luckam & 1988 20,662 2.18
(50) Smith-Gloucester
Chairman of the Board
George A. Marston, Jr. Retired Owner, Oakland Farm- Norge 1992 13,500 1.43
(75) Director
Hersey M. Mason, Jr. Owner, Mason Realty-Middlesex Co. 1990 32,074 3.39
(67) Director
Henry C. Rowe, MD Medical Director, Riverside Hayes 1988 4,900 .52
(49) Medical Center-Gloucester
Director
Kenneth E. Smith Executive Vice President, 1988 19,430 2.02
(45) Mid-Atlantic Community BankGroup,
Incorporated
Director
Thomas Z. Wilke Agent, State Farm Insurance-Gloucester 1990 8,620 .91
(43) Point
Director
All present executive officers and 219,770 23.14
directors as a group (15 persons)
- ---------------------------------------
-27-
(1) The total shares reported include sole voting shares, shared voting
shares, sole investment shares and shared investment shares. Included
in the totals are shared voting and investment shares as follows: W. J.
Farinholt, 1,866 shares; W. D. Fary, 300 shares; R. D. Foster, 6,520
shares; J. P. Hockaday, 200 shares; J. A. Lombard, Jr., 2,354 shares;
G. A. Marston, Jr., 6,750 shares; K. E. Smith, 75 shares.
(2) Included in shares beneficially owned are shares that may be acquired
within 60 days upon the exercise of stock options held by individuals
as follows: C. F. Bristow, 1,500 shares; J. R. Curtis, 1,300 shares;
C. F. Dawson, 1,540 shares; W. J. Farinholt, 17,000 shares; W. D. Fary,
1,600 shares; R. D. Foster, 2,500 shares; H. M. Healy, 2,300 shares;
K. C. Healy, 200 shares; J. P. Hockaday, 1,500 shares; J. A. Lombard,
Jr., 2,362 shares; H. M. Mason, Jr., 1,500 shares; H. C. Rowe, MD,
2,400 shares; K. E. Smith, 17,000 shares; T.Z. Wilke, 1,520 shares.
Security Ownership of Certain Beneficial Owners. No one is known to
be the beneficial owner of more than five percent (5%) of the issued and
outstanding Company Common Stock.
The Board of Directors. The Board of Directors is responsible for the
overall performance of the Company and for establishing Company policy. The
Board establishes the compensation of all executive officers. Regular meetings
of the Board are held each month. The Board held 16 meetings in 1996, including
the organizational meeting in June and three special meetings. Each Director
attended at least 75% of the total number of meetings of the Board and meetings
of committees of which the director was a member in 1996.
Board Committees. The Company's bylaws provide for one permanent
standing committee, the Audit Committee, the principal responsibilities of which
are described below.
The Audit Committee meets on an on call basis as needed. The Committee
met six times in 1996. Members of the committee include Thomas Z. Wilke,
Chairman, Charles F. Bristow, Charles F. Dawson, Robert D. Foster, Jeanne P.
Hockaday and Joseph A. Lombard, Jr., DDS. The Audit Committee recommends to the
Board the appointment of a firm to serve as independent auditors, subject to
ratification by the Board and the Shareholders at the Annual Meeting.
The Company does not have a standing Nomination or Compensation
Committee.
The Chairman of the Board is an ex-officio member of all committees.
Executive Officers. The Company currently has three Executive
Officers:
William J. Farinholt has served as President and Chief Executive
Officer of the Company and the Bank since 1988. He has more than 25 years of
banking experience. He was employed as a bank examiner with the Virginia Bureau
of Financial Institutions from 1970 to 1972. He then served as an officer with
the Bank of Middlesex, Urbanna, Virginia, from 1972 to 1974. He then served with
Citizens and Farmers Bank, West Point, Virginia, from 1974 to 1988, where he was
the Senior Vice President in charge of all lending and Secretary of the bank. He
is experienced in lending, marketing, branch management and bank operations. He
has held various officer positions in industry associations, including chairman
of the Northern Neck-Southside Bankers Association. He also has served on
several committees as well as the Board of Directors of the Virginia Bankers
Association. He has taught numerous banking classes at Rappahannock Community
College. He has also been active in many civic and religious activities. Mr.
Farinholt was born in Gloucester County and has a broad knowledge of the
Company's general trade area.
Kenneth E. Smith has served as Executive Vice President, Chief
Administrative and Chief Financial Officer of the Company and the Bank, with
primary oversight of the Company's operations, since 1988. Mr. Smith has 23
years of banking experience. Prior to joining the Company, he served as
Compliance Officer and Auditor with Citizens and Farmers Bank, West Point. Prior
to that he spent 11 years as a commercial bank examiner with the Federal Reserve
Bank of Richmond. He served for two years with The Colonial Bank of Providence
Forge, Virginia. Before that he worked as an internal auditor with United
Virginia Bank and as a teller with Second National Bank, Richmond, Virginia. He
has experience in virtually all areas of the Company, including lending,
liquidity management, bank regulations and financial analysis. He has attended
various banking schools, is a graduate of the University of Richmond and has
taught at Rappahannock Community College.
-28-
Kathleen C. Healy, age 36, serves as Vice President, Chief Accounting
Officer and Secretary of the Company. Ms. Healy works in conjunction with the
Chief Administrative Officer having more specific oversight of the overall
accounting area, including the accuracy of financial records and regulatory
financial reporting. Prior to joining the Company, she served as office
supervisor and insurance producer with an independent insurance agency. She has
approximately seven years of banking experience. She has attended the Virginia
Bankers School of Bank Management and she is a graduate of the School of
Business Administration at the University of Richmond.
Family Relationships. The husband of Kathleen C. Healy, Chief
Accounting Officer, is the nephew of Harry M. Healy, a director of the Company.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
requires the Company's directors and executive officers, and any persons who own
more than 10% of Company Common Stock, to file with the Securities and Exchange
Commission ("SEC") reports of ownership and changes in ownership of Company
Common Stock. Officers and directors are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms that they file. Based solely
on review of the copies of such reports furnished to the Company or written
representation that no other reports were required, the Company believes that,
during fiscal year 1996, all filing requirements applicable to its officers and
directors were complied with except that Joseph A. Lombard, Jr., DDS, Director,
inadvertently filed one late report on Form 5 in February 1997 covering the
purchase of 125 shares of Common Stock by his son in September 1996.
Executive Officer Compensation. The following table presents
information concerning the annual and long-term compensation of Messrs.
Farinholt and Smith. This table presents compensation for services rendered in
all capacities to the Company in 1996, 1995 and 1994.
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Securities All Other
Name and Other Annual Underlying Compensation
Principal Position Year Salary ($) Bonus ($) Compensation Options (#) (b) ($)
- ------------------ ---- ---------- --------- ------------ ----------- -------
W. J. Farinholt 1996 100,651 25,650 (a) - 1,501
President/Chief 1995 86,699 19,464 (a) 10,000 1,777
Executive Officer 1994 81,682 17,901 (a) - -
Kenneth E. Smith 1996 88,675 22,410 (a) - 1,321
Executive Vice- 1995 75,966 17,000 (a) 10,000 1,555
President/Chief Financial 1994 71,087 15,635 (a) - -
Officer
- -------------------
(a) The value of perquisites and other personal benefits did not exceed
the lesser of $50,000 or 10% of total annual salary and bonus.
(b) "All Other Compensation" represents matching contributions by the
Company in its 401(k) plan, which was established on March 1, 1995.
-29-
There were no stock options granted to Messrs. Farinholt or Smith in
1996.
Option Exercises and Holdings. The following table sets forth
information with respect to exercised and unexercised options held by such
officers as of December 31, 1996. No stock options were exercised by Mr.
Farinholt or Mr. Smith in 1996.
Fiscal Year End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised In-The-Money
Options at Options at
Name December 31, 1996 (#) December 31, 1996 ($)(1)
- ---- --------------------- ------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
W. J. Farinholt 13,250 3,750 155,000 33,750
Kenneth E. Smith 13,250 3,750 155,000 33,750
- -------------------
(1) The value of unexercised in-the-money options at fiscal year end was
calculated by determining the difference between (i) the fair market
value of the Company Common Stock underlying the options at December
31, 1996 ($25.00 per share) and (ii) the exercise price of the options.
Employment Agreements. Messrs. Farinholt and Smith entered into
employment agreements with the Company effective as of November 29, 1988. The
Agreements are general in nature and have few conditions relative to current or
ongoing employment conditions. However, these agreements provide that in the
event the Company, acting through either its shareholders or its Directors,
sells or disposes of the controlling interest in the Company to a conglomerate
or "bank holding company" (as such term is defined in Article I of Title 6.1 of
the Code of Virginia, as amended), with the result that the Company is either
50% or more owned or controlled by such entity (provided that the respective
bank officer, at the time of such transaction, is employed at either his current
position or an equal or higher ranking position of the Company) each such
officer shall be entitled to receive from the Company $150,000. Restrictive
covenants contained in each agreement require that such payment shall be paid in
addition to any and all normal compensation payable at the time of such
transaction, but also shall be dependent upon the sale price of the Company
being equal to at least 1.75 times the then current "book value" of the Company
Common Stock as determined by the independent accounting firm being utilized by
the Company at the time of such sale of the Company. As incentive for the
Company's officers to remain in the employ of the Company and as protection for
the Company from the Company's officers' leaving the Company's employ, absent a
sale of the Company as defined above, each agreement provides that if the
officer voluntarily leaves the employ of the Company without there being any
such sale of the Company, he may not become employed with or work in any office
of any financial institution (bank, savings bank, savings and loan association
or credit union) that is located in Gloucester, Mathews, or Middlesex counties.
Directors Compensation. Each Director was paid a fee of $300 for each
Board meeting attended and $150 for each Board Committee meeting attended in
1996. The total expense to the Company for directors fees in 1996 was $83,050.
Interest of Management in Certain Transactions. The Company's officers,
directors and other corporations, business organizations and persons with which
certain of the Company's officers and directors are associated customarily have
banking transactions with the Company. During 1996 loans to related parties
amounted to $1.0 million. New loans made to related parties during this same
period totaled $918,000, with repayments of $327,000. All such transactions have
been made in the ordinary course of business on substantially the same terms,
including interest rates and security for loans, as those prevailing at the time
for comparable transactions with others and have not involved more than the
normal risk of collectibility or presented other unfavorable features.
-30-
DESCRIPTION OF CAPITAL STOCK
The Company's Articles of Incorporation authorize 10,000,000 shares of
Common Stock, par value $5.00 of which 944,333 shares were issued and
outstanding on December 31, 1996. There were 903 shareholders of record as of
December 31, 1996.
The Board of Directors may issue shares of its Common Stock from time
to time for such consideration as the Board may deem advisable without further
shareholder approval.
The Common Stock of the Company represents nonwithdrawable capital, is
not an account of the insurable type, and is not insured by the FDIC.
Certain characteristics of the Common Stock are summarized below:
Dividend Rights. The Company may pay dividends as declared from time to
time by the Board of Directors out of funds legally available therefore, subject
to certain restrictions imposed by federal and state laws. See "Dividend
Information." The holders of Common Stock will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors.
Voting Rights. In all elections of directors, each shareholder has the
right to cast one vote for each share of Common Stock owned by him and is
entitled to vote for as many persons as there are directors to be elected.
Shareholders of the Company do not have cumulative voting rights. On any other
question to be determined by a vote of shares at any meeting of shareholders,
each shareholder shall be entitled to one vote for each share of Common Stock
owned by him and entitled to vote.
Liquidation Rights. Upon liquidation, after payment of all creditors,
the remaining assets of the Company would be distributed to the holders of the
Common Stock on a pro rata basis.
Preemptive Rights. Holders of Common Stock have no preemptive rights
with respect to the issuance of additional shares of Common Stock.
Calls and Assessments. All Common Stock outstanding is fully paid and
nonassessable.
Removal of Directors. Virginia law provides that unless a corporation's
articles of incorporation provide otherwise, any Director or the entire Board
may be removed, with or without cause, by a majority vote of shares at an
election of Directors. The Company's Articles of Incorporation require a vote of
more than 70% of the outstanding shares of Common Stock to remove a Director.
The Company's Articles of Incorporation thus preclude a third party who holds
less than 70% of the Company's outstanding shares from unilaterally removing
incumbent Directors and simultaneously gaining control of the Board by
installing his own nominees.
Amendment of Governing Instruments. Amendments to the articles of
incorporation of Virginia corporations, such as the Company, can be submitted to
the shareholders for a vote only by the board of directors. As a general rule,
the Articles of Incorporation of the Company can be amended by the vote of
holders of a majority of the issued and outstanding shares of Common Stock.
However, any amendment that is not approved by at least two-thirds of the
Directors, must be approved by holders of more than two-thirds of the issued and
outstanding shares of Common Stock.
Business Combinations. Under the Articles of Incorporation of the
Company, a plan of merger or share exchange or a direct or indirect sale, lease,
exchange or other disposition of all or substantially all of the property of the
Company not in the ordinary course of business, must be approved by holders of a
majority of the issued and outstanding shares of Common Stock. However, if such
a transaction is not approved by at least two-thirds of the Directors, it must
be approved by holders of more than two-thirds of the issued and outstanding
shares of Common Stock. Consistent with Virginia law, the Board of Directors of
the Company may condition its submission of such a plan of merger or share
exchange or a sale or disposition of assets to the shareholders on any basis,
including the requirement of a greater vote than the required vote described
above.
Indemnification of Officers and Directors. The Articles of
Incorporation provide for the indemnification of officers and directors of the
Company for their actions unless a court finds them liable for willful
misconduct or a knowing violation of criminal law. In any proceeding brought by
a shareholder against an officer or director in connection with his position
with the Company, the amount of damages that may be assessed
-31-
against an officer or director is limited to $50,000 per transaction, unless the
individual is liable for willful misconduct or a knowing violation of criminal
or securities laws.
Reports to Shareholders. The company furnishes its shareholders with
annual reports, including audited financial statements, as well as quarterly
reports containing unaudited financial information.
Transfer Agent. The Bank acts as the Company's transfer agent.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement
between the Company and the Underwriter, the Underwriter has agreed to purchase
from the Company and the Company has agreed to sell to the Underwriter, 130,000
shares of Common Stock.
The Underwriting Agreement provides that the obligations of the
Underwriter thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriter's
obligation is such that it is committed to purchase and pay for all of the above
shares of Common Stock if any are purchased.
The Underwriter proposes to offer the shares of Common Stock directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to selected dealers who are members of the National Association
of Securities Dealers, Inc. at such price less a concession not in excess of
$____ per share of Common Stock. The Underwriter may allow, and such selected
dealers may reallow, a concession not in excess of $____ per share of Common
Stock to certain other dealers who are members of the National Association of
Securities Dealers, Inc.
The Underwriter has a 30-day option to purchase from the Company up to
19,500 additional shares of Common Stock to cover over-allotments, if any, at
the public offering price set forth on the cover page of the Prospectus. The
Underwriter may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby.
Certain officers and directors of the Company have agreed that they
will not offer, sell or contract to sell or otherwise dispose of shares of
Common Stock of the Company (other than by gift to a person who agrees not to so
sell, or by operation of law) for a period of 90 days after the date hereof
without the prior written consent of the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities or to contribute to payments that the Underwriter may be required to
make in respect thereof.
The Common Stock of the Company or the Bank has been traded on the
Nasdaq SmallCap Market since September 20, 1995. There is a limited public
market for the Common Stock, with trading volume averaging approximately 1,000
shares per week since September 1995. See "Market for Common Stock." The public
offering price for the Common Stock will be determined by negotiation between
the Company and the Underwriter. Among the factors that will be considered in
such negotiations are the current market for the Common Stock, the history of,
and the prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations, the
past and present earnings and the trend of such earnings, the prospects for
future earnings of the Company, the present state of the Company's development,
the general condition of the securities markets at the time of the offering, and
the market prices of and demand for the Common Stock and for publicly-traded
common stock of comparable companies in recent periods. The Underwriter intends
to make a market in the Common Stock following completion of the offering.
In order to facilitate the offering of the Common Stock, the
Underwriter may engage in the transactions that stabilize, maintain or otherwise
affect the price of the Common Stock. Specifically, the Underwriter may
overallot in connection with the offering creating a short position in the
Common Stock for its own account. In addition, to cover overallotments or to
stabilize the price of the Common Stock, the Underwriter may bid for, and
purchase, shares of Common Stock in the open market. Finally, the Underwriter
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the Common Stock in the offering, if the Underwriter repurchases
previously distributed Common Stock in transactions to cover short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock
-32-
above independent market levels. The Underwriter is not required to engage in
these activities, and may end any of these activities at any time.
The Underwriter and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Securities and Exchange Commission. In general, a passive
market maker may not bid for, or purchase, the Common Stock at a price that
exceeds the highest independent bid. In addition, the net daily purchases made
by any passive market maker generally may not exceed 30% of its average daily
trading volume in the Common Stock during a specified two month prior period, or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market making may stabilize or maintain the market price of the
Common Stock above independent market levels. The Underwriter and dealers are
not required to engage in passive market making and may end passive market
making activities at any time.
The Underwriter has from time to time provided investment banking
services to the Company in the ordinary course of business.
LEGAL OPINIONS
Certain legal matters relating to the shares offered hereby will be
passed upon for the Company by Williams, Mullen, Christian & Dobbins, P.C., Two
James Center, 1021 East Cary Street, Richmond, Virginia 23219, counsel for the
Company. Certain legal matters in connection with the offering will be passed
upon for the Underwriter by Hunton & Williams, Riverfront Plaza, East Tower, 951
East Byrd Street, Richmond, Virginia 23219.
EXPERTS
The financial statements of the Company included in this Offering
Circular have been examined by Smith & Eggleston, P.C., Richmond, Virginia,
independent auditors, whose report thereon appears elsewhere herein. Such
financial statements have been included herein in reliance upon the reports of
Smith & Eggleston, P.C., given upon their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
The principal executive offices of the Company are located at 7171
George Washington Memorial Highway, Gloucester, Virginia 23061, and its
telephone number is (804) 693-0628. The Company is subject to the informational
requirements of the Exchange Act, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the offices of the Commission, at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at regional offices of
the Commission at the following locations: Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and World Trade Center,
new York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. In addition, the Commission
maintains a Web site (address: http://www.sec.gov) that contains reports, proxy
statements and other information regarding the Company.
The Company has filed with the Commission a Registration Statement, on
Form SB-2 under the Securities Act, with respect to the Common Stock offered
herein. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain items of which have been omitted in accordance
with the rules and regulations of the Commission. For further information
pertaining to the Company and the Common Stock offered herein, reference is made
to the Registration Statement and amendments and exhibits thereto, which may be
inspected and copied as described above.
-33-
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report...............................................F-1
Consolidated Financial Statements
Consolidated Balance Sheet........................................F-2
Consolidated Statements of Income.................................F-3
Consolidated Statements of Changes in Shareholders' Equity........F-4
Consolidated Statements of Cash Flows.............................F-5
Notes to Financial Statements..............................................F-7
Independent Auditors' Report on Supplementary Information.................F-20
Supplementary Information
Consolidated Balance Sheets - Five Years.........................F-21
Consolidated Statements of Income - Five Years...................F-23
[LETTERHEAD]
[Smith & Eggleston, P.C.
Suite 100, Spotswood Building
8003 Franklin Farms Drive
Richmond, Virginia 23229-5107]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mid-Atlantic Community BankGroup, Inc.
Gloucester, Virginia
We have audited the accompanying consolidated balance sheets of
Mid-Atlantic Community BankGroup, Inc. and subsidiary as of December 31, 1996
and 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mid-Atlantic
Community BankGroup, Inc. and subsidiary as of December 31, 1996 and 1995, and
the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Smith & Eggleston, P.C.
February 13, 1997
F-1
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
- ---------------------------------------------------------------------------------------------------------
A S S E T S
CASH AND DUE FROM BANKS (Note 15) $ 6,014,540 $ 4,553,325
INVESTMENT SECURITIES (Notes 1 & 2) 27,297,458 24,792,759
FEDERAL FUNDS SOLD 5,363,865 4,678,330
LOANS: (Net of allowance for loan losses of $1,111,607
and $865,479 for 1996 and 1995, respectively) (Notes 1 & 3) 90,978,452 69,556,325
PREMISES AND EQUIPMENT (Notes 1 & 7) 4,922,897 3,308,385
OTHER ASSETS (Note 4) 1,856,961 1,424,685
- --------------------------------------------------------------------------------------------------------
Total Assets $136,434,173 $108,313,809
=========================================================================================================
L I A B I L I T I E S A N D S T O C K H O L D E R S ` E Q U I T Y
DEPOSITS:
Demand $ 15,133,165 $ 14,333,604
NOW and money market 25,967,974 17,605,457
Savings 14,969,421 9,331,624
Time, $100,000 and over 9,416,511 8,798,436
Other time 54,998,270 44,045,617
- ---------------------------------------------------------------------------------------------------------
Total Deposits $120,485,341 $ 94,114,738
OTHER BORROWED FUNDS (Note 13) 43,406 55,322
OTHER LIABILITIES (Note 5) 1,473,836 808,273
- ---------------------------------------------------------------------------------------------------------
Total Liabilities $122,002,583 $ 94,978,333
- ---------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock - par value $5 per share: (Notes 9 & 10)
Issued and outstanding - 944,333 $ 4,721,665 $ 4,721,665
Stock options (Note 10) 7,380 7,380
Surplus 6,693,925 6,692,775
Retained earnings 3,170,029 1,872,178
Unrealized gain (loss) on securities available for sale (Note 2) (161,409) 41,478
- ---------------------------------------------------------------------------------------------------------
Total Stockholders' Equity $ 14,431,590 $ 13,335,476
- ---------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $136,434,173 $108,313,809
=========================================================================================================
See Notes To Consolidated Financial Statements
F-2
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 8,689,054 $6,652,980 $4,785,973
Interest on investment securities:
Taxable 1,393,367 1,051,863 597,910
Tax exempt 340,031 141,497 122,458
Interest on federal funds sold 230,862 377,327 144,420
- ----------------------------------------------------------------------------------------------------------------
Total Interest Income $10,653,314 $8,223,667 $5,650,761
Interest on deposits 4,359,461 3,468,896 2,120,123
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income $ 6,293,853 $4,754,771 $3,530,638
PROVISION FOR LOAN LOSSES (Notes 1 & 3) 380,000 288,000 257,500
- ----------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision For Loan Losses $ 5,913,853 $4,466,771 $3,273,138
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts $ 479,651 $ 388,245 $ 288,413
Other service charges 57,765 30,353 26,154
Other 88,504 59,106 43,591
Net investment securities gains (losses) (1,936) (740) --
- ----------------------------------------------------------------------------------------------------------------
$ 623,984 $ 476,964 $ 358,158
- ----------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits $ 2,153,570 $1,842,746 $1,304,361
Occupancy 308,224 264,135 174,386
Equipment 642,085 499,273 339,740
Other 1,087,374 889,443 662,826
- ----------------------------------------------------------------------------------------------------------------
$ 4,191,253 $3,495,597 $2,481,313
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Tax $ 2,346,584 $1,448,138 $1,149,983
PROVISION FOR INCOME TAX (Notes 1 & 11) 812,650 424,989 397,850
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 1,533,934 $1,023,149 $ 752,133
================================================================================================================
Net income per common share and
common equivalent (Note 1) $ 1.57 $ 1.29 $ 1.20
================================================================================================================
Weighted average shares outstanding 975,486 794,376 624,789
================================================================================================================
See Notes To Consolidated Financial Statements
F-3
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
Retained
Common Stock Class A Earnings
Stock Options Warrants Surplus (Deficit) Total
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE-JANUARY 1, 1994 $2,913,140 $7,380 $ 53,378 $3,060,015 $ 310,984 $ 6,344,897
Sold 75,000 shares (Note 9) 375,000 -- -- 671,042 -- 1,046,042
Warrants exercised 1,750 -- (149) 3,650 -- 5,251
Dividends declared -- -- -- -- (100,750) (100,750)
Net income -- -- -- -- 752,133 752,133
Unrealized loss on securities
available for sale (Note 2) -- -- -- -- (147,488) (147,488)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE-DECEMBER 31, 1994 $3,289,890 $7,380 $ 53,229 $3,734,707 $ 814,879 $ 7,900,085
Sold 149,500 shares 747,500 -- -- 1,514,401 -- 2,261,901
Sold 16,180 shares 80,900 -- -- 186,070 -- 266,970
Warrants exercised 603,375 -- (51,552) 1,256,072 -- 1,807,895
Warrants purchased -- -- (1,677) 1,525 -- (152)
Dividends declared -- -- -- -- (113,338) (113,338)
Net income -- -- -- -- 1,023,149 1,023,149
Unrealized gain on securities
available for sale (Note 2) -- -- -- -- 188,966 188,966
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE-DECEMBER 31, 1995 $4,721,665 $7,380 $ -- $6,692,775 $1,913,656 $13,335,476
Additional contributed capital -- -- -- 1,150 -- 1,150
Dividends declared -- -- -- -- (236,083) (236,083)
Net income -- -- -- -- 1,533,934 1,533,934
Unrealized loss on securities
available for sale (Note 2) -- -- -- -- (202,887) (202,887)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE-DECEMBER 31, 1996 $4,721,665 $7,380 $ -- $6,693,925 $3,008,620 $14,431,590
- ---------------------------------------------------------------------------------------------------------------------------
See Notes To Consolidated Financial Statements
F-4
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,533,934 $ 1,023,149 $ 752,133
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 276,908 250,514 160,321
Loss on disposal of equipment 19,438 -- --
Provision for loan losses 380,000 288,000 257,500
Amortization of premium on investment securities 63,419 62,246 30,946
(Gain) loss on sale of investment securities 1,936 740 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Deferred income taxes (104,518) 29,009 (100,401)
Interest receivable (205,125) (308,139) (143,247)
Prepaid expenses (38,398) (47,783) 6,554
Other assets (84,235) (136,769) (41,191)
Increase (decrease) in:
Accrued interest on deposits 55,140 170,874 55,637
Accrued income taxes 208,339 (245,570) 211,899
Other liabilities 279,321 (5,018) 67,360
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Operating Activities $ 2,386,159 $ 1,081,253 $ 1,257,511
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans $(21,802,127) $(16,240,137) $(14,290,791)
Purchase of investment securities (22,383,956) (20,802,211) (4,142,959)
Proceeds from sales of investment securities 19,611,015 9,093,835 1,698,898
(Increase) decrease in federal funds sold - net (685,535) 2,587,960 (3,801,290)
Purchase of premises and equipment (1,910,858) (846,507) (801,377)
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Used In Investing Activities $(27,171,461) $(26,207,060) $(21,337,519)
- --------------------------------------------------------------------------------------------------------------------------
F-5
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net $ 26,370,603 $ 22,590,307 $ 19,594,503
Dividends paid (113,320) (65,816) (34,952)
Proceeds from issuance of stock - net -- 2,528,871 1,046,042
Proceeds from exercise of warrants - net -- 1,807,743 5,251
Curtailment of other borrowed funds (11,916) (11,295) (10,708)
Additional contributed capital 1,150 -- --
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities $ 26,246,517 $ 26,849,810 $ 20,600,136
- --------------------------------------------------------------------------------------------------------------------------
Net Increase In Cash and Due From Banks $ 1,461,215 $ 1,724,003 $ 520,128
CASH AND DUE FROM BANKS - BEGINNING OF YEAR 4,553,325 2,829,322 2,309,194
- --------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS - END OF YEAR $ 6,014,540 $ 4,553,325 $ 2,829,322
==========================================================================================================================
See Notes To Consolidated Financial Statements
F-6
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Mid-Atlantic Community BankGroup, Inc. is the parent of Peninsula Trust Bank,
Inc., which provides general commercial banking services primarily within
Gloucester, Charles City, Newport News and Williamsburg, Virginia and
surrounding communities. It is subject to the regulations of certain federal and
state agencies and undergoes periodic examinations by regulatory authorities.
Principles of Consolidation
On August 15, 1996, Peninsula Trust Bank created Mid-Atlantic Community
BankGroup, Inc., a bank holding company, and exchanged one share of the holding
company stock for one share of Peninsula Trust Bank stock. The total number of
$5 par value shares of holding company stock exchanged for the outstanding stock
of the bank was 944,333. The transaction is accounted for at historical cost in
a manner similar to that in pooling-of-interests accounting. As a result of this
change in legal structure, the bank is now a wholly-owned subsidiary of the
holding company. The holding company did not generate any revenues or incur any
expenses prior to the consummation of the share exchange. The consolidated
financial statements include the accounts of Mid-Atlantic Community BankGroup,
Inc. and its wholly-owned subsidiary, Peninsula Trust Bank. All material
intercompany transactions have been eliminated.
Before the creation of the holding company, the Bank had the following results
of operations for the period January 1, 1996 through August 14, 1996:
Total interest income $ 7,762,000
Total interest expense 3,172,000
- ------------------------------------------------------------------------
Net Interest Income $ 4,590,000
Allowance for loan losses 239,000
- ------------------------------------------------------------------------
Net Interest Income after Allowance for Loan Losses $ 4,351,000
Other income 426,000
Other expenses (3,034,000)
- ------------------------------------------------------------------------
$ 1,743,000
Provision for income taxes (624,000)
- ------------------------------------------------------------------------
Net Income $ 1,119,000
========================================================================
Investment Securities
Investment debt securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as
available-for-sale and are carried at fair value. Unrealized gains and losses on
securities available-for-sale are recognized as direct increases or decreases in
stockholders' equity. Cost of securities sold is recognized using the specific
identification method.
F-7
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and discounts
are amortized using methods approximating the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Mortgage-backed securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity. Other mortgage-backed securities
are classified as available-for-sale and are carried at fair value. Should any
be sold, cost of securities sold is determined using the specific identification
method.
Income Tax
Income tax is provided for the tax effects of transactions reported in the
consolidated financial statements and consists of tax currently due plus
deferred tax related primarily to differences between the basis of the allowance
for loan losses, premises and equipment, and deferred loan fees for financial
and income tax reporting. The deferred tax asset represents the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Income tax expense is the tax payable or refundable for the year plus or minus
the change for the year in deferred tax assets and liabilities.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding. The allowance for loan
losses is established through a provision for loan losses charged to operations.
Loans are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance is an amount
that management believes will be adequate to absorb probable losses on existing
loans that may become uncollectible, based on evaluations of the collectibility
of loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' abilities to pay. Accrual of interest
is discontinued on a loan when management believes, after considering economic
and business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful.
Premises and Equipment
Premises and equipment is recorded at cost. Depreciation is based on estimated
useful service lives and is computed on the straight-line method for reporting
purposes. Computer software is amortized over 5 years.
F-8
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
Cash Flow Information
The statement of cash flows reconciles net income with the increase in cash and
due from banks. The indirect method has been used. For purposes of reporting
cash flows, cash and due from banks include cash on hand and amounts due from
depository institutions. The Company considers amounts due from banks and money
market investments which have original maturities of three months or less to be
cash equivalents.
Earnings Per Share
Net income per share is calculated on the basis of the weighted average number
of shares outstanding. The Company's stock options outstanding are considered
common stock equivalents and are included in the calculation of weighted average
number of shares outstanding. The Company's Class A warrants were also
considered common stock equivalents; however, the assumed exercise of these
warrants was not included in earnings per share computations for 1994 and 1993
because the result would not have a dilutive effect. There were no Class A
warrants outstanding as of December 31, 1995.
Loan Fees and Costs
Loan fees and certain direct loan origination costs of completed loans are
deferred and recognized as an adjustment of the yields on related loans using
the interest method over the lives of the loans.
Off Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
consolidated financial statements when they become payable.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain previously reported amounts have been reclassified to conform to current
presentations.
F-9
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 2: INVESTMENT SECURITIES: (Continued)
Securities available-for-sale at December 31, 1996 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
U. S. Treasury securities $ 534,510 $ -- $ 4,510 $ 530,000
U. S. Government and
federal agencies 15,650,657 35,193 211,449 15,474,401
State and local governments 7,467,586 40,224 86,833 7,420,977
Mortgage-backed securities 3,195,614 1,652 20,648 3,176,618
- -------------------------------------------------------------------------------------------
$26,848,367 $77,069 $323,440 $26,601,996
Federal Reserve Bank stock 342,650 -- -- 342,650
Marketable equity securities 351,000 1,812 -- 352,812
- -------------------------------------------------------------------------------------------
$27,542,017 $78,881 $323,440 $27,297,458
===========================================================================================
Securities available-for-sale at December 31, 1995 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------
U. S. Government and
federal agencies $12,967,341 $ 63,493 $16,509 $13,014,325
State and local governments 5,860,498 39,024 66,679 5,832,843
Mortgage-backed securities 5,613,024 47,100 3,583 5,656,541
- -------------------------------------------------------------------------------------------
$24,440,863 $149,617 $86,771 $24,503,709
Federal Reserve Bank stock 289,050 -- -- 289,050
- -------------------------------------------------------------------------------------------
$24,729,913 $149,617 $86,771 $24,792,759
===========================================================================================
December 31,
-----------------------
1996 1995
- --------------------------------------------------------------------------------
Unrealized gain (loss) on
available-for-sale securities $(244,559) $ 62,846
Deferred income tax on unrealized gain (loss) 83,150 (21,368)
- --------------------------------------------------------------------------------
Net increase (reduction) in stockholders' equity $(161,409) $ 41,478
================================================================================
U. S. Government and government backed obligations and state and municipal
backed obligations with a carrying amount of $3,263,473 are pledged to secure
municipality and treasury, tax and loan deposits as of December 31, 1996.
F-10
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 2: INVESTMENT SECURITIES: (Continued)
The schedule below reflects the maturities of investment securities at December
31, 1996. The classification of mortgage-backed securities was based on expected
maturities, while contractual maturities were used for other debt securities.
Expected maturities differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------
Due in one year or less $ 1,526,236 $ 1,469,086
Due after one year through five years 5,126,323 5,103,482
Due after five years through ten years 9,893,301 9,842,746
Due after ten years 10,302,507 10,186,682
Federal Reserve Bank stock 342,650 342,650
Marketable equity security 351,000 352,812
- -------------------------------------------------------------------------------
$27,542,017 $27,297,458
- -------------------------------------------------------------------------------
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES:
Major classifications of loans are as follows:
1996 1995
- -------------------------------------------------------------------------------
Commercial loans $56,251,276 $38,872,133
Consumer loans 1,884,672 3,777,954
Real estate loans 34,437,476 28,193,050
Deferred net loan fees (483,365) (421,333)
- -------------------------------------------------------------------------------
$92,090,059 $70,421,804
Allowance for loan losses 1,111,607 865,479
- -------------------------------------------------------------------------------
$90,978,452 $69,556,325
===============================================================================
Certain directors, officers and employees were indebted to the Company in the
aggregate amount of $1,016,746 as of December 31, 1996. During the year ended
December 31, 1996 new loans made to related parties totaled $917,976 and
repayments totaled $327,303.
At December 31, 1996 and 1995, loans on which the accrual of interest had been
discontinued totaled $190,000 and $137,000, respectively.
F-11
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES: (Continued)
An analysis of the changes in the allowance for loan losses follows:
1996 1995
- -------------------------------------------------------------------------------
Balance - beginning of year $ 865,479 $ 712,663
Additions:
Provision charged to operations 380,000 288,000
Recoveries of loans charged off in prior years 27,476 34,140
- -------------------------------------------------------------------------------
$1,272,955 $1,034,803
Deduction:
Loans charged off 161,348 169,324
- -------------------------------------------------------------------------------
Balance - end of year $1,111,607 $ 865,479
===============================================================================
NOTE 4: OTHER ASSETS:
Other assets consist of the following:
1996 1995
- --------------------------------------------------------------------------------
Interest and fees receivable $1,017,109 $ 811,984
Deferred income tax 412,652 308,134
Computer software - net of amortization 124,304 152,844
Prepaid expenses 162,150 123,752
Other 140,746 27,971
- --------------------------------------------------------------------------------
$1,856,961 $1,424,685
================================================================================
NOTE 5: OTHER LIABILITIES:
Other liabilities consist of the following:
1996 1995
- --------------------------------------------------------------------------------
Interest payable on deposits $ 396,132 $ 340,992
Accounts payable and accrued expenses 190,361 140,619
Treasury, tax and loan 352,107 122,528
Dividends payable 236,083 113,320
Accrued income tax 299,153 90,814
- --------------------------------------------------------------------------------
$1,473,836 $ 808,273
================================================================================
F-12
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 6: OFF-BALANCE-SHEET ITEMS, COMMITMENTS AND CONTINGENT LIABILITIES:
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, lines of
credit, commercial letters of credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the statements of financial
condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit, lines
of credit, commercial letters of credit and standby letters of credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Company upon extension of credit, varies
and is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Company's policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit.
At December 31, 1996, the Company had outstanding letters of credit totaling
$2,049,866 and does not anticipate losses as a result of these transactions. The
Company also had, at December 31, 1996, undisbursed funds under various lines of
credit and loan commitments totaling $13,034,099.
The Company leases its branch facility in Newport News, Virginia under a
non-cancelable operating lease expiring October 31, 1998. Monthly lease payments
total $2,898 and future minimum lease payments under the lease are as follows as
of December 31, 1996:
1997 $34,779
1998 $28,983
F-13
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 7: PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31, 1996 and 1995 follows:
1996 1995
- -----------------------------------------------------------------------------
Building and improvements $1,347,437 $1,329,520
Furniture and equipment 1,269,370 1,246,464
Land 1,498,656 887,398
Land improvements 410,342 408,729
Construction in progress 1,177,783 23,160
- -----------------------------------------------------------------------------
$5,703,588 $3,895,271
Accumulated depreciation (780,691) (586,886)
- -----------------------------------------------------------------------------
$4,922,897 $3,308,385
=============================================================================
NOTE 8: FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair values of
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Certain financial instruments and all
nonfinancial instruments are excluded from fair value disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Cash and Due from Banks
The carrying amounts reported in the consolidated financial statements for cash
and due from banks approximate those assets' fair values.
Investment Securities
Fair values for investment securities, including mortgage-backed securities, are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Deposits
The fair values disclosed for demand deposits (for example, checking accounts,
savings accounts and money market deposits) are equal to the amount payable on
demand at the reporting date. The carrying amount of accrued interest payable
approximates fair value.
Other Borrowed Funds
The carrying amounts of other borrowed funds approximates their fair values.
F-14
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 8: FAIR VALUES OF FINANCIAL INSTRUMENTS: (Continued)
Other Liabilities
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 fair values of loans and time deposits are not presented herein, as it is
not practicable to estimate the fair value without incurring excessive costs.
NOTE 9: COMMON STOCK AND CLASS A WARRANTS:
During 1994, the Company sold 75,000 shares of its common stock at $14.50 per
share. As a result of this sale, equity was increased by $1,046,897, which was
net of issuance costs of $41,458.
The Company sold 149,500 shares of its common stock at a price of $16.50 per
share pursuant to an offering agreement dated April 21, 1995. The Company also
sold 16,180 shares of its common stock at a price of $16.50 per share pursuant
to a private placement offering in June, 1995. The related increase in equity of
$2,528,871 was net of issuance costs totaling $204,849.
During 1992, the bank sold 2,500 units, each of which was comprised of 100
shares of common stock, $5.00 par value, and 100 redeemable Class A warrants.
Each Class A warrant entitled the holder thereof to purchase one-half of one
share of common stock at an exercise price of $7.50. Seven hundred warrants were
exercised during 1994 and 241,350 were exercised during 1995. The Company
purchased 7,850 warrants that were not exercised for $78 and there were no
warrants outstanding at December 31, 1995. The increase in equity related to the
1995 warrant transactions of $1,807,743 was net of issuance costs totaling
$2,304.
NOTE 10: EMPLOYMENT AGREEMENTS AND STOCK OPTION PLANS:
The Company has entered into employment agreements with certain of its
executives. The agreements provide for severance benefits payable to the
executives upon termination of employment following a change of control in the
bank. If certain requirements are met, the aggregate maximum benefits payable
will be $373,725.
F-15
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 10: EMPLOYMENT AGREEMENTS AND STOCK OPTION PLANS: (Continued)
The Company adopted an employee incentive stock option plan and a nonemployee
directors' stock option plan. 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. Future options, when granted under this
plan, will have an exercise price equal to the greater of the stock's fair
market value or 100% of the book value per share of the Company's common stock
at the date of the grant. The Company has reserved up to a maximum of 50,000
shares of unissued common stock for issuance under the employee incentive stock
option plan. A summary of options granted through December 31, 1996 follows:
Number of Exercise
Date Granted Options Price
-------------------------------------------------------
1990 4,000 $10.00
1991 10,000 $11.25
1995 21,000 $16.00
1995 1,000 $16.50
1996 2,500 $22.50
The nonemployee directors' stock option plan allowed the directors to purchase
options during August, 1990. A total of 29,522 were sold at a price of $.25.
Each option entitles the owner thereof to purchase one share of common stock for
$9.75.
The Company adopted a management incentive bonus plan designed to reward its
tier one executive officers for the achievement of certain Company goals
regarding its return on average total assets, capital and loan loss reserve.
Bonuses under this plan totaled $48,060 and $36,464 for 1996 and 1995,
respectively.
NOTE 11: INCOME TAX:
The provision for income tax consists of the following:
1996 1995 1994
- ------------------------------------------------------------------------
Current $787,619 $493,326 $ 498,251
Deferred 25,031 (68,337) (100,401)
- ------------------------------------------------------------------------
$812,650 $424,989 $ 397,850
========================================================================
F-16
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 11: INCOME TAX: (Continued)
The following reconciles income tax reported in the consolidated financial
statements to tax that would be obtained by applying regular tax rates to net
income before income tax.
1996 1995 1994
- ------------------------------------------------------------------------------
Income tax at statutory rate $ 797,839 $ 492,367 $390,994
Increase (decrease) resulting from:
Tax exempt income (115,611) (48,110) (36,229)
Other 130,422 (19,268) 43,085
- ------------------------------------------------------------------------------
Provision for Income Tax $ 812,650 $ 424,989 $397,850
==============================================================================
Deferred tax liabilities have been provided for taxable temporary differences
related to fixed assets. Deferred tax assets have been provided for deductible
temporary differences related to the allowance for loan losses,
available-for-sale investments, and capitalized loan fees. The net deferred tax
assets in the accompanying statements of financial condition include the
following components:
1996 1995
- ---------------------------------------------------------------------------
Deferred tax assets $495,489 $407,551
Deferred tax liabilities (82,820) (99,417)
- ---------------------------------------------------------------------------
$412,669 $308,134
===========================================================================
NOTE 12: OTHER INFORMATION:
The principal components of "Salaries and employee benefits", "Occupancy",
"Equipment" and "Other noninterest expense" are as follows:
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Salaries and employee benefits:
Salaries and wages $1,828,575 $1,555,258 $1,104,310
Fringe benefits 324,995 287,488 200,051
- ---------------------------------------------------------------------------------------------------------
$2,153,570 $1,842,746 $1,304,361
=========================================================================================================
Occupancy (includes no items in excess
of 1% of total revenue) $ 308,224 $ 264,135 $ 174,386
=========================================================================================================
F-17
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 12: OTHER INFORMATION: (Continued)
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
Equipment:
Depreciation $ 275,665 $ 203,043 $ 132,249
Computer equipment rental 33,943 35,315 23,240
Data processing 239,788 177,363 135,626
Other (includes no items in excess
of 1% of total revenue) 92,689 83,552 48,625
- ---------------------------------------------------------------------------------------------------------
$ 642,085 $ 499,273 $ 339,740
=========================================================================================================
Other noninterest expense:
Postage and freight $ 107,961 $ 81,569 $ 87,410
Advertising and public relations 152,315 158,230 100,532
Insurance 37,541 31,646 29,985
Stationery and supplies 179,062 160,022 66,603
FDIC assessment 2,000 79,972 121,440
Other (includes no items in excess
of 1% of total revenue) 608,495 378,004 256,856
- ---------------------------------------------------------------------------------------------------------
$1,087,374 $ 889,443 $ 662,826
=========================================================================================================
NOTE 13: OTHER BORROWED FUNDS:
During 1993, in a noncash transaction, the Company executed a deed of trust note
as payment for the purchase of land which cost $85,000 adjacent to its
Williamsburg, Virginia office. The mortgage provides for monthly payments of
$1,214 for 84 months and includes 5.32% interest. The purchased land secures
this debt.
Maturities of this long-term debt are as follows:
1997 $12,563
1998 13,247
1999 13,969
2000 3,627
---------------------------------------
$43,406
=======================================
F-18
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(Continued)
December 31, 1996
NOTE 14: SUPPLEMENTARY CASH FLOW INFORMATION:
Additional cash flow information follows:
1996 1995 1994
- ---------------------------------------------------------------------------------------
Cash paid during the year for interest $4,304,321 $3,298,022 $2,064,486
- ---------------------------------------------------------------------------------------
Cash paid during the year for income tax $ 604,311 $ 738,896 $ 286,352
- ---------------------------------------------------------------------------------------
NOTE 15: CONCENTRATION OF CREDIT RISK:
The Company maintains a deposit relationship with several financial
institutions, all of which are insured by the FDIC. As of December 31, 1996,
deposits with these banks in excess of federal deposit insurance coverage
totaled $4,374,427.
NOTE 16: PROFIT SHARING PLAN:
The Company maintains a qualified profit sharing plan under section 401(k) of
the Internal Revenue Code. 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 and the Company makes discretionary
matching contributions. During 1995, the plan's first year, the Company matched
100% of elected deferrals for up to 5% of covered compensation during the first
90 days of the plan. For the balance of 1995 and 1996, the Company matched 25%
of up to 5% of elected deferrals. The Company's contributions for 1996 and 1995
totaled $15,051 and $22,027, respectively. The plan may be amended or terminated
at any time by the board of directors and its contributions to the plan are
included in salaries and employee benefits.
NOTE 17: DISCLAIMER:
This financial information has not been reviewed, or confirmed for accuracy or
relevance, by the Federal Reserve System.
F-19
[SMITH & EGGLESTON, P.C. LETTERHEAD]
[RICHMOND, VIRGINIA]
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
Stockholders and Directors
Mid-Atlantic Community BankGroup, Inc.
Gloucester, Virginia
Our report on our audits of the basic consolidated financial statements
of Mid-Atlantic Community BankGroup, Inc. and subsidiary as of December 31, 1996
and 1995 and for the three-year period ended December 31, 1996 accompanies the
consolidated financial statements. Those audits were made for the purpose of
forming an opinion on such consolidated financial statements taken as a whole.
The accompanying supplementary information as of December 31, 1996 and 1995 and
for each of the years in the three-year period ended December 31, 1996 is
presented for purposes of additional analysis and is not a required part of the
basic consolidated financial statements. Such information has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements as of December 31, 1996
and 1995 and for each of the years in the three-year period ended December 31,
1996, taken as a whole.
We also have previously audited, in accordance with generally accepted
auditing standards, the balance sheets of Mid-Atlantic Community BankGroup, Inc.
and subsidiary as of December 31, 1994, 1993, and 1992 and the related
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the two-year period ended December 31, 1993 (none of which is
presented herein), and we expressed unqualified opinions on those consolidated
financial statements. In our opinion, the accompanying supplementary information
as of December 31, 1994, 1993, and 1992 and for each of the years in the
two-year period ended December 31, 1993 is fairly stated in all material
respects in relation to the basic consolidated financial statements for which it
has been derived.
/s/ Smith & Eggleston, P.C.
February 13, 1997
F-20
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
BALANCE SHEETS - FIVE YEARS
As of December 31,
A S S E T S
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS $ 6,014,540 $ 4,553,325 $ 2,829,322 $ 2,309,194 $ 2,212,677
INVESTMENT SECURITIES 27,297,458 24,792,759 12,958,403 10,768,754 9,887,969
FEDERAL FUNDS SOLD 5,363,865 4,678,330 7,266,290 3,465,000 3,000,000
LOANS (Net of allowance for loan losses) 90,978,452 69,556,325 53,604,188 39,570,897 23,337,046
PREMISES AND EQUIPMENT 4,922,897 3,308,385 2,675,972 2,004,086 1,858,097
OTHER ASSETS 1,856,961 1,424,685 997,423 673,990 479,262
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $136,434,173 $108,313,809 $80,331,598 $58,791,921 $40,775,051
===========================================================================================================================
F-21
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
BALANCE SHEETS - FIVE YEARS
As of December 31,
L I A B I L I T I E S A N D S T O C K H O L D E R S ' E Q U I T Y
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
DEPOSITS:
Demand $ 15,133,165 $ 14,333,604 $13,912,420 $ 6,041,383 $ 3,816,160
NOW and money market 25,967,974 17,605,457 18,433,465 15,581,305 5,402,656
Savings 14,969,421 9,331,624 8,722,803 6,967,012 6,877,258
Time, $100,000 and over 9,416,511 8,798,436 5,042,663 3,001,061 2,132,273
Other time 54,998,270 44,045,617 25,413,080 20,339,167 16,283,165
- ---------------------------------------------------------------------------------------------------------------------------
Total Deposits $120,485,341 $ 94,114,738 $71,524,431 $51,929,928 $34,511,512
OTHER BORROWED FUNDS 43,406 55,322 66,617 77,325 --
OTHER LIABILITIES 1,473,836 808,273 840,465 439,771 254,916
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $122,002,583 $ 94,978,333 $72,431,513 $52,447,024 $34,766,428
- ---------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Capital stock - par value $5 per share:
Issued and outstanding $ 4,721,665 $ 4,721,665 $ 3,289,890 $ 2,913,140 $ 2,913,140
Stock options 7,380 7,380 7,380 7,380 7,380
Class A warrants -- -- 53,229 53,378 53,378
Surplus 6,693,925 6,692,775 3,734,707 3,060,015 3,060,015
Retained earnings (deficit) 3,170,029 1,724,690 962,367 310,984 ( 25,290)
Unrealized gain (loss) on securities
available for sale (161,409) 188,966 (147,488) -- --
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY $ 14,431,590 $ 13,335,476 $ 7,900,085 $ 6,344,897 $ 6,008,623
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $136,434,173 $108,313,809 $80,331,598 $58,791,921 $40,775,051
===========================================================================================================================
F-22
MID-ATLANTIC COMMUNITY BANKGROUP, INC. AND SUBSIDIARY
STATEMENTS OF INCOME - FIVE YEARS
Years Ended December 31,
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $ 8,689,054 $6,652,980 $4,785,973 $3,147,804 $2,297,831
Interest on investment securities:
Taxable 1,393,367 1,051,863 597,910 545,795 571,593
Tax exempt 340,031 141,497 122,458 69,120 --
Interest on federal funds sold 230,862 377,327 144,420 65,981 60,144
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income $10,653,314 $8,223,667 $5,650,761 $3,828,700 $2,929,568
Interest on deposits 4,359,461 3,468,896 2,120,123 1,623,518 1,539,861
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 6,293,853 $4,754,771 $3,530,638 $2,205,182 $1,389,707
PROVISION FOR LOAN LOSSES 380,000 288,000 257,500 255,000 121,700
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
For Loan Losses $ 5,913,853 $4,466,771 $3,273,138 $1,950,182 $1,268,007
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts $ 479,651 $ 388,245 $ 288,413 $ 226,612 $ 163,892
Other service charges 57,765 30,353 26,154 7,861 11,619
Other 88,504 59,106 43,591 21,395 25,211
Net investment security gains (losses) (1,936) (740) -- 33,760 1,620
- ---------------------------------------------------------------------------------------------------------------------------
$ 623,984 $ 476,964 $ 358,158 $ 289,628 $ 202,342
- ---------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSES:
Salaries and employee benefits $ 2,153,570 $1,842,746 $1,304,361 $ 980,147 $ 623,923
Occupancy 308,224 264,135 174,386 118,841 52,568
Equipment 642,085 499,273 339,740 272,541 187,272
Other 1,087,374 889,443 662,826 466,043 382,192
- ---------------------------------------------------------------------------------------------------------------------------
$ 4,191,253 $3,495,597 $2,481,313 $1,837,572 $1,245,955
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax $ 2,346,584 $1,448,138 $1,149,983 $ 402,238 $ 224,394
PROVISION FOR INCOME TAX 812,650 424,989 397,850 65,964 12,123
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,533,934 $1,023,149 $ 752,133 $ 336,274 $ 212,271
===========================================================================================================================
Net income per common share and
common equivalent 1.57 1.29 1.20 .57 .45
===========================================================================================================================
Weighted average shares outstanding 975,486 794,376 624,789 592,735 476,798
===========================================================================================================================
F-23
No dealer, salesman or other person has been
authorized to give any information or to make
any representation not contained in this 130,000 Shares
Prospectus, and if given or made, such
information or representation must not be
relied upon as having been authorized by the
Company. This Prospectus does not constitute MID-ATLANTIC
an offer to sell or a solicitation of an COMMUNITY
offer to buy any securities other than those BANKGROUP, INC.
specifically offered hereby or an offer or
solicitation in any jurisdiction to any person Common Stock
to whom it is unlawful to make an offer or
solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication
that there has been no change in the affairs of
the Company since the date hereof or that the
information herein is correct as of any time
ubsequent to its date or the date hereof.
--------------------
------------------
PROSPECTUS
Table of Contents
Page --------------------
----
Prospectus Summary.................................
Summary Financial Data.............................
Risk Factors.......................................
The Company........................................ DAVENPORT & COMPANY LLC
Use of Proceeds....................................
Market for Common Stock............................
Dividend Information...............................
Capitalization.....................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. ______ , 1997
Business...........................................
Management.........................................
Description of Capital Stock.......................
Underwriting.......................................
Legal Opinions.....................................
Experts............................................
Available Information..............................
Index to Financial Statements...................F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia, 1950, as
amended (the "Code"), permits a Virginia corporation to indemnify any director
or officer for reasonable expenses incurred in any legal proceeding in advance
of final disposition of the proceeding, if the director or officer furnishes the
corporation a written statement of his good faith belief that he has met the
standard of conduct prescribed by the Code, and a determination is made by the
board of directors that such standard has been met. In a proceeding by or in the
right of the corporation, no indemnification shall be made in respect of any
matter as to which an officer or director is adjudged to be liable to the
corporation, unless the court in which the proceeding took place determines
that, despite such liability, such person is reasonably entitled to
indemnification in view of all the relevant circumstances. In any other
proceeding, no indemnification shall be made if the director or officer is
adjudged liable to the corporation on the basis that personal benefit was
improperly received by him. Corporations are given the power to make any other
or further indemnity, including advance of expenses, to any director or officer
that may be authorized by the articles of incorporation or any bylaw made by the
shareholder, or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against willful misconduct or a knowing
violation of the criminal law. Unless limited by its articles of incorporation,
indemnification of a director or officer is mandatory when he entirely prevails
in the defense of any proceeding to which he is a party because he is or was a
director or officer.
The Amended and Restated Articles of Incorporation (the "Articles") of
the Registrant contain provisions indemnifying the directors and officers of the
Registrant, unless he is adjudged liable for willful misconduct or a knowing
violation of criminal law. In addition, the Articles limit the personal
liability of the Registrant's directors and officers to the Registrant or its
shareholders for monetary damages to $50,000 per transaction.
Item 25. Other Expenses of Issuance and Distribution
Securities and Exchange Commission Registration Fee $ 1,160.89 *
National Association of Securities Dealers Examination Fee $ 883.09 *
Printing Expenses $ 12,000.00
Accounting Fees and Expenses $ 10,000.00
Legal Fees and Expenses $ 25,000.00
Blue Sky Fees and Expenses $ 2,000.00
Miscellaneous Expenses $ 1,956.02
--------------
Total $ 53,000.00
==============
- ---------------
* Represents actual expenses. All other expenses are estimates.
Item 26. Recent Sales of Unregistered Securities
The Registrant is the successor to Peninsula Trust Bank, Incorporated
(the "Bank") pursuant to an Agreement and Plan of Share Exchange (the "Plan")
dated as of February 29, 1996 between the Bank and
II-1
the Registrant. Pursuant to the Plan, the Registrant was formed to become the
holding company for the Bank. Upon the consummation of the Plan on August 15,
1996, the Bank became the wholly-owned subsidiary of the Registrant, and the
shareholders of the Bank became shareholders of the Registrant (the "Share
Exchange"). At that time, the Registrant issued 944,333 shares of its Common
Stock to the shareholders of the Bank in exchange for all of the outstanding
shares of the Bank's common stock.
The Common Stock of the Registrant issued in the Share Exchange was not
registered under Section 5 of the Securities Act of 1933, as amended (the
"Act"), pursuant to the exemption provided by Section 3(a)(12) of the Act.
Provided that certain conditions are met, as they were in the Share Exchange,
section 3(a)(12) exempts "[a]ny equity security issued in connection with the
acquisition by a holding company of a bank . . . ."
Item 27. Exhibits
The following exhibits are filed on behalf of the Registrant as part of
this Registration Statement:
1 Form of Underwriting Agreement.*
3(i) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form 8-A, filed August 30, 1996.
3(ii) Bylaws, incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form 8-A, filed August 30, 1996.
4 Form of Stock Certificate.*
5 Opinion of Williams, Mullen, Christian & Dobbins.
10.1 Employment Agreement between W. J. Farinholt and the Registrant.*
10.2 Employment Agreement between Kenneth E. Smith and the Registrant.*
21 Subsidiaries of the Registrant.
23.1 Consent of Williams, Mullen, Christian & Dobbins(included in Exhibit
5).
23.2 Consent of Smith & Eggleston, P.C.
24 Powers of Attorney(included on Signature Page).
- -------------------
* To be filed by amendment.
Item 28. Undertakings
The small business issuer will provide to the underwriter at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling
II-2
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4), or
497(h) under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration Statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
County of Gloucester, Commonwealth of Virginia, on April 15, 1997.
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
By: /s/ William J. Farinholt
-------------------------------------
William J. Farinholt
President and Chief Executive Officer
and Director
POWER OF ATTORNEY
Each of the undersigned hereby appoints William J. Farinholt as
attorney and agent for the undersigned, with full power of substitution, for and
in the name, place and stead of the undersigned, to sign and file with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
any and all amendments and exhibits to the Registration Statement and any and
all applications, instruments and other documents to be filed with the
Securities and Exchange Commission pertaining to the registration of securities
covered hereby with full power and authority to do and perform any and all acts
and things whatsoever requisite or desirable.
In accordance with the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ William J. Farinholt President and Chief Executive April 15, 1997
- -------------------------------------------
William J. Farinholt Officer and Director
(Principal Executive Officer)
/s/ Kenneth E. Smith Executive Vice President and April 15, 1997
- -------------------------------------------
Kenneth E. Smith Chief Financial Officer and Director
(Principal Financial Officer)
/s/ Kathleen C. Healy Vice President and April 15, 1997
- -------------------------------------------
Kathleen C. Healy Chief Accounting Officer
(Principal Accounting Officer)
/s/ Joseph A. Lombard, Jr., DDS Chairman of the Board April 15, 1997
- -------------------------------------------
Joseph A. Lombard, Jr., DDS
Director April __, 1997
- -------------------------------------------
Charles F. Bristow
Director April __, 1997
- -------------------------------------------
John R. Curtis
Director April __, 1997
- -------------------------------------------
Charles F. Dawson
/s/ William D. Fary Director April 15, 1997
- -------------------------------------------
William D. Fary
Director April __, 1997
- -------------------------------------------
Robert D. Foster
/s/ Harry M. Healy Director April 15, 1997
- -------------------------------------------
Harry M. Healy
Director April __, 1997
- -------------------------------------------
Jeanne P. Hockaday
/s/ George A. Marston, Jr. Director April 15, 1997
- -------------------------------------------
George A. Marston, Jr.
/s/ Hersey M. Mason, Jr. Director April 15, 1997
- -------------------------------------------
Hersey M. Mason, Jr.
/s/ Henry C. Rowe, MD Director April 15, 1997
- -------------------------------------------
Henry C. Rowe, MD
Director April __, 1997
- -------------------------------------------
Thomas Z. Wilke
Exhibit Index
Number Description
1 Form of Underwriting Agreement.*
3(i) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form 8-A, filed August 30, 1996.
3(ii) Bylaws, incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form 8-A, filed August 30, 1996.
4 Form of Stock Certificate.*
5 Opinion of Williams, Mullen, Christian & Dobbins.
10.1 Employment Agreement between W. J. Farinholt and the Registrant.*
10.2 Employment Agreement between Kenneth E. Smith and the Registrant.*
21 Subsidiaries of the Registrant.
23.1 Consent of Williams, Mullen, Christian & Dobbins(included in Exhibit
5).
23.2 Consent of Smith & Eggleston, P.C.
24 Powers of Attorney(included on Signature Page).
- -------------------
* To be filed by amendment.