SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ x ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number 0-21285
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
VIRGINIA 54-1809409
- -------------------------------------- --------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
7171 George Washington Mem. Hwy.
Gloucester, Virginia 23061
--------------------------------------------
(Address of Principal Executive Offices)
(804) 693-0628
------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
-------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X . No .
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 14, 1998.
Common stock, $5 par value--2,198,900
-------------------------------------
INDEX
MID-ATLANTIC COMMUNITY BANKGROUP, INC. Page No.
Part I. Financial Information
Item 1. Financial Statements 3
Consolidated Balance Sheets--
June 30, 1998 and December 31, 1997
Consolidated Statements of Income-- 4
Six months ended June 30, 1998 and 1997
Three months ended June 30, 1998 and 1997
Consolidated Statements of Stockholders' Equity-- 5
Six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows-- 6
Six months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 14
Part II. Other Information: 15 - 16
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
Item 1. FINANCIAL INFORMATION
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
June 30, December 31,
ASSETS: 1998 1997
------------ ------------
Cash and due from banks $ 10,079 $ 6,960
Securities available for sale (at market value) 25,336 24,104
Securities held to maturity (market value)
$11,328 in 1998 and $7,381 in 1997) 11,243 7,290
Federal funds sold 9,604 8,414
Loans, net 113,704 104,240
Premises and equipment 7,700 5,928
Other real estate owned 437 208
Other assets 3,238 2,161
------------ ------------
TOTAL ASSETS $ 181,341 $ 159,305
============ ============
LIABILITIES:
Deposits
Demand $ 26,331 $ 18,791
Interest-bearing demand 28,308 25,673
Savings 16,617 15,758
Certificates of deposit, $100,000 or more 17,052 13,528
Other Time 71,243 64,673
------------ ------------
TOTAL DEPOSITS 159,551 138,423
Short-term debt 266 292
Long-term debt 24 31
Other liabilities 912 1,282
------------ ------------
TOTAL LIABILITIES 160,753 140,028
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, par value $5 per share,
10,000,000 shares authorized, 2,198,900
shares issued in 1998 and 1,093,833 in 1997 10,995 5,477
Surplus 4,026 9,294
Undivided profits 5,460 4,453
Accumulated other comprehensive income, net 107 53
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 20,588 19,277
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 181,341 $ 159,305
============ ============
Notes to financial statements are an integral part of these statements.
3
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands of Dollars)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME:
Loans and Fees $ 2968 $ 2548 $ 5773 $ 4960
Federal Funds Sold 121 63 253 100
Investment Securities 632 511 1195 1021
------- ------- ------- -------
Total Interest Income 3721 3122 7221 6081
INTEREST EXPENSE:
Demand Deposits 227 194 461 384
Savings Deposits 119 109 233 215
Certificates of Deposit,
$1000,000 or more 226 157 415 291
Other Time Deposits 986 835 1918 1605
Short-term Debt 2 2 5 5
Long-term Debt -- 1 1 1
------- ------- ------- -------
Total Interest Expense 1560 1298 3033 2501
------- ------- ------- -------
Net Interest Income 2161 1824 4188 3580
PROVISION FOR LOAN
AND LEASE LOSSES 152 117 233 210
------- ------- ------- -------
Net Interest Income After
Provision for Loan
and Lease Losses 2009 1707 3955 3370
------- ------- ------- -------
OTHER INCOME:
Service Chgs on Deposit Accts 177 144 348 291
Other Service Charges & Fees 115 55 180 100
Securities Gains (Losses) -- -- 1 2
------- ------- ------- -------
Total Other Income 292 199 529 393
------- ------- ------- -------
OTHER EXPENSES:
Salaries & Employee Benefits 813 700 1580 1365
Occupancy Expenses 141 125 260 222
Furniture & Equipment Expenses 235 202 406 368
Other Operating Expenses 381 392 757 724
------- ------- ------- -------
Total Other Expenses 1570 1419 3003 2679
------- ------- ------- -------
Income Before Income Taxes 731 487 1481 1084
Applicable Income Taxes 229 138 474 319
------- ------- ------- -------
Net Income $ 502 $ 349 $ 1007 $ 765
======= ======= ======= =======
EARNINGS PER SHARE, BASIC .23 .18 .46 .40
EARNINGS PER SHARE,
ASSUMING DILUTION .22 .18 .44 .39
======= ======= ======= =======
Notes to financial statements are an integral part of these statements.
4
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands of Dollars)
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital
Total Income Earnings Income Stock Surplus
----- ------ -------- ------ ----- -------
Balances - January 1, 1997 $14,431 $ 3,170 ($162) $ 4,722 $ 6,701
Comprehensive income:
Net income 764 $ 764 764
Other comprehensive income,
net of tax:
Unrealized gain on securities
available for sale
Unrealized holding gain
arising during the period 86 86
Less: reclassification
adjustment 2 2
------- ---------
Other comprehensive income,
net of tax 84 84 84
------- --------- --------
Total comprehensive income 848 $ 848 ($78)
------- ========= ------- ======== ------- -------
Balances - June 30, 1997 $15,279 $ 3,934 $ 4,722 $ 6,701
======= ======= ======= =======
Balances - January 1, 1998 $19,277 $ 4,453 $ 53 $ 5,477 $ 9,294
Comprehensive income:
Net income 1,007 $ 1,007 1,007
Other comprehensive income,
net of tax:
Unrealized gain on securities
for sale
Unrealized holding gain arising
during the period 55 55
Less: reclassification
adjustment 1 1
------- ---------
Other comprehensive income,
net of tax 54 54 54
------- --------- --------
Total comprehensive income $ 541 $ 1,061
------- =========
Issuance of common stock -
stock split effected in the form
of 100% stock dividend 5,490 (5,490)
Issuance of common stock -
Johnson Mortgage Co. 250 28 222
------- ------- -------- ------- -------
Balances - June 30, 1998 $20,588 $ 5,460 $ 107 $10,995 $ 4,026
======= ======= ======== ======= =======
Notes to financial statements are an integral part of these statements.
5
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Six Months Ended
June 30,
--------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,007 $ 765
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 210 201
Provision for loan losses 233 210
Amortization of premiums on investment securities 46 16
(Gain) on sale of investment securities (1) (2)
Changes in operating assets and liabilities:
(Increase) in other assets (1,106) (467)
Increase (decrease) in accrued income taxes 45 (152)
Increase (decrease) in other liabilities (159) (22)
--------- ---------
Net Cash Provided By Operating Activities $ 275 $ 549
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans ($9,696) ($5,964)
Proceeds from sales of securities available for sale 200 1,593
(Increase) decrease in federal funds sold (1,419) (3,067)
Purchase of securities available for sale (6,628) (2,603)
Purchase of securities held to maturity (5,301) --
Purchase of property and equipment (1,983) (808)
Proceeds from maturities of securities available for sale 4,538 --
Proceeds from maturities of securities held to maturity 2,043 --
--------- ---------
Net Cash (Used In) Investing Activities ($18,246) ($10,849)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 21,128 $ 11,121
Dividends paid (547) (236)
Increase (decrease) in short-term debt 266 (15)
Curtailment of other borrowed funds (7) (6)
Issuance of common stock - Johnson Mortgage Co. 250 --
--------- ---------
Net Cash Provided by Financing Activities $ 21,090 $ 10,864
--------- ---------
Net Increase In Cash and Due From Banks $ 3,119 $ 564
CASH AND DUE FROM BANKS - BEGINNING OF PERIOD 6,960 6,015
--------- ---------
CASH AND DUE FROM BANKS - END OF PERIOD $ 10,079 $ 6,579
========= =========
Notes to financial statements are an integral part of these statements.
6
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
The consolidated statements include the accounts of Mid-Atlantic Community
BankGroup, Inc. and its subsidiaries, Peninsula Trust Bank, Incorporated
and Johnson Mortgage Company, LLC. All significant intercompany balances
and transactions have been eliminated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial positions as of June 30, 1998 and December
31, 1997, and the results of operations and cash flows for the six months
ended June 30, 1998 and 1997.
The results of operations for the six months ended June 30, 1998 and 1997
are not necessarily indicative of the results to be expected for the full
year.
2. Investment Securities
Amortized cost and carrying amount (estimated fair value) of securities
available for sale are summarized as follows:
June 30, 1998
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands of Dollars)
US Treasury Securities 626 -- 2 624
US Government Agencies & Corporations 7,360 59 4 7,415
Obligations of States & Political Subdivisions 5,544 92 16 5,620
Mortgage-backed Securities 10,756 62 29 10,789
Federal Reserve Bank Stock 343 -- -- 343
Other Equity Securities 545 -- -- 545
--------- ---------- ---------- ---------
$ 25,174 $ 213 $ 51 $ 25,336
========= ========== ========== =========
Amortized cost and carrying amount (estimated fair value) of securities held
to maturity are summarized as follows:
June 30, 1998
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands of Dollars)
US Government Agencies & Corporations 6,064 22 1 6,085
Obligations of States & Political Subdivisions 1,911 55 13 1,953
Mortgage-backed Securities 3,268 22 -- 3,290
--------- ---------- ---------- ---------
$ 11,243 $ 99 $ 14 $ 11,328
========= ========== ========== =========
7
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Securities available for sale at December 31, 1997 consist of the following:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands of Dollars)
US Treasury Securities 632 -- 3 629
US Government Agencies & Corporations 10,301 84 4 10,381
Obligations of States & Political Subdivisions 4,946 90 80 4,956
Mortgage-backed Securities 7,743 40 46 7,737
Federal Reserve Bank Stock 343 -- -- 343
Other Equity Securities 57 -- -- 57
--------- ---------- ---------- ---------
$ 24,024 $ 215 $ 135 $ 24,104
========= ========== ========== =========
Securities held to maturity at December 31, 1997 consist of the following:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands of Dollars)
US Government Agencies & Corporations 3,035 23 -- 3,058
Obligations of States & Political Subdivisions 1,682 52 -- 1,734
Mortgage-backed Securities 2,573 16 -- 2,589
--------- ---------- ---------- ---------
$ 7,290 $ 91 $ -- $ 7,381
========= ========== ========== =========
Six Months Ended
June 30,
1998 1997
-------- --------
(In Thousands of Dollars)
Gross proceeds from sales of securities 200 1,593
======== =======
Gross Gains on Sale of Securities 1 2
Gross Losses on Sale of Securities -- --
-------- -------
Net Securities Gains (Losses) 1 2
======== =======
8
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Loans
The following is a summary of loans outstanding at the end of the periods
indicated:
June 30, December 31,
1998 1997
------------ ------------
(In Thousands of Dollars)
Commercial Mortgage 24,022 23,135
Residential Mortgage 31,243 28,987
Home Equity 12,574 10,905
Construction 7,640 6,059
Commercial 13,951 12,477
Installment 25,680 23,926
All Other 604 617
------------ ------------
115,714 106,106
Less Unearned Income 546 542
------------ ------------
115,168 105,564
Less Allowance for Loan and Lease Losses 1,464 1,324
------------ ------------
$ 113,704 $ 104,240
============ ============
The following schedule summarizes the changes in the allowance for loan and
lease losses:
Six Months Six Months
Ending Ending
June 30, June 30, December 31,
1998 1997 1997
------------ ----------- ------------
(In Thousands of Dollars)
Balance, Beginning 1,324 1,112 1,112
Provision Charged Against Income 233 210 347
Recoveries 21 29 55
Loans Charged Off (114) (57) (190)
------------ ----------- ------------
Balance, Ending $ 1,464 $ 1,294 $ 1,324
============ =========== ============
Nonperforming assets consist of the following:
June 30, December 31,
1998 1997
------------ ------------
(In Thousands of Dollars)
Nonaccrual Loans $ 339 $ 302
Restructured Loans -- --
----------- ------------
Nonperforming Loans 339 302
Foreclosed Properties 437 208
----------- ------------
Nonperforming Assets $ 776 $ 510
=========== ============
Total loans past due 90 days or more and still accruing were $280 on June 30,
1998 and $77 on December 31, 1997.
9
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of diluted potential common stock income available to common shareholders.
June 30, 1998 June 30, 1997
------------- -------------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic Earnings Per Share 2,193,376 $ .46 1,888,666 $ .40
Effect of dilutive securities:
Nonemployee directors' stock options 45,391 36,170
Employee incentive stock options 53,229 32,444
--------- ---------
Diluted Earnings Per Share 2,291,996 $ .44 1,957,280 $ .39
========= ======= ========= =======
5. Capital Requirements
A comparison of the Company's capital as of June 30, 1998 with the minimum
requirements is presented below:
Minimum
Actual Requirements
------ ------------
Tier I Risk-based Capital 16.39 % 4.00 %
Total Risk-based Capital 17.56 % 8.00 %
Leverage Ratio 11.94 % 4.00 %
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of Mid-Atlantic Community
BankGroup, Inc. (the "Company") as of the dates and for the periods indicated.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto and other financial data appearing
elsewhere in this report. The consolidated financial statements include the
accounts of the Company and its subsidiaries, Peninsula Trust Bank, Incorporated
(the "Bank") and Johnson Mortgage Co., LLC ("JMC"). The Company consummated
negotiations to purchase a 50% interest in JMC as of March 31, 1998. This is
viewed as an attractive complement to loan products previously offered by the
Bank.
Results of Operations
- ---------------------
After enjoying strong balance sheet expansion during the first quarter of 1998,
the Company experienced moderate balance sheet growth during the second quarter
of 1998, with total assets increasing $6.9 million, or 4.0% over March 31, 1998
and $22.0 million, or 13.8% over December 31, 1997. Growth was funded almost
entirely from new deposits, which reflected $6.4 million and $21.1 million
increases for the three months and six months ending June 30, 1998,
respectively. The majority of the increase was in non-interest bearing demand
deposits, which experienced an increase of $7.5 million over December 31, 1997.
Loan demand maintained strong growth during the second quarter, evidenced by net
loans increasing $6.0 million (5.6%) and $9.5 million (9.1%) over March 31, 1998
and December 31, 1997, respectively.
Asset quality continues to be strong. Total loans past due 30 days or more
equaled $2.9 million (2.51% of total outstandings). Included in the 30 day total
are $280,000 in loans which are 90 days or more past due and still accruing
interest. Non-accrual loans totaled $339,000 at June 30, 1998, which represented
0.29% of total outstanding loans and 23.2% of the loan loss reserve. Foreclosed
properties totaled $437,000 at June 30, 1998. The provision for loan losses was
$152,000 in the second quarter of 1998 and $233,000 in the first half of 1998.
Gross charge-offs for the quarter were $66,000, while total recoveries were
$4,600.
The Company maintained its practice during the second quarter of selling Federal
funds, having sold continuously on a daily basis in amounts averaging $8.8
million, 5.11% of average total assets. These figures compare to $9.7 million
and 5.98%, respectively, for the first quarter 1998. The quarter-end balance of
$9.6 million represented a $2.3 million decrease from the first quarter 1998 and
a $1.2 million increase from December 31, 1997.
The level of the investment account increased $1.2 million during the second
quarter of 1998, ending the period at $36.6 million or 20.1% of total assets.
The portfolio is comprised of 2% US Treasuries, 75% US Government Agencies, 21%
State, County and Municipal governments, and 2% other equity securities and
Federal Reserve Bank Stock.
The Financial Accounting Standards Board (FASB) Statement 115 stipulated the way
in which banks must classify and account for their securities portfolio,
beginning with the first quarter of 1994. Securities are classified as
Investment Securities when management has both the intent and the ability at the
time of purchase to hold the securities until maturity. Investment Securities
are carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities which are held for an indefinite period of time are
classified as Securities Available for Sale and are marked to market at each
financial reporting date, or at each month-end. Securities Available for Sale
include securities that may be sold in response to changes in
11
interest rates, changes in the security's prepayment risk, increases in loan
demand, general liquidity needs and other similar factors.
The Company elected, as of year-end 1995, to classify the entire portfolio as
"available for sale". In an effort to manage the fluctuation in the "net
unrealized gains/losses", the Company elected to reclassify $5.1 million of the
portfolio as "held to maturity" as of July 31, 1997, resulting in a one time
capital adjustment for the gain. These reclassified bonds have longer final
maturities. However, due to their respective call structures, they exhibit more
price volatility with subtle changes in overall interest rates. Also, the need
for such bonds to be used for liquidity purposes is considered remote. The
Company purchased an additional $7.0 million and $6.1 million, during the first
half of 1998, which were classified as available for sale and held to maturity,
respectively.
Deposits represent 99.3% of total liabilities of the Company, including
non-interest bearing checking accounts which represent 16.5% of total deposits.
Earnings
- --------
Net income for the second quarter of 1998 totaled $503,000. This represents an
impressive 44% increase over net income of $349,000 for the second quarter of
1997, but a slight decline from the $504,000 reported for the first quarter of
this year. The current quarter figures reflect the initial financial impact of
the Bank's implementation of check imaging. This process required the purchase
of computer hardware and software approximating $500,000, resulting in increased
depreciation expense. However, the new technology will greatly enhance employee
efficiency in rendering customer statements and performing account research.
This technology will allow for better customer service while also controlling
future personnel/overhead costs and was, therefore, considered an investment in
improving earnings over time.
Net interest income for the second quarter of 1998 totaled $2,161,000 (an 18.5%
increase over second quarter 1997). The net interest margin experienced modest
contraction as renewing deposits among consumer CDs reflected an upward trend in
renewal rates. This trend occurred during a period when the average yield on the
securities portfolio declined by 42 basis points. As a result, the 19.2%
increase in interest income for the second quarter 1998 compared to the second
quarter of 1997 was offset by a 20.2% increase in interest expense for the same
period.
Non-interest income for the second quarter of 1998 totaled $292,000, a 46.7%
increase over the second quarter of 1997. Primary contributors of the period
over period improvement were new automated teller machine (ATM) service charges
for non-customers of the Bank and the Company's portion of second quarter
earnings of JMC.
Non-interest expense for the second quarter totaled $1.6 million, compared to
$1.4 million for the first quarter of 1998 and $1.4 million for the second
quarter of 1997. The increase was attributable to several factors. The check
imaging process, described above, was joined by other increases in depreciation
expense associated with the opening of the Bank's new permanent office for its
Newport News branch. The Bank also converted to a new software package for its
ATM processing. The software will permit better risk management of the ATM
product and enhanced customer service. One-time costs related to the
de-conversion of the old ATM software, as well as installation of the new
software should be offset by improved profitability and efficiency in this area
of the Bank's operation.
Capital and Liquidity
- ---------------------
Equity capital at June 30, 1998 totaled $20.6 million, representing 11.35% of
total assets. This level of capital will position the Company for growth well
into the future and could support asset growth to more than $250 million with no
further capital augmentation.
12
Short term liquidity is provided by access to the Federal funds market through
correspondent bank relationships. The Bank maintains lines of credit to purchase
Fed funds totaling $5.4 million. Fed funds sold equaled 17.6% of total demand
deposits at June 30, 1998. This compares to 19.3% at June 30, 1997 and is
considered an adequate level of liquidity to meet anticipated withdrawals and
expected loan demand.
Future Plans
- ------------
The Bank consummated the purchase of the Mattaponi branch office of First
Virginia Bank-Commonwealth on July 17, 1998 and opened for business as the
Bank's sixth branch office on July 20, 1998. The Bank purchased the branch and
deposits from First Virginia Bank-Commonwealth for $600,000. The Bank will
complete the renovation of the building during the third quarter of 1998, which
should result in total capitalized cost of the building and land improvements of
approximately $500,000.
In April 1998, the Company purchased a bank building from Wachovia Bank for
$443,000. The building had previously been operated as a Jefferson National Bank
branch, but was closed in February 1998 when Wachovia acquired Jefferson
National. No deposits were purchased with the branch. Renovation of this
building has begun and the de novo branch office is expected to open during the
third quarter of 1998. Total capitalized cost of the building and land
improvements at this location are expected to approximate $400,000.
On July 9, 1998, the Company announced the execution of a definitive Merger
Agreement providing for a merger of equals with United Community Bankshares,
Inc. ("UCB"), headquartered in Franklin, Virginia. UCB is the parent company for
The Bank of Franklin and The Bank of Sussex and Surry. The agreed upon exchange
rate would provide for holders of UCB stock to receive 1.075 shares of the
Company's stock for each share of UCB stock owned, plus cash for fractional
shares. The merger will be accounted for as a pooling of interest and is
expected to be consummated by December 31, 1998, subject to shareholder
approvals, regulatory approvals and other customary conditions of closing.
Year 2000 Issue
- ---------------
The Company utilizes and is dependent upon data processing systems and software
to conduct its business. The data processing systems include various software
packages licensed to the Company by outside vendors and a mainframe processing
system, which are run on in-house computer networks. All of these systems are
vulnerable to the Year 2000 issue.
In 1997, the Company initiated a review and assessment of all hardware and
software to confirm that it will function properly in the year 2000. Based on
this assessment, the Company's mainframe hardware and banking software are
currently Year 2000 compliant. However, testing is scheduled for the fourth
quarter of 1998 and early 1999 to confirm this compliance. For certain other
systems, the Company has determined that it will have to replace or modify
certain pieces of hardware and/or software so that the systems will properly
function in the year 2000. The third party vendors of these systems have been
contacted and have indicated that the hardware and/or software will be Year 2000
compliant. Modifications and/or replacements depend on the individual vendor and
their respective products.
The Company has also begun to formulate a process by which all significant loan
and deposit customers will be contacted to determine the extent to which the
Company is vulnerable to those third parties' failure to remedy their own Year
2000 issue. No conclusion has been drawn at this time on exposure to these
customers, due to the fact that this process is still in the developmental
stages.
13
The Company plans to complete the majority of the Year 2000 project by the
second quarter of 1999. Expenditures are not expected to have a large material
effect on the Corporation's consolidated financial statements.
The expected costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel trained in this area, the ability of third
party vendors to correct their software and hardware, the ability of significant
customers to remedy their Year 2000 issues, and similar uncertainties.
New Accounting Pronouncements
- -----------------------------
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers Disclosure about Pensions and
Other Post Retirement Benefits". This Statement revises employers' disclosure
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. This Statement standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. Restatement of disclosures for
earlier periods is required. This Statement is effective for the Company's
financial statements for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. This Statement is not expected to have a material impact
on the Company's financial statements. This Statement is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged. The
Company will adopt this accounting standard as required by January 1, 2000.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Development or Obtained for Internal Use". This SOP provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. This SOP requires that entities capitalize certain internal-use
software costs once certain criteria are met. This SOP is not expected to have a
material impact on the Company's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities", which requires the costs of start-up activities and organization
costs to be expensed as incurred. This SOP is effective for the fiscal year 1999
financial statements. This SOP is not expected to have a material impact on the
Company's financial statements.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Financial statements for prior periods have been restated
as required.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
On April 28 1998, the Annual Meeting of Shareholders was held to (i) elect 14
directors for a term of one year each, (ii) approve the Company's 1998 Incentive
Plan, and (iii) ratify the appointment by the Board of Directors of the firm of
Yount, Hyde & Barbour, P.C. as the Company's independent auditors for the year
ending December 31, 1998. The results of the votes on these matters are as
follows:
(1) Election of Directors
For Against Withheld
Charles F. Bristow 1,838,427 200 1,400
John R. Curtis 1,838,427 200 1,400
Charles F. Dawson 1,838,627 0 1,400
William J. Farinholt 1,838,627 0 1,400
William D. Fary 1,838,627 0 1,400
Robert D. Foster 1,837,777 850 1,400
Harry M. Healy 1,838,427 200 1,400
Jeanne P. Hockaday 1,838,627 0 1,400
Joseph A. Lombard, Jr. 1,838,627 0 1,400
George A. Marston, Jr. 1,838,627 0 1,400
Hersey M. Mason, Jr. 1,838,627 0 1,400
Henry C. Rowe 1,838,027 600 1,400
Kenneth E. Smith 1,838,627 0 1,400
Thomas Z. Wilke 1,838,627 0 1,400
(2) Approval of 1998 Incentive Plan
For Against Withheld Abstentions Broker Non-votes
--------- ------- -------- ----------- ----------------
1,782,427 41,510 -- 16,090 12,860
(3) Ratification of Accountants
For Against Withheld Abstentions Broker Non-votes
--------- ------- -------- ----------- ----------------
1,828,077 2,400 -- 9,550 12,860
Item 5. Other Information - None
15
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule (filed electronically only)
b) Reports on Form 8-K
A current report on Form 8-K, dated March 31, 1998, was filed on
April 7, 1998 and reported Item 4 to announce a change in the
Company's certifying accountant.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MID-ATLANTIC COMMUNITY BANKGROUP, INC.
Date: August 14, 1998 BY /s/ W. J. Farinholt
-----------------------------------
W. J. Farinholt, President & CEO
Date: August 14, 1998 BY /s/ Kenneth E. Smith
-----------------------------------
Kenneth E. Smith, Exec. Vice President
& Chief Financial Officer
Date: August 14, 1998 BY /s/ Kathleen C. Healy
-----------------------------------
Kathleen C. Healy, Senior Vice President &
Chief Accounting Officer
17