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 September 30, 1999
                               ------------------

[   ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934

For the transition period from ___________________ to ___________________


                         Commission file number 0-21285
                                                -------

                            ATLANTIC FINANCIAL CORP.
        (Exact Name of 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)


                          737 J. Clyde Morris Boulevard
                          Newport News, Virginia 23601
                    ----------------------------------------
                    (Address of Principal Executive Offices)


                                 (757) 595-7020
                ------------------------------------------------
                (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 September 30, 1999.


                      Common stock, $5 par value--4,190,185
                      -------------------------------------

<PAGE>

                                      INDEX

ATLANTIC FINANCIAL CORP.                                                Page No.

Part I.   Financial Information

          Item 1.  Financial Statements
                   Consolidated Balance Sheets--
                     September 30, 1999 and December 31, 1998                  3

                   Consolidated Statements of Income--
                     Nine months ended September 30, 1999 and 1998
                     Three months ended September 30, 1999 and 1998            4

                   Consolidated Statements of Stockholders' Equity--
                     Nine months ended September 30, 1999 and 1998             5

                   Consolidated Statements of Cash Flows--
                     Nine months ended September 30, 1999 and 1998             6

                   Notes to Consolidated Financial Statements             7 - 10

          Item 2.  Management's Discussion and Analysis of Financial
                     Condition and Results of Operations                 11 - 19

Part II.  Other Information:                                                  20

          Item 1.  Legal Proceedings
          Item 2.  Changes in Securities
          Item 3.  Defaults Upon Senior Securities
          Item 4.  Submission of Matters to a Vote of Security Holders
          Item 5.  Other Information
          Item 6.  Exhibits and Reports on Form 8-K




                                       2
<PAGE>

                         PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

                            ATLANTIC FINANCIAL CORP.
                           CONSOLIDATED BALANCE SHEETS
                            (In Thousands of Dollars)
<TABLE>
<CAPTION>
                                                        (Unaudited)            (Audited)
                                                        September 30,         December 31,
ASSETS:                                                     1999                  1998
                                                      ----------------     -----------------
<S>                                                      <C>                  <C>
    Cash and due from banks                              $   17 376           $   11 782
    Securities available for sale (at market value)          91 465               80 281
    Securities held to maturity (market value of
        $9,962 and $14,173, respectively)                    10 072               13 926
    Federal funds sold                                        3 889               29 524
    Loans, net                                              225 554              207 733
    Premises and equipment                                   10 623               10 703
    Other real estate owned                                     374                  212
    Other assets                                              7 233                6 142
                                                         ----------           ----------
          TOTAL ASSETS                                   $  366 586           $  360 303
                                                         ==========           ==========

LIABILITIES:
Deposits
    Non-interest bearing                                 $   46 279           $   49 291
    Interest-bearing                                        272 653              263 019
                                                         ----------           ----------
       TOTAL DEPOSITS                                       318 932              312 310
Short-term debt                                                 730                1 589
Other liabilities                                             3 873                3 275
                                                         ----------           ----------
          TOTAL LIABILITIES                                 323 535              317 174
                                                         ----------           ----------

STOCKHOLDERS' EQUITY:
    Preferred stock; $1 par value per share;
     authorized 1,000,000 shares; no shares
     issued and outstanding                              $       --           $       --
    Common stock; $5 par value per share;
     authorized 20,000,000 shares; issued and
     outstanding 4,190,185 and 4,168,941
     shares, respectively                                    20 950               20 845
    Stock Options                                                 4                    6
    Surplus                                                      --                   --
    Undivided profits                                        22 853               21 048
    Accumulated other comprehensive
      income, net                                              (756)               1 230
                                                         ----------           ----------
          TOTAL STOCKHOLDERS' EQUITY                         43 051               43 129
                                                         ----------           ----------
          TOTAL LIABILITIES AND
            STOCKHOLDERS' EQUITY                         $  366 586           $  360 303
                                                         ==========           ==========
</TABLE>

Notes to financial statements are an integral part of these statements.


                                       3
<PAGE>

                            ATLANTIC FINANCIAL CORP.
                        CONSOLIDATED STATEMENTS OF INCOME
                            (In Thousands of Dollars)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                       Three Months Ended          Nine Months Ended
                                                          September 30,              September 30,
                                                        1999         1998          1999         1998
                                                        ----         ----          ----         ----
<S>                                                   <C>         <C>            <C>         <C>
INTEREST INCOME:
Loans and Fees                                        $  5 375    $  5 139       $ 15 680    $ 14 722
Federal Funds Sold                                         191         214            781         711
Investment Securities                                    1 571       1 359          4 425       4 015
                                                      --------    --------       --------    --------
   Total Interest Income                                 7 137       6 712         20 886      19 448

INTEREST EXPENSE:
Interest on deposits                                     3 043       2 886          9 020       8 366
Interest on federal funds purchased
 and other borrowings                                       29          25             71          39
                                                      --------    --------       --------    --------
   Total Interest Expense                                3 072       2 911          9 091       8 405
                                                      --------    --------       --------    --------
   Net Interest Income                                   4 065       3 801         11 795      11 043

PROVISION FOR LOAN
AND LEASE LOSSES                                           136          89            345         375
                                                      --------    --------       --------    --------
   Net Interest Income After
   Provision for Loan
   and Lease Losses                                      3 929       3 712         11 450      10 668

OTHER INCOME:
Service Charges & Fees                                     605         513          1 685       1 500
Securities Gains (Losses)                                   --          --              1           1
                                                      --------    --------       --------    --------
   Total Other Income                                      605         513          1 686       1 501

OTHER EXPENSES:
Salaries & Employee Benefits                             1 737       1 451          4 873       4 135
Occupancy Expenses                                         245         261            714         639
Furniture & Equipment Expenses                             413         310          1 243         876
Other Operating Expenses                                   775         891          2 292       2 311
                                                      --------    --------       --------    --------
   Total Other Expenses                                  3 170       2 913          9 122       7 961
                                                      --------    --------       --------    --------
Income Before Income Taxes                               1 364       1 312          4 014       4 208
Applicable Income Taxes                                    337         368          1 028       1 191
                                                      --------    --------       --------    --------
   Net Income                                         $  1 027    $    944       $  2 986    $  3 017
                                                      ========    ========       ========    ========

    Earnings Per Share, Basic                              .25         .23            .71         .73
                                                      ========    ========       ========    ========
    Earnings Per Share, Assuming
    Dilution                                               .24         .22            .70         .71
                                                      ========    ========       ========    ========
</TABLE>

Notes to financial statements are an integral part of these statements.


                                       4
<PAGE>

                            ATLANTIC FINANCIAL CORP.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  For the nine months ended September 30, 1999
                            (In Thousands of Dollars)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                             Accumulated
                                                                                                Other
                                                  Common     Stock              Retained   Comprehensive   Comprehensive
                                                  Stock     Options   Surplus   Earnings      Income          Income        Total
                                                  -----     -------   -------   --------      ------          ------        -----
<S>                                              <C>        <C>       <C>        <C>   >      <C>            <C>          <C>
Balance, January 1, 1999                         $20 845    $     6       - -    $21 048      $1 230                      $43 129
Comprehensive Income:
   Net Income                                        - -        - -       - -      2 986         - -         $ 2 986        2 986
   Other comprehensive income:
     Unrealized holding gains (losses) on
     securities available for sale arising
     during the period net of tax of $(1,023)                                                                 (1 986)         - -
                                                                                                             -------
   Other comprehensive income, net of tax            - -        - -       - -        - -      (1 986)         (1 986)      (1 986)
                                                                                                             -------
   Total comprehensive income                        - -        - -       - -        - -         - -         $ 1 000          - -
                                                                                                             =======
Acquisition of common stock                          (22)                            (50)                                     (72)
Exercise of stock options                            127         (2)      - -        - -         - -                          125
Cash dividends                                       - -        - -       - -     (1 131)        - -                       (1 131)
                                                 -------    -------   -------    -------     -------                      -------
Balance, September 30, 1999                      $20 950    $     4   $   - -    $22 853     $  (756)                     $43 051
                                                 =======    =======   =======    =======     =======                      =======
</TABLE>


Notes to financial statements are an integral part of these statements.



                                       5
<PAGE>

                            ATLANTIC FINANCIAL CORP.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In Thousands of Dollars)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                              Nine Months Ended
                                                                                 September 30,
                                                                              1999          1998
                                                                              ----          ----
<S>                                                                        <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income                                                              $    2 986   $    3 017
Adjustments to reconcile net income to net cash
   provided by operating activities:
     Depreciation and amortization                                                941          573
     Provision for loan losses                                                    345          375
     Amortization of premiums, net                                                 76           48
     (Gain) on sale of securities available for sale                              (1)           (2)
     (Gain) on sale of other real estate owned                                   (14)           --
     (Gain) on sale of premises and equipment                                     (1)           (3)
     Changes in assets and liabilities:
       (Increase) decrease in other assets                                        225       (1 543)
       Increase (decrease) in other liabilities                                   790          (48)
                                                                           ----------   ----------
          Net Cash Provided by Operating Activities                        $    5 347   $    2 417
                                                                           ----------   ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net (increase) in loans                                                    (18 393)     (21 670)
   Purchase of securities available for sale                                  (31 722)     (23 010)
   Proceeds from sales of securities available for sale                         1 619          200
   Proceeds from calls and maturities of securities available for sale         15 835       13 440
   Purchase of securities held to maturity                                        - -       (5 682)
   Proceeds from calls and maturities of securities held to maturity            3 854        6 480
   Proceeds from sale of other real estate                                         79           --
   Purchase of premises and equipment                                            (798)      (3 513)
   Proceeds from sales of premises and equipment                                    1            3
                                                                           ----------   ----------
          Net Cash (Used In) Investing Activities                          ($  29 525)  ($  33 752)
                                                                           ----------   ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Increase in deposits                                                    $    6 622   $   21 319
   Acquisition of common stock                                                    (72)          --
   Issuance of common stock                                                       125           --
   Net increase (decrease) in short-term borrowings                              (859)       2 392
   Cash dividends paid                                                         (1 679)        (640)
                                                                           ----------   ----------
            Net Cash Provided by Financing Activities                      $    4 137   $   23 071
                                                                           ----------   ----------

            Net Increase In Cash and Cash Equivalents                         (20 041)      (8 264)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                41 306       32 550
                                                                           ----------   ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD                                  $   21 265   $   24 286
                                                                           ==========   ==========
</TABLE>





Notes to financial statements are an integral part of these statements.


                                       6
<PAGE>

                            ATLANTIC FINANCIAL CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1.    General

      The  consolidated  statements  include the accounts of Atlantic  Financial
      Corp. and its  subsidiaries,  Peninsula  Trust Bank, Inc. (PTB) and United
      Community  Bank  (UCB).   All   significant   intercompany   balances  and
      transactions  have been  eliminated.  In the  opinion of  management,  the
      accompanying  unaudited  consolidated  financial  statements  contain  all
      adjustments  (consisting of only normal recurring  accruals)  necessary to
      present  fairly the  financial  positions  as of  September  30,  1999 and
      December 31, 1998,  and the results of  operations  and cash flows for the
      nine months ended September 30, 1999 and 1998.

      The results of operations for the nine months ended September 30, 1999 and
      1998 are not necessarily  indicative of the results to be expected for the
      full year.

2.    Investment Securities

      Amortized cost and carrying  amount  (estimated  fair value) of securities
      available for sale are summarized as follows:
<TABLE>
<CAPTION>
                                                                    September 30, 1999
                                                 ----------------------------------------------------
                                                                    Gross          Gross    Estimated
                                                   Amortized   Unrealized     Unrealized       Market
                                                        Cost        Gains         Losses        Value
                                                 ----------------------------------------------------
                                                                (In Thousands of Dollars)
<S>                                              <C>           <C>            <C>         <C>
US Treasury Securities                                  862             1              2         861
US Government Agencies & Corporations                29 953            34            912      29 075
Obligations of States & Political Subdivisions       30 153           210            502      29 861
Mortgage-backed Securities                           22 964             6            633      22 337
Corporate Debt Obligations                            4 599             2             87       4 514
Restricted Stock                                        647            --             --         647
Other Securities                                      3 432           935            197       4 170
                                                 ----------    ----------     ----------  ----------
                                                 $   92 610    $    1 188     $    2 333  $   91 465
                                                 ==========    ==========     ==========  ==========
</TABLE>


    Amortized cost and carrying amount (estimated fair value) of securities held
    to maturity are summarized as follows:

<TABLE>
<CAPTION>
                                                                    September 30, 1999
                                                 ----------------------------------------------------
                                                                    Gross          Gross    Estimated
                                                   Amortized   Unrealized     Unrealized       Market
                                                        Cost        Gains         Losses        Value
                                                 ----------------------------------------------------
                                                                (In Thousands of Dollars)
<S>                                              <C>           <C>            <C>         <C>
US Government Agencies & Corporations                 2 592             2             74       2 520
Obligations of States & Political Subdivisions        5 440            36             35       5 441
Mortgage-backed Securities                            2 040            --             39       2 001
                                                 ----------    ----------     ----------  ----------
                                                 $   10 072    $       38     $      148  $    9 962
                                                 ==========    ==========     ==========  ==========
</TABLE>



                                       7
<PAGE>

                            ATLANTIC FINANCIAL CORP.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                  (Unaudited)

    Securities available for sale at December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
                                                                    Gross          Gross    Estimated
                                                   Amortized   Unrealized     Unrealized       Market
                                                        Cost        Gains         Losses        Value
                                                 ----------------------------------------------------
                                                                (In Thousands of Dollars)
<S>                                              <C>           <C>            <C>         <C>
US Treasury Securities                                  877             9             --         886
US Government & Federal Agencies                     25 938           321           (82)      26 177
States & Local Governments                           28 596           696           (55)      29 237
Mortgage-backed Securities                           15 148            97           (37)      15 208
Corporate Debt Obligations                            3 091            50            (6)       3 135
Restricted Stocks                                       698            --             --         698
Other Securities                                      4 069           881           (10)       4 940
                                                 ----------    ----------     ----------  ----------
                                                 $   78 417    $    2 054     $    (190)  $   80 281
                                                 ==========    ==========     ==========  ==========
</TABLE>

    Securities held to maturity at December 31, 1998 consist of the following:

<TABLE>
<CAPTION>
                                                                    Gross          Gross    Estimated
                                                   Amortized   Unrealized     Unrealized       Market
                                                        Cost        Gains         Losses        Value
                                                 ----------------------------------------------------
                                                                (In Thousands of Dollars)
<S>                                              <C>           <C>            <C>         <C>
US Government & Federal Agencies                      4 718            41            (4)       4 755
State & Local Governments                             6 493           199           (12)       6 680
Mortgage-backed Securities                            2 715            23             --       2 738
                                                 ----------    ----------     ----------  ----------
                                                 $   13 926    $      263     $     (16)  $   14 173
                                                 ==========    ==========     ==========  ==========
</TABLE>


                                                      Nine Months Ended
                                                         September 30,
                                                 ----------------------------
                                                    1999               1998
                                                 ----------         ---------
                                                  (In Thousands of Dollars)

Gross proceeds from sales of securities               1 619             1,535
                                                 ==========         =========
Gross Gains on Sale of Securities                         3                16
Gross Losses on Sale of Securities                        3                14
                                                 ----------         ---------
  Net Securities Gains (Losses)                          --                 2
                                                 ==========         =========




                                       8
<PAGE>

                            ATLANTIC FINANCIAL CORP.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                  (Unaudited)

3.  Loans

    Major classifications of loans are as follows:
<TABLE>
<CAPTION>
                                                                  September 30,        December 31,
                                                                      1999                 1998
                                                                   ---------             --------
                                                                       (In Thousands of Dollars)
<S>                                                                <C>                   <C>
Commercial                                                            29 790               30 105
Agriculture                                                            8 099                6 068
Real estate mortgage:
   Construction                                                       15 995               13 935
   Residential (1-4 family)                                           56 403               52 632
   Home Equity Lines                                                  16 946               15 939
   Commercial                                                         57 316               48 788
   Agricultural                                                        5 447                3 044
Loans to individuals for household,
 family and other consumer expenditures                               38 184               39 564
All other Loans                                                          670                  672
                                                                   ---------            ---------
                                                                     228 850              210 747
Less Unearned Income                                                   (585)                (590)
Less Allowance for Loan Losses                                       (2 711)              (2 424)
                                                                   $ 225 554            $ 207 733
                                                                   =========            =========
</TABLE>

The  following  schedule  summarizes  the changes in the  allowance for loan and
lease losses:
<TABLE>
<CAPTION>
                                                 Nine Months      Nine Months
                                                   Ending           Ending        December 31,
                                                Sept 30, 1999    Sept 30, 1998        1998
                                                -------------    -------------        ----
                                                          (In Thousands of Dollars)
<S>                                              <C>              <C>              <C>
Balance, Beginning                                    2 424            2 430           2 430
Provision Charged Against Income                        345              375             477
Recoveries                                              215               87             110
Loans Charged Off                                       273              355             593
                                                 ----------       ----------       ---------
Balance, Ending                                  $    2 711       $    2 537       $   2 424
                                                 ==========       ==========       =========
</TABLE>

Nonperforming assets consist of the following:

                                             September 30,         December 31,
                                                 1999                  1998
                                               --------              -------
                                                 (In Thousands of Dollars)

Nonaccrual Loans                               $  1 004              $   681
Restructured Loans                                   --                   --
                                               --------              -------
Nonperforming Loans                               1 004                  681
Foreclosed Properties                               374                  212
                                               --------              -------
Nonperforming Assets                           $  1 378              $   893
                                               ========              =======

Total loans past due 90 days or more and still  accruing  were $449 on September
30, 1999 and $559 on December 31, 1998.



                                       9
<PAGE>

                            ATLANTIC FINANCIAL CORP.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                  (Unaudited)

4.    Earnings Per Share

      The  following  shows  the  weighted  average  number  of  shares  used in
      computing  earnings per share and the effect on weighted average number of
      shares of  diluted  potential  common  stock  income  available  to common
      shareholders.
<TABLE>
<CAPTION>
                                                     September 30, 1999                   September 30, 1998
                                                     ------------------                   ------------------
                                                                  Per Share                          Per Share
                                                    Shares          Amount               Shares        Amount
                                                    ------          ------               ------        ------
<S>                                              <C>               <C>                <C>             <C>
Basic Earnings Per Share                         4 187 711         $   .71            4 160 979       $   .73

Effect of dilutive securities:
  Nonemployee directors' stock options              20 897                               45 246
  Employee incentive stock options                  60 139                               71 263
                                                 ---------                            ---------

Diluted Earnings Per Share                       4 268 747         $   .70            4 277 488       $   .71
                                                 =========         =======            =========       =======
</TABLE>


5.    Capital Requirements

      A comparison  of the  Company's  capital as of September 30, 1999 with the
      minimum requirements is presented below:

                                                                      Minimum
                                               Actual               Requirements
                                               ------               ------------
Tier I Risk-based Capital                      16.87%                  4.00 %
Total Risk-based Capital                       17.94%                  8.00 %
Leverage Ratio                                 12.42%                  4.00 %






                                       10
<PAGE>

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Forward-Looking Statements
--------------------------

Certain  information  contained in this discussion may include  "forward-looking
statements"  within the meaning of Section 27A of the Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended.
These  forward-looking  statements  are generally  identified by phrases such as
"the Company expects," "the Company  believes" or words of similar import.  Such
forward-looking  statements  involve known and unknown risks including,  but not
limited to, changes in general economic and business  conditions,  interest rate
fluctuations,  competition  within and from  outside the banking  industry,  new
products and  services in the banking  industry,  risk  inherent in making loans
such as  repayment  risks  and  fluctuating  collateral  values,  problems  with
technology  utilized by the Company,  changing  trends in customer  profiles and
changes in laws and regulations applicable to the Company.  Although the Company
believes that its expectations  with respect to the  forward-looking  statements
are based upon  reliable  assumptions  within the bounds of its knowledge of its
business  and  operations,  there  can  be no  assurance  that  actual  results,
performance or achievements  of the Company will not differ  materially from any
future  results,  performance  or  achievements  expressed  or  implied  by such
forward-looking statements.

General
-------

The following presents management's  discussion and analysis of the consolidated
financial  condition and results of operations of Atlantic  Financial Corp. (the
"Company") as of the dates and for the periods indicated. This discussion should
be read in conjunction with the Company's  Consolidated Financial Statements and
the Notes thereto,  and other financial data appearing elsewhere in this report.
The  Company is the parent  bank  holding  company  for  Peninsula  Trust  Bank,
Incorporated  (PTB) and United Community Bank (UCB), (the "Banks").  PTB and UCB
are Virginia chartered banks that offer a full range of banking services through
fifteen offices,  principally to individuals and small to medium size businesses
in their  respective  market areas. UCB is the successor to The Bank of Franklin
(BOF) and The Bank of Sussex and Surry (BSS). These latter two banks were merged
effective  August  26,  1999.  The  merger  is  expected  to  improve  operating
efficiencies of the combined entity.

Results of Operations
---------------------

During the third  quarter,  the  Company's  trade area  experienced  significant
hurricane  activity.  In  September,  Hurricane  Floyd caused  severe  flooding,
particularly in Franklin, VA, where the Company's UCB Main Office was under more
than four feet of water for more than a week.  The office  will likely be closed
until the end of the year. The Company was covered by a flood  insurance  policy
including  both the  building and its  contents,  plus extra  expense  coverage.
Restoration  efforts are already  under way and a second office in Franklin that
was  not  flooded  is   servicing   the  Main  Office   customers   with  little
inconvenience.

The Company experienced balance sheet contraction during the third quarter 1999,
with total  assets  decreasing  $7.8  million,  or 2.1% below June 30,  1999 and
increasing  $6.3  million,  or 1.7% over December 31, 1998.  Deposits  represent
98.6%  of  total  liabilities  of the  Company,  including  non-interest-bearing
checking accounts that represent 14.5% of total deposits on September 30, 1999.

Loan  demand was  moderate  during  the third  quarter,  evidenced  by net loans
increasing $5.0 million, or 2.3%, over June 30, 1999 and $17.8 million, or 8.6%,
over  December  31,  1998.  Competition  for loans  continued  from the previous
quarter,  relative to  pricing,  as all banks in the  Company's  trade area were
experiencing similar moderation in overall loan demand. The Company continues to
be reluctant to match all  competitor  pricing bids when the credit quality does
not match the pricing  structure.  While there are many signs of strength in the
overall U.S. economy, there are also many signs of weakness in the local markets
of the Company's trade area. Some local  businesses are reducing hours of hourly


                                       11
<PAGE>

workers, even though there are only limited actual layoffs.  Therefore, the risk
/ rate  relationship  continues to represent a major portion of the underwriting
practices of the Company.

The Company  maintained its practice during the third quarter of selling Federal
funds,  having sold  continuously  on a daily basis in amounts  averaging  $18.7
million,  5.1% of average total assets. The quarter-end  balance of $3.9 million
represented an $18.3 million (or 82.4%)  decrease from June 30, 1999 and a $25.6
million (or 86.8%)  decrease  from  December  31, 1998.  Earlier this year,  the
Company had purposely  reduced the level of these  overnight  investments  in an
effort to enhance interest  earnings.  The majority of the decrease was employed
in the  purchase  of  investment  securities  (bonds).  However,  in the current
quarter, the decrease was primarily the result of two different factors.  First,
competition for certificates of deposits (CDs)  intensified as many larger banks
began  offering  premium  rates as a part of their  Year  2000  (Y2K)  liquidity
promotions.  This  occurred at the same time that UCB allowed some of its higher
cost maturing CDs to be redeemed in an effort to reduce cost of funds. Secondly,
the flooding caused by Hurricane Floyd resulted in reduced  deposits among UCB's
offices  during the latter half of September,  1999.  Several  businesses in the
flood-affected  areas were  inoperative  for several  days  during this  period,
restricting their normal cash flow.

The level of the investment account increased  approximately $1.9 million (1.9%)
during the third quarter 1999 and $7.3 million  (7.8%) for the first nine months
of 1999, ending the period at $101.5 million or 27.7% of total assets. Yields in
the bond market have been rising  during  recent  months and reached  levels not
seen within the previous  twelve months.  Management has attempted to capitalize
on higher yields,  with greater call protection (early redemption  privileges of
the issuer),  without unduly compromising balance sheet liquidity. The portfolio
is comprised of 1% US Treasuries, 55% US Government Agencies and Mortgage-backed
Securities,  35% State, County and Municipal governments,  and 9% other debt and
equity securities.

The Financial Accounting Standards Board (FASB) Statement 115 stipulated the way
in which  banks  must  classify  and  account  for their  securities  portfolio,
beginning  with  the  first  quarter  of  1994.  Securities  are  classified  as
investment securities held to maturity (HTM) when management has both the intent
and the ability at the time of purchase to hold the securities  until  maturity.
HTM  securities  are carried at cost adjusted for  amortization  of premiums and
accretion of discounts.  Securities that are held for indefinite periods of time
are  classified as  Securities  available for sale (AFS) and are marked to their
respective market values at each financial reporting date, or at each month-end.
AFS  Securities  include  securities  that may be sold in response to changes in
interest rates,  changes in the security's  prepayment  risk,  increases in loan
demand,  general  liquidity  needs  and other  similar  factors.  The  increased
volatility  of  interest  rates  during  the most  recent  quarter  has caused a
significant negative swing in the net unrealized loss in market value of the AFS
segment of the  portfolio.  Although  these  securities  are  identified as AFS,
management  has never  exercised  a  practice  of  selling  securities  prior to
maturity,  nor is there an identifiable  liquidity need which would require such
practices in the immediate future.

The Company uses earnings simulations, duration, and gap analysis to analyze and
project future interest rate risk. The investment  portfolio,  specifically,  is
analyzed as to interest rate risk as well as call and extension  risk. Call risk
occurs when interest  rates  decline and  additional  principal  dollars must be
reinvested at lower  interest  rates.  Extension risk occurs when interest rates
increase and fewer principal dollars can be reinvested at higher interest rates.
The timing and magnitude of principal  return will  determine the degree of call
and extension risk.

These three elements  combined will have a direct bearing on long term portfolio
profitability, both in terms of price change and, importantly, future yield. The
amount  of  interest  rate risk and call and  extension  risk  contained  in the
portfolio  will either  stabilize  or  destabilize  future  Company  earnings if
overall interest rates change.  The best  mathematical  measurements of interest
rate risk and call and extension risk are effective  modified duration (EMD) and
convexity,  especially  in today's  environment  with so many  bonds  containing
direct or indirect call options.  Convexity  measures the  percentage  amount of
portfolio  price  appreciation  if  interest  rates  fall  1%  relative  to  the
percentage  of price  depreciation  if  interest  rates rise 1%. The more a bond
declines  relative to its depreciation,  the higher



                                       12
<PAGE>

the negative  convexity and,  consequently the more potential call and extension
risk that bond is likely to have.

Since many  types of bonds are  callable  or can vary in  average  life as rates
change,  the Company  considers what effect this could have on market value, and
thus,  potential  earnings.  Duration  and  Modified  Duration  are used without
negative  convexity  and,  therefore,  are not as accurate  predictors  of price
change  when  dealing  with  bonds  that can  have  variable  principal  payouts
("callables",  "mortgages").  Negative convexity is used in conjunction with EMD
and is useful  when there is a chance of more than one  average  life or workout
date  (maturity/call  date).  It  reflects  the fact that with these type bonds,
market prices will almost always decrease in value more than they increase given
the same rate shift up and down. EMD and convexity, when used together,  provide
a close  approximation  of market price changes per 1% moves in interest  rates.
Negative convexity usually works against the bondholder in both higher and lower
rate  scenarios.  Future  investment  strategies  will  attempt to position  the
Company  where  it is less  exposed  to  either  extreme  call  risk or  extreme
extension  risk,  and, thus reduce  overall  volatility of investment  portfolio
performance in terms of earnings and market value.

Allowance for Loan Losses / Provision for Loan Loss Expense
-----------------------------------------------------------

Asset quality is sound with problem credits considered to be at satisfactory and
manageable  levels.  Total loans past due 30 days or more  equaled  $5.9 million
(2.6% of total  outstandings).  Included in the 30 day total is $449,000,  which
are 90 days or more  past due and still  accruing  interest.  Non-accrual  loans
totaled  $1,004,000  at September  30,  1999,  which  represented  0.4% of total
outstanding  loans  and 37% of the  loan  loss  reserve.  Foreclosed  properties
totaled  $374,000 at September 30, 1999,  with potential  losses  expected to be
minimal.

The  Allowance  for Loan and  Lease  Losses  (ALLL)  equaled  $2.71  million  at
September 30, 1999,  comfortably  above the Company's  overall target of 1.1% of
total outstanding loans. Gross charge-offs for the current quarter were $75,000,
while total  recoveries were $34,000.  The provision for loan losses expense was
$136,000  in the third  quarter  1999 and  $345,000  in the first nine months of
1999.

The provision  reflects  management's  assessment of the adequacy of the ALLL to
absorb losses inherent in the loan portfolio due to  deterioration of borrowers'
financial  condition  or changes in overall risk  profile.  Overall risk profile
considers  several  factors,  as  appropriate,  such as  historical  credit loss
experience,  current  economic  conditions,  the  composition  of the total loan
portfolio, and assessments of individual credits within specific loan types.

The Company  uses a  documented  system for  internal  loan  classifications  to
identify ongoing credit risk imbedded within the loan portfolio.  Credit reviews
are  based  primarily  on  analysis  of  borrowers'  cash  flows,  with  pledged
collateral values and values of non-pledged borrower assets considered only as a
secondary source of repayment.  Utilizing the results of this system to test the
adequacy of the ALLL also indicates that the ALLL is sufficient to safeguard the
Company in light of known or identified  potential  loan loss risks.  Management
has been continuously monitoring credit quality relative to borrowers' readiness
for the upcoming century date change. Although no significant  deficiencies have
been identified in any specific credit relationships,  the Company has allocated
a portion of the ALLL as "Year 2000" reserves.  Even with this  allocation,  the
ALLL exceeds management's desired level, indicating no need for more than normal
expense provisions during the fourth quarter.

As mentioned  above,  the flooding  associated with Hurricane Floyd has rendered
many  businesses  to be fully or partially  inoperable  in part of the Company's
market  area.  This  could  have a  negative  financial  impact  on  some of the
Company's borrowers.  Management is carefully monitoring credits in the affected
areas  to  quickly  identify  potential  deterioration  in  credit  quality.  No
substantial  loss or  deterioration  has been  reflected thus far.  However,  as
acknowledged by the State Banking  Commission,  there may be instances requiring
some level of  forbearance  with specific  borrowers.  This practice will not be
done to delay  recognition of problem assets,  but to assist those borrowers who
can recover from the flood with minor changes to their credit facility.



                                       13
<PAGE>

Earnings
--------

Net income for the third  quarter  1999  increased  to  $1,027,000,  compared to
$944,000 for the third  quarter 1998 and $961,000 for the second  quarter  1999.
After two  consecutive  quarters of flat or down earnings,  the current  quarter
earnings per share (EPS)  represented an up quarter.  The current quarter's $.24
EPS was a $.02 per share  increase  over third  quarter  1998 and $.01 per share
over the second quarter 1999.

Net interest income for the third quarter 1999 (tax  equivalent  interest income
less interest  expense)  totaled $4.25  million,  a 7.1% increase over the third
quarter  1998.  The  Company  continues  to try to attract  non-interest-bearing
deposits  to mitigate  negative  pressure on the  interest  rate spread  between
interest-earning  assets and  interest-bearing  deposit  liabilities.  Until the
action of July 1, 1999, by the Federal Reserve System (Fed) to raise  short-term
interest rates,  the general interest rate environment had been one of declining
rates.  The quarter saw the Fed raise rates a second time August 25, 1999.  Each
of the  actions  taken by the Fed  resulted  in a 0.25%  increase  in the  Prime
interest rate. The Company's  balance sheet was positioned to benefit from these
increases  in  short-term  interest  rates.  As a result,  the 6.3%  increase in
interest  income for the third  quarter 1999 compared to third quarter 1998 more
than  offset the 5.5%  increase in interest  expense  for the same  period.  The
Company's  balance sheet asset  liability mix should allow for a slower increase
in interest expense compared to interest income in the current rate environment.
Premium rates offered on Y2K deposits,  discussed  elsewhere,  may slightly slow
the  improving  trend in net interest  earnings in the  short-term,  but general
improvement is still  projected.  Non-bank  investment  alternatives  persist in
tempting and even luring  consumers  away from  traditional  bank  deposits,  as
consumers express their reluctance to accept relatively low rate deposits,  even
with the slight increases of recent months.

Non-interest  expense for the third quarter  totaled $3.2  million,  compared to
$2.9 for the third quarter 1998. The primary  contributors  to the increase were
salary and fixed asset  depreciation  expenses,  which were  associated with the
opening,  during the second half of 1998, of two branch offices by the Company's
lead subsidiary, Peninsula Trust Bank (PTB). PTB practices extended office hours
and extensive computer  automation in its branch network.  Thus, each new office
produces   significant   overhead   expense  even  during  the  start-up  phase.
Historically,  this has dampened  earnings as PTB has opened new  offices,  even
when opening only one office. The impact of two new offices,  within ninety days
of each other (July and October,  1998), has placed a more challenging burden on
operating earnings. Additionally, the merger and computer related integration of
BOF and BSS into the  Company's  central  data  processing  center in August and
November,  1998, required substantial investment in capitalized fixed assets and
upgraded  computer  equipment during the third and fourth quarters of 1998. This
resulted in increased depreciation expense beginning in 1999. Thus, quarter over
quarter  comparisons  of the third  quarters of 1999 and 1998,  reflect the full
impact by third quarter 1999 of these improvements in technology.

Capital and Liquidity
---------------------

Equity capital (net of accumulated other comprehensive  income) at September 30,
1999  totaled  $43.1  million,   representing   11.7%  of  total  assets.   Cash
stockholders'  equity  (Total  Stockholders'   Equity,  before  adjustments  for
unrealized  gains or losses on AFS securities as described  above) totaled $43.8
million  for the  same  period,  or 11.9% of  total  assets,  compared  to $41.9
million,  11.6% of total assets, on December 31, 1998. This amount of capital is
more than adequate to support  current  operations,  as well as future growth of
the  balance  to levels  approximating  $500  million  in total  assets  without
external  augmentation  of capital  funds.  The Company  continues to attempt to
expand the balance  sheet at a pace  greater  than the rate of internal  capital
generation.  This  creates a leveraging  effect on capital  that should  improve
return on equity and earnings per share, thus, enhancing stockholder value.

Liquidity is provided by both excess funds in the form of Federal funds sold and
access to the Federal  funds market  through the purchase of Federal  funds from
correspondent  banks. The Company maintains deposit  relationships  with several
correspondent banks that include commitments through various lines of credit for
short-term  borrowing  needs.  Federal  funds sold  equaled 3.4% of total demand


                                       14
<PAGE>

deposits at September 30, 1999. The investment portfolio also provides liquidity
through  actual and  projected  cash flows.  The actual cash flows are  provided
through known maturities, while projected amounts are from anticipated principal
reductions  through early  redemption  calls and  prepayments of mortgage backed
securities. At level rates, cumulative cash flow projection over the next twelve
months approximates $10 million. The Company, through its subsidiary banks, is a
member of the Federal  Home Loan Bank of Atlanta.  This  membership  affords the
Company  various  credit  vehicles.  The level of balance  sheet  liquidity  and
available credit facilities is considered  adequate to meet anticipated  deposit
withdrawals  and  expected  loan  demand  from normal  operations.  However,  as
discussed  further  below  in the  "Year  2000  Issue",  liquidity  planning  in
anticipation of potential increased demand for funds in the last quarter of this
year will  result  in higher  levels of  short-term  liquidity.  Management  has
targeted  some  short-term  deposit  products  to be offered at premium or bonus
rates to bolster short-term liquidity.  The two primary maturities to be used in
the promotion are 182 days and 13 months.  These products were created to induce
depositors  to take  advantage  of the  premium  rate,  while  not  creating  an
unnecessarily  long-term  increase in cost of funds.  The increase cost of funds
will be  exacerbated  by the reduced  yield on the  employment of these funds to
provide the  necessary  liquidity,  thus,  causing  pressure on the net interest
margin albeit short-term and by design.

Future Plans
------------

The Company continues to explore branch expansion  opportunities for its banking
operations;  however, it has secured only one site for such growth. That site is
located on U. S. Route 17 in Gloucester  Point,  Virginia.  No definite date has
been established for opening an office on this site. The Company  recognizes the
importance of growth, but has determined a greater need to absorb and assimilate
some of its recent growth initiatives,  discussed above.  Immediate future focus
will be on improving the efficiency ratio and earnings performance ratios.

The  Company  employed  an  individual  in  September,   1999  to  staff  a  new
relationship with UVEST for the sale of fixed and variable rate annuity products
to enhance non-interest income, as well as attract potential new bank customers.
The Company has identified  non-interest  income as a critical  component of its
strategic planning and is, therefore,  exploring various avenues to enhance this
key element of future earnings.


Year 2000 Issue
---------------

The Company has an internal Y2K committee comprised of Senior Management,  other
officers,  and  staff  under  the  direction  of the  Company's  Executive  Vice
President  and  Chief  Financial  Officer.   The  committee  meets  monthly  and
subsequently  reports on its  activities  to the Board of  Directors.  The Board
passed an omnibus resolution in 1998,  committing all of the financial and human
resources  necessary  to  enable  the  Company  to  satisfactorily  achieve  Y2K
readiness and to conduct normal  operations  beyond the century date change with
minimal disruption to either the quantity or quality of customer service.

Internal Systems: Computer Hardware and Software

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 (Y2K) issue.  The  Company's  Board of Directors has
addressed the Y2K issue and  identified the  seriousness  of the challenge.  The
Directors  receive routine reports from management of the Company to enable them
to monitor the Company's  progress in its  preparation  for Y2K  readiness.  The
Company's Y2K coordinator,  who was hired in 1997, commits  approximately 75% of
her schedule to the Y2K project. In addition,  a Y2K project team was formed and
meets  regularly to review and ensure  consistent  progress in moving toward Y2K
readiness.


                                       15
<PAGE>

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. The Company
inventoried  more  than 70  applications  on which  it  relies  for its  routine
operations.  The degree of reliance was evaluated,  with each application  being
identified as either mission critical,  mission necessary or mission  desirable.
An  application  was deemed  mission  critical if it is vital to the  successful
continuation of a core business  activity.  The Federal  Financial  Institutions
Examination Council (FFIEC) has issued several inter-agency statements providing
guidance  and/or  requirements of all financial  institutions.  Included in this
guidance was an emphasis that mission  critical  applications  be identified and
related priorities be set by the end of the third quarter of 1998. Based on this
regulatory  guidance,  the Company's inventory process identified twelve mission
critical  applications,  all of which are associated with information technology
(IT). There were no non-IT systems identified as mission critical.  Such systems
might include elevators or other equipment with embedded  micro-controllers that
may be century date  sensitive.  The Company  currently  has only two  elevators
throughout  its  branching  network.  In each of these  locations,  all business
activities  can be  conducted  in the  event  that the  elevators  are  rendered
inoperable.   Other  non-IT  systems  include  electricity  and  telephone  line
communications.  Both of  these  are  necessary  for  daily  operations  but are
considered to be beyond the Company's  control to facilitate Y2K readiness.  The
Company is  communicating  with the providers of these services to monitor their
progress toward Y2K readiness.

As a part of its normal  disaster  recovery  plan (prior to any Y2K plans),  the
Company  had  installed  generator  power  for  its  primary  Bookkeeping,  Item
Processing,  and  Computer  Data  Processing  Operations  Center in Glenns,  Va.
Subsequently,  the Company added generator power for its two remote item capture
/ check  processing  centers.  The Glenns site is capable of operating  not only
data  processing  and  bookkeeping  functions,  but also a full service  banking
branch office and the Company's Accounting Department. These efforts will enable
the  Company  to meet  customer  needs in the case of a  natural  disaster  with
extended  electrical power outages.  In fact during the flood of Hurricane Floyd
in  September,  1999,  the Company  operated  in a disaster  mode that very much
simulated  disaster  conditions  that  could  be  possible  from  Y2K,  such  as
combinations  power  failures,  loss of voice  phone  lines,  and  data  circuit
communication  lines. The Company continued banking  operations and satisfactory
customer service with limited inconveniences. These disaster recovery and backup
efforts will also complement Y2K business  resumption plans in the case of a Y2K
related interruption of electricity.

Based on the assessment  described above, the Company's  mainframe  hardware (an
IBM AS-400) and banking software are currently Y2K compliant. The Company's core
data processing package is currently installed in more than 200 banks across the
country.  The  vendor  of this  software,  Jack  Henry &  Associates  (JHA)  has
completed their testing of the software and distributed the software  release to
provide for Y2K compliance.  However,  JHA facilitated a process for independent
user group  testing in order for the user banks to test their live customer data
files in a  non-production  test  environment.  Members of the  Federal  Reserve
System,  FDIC,  and OCC met JHA  management to discuss and review the process of
User  Group  Testing.  The  regulatory  authorities,  while  unable  to issue an
approval of the  specific JHA plan,  did specify that User Group  Testing was an
acceptable  method for testing Y2K  readiness.  The Company was one of the users
selected for the user group  testing.  This test was conducted in December 1998.
Total cost to the Company  including  the  vendor's  certification,  third party
certification  of the  vendor's  testing,  user group  testing  and third  party
certification of the latter's test was less than $10,000.  Considerable planning
went into the writing of test  scripts to assess the impact of the century  date
change on the  processing of  transactions  that affected  date  sensitive  data
fields as well as interest  accruals.  These  transactions  were  processed on a
mainframe on which the system date had been advanced to January 01, 2000. Normal
daily  processing  was conducted  throughout the first quarter of 2000. All test
transactions were considered  successful as related to Y2K. It is also important
to note that JHA Liberty Banking System received an ITAA*2000 certification from
the Information Technology


                                       16
<PAGE>

Association of America indicating it meets the information technology industry's
best software development practices for addressing the Year 2000 issue.

UCB had previously been operating a non-Y2K ready core data  processing  system.
It was  converted  to the JHA  Liberty  product  discussed  above in 1998 and is
processed in the Company's centralized data center.

Certain other systems were determined to require  replacement or modification to
properly  function in the year 2000. The replacement / modification  process has
been  coordinated  with third party  vendors of these  systems and is  virtually
complete as of the end of the current quarter.

The Company  utilizes an extensive  network of personal  computers  (PCs) in its
daily operations. With the rapid changes in technology in the past 10 years, the
Company adopted a philosophy more than five years ago that acknowledged that the
average  useful life of PCs was in the  three-to  four-year  time range.  Having
embraced this  philosophy  previously,  replacement  of PCs is a part of routine
hardware  planning.  Currently,  all of the  Company's  PCs are  considered  Y2K
compliant.  Total  historical and future costs directly  associated with the Y2K
project are expected to approximate $225,000 - $250,000  (approximately 6.25% of
projected 1999 net income).

Customer / Public Relations Issues

The Company has implemented a process by which all significant  loan and deposit
customers  have been  contacted to determine  the extent to which the Company is
vulnerable to those third parties'  failure to remedy their own Y2K issue.  Loan
officers have  received  training to include a Y2K  understanding  in the credit
decision making process. Existing borrowers have been evaluated to determine the
risk that Y2K poses to their  respective  cash flow  capacities or other related
factors that may impact their ability to repay their loans.  The Company is also
working with  borrowers who have current line of credit  commitments to properly
plan for the liquidity  requirements  of the Company to fund greater than normal
line of credit draw  requests.  In this same vein,  deposit  customers are being
evaluated to produce some basis for projecting  possible  interruption  to daily
deposit inflows. While the Company does not intend to abandon meeting the credit
needs of its  community,  it has  adopted a more  conservative  position  in its
lending  associated with overall liquidity planning as well as credit evaluation
of borrowing  requests.  Also in the interest of liquidity,  the Company will be
more  aggressive in its pricing of  certificates of deposit with maturities that
extend beyond the Year 2000.  This position  should  reduce the  possibility  of
deposit  runoff during the fourth  quarter of 1999 and first quarter of the year
2000.

The Company has been pro-actively involved with public information and education
programs to assist customers in satisfying themselves that their banks are safe.
These  programs have been  coordinated  with other banks as well as the Virginia
Association  of  Community  Banks and  includes a cable TV  advertising  program
describing some of the  preparations  performed by banks as a group. The Company
has also issued  substantial  amounts of direct  correspondence  to its customer
base.  The  Company has  developed a cash  withdrawal  policy for  customers  to
require  customers to  acknowledge  certain risks  (physical  and  financial) to
reduce  unnecessarily   chaotic,   irrational,   or  unreasonable  practices  by
customers. Total estimated costs in the areas should be less than $10,000.

Summary

The Company has completed the majority of its Y2K  preparations as of 1999. Cash
expenditures  have  not had a  material  effect  on the  Company's  consolidated
financial  statements.  The Company has formalized for all of its subsidiaries a
corporate  contingency  strategy,  discussed  below. A formal liquidity plan has
also been developed to address  potentially  unusual  shifts in customer  habits
related to credit line utilization, deposit activity, and cash requirements. The
following tables present the Company's  overall progress of its mission critical
applications.


                                       17
<PAGE>

 Year 2000 Plan - Planned Number of Mission Critical Applications In Each Phase
<TABLE>
<CAPTION>
                                 Year 2000 Plan
--------------------------------------------------------------------------------------------------------------
Phase                12/31/97  3/31/98   6/30/98   9/30/98   12/31/98  3/31/99   6/30/99  9/30/99   12/31/99
--------------------------------------------------------------------------------------------------------------
<S>                  <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>       <C>
Awareness               -         -         -         -         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Assessment              9         6         2         1         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Renovation              3         6         7         8         5         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Validation              -         -         3         3         7         9         -        -         -
--------------------------------------------------------------------------------------------------------------
Implementation          -         -         -         -         -         3        12        12        12
--------------------------------------------------------------------------------------------------------------
TOTAL                   12        12       12        12         12        12       12        12        12
--------------------------------------------------------------------------------------------------------------
</TABLE>

           Year 2000 Plan - Planned Percentage of Completion by Phase
<TABLE>
<CAPTION>
                                 Year 2000 Plan
--------------------------------------------------------------------------------------------------------------
Phase                12/31/97  3/31/98   6/30/98   9/30/98   12/31/98  3/31/99   6/30/99  9/30/99   12/31/99
--------------------------------------------------------------------------------------------------------------
<S>                  <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>       <C>
Awareness               -         -         -         -         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Assessment              75        50       17         8         -         -         -        -         -
--------------------------------------------------------------------------------------------------------------
Renovation              25        50       58        67         42        75        -        -         -
--------------------------------------------------------------------------------------------------------------
Validation              -         -        25        25         58        25        -        -         -
--------------------------------------------------------------------------------------------------------------
Implementation          -         -         -         -         -         -        100      100       100
--------------------------------------------------------------------------------------------------------------
TOTAL                  100       100       100       100       100       100       100      100       100
--------------------------------------------------------------------------------------------------------------
</TABLE>


The Company's  contingency  strategy addresses risks associated with Y2K issues.
These issues include  remediation  contingency  plans,  Y2K business  resumption
contingency  plans, and event management plans.  Remediation  contingency covers
the  actions  that may be required if the  current  approach  to  remediating  a
mission critical  application is falling behind schedule or may not be completed
when  required.   The  Company  has  substantially   completed  its  remediation
contingency  plans.  The Company  already had in place a  documented  and tested
disaster  recovery plan. This plan has been expanded and enhanced to incorporate
the  elements of the Y2K  challenge.  The Company  substantially  completed  and
implemented its business resumption  contingency plan by June 30, 1999. The plan
identifies core business  processes and details each step in these processes for
identification  of alternate  methods and means of completing  such steps in the
event of failure of current systems. Potential system failures are being studied
for the  varying  effects of partial  system  failures  compared  to full system
failures.  Business impact  analysis is being performed  through the use of risk
analysis  worksheets to assess,  among other things the  probability  of certain
failures,  the expected warning time, the consequences of such failure,  and the
weight  that  should be  applied  to system  component  failure  in the  overall
operation  of a specific  system or  department.  An example of a core  business
process is taking a deposit.  Each step of this process is being  flowcharted to
establish rudimentary, manual alternatives in the event of a failure of internal
computer systems, loss of electrical power, or loss of telecommunication  lines.
Business  resumption may also be dependent on backup or saved  information  from
prior to year-end 1999. Therefore, all computer processing during December, 1999
will be amended to include  changes in backup save routines,  printing  hardcopy
reports  normally only saved to optical disks,  and rotation of backup media, to
name a few. The Company is continuing  direct  communication  with  customers to
minimize  unwarranted  public  alarm  that  could  cause  serious  problems  for
financial institutions.

The Company  has  adopted a formal  Event Plan  Handbook  for guiding  personnel
through the periods  prior to,  during,  and after the century date change.  The
handbook  covers,  but is not  limited  to,  such  critical  issues as  vacation
policies,  internal and external  communication  trees,  rapid  response  teams,
recovery response teams, media relations,  facilities  management,  and physical
security.  The Event Plan is "process" driven and includes  extensive  checklist
verification and validation  activities for January 1,


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<PAGE>

2000.  These  practices are designed to enhance smooth  operations for the first
normal business day, Monday, January 3, 2000.

The Company previously had established a series of trigger dates associated with
core  application  products that govern  primarily the customer loan and deposit
data bases. These  applications  address production of new and renewal loans and
deposit accounts as well as maintenance of ongoing customer  relationships.  The
trigger dates started November 30, 1998 and concluded on March 31, 1999. Through
the various  testing  methods  that  management  has  selected  to validate  the
readiness of these applications,  management expects all current vendors will be
Y2K  ready  and  that  the  Company  will   continue  to  utilize  all  existing
applications.

Worst-case analysis

Until the year 2000 event actually occurs,  and for a period  thereafter,  there
can be no  assurance  that there will be no  problems  related to the year 2000.
Worst-case  scenarios  would  indicate  that if Y2K  issues  are not  adequately
addressed by the Company as well as third parties, the Company could face, among
other things,  business  disruptions,  operational  problems,  financial losses,
legal  liability  and similar  risks,  and the  Company's  business,  results of
operations and financial position could be materially  adversely  affected.  The
Company's  credit risks  associated  with  borrowers  may increase to the extent
borrowers  fail to  prepare  for Y2K in ways  that  impact  their  cash flow and
capacity to repay.  As a result  there may  increases in the  Company's  problem
loans,  non-performing  assets, and credit losses in future years.  Additionally
the  Company  may be  subject  to  increased  liquidity  risks  associated  with
excessive cash withdrawals and/or abnormally high draws against borrowers' lines
of credit. It is not possible to quantify the potential impact of any such risks
or  losses  at  this  time.  Temporary  closings  of  individual  offices  could
materialize,  but would do so only under the allowances  provided by the banking
regulatory  authorities.  Bank  customers  should  note that FDIC  deposits  are
considered safe.

The Company is cognizant of and sensitive to the potential risks associated with
the Year 2000  challenge.  However,  in its efforts to be prepared,  the Company
also sees a social  responsibility  to calm public  anxiety and potential  panic
where verifiable preparedness can be identified.

Forward Looking Statements
--------------------------

The foregoing year 2000 discussion contains "forward-looking  statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
statements, including, without limitation, anticipated costs, the dates by which
the  Company  expects  to  complete  remediation  and  testing  of  systems  and
contingency planning,  and the impact of the redeployment of existing staff, are
based on  management's  best current  estimates,  which were  derived  utilizing
numerous assumptions about future events,  including the continued  availability
of certain  resources,  representations  received from  third-party  vendors and
other factors.

However,  there can be no guarantee  that these  estimates  will be achieved and
actual results could differ  materially from those plans.  Specific factors that
might  cause such  material  differences  include,  but are not  limited to, the
availability  of  personnel  trained in this area,  the  ability of third  party
vendors to correct  their  software  and  hardware,  the ability of  significant
customers to remedy their Y2K issues, and similar uncertainties.

The foregoing Year 2000 discussion  constitutes a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.



                                       19
<PAGE>

                           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 - None

Item 5. Other Information - None

Item 6. Exhibits and reports on Form 8-K

           a)  Exhibits

                  27   Financial Data Schedule (filed electronically only)

           b)  Form 8-K - None





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<PAGE>

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                       ATLANTIC FINANCIAL CORP.


Date:  November 15, 1999               BY /s/ W. J. Farinholt
                                          -------------------------------------
                                          W. J. Farinholt, President & CEO


Date:  November 15, 1999               BY /s/ Kenneth E. Smith
                                          -------------------------------------
                                          Kenneth E. Smith, Exec. Vice President
                                          & Chief Financial Officer








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