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, 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 June 30, 1999.


                      Common stock, $5 par value--4,192,185


<PAGE>


                                      INDEX

ATLANTIC FINANCIAL CORP.                                               Page No.

Part I.   Financial Information

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

                   Consolidated Statements of Income--
                     Six months ended June 30, 1999 and 1998
                     Three months ended June 30, 1999 and 1998                4

                   Consolidated Statements of Stockholders' Equity--
                     Six months ended June 30, 1999 and 1998                  5

                   Consolidated Statements of Cash Flows--
                     Six months ended June 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 - 18

Part II.  Other Information:                                                 19

          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)
                                                      June 30,             December 31,
ASSETS:                                                 1999                   1998
                                                  ----------------     ---------------------

<S>                                                    <C>                   <C>
    Cash and due from banks                            $   14 264            $   11 782
    Securities available for sale (at market value)        88 854                80 281
    Securities held to maturity (market value of
        $10,768 and $14,173, respectively)                 10 811                13 926
    Federal funds sold                                     22 152                29 524
    Loans, net                                            220 598               207 733
    Premises and equipment                                 10 710                10 703
    Other real estate owned                                   169                   212
    Other assets                                            6 782                 6 142
                                                       ----------            ----------
          TOTAL ASSETS                                 $  374 340            $  360 303
                                                       ==========            ==========

LIABILITIES:
Deposits
    Non-interest bearing                               $   51 014            $   49 291
    Interest-bearing                                      275 232               263 019
                                                       ----------            ----------
       TOTAL DEPOSITS                                     326 246               312 310
Short-term debt                                             1 139                 1 589
Other liabilities                                           3 985                 3 275
                                                       ----------            ----------
          TOTAL LIABILITIES                               331 370               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 4,192,185 and 4,168,941
     shares, respectively                                  20 965                20 851
    Surplus                                                    --                    --
    Undivided profits                                      22 227                21 048
    Accumulated other comprehensive
      income, net                                           (222)                 1 230
                                                       ----------            ----------
          TOTAL STOCKHOLDERS' EQUITY                       42 970                43 129
                                                       ----------            ----------
          TOTAL LIABILITIES AND
            STOCKHOLDERS' EQUITY                       $  374 340            $  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        Six Months Ended
                                                             June 30,                June 30,
                                                         1999       1998         1999         1998
                                                         ----       ----         ----         ----
<S>                                                   <C>    >   <C>          <C>         <C>
INTEREST INCOME:

Loans and Fees                                        $  5 244   $  4 926     $   10 323  $   9 580
Federal Funds Sold                                         290        220            590        496
Investment Securities                                    1 478      1 374          2 854      2 656
                                                     ---------  ---------       --------   --------
   Total Interest Income                                 7 012      6 520         13 767     12 732

INTEREST EXPENSE:
Interest on deposits                                     3 020      2 797          5 977      5 479
Interest on federal funds purchased
 and other borrowings                                       26          7             42         15
                                                     ---------  ---------       --------   --------
   Total Interest Expense                                3 046      2 804          6 019      5 494
                                                     ---------  ---------       --------   --------
   Net Interest Income                                   3 966      3 716          7 748      7 238

PROVISION FOR LOAN
AND LEASE LOSSES                                           137        176            209        286
                                                     ---------  ---------       --------   --------
   Net Interest Income After
   Provision for Loan
   and Lease Losses                                      3 829      3 540          7 539      6 952

OTHER INCOME:
Service Charges & Fees                                     515        546          1 061      1 001
Securities Gains (Losses)                                    1         --              1          1
                                                     ---------  ---------       --------   --------
   Total Other Income                                      516        546          1 062      1 002

OTHER EXPENSES:
Salaries & Employee Benefits                             1 606      1 370          3 136      2 666
Occupancy Expenses                                         238        202            469        378
Furniture & Equipment Expenses                             439        322            830        566
Other Operating Expenses                                   766        704          1 516      1 378
                                                     ---------  ---------       --------   --------
   Total Other Expenses                                  3 049      2 598          5 951      4 988
                                                     ---------  ---------       --------   --------
Income Before Income Taxes                               1 296      1 488          2 650      2 966
Applicable Income Taxes                                    335        448            691        892
                                                     ---------  ---------       --------   --------
   Net Income                                          $   961    $ 1 040        $ 1 959    $ 2 074
                                                     =========  =========       ========   ========

    Earnings Per Share, Basic                              .23        .25            .47        .50
                                                     =========  =========       ========   ========
    Earnings Per Share, Assuming
    Dilution                                               .23        .24            .46        .48
                                                     =========  =========       ========   ========
</TABLE>

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

                                       4
<PAGE>


                            ATLANTIC FINANCIAL CORP.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     For the six months ended June 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                                     - -        - -       - -        1 959             - -          $1 959       1 959
   Other comprehensive income:
     Unrealized holding gains (losses) on
     securities available for sale arising
     during the period net of tax of $(748)                                                                     (1 452)         - -
                                                                                                                -------
   Other comprehensive income, net of tax         - -        - -       - -          - -         (1 452)         (1 452)     (1 452)
                                                                                                                -------
   Total comprehensive income                     - -        - -       - -          - -             - -            $507         - -
                                                                                                                =======
Acquisition of common stock                      (11)                              (26)                                        (37)
Exercise of stock options                         127        (2)       - -          - -             - -                         125
Cash dividends                                    - -        - -       - -        (754)             - -                       (764)
                                              -------        ---    ------      -------            ----                     -------
Balance, June 30, 1999                        $20 961         $4    $  - -      $22 227            $222                     $42 970
                                              =======         ==    ======      =======            ====                     =======

</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>

                                                                             Six Months Ended
                                                                                June 30,

                                                                            1999            1998
                                                                            ----            ----
<S>                                                                      <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income                                                            $      1 959   $     2 074
   Adjustments to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization                                                337           347
     Deferred tax                                                                 320            --
     Provision for loan losses                                                    209           286
     Amortization of premiums, net                                                 47            54
     (Gain) on sale of securities available for sale                              (1)           (1)
     (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 accrued interest receivable                          36         (144)
       (Increase) decrease in other assets                                          7       (1 112)
       Increase in accrued interest payable                                        27           215
       Increase (decrease) in other liabilities                                   334         (171)
                                                                         ------------    ----------
          Net Cash Provided by Operating Activities                         $   3 260  $      1 545
                                                                         ------------    ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net (increase) in loans                                                   (13 073)      (14 553)
   Purchase of securities available for sale                                 (23 779)      (16 089)
   Proceeds from sales of securities available for sale                         1 619           200
   Proceeds from calls and maturities of securities available for sale         10 376         8 686
   Purchase of securities held to maturity                                        - -       (5 682)
   Proceeds from calls and maturities of securities held to maturity            3 114         4 526
   Proceeds from sale of other real estate                                         79            --
   Purchase of premises and equipment                                           (323)       (2 465)
   Proceeds from sales of premises and equipment                                    1             3
                                                                         ------------    ----------
          Net Cash (Used In) Investing Activities                        ($   21 986)    ($ 25 374)
                                                                         ------------    ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Increase in deposits                                                   $    13 936    $   18 771
   Acquisition of common stock                                                   (36)            --
   Issuance of common stock                                                       127           250
   Proceeds from long-term debt                                                 1 550            --
   Net increase (decrease) in short-term borrowings                             (439)           600
   Cash dividends paid                                                        (1 302)         (858)
                                                                         ------------    ----------
            Net Cash Provided by Financing Activities                     $    13 836    $   18 763
                                                                         ------------    ----------

            Net Increase In Cash and Cash Equivalents                         (4 890)       (5 066)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD                                41 306        32 550
                                                                         ------------    ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD                                 $    36 416    $   27 484
                                                                         ============    ==========
</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), The Bank of
      Franklin  (BOF) and The Bank of Sussex and Surry  (BSS).  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, 1999 and  December 31, 1998,  and the results of  operations  and cash
      flows for the six months ended June 30, 1999 and 1998.

      The results of operations  for the six months ended June 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>
                                                                       June 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                            $     867    $        1       $      3    $    865
US Government Agencies & Corporations                30 456            66            750      29 772
Obligations of States & Political Subdivisions       30 339           275            378      30 236
Mortgage-backed Securities                           19 746            15            455      19 306
Corporate Debt Obligations                            4 199             5             74       4 131
Restricted Stock                                        647            --             --         647
Other Securities                                      2 934         1 031             67       3 897
                                                   --------     ---------       --------    --------
                                                   $ 89 188     $   1 393       $  1 727    $ 88 854
                                                   ========     =========       ========    ========
</TABLE>


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

                                                                       June 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              $  2 743        $    3        $    62     $ 2 684
Obligations of States & Political Subdivisions        5 861            58             20       5 899
Mortgage-backed Securities                            2 207            --             22       2 185
                                                   --------        ------        -------     -------
                                                   $ 10 811        $   61        $   104     $10 768
                                                   ========        ======        =======     =======
</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>


                                                         Six Months Ended
                                                             June 30,
                                                        1999              1998
                                                   (In Thousands of Dollars)

Gross proceeds from sales of securities                1 619               391
                                                    ========         =========
Gross Gains on Sale of Securities                          3                 1
Gross Losses on Sale of Securities                         3                --
                                                    --------         ---------
  Net Securities Gains (Losses)                           --                 1
                                                    ========         =========

                                       8
<PAGE>

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

3.  Loans

    Major classifications of loans are as follows:

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

Commercial                                $  30 734            $  30 105
Agriculture                                   6 691                6 068
Real estate mortgage:
   Construction                              15 923               13 935
   Residential (1-4 family)                  57 238               52 632
   Home Equity Lines                         15 910               15 939
   Commercial                                52 675               48 788
   Agricultural                               4 956                3 044
Loans to individuals for household,
 family and other consumer expenditures      39 233               39 564
All Other Loans                                 437                  672
                                          ---------             --------
                                            223 797              210 747
Less Unearned Income                          (583)                (590)
Less Allowance for Loan Losses              (2 616)               2 424)
                                          $220 598              $207 733
                                          =========             ========

The  following  schedule  summarizes  the changes in the  allowance for loan and
lease losses:
<TABLE>
<CAPTION>

                                     Six Months         Six Months
                                        Ended              Ended           December 31,
                                    June 30, 1999      June 30, 1998           1998
                                    -------------      -------------           ----
                                                   (In Thousands of Dollars

<S>                                    <C>                  <C>            <C>
Balance, Beginning                     $  2 424             $  2 430       $   2 430
Provision Charged Against Income            209                  286             477
Recoveries                                  181                   51             110
Loans Charged Off                           198                  198           (593)
                                     ----------           ----------       ---------
Balance, Ending                        $  2 616             $  2 569       $   2 424
                                       ========             ========       =========
</TABLE>


Nonperforming assets consist of the following:

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

Nonaccrual Loans                          $    467             $    681
Restructured Loans                              --                   --
                                       -----------           ----------
Nonperforming Loans                            467                  681
Foreclosed Properties                          169                  212
                                         ---------             --------
Nonperforming Assets                      $    636              $   893
                                          ========              =======

Total  loans past due 90 days or more and still  accruing  were $570 on June 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>

                                                June 30, 1999                June 30, 1998
                                                -------------                -------------
                                                         Per Share                    Per Share
                                            Shares          Amount         Shares        Amount
                                            ------          ------         ------        ------

<S>                                      <C>               <C>          <C>             <C>
Basic Earnings Per Share                 4 185 685         $   .47      4 159 117       $   .50

Effect of dilutive securities:
  Nonemployee directors' stock options      20 796                         45 085
  Employee incentive stock options          59 500                         70 714
                                         ---------                      ---------

Diluted Earnings Per Share               4 265 981         $   .46      4 274 916       $   .48
                                         =========         =======      =========       =======
</TABLE>



5.  Capital Requirements

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

                                                                Minimum
                                      Actual                   Requirements
                                      ------                   ------------
Tier I Risk-based Capital             16.99%                      4.00  %
Total Risk-based Capital              18.03%                      8.00  %
Leverage Ratio                        11.62%                      4.00  %



                                       10


<PAGE>


Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS

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), The Bank of Franklin (BOF) and The Bank of Sussex and Surry
(BSS) (the "Banks").  PTB, BOF and BSS are Virginia chartered banks that offer a
full range of banking  services,  principally to individuals and small to medium
size businesses in their respective market areas.

Results of Operations

The Company  experienced  flat balance sheet expansion during the second quarter
1999, with total assets  increasing  $3.7 million,  or .99%, over March 31, 1999
and $14.0 million, or 3.90%, over December 31, 1998. Growth was funded primarily
with new interest  bearing  deposits,  which reflected a $2.3 million,  or .84%,
increase during the second quarter 1999 and a $12.2 million, or 4.64%,  increase
during the first six months of 1999.

Deposits  represent  98.5%  of  total  liabilities  of  the  Company,  including
non-interest-bearing checking accounts that represent 15.6% of total deposits on
June 30, 1999.

Loan  demand was  moderate  during the second  quarter,  evidenced  by net loans
increasing  $7.8 million,  or 3.65%,  over March 31, 1999 and $12.9 million,  or
6.19%,  over  December 31, 1998.  Competition  for loans  intensified  primarily
relative to pricing as all banks in the Company's  trade area were  experiencing
similar  moderation  in overall loan demand.  The Company has been  reluctant to
match all  competitor  pricing  bids when the credit  quality does not match the
pricing  structure.  Put another way, the risk / rate relationship  continues to
represent a major portion of the underwriting practices of the Company.

The Company maintained its practice during the second quarter of selling Federal
funds,  having sold  continuously  on a daily basis in amounts  averaging  $24.0
million, 6.52% of average total assets. The quarter-end balance of $22.2 million
represented  a $6.1 million (or 21.56%)  decrease from March 31, 1999 and a $7.4
million (or 24.97%)  decrease  from  December  31, 1998.  The Company  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). Yields in the bond market have been rising during
recent  months and reached  levels not seen within the previous  twelve

                                       11
<PAGE>

months.  Management has attempted to capitalize on higher  yields,  with greater
call  protection  (early  redemption  privileges of the issuer),  without unduly
compromising balance liquidity. Liquidity planning, however, will be receiving a
different  level of  scrutiny  for the  balance  of the year for Year 2000 (Y2K)
purposes, discussed further below.

The level of the investment account increased approximately $3.5 million (3.66%)
during the second  quarter 1999 and $19.4 million  (24.2%) for the first half of
1999,  ending  the  period  at $99.7  million  or 26.62%  of total  assets.  The
portfolio is  comprised  of 1% US  Treasuries,  54% US  Government  Agencies and
Mortgage-backed Securities, 36% 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.  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 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  $5.1 million
(2.29% of total outstandings).  Included in the 30 day total is $570,000,  which
are 90 days or more  past due and still  accruing  interest.  Non-accrual

                                       12
<PAGE>

loans  totaled  $470,000  at June 30,  1999,  which  represented  0.21% of total
outstanding  loans and 17.97% of the loan loss  reserve.  Foreclosed  properties
totaled $169,000 at June 30, 1999, with potential losses expected to be minimal.

The Allowance for Loan and Lease Losses (ALLL) equaled $2.62 million at June 30,
1999,  comfortably  above  the  Company's  overall  target  of  1.10%  of  total
outstanding loans. Gross charge-offs for the quarter were $198,000,  while total
recoveries were $181,000.  The provision for loan losses expense was $137,000 in
the second quarter 1999 and $209,000 in the first half 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.  Management's  overall  credit  review  process
assesses Year 2000 compliance / preparedness by borrowers. Utilizing the results
of this system to test the adequacy of the ALLL also  indicates that the ALLL is
sufficient to safeguard  the Company in light of known or  identified  potential
loan loss risks.

Earnings

Net income for the second  quarter  1999  decreased  to  $961,000,  compared  to
$1,040,000 for the second quarter 1998 and $998,000 for the first quarter 1999.

Net interest income for the second quarter 1999 (tax equivalent  interest income
less interest  expense)  totaled $3.97 million,  a 6.7% increase over the second
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  to raise  short-term
interest rates,  the general interest rate environment had been one of declining
rates.  During this  period,  including  the second  quarter of 1998 through the
second  quarter of 1999,  average  interest-sensitive  asset  yields have fallen
faster than average  interest-sensitive  deposit  costs.  As a result,  the 7.5%
increase  in  interest  income for the second  quarter  1999  compared to second
quarter  1998 was offset by an 8.6%  increase in  interest  expense for the same
period. The challenge to attract and retain consumer certificates of deposits in
a falling  interest rate  environment has been the major cause of compression of
net interest spreads.  Non-bank investment  alternatives persist in tempting and
even luring consumers away from traditional bank deposits,  as consumers express
their  reluctance  to accept the full effect of the  decline in interest  rates.
Therefore,  the Company  cannot  always reduce the cost of funds in a one-to-one
relationship  with  reductions of yields on earning  assets during  falling rate
cycles.

Non-interest  expense for the second quarter  totaled $3.0 million,  compared to
$2.6 for the second 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 related integration of BOF and BSS
into  the  Company's  central  data  processing   center  involved   substantial
investment in capitalized  fixed assets and upgraded  computer  equipment during
the third and fourth quarters of 1998.  This resulted in increased  depreciation
expense

                                       13
<PAGE>

beginning in 1999. Thus, quarter over quarter comparisons of the second quarters
of 1999 and  1998,  reflect  the full  impact by  second  quarter  1999 of these
improvements in technology.

Capital and Liquidity

Equity capital (net of accumulated other comprehensive  income) at June 30, 1999
totaled $42.97 million,  representing 11.48% of total assets. Cash stockholders'
equity (Total Stockholders'  Equity,  before adjustments for unrealized gains or
losses on AFS securities as described above) totaled $43.19 million for the same
period,  or 11.54% of total assets,  compared to $41.9 million,  11.63% 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  $475 million in total assets. The Company continues to attempt to
expand  the  balance  at a pace  greater  than  the  rate  of  internal  capital
generation, in an effort to improve return on equity and earnings per share.

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 18.7% of total demand
deposits at June 30, 1999. The Company,  through two of its subsidiary banks, is
a member of the Federal Home Loan Bank of Atlanta.  This membership  affords the
Company  various  credit  vehicles.  The level of balance  sheet  liquidity  and
available credit facilities is considered  adequate to meet anticipated  deposit
withdrawals  and  expected  loan  demand  from normal  operations.  However,  as
discussed  further  below  in the  "Year  2000  Issue",  liquidity  planning  in
anticipation of potential  increased demand for funds in the second half of this
year (and more  importantly the fourth quarter) will dictate more  sophisticated
analytical exercises and possibly greater levels of liquidity.

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 also continues
interviewing  prospective  candidates to staff a new relationship with UVEST for
the sale of fixed and  variable  rate annuity  products to enhance  non-interest
income. 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 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
Board  has  passed  a  resolution  authorizing  management  to  commit  the full
financial  and human  resources  of the  Company  to  achieve  satisfactory  Y2K
readiness with a minimum of disruption to ordinary operations. 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.

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

                                       14
<PAGE>

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.  The Company  possesses and  routinely  tests a
gasoline-powered  generator  for  temporary  electrical  power  for its  primary
computer room  operations.  This form of backup power provides  limited business
continuation  features  to  the  Company  in the  area  of  processing  customer
information in its core data processing package. Therefore, the Company believes
that the integrity of critical customer information will be protected.

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

Two of the affiliate banks, BOF and BSS, were operating  non-Y2K ready core data
processing  systems  prior to the  merger of UCB and MACB.  These two banks were
converted to the JHA Liberty  product  discussed  above and are processed in the
Company's  centralized  data  center.  For  these  two  banks,  there  was  more
substantial expense associated with Y2K readiness preparation. These accumulated
historical costs  approximated  $100,000,  bringing the total for the Company to
approximately $125,000.

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  Y2K  compliant.   Modifications  and/or  replacements  depend  on  the
individual  vendor and their  respective  products.  During the first quarter of
1999,  the  Company  installed  Y2K  updates  in each of its ATMs  based on each
respective vendor's recommendation.

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,  approximately 30% of the Company's PCs are viewed
as nearing  the end of their  useful  life


                                       15
<PAGE>

even absent any Y2K  considerations.  Throughout  the first quarter of 1999, the
Company has purchased  hardware and software  upgrades in its PC workstation and
network communications area, with an approximate capitalized cost of $35,000 and
associated  increase in depreciation  expense of $1,000 per month for the useful
life  of the  asset.  This  renovation/replacement  process  also  has  included
one-time  consultant and installation  costs  approximating  $5,000.  Additional
one-time  costs may approach  $20,000  during the next two quarters.  Management
considers that its total requirement in hardware expenditure associated with Y2K
readiness  will not have a significant  negative  effect on the Company's  total
earnings  performance.  It is  anticipated  that the total future costs directly
associated with the Y2K project will not exceed $250,000 (approximately 6.25% of
projected 1999 net income).

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  completed the majority of its Y2K  preparations  as of June 30,
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.

 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>

                                       16
<PAGE>

           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 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.

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.

As a part of the Company's normal disaster  recovery plan, it has decided to add
generator power for its two remote item capture / check  processing  centers and
to upgrade its existing  generator power for its Glenns,  Virginia  Operations /
Data  Center.  The  Glenns  site  will be  capable  of  operating  not only data
processing and  bookkeeping  functions,  but also a full service  banking branch
office. These efforts will enable the Company to meet customer needs in the case
of a natural  disaster  with extended  electrical  power  outages.  It will also
complement  Y2K  business  resumption  plans  in  the  case  of  a  Y2K  related
interruption of electricity.

                                       17
<PAGE>

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.

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.

                                       18
<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

           On April 27, 1999,  the Annual  Meeting of  Shareholders  was held to
elect  directors for a term of three years each and to ratify the appointment by
the  Board of  Directors  of the firm of  Yount,  Hyde &  Barbour,  P.C.  as the
Company's  independent  auditors  for the year ending  December  31,  1999.  The
results of the votes on these matters are as follows:

           (1)    Election of Directors
<TABLE>
<CAPTION>

                                                                                        Broker
                                               For         Against      Withheld       Non-Votes

<S>                                         <C>               <C>        <C>              <C>
                  Charles F. Dawson         3,382,124         0          29,161           0
                  William J. Farinholt      3,382,330         0          28,955           0
                  Harvey G. Pope            3,382,130         0          29,155           0
                  J. Russell West           3,382,130         0          29,155           0
                  Thomas Z. Wilke           3,382,227         0          29,058           0
</TABLE>


           (2)    Ratification of Accountants
                                                                 Broker
                        For          Against      Withheld      Non-Votes

                       3,382,926      5,548        22,811          0

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



                                       19
<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:  August 13, 1999               BY /s/ W. J. Farinholt
                                       ---------------------------------
                                        W. J. Farinholt, President & CEO


Date:  August 13, 1999               BY /s/ Kenneth E. Smith
                                       ---------------------------------
                                        Kenneth E. Smith, Exec. Vice President
                                        & Chief Financial Officer




                                       20