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SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File Number 0-13395
UNITED FINANCIAL BANKING
COMPANIES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1201253
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8399 LEESBURG PIKE
P.O. BOX 2459
VIENNA, VIRGINIA 22182
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 734-0070
Securities registered pursuant to Section 12(g) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $1.00 par value N.A.S.D.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent files pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
-----
For the year ended December 31, 1996, United Financial Banking Companies, Inc.
reported net loss of $907,609.
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was $1,947,011 as of March 1, 1997.
As of March 1, 1997, the registrant had 2,808,201 shares of outstanding common
stock, $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Company's 1996 Proxy Statement for the
Annual Meeting to be held June 6, 1997 is incorporated by reference into Part
III of this report, and information from the 1996 Annual Report to Shareholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A, are incorporated by reference into Parts I, II and III of this report.
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PART I
ITEM 1. BUSINESS
United Financial Banking Companies, Inc. ("UFBC"), is a one-bank holding
company which was organized under the laws of the State of Virginia in February
1982. In July 1983, UFBC acquired all the outstanding common stock of The
Business Bank (the "Bank"), a banking Company organized under the laws of the
State of Virginia. UFBC also wholly owns Business Venture Capital, Inc. (BVCI),
a subsidiary which has developed certain foreclosed real estate and holds, and
Omni Homes, Inc. (Omni), a subsidiary which holds certain foreclosed real
estate. Collectively, UFBC, the Bank, BVCI and Omni are referred to as "the
Company".
The Bank was organized in 1980. In October 1981, the Bank commenced limited
operations and began full scale operations in August 1982, when its main office
building was completed.
As of December 31, 1996, the Company had consolidated total assets of
$41,601,689, total deposits of $37,734,575, total loans of $30,618,335 and total
stockholders' equity of $2,738,070.
On March 1, 1997, the Company and its subsidiaries employed 18 full-time
people.
THE BANK
The Bank, UFBC's primary subsidiary, is a state banking association engaging
in a general commercial banking business and specializing in offering banking
services to business and professional customers. These services include the
usual deposit functions of commercial banks, including business and personal
checking accounts, "NOW" accounts and savings accounts; business and commercial
loans; and processing of collections. The Bank is a Federally insured state non-
member bank and its deposits are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
The Bank markets its services to professionals and small and medium sized
businesses in its service area of Northern Virginia and surrounding communities
because it believes that business accounts are more profitable than small
consumer accounts, which comprise the majority of accounts at most retail banks.
The Bank further believes that professionals and small businesses represent a
market segment whose needs have not been met by many retail banks.
It is the Bank's belief that business accounts can be more profitable due to
the income generated from business' higher average balances for both deposits
and loans. In the past, business accounts had been less costly than consumer
accounts as they had required fewer conveniences such as numerous branches,
extended hours and drive-thru facilities. The Bank had previously limited its
service relationship with customers to primarily encompass their business needs.
In order to fully meet customers' needs and to remain competitive in the current
market, the Bank has broadened service to business and professional customers by
offering products such as consumer installment and mortgage loans. It is the
Bank's belief that this augmentation will maintain the Bank's core accounts and
will enable the organization to diversify asset growth.
By emphasizing personal relationships between the Bank's officers and its
customers, the Bank believes it attracts customers that have been neglected by
retail banks that direct their services to more numerous consumer accounts and
large business customers.
The Company experiences a high degree of competition in the Washington
Metropolitan area. All of the Company's products and services compete actively
with national and state banks, savings banks, savings and loan associations,
credit unions, finance companies, money market funds, mortgage banks, insurance
companies, investment banking firms, brokerage firms and other nonbank
institutions that provide one or more of the services offered by the Company and
its subsidiaries, primarily the Bank. As a result of federal and state
legislation regarding interstate branching and mergers, additional competitors
not currently in the Bank's service area may enter the market. Among
commercial banks, the principal method of competition is the provision and
delivery of financial services that are specific to the needs of the community.
The Company believes that the expertise in and awareness of the demands of our
business community position us with the unique ability to meet those needs
expeditiously.
The Company does not believe that there will be any material effect on
capital expenditures, results of operations, financial condition or the
competitive position of itself or any of its subsidiaries with regard to
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compliance with federal, state or local requirements related to the general
protection of the environment.
SUPERVISION AND REGULATION
GENERAL
United Financial Banking Companies, Inc. is a bank holding company subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") pursuant to the BHCA, and files with the
Federal Reserve Board an annual report and such additional reports as the
Federal Reserve Board may require. As a bank holding company, UFBC's activities
and those of its banking and nonbanking subsidiaries are limited to the business
of banking and activities closely related or incidental to banking, and UFBC may
not directly or indirectly acquire the ownership or control of more than 5
percent of any class of voting shares or substantially all of the assets of any
company, including a bank, without prior approval of the Federal Reserve Board.
The deposits of UFBC's subsidiary bank are insured by, and therefore the
subsidiary bank is subject to the regulations of, the Federal Deposit Insurance
Corporation (the "FDIC"), and is also subject to regulation and examination by
the State of Virginia. Various consumer laws and regulations also affect the
operations of the Bank. Regulatory limitations on the payment of dividends to
UFBC by its banking subsidiary are discussed in Note 14 to the consolidated
financial statements.
HOLDING COMPANY LIABILITY
Federal Reserve Board policy requires bank holding companies to serve as a
source of financial strength to their subsidiary banks by standing ready to use
available resources to provide adequate capital funds to subsidiary banks during
periods of financial stress or adversity. A bank holding company also could be
liable under certain provisions of a new banking law for the capital
deficiencies of an undercapitalized bank subsidiary. In the event of a bank
holding company's bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, the
trustee will be deemed to have assumed and is required to cure immediately any
deficit under any commitment by the debtor to any of the federal banking
agencies to maintain the capital of an insured depository institution, and any
claim for a subsequent breach of such obligation will generally have priority
over most other unsecured claims.
SUPERVISORY AGREEMENTS
UFBC entered into a formal agreement with the Federal Reserve Bank of Richmond
and the Virginia Commissioner of Financial Institutions on December 31, 1993.
On August 12, 1993, The Business Bank consented to the issuance of a Cease and
Desist Order by the FDIC and the Virginia Commissioner of Financial
Institutions. These agreements are discussed in detail in Note 11 to the 1996
consolidated financial statements.
ENFORCEMENT ACTIONS AND ADMINISTRATIVE SANCTIONS
Failure to comply with applicable laws and regulations and the Supervisory
Agreements could subject UFBC, its subsidiary bank and their officers, directors
and other institution-affiliated parties to administrative sanctions and
potentially substantial civil money penalties.
TRANSACTIONS WITH AFFILIATES
UFBC's subsidiary bank is subject to restrictions under federal law which
limit a bank's extensions of credit to, and certain other transactions with,
affiliates. Such transactions by any subsidiary bank with any one affiliate are
limited in amount to 10 percent of such subsidiary bank's capital and surplus
and with all affiliates to 20 percent of such subsidiary bank's capital and
surplus. Furthermore, such loans and extensions of credit, as well as certain
other transactions, are required to be secured in accordance with specific
statutory requirements. The purchase of low quality assets from affiliates is
generally prohibited. Federal law also provides that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same, or
at least as favorable to the institution as those prevailing at the time for
comparable transactions involving other non-qualified companies or, in the
absence of comparable transactions, on terms and under circumstances, including
credit standards, that in good faith would be offered to, or would apply to,
non-affiliated companies.
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CAPITAL REQUIREMENTS
Under the prompt corrective action provisions of the Federal Deposit Insurance
Corporation Act of 1991 ("FDICIA") federal banking regulators are required to
take prompt corrective action in respect of depository institutions that do not
meet minimum capital requirements. FDICIA establishes five capital categories:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
Under the regulations, a "well capitalized" institution has a minimum total
capital to total risk-weighted assets ratio of at least 10 percent, a minimum
Tier I capital to total risk-weighted assets ratio of at least 6 percent, a
minimum leverage ratio of at least 5 percent and is not subject to any written
order, agreement, or directive; an "adequately capitalized" institution has a
total capital to total risk-weighted assets ratio of at least 8 percent, a Tier
I capital to total risk-weighted assets ratio of at least 4 percent, and a
leverage ratio of at least 4 percent (3 percent if given the highest regulatory
rating and not experiencing significant growth), but does not qualify as "well
capitalized." An "undercapitalized" institution fails to meet any one of the
three minimum capital requirements. A "significantly undercapitalized"
institution has a total capital to total risk-weighted assets ratio of less than
6 percent, a Tier I capital to total risk-weighted assets ratio of less than 3
percent or a Tier I leverage ratio of less than 3 percent. A "critically
undercapitalized" institution has a Tier I leverage ratio of 2 percent or less.
Under certain circumstances, a "well capitalized," "adequately capitalized" or
"undercapitalized" institution may be required to comply with supervisory
actions as if the institution was in the next lower capital category. As a
result of the Cease and Desist Order ("Order"), the Bank is treated as an
adequately capitalized institution. Except for the Order, the Bank would be
treated as a well capitalized institution.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth and activity
limitations and are required to submit "acceptable" capital restoration plans.
Such a plan will not be acceptable unless, among other things, the depository
institution's holding company guarantees the capital plan, up to an amount equal
to the lesser of five percent of the depository institution's assets at the time
it becomes undercapitalized or the amount of the capital deficiency when the
institution fails to comply with the plan. The federal banking agencies may not
accept a capital plan without determining, among other things, that the plan is
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital. If a depository institution fails to submit an
acceptable plan, it is treated as if it is significantly undercapitalized and
may be placed into conservatorship or receivership.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, more stringent requirements to
reduce total assets, cessation of receipt of deposits from correspondent banks,
further activity restricting prohibitions on dividends to the holding company
and requirements that the holding company divest its bank subsidiary, in certain
instances. Subject to certain exceptions, critically undercapitalized depository
institutions must have a conservator or receiver appointed for them within a
certain period after becoming critically undercapitalized.
BROKERED DEPOSITS
FDIC regulations adopted under FDICIA prohibit a bank from accepting brokered
deposits (which term is defined to include any deposit with an interest rate
more than 75 basis points above prevailing rates in the applicable market area)
unless (i) it is well capitalized, or (ii) it is adequately capitalized and
receives a waiver from the FDIC. For purposes of this regulation, a bank is
defined to be well capitalized if it maintains a leverage ratio of at least 5
percent, a risk-adjusted Tier I capital ratio of at least 6 percent and a risk-
adjusted total capital ratio of at least 10 percent and is not otherwise in a
"troubled condition", as specified by its appropriate federal regulatory agency.
A bank that is adequately capitalized may not pay an interest rate on any
deposits in excess of 75 basis points over the prevailing market rates of its
specified market area. There are no such restrictions on a bank that is well
capitalized. At December 31, 1996, the Company had no brokered deposits.
FDIC INSURANCE ASSESSMENTS
The bank is subject to FDIC deposit insurance assessments. The FDIC has fully
adopted the transitional risk-based system for determining deposit insurance
assessments. An insured institution is assessed at rates
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depending on its capital and supervisory classifications, as assigned by its
primary federal regulator. As a result of the bank insurance fund ("BIF"), which
insures the Bank's deposits, reaching the mandated level of reserves, the range
of deposit premium rates was reduced in the first half of 1996 to a range of .00
percent to .27 percent.
CONSERVATORSHIP AND RECEIVERSHIP POWERS OF FEDERAL BANKING AGENCIES
FDICIA significantly expanded the authority of the federal banking regulators
to place depository institutions into conservatorship or receivership to
include, among other things, appointment of the FDIC as conservator or receiver
of an undercapitalized institution under certain circumstances. In the event a
bank is placed into conservatorship or receivership, the FDIC is required,
subject to certain exceptions, to choose the method for resolving the
institution that is least costly to the BIF of the FDIC, such as liquidation.
The FDIC may provide federal assistance to a "troubled institution" without
placing the institution into conservatorship or receivership. In such case, pre-
existing debtholders and shareholders may be required to make substantial
concessions and, insofar as practical, the FDIC will succeed to their interests
in proportion to the amount of federal assistance provided.
Various other legislation, including proposals to overhaul the banking
regulatory system and to limit the investments that a depository institution may
make with insured funds are from time to time introduced in Congress. The
Company cannot determine the ultimate effect that FDICIA and the implementing
regulations to be adopted thereunder, or any other potential legislation, if
enacted, would have upon its financial condition or results of operations.
UNITED FINANCIAL BANKING COMPANIES, INC. SUBSIDIARIES
THE BUSINESS BANK
The Business Bank was organized on April 17, 1980 to provide commercial banking
services.
BUSINESS VENTURE CAPITAL, INC.
Business Venture Capital, Inc. was incorporated February 26, 1985 to hold
certain foreclosed real estate.
OMNI HOMES, INC.
Omni Homes, Inc. was incorporated August 21, 1985 to hold and develop certain
real estate.
BANK SUBSIDIARIES
UFBC, INC.
UFBC, Inc. was incorporated June 19, 1984 for the purpose of holding real
estate and various equipment lease arrangements. At December 31, 1996 UFBC, Inc.
held one leveraged lease arrangement.
ITEM 2. PROPERTIES
The main offices of the Company and the Bank are located at 8399 Leesburg
Pike, Vienna, Virginia 22182. The Bank currently has no branches. The Company
was consolidated into the main office location in May 1995. The Bank's
Operations Center was formerly located at 8351 Leesburg Pike under a lease which
expires in June 2000 and for which the Bank remains liable through June 2000.
Rental expense for 1995 under the lease totaled $59,508 and increase 3.0% per
year for the remainder of the lease. Approximately two thirds of the former
Operations Center space is sublet through the end of the lease term.
Approximately one third of the former Operations Center space is sublet through
March 31, 1997.
On December 30, 1996, the Bank sold the building it occupies and the
surrounding land for $1,968,171, net to an entity in which a holder of more than
5% of the Company's Common Stock has an interest. The transaction resulted in a
gain of $734,291. The Bank then entered into a one year lease to rent the
building sold. As of December 31, 1996, the Bank's minimum obligation for the
lease totaled $187,820. The lease terms include three options for renewal and a
right of first offer. Subsequent to December 31, 1996, the Bank chose to
exercise the first option, a nine year extension, after significant analysis of
alternative bank sites. The future minimum lease payments for the Bank lease,
including the option period, total $2,083,620. Further information regarding
this transaction is discussed in Part III, item 12 of this report.
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to legal
proceedings. There is no litigation currently pending against the Company or
any of its subsidiaries which individually or in the aggregate would have a
material adverse affect on the Company's financial condition or results of
operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to security holders during the 4th quarter of the
Company's fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
A. There is no established trading market for the stock of the Company.
B. There were 402 holders of record of the Registrant's common stock as of
December 31, 1996.
C. The Company's dividend history is incorporated by reference to the section
entitled "Corporate Information" appearing on page 38 of the Annual Report to
Shareholders for the year ended December 31, 1996.
SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item is incorporated by reference to the
section entitled, "Selected Consolidated Financial Data" appearing on page 29
of the Annual Report to Shareholders for the year ended December 31, 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information required by this item is incorporated by reference to the
section entitled, "Management's Discussion and Analysis" appearing on pages 30
through 36 of the Annual Report to Shareholders for the year ended December 31,
1996.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from the
information appearing on pages 1 through 28 of the Annual Report to Shareholders
for the year ended December 31, 1996.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The accounting firm of D.R. Maxfield & Company was selected to audit the
consolidated financial statements of the Company by the Audit Committee on July
22, 1996 for the year ended December 31, 1996 and on October 16, 1995 for the
year ended December 31, 1995. Said firm replaced the previous accounting firm
of Homes, Lowry, Horn & Johnson Ltd. who audited the consolidated financial
statements for the year ended December 31,1994. The change was not due to
disagreement and was reported on Form 8-K on October 20, 1995.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information as to the Registrant's Executive Officers and Directors is
incorporated by reference from the information contained under "Election of
Directors" in the Registrant's Proxy Statement filed with respect to the Annual
Meeting of Shareholders to be held on June 6, 1997.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information contained under "Election of Directors" in the Registrant's Proxy
Statement filed with respect to the Annual Meeting of Shareholders to be held on
June 6, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information contained under "Election of Directors" in the Registrant's Proxy
Statement filed with respect to the Annual Meeting of Shareholders to be held on
June 6, 1997.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31,1996, the building which serves as the
Company's headquarters was sold to a limited liability corporation, organized in
the state of Virginia. Mr. Manuel V. Fernandez, a beneficial shareholder owning
in excess of 5% of the Company's Common Stock, has 50% beneficial ownership of
the limited liability corporation. A second shareholder, owning less than 5% of
the Company's Common Stock also has 50% beneficial ownership in the limited
liability corporation. The building was sold for $1,968,171, net. The sale
resulted in a gain of $734,291 for the Company's banking subsidiary which owned
the building. The terms of the sale were substantially the same as those
prevailing for similar sales within the market area that the building is
located. The Company did not finance any portion of the transaction.
During the year ended December 31, 1996, the Bank sold a piece of foreclosed
real estate to another limited liability corporation, organized in the state of
Virginia. Mr. Manuel V. Fernandez, a beneficial shareholder owning in excess
of 5% of the Company's Common Stock, has 50% beneficial ownership of the limited
liability corporation. A second shareholder, owning less than 5% of the
Company's Common Stock also has 50% beneficial ownership in the limited
liability corporation. The foreclosed property was sold for $960,294, net. The
sale resulted in a consolidated loss of $370,529. With regulatory approval,
the Bank financed $790,000 of the sales price of the property. The loan was
made on substantially the same terms as those prevailing for comparable loans to
other persons and did not involve more than normal risk of collectibility or
present other unfavorable features.
Additional information required by this item is incorporated by reference to
the information contained under "Election of Directors" in the Registrant's
Proxy Statement filed with respect to the Annual Meeting of Shareholders to be
held on June 6, 1997.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements of United Financial Banking Companies, Inc.
and subsidiaries are incorporated by reference to the Registrant's 1996 Annual
Report to Shareholders as listed below:
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Page
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Report of Independent Certified Public Accountants 1
Consolidated Balance Sheets--December 31, 1996 and 1995 2
Consolidated Statements of Income--
Years Ended December 31, 1996, 1994 and 1993 3
Consolidated Statements of Changes in Shareholders' Equity--
Years Ended December 31, 1996, 1995 and 1994 4
Consolidated Statements of Cash Flows--
Years Ended December 31, 1996, 1995 and 1994 5-6
Notes to Financial Statements 7-28
</TABLE>
(a)(2) SCHEDULES
All schedules are omitted since the required information is either not
applicable, not deemed material or is shown in the respective financial
statements or in the notes thereto.
(b) REPORTS ON FORM 8-K
There were no items reported on Form 8-K during the quarter ended December
31, 1996.
(c) EXHIBITS
EXHIBIT 3--ARTICLES OF INCORPORATION AND BYLAWS
Articles of incorporation for United Financial Banking Companies, Inc. as
amended are incorporated by reference to Exhibit 3 of Form 10-Q for the period
ended September 30, 1996. The bylaws for United Financial Banking Companies,
Inc. are incorporated by reference to Exhibit 3 of Form 10-K for December 31,
1990.
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EXHIBIT 11--STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Earnings per share are computed as expressed in Note 1 to the consolidated
financial statements, incorporated by reference to the 1996 Annual Report.
EXHIBIT 13--ANNUAL REPORT TO SECURITY HOLDERS
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report or amendment
thereto to be signed on its behalf by the undersigned, thereunto duly authorized
on the 31 day of March, 1997.
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UNITED FINANCIAL BANKING COMPANIES, INC.
(Registrant)
By:____________/s/_______________________
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Jeffery T. Valcourt, Chairman*
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
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<CAPTION>
<S> <C> <C>
/s/ Chairman* /Director 3/31/97
- -------------------------------------- -------
Jeffery T. Valcourt
/s/ President, CEO/Director 3/31/97
- -------------------------------------- -------
Harold C. Rauner
/s/ Director 3/31/97
- -------------------------------------- -------
William J. McCormick, Jr.
/s/ Director 3/31/97
- -------------------------------------- -------
Dennis I. Meyer
/s/ Director 3/31/97
- -------------------------------------- -------
Edward H. Pechan
/s/ Director 3/31/97
- -------------------------------------- -------
Sharon A. Stakes
/s/ Principal Financial Officer 3/31/97
- -------------------------------------- -------
Lisa M. Porter Principal Accounting Officer
</TABLE>
*Pending Regulatory Approval
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UNITED FINANCIAL BANKING
COMPANIES, INC. AND SUBSIDIARIES
ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
C O N T E N T S
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5 - 6
Notes to financial statements 7 - 28
</TABLE>
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INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
United Financial Banking Companies, Inc.
We have audited the consolidated balance sheet of United Financial Banking
Companies, Inc., and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
of United Financial Banking Companies, Inc., and subsidiaries as of December 31,
1994, and for the year ended December 31, 1994, were audited by other auditors
whose report dated February 6, 1995 on those statements included an explanatory
paragraph that described substantial doubt about the Company's ability to
continue as a going concern as discussed in Note 9 to the financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the consolidated financial position of United Financial
Banking Companies, Inc., and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
consolidated financial statements, the Company has suffered recurring losses
from operations. As of December 31,1996, the Company's banking subsidiary is in
compliance with the provisions of an Order to Cease and Desist Certain Practices
issued by the Federal Deposit Insurance Corporation, as discussed in Note 11.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are described in
Notes 9 and 11. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/ s /
D.R. MAXFIELD & COMPANY
January 16, 1997
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UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES 2
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
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<S> <C> <C>
Cash and due from banks (Note 11) $ 4,265,513 $ 2,187,146
Interest-bearing deposits in other banks 300,000 400,541
Federal funds sold 898,000 6,360,000
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Total cash and cash equivalents 5,463,513 8,947,687
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Securities available-for-sale (Note 2) 2,095,422 603,500
Securities held-to-maturity (Note 2) 300,000 300,000
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Total securities 2,395,422 903,500
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Loans and lease financing, net of unearned income of
1996 $52,175; 1995 $320,716 (Notes 3, 4 and 10) 30,618,335 23,874,982
Less: Allowance for loan/lease losses (584,106) (462,846)
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Net loans and lease financing 30,034,229 23,412,136
Real estate owned, net (Note 5) 3,115,080 7,912,936
Premises and equipment, net (Note 6) 132,712 1,419,122
Other assets 460,733 470,589
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33,742,754 33,214,783
------------- -----------
Total assets $ 41,601,689 $43,065,970
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 7,897,677 $ 7,033,571
Savings and NOW 2,779,982 2,966,721
Money market 3,970,348 5,917,979
Time:
Under $100,000 16,763,355 15,139,336
$100,000 and over 6,323,212 6,417,628
------------- -----------
Total deposits 37,734,574 37,475,235
Short-term debt (Note 7) - 1,538,544
Accounts payable and accrued expenses (Note 8) 360,295 382,144
------------- -----------
Total liabilities 38,094,869 39,395,923
------------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 9)
REDEEMABLE PREFERRED STOCK (Note 16)
Series A $-0- par value, authorized 900 shares, 500 shares
issued in 1996 and 0 shares in 1995, 10% cumulative
dividend, redemption value @ 9/30/2001 $1,125,000 768,750 -
------------- -----------
STOCKHOLDERS' EQUITY (Notes 11, 14 and 17)
Preferred stock $-0- par value,
authorized 5,000,000 shares, no shares issued - -
Common stock, par value $1; authorized 3,500,000
shares, issued 2,808,201 shares in 1996 and 1995; 2,808,201 2,808,201
Surplus 10,514,311 10,533,061
Accumulated deficit ( 10,583,932) (9,676,323)
Unrealized holding gain (loss) on securities available-for-sale (510) 5,108
------------- -----------
Total stockholders' equity 2,738,070 3,670,047
------------- -----------
Total liabilities and stockholders' equity $ 41,601,689 $43,065,970
============= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES 3
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans/leases $2,462,895 $ 1,823,798 $ 1,442,648
Interest on investment securities 117,225 37,872 -
Interest on interest-bearing deposits 23,351 8,793 -
Interest on federal funds sold 224,807 321,404 163,917
---------- ----------- -----------
2,828,278 2,191,867 1,606,565
---------- ----------- -----------
Interest expense:
Interest on deposits (Note 13) 1,498,089 1,341,370 942,657
Interest on short-term borrowings (Note 7) 64,762 347 38,962
Interest on long-term debt - 1,879 10,470
---------- ----------- -----------
1,562,851 1,343,596 992,089
---------- ----------- -----------
Net interest income 1,265,427 848,271 614,476
Provision for loan/lease losses (Note 3) 694,203 (295) (238,727)
---------- ----------- -----------
Net interest income after provision
for loan/lease losses 571,224 848,566 853,203
---------- ----------- -----------
Noninterest income (loss):
Other earning assets 11,000 8,250 24,448
Loan servicing and other fees 82,669 77,614 117,107
Gain on the sale of fixed assets (Notes 6 and 10) 734,641 - 20,000
Other income (Note 12) (176,428) 145,932 418,233
---------- ----------- -----------
651,882 231,796 579,788
---------- ----------- -----------
Noninterest expense:
Salaries 746,352 762,478 818,229
Employee benefits (Note 14) 140,611 (21,447) 125,513
Occupancy 133,151 154,864 193,263
Furniture and equipment 45,697 103,857 115,620
Other (Note 15) 1,067,365 1,404,098 2,409,131
---------- ----------- -----------
2,133,176 2,403,850 3,661,756
---------- ----------- -----------
Loss before income taxes (910,070) (1,323,488) (2,228,765)
Provision (credit) for federal income
taxes (Note 8) (2,461) 2,598 10,640
---------- ----------- -----------
Net loss before extraordinary gain (907,609) (1,326,086) (2,239,405)
Extraordinary gain, net of state income
tax effect of $20,158 (Note 9) - - 3,357,375
---------- ----------- -----------
Net income (loss) $ (907,609) $(1,326,086) $ 1,117,970
========== =========== ===========
Earnings per share:
Income (loss) before extraordinary gain $(.32) $(.48) $(2.20)
Extraordinary gain - - 3.30
---------- ----------- -----------
Net income (loss) (Note 1) $(.32) $(.48) $1.10
========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Accumulated Unrealized
Stock Surplus Deficit Gain on AFS Total
---------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $1,007,201 $10,191,762 $ (9,468,207) $ - $ 1,730,756
Net income - - 1,117,970 - 1,117,970
Net proceeds from issuance
of shares of common
stock (Note 17) 1,701,641 316,459 - - 2,018,100
---------- ----------- ------------ ----------- -----------
Balance, December 31, 1994 $2,708,842 $10,508,221 $ (8,350,237) $ - $ 4,866,826
Net loss - - (1,326,086) - (1,326,086)
Net proceeds from issuance
of shares of common
stock (Note 17) 99,359 24,840 - - 124,199
Change in unrealized
holding gain on
available-for-sale
securities (AFS), net
of taxes - - - 5,108 5,108
---------- ----------- ------------ ----------- -----------
Balance, December 31, 1995 $2,808,201 $10,533,061 $ (9,676,323) $ 5,108 $ 3,670,047
---------- ----------- ------------ ----------- -----------
Net loss - - (907,609) - (907,609)
Accrued dividend for
redeemable preferred
stock - series A (Note 16) - (18,750) - - (18,750)
Change in unrealized
holding gain (loss) on
available-for-sale
securities (AFS), net
of taxes - - - (5,618) (5,618)
---------- ----------- ------------ ----------- -----------
Balance, December 31, 1996 $2,808,201 $10,514,311 $(10,583,932) $ (510) $ 2,738,070
========== =========== ============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (907,609) $(1,326,086) $ 1,117,970
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Extraordinary gain from extinguishment
of debt - - (3,377,533)
Depreciation and amortization 72,370 77,621 90,890
Provision for loan/lease losses 694,203 295 (238,727)
Provision for losses on real estate owned 168,187 488,000 1,437,957
Amortization of investment security discounts (1,898) (13,488) -
Amortization of loan fees and discounts (25,991) (78,468) 102,823
Net gain on disposal of fixed assets (734,641) (10,653) (20,000)
Net (gain) loss on real estate owned 306,969 (43,671) 111,022
Net gain on other earning assets - - (211,948)
Net gain on loan servicing rights - - (27,919)
Amortization of loan servicing rights - - 29,124
Increase in taxes payable - - 30,798
(Increase) decrease in other assets 13,908 (83,511) 470,107
Increase (decrease) in other liabilities (22,673) (698,738) 28,821
----------- ----------- -----------
Net cash provided by (used in) operating
activities (437,175) (1,688,699) (456,615)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected - non-bank subsidiaries 50,493 47,220 149,473
Bank loans and leases repaid, net of
originations (7,857,586) (9,852,649) 2,922,888
Loan fees and discounts deferred 3,049 - 88,196
Purchases of securities held-to-maturity - (300,376) -
Purchases of securities available-for-sale (1,695,642) (584,528) -
Investments made in real estate owned (5,178,439) (4,404,748) (1,942,066)
Investments made in other earning assets - - (40,350)
Proceeds received from maturity of AFS securities 200,000 - -
Proceeds received from real estate owned 10,011,649 7,235,937 3,009,908
Proceeds received from other earning assets - - 419,652
Proceeds received from loan servicing rights sold - - 128,844
Purchases of premises and equipment (19,840) (79,370) (3,627)
Proceeds from sale of premises and equipment 1,968,521 17,236 20,000
----------- ----------- -----------
Net cash provided by (used in) investing
activities (2,517,795) (7,921,278) 4,752,918
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
6
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, savings
accounts, NOW accounts and money market accounts (1,276,263) 8,350,008 (1,611,890)
Certificates of deposit sold (matured), net 1,535,603 3,088,918 (5,345,419)
Net change in short-term borrowings (1,538,544) 804,544 (1,300,000)
Proceeds from issuance of long-term debt - - 700,000
Proceeds from issuance of redeemable preferred stock 750,000 - -
Proceeds from issuance of convertible note - - 124,199
Proceeds from issuance of common stock - - 2,018,100
Payments on long-term debt - (84,948) (1,516)
----------- ----------- -----------
Net cash provided by (used in) financing
activities (529,204) 12,158,522 (5,416,526)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (3,484,174) 2,548,545 (1,120,223)
Cash and cash equivalents at beginning of year 8,947,687 6,399,142 7,519,365
----------- ----------- -----------
Cash and cash equivalents at end of year $ 5,463,513 $ 8,947,687 $ 6,399,142
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest on deposits and other borrowings $ 1,701,011 $ 1,513,210 $ 1,014,979
=========== =========== ===========
Income taxes $ 11,471 $ 33,080 $ 4,572
=========== =========== ===========
NON-CASH ITEMS
Increase in foreclosed properties and
decrease in loans $ 513,740 $ 486,974 $ 1,002,455
Other liabilities - accrued REO payables - - 492,336
Effect on stockholders' equity of an
unrealized gain (loss) on debt and
equity securities in available-for-sale (5,618) 5,108 -
</TABLE>
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of accounting:
The accounting and reporting policies used in preparing these
financial statements conform to generally accepted accounting
principles and to general practices within the commercial banking
industry.
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of United Financial Banking Companies, Inc. and subsidiaries
(the Company). Following is a summary of each subsidiary and its
primary business activity:
The Business Bank and Subsidiaries Commercial Bank
(the Bank)
Business Venture Capital, Inc. (BVCI) Develop certain real estate
held for sale
Omni Homes, Inc. (Omni) Hold certain real estate
held for sale see Note 9
All material intercompany accounts and transactions have been eliminated
in consolidation.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold and
investments in certificates of deposit. Generally, federal funds are
purchased and sold for one-day periods. Cash flows from loans not
acquired for resale, demand, interest checking, savings, and time
deposits are reported net.
Securities:
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as
of each balance sheet date. Debt securities are classified as held-to-
maturity (HTM) when the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost.
Debt securities not classified as held-to-maturity or trading and
marketable equity securities not classified as trading are classified
as available-for-sale (AFS). Available-for-sale securities are stated
at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
Note 1. Summary of Significant Accounting Policies (continued)
Securities (continued):
The amortized cost of debt securities classified as held-to-maturity
or available-for-sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion
is included in interest income from investments. The Company adopted
SFAS 115 effective January 1, 1996. See Note 2.
Loans and lease financing:
Loans are stated at unpaid principal balances, net of unearned income
and the allowance for loan losses. Interest on discounted loans is
recognized using the effective yield method. For all other loans,
interest is accrued daily on the outstanding balances. Net deferred
loan fees and discounts on loans are being amortized over the
contractual and/or the estimated average life of the loans as an
adjustment of the yield. The estimated average lives of such loans
range from one to ten years.
Lease financing contracts are recorded on the finance method of
accounting. Under this method, the aggregate amount of all lease
payments and the estimated residual value of the equipment is recorded
as an asset. The excess of these assets over the investments in the
leased equipment is recorded as unearned income and is credited to
income over the lives of the leases under a method that results in an
approximate level rate of return when related to the unrecovered lease
investment.
Loans are placed on non-accrual status when a loan is specifically
determined to be impaired or when principal or interest is delinquent
for 90 days or more. Any unpaid interest previously accrued on those
loans is reversed from income. Interest income generally is not
recognized on specific impaired loans unless the likelihood of further
loss is remote. Interest payments received on such loans are applied
as a reduction of the loan principal balance. Interest income on
other non-accrual loans is recognized only to the extent of interest
payments received.
Allowance for loan/lease losses:
The allowance for loan/lease losses represents an amount which
management believes will be adequate to absorb potential losses
inherent in the existing loan/lease portfolio. Principal factors in
management's evaluation of the adequacy of the allowance include prior
loss experience, changes in the composition and volume of the
portfolio, overall portfolio quality, the value of underlying
collateral, reviews of portfolio quality by state and federal
supervisory authorities, specific problem loans, and current and
anticipated economic conditions that may affect a borrower's ability
to repay. The allowance for loan/lease losses is increased by
provisions for losses charged to expense and decreased by charge-offs,
net of recoveries. In the normal course of business, it is reasonably
possible that this estimate will change in the near term.
In 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (SFAS 114), which was amended in 1995 by
Statement of Financial Accounting Standards No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosure
(SFAS 118). These standards address the accounting for certain loans
when it is probable that all amounts due pursuant to the contractual
terms of the loan will not be collected. Individually identified
impaired loans are measured based on the present value of payments
expected to be received, using the historical effective loan rate as
the discount rate. Loans that are to be foreclosed or that are solely
dependent on the collateral for repayment may alternatively be
measured based on the fair value of the collateral for such loans.
Measurement may also be based on observable market prices. If the
recorded investment in the loan exceeds the measure of fair value, a
valuation allowance is established as a component of the allowance for
credit losses. The Company adopted SFAS 114 and SFAS 118 effective
January 1, 1995. Adoption of the standards has not had a material
impact on the Company's financial position or results of operations.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9
Note 1. Summary of Significant Accounting Policies (continued)
Real estate owned:
Real estate owned consists of properties held for resale which were
acquired through foreclosure on loans secured by real estate. Other
real estate is carried at the lower of cost or appraised market value.
In the normal course of business, it is reasonably possible that the
estimated market value will change in the near term. Write-downs to
market value at the date of foreclosure are charged to the allowance
for loan losses. Subsequent declines in market value are charged to
expense. Routine holding costs, subsequent declines and recoveries in
appraised value are included in other expense. Net gains or losses on
disposal are included in other income.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, (SFAS 121). SFAS 121 does not apply to financial
instruments, long-term customer relationships of a financial
institution, mortgage and other servicing rights, deferred policy
acquisition costs or deferred tax assets, all of which are covered by
existing accounting standards. Assets which are within the scope of
SFAS 121 include real estate owned, premises and equipment, certain
identifiable intangibles and goodwill related to those assets. The
Company adopted SFAS 121 effective January 1, 1996. As the Company
had similar existing accounting policies, adoption of SFAS 121 did not
have a material impact on the Company's financial position or results
of operations.
Other earning assets:
Other earning assets includes certain acquisition, development and
construction (ADC) loans and rental properties. Certain ADC loans,
while legally structured as loans, are accounted for as real estate
investments or joint ventures in accordance with generally accepted
accounting principles. This accounting treatment is applied whenever,
in management's opinion, such loans have essentially the same risks
and rewards as those of investments in real estate or joint ventures.
The Company capitalizes interest on ADC loans accounted for as
investments or joint ventures at the Company's average applicable
interest rate. The equity method of accounting is used for
investments in ADC loans accounted for as joint ventures. Assets are
recorded at the lower of cost or estimated net realizable value.
Premises and equipment:
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets, not exceeding 40 and 10
years for buildings and equipment, respectively. Leasehold
improvements are amortized over the lesser of the life of the lease or
life of the improvements. Maintenance and repairs of property and
equipment are charged to operations and major improvements are
capitalized. Upon retirement, sale or other disposition of property
and equipment, the cost and accumulated depreciation are eliminated
from the Company's records and net gain or loss is included in
operations expense or income .
Mortgage Servicing Rights:
In May 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights, (SFAS 122). SFAS 122 amends SFAS 65, Accounting for
Certain Mortgage Banking Activities, to require the rights to service
mortgage loans originated for sale be recognized as separate assets
either upon origination (if a definitive plan to sell the loans and to
retain the rights exists) or upon sale of the loans, based on the
relative fair values of the rights and loans. SFAS 122 also requires
that mortgage servicing rights be assessed for impairment based on the
fair value of those rights, using a stratified method. The Company
adopted SFAS 122 effective January 1, 1996. The adoption of this
standard had no impact on the financial condition or results of
operation, since the Company, as of December 31, 1996, had no
transactions which were identified as meeting the criteria of SFAS
122.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10
Note 1. Summary of Significant Accounting Policies (continued)
Income taxes:
The Company accounts for certain income and expense items in different
time periods for financial reporting purposes than for income tax
purposes. Provisions for deferred taxes are made in recognition of
such temporary differences using an asset and liability approach.
Investment tax credits taken in prior years relating to lease
financing are deferred and amortized over the terms of the respective
leases.
Earnings per share:
Earnings per share are computed using the weighted average number of
shares of common stock outstanding as adjusted retroactively to
reflect shares issued in connection with stock dividends. The
computation includes the effect of average common equivalent shares
attributable to stock options and/or stock warrants only if such
effect is dilutive. Weighted average shares were 2,808,201 in 1996,
2,757,752 in 1995 and 1,016,525 in 1994. The computation includes the
effect of the dividend accrued on the Company's redeemable preferred
stock (Note 16) which totaled $18,750 in 1996 and $-0- in 1995 and
1994.
Reclassifications:
Certain amounts for fiscal year 1995 and 1994 have been reclassified
to conform to the presentation for fiscal year 1996.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11
Note 2. Securities
In May 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities (SFAS 115)." The Company adopted the
provisions of SFAS 115 effective January 1, 1996, in accordance with the
statement. SFAS 115 was not applicable for the prior period financial
statements as the Company did not hold any investment securities at that
date.
The amortized cost, market value, gross unrealized gains and losses, and
fair value related to the securities portfolio are as follows:
<TABLE>
<CAPTION>
Securities Available-for-Sale
-----------------------------
Gross Gross
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
December 31, 1996:
U.S. Treasury $2,095,932 $ - $(510) $2,095,422
---------- ------ ---------- ----------
Total $2,095,932 $ - $(510) $2,095,422
========== ====== ========== ==========
December 31, 1995:
U.S. Treasury $ 598,392 $5,108 $ - $ 603,500
---------- ------ ---------- ----------
Total $ 598,392 $5,108 $ - $ 603,500
========== ====== ========== ==========
Securities Held-to-Maturity
---------------------------
December 31, 1996:
U.S. Government Agencies $ 300,000 $1,768 $ - $ 301,768
---------- ------ ---------- ----------
Total $ 300,000 $1,768 $ - $ 301,768
========== ====== ========== ==========
December 31, 1995:
U.S. Government Agencies $ 300,000 $6,250 $ - $ 306,250
Other Securities - $ - $ - $ -
---------- ------ ---------- ----------
Total $ 300,000 $6,250 $ - $ 306,250
========== ====== ========== ==========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12
Note 2. Securities (continued)
The amortized cost and estimated fair value of securities at December 31,
1996, by contractual maturity are shown below.
<TABLE>
<CAPTION>
Securities Available-for-Sale Cost Fair Value
----------------------------- ---------- ----------
<S> <C> <C>
Due in one year or less $1,099,429 $1,101,172
Due after 1 year through 5 years 996,503 994,250
Due after 5 years through 10 years - -
Due after 10 years - -
---------- ----------
Total $2,095,932 $2,095,422
========== ==========
Securities Held-to-Maturity
---------------------------
Due in one year or less $ 300,000 $ 301,768
Due after 1 year through 5 years - -
Due after 5 years through 10 years - -
Due after 10 years - -
---------- ----------
Total $ 300,000 $ 301,768
========== ==========
</TABLE>
Securities with an amortized cost of $1,598,415 and $898,392 at December 31,
1996, and 1995, respectively, were pledged as collateral for treasury, tax and
loan, a daylight overdraft line at the Federal Reserve and a letter of credit
at Community Bankers Bank.
No gross gains or gross losses were realized in 1996 or 1995.
Note 3. Loans and Lease Financing and Related Accounts
Loans and lease financing consists of:
<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
<S> <C> <C>
Commercial $21,868,684 $17,535,738
Real estate construction 1,527,521 1,979,587
Real estate mortgage 4,418,814 1,568,745
Installment 2,438,674 1,946,570
Direct financing lease - -
Leveraged leases 364,642 844,342
----------- -----------
$30,618,335 $23,874,982
=========== ===========
</TABLE>
Investment in direct financing leases does not include total estimated
residual values for leased computer equipment at December 31, 1996 and 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13
Note 3. Loans and Lease Financing and Related Accounts (continued)
During 1988, the Company entered into an agreement to lease computer
equipment under a leveraged lease agreement. During 1995, the lessee
exercised its option to exchange computer equipment for like-kind computer
equipment in a tax-free exchange. The leases have been reclassified as new
leveraged leases since the lessees, lease term and residual value also
changed. The lease expires in 1998. The estimated residual value of the
leased computer equipment has been determined by an independent appraiser.
Estimated residual values are subject to change based upon technological
obsolescence, physical deterioration and other factors. In the normal course
of business, it is reasonably possible that this estimate will change in the
near term. A change in the estimated residual value would affect the
unearned and deferred income. The Company's net investment in leveraged
leases is composed of the following elements:
<TABLE>
<CAPTION>
1996 1995
--------- -----------
<S> <C> <C>
Estimated residual value of leased assets $366,700 $1,086,590
Less: unearned and deferred income (2,058) (242,248)
-------- ----------
Investment in leveraged leases 364,642 844,342
Less: deferred taxes arising from
leveraged leases - -
-------- ----------
Net investment in leveraged leases $364,642 $ 844,342
======== ==========
</TABLE>
Deferred taxes arising from leveraged leases have been limited by the
carryforward of net operating losses. For the years ended December 31, 1996
and 1995 there was no income effect from the leveraged lease.
Nonperforming loans are those on which income is recognized on the cash basis
(non-accrual loans) and those on which the yield has been reduced
substantially because of credit deterioration (restructured loans).
Nonperforming loans and loans 90 days or more past due are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Non-accrual $328,355 $403,318
Restructured - -
-------- --------
Total nonperforming 328,355 403,318
90 days or more past due - -
-------- --------
$328,355 $403,318
======== ========
</TABLE>
The following is an analysis of approximate interest income related to loans
on non-accrual status:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Interest income that would have been recognized $ 55,000 $ 80,000
Amount recognized as interest income 17,000 33,000
-------- --------
Difference $ 38,000 $ 47,000
======== ========
</TABLE>
There were no commitments to lend additional funds to customers whose loans
were classified as nonperforming at December 31, 1996.
Changes in the allowance for loan/lease losses are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Balance, beginning $ 462,846 $ 700,666
Provision charged to operations 694,203 (295)
Loans charged off (594,140) (269,434)
Recoveries 21,197 31,909
--------- ---------
Balance, ending $ 584,106 $ 462,846
========= =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14
Note 4. Significant Concentrations of Credit Risk
The Company's business activity is primarily with customers located in
Northern Virginia and the surrounding metropolitan area. A portion of the
Company's lending activities is with customers involved in residential or
commercial real estate development or in holding land to be developed. As of
December 31, 1996 and 1995, the Company and its subsidiaries had loans to
such customers amounting to approximately $4,019,000 and $4,478,000,
respectively. The Company evaluates each customer's creditworthiness on a
case-by-case basis. Generally, these loans are secured by the underlying real
estate, securities and/or business assets.
The Company maintains cash in commercial checking accounts. Accounts at the
commercial banks are insured by the Federal Deposit Insurance Corporation
only up to $100,000 per customer. At December 31, 1996, the Company had
uninsured cash of $58,203.
Note 5. Real Estate Owned
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Real estate owned $ 4,452,905 $11,658,239
Allowances for losses on real estate owned (1,337,825) (3,745,303)
----------- -----------
Real estate owned, net $ 3,115,080 $ 7,912,936
=========== ===========
</TABLE>
Capitalized interest amounted to $144,000 and $147,800 for the years ended
December 31, 1996 and 1995, respectively.
Changes in the allowance for losses on real estate owned are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Balance, beginning $ 3,745,303 $ 4,025,486
Provision charged to operations 168,187 488,000
Losses charged to allowance (2,575,665) (768,183)
----------- -----------
Balance, ending $ 1,337,825 $ 3,745,303
=========== ===========
</TABLE>
Note 6. Premises and Equipment
Major classifications of premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ------------
<S> <C> <C>
Land $ - $ 390,923
Buildings - 1,226,875
Leasehold improvements 225,908 225,908
Furniture and equipment 634,581 637,111
--------- -----------
860,489 2,480,817
Accumulated depreciation and
amortization (727,777) (1,061,695)
--------- -----------
$ 132,712 $ 1,419,122
========= ===========
</TABLE>
On December 30, 1996, the Bank sold the building it occupies and the
surrounding land for $1,968,171, net. The transaction resulted in a gain of
$734,291. The Bank then entered into a one year lease to rent the building
sold. As of December 31, 1996, the Bank's minimum obligation for the lease
totaled $187,820. The lease terms include three options for renewal and a
right of first offer. During the normal course of planning, Bank management
decided that the Bank would require a significant capital expenditure, the
purchase of an automatic teller machine. The projected expense required Bank
management to analyze and to decide the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15
Note 6. Premises and Equipment (continued)
best location for the Bank for the future. As a result of the analysis,
the Bank, subsequent to December 31, 1996, chose to exercise the first
option, a nine year extension. The future minimum lease payments for the
Bank lease, including the option period, total $2,083,620.
Future minimum lease payments for noncancellable operating leases with
initial or remaining terms of one year or more as of December 31, 1996, are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $248,913
1998 63,132
1999 65,026
2000 33,488
2001 -
Later years -
--------
Total minimum lease payments $410,559
========
</TABLE>
In 1995, the Company consolidated its operations into one location. The site
previously leased for bank operations has been sublet and the rental income
has been netted against rent expense. Also, during 1996 and 1995 the Bank
sublet a portion of the building headquarters, the income of which is netted
against rent expense.
Rental expense for operating leases amounted to $(17,074), $13,261 and
$29,115 for the years ended December 31, 1996, 1995 and 1994, respectively.
Depreciation and amortization expense of $72,370 in 1996, $77,621 in 1995 and
$90,890 in 1994, is included in occupancy expense or furniture and equipment
expense, depending on the nature of the asset.
<TABLE>
<CAPTION>
Note 7. Short-Term Debt
1996 1995
----- ----------
<S> <C> <C>
Note payable at 8% fixed, collateralized
by real estate classified as real estate
owned. Interest is payable quarterly and
principal is due on demand. $ - $ 64,840
Note payable of $500,000 at prime plus 5%,
collateralized by cash distributions from
BVCI. Interest is payable quarterly
and principal is due December 31, 1996.*** - 500,000
Note payable of $700,000 at prime plus 5%,
collateralized by common stock of the Bank
and BVCI. Interest is payable quarterly
and principal is due December 31, 1996.*** - 700,000
Note payable of $273,704 at prime plus 2%,
collateralized by a first deed of trust on
certain BVCI property. Interest is payable
monthly and principal is due December 1996. - 273,704
------ ----------
$ - $1,538,544
====== ==========
</TABLE>
In 1996 and 1995, interest was capitalized on certain properties classified
as real estate owned (Note 5).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16
Note 7. Short-Term Debt (continued)
The following is a summary of short-term debt and weighted average interest
rates:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Average daily amount outstanding $1,743,971 $ 727,511
========== ==========
Weighted average interest rate 12.0% 12.5%
========== ==========
Maximum outstanding at any month-end** $3,962,946 $1,538,544
========== ==========
</TABLE>
*** On October 1, 1996, the Company paid various note holders $600,000 to
retire a portion of the $700,000 and $500,000 secured note debt. The
remaining $600,000 of short-term debt was converted into redeemable preferred
stock (Note 16).
Note 8. Income Taxes
The Company adopted Statement of Financial Accounting Standards No. 109 (SFAS
No. 109), Accounting for Income Taxes, as of the beginning of the fiscal year
1994. The adoption of SFAS No. 109 had no effect on the net income of the
Company.
Provision (credit) for income taxes in the consolidated statements of income
are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------ -------
<S> <C> <C> <C>
Current $(2,461) $2,598 $10,640
Deferred - - -
------- ------ -------
$(2,461) $2,598 $10,640
======= ====== =======
</TABLE>
The credit for income taxes for the years ended December 31, 1996 and 1995,
is limited due to the Company's inability to utilize net operating losses and
alternative minimum tax credits.
There were no net deferred income tax assets (liabilities) as of December 31,
1996 and 1995, as illustrated in the following table:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities $(1,086,224) $(2,840,812)
Deferred tax assets 5,395,677 7,153,062
Deferred asset valuation allowance (4,309,453) (4,312,250)
----------- -----------
Net deferred tax assets (liabilities) $ - $ -
=========== ===========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17
Note 8. Income Taxes (continued)
The principal sources of the deferred tax provisions were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Accelerated depreciation $ 182,978 $ 65,151 $ (73,237)
Lease financing 285,950 109,694 241,747
Provision for loan losses (185,201) (101) (261,819)
Valuation adjustment of real properties (851,512) (36,098) (321,089)
Deferred compensation plans - (65,867) 8,785
Supplemental retirement plans 1,632 1,513 (49,995)
Acquisition, development and
construction loans - - (18,129)
Net operating loss carryforward (614,880) (628,677) (313,037)
Limitation of net operating losses
and alternative minimum tax credits 1,195,450 585,839 785,777
Other (14,417) (31,454) 997
---------- --------- ---------
$ - $ - $ -
========== ========= =========
</TABLE>
A reconciliation between the amount of reported federal income tax expense
and the amount computed by multiplying the applicable statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------ -----------
<S> <C> <C> <C>
Income (loss) before income taxes $(910,070) $(1,323,488) $1,148,768
Applicable statutory income tax rate 34% 34% 34%
--------- ----------- ----------
Computed "expected" federal tax
expense (309,424) (449,986) 390,581
Adjustments to federal income tax
resulting from:
Net operating loss carryforward 309,424 449,986 (275,637)
Other (2,461) 2,598 (104,304)
--------- ----------- ----------
Provision for federal income tax $ (2,461) $ 2,598 $ 10,640
========= =========== ==========
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards for
income tax purposes of $5,264,330 which will expire $518,977 in 2006,
$1,066,398 in 2007, $1,849,246 in 2008 and $1,829,709 in 2010. The Company
also has an alternative minimum tax credit carryforward of approximately
$302,000 which may be carried forward indefinitely.
Note 9. Commitments and Contingencies
Omni Homes, Inc.
----------------
In 1994, the Company foreclosed its collateral position on the common stock
of its borrower, Omni Homes, Inc. (Omni). Omni, a real estate development
company, defaulted on its loan with a principal balance of $465,000. This
loan subsequently was charged off in full by the Company in 1994, all
expenses associated with the foreclosure and lawsuit have been expensed as
incurred, and the Omni common stock is currently carried on the books at no
value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18
Note 9. Commitments and Contingencies (continued)
In 1994, the Company on behalf of the wholly-owned subsidiary, Omni,
instituted a lawsuit against Prince William County, alleging indirect
condemnation and substantial damages therefrom. On November 1, 1995, the
Prince William County Circuit Court ruled in favor of Omni Homes and awarded
$850,000 in damages in addition to allowing Omni to retain ownership of the
72-acre piece of property appraised at $350,000. Prince William County
appealed the ruling in December, 1995, to the Virginia Supreme Court. On
January 10, 1997, the Virginia Supreme Court reversed the lower court ruling
and ruled in favor of Prince William County. In addition to the 'land
condemnation' issue, Omni pursued recovery of legal expenses. As a result of
the Virginia Supreme Court ruling in favor of Prince William County, the
Virginia Supreme Court also ruled that Omni was responsible for Prince
William County's legal fees of approximately $8,200.
On the recommendation of counsel, the UFBC Board of Directors and management
have decided to pursue the appeal process. During the process, Omni is
projected to incur only minor out of pocket expenses. If the matter is
accepted for hearing before the U.S. Supreme Court, UFBC on behalf of Omni,
will incur duplication charges of approximately $8,000.
FDIC Settlement
---------------
Although a profit was reported by the Company for the year ended December 31,
1994, it was primarily attributable to one-time asset recoveries and an
extraordinary gain on settlement of a debt with the Federal Deposit Insurance
Corporation. The Company continues to report losses. As a consequence, the
Company continues to operate under a restrictive agreement with the Federal
Reserve and State Corporation Commission, and the Company's Bank subsidiary
operates under a similar agreement with the Federal Deposit Insurance
Corporation. These agreements are discussed further in Note 11. The
Company and the Bank subsidiary currently are in compliance with these
agreements and, most importantly, exceed the capital adequacy requirements.
Nonetheless, the long-term ability of the Company to continue as a going
concern is dependent upon management's ability to return the Company to
consistent profitability. Achieving this goal will depend on continuing to
reduce the level of non-earning assets, increasing earning assets (loans and
investments), controlling operating expenses and continuing to meet the terms
of the agreements with the regulatory agencies.
Though there can be no assurance that these measures will succeed, the
Company has taken several steps since 1994 to achieve the above objectives.
During 1994 and 1995, a significant portion of senior management was replaced
and the organization restructured in order to facilitate the implementation
of a more focused strategic plan for the Company. Concurrently, several
seasoned businessmen of varied backgrounds were added to the Company's Boards
of Directors. During 1996, the Bank subsidiary gained additional expertise
and community support by the establishment of an Advisory Board consisting of
ten community businessmen and women. Since December 31, 1994 to December 31,
1996, the Company has reduced non-earning assets, including real estate
owned, by $8,365,000 or 68.9%. During the same period, the Company's loan
portfolio, net of unearned income, and security investments have increased
$10,462,000 or 71.1%, while operating expenses have decreased $250,000 or
12.3%.
General Contingency
-------------------
The Company, in the normal course of its business, is occasionally the
subject of legal actions and proceedings. In the opinion of management,
after consultation with counsel, there were no legal matters pending as of
December 31, 1996 which would have a material adverse effect on the Company's
financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19
Note 9. Commitments and Contingencies (continued)
Financial Instruments With Off-Balance Risk
- -------------------------------------------
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities which are not reflected in the
accompanying financial statements. These commitments and contingent
liabilities include commitments to extend credit and standby letters of
credit. The Company evaluates each customer's creditworthiness on a case-by-
case basis. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation
of the customer. Such collateral, where required, generally consists of real
estate and assets of the business.
Lines of credit are established for a potential borrower as an indication of
the aggregate amount of outstanding loans that the Company is willing to
extend. At December 31, 1996 and 1995, commitments to extend credit under
unused lines of credit amounted to approximately $2,813,335 and $1,747,000,
respectively.
The Company's outstanding standby letters of credit amounted to approximately
$531,528 and $167,000 as of December 31, 1996 and 1995, respectively. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in making loans to customers.
Note 10. Related Party Transactions
Directors and officers of the Company were customers of, and entered into
transactions with, the Company in the ordinary course of business. Loan
transactions with directors and officers were made on substantially the same
terms as those prevailing for comparable loans to other persons and did not
involve more than normal risk of collectibility or present other unfavorable
features. Loans to directors and officers, including family members or
businesses in which they have 5 percent or more beneficial ownership, are
summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1994 $ 50,722
Additions 58,309
Reductions (41,123)
--------
Balance, December 31, 1995 $ 67,908
Additions 863,623
Reductions (48,144)
--------
Balance, December 31, 1996 $883,387
========
</TABLE>
The December 31, 1996 balance consists of both secured and unsecured loans.
None of the loans to related parties were classified as non-performing as of
December 31, 1996.
As part of the recapitalization which occurred at December 30, 1994, certain
directors and shareholders of the Company purchased $700,000 of notes secured
by all of the common stock of the Bank and BVCI (Notes 7 and 11). In 1995,
as a measure to comply with the Order (Note 11), certain directors and
shareholders of the Company purchased $500,000 of notes secured by projected
cashflows of BVCI.
Certain directors and shareholders were participants in both transactions.
During 1996, certain shareholders and directors holding $600,000 of the
secured notes were paid in full. Certain shareholders and directors holding
$600,000 of the secured notes chose to convert their notes to redeemable
preferred stock (Note 16).
During the year ended December 31,1996, the building which serves as the
Company's headquarters was sold to a limited liability corporation, organized
in the state of Virginia. Mr. Manuel V. Fernandez, a beneficial shareholder
owning in excess of 5% of the Company's Common Stock, has 50% beneficial
ownership of the limited liability corporation. A second shareholder, owning
less than 5% of the Company's Common Stock also has 50% beneficial ownership
in the limited liability corporation. The building was sold for $1,968,171,
net. The sale resulted in a gain of $734,291 for the Company's banking
subsidiary which owned the building. The terms of the sale were substantially
the same as those prevailing for similar sales within the market area that
the building is located. The Company did not finance any portion of the
transaction.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20
Note 10. Related Party Transactions (continued)
During the year ended December 31, 1996, the Bank sold a piece of foreclosed
real estate to another limited liability corporation, organized in the state
of Virginia. Mr. Manuel V. Fernandez, a beneficial shareholder owning in
excess of 5% of the Company's Common Stock, has 50% beneficial ownership of
the limited liability corporation. A second shareholder, owning less than 5%
of the Company's Common Stock also has 50% beneficial ownership in the
limited liability corporation. The foreclosed property was sold for
$960,294, net. The sale resulted in a consolidated loss of $370,529. With
regulatory approval, the Bank financed $790,000 of the sales price of the
property. The loan was made on substantially the same terms as those
prevailing for comparable loans to other persons and did not involve more
than normal risk of collectibility or present other unfavorable features.
Note 11. Regulatory Requirements and Restrictions
On August 12, 1994, the Business Bank (Bank), UFBC's main subsidiary,
consented to the issuance of a Cease and Desist Order (Order) by the Federal
Deposit Insurance Corporation (FDIC) and by the Virginia Commissioner of
Financial Institutions. On December 31, 1994, UFBC entered into a written
agreement (Agreement) with the Federal Reserve Bank of Richmond and the
Commissioner of Financial Institutions, Bureau of Financial Institutions of
the Commonwealth of Virginia. The Order and the Agreement address various
areas of operation in the Company, most specifically the Bank, and required
the Board of Directors and management to complete and to perform several
specific directives. The Order and the Agreement also include provisions to
monitor the Company's progress toward profitability. The Order also requires
the Bank to maintain a minimum Leverage Capital ratio of 6%.
As of December 31, 1996, management believes that the Company is in
compliance with all terms and provisions of the Order and of the Agreement.
The Company's banking subsidiary is subject to federal and/or state statutes
which prohibit or restrict certain of its activities, including the transfer
of funds to the Company. There are restrictions on loans from the Bank to
the Company, and the Bank is limited as to the amount of cash dividends it
can pay. As stipulated in the Order, the Bank is restricted from paying
dividends until so approved by the appropriate regulatory authorities. The
Bank paid no dividends in 1996, 1995 and 1994.
The Federal Reserve Act (Act) allows the Bank to make loans or other
extensions of credit to its parent, UFBC, only if such loans do not exceed 10
percent of the Bank's capital and surplus and if such loans or extensions of
credit are secured by adequate collateral, as defined by the Act. The Bank's
capital and surplus totaled approximately $2,846,000 at December 31, 1996;
thus net assets of the Bank in excess of approximately $284,600 were
restricted from use by UFBC in the form of loans or advances. UFBC had no
such borrowings from the Bank in 1996 or 1995.
As a participant in the Federal Reserve system, the Bank is required to
maintain certain average reserve balances which are non-interest bearing.
The daily average reserve requirement for the week including December 31,
1996 was $379,000.
The Federal Reserve Board issued risk-based capital guidelines for bank
holding companies. The guidelines initially defined a two-tier capital
framework. Tier I Capital consists of common and qualifying preferred
shareholders' equity less intangible assets. Tier II Capital consists of
mandatory convertible, subordinated and other qualifying debt, preferred
stock not qualifying as Tier I Capital and the reserve for loan losses up to
1.25 percent of risk-weighted assets. Under these guidelines, one of four
risk weights is applied to the different on-balance sheet assets. Off-
balance sheet items such as loan commitments are also applied a risk weight
after conversion to balance sheet equivalent amounts. Tier I and Tier II
Capital require a minimum ratio of 4.0% and 8.0%, respectively. The Federal
Reserve issued another guideline, a minimum Leverage ratio, which measures
the ratio of Tier I capital to quarterly average assets less intangible
assets. A Leverage ratio of 3% must be maintained for highly rated banks.
Otherwise, the minimum leverage ratio, based upon the institution's overall
financial condition, must be at least 100 to 200 basis points above the
minimum. These guidelines were also adopted by the Federal Deposit Insurance
Corporation and therefore applies to the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21
Note 11. Regulatory Requirements and Restrictions (continued)
Company's banking subsidiary. Additionally, the Federal Reserve Board
requires bank holding companies to meet a minimum ratio of qualifying Total
(combined Tier I and Tier II) capital to risk-weighted assets of 8.0%, at
least half of which must be composed of core (Tier I) capital elements. The
following table presents the Company and the Bank's capital position and
related ratios as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C> <C>
Tier I Capital
Company $ 2,737,560 $ 3,670,047
The Business Bank 2,846,159 2,444,320
Total qualifying capital
Company $ 3,862,590 $ 4,086,452
The Business Bank 3,233,509 2,829,855
Risk-weighted assets
Company $31,388,047 $33,265,920
The Business Bank 30,987,987 30,842,784
Quarterly average assets
Company $42,658,678 $43,517,261
The Business Bank 41,014,942 40,456,681
Required
Risk-based capital ratios: 1996 1995 Minimum
--------- ----------- -----------
Tier I capital (Tier I capital/risk-weighted assets)
Company 8.72% 11.03% 4.00%
The Business Bank 9.18% 7.93% 4.00%
Total capital (Total capital/risk-weighted assets)
Company 12.31% 12.28% 8.00%
The Business Bank 10.43% 9.18% 8.00%
Leverage ratio (Tier I capital/adjusted average assets)
Company 6.42% 8.43% *6.00%
The Business Bank 6.94% 6.04% *6.00%
*Minimum required by the Order and Agreement
Note 12. Other Income
1996 1995 1994
--------- ----------- -----------
Gain on sale of loans $ - $ - $ 73,651
Service charges on deposits 71,362 65,795 65,712
Fees on letters of credit 7,433 5,188 5,060
Gain on sale of other earning assets - - 187,500
Gain (loss) on sale of real estate owned (306,969) 35,420 (111,022)
Other 30,294 39,529 59,331
Gain on canceled director deferred
compensation plans - - 27,803
Forfeited deposit on real estate owned 21,452 - 50,000
Gain on sale of loan servicing rights - - 27,919
Benefit from life insurance policy - - 32,279
--------- ----------- -----------
$(176,428) $ 145,932 $ 418,233
========= =========== ===========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22
<TABLE>
<CAPTION>
Note 13. Interest on Deposits
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Savings and NOW $ 66,738 $ 46,248 $ 44,630
Money market 163,612 155,577 58,354
Time:
Under $100,000 929,006 811,137 650,949
$100,000 and over 338,733 328,408 289,935
Less capitalized interest - - (101,211)
---------- ---------- ---------
$1,498,089 $1,341,370 $ 942,657
========== ========== =========
</TABLE>
In 1994, interest was capitalized on certain ADC loans and certain property
classified as real estate owned (Note 5).
Note 14. Employee Benefit Programs
(a) Retirement Plans
The Company had a 401(K) Plan which covered all employees who met specified
age and employment requirements. The administrative expense associated with
the 401(K) Plan was approximately $1,200 in 1996. The Company has made no
contributions to the Plan to date. Future contributions, if any, will be
determined annually at the discretion of the Company's Board of Directors.
(b) Stock Options
The Company has an Executive Stock Plan (Plan) covering substantially all
employees. Under the Plan, any employee who has or is expected to
significantly contribute to the Company's growth and profit may be granted
one or more options and/or Stock Appreciation Rights (SAR). Members of the
Compensation Committee are not eligible. The Committee, consisting of non-
employee members of the Board of Directors, may designate the characteristics
and terms of the granted options or SAR's.
The Committee establishes the price of each option share granted. The
maximum number of shares issuable under the Plan currently is 308,910 based
on formula adjustments since adoption of the Plan. This amount includes the
60,313 increase in the number of shares issuable under the Plan which was
approved at the Annual Meeting of Shareholders on June 12,1996. The options
are exercisable at any time over a ten year period from the date of grant as
long as the option holder is an employee of the Company. As of December 31,
1996, 205,410 options to purchase common stock were granted. Certain
employee grants are to vest over a 4 year span.
In 1996, Company shareholders approved the 1996 Nonqualified Stock Option
Plan for Non-Employee Directors (the Directors Plan) which awards options to
purchase an aggregate of 40,000 shares of Company Common Stock to non-
employee directors of the Company and the Bank. The options have a term of
ten years from the date of grant and have an exercise price of $1.50 per
share. On July 1, 1996, five non-employee directors received options to
purchase 4,000 shares of Company Common Stock. All non-employee members of
the Board of Directors of the Company and the Bank will receive non-
qualified options to purchase 2,000 shares of Common Stock on each of July
1,1997 and July 1, 1998, subject to reduction and proration if there are not
sufficient authorized shares remaining available for issuance pursuant to the
plan to issue the full number of options to each director. No options may be
granted pursuant to the Directors Plan after July 1, 1998. In the event of
the sale, merger or other consolidation of the Company before July 1, 1998,
all options available for issuance shall be immediately granted, vested and
exercisable without any waiting periods.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23
Note 14. Employee Benefit Programs (continued)
The following table summarizes the Company's stock option activity for the
year ended December 31, 1996:
<TABLE>
<CAPTION>
Average
Price Per
Share Options
--------- -------
<S> <C> <C>
Outstanding at December 31, 1995 $ - -
Granted 1.50 245,410
Exercised - -
Canceled or expired - -
-------- -------
Outstanding at December 31, 1996 $1.50 245,410
-------- =======
Exercisable at December 31, 1996 $1.50 141,264
-------- =======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, (SFAS 123). This statement establishes financial accounting
and reporting standards for stock-based employee compensation plans. Such
plans include all arrangements by which employees or others receive shares of
stock or other equity instruments of the Company. SFAS 123 allows two
alternative accounting methods: (1) fair-value-based method, or (2) an
intrinsic-value-based method which is already prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
(APB 25).
Under the fair value based method, compensation expense would be measured as
the fair value of the equity instrument, such as a stock option (option) on
the date granted, and would be recognized over the vesting period of the
option. Fair value would be determined by considering, as of the grant date,
the exercise price and expected life of the option, the current price of the
underlying stock of the option and the stock's expected volatility, expected
dividends on the underlying stock, and the risk-free interest rate for the
expected term of the option. Under the intrinsic value based method,
compensation expense is measured as the excess, if any, of the market price
of the stock underlying the option as of the date granted, over the exercise
price. Under the Company's plan, options have no intrinsic value on the date
of grant as the exercise price equals the market price of that date.
The Company has elected to account for stock-based compensation under the
intrinsic value guidelines of APB 25. Accordingly, no compensation expense
associated with the options granted had been recognized as of December 31,
1996. The required proforma disclosures have not been presented because the
effect of applying SFAS 123's fair value method to the Company's stock-based
awards results in net income and earnings per share that are not materially
different from the 1996 amounts reported.
Note 15. Other Expense
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Amortization of loan servicing rights $ - $ - $ 29,124
Data processing 90,088 47,402 2,469
Professional fees 180,634 314,596 213,139
Stationery, printing and supplies 36,137 38,669 61,376
Insurance 144,232 111,910 158,923
Consulting and commissions 121,622 90,246 58,294
Telephone 15,956 29,574 27,740
Advertising 22,405 29,127 37,856
Travel, mileage, and lodging 11,909 1,151 10,172
Provision for losses on real
estate owned, net 168,187 488,000 1,437,957
Real estate owned, holding expense 178,202 183,764 187,515
Other 97,993 69,659 184,566
---------- ---------- ----------
$1,067,365 $1,404,098 $2,409,131
========== ========== ==========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24
NOTE 16. Redeemable Preferred Stock
The Board of Directors has authorized the issuance of up to 900 shares of
Series A Preferred Stock in exchange for the certain promissory notes issued
by the Company or for cash. The issuance of up to 180,000 warrants,
exercisable at $1.50 per warrant and expiring September 30, 2001, has also
been authorized. The Series A Preferred Stock shall bear a ten percent (10%)
cumulative annual dividend, payable quarterly, prorated for any quarter where
the shares have been outstanding for less than a full quarter, except for the
dividend payable January 1, 1997, which shall be a full dividend regardless
of the date of issuance of the Series A Preferred Stock. The Series A
Preferred Stock shall be redeemable by the company at any time, or from time
to time, in whole or in part, at a redemption price of one thousand five
hundred dollars ($1,500) plus any dividends accrued but unpaid as of the
redemption date. The Series A Preferred Stock will be mandatorily redeemed,
at a redemption price of one thousand five hundred dollars ($1,500) plus any
dividends accrued but unpaid as of the redemption date, on September 30,
2001. The Company is not required to set up a sinking fund or similar
reserve of funds for the redemption of the Series A Preferred Stock. While
any shares of Series A Preferred Stock are outstanding, the Company is
restricted from repurchasing or redeeming any shares of Common Stock or any
other class of stock junior to the Series A Preferred Stock. Generally, the
Series A Preferred Stock will not be entitled to vote except as may be
required by law or upon the occurrence of an event of default. In general,
an event of default will have occurred if the Company shall fail to redeem or
provide for the redemption of all Series A Preferred Stock, and to have paid
all accrued but unpaid dividends on the Series A Preferred Stock, by
September 30, 2001. Upon the occurrence of an event of default, the Series A
Preferred Stock, voting as a separate class and subject to the receipt of any
required regulatory approvals, shall be entitled to elect a majority of the
Board of Directors. Additionally, the approval of the holders of a majority
of the Series A Preferred Stock is required in order to authorize the
issuance of any shares of a class or series of stock having dividend or
liquidation rights prior or superior to the Series A Preferred Stock.
As of December 31, 1996, the Series A Preferred Stock balance of $768,750 is
projected to have a redemption value of $1,125,000 at September 30, 2001.
Subsequent to December 31, 1996, the Company sold an additional 300 shares or
$450,000 of Series A Preferred Stock to a director and shareholder of
beneficial ownership in excess of 5%. As of January 24,1997, redemption
value of the Company's redeemable preferred stock, at September 30, 2001, is
projected to be $1,786,000.
Note 17. Shareholder's Equity
The Company has authorized 5,000,000 shares of no par value preferred stock.
As of December 31, 1996, no shares of preferred stock had been issued. The
preferred stock discussed in Note 16 is prohibited from being classified as
shareholder's equity by the Security and Exchange Commission (SEC) due to its
mandatory redemption requirement. Additionally, the SEC requires specific
disclosures regarding mandatory redeemable preferred stock. These
disclosures are presented in the Consolidated Balance Sheets and in Note 16.
The Company has authorized 3,500,000 shares of $1 par value common stock. At
December 31, 1996 and 1995, there were 2,808,201 outstanding. Shares
reserved by the Company for future issuance (convertible notes, stock option
plans and stock warrants) total 318,590.
Beginning on or about August 22, 1994, the Company offered subscriptions to
purchase shares of stock, at $1.25 per share, to certain qualified investors
through a private placement memorandum (Offering). The Offering closed on or
about December 29, 1994. On December 30, 1994, the Company issued to
subscribers 1,701,641 shares of common stock. Proceeds received from the
Offering totaled $2,251,250 and increased the Company's capital $2,018,100,
net of expenses and convertible notes.
Certain investors' total subscriptions would have granted them voting shares
of 10% or more of the Company's total outstanding shares of common stock.
The Change in Bank Control Act of 1978 requires any such person(s) to notify
and to be granted the permission of The Federal Reserve Bank of the District
in which the bank or bank holding company is located. Until approval was
granted, certain subscribers were issued non-interest bearing notes for the
subscribed voting shares in excess of 10% of the Company's total outstanding
shares. Upon the approval of the Federal Reserve Bank of Richmond (the
Company's District), the notes were automatically converted to shares of
common stock totaling 99,359.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25
Note 17. Shareholder's Equity (continued)
Concurrent to the 1994 Offering, a $700,000 secured loan (Note 7) was
arranged for the Company. The loan carries detachable warrants for the
purchase of 70,000 shares of the Company's common stock. The warrants have
an exercise price of $1.50/share and expire in December 1999. The $700,000
loan was repaid in October, 1996 (Note 7). The associated detachable
warrants remain outstanding until December 1999.
Note 18. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (SFAS 107), requires disclosure of the
estimated fair values of financial instruments which is defined as the amount
at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. In cases where
quoted market prices are not available, fair values are based on estimates
using discounted cash flow analyses or other valuation techniques. Those
techniques involve subjective judgment and are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. The estimation methods for individual classifications of financial
instruments are more fully described below. Accordingly, the net realizable
values could be materially different from the estimates presented below.
Cash and short-term investments
The carrying value of cash and short-term investments is a reasonable
estimate of fair value.
Investment Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans
For certain homogeneous categories of loans, such as some residential
mortgages and other consumer loans, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans
is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
Deposits
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at December 31, 1996. The fair
value of fixed maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Borrowings
The Company's book values for short and long-term borrowings approximate
their fair values.
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term
investments $ 5,463,000 $ 5,463,000 $ 8,947,000 $ 8,947,000
Investment Securities 2,395,000 2,397,000 903,000 909,000
Net loans 29,670,000 30,761,000 22,568,000 22,755,000
Financial Liabilities:
Deposits 37,735,000 37,551,000 37,475,000 37,649,000
Short-term borrowings - - 339,000 339,000
Long-term debt - - 1,200,000 1,200,000
</TABLE>
SFAS 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amount presented should not be interpreted as representing the
underlying value of the Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26
Note 19. Parent Company Financial Statements
Condensed financial statements of the parent company, United Financial
Banking Companies, Inc., as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995 and 1994, follow:
BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Cash on deposit with subsidiary bank $ 132,832 $ 188,435
Investment in The Business Bank 2,846,671 2,439,211
Investments in other subsidiaries 97,619 1,780,833
Loans receivable 425,576 441,707
Real estate owned - -
Other assets 44,874 43,265
---------- ----------
Total assets $3,547,572 $4,893,451
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term and long-term debt $ - $1,200,000
Other liabilities 40,242 28,512
---------- ----------
Total liabilities 40,242 1,228,512
---------- ----------
REDEEMABLE PREFERRED STOCK
Series A 768,750 -
STOCKHOLDERS' EQUITY 2,738,580 3,664,939
---------- ----------
Total liabilities and stockholders' equity $3,547,572 $4,893,451
========== ==========
</TABLE>
STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------ ------------
<S> <C> <C> <C>
Income:
Interest $ 35,337 $ 40,257 $ 16,757
Other (73,051) 17,475 239,378
--------- ----------- -----------
Total income (37,714) 57,732 256,135
Expenses 946,093 394,463 (223,569)
--------- ----------- -----------
Income (loss) before income taxes (983,807) (336,731) 479,704
Income tax expense (benefit) (2,461) 2,598 10,640
--------- ----------- -----------
Income (loss) (981,346) (339,329) 469,064
Undistributed net loss of subsidiaries 73,737 (986,757) (2,708,469)
Extraordinary item, net of tax - - 3,357,375
--------- ----------- -----------
Net income (loss) $(907,609) $(1,326,086) $ 1,117,970
========= =========== ===========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27
Note 19. Parent Company Financial Statements (continued)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (907,609) $(1,326,086) $ 1,117,970
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Extraordinary gain from extinguishment
of debt - - (3,377,533)
Depreciation and amortization - 159 638
Provision for loan losses 498,800 (250,000) (325,727)
Valuation adjustment on ADC arrangements - - -
Provision for losses on real estate owned 28,000 194,000 (542,011)
(Gain) loss on other earning assets - - (187,500)
(Gain) loss on real estate owned 75,000 10,795 (16,867)
Undistributed net (gain) loss of:
The Business Bank (154,460) 1,149,694 1,351,026
Other Subsidiaries 80,723 (162,937) 1,357,442
Increase in taxes payable - - 30,798
(Increase) decrease in other assets (1,609) 321,274 46,732
Increase (decrease) in other liabilities 11,730 (281,900) (50,448)
---------- ----------- -----------
Net cash used in
operating activities (369,425) (345,001) (595,480)
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on loans 50,493 47,220 149,473
Investments made in other real estate - (2,037) (15,089)
Proceeds received from other earning assets - - 187,500
Proceeds received from real estate owned - 564,241 657,340
Cash received in liquidation of subsidiaries - - 30,403
Loans purchased from subsidiary (533,162) - (40,273)
Real estate owned purchased from subsidiary (103,000) - -
(Investment in) distributions from
subsidiaries 1,349,491 (631,411) (1,774,439)
---------- ----------- -----------
Net cash used in investing activities 763,822 (21,987) (805,085)
---------- ----------- -----------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28
Note 19. Parent Company Financial Statements (continued)
<TABLE>
<CAPTION>
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Net short-term borrowings (600,000) 466,000 (1,300,000)
Proceeds from issuance of long-term debt - - 700,000
Proceeds from issuance of redeemable preferred stock 150,000 - -
Proceeds from issuance of convertible note - - 124,199
Proceeds from issuance of common stock - - 2,018,100
Retirement of long-term debt - (84,948) -
--------- -------- -----------
Net cash provided by (used in)
financing activities (450,000) 381,052 1,542,299
--------- -------- -----------
Net increase (decrease) in cash and
cash equivalents (55,603) 14,064 141,734
Cash and cash equivalents at
beginning of year 188,435 174,371 32,637
--------- -------- -----------
Cash and cash equivalents at
end of year $ 132,832 $188,435 $ 174,371
========= ======== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the years for:
Interest on borrowings $ 69,811 $ 98,723 $ 6,485
========= ======== ===========
Income taxes $ 11,471 $ 12,607 $ -
========= ======== ===========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
In 1996, $600,000 of short-term borrowings were converted into 400 shares of
redeemable preferred stock. See Note 16 to consolidated financial statements.
In 1995, two convertible notes were converted into 99,359 shares of common
stock.
In 1994, a subsidiary was liquidated and commercial loans of $555,293,
liabilities of $384,601, and REO of $767,000 were transferred to the parent
company. Also, the parent transferred REO property of $372,435 to another
subsidiary.
<PAGE>
<TABLE>
<CAPTION>
TABLE 1
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 1993 1992
- ----------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Results of operations:
Total Interest Income $ 2,828,278 $ 2,191,867 $ 1,606,565 $ 1,964,012 $ 2,782,256
Total Interest Expense 1,562,851 1,343,596 992,089 967,164 1,252,313
----------- ----------- ----------- ----------- -----------
Net Interest Income 1,265,427 848,271 614,476 996,848 1,529,943
Provision for
loan/lease losses 694,203 (295) (238,727) (305,000) 880,000
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for
loan/lease losses 571,224 848,566 853,203 1,301,848 649,943
Other income 651,882 231,796 579,788 1,404,099 1,749,272
Other expenses 2,133,176 2,403,850 3,661,756 8,221,780 5,667,306
----------- ----------- ----------- ----------- -----------
Income before (910,070) (1,323,488) (2,228,765) (5,515,833) (3,268,091)
income taxes and
extraordinary gain
Income tax
expense (benefit) (2,461) 2,598 10,640 - (378,990)
----------- ----------- ----------- ----------- -----------
Net income (loss) before (907,609) (1,326,086) (2,239,405) (5,515,833) (2,889,101)
extraordinary gain
Extraordinary gain, net of
state income tax effect
of $20,158 - - 3,357,375 - -
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (907,609) $(1,326,086) $ 1,117,970 $(5,515,833) $(2,889,101)
=========== =========== =========== =========== ===========
Earning per share:
Income (loss) before
extraordinary gain $ (0.32) $ (0.48) $ (2.20) $ (5.48) $ (2.87)
Extraordinary gain - - 3.30 - -
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (0.32) $ (0.48) $ 1.10 $ (5.48) $ (2.87)
=========== =========== =========== =========== ===========
Period-ending balances:
Total loans $30,618,335 $23,874,982 $14,716,184 $17,922,719 $22,727,935
Total assets 41,601,689 43,065,970 32,945,072 40,069,206 58,853,179
Total deposits 37,734,574 37,475,235 26,036,309 32,993,618 46,477,127
Shareholders' equity 2,738,070 3,670,047 4,866,826 1,730,756 7,246,589
Selected ratios:
Return on average
total assets (2.07%) (3.45%) 3.15% (11.43%) (4.44%)
Return on average
earning assets (2.68%) (5.23%) 5.61% (20.12%) (7.43%)
Return on average
shareholders' equity (27.51%) (29.73%) 94.59% (91.47%) (31.40%)
Average shareholders'
equity to average
total assets 7.54% 11.60% 3.33% 12.50% 14.14%
</TABLE>
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
OVERVIEW
- --------
United Financial Banking Companies, Inc. (UFBC) is a one-bank holding
company which owns 100% of the issued and outstanding shares of common stock of
The Business Bank (the Bank) and its subsidiaries. UFBC also wholly owns
Business Venture Capital, Inc. (BVCI) which holds and is developing certain real
estate held for sale and Omni Homes, Inc. (Omni) which holds certain real estate
held for sale. Collectively, UFBC, the Bank, BVCI and Omni are referred to as
"the Company". The following commentary provides an overview of the
consolidated financial condition and results of operation of the Company, and
should be read together with the consolidated financial statements and
accompanying notes presented in this report.
Forward looking statements. This discussion contains forward looking
statements, including statements of goals, intentions and expectations as to
future trends, plans, or results of Company operations and policies and
regarding general economic conditions. These statements are based upon current
and anticipated economic conditions, nationally and in the Company's market,
interest rates and interest rate policy, competitive factors and other
conditions which, by their nature, are not susceptible to accurate forecast, and
are subject to significant uncertainty. Because of these uncertainties and the
assumptions on which this discussion and the forward looking statements are
based, actual future operations and results may differ materially from those
indicated herein.
The Company reported a net loss of $907,609, or $.32, per share for the
year ended December 31, 1996. The net loss for the year ended December 31, 1995
was $1,326,086, or $.48 per share. The Company's loss for the year ended
December 31, 1996 is primarily attributable to the charge-off of a portion of a
leveraged lease arrangement, losses on the sale of real estate owned (REO) and
REO write-downs and holding costs.
During 1996, management continued to focus on the liquidation of nonearning
assets which is a critical part of the Company's plan to return to
profitability, although there can be no assurance that the plan will succeed.
The Bank building was sold on December 30, 1996 for a net gain of $734,291. As
the result of the REO sales, the partial charge-off of the leveraged lease and
the sale of the Bank building, non-earning assets decreased $6,564,000 or 64.5%
from $10,176,000 at December 31, 1995 to $3,612,000 at December 31, 1996 as
shown in the Consolidated Balance Sheets. Non-earning assets were 8.7% of total
assets at December 31, 1996 compared to 23.6% of total assets at December 31,
1995. The decrease in nonearning assets contributed to the Company's growth in
total average earning assets which grew 8,437,000 or 33.4% during 1996 and
produced a 49.2% increase in net interest income (Consolidated Average Balances,
Table 2).
The Company's loss for the year ended December 31, 1995 was primarily
attributable to the real estate owned (REO) nonearning asset balance and REO
write-downs and holding costs. Although total average earning assets grew 27.3%
in 1995 and produced a 38.1% increase in net interest income, the $7,912,936 of
REO held by the Company at December 31, 1995, represented 31.2% of total average
earning assets and continued to hinder the Company's progress towards
profitability.
Net income of $1,117,970 for the year ended December 31, 1994 was primarily
attributable to an extraordinary gain of $3,357,375, net of tax, from UFBC's
settlement of its debt with the Federal Deposit Insurance Corporation (FDIC) and
one-time asset recoveries. Before the extraordinary gain, the Company
experienced an operating loss of $2,239,405. The 1994 operating
29
<PAGE>
loss was influenced by low volumes of earning assets, high cost deposits and
real estate related write-downs and holding costs.
----------------------------------------------------
TABLE 2 UNITED FINANCIAL BANKING COMPANIES, INC.
CONSOLIDATED AVERAGE BALANCES/NET INTEREST ANALYSIS/
YIELDS AND RATES
----------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans/Leases:
Commercial $19,112,191 $1,860,952 9.74% $14,437,231 $1,464,937 10.15%
Real estate construction 2,031,003 175,921 8.66% 1,513,131 148,151 9.79%
Real estate mortgage 2,762,087 215,294 7.79% 1,004,975 80,649 8.02%
Installment 2,497,572 210,729 8.44% 1,343,754 130,061 9.68%
Leases 807,442 - 0.00% 844,342 - 0.00%
----------- ---------- ----------- ----------
Total loans/leases 27,210,295 2,462,896 9.05% 19,143,433 1,823,798 9.53%
----------- ---------- ----------- ----------
Interest-bearing deposits 377,217 23,350 6.19% 154,379 8,793 5.70%
Federal funds sold 4,203,072 224,807 5.35% 5,492,258 321,404 5.85%
Investment securities 1,999,656 117,225 5.86% 563,027 37,872 6.73%
----------- ---------- ----------- ----------
Total earning assets 33,790,240 2,828,278 8.37% 25,353,097 2,191,867 8.65%
========== ==========
Noninterest-earning assets
Cash and due from banks 1,768,340 2,002,293
Other assets 8,678,803 11,667,430
Allowance for loan losses/lease (495,103) (572,666)
----------- -----------
Total assets $43,742,280 $38,450,154
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 2,717,904 66,738 2.46% 2,075,394 46,248 2.23%
Money market accounts 5,106,331 163,612 3.20% 4,318,259 155,577 3.60%
Time:
Under $100,000 16,569,137 929,006 5.61% 14,195,288 811,137 5.71%
$100,000 and over 6,237,825 338,733 5.43% 5,979,498 328,408 5.49%
----------- ---------- ----------- ----------
Total interest-bearing
deposits 30,631,197 1,498,089 4.89% 26,568,439 1,341,370 5.05%
Short-term borrowings 1,624,107 64,762 12.82% 1,255,571 2,226 11.95% *
Long-term debt - - 0.00% - - 0.00%
----------- ---------- ----------- ----------
Total interest-bearing
liabilities 32,255,304 $1,562,851 5.29% 27,824,010 $1,343,596 5.36% *
========== ==========
Non interest-bearing liabilities:
Demand deposits 7,543,201 5,671,220
Other liabilities 470,137 494,575
Redeemable preferred stock 174,519 -
Stockholders' equity 3,299,119 4,460,349
----------- -----------
Total liabilities and
stockholders' equity $43,742,280 $38,450,154
=========== ===========
Net interest income $1,265,427 $ 848,271
========== ==========
Net interest margin (1) 3.74% 3.35%
===== =====
Net interest spread (2) 3.08% 3.29%
===== =====
Fees included in loan income $ 119,781 $ 133,990
========== ==========
Taxable equivalent adjustment $ 0 $ 0
========== ==========
<CAPTION>
For the Year Ended
December 31, 1994
- ---------------------------------------------------------------------------
Average Yield/
Balance Interest Rate
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Earning assets:
Loans/Leases:
Commercial $12,951,841 $1,195,056 9.23%
Real estate construction 1,434,160 159,739 11.14%
Real estate mortgage 285,331 36,339 12.74%
Installment 569,260 51,514 9.05%
Leases 844,462 - 0.00%
----------- ----------
Total loans/leases 16,085,054 1,442,648 8.97%
----------- ----------
Interest-bearing deposits - - 0.00%
Federal funds sold 3,831,391 163,917 4.28%
Investment securities - - 0.00%
----------- ----------
Total earning assets 19,916,445 1,606,565 8.07%
==========
Noninterest-earning assets
Cash and due from banks 1,742,634
Other assets 14,430,713
Allowance for loan losses/lease (576,819)
-----------
Total assets $35,512,973
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 1,990,225 44,630 2.24%
Money market accounts 1,912,205 58,354 3.05%
Time:
Under $100,000 14,417,108 650,949 4.52%
$100,000 and over 6,502,668 188,724 4.48%
----------- ----------
Total interest-bearing
deposits 24,822,206 942,657 4.60%
Short-term borrowings 3,824,724 38,962 7.40%
Long-term debt 124,989 10,470 8.38%
----------- ----------
Total interest-bearing
liabilities 28,771,919 $ 992,089 4.57%
==========
Non interest-bearing liabilities:
Demand deposits 4,066,104
Other liabilities 1,493,018
Redeemable preferred stock -
Stockholders' equity 1,181,932
-----------
Total liabilities and
stockholders' equity $35,512,973
===========
Net interest income $ 614,476
==========
Net interest margin (1) 3.09%
=====
Net interest spread (2) 3.50%
=====
Fees included in loan income $ 102,823
==========
Taxable equivalent adjustment $ 0
==========
</TABLE>
Average balances for the years presented are calculated on a monthly basis.
Nonaccruing loans are included in the average loan balance.
* The yield on this component of interest-bearing liabilities is derived as a
percentage of gross interest paid on the average balance. Interest shown is
net of capitalized interest of $144,000 on short-term debt in 1996,
$147,800 on short-term debt in 1995 and $101,211 on CODs over $100,000 and
$221,100 on short-term debt in 1994.
(1) Net interest income divided by total earning assets.
(2) Average rate earned on total earning assets less average rate paid for
interest-bearing liabilities.
NET INTEREST INCOME AND INTEREST ANALYSIS
- -----------------------------------------
Net interest income is the principal component of the Company's operating
income and is the amount by which interest and fee income earned on earning
assets exceeds interest paid on interest-bearing liabilities. Net interest
income increased $417,000 or 49.2% from $848,000 at December 31, 1995 to
$1,265,000 at December 31, 1996. The increase is primarily attributable to the
increased loan volume in the Bank. As shown in Table 2, Consolidated Average
Balances, the average total loan/lease volume increased $8,067,000 or 42.1% from
$19,143,000 at December 31, 1995 to $27,210,000 at December 31, 1996. Due to
the increased loan volume, interest and fees on loans rose $639,000 or 35.0%
during the year ended December 31,1996 when compared to the comparable period of
1995 which favorably impacted net interest income.
For the year ended December 31, 1996 when compared to the year ended
December 31, 1995, interest income from federal funds sold declined $97,000 or
30.0% as a result of a $1,200,000 decline in the volume of federal funds sold
and a decline in the average rate as shown in Table 2. A substantial change in
the investment mix, such as loans, securities or federal funds sold, chosen by
management during the compared years also contributed to the decline. As a
result of the change in the investment mix, interest income from investment
securities and interest bearing deposits increased 94,000 or 201.3% when
comparing the years ended December 31, 1996 and 1995.
Interest expense on deposits increased $157,000 or 11.7% at December 31,
1996 when compared to the year ended December 31, 1995. Interest expense on
deposits reflects management's continuing plan and efforts to alter the Bank's
deposit mix by obtaining more demand or low interest-bearing deposits. The
implementation of management's plan for the Bank's deposit mix is the reason for
the sixteen basis points decrease in the cost of total interest-bearing deposits
as shown in Table 2, Consolidated Average Balances, when comparing the year
ended December 31, 1995 to the year ended December 31,1996.
Net interest margin is a key measure of net interest income performance.
Representing the Company's net yield on its average earning assets, net interest
margin is calculated as net interest income divided by average earning assets.
Both net interest margin and net interest income are affected by many factors,
including competition, the economy, and the volume and mix of balance sheet
components and their relative sensitivity to interest rate fluctuations. In
1996, the net interest margin of 3.74% improved thirty-nine basis points from
3.35% in 1995. The 1996 increase was principally attributable to the increased
volume of earning assets as shown in Table 3.
CHANGE IN NET INTEREST INCOME (RATE/VOLUME VARIANCE)
- ----------------------------------------------------
The analysis of the changes for the components of net interest income
presented in Table 3 shows the direct causes of the changes in net interest
earnings from year to year. It is computed as prescribed by the Securities and
Exchange Commission. UFBC's net yield on earning assets, interest income and
expense is affected by fluctuating interest rates, volumes of and changes in the
mix between earning assets and interest-bearing liabilities, and the interaction
between these factors.
30
<PAGE>
TABLE 3 ANALYSIS OF THE CHANGES FOR THE COMPONENTS OF NET INTEREST
INCOME
United Financial Banking Companies, Inc.
Changes in the components of net interest income
December 31, 1996
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
----------------------------------------------------------------------------------------------
Total Change Due To: Total Change Due To:
Increase -------------- Increase --------------
(Decrease) Rate Volume (Decrease) Rate Volume
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans & lease financing:
Commercial $396,015 $ (78,350) $474,365 $ 269,881 $ 132,825 $ 137,056
Real estate - construction 27,770 (22,935) 50,705 (11,588) (20,384) 8,796
Real estate - mortgage 134,645 (6,363) 141,008 44,310 (47,342) 91,652
Installment 80,668 (31,009) 111,677 78,547 8,461 70,086
Leases - - - - - -
-------- ---------
Total loans/leases 639,098 (138,657) 777,755 381,150 73,560 307,590
Interest-bearing deposits 14,557 1,865 12,692 8,793 8,793 -
Investment securities 79,353 (17,282) 96,635 37,872 37,872 -
Federal funds sold (96,597) (21,155) (75,442) 157,487 86,431 71,056
-------- ---------
Total interest income 636,411 (175,229) 811,640 585,302 206,656 378,646
-------- ---------
Interest expense:
Savings and NOW accounts 20,490 6,172 14,318 1,618 (292) 1,910
Money markets accounts 8,035 (20,357) 28,392 97,223 23,798 73,425
Time:
Under $100,000 117,869 (17,776) 135,645 160,188 170,203 (10,015)
$100,000 and over 10,325 (3,863) 14,188 38,473 61,800 (23,327)
Short-term borrowings 58,736 14,700 44,036 (110,036) 64,653 (174,689)
Long-term borrowings - - - (10,470) - (10,470)
-------- ---------
Total interest expense 215,455 (21,124) 236,579 176,996 320,162 (143,166)
-------- ---------
Net interest income $420,956 * $(154,105) $575,061 $ 408,306 * $(113,506) $ 521,812
======== =========
</TABLE>
* Net interest income on the yield report is net of capitalized interest of
$147,800 in 1995 and $322,311 in 1994. Time deposits $100,000 and over,
interest on short and long-term borrowings, and total interest-bearing
expense are affected by the same factor.
NONINTEREST INCOME
- ------------------
Total noninterest income increased 101.2% or $420,000 during 1996. In
1996, the Bank building was sold for a gain of $734,291, which primarily
accounts for the increase in total noninterest income when comparing the years
ended December 31,1996 and 1995.
The Bank sold the final portion of the servicing rights for its multi-
family loan portfolio during 1994 for a net gain of $27,919. The cessation of
income from the multi-family loan portfolio accounts for the decline in loan
servicing and other fees for the years ended December 31, 1996 and 1995 when
compared to the same period of 1994.
For the year ended December 31, 1996 as compared to the year ended December
31,1995, other income dropped 220.9% or $322,000 due to the losses sustained on
the sales of REO during 1996. Other income decreased 65.1% or $272,000 for the
year ended December 31, 1995 as compared to the comparable year ended 1994.
During 1994, as the result of several one-time asset transactions, the Bank
received other income totaling approximately $130,000. Additionally, sales of
SBA loans in the Bank generated approximately $74,000 of income for the year
ending 1994.
Detail of other income is shown in Note 12 to the consolidated financial
statements.
NONINTEREST EXPENSE
- -------------------
Noninterest expense decreased 11.3% or $271,000 for the year ended December
31,1996 as compared to the comparable period of 1995 as shown in Table 4.
Diminished expense for professional fees and the provision for real estate owned
during 1996 primarily account for the decline when comparing year end 1996 to
1995. The variance between the years ended December 31, 1995 and 1994 is due
primarily to significant REO write-downs which occurred in 1994.
Expense for professional fees declined during the year ended December 31,
1996 when compared to the comparable year ended December 31, 1995. The decline
is principally attributable to significantly reduced litigation expense in UFBC
during 1996. In 1995, UFBC, as plaintiff, incurred substantial litigation
expense associated with the subsidiary, Omni Homes, Inc. Omni litigation is
discussed in Note 9 to the consolidated financial statements.
Insurance expense increased 28.9% at December 31,1996 when compared to
December 31,1995 as a result of the Bank's deposit growth during 1996. The
29.6% decrease in insurance expense at December 31, 1995 when compared to
December 31,1994 is primarily attributable to a reduction in the Bank's FDIC
insurance assessment during 1995 as a result of its improved capital position.
Furniture and equipment expense dropped $58,000 or 56.0% during 1996 when
compared to the same period of 1995 as a result of the Bank's purchase of new
equipment and the decision to out source the Bank's proof operations. These
changes significantly reduced the cost of repairing aged equipment which was
principally associated with the Bank's proof operations. Additionally, during
1996 many of the Company fixed assets became fully depreciated.
Table 4 shows the major categories of noninterest expense for the past three
years and its relation to average assets, average earning assets and gross
income.
31
<PAGE>
TABLE 4 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Percentage
increase (decrease)
-------------------
1996 1995 1994 '96/'95 '95/'94
--------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits 886,963 741,031 943,742 19.69 % (21.48)%
Occupancy, net 133,151 154,864 193,263 (14.02) (19.87)
Furniture and equipment 45,697 103,857 115,620 (56.00) (10.17)
Professional fees 180,634 314,596 213,139 (42.58) 47.60
Insurance 144,232 111,910 158,923 28.88 (29.58)
Provision for real estate owned 168,187 488,000 1,437,957 (65.54) (66.06)
Real estate owned holding expense 178,202 183,764 187,515 (3.03) (2.00)
Other expenses 396,110 305,828 411,597 29.52 (25.70)
--------- --------- ---------
Total 2,133,176 2,403,850 3,661,756 (11.26) (34.35)
========= ========= =========
Total other expense as a percentage of:
Average assets 4.88% 6.25% 10.30%
========= ========= =========
Average earning assets 6.31% 9.48% 18.39%
========= ========= =========
Gross income 61.30% 99.18% 167.48%
========= ========= =========
</TABLE>
BALANCE SHEET ANALYSIS
- ----------------------
Total assets decreased $1,464,000 or 3.5% since December 31, 1995. The
decline is due primarily to sales of nonearning assets and run off of deposits
in the normal course of business, during December 1996. The decline at December
31, 1996 is not representative of the year. Average total assets were
$43,742,000 at December 31, 1996 compared to $38,450,000 at December 31, 1995 as
shown in Table 2, Consolidated Average Balances. The growth is primarily
concentrated in loans and deposits. Management believes that this change is
necessary for the Company to return to profitability. Additionally, management
believes that developing a diversified balance sheet is essential to supporting
future growth. During 1996, the Company retired its short-term debt (Note 7 to
the consolidated financial statements). The Company also authorized and sold
redeemable preferred stock to maintain the capital necessary for further growth.
Both the Company and the Bank remained above regulatory capital requirements,
although the Company's stockholders' equity decreased 25.4% during 1996.
LOAN PORTFOLIO
- --------------
Loans and leases are the largest component of total assets. Loans as a
percentage of total assets were 73.6% at the end of 1996 compared to 55.4% at
the end 1995.
In managing risk for what is predominantly a commercial loan portfolio,
management maintains clearly defined credit standards. Approval and funding of
all loans is centralized, providing for uniform application of credit standards.
The Bank Board reviews and regularly monitors policies for lending practices.
The Bank has policies limiting exposure to certain industries in an effort to
limit the risks associated with commercial lending, particularly in the area of
extending new credit to real estate related businesses. The primary focus when
extending credit is the borrower's ability to repay the loan from expected cash
flows.
As the Bank continues to focus on expanding deposit relationships, management
projects that the resulting blend of loan types and maturities will continue to
become more diversified due to the new customers' product needs. However, the
Bank has also refocused on its primary market, providing short-term working
capital for small and medium-sized businesses and professionals. Commercial
loans, therefore remain the most sizable element of the portfolio, comprising
71.4% and 73.4% of total loans and leases at the end of 1996 and 1995,
respectively.
TABLE 5 LOAN DISTRIBUTION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 21,868,684 $ 17,535,738 $ 10,991,625 $ 14,706,691 $ 19,529,947
Real estate construction 1,627,521 1,979,587 1,500,816 1,979,680 1,866,169
Real estate mortgage 4,418,814 1,568,745 477,286 184,009 267,333
Installment 2,438,674 1,946,570 902,115 207,221 225,113
Lease financing - - - 775 5,031
Leveraged leases 364,642 844,342 844,342 844,342 844,342
----------- ----------- ----------- ----------- -----------
Total loans $ 30,618,335 $ 23,874,982 $ 14,716,184 $ 17,922,719 $ 22,727,935
============ ============ ============ ============ ============
</TABLE>
The loan portfolio is still predominately short-term, which works to minimize
interest rate risk. Approximately 55.1% of the commercial and mortgage loans
mature within one year. The following chart shows the maturities of the two
largest loan classes, commercial and mortgage.
(TABLE 5A) NO HEADING
<TABLE>
<CAPTION>
One Year One Through Over Five
or Less Five Years Years Total
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Commericial $14,339,958 $5,645,765 $1,882,961 $21,868,684
Real estate mortgage 144,416 1,132,088 3,142,310 4,418,814
----------- ---------- ---------- -----------
$14,484,374 $6,777,853 $5,025,271 $26,287,498
=========== ========== ========== ===========
</TABLE>
At December 31, 1996, the loan portfolio had approximately $4,019,000 in
loans to customers in land, residential, or commercial real estate development,
compared to $4,478,000 at December 31, 1995. The decrease is attributable to
the mix of the loan portfolio which occurs in the normal course of business.
The Company had no loans or leases still accruing interest that were ninety days
or more past due as to principal or interest as of December 31, 1996.
Management's policy for placing loans on nonaccrual status, as described under
Nonperforming Assets, is to consider the overall security and character of the
loan.
32
<PAGE>
The allowance for loan/lease losses is established as an amount to cover the
potential inability of borrowers to make payment on their indebtedness. The
determination of the level of allowance is based on management's judgment as to
the overall risk in the loan portfolio, identification and analysis of loss
potential utilizing a credit risk grading process, as well as other factors
outlined in Note 1 to the consolidated financial statements. Conclusions are of
necessity dependent upon estimates, appraisals and judgments, which may change
quickly because of economic conditions and the Company's perception as to how
these factors may affect debtors' financial conditions.
The allowance for loan/lease losses increased $121,000 or 26.2% in 1996. The
ratio of allowance for loan/lease losses to total loans/leases on a consolidated
basis was 1.9% at the end of 1996 and 1995, compared to 4.8% at the end of 1994.
In addition to the charge-offs, the increased loan volume influenced the
decrease in the allowance as a percentage of total loans. During 1996, UFBC
purchased and charged-off $479,700 of the leveraged lease arrangement due to a
change in the appraised value as of December 1996. UFBC replenished the
allowance for loan/leases $498,800 as a result of the charge-off and risks
associated with its loan portfolio. The Bank charged approximately $195,400 to
provision expense during 1996.
A five-year history of the activity in the allowance for loan/lease losses
follows:
ALLOWANCE FOR LOAN/LEASE LOSSES
<TABLE>
<CAPTION>
TABLE 6
ALLOWANCE FOR LOAN/LEASE LOSSES
-------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 462,846 $ 700,666 $ 712,548 $ 1,568,223 $ 1,224,338
Charge-offs:
Installment -- (31,891) (3,670) (633) --
Commercial (114,440) (237,542) (394,501) (1,385,942) (583,382)
Lease financing (479,700) -- -- -- (20,340)
Recoveries:
Installment 3,011 6,522 8,392 2,155 384
Commercial 18,186 25,388 616,624 833,745 65,196
Lease financing -- -- -- -- 2,027
-------------- ------------- -------------- ------------ -----------
Net charge-offs (572,943) (237,525) 226,845 (550,675) (536,115)
Provision charged to operations 894,203 (295) (238,727) (305,000) 880,000
-------------- ------------- -------------- ------------ -----------
Balance at end of period $ 584,108 $ 462,846 $ 700,666 $ 712,548 $ 1,568,223
============== ============= ============== ============ ===========
Average total loans $ 27,210,295 $ 19,143,433 $ 16,086,054 $ 20,835,808 $ 25,265,800
============== ============= ============== ============ ===========
Ratio of net charge-offs
to average total loans (2.10%) (1.24%) 1.41% (2.64%) (2.12%)
============== ============= ============== ============ ============
</TABLE>
The allowance for loan losses is a general allowance applicable to all loan
categories. The allocation of the allowance for loan/lease losses following is
intended only as an indication of the relative risk characteristics in the loan
portfolio and not as a definitive indication of relative portfolio risks or of
funds available to cover losses in any category of loans:
<TABLE>
<CAPTION>
TABLE 6A
- -----------------------------------------------------------------------------------------------------------------------------------
Period ending December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 385,000 $ 379,000 $ 550,000 $ 580,000 $ 1,372,000
Real estate construction 23,000 29,000 35,000 55,000 65,000
Real estate mortgage 121,000 23,000 12,000 25,000 30,000
Installment 37,000 29,000 40,000 15,000 20,000
Leases 5,600 -- 5,000 5,000 5,000
Unallocated 12,506 2,846 58,666 32,548 76,223
-------------- ------------- -------------- ------------ ------------
$ 584,106 $ 462,846 $ 700,666 $ 712,548 $ 1,568,223
============== ============= ============== ============ ============
</TABLE>
NONPERFORMING ASSETS
- --------------------
Nonperforming assets are assets on which income recognition has been
discontinued. Nonperforming assets include nonaccrual loans, restructured loans
and foreclosed real estate. As of December 31, 1996, the Company had no
restructured loans. Nonaccrual loans are those on which the accrual of interest
has been discontinued and any accrued interest reversed. Loans are placed on
nonaccrual status when management believes that the collection of interest
and/or principal is uncertain or when it is 90 days or more past due and not
well secured and in the process of collection. Whenever a loan is placed on
nonaccrual status, all other credit exposures to the same borrower are also
placed on nonaccrual status unless there is no doubt as to the performance of
that credit. Interest payments received on nonaccrual loans are applied as a
reduction of principal where there is concern as to the ultimate collection of
principal. The financial condition of the borrower, the nature of the loan, and
the loan's security are evaluated individually to determine the probability of
collection. Loans are charged against the allowance when the collection of
principal is considered unlikely.
Nonaccruing loans at the end of 1996 totaled $328,355. This compares to a
balance of $403,318 in nonaccrual loans at the end of 1995. The allowance for
loan/lease losses covers nonaccruing loans 1.2 times at year end 1996, compared
to a coverage of 1.1 times at year end 1995. Interest foregone as a result of
loans on nonperforming status amounted to approximately $55,000 in 1996,
compared to $80,000 for 1995. Interest income on nonperforming loans reflected
in earnings for 1996 and 1995 was $17,000 and $39,000, respectively. The
decline in nonaccruing loans at December 31, 1996 when compared to the year
ended December 31, 1995 is due principally to charge-off activity.
33
<PAGE>
The following is a summary of nonperforming assets:
TABLE 7 NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- ------------ ---------- ---------- -----------
<S> <C> <C> <C>
Nonaccruing loans (90 days or more past due) $ 328,355 $ 403,318 $ 581,632
Real estate owned 3,115,080 7,912,936 10,719,378
---------- ---------- -----------
Total nonperforming assets $3,443,435 $8,316,254 $11,301,010
========== ========== ===========
Nonaccruing loans as a % of total loans 1.06% 1.69% 3.85%
Reserve for loans losses to nonaccruing loans 177.89% 114.76% 120.45%
Nonperforming assets to total loans 11.25% 34.83% 76.79%
</TABLE>
REAL ESTATE OWNED
- -----------------
Real estate owned includes properties that the Company has foreclosed on
and taken title. Accounting policies for real estate owned are outlined in Note
1 to the consolidated financial statements.
REO comprised 7.5% and 18.4% of total assets of the Company at December 31,
1996 and 1995, respectively. Of the Company's total REO, $2,998,785 is held in
the Bank, representing 7.3% of the Bank's total assets and is comprised mainly
of the two properties described below. The book value of the Company's REO was
$3,115,080 at year end 1996, as compared to $7,912,936 at year end 1995, and was
comprised of six properties, five of which are in the Bank. The 60.6% or
$4,798,000 decline in the value of REO held by the Company is attributable to
net write-downs of $168,000, property sales of $10,012,000, investment of
$5,178,000, net losses on sales of $310,000 and foreclosures totaling $514,000.
Three properties accounted for 85% of the Company's property sales; BVCI's North
Ocean City project represented 50.0%, the Bank's Culpeper project represented
25.0% and the sale of property located in Washington, D.C. represented 10.0%.
The North Ocean City project accounted for 55.0% of the Company's investment
cost, while the Bank's Culpeper project accounted for 34.0%. As of December
31,1996, one hundred and two of BVCI's North Ocean City project's one hundred
and three townhomes had been sold.
At December 31, 1996, two properties accounted for 73.9% of the total
dollar volume of the Company's REO: (1) 354 acres of land in Culpeper,
Virginia, recorded at $1,480,000, (2) undeveloped land located in Prince William
County, Virginia, recorded at $825,000.
An aging of real estate owned and a breakdown by project type as of
December 31, 1996 and 1995 are presented in Table 8.
TABLE 8 REAL ESTATE OWNED
Aging of Foreclosed Properties
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
December 31, 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
From 1 to 6 months $ - $ 252,118
From 7 to 12 months - 196,337
From 13 to 24 months 106,105 514,405
Over 24 months 3,008,975 6,950,076
---------- ----------
$3,115,080 $7,912,936
========== ==========
</TABLE>
Foreclosed Properties by Project Type
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
December 31, 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Undeveloped land $2,508,719 $2,506,117
Commercial - 1,330,000
1 - 4 family dwelling 372,809 342,350
Developed land 233,552 3,734,469
---------- ----------
$3,115,080 $7,912,936
========== ==========
</TABLE>
DEPOSITS
- --------
As shown in Table 10, deposits increased $259,340 or .7% at December 31,
1996 when compared to December 31, 1995. The minimal increase shown in Table 10
and on the consolidated balance sheets at December 31, 1996 is due to a run off
of deposits which occurred in the normal course of business. Total average
deposits, as shown in Table 9, increased $5,935,000 for the year ended December
31, 1996 when compared to the year ended December 31, 1995. By design, the
deposit mix continues to change as the Bank seeks to increase core deposits.
Core deposits consist of demand, savings and NOW, money market accounts and
time deposits under $100,000. Total average core deposits increased $5,676,000
or 21.6% from $26,260,000 at December 31, 1995 to $31,937,000 at December 31,
1996. The growth in average core deposits occurred in: demand deposits
increased $1,872,000 or 33.0%, savings and NOW deposits rose $643,000 or 31.0%,
money market deposits grew $788,000 or 18.2% and time deposits under $100,000
escalated 2,374,000 or 16.7%.
TABLE 9 DEPOSITS BALANCE AND RATE
Deposits Structure
Rates paid on each classification of deposits are shown below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 7,543,201 -% $ 5,671,220 -% $ 4,066,104 -%
Savings and NOW 2,717,904 2.46 2,075,394 2.23 1,990,225 2.24
accounts
Money market 5,106,331 3.20 4,318,259 3.60 1,912,205 3.05
accounts
Time:
Under $100,000 16,569,137 5.61 14,195,288 5.71 14,417,108 4.52
$100,000 and over 6,237,825 5.43 5,979,498 5.49 6,502,668 4.48
----------- ----------- -----------
Total $38,174,398 3.93% $32,239,659 4.16% $28,888,310 3.62%
=========== =========== ===========
<CAPTION>
- ---------------------------------------------------------------------
Year Ended December 31, 1993 1992
- ---------------------------------------------------------------------
Average Average
Balance Rate Balance Rate
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand $ 7,616,240 -% $16,784,524 -%
Savings and NOW 2,693,948 2.46 3,017,486 3.06
accounts
Money market 4,012,324 2.72 13,165,245 3.08
accounts
Time:
Under $100,000 15,796,522 4.46 9,719,725 5.44
$100,000 and over 6,734,922 4.16 7,701,574 5.35
----------- -----------
Total $36,853,956 3.16% $50,388,554 2.85%
=========== ===========
</TABLE>
* Rates for 1995, 1994, 1993, 1992, and 1991 are presented consistently with the
method within the Net Interest Analysis/Yield & Rate presented earlier.
TABLE 10 DEPOSITS STRUCTURE AND CERTIFICATES OF DEPOSIT 100K AND OVER
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $ 7,897,677 20.93 % $ 7,033,571 16.77 % $ 3,666,226 14.10 % $ 4,954,159 15.00 % $ 17,624,571 37.90 %
Savings and
NOW
accounts 2,779,982 7.37 2,966,721 7.92 1,596,898 5.10 2,158,871 6.50 5,450,658 11.70
Money
market
accounts 3,970,348 10.62 5,917,979 15.78 2,305,139 8.90 2,067,123 6.30 5,462,722 18.20
Time:
Under
$100,000 16,763,355 44.42 15,139,336 40.40 12,499,708 48.00 15,418,036 49.80 9,551,502 20.60
$100,000 and
over 6,323,212 16.76 6,417,628 17.12 5,965,335 22.90 7,395,428 22.40 5,377,678 11.60
----------- ------- ------------ ------ ----------- ----- ------------- ------ ------------ ------
Total $ 37,734,574 100.00 % $ 37,475,235 100.00 % $ 26,036,309 100.00 % $ 32,993,618 100.00 % $ 48,477,127 100.00 %
=========== ======= ============ ======= =========== ====== ============= ======= ============ ======
</TABLE>
The maturity schedule that follows categorizes time deposits of $100,000 or
more as of December 31, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Maturing Balance Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Three months or less $ 1,749,806 27.87 %
Three months to six months 734,967 11.52
Six months to twelve months 2,604,333 41.19
Twelve months and over 1,234,104 19.52
------------- ------------
Total $ 6,323,212 100.00 %
============= ============
</TABLE>
34
<PAGE>
INVESTMENTS
- -----------
The Bank holds all of the Company's investments. The securities portfolio
is comprised of U.S. Treasury securities, U.S. Government agency securities and
interest-bearing deposits placed with financial institutions. The Bank is
strategically growing its securities portfolio to ensure safe levels of
liquidity, to enhance the overall credit quality of its asset base and to
generate increased interest income. The securities portfolio includes both
instruments available-for-sale and those held-to-maturity. Securities
classified as available for sale may be sold in response to changes in market
interest rates, changes in prepayment or extension risk, management of the
federal tax position, liquidity needs and other asset/liability management
issues. Securities classified as held to maturity are intended for investment
purposes. Further detail on securities is discussed in Note 2 to the
consolidated financial statements.
LIQUIDITY AND INTEREST SENSITIVITY
- ----------------------------------
The Company's liquidity management is designed to achieve an appropriate
balance between the maturities of its assets and liabilities. This is
accomplished through a combined strategy of maintaining sufficient liquid assets
which can be easily converted into cash as well as the ability to increase core
deposits or to raise funds in the various money markets. Cash and due from
banks, money market investments, securities available-for-sale and loan
maturities are the Company's primary source of liquidity. Average liquid assets
were 15.7% of average total assets for 1995, and 21.4% for 1996. Additional
sources of liquidity are available through loan participations, deposit growth
and other borrowings. Cash flows from operations are presented in the
consolidated statements of cash flows.
UFBC's operational needs were significantly reduced by the cancellation of its
debt to the FDIC and staff reduction in 1995. For the near future, management
projects that proceeds received from earning assets, the liquidation of non-Bank
REO and the sale of non-Bank assets will provide sufficient cash flow for UFBC's
continuing operational needs.
Interest rate risk is primarily the result of the imbalance between the
repricing of assets and liabilities either through maturity or interest rate
changes. Perfectly matching liabilities with assets can eliminate interest rate
risk, but profits are not always enhanced. As a result, the Company manages its
interest rate sensitivity in order to limit risk while at the same time
profiting from favorable market opportunities. The objective is to obtain an
appropriate balance sheet mix that maximizes earnings while protecting against
unanticipated changes in interest rates.
One method of monitoring rate risk is through the analysis of gap positions.
Gap is the difference between the amount of assets and the amount of liabilities
that mature or are repriced during a given period of time. A positive gap
results when more assets than liabilities mature or are repriced during a given
period of time. A negative gap results when there are more liabilities than
assets maturing or being repriced during a given time frame.
The short-term nature of the Company's assets and liabilities can be seen in
the interest sensitivity analysis presented below in Table 11. The volume of
nonearning assets also significantly affects the analysis, limiting the amount
of assets available to reprice. As nonearning assets are returned to earning
status, the gap position will become more balanced throughout the time frames
measured. The negative gap position indicates that more liabilities than assets
will reprice, having a negative earnings impact in a rising rate environment.
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
- ----------------------------------------
TABLE 11 - INTEREST SENSITIVITY ANALYSIS
- ----------------------------------------
CURRENT 0-3 4-6 7-12
BALANCES MONTHS RATE MONTHS RATE MONTHS
---------- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
FEDERAL FUNDS SOLD 898,000 898,000 5.87%
AVAILABLE-FOR-SALE INVESTMENTS 2,095,422 100,078 6.25% 200,313 5.63% 800,781
HELD-TO-MATURITY INVESTMENTS 300,000 200,000 6.78% 100,000
INTEREST BEARING DEPOSITS 300,000 100,000 6.13% 100,000 6.50%
LOANS, NET - FIXED 16,966,861 3,124,028 9.36% 483,767 9.31% 1,259,663
LOANS, NET - VARIABLE 13,343,356 13,000,108 9.35% 343,248
---------- ---------- ---- ---------- ---- ----------
TOTAL EARNING ASSETS 33,903,639 17,422,214 8.96% 784,080 6.58% 2,503,692
LOAN LOSS RESERVE (584,106)
NON-ACCRUAL LOANS 308,118
CASH AND DUE FROM BANKS 4,265,513
REAL ESTATE OWNED 3,115,080
FIXED ASSETS 132,712
OTHER NONINTEREST-BEARING ASSETS 460,733
---------- ---------- ---- ---------- ---- ----------
TOTAL NONEARNING ASSETS 7,698,050 0 0 0
---------- ---------- ---- ---------- ---- ----------
TOTAL ASSETS 41,601,689 17,422,214 784,080 2,503,692
========== ========== ==== ========== ==== =========
LIABILITIES
NOW ACCOUNTS 2,539,111 2,539,111 2.36%
MONEY MARKET ACCOUNTS 3,970,348 3,970,348 3.29%
SAVINGS ACCOUNTS 240,872
CERTIFICATES OF DEPOSIT
LESS THAN OR EQUAL TO $100,000 16,763,355 3,857,319 5.70% 2,500,241 5.24% 5,182,718
CERTIFICATES OF DEPOSIT
GREATER THAN $100,000 6,323,212 1,749,808 5.90% 734,967 5.10% 2,604,333
---------- ---------- ---- ---------- ---- ----------
TOTAL INTEREST-BEARING DEPOSITS 29,836,897 12,116,586 4.24% 3,235,208 5.21% 7,787,051
---------- ---------- ---- ---------- ---- ----------
NONINTEREST-BEARING DEPOSITS 7,897,677
---------- ---------- ---- ---------- ---- ----------
TOTAL DEPOSITS 37,734,575 12,116,586 3,235,208 7,787,051
TOTAL OTHER LIABILITIES 360,295
REDEEMABLE PREFERRED STOCK-SERIES A 768,750
TOTAL CAPITAL 2,738,070
---------- ---------- ---- ---------- ---- ----------
TOTAL LIABILITIES & CAPITAL 41,601,689 12,116,586 3,235,208 7,787,051
========== ========== ==== ========== ==== =========
INTERVAL GAP/GAP SPREAD 5,305,629 4.72% (2,451,128) 1.37% (5,283,359)
CUMULATIVE GAP 5,305,629 2,854,500 (2,428,859)
INTERVAL GAP/TOTAL ASSETS 12.75% -5.89% -12.70%
CUMULATIVE GAP/TOTAL ASSETS 12.75% 6.86% -5.84%
INTERVAL GAP/EARNING ASSETS 15.65% -7.23% -15.58%
CUMULATIVE GAP/EARNING ASSETS 15.65% 8.42% -7.16%
MATCHED 12,116,586 4.24% 784,080 5.21% 2,503,692
OPEN 5,305,629 4.72% (2,451,128) 1.37% (5,283,359)
<CAPTION>
5-Jan OVER 5
RATE YEARS RATE YEARS RATE TOTAL
----- --------- ---- --------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
FEDERAL FUNDS SOLD 898,000
AVAILABLE-FOR-SALE INVESTMENTS 5.63% 994,250 5.25% 2,095,422
HELD-TO-MATURITY INVESTMENTS 6.92% 300,000
INTEREST BEARING DEPOSITS 100,000 6.00% 300,000
LOANS, NET - FIXED 8.57% 7,826,799 8.78% 4,272,604 7.95% 16,966,861
LOANS, NET - VARIABLE 10.25% 13,343,356
----- --------- ---- --------- ---- ----------
TOTAL EARNING ASSETS 6.39% 8,921,049 8.35% 4,272,604 7.95% 33,903,639
LOAN LOSS RESERVE
NON-ACCRUAL LOANS 0
CASH AND DUE FROM BANKS 0
REAL ESTATE OWNED 0
FIXED ASSETS 0
OTHER NONINTEREST-BEARING ASSETS 0
----- --------- ---- --------- ---- ----------
TOTAL NONEARNING ASSETS 0 0 0
0
----- --------- ---- --------- ---- ----------
TOTAL ASSETS 8,921,049 4,272,604 33,903,639
===== ========= ==== ========= ==== ==========
LIABILITIES
NOW ACCOUNTS 2,539,111
MONEY MARKET ACCOUNTS 3,970,348
SAVINGS ACCOUNTS 240,872 2.97% 240,872
CERTIFICATES OF DEPOSIT LESS THAN
OR EQUAL TO $100,000 5.43% 5,223,077 5.47% 16,763,355
CERTIFICATES OF DEPOSIT GREATER
THAN $100,000 5.22% 1,234,104 5.45% 6,323,212
----- --------- ---- --------- ---- ----------
TOTAL INTEREST-BEARING DEPOSITS 5.36% 6,698,053 5.38% 0 29,836,897
----- --------- ---- --------- ---- ----------
NONINTEREST-BEARING DEPOSITS 0
----- --------- ---- --------- ---- ----------
TOTAL DEPOSITS 6,698,053 0 29,836,897
TOTAL OTHER LIABILITIES 0
REDEEMABLE PREFERRED STOCK-SERIES A
TOTAL CAPITAL 0
----- --------- ---- --------- ---- ----------
TOTAL LIABILITIES & CAPITAL 6,698,053 0 29,836,897
===== ========= ==== ========= ==== ==========
INTERVAL GAP/GAP SPREAD 1.03% 2,222,996 2.98% 4,272,604 7.95%
CUMULATIVE GAP (205,862) 4,066,742
INTERVAL GAP/TOTAL ASSETS 5.34% 10.27%
CUMULATIVE GAP/TOTAL ASSETS -0.49% 9.78%
INTERVAL GAP/EARNING ASSETS 6.56% 12.60%
CUMULATIVE GAP/EARNING ASSETS -0.61% 12.00%
MATCHED 6.39% 8,921,049 8.35% 0 0.00%
OPEN 1.03% 2,222,996 2.98% 4,272,604 7.95%
</TABLE>
35
<PAGE>
REGULATORY MATTERS
- ------------------
The Bank entered into a Cease and Desist Order (Order) with the Federal
Deposit Insurance Corporation (FDIC) and the Virginia State Corporation
Commission (SCC) on August 12, 1993. UFBC entered into a formal agreement
(Agreement) with the Federal Reserve and SCC as of December 31, 1993. These
regulatory authorities monitor the Bank's and the Company's compliance with the
agreements and progress towards profitability through quarterly reports and
periodic examinations. The underlying objective of these agreements is to
return Company operations to profitability as soon as possible. The Order and
Agreement are discussed in further detail in Note 11 to the consolidated
financial statements.
CAPITAL RESOURCES AND ADEQUACY
- ------------------------------
The Federal Reserve Board has issued risk-based capital guidelines for bank
holding companies. The guidelines require three standard minimum ratios to
measure the adequacy of capital, Tier I capital ratio of 4%, Tier II (Total)
capital ratio of 8% and a minimum Leverage ratio of 3% must be maintained for
top-rated banks. Otherwise, the minimum leverage ratio, based upon the
institution's overall financial condition, is to be at least 100 to 200 basis
points above the minimum. These guidelines were also adopted by the Federal
Deposit Insurance Corporation and therefore apply to the Company's banking
subsidiary. Regulatory capital requirements are discussed in further detail in
Note 11 to the consolidated financial statements.
One of the provisions of the Order requires the Bank to maintain Leverage
Capital of 6% or above. UFBC, with the support of the Board of Directors,
continued to support Bank capital in 1996 by contributing $253,000 of cash. The
cash infusions were primarily achieved through cashflow generated by sales of
REO in BVCI. At December 31, 1996, both the Company and the Bank had capital
levels above the minimums required by the Federal Reserve and the Order. The
Company's capital at the end of 1996 amounted to $2,738,070, or $.98 per share,
and represented 6.6% of year-end assets.
In 1995, UFBC, with the support of the Board of Directors, supported Bank
capital by contributing $1,030,000 of cash. The cash infusions were primarily
achieved by the sale a piece of UFBC real estate for $445,000 and by the
issuance of $500,000 of one year notes secured by the projected cashflows of the
Company subsidiary, BVCI. The debt was retired during 1996. Notes 7, 10 and 12
to the consolidated financial statements provide further details on Company's
borrowing and related transactions. At December 31, 1995, both the Company and
the Bank had capital levels above the minimums required by the Federal Reserve
and the Order. The Company's capital at the end of 1995 amounted to $3,670,047,
or $1.31 per share, and represented 8.5% of year-end assets.
EFFECTS OF INFLATION
- --------------------
The effect of changing prices on financial institutions is typically different
than on non-banking companies since principally all assets and liabilities are
monetary in nature. Interest rates are significantly affected by inflation,
neither the timing nor the magnitude of the changes are necessarily directly
related to price level indexes. Consequently, management believes the Company
can best counter inflation over the long term by managing net interest income,
diversifying its asset and liability mix and controlling noninterest income and
expenses.
36
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
- --------- --------
<S> <C>
Jeffery T. Valcourt Harold C. Rauner
Chairman of the Board President/CEO
United Financial Banking Companies, Inc.
President/CEO, Valcourt Building Services, Inc. Karen L. Laughlin
Vice President and Secretary
William J. McCormick, Jr. Sharon A. Stakes
President, Jordan Kitts Music, Inc. Vice President
Dennis I. Meyer Lisa M. Porter
Partner, Baker & McKenzie, Attorneys Controller/Chief Financial Officer
Edward H. Pechan F. Janette Collins
President, E. H. Pechan and Associates, Inc. Assistant Secretary
Harold C. Rauner
President/CEO, United Financial Banking Companies, Inc.
President/CEO, The Business Bank
Sharon A. Stakes
Vice President, United Financial Banking Companies, Inc.
Vice President, The Business Bank
ADVISORY BOARD MEMBERS - UNITED FINANCIAL BANKING COMPANIES, INC.
James K. Jeanblanc L. Lawton Rogers, III
Partner, Grove, Jaskiewicz & Cobert, Attorneys Partner, Rogers & Killeen, Attorneys
ADVISORY BOARD MEMBERS - THE BUSINESS BANK
Chris Petersen, Chairman William N. Ball
President, News USA Retired Banker
Dean G. Popps, Vice Chairman Deborah J. Dunn
President/CEO, Crow Communications, Inc. President/CEO, Martha Weems, Ltd.
and Dallas Fort Worth Teleport
Charles S. Evans Robert L. Hansan
President/CEO, Computerware President/CEO, Hansan Group, Inc.
Gilbert J. McWane Michael P. Mullen
President/CEO, McWane & Co., Inc. Principal, Washington Financial
Carl M. Summerfield Robert W. Pitts
President/CEO, Day & Night Printing Partner, Pitts and Pitts
</TABLE>
37
<PAGE>
CORPORATE INFORMATION
---------------------
The Company, a one-bank holding company, acquired The Business Bank in July
1983. The Company has not declared any cash dividends. A stock dividend of
10,089 shares, representing 5% of issued shares was distributed in August 1983.
A second stock dividend of 27,844 shares, or 5% of issued shares, was declared
on December 17, 1984, and paid on January 15, 1985. An 8% stock dividend,
46,778 shares, was declared July 31, 1985 and paid on August 23, 1985. A 6%
stock dividend of 45,990 shares, was declared on July 31, 1986, and paid on
August 23, 1986. A 6% stock dividend, representing the distribution of 49,084
shares was declared on July 31, 1987 and paid on August 24, 1987. A 10% stock
dividend, representing the distribution of 77,404 shares, was declared on July
20, 1988, and paid on August 24, 1988. A 9% stock dividend representing 75,536
shares was declared on July 24, 1989, and paid on August 28, 1989. On July 23,
1990 a 10% stock dividend representing 91,344 shares was declared. It was paid
on August 30, 1990. The Company will not resume the issuance of stock dividends
until retained earnings are returned to a positive level.
The Company had 402 shareholders of record as of December 31, 1996.
FORM 10KSB
----------
For a free copy of the Annual Report on Form 10KSB, shareholders should write
to:
Corporate Secretary
United Financial Banking Companies, Inc.
8399 Leesburg Pike
P.O. Box 2459
Vienna, Virginia 22182
38
<PAGE>
Exhibit 21 -- Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Jurisdiction Percent of
under laws Voting Security
of which owned by
Name of Subsidiary organized Immediate Parent
- ------------------ ------------ ----------------
<S> <C> <C>
The Business Bank Virginia 100%
Business Venture Capital, Inc. Virginia 100%
UFBC, Inc. Virginia 100%
Omni Homes, Inc. Virginia 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,265,513
<INT-BEARING-DEPOSITS> 300,000
<FED-FUNDS-SOLD> 898,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 300,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 2,095,422
<LOANS> 30,618,334
<ALLOWANCE> 584,106
<TOTAL-ASSETS> 41,601,689
<DEPOSITS> 37,734,575
<SHORT-TERM> 0
<LIABILITIES-OTHER> 360,294
<LONG-TERM> 0
0
768,750
<COMMON> 2,808,201
<OTHER-SE> (70,131)
<TOTAL-LIABILITIES-AND-EQUITY> 41,601,689
<INTEREST-LOAN> 2,462,896
<INTEREST-INVEST> 117,225
<INTEREST-OTHER> 248,157
<INTEREST-TOTAL> 2,828,278
<INTEREST-DEPOSIT> 1,498,089
<INTEREST-EXPENSE> 64,762
<INTEREST-INCOME-NET> 1,265,427
<LOAN-LOSSES> 694,203
<SECURITIES-GAINS> (510)
<EXPENSE-OTHER> 1,278,535
<INCOME-PRETAX> (907,609)
<INCOME-PRE-EXTRAORDINARY> (907,609)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (907,609)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
<YIELD-ACTUAL> 8.37
<LOANS-NON> 328,355
<LOANS-PAST> 0
<LOANS-TROUBLED> 20,698
<LOANS-PROBLEM> 328,355
<ALLOWANCE-OPEN> 462,846
<CHARGE-OFFS> 594,140
<RECOVERIES> 21,197
<ALLOWANCE-CLOSE> 584,106
<ALLOWANCE-DOMESTIC> 584,106
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 398,644
</TABLE>
