<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
-------------- ---------------
COMMISSION FILE NO. 0-13395
UNITED FINANCIAL BANKING COMPANIES, INC.
A VIRGINIA CORPORATION IRS EMPLOYER IDENTIFICATION
NO. 54-1201253
8399 LEESBURG PIKE, VIENNA, VIRGINIA 22182
TELEPHONE: (703) 734-0070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
----- ------
COMMON STOCK $1.00 PAR VALUE
2,808,201 SHARES OUTSTANDING
AS OF SEPTEMBER 30, 1997
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES NO X
----- -----
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-QSB and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles for complete financial
statements. The interim financial statements have been prepared
utilizing the interim basis of reporting and, as such, reflect all
adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the periods presented. The
results of operations for the interim periods are not necessarily
indicative of the results for the full year.
Note 2 - 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.
Note 3 - 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. The computation includes the effect of the
dividend accrued on the Company's redeemable preferred stock which
totaled $87,250 for the first nine months ended September 30, 1997 and
$-0- for the same period ended September 30, 1996.
Note 4 - 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.
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
UNITED FINANCIAL BANKING COMPANIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME / RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans/leases $755,007 $ 645,664 $2,166,851 $1,802,284
Interest on investment securities 52,514 34,387 134,043 82,591
Interest on federal funds sold 75,431 45,829 214,938 195,564
Interest on interest-bearing deposits 1,435 5,954 7,478 18,281
---------- ---------- ---------- ----------
Total interest income 884,387 731,834 2,523,310 2,098,720
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 379,138 369,894 1,126,340 1,124,418
Interest on short-term borrowings - 44,725 - 64,726
Interest on long-term debt - - - -
Total interest expense 379,138 414,619 1,126,340 1,189,144
---------- ---------- ---------- ----------
Net interest income 505,249 317,215 1,396,970 909,576
PROVISION FOR LOAN/LEASE LOSSES 40,200 32,000 137,300 145,942
---------- ---------- ---------- ----------
Net interest income after provision
for loan/lease losses 465,049 285,215 1,259,670 763,634
NONINTEREST INCOME:
Gain (loss) on sale of real estate
owned and other earning assets 477 28,222 29,287 46,241
Loan servicing and other fees 18,770 19,774 56,357 59,294
Other income 28,092 52,010 84,050 84,989
Total noninterest income 47,339 100,006 169,694 190,524
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries 190,951 203,431 567,811 562,954
Employee benefits 32,911 37,154 99,443 108,400
Occupancy 71,868 32,544 223,849 103,596
Furniture and equipment 18,119 12,273 43,457 33,989
Legal 6,148 27,401 17,828 89,485
FDIC Insurance 4,198 21,280 51,397 63,687
Data processing 24,470 22,816 70,560 67,285
Real estate owned holding expense 10,570 45,343 60,857 136,537
Provision for real estate owned losses 49,400 12,257 73,900 12,257
Other expense 56,733 113,627 192,266 310,602
Total noninterest expense 465,368 528,126 1,401,368 1,488,792
---------- ---------- ---------- ----------
Income (loss) before income taxes 47,020 (142,905) 27,996 (534,634)
Provision (credit) for income taxes 4,938 (464) 14,988 4,439
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 42,082 $(142,441) $ 13,008 $ (539,073)
========== ========== ========== ==========
Net income (loss) per share
of common stock $ - $ (0.05) $ (0.03) $ (0.19)
========== ========== ========== ==========
Weighted average number of
shares outstanding 2,808,201 2,808,201 2,808,201 2,808,201
========== ========== ========== ==========
</TABLE>
3
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS / FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30 December 31
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
Cash and due from banks $ 2,058,910 $ 4,265,513
Interest-bearing deposits in other banks 100,000 300,000
Federal funds sold 2,558,000 898,000
Investment Securities:
Available-for-sale (AFS) 2,439,750 2,095,422
Held-to-maturity (HTM) 1,279,717 300,000
Loans and lease financing, net of unearned
income of $42,493 and $57,635 34,532,648 30,618,335
Less: Allowance for loan/lease losses (660,340 (584,106)
Net loans and lease financing 33,872,308 30,034,229
Real estate owned held for sale, net 2,595,178 3,115,080
Premises and equipment, net 176,984 132,712
Other assets 332,125 460,733
Total assets $ 45,412,972 $ 41,601,689
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Demand $ 7,944,125 $ 7,897,677
Savings and NOW 2,170,316 2,779,982
Money market 8,172,015 3,970,348
Time deposits:
Under $100,000 17,477,476 16,763,355
$100,000 and over 5,317,999 6,323,212
Total deposits 41,081,931 37,734,574
Other liabilities 358,571 360,295
Total liabilities 41,440,502 38,094,869
Redeemable Preferred Stock:
Series A $-0- par value, authorized 900 shares, 800 shares
issued in 1997 and 500 shares in 1996, 10% cumulative dividend 1,306,000 768,750
Stockholders' Equity:
Preferred stock of no 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 at 9/30/97 and 12/31/96 2,808,201 2,808,201
Capital in excess of par value 10,427,061 10,514,311
Retained earnings (10,570,924) (10,583,932)
Unrealized holding gain (loss) - AFS securities 2,132 (510)
Total stockholders' equity 2,666,470 2,738,070
Total liabilities and stockholders' equity $45,412,972 $41,601,689
=========== ===========
</TABLE>
4
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 13,008 $ (539,073)
Adjustment to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation & amortization 36,275 53,813
Provision for loan/lease losses 137,300 145,942
Provision for losses on real estate owned 73,900 12,257
Amortization of investment security discount (4,946) (10,551)
Amortization of loan fees and discounts, net (10,423) (20,833)
Net (gain) loss on sale of other real estate owned (28,687) 5,431
Amortization of capitalized interest (38,400) -
(Increase) decrease in other assets 128,610 133,987
Increase (decrease) in other liabilities 2,777 (11,817)
------------------ ------------------
Net cash provided by (used in) operating activities 309,414 (230,844)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected - non-bank subsidiaries 46,343 36,803
Loans and lease originations, net of collections (4,213,300) (5,958,329)
Purchases of investment securities (2,036,582) (1,086,223)
Purchases of securities held-to-maturity (HTM) - -
Investment made in other real estate owned (1,147,371) (4,693,304)
Proceeds received from sale of AFS securities - -
Proceeds received from maturity of investment securities 720,125 -
Proceeds from real estate owned 1,857,960 7,821,564
Purchases of premises and equipment (80,547) (18,518)
------------------ ------------------
Net cash provided by (used in) investing activities (4,853,372) (3,898,007)
------------------ ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, savings
accounts, NOW accounts and money market accounts 3,652,122 1,050,736
Certificates of deposit sold (matured), net (304,767) 1,165,873
Net change in short-term borrowings - (888,544)
Proceeds from issuance of redeemable preferred stock 450,000 -
------------------ ------------------
Net cash provided by (used in) financing activities 3,797,355 1,328,065
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (746,603) (2,800,786)
Cash and cash equivalents at beginning of the year 5,463,513 8,547,687
------------------ ------------------
Cash and cash equivalents at end of the quarter $4,716,910 $ 5,746,901
================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest on deposits and other borrowings $1,174,729 $ 1,333,078
Income taxes 14,786 7,852
NON-CASH ITEMS:
Effect on stockholders' equity of an unrealized gain (loss)
on debt and equity securities available-for-sale $ 2,642 $ (16,422)
Increase in foreclosed properties and decrease in loans $ 202,000 $ 513,740
Accrued dividend on preferred stock - series A $ 87,250 $ -
</TABLE>
5
<PAGE>
====================================================
UNITED FINANCIAL BANKING COMPANIES, INC.
CONSOLIDATED AVERAGE BALANCES/NET INTEREST ANALYSIS/
YIELDS AND RATES
====================================================
<TABLE>
<CAPTION>
For the Nine Month Period Ended For the Year Ended
September 30, 1997 September 30, 1996 December 31, 1996
------------------------------ ------------------------------- ------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------- ---------- ----- ----------- ---------- ----- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans/Leases:
Commercial $23,247,823 $1,653,785 9.51% $18,650,633 $1,381,201 9.87% $19,112,191 $1,860,952 9.74%
Real estate
construction 1,404,585 99,550 9.48% 2,141,589 136,080 8.46% 2,031,003 175,921 8.66%
Real estate
mortgage 4,867,230 273,933 7.52% 2,295,079 134,394 7.80% 2,762,087 215,294 7.79%
Installment 2,039,896 139,584 9.15% 2,339,741 150,609 8.57% 2,497,572 210,729 8.44%
Leases 364,650 - - 844,342 - - 807,442 - -
----------- ---------- ----------- ---------- ----------- ----------
Total
loans/leases 31,924,184 2,166,852 9.07% 26,271,384 1,802,284 9.14% 27,210,295 2,462,896 9.05%
----------- ---------- ----------- ---------- ----------- ----------
Interest-bearing
deposits 168,817 7,478 5.92% 400,382 18,281 6.08% 377,217 23,350 6.19%
Federal funds sold 5,140,719 214,938 5.59% 4,832,694 195,564 5.39% 4,203,072 224,807 5.35%
Investment
securities 3,041,805 134,043 5.89% 1,883,164 82,591 5.84% 1,999,656 117,225 5.86%
----------- ---------- ----------- ---------- ----------- ----------
Total earning
assets 40,275,525 2,523,311 8.38% 33,387,624 2,098,720 8.37% 33,790,240 2,828,278 8.37%
========== ========== ==========
Noninterest-earning
assets
Cash and due from
banks 1,649,151 1,699,775 1,768,340
Other assets 3,886,394 9,556,828 8,678,803
Allowance for loan
losses/lease (597,800) (480,614) (495,103)
----------- ----------- -----------
Total assets $45,213,270 $44,163,613 $43,742,280
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing
deposits:
Savings and NOW
accounts 2,679,163 46,838 2.34% 2,807,815 50,410 2.39% 2,717,904 66,738 2.46%
Money market
accounts 6,657,654 164,398 3.30% 5,316,349 126,427 3.17% 5,106,331 163,612 3.20%
Time:
Under $100,000 17,680,083 674,214 5.39%* 16,546,010 699,004 5.63% 16,569,137 929,006 5.61%
$100,000 and
over 6,052,609 240,891 5.32% 6,109,765 248,577 5.42% 6,237,825 338,733 5.43%
----------- ---------- ----------- ---------- ----------- ----------
Total
interest-bearing
deposits 33,069,509 1,126,341 4.71%* 30,779,939 1,124,418 4.87% 30,631,197 1,498,089 4.89%
Short-term
borrowings - - - 2,111,339 64,726 13.17%* 1,624,107 64,762 12.82%*
----------- ---------- ----------- ---------- ----------- ----------
Total
interest-bearing
liabilities 33,069,509 1,126,341 4.71%* 32,891,278 1,189,144 5.40%* 32,255,304 $1,562,851 5.29%*
========== ========== ==========
Non
interest-bearing
liabilities:
Demand deposits 7,850,006 7,369,765 7,543,201
Other
liabilities 360,691 507,994 470,137
Redeemable
preferred stock 1,266,000 - 174,519
Stockholders'
equity 2,667,064 3,394,576 3,299,119
----------- ----------- -----------
Total
liabilities and
stockholders'
equity $45,213,270 $44,163,613 $43,742,280
=========== =========== ===========
Net interest
income $1,396,970 $909,576 1,265,427
========== ========== ==========
Net interest
margin (1) 4.64% 3.63% 3.74%
===== ===== =====
Net interest
spread (2) 3.66% 2.97% 3.08%
===== ===== =====
Fees included
in loan income $ 1,023 $111,658 119,781
========== ========== ==========
Taxable
equivalent
adjustment $ - $ - $ -
========== ========== ==========
</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 $38,400 on CODs under $100,000 for the nine
month period ended September 30, 1997, and $144,000 on short-term debt for
the nine month period ended September 30, 1996, and $144,000 on short-term
debt for the year ended December 31, 1996.
(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.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997, AS
---------------------------------------------------------------------
COMPARED TO THE SIX MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------
GENERAL
- -------
The following discussion provides an overview of the financial condition
and results of operations of United Financial Banking Companies, Inc. (UFBC) and
its subsidiaries, which is presented on a consolidated basis. UFBC reported net
income of $13,008 for the nine-month period ended September 30, 1997. This
compares with a net loss of $539,073 for the same period of 1996. Earnings
(loss) per share were ($.03) for the first nine months ended September 30, 1997,
compared to ($.19) for the first nine months of 1996.
During the nine-month period ended September 30, 1997, UFBC's primary
subsidiary, The Business Bank (the Bank), increased the Company's earning asset
base. As of September 30, 1997, average total earning assets increased
$6,888,000 or 20.6% when compared to the comparable period of September 30, 1996
(Consolidated Average Balances table). The increase has favorably contributed
to the Company's earnings. The Company's real estate owned (REO) which are
nonearning assets, and related holding costs continue to hinder the Company's
profitability. At September 30, 1997, REO was $2,595,000 or 5.7% of the
Company's total assets (Consolidated Balance Sheets). However, the REO
hindrance has been diminished by the Company's liquidation or sale of several
large pieces of property over the past three years. In addition to focusing on
deposit and loan growth, management continues to prioritize the liquidation of
REO and as of September 30, 1997 had REO contracts (both firm and pending)
totaling approximately $790,000. Although there can be no assurance of
settlement, management anticipates that these contracts will close and settle
during the fourth quarter of 1997 and the first quarter of 1998.
NET INTEREST INCOME
- -------------------
For the nine-month period ended September 30, 1997, net interest income
increased $487,000 or 53.6% from $910,000 at September 30, 1996 to $1,397,000 at
September 30, 1997. The increase is primarily attributable to the increased
loan volume in the Bank. As shown in the Consolidated Average Balances table,
the average total loan/lease volume increased $5,653,000 or 21.5% from
$26,271,000 at September 30, 1996 to $31,924,000 at September 30, 1997. Due to
the increased loan volume, interest and fees on loans rose $365,000 or 20.2% as
of the nine-month period ended September 30, 1997 when compared to the
comparable period of 1996 which favorably impacted net interest income.
For the same comparable nine-month period, interest income earned on
federal funds sold increased $19,000 or 9.9% (Consolidated Statements of
Income). The increase resulted from a change in the investment mix, such as
loans, securities or federal funds, chosen by management during the comparable
periods. Interest earned on investment securities increased $51,000 or 62.3%.
The investment mix and higher yielding securities (Consolidated Average Balances
table) contributed to the rise. The modified investment mix also explains the
variances of the three-month period ended September 30, 1997 when compared to
the same three-month period ended September 30, 1996.
Interest expense on deposits increased $2,000 or .17% at September 30, 1997
when compared to the period ended September 30, 1996. The modest increase
reflects management's continuing efforts to alter the Bank's deposit mix toward
more core deposits. At September 30, 1997, capitalized interest totaling
$38,400 was netted against interest expense on deposits and also contributed to
the modest increase. As the Bank becomes less dependent on volatile
certificates of deposits more than $100,000, management has had more freedom to
restructure or reduce the rates paid on interest-bearing deposits.
7
<PAGE>
SHORT-TERM BORROWINGS
- ---------------------
The Company had no expense for borrowings during the first nine months of
1997. Borrowing expense during the three month and nine month periods ended
September 30, 1996, shown net of $144,000 of capitalized interest, was incurred
as the result of financing for the Company's North Ocean City project. The North
Ocean City project concluded activities in April 1997. All borrowings were
either repaid in full or converted to redeemable preferred stock - series A
during the year ended December 31, 1996.
PROVISION FOR LOAN/LEASE LOSSES
- -------------------------------
During the first nine months of 1997, the Bank funded its allowance by
charging $120,200 against earnings compared to $145,942 charged against earnings
during the first nine months of 1996. The parent company, UFBC, replenished its
allowance $17,100 during in the first nine months of 1997.
NONINTEREST INCOME
- ------------------
Total noninterest income decreased $21,000 or 10.9% for the nine months
ended September 30, 1997 compared to the comparable period of 1996. The decline
is primarily attributable to the gain on the sale of REO from the North Ocean
City project which occurred during 1996. The 1996 REO gain also contributed to
the variance between the comparable three month periods ended September 30, 1996
and 1997. Income from a forfeited REO deposit of $22,000 in September 1996
explains the other income variance between the three month periods ended
September 30, 1996 and 1997.
NONINTEREST EXPENSE
- -------------------
Total noninterest expense decreased $87,000 or 5.9% during the first nine
months of 1997 when compared to the same period of 1996. The decline is due
principally to the Company's restructuring and management's continuing efforts
to curtail expenses even as the Company continues to grow.
For the nine-month period ended September 30, 1997 as compared to the
comparable period of 1996, occupancy expense increased $120,000 or 116.1% due to
the rental expense incurred for the space leased for the Bank. The cessation of
depreciation expense associated with ownership of the Bank building serves to
partially offset the increased expense. The cessation of a consulting
arrangement with the Company in January 1997 primarily explains the drop in
other expense for the first nine months ended September 30, 1997 when compared
to the first nine months ended September 30, 1996. Consulting expense totaled
$7,900 for the first nine months ended September 30, 1997 compared to $95,000
for the comparable period of 1996.
Legal expense declined $21,000 or 77.7% during the three-month period ended
September 30, 1997 and $72,000 or 80.1% during the first nine months of 1997
when compared to the comparable periods of 1996. The decline is principally
attributable to significantly reduced litigation expense in the parent during
the first nine months of 1997. During the first nine months of 1996, the
parent, as plaintiff, incurred substantial litigation expense associated with
the subsidiary, Omni Homes, Inc.
Expense for the Bank's FDIC insurance decreased $17,000 or 80.2% during the
three month period ended September 30, 1997 when compared to the comparable
period ended September 30, 1996. The decline is attributable to the improved
risk rating assessed by the FDIC.
The provision for REO increased $62,000 or 502.9% for the first nine months
of 1997 compared to the comparable period of 1996. The rise is due partially to
management's efforts to liquidate the Company's REO in an expeditious manner.
Though FASB 34 requires interest to be capitalized on REO that is being
developed, the Company chooses to write-down REO in an equivalent amount. These
write-downs total $38,400 for 1997 and significantly contributed to the REO
provision increase when comparing the first nine month periods ended September
30, 1997 and 1996. REO holding expense decreased 76,000 or 55.4%
8
<PAGE>
for the first nine months of 1997 when compared to the first nine months of
1996. The Company's liquidation of several large pieces of property during 1996
and 1997, which eliminated the related holding costs, explains the drop.
INCOME TAXES
- ------------
In 1993, the rate that UFBC accrued its tax benefit differed from the
statutory tax rate based on the inability of UFBC to use its losses to reduce
deferred taxes or to record a tax benefit. At the end of 1993, all of UFBC's
accrued tax benefits were eliminated due to UFBC's inability to demonstrate
capacity for their future use. As a result, until such time that UFBC
demonstrates a capacity for their future use, UFBC will not be able to accrue
tax benefits. UFBC has accrued no tax benefits for the six months ended
September 30, 1997.
B. FINANCIAL CONDITION AS OF SEPTEMBER 30, 1997
--------------------------------------------
ASSETS
- ------
Total assets grew $3,811,000 or 9.2% during the first nine months of 1997
when compared to the period ended December 31, 1996. The rise in assets is
primarily attributable to the Bank's increased volume of loans. Net loans and
lease financing increased $3,914,000 or 12.8% to $34,533,000 at September 30,
1997 from $30,618,000 at December 31, 1996.
Allowance for Loan/Lease Losses
- -------------------------------
The allowance for loan/lease losses (allowance) represents an amount which
management believes will be adequate to absorb potential losses inherent in the
loan/lease portfolio. The provision for loan losses represents the charge to
earnings during the year to cover potential future losses. The amount charged
to expense during the year is dependent upon management's assessment of the
adequacy of the allowance. Principal factors in management's evaluation 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.
At September 30, 1997 and December 31, 1996, the allowance was $660,000 and
$584,000, respectively, or 1.9% of total loans and leases. Nonperforming loans
for the nine-month period ended September 30, 1997 totaled $315,000 of which
$244,000 resided in the Bank and $71,000 in the parent. This compares to a
balance of $328,000 at December 31, 1996, of which $308,000 resided in the Bank
and $20,000 resided in the parent. The consolidated allowance for loan/lease
losses covers nonperforming loans 4.77 times at September 30, 1997, compared to
a coverage of 1.78 times at year end 1996.
Real Estate Owned, Premises and Equipment, Other Assets
- -------------------------------------------------------
REO decreased $520,000 or 16.7% during the nine-month period ended
September 30, 1997. The decrease is primarily due to sales. During the first
nine months of 1997, the Bank installed an ATM and upgraded or changed several
pieces of equipment which primarily accounts for the $44,000 or 33.4% rise in
premises and equipment. At September 30, 1997 and December 31, 1996, other
assets included proceeds in transit for REO sales and explains the elevated
balance at both dates.
LIABILITIES
- -----------
Total deposits increased $3,347,000 or 8.8% during the first nine months of
1997 when compared to the year ended 1996. During the nine months ended
September 30, 1997, the deposit mix changed as money market accounts rose
$4,202,000 or 105.8% from $3,970,000 at December 31, 1996 to $8,172,000 at
September 30, 1997. The change is part of management's continuing plan to
increase core deposits to provide an adequate base for the Bank's growth.
9
<PAGE>
LIQUIDITY AND INVESTMENT
- ------------------------
Since January 1994, operational expenses of UFBC have been provided
primarily by liquidation of assets. UFBC's working capital is significantly
limited by the inability to receive dividends from the Bank subsidiary.
Accordingly, UFBC's ability to meet its short-term obligations continues to
depend on the liquidation of REO and loan payments of approximately $21,000 per
quarter.
Consolidated average liquid assets were 22.1% of average total assets at
September 30, 1997 compared to 20.0% for the same period ended September 30,
1996 and 19.1% at December 31, 1996 (Consolidated Average Balances table). The
Company's liquidity needs exist primarily in the Bank subsidiary. To maintain
adequate liquidity, the Bank purchases certain traditional assets such as
government and other investment securities. The Bank's securities portfolio
comprises 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 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.
At September 30, 1997, the Bank's investment portfolio consisted of the
following:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------ ----------------
<S> <C> <C>
U.S. Treasury 2,439,750 249,500
U.S. Government Agency 1,030,217
Interest-bearing Deposits 100,000
(placed with financial institutions)
</TABLE>
REDEEMABLE PREFERRED STOCK
- --------------------------
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%
during the first nine months of 1997. As of September 30, 1997, redemption
value of the Company's preferred stock series A at September 30, 2001 is
projected to be $1,786,000.
REGULATORY AGREEMENTS AND COMPLIANCE
- ------------------------------------
On June 2, 1997, the State Corporation Commission Bureau of Financial
Institutions (SCC) terminated its participation in the Order to Cease and Desist
issued by the Federal Deposit Insurance Corporation (FDIC) against the Business
Bank (Bank), the primary subsidiary of United Financial Banking Companies, Inc.,
on August 12, 1993.
Effective June 3, 1997, the FDIC terminated the Order to Cease and Desist
issued against the Bank on August 12, 1993.
Previously, on May 19, 1997, the Board of Directors of the Bank submitted a
resolution to the FDIC and to the SCC. The resolution included the following:
(1) The Bank will maintain a Tier 1 Leverage Capital ratio of 6.0 percent
or more and a Total Risk Based Capital ratio of 8.0 percent or more. In
the event that the Tier 1 and/or Total Risk Based Capital ratio falls
below the prescribed percentages as calculated on a quarterly calendar
period, the Bank agrees to notify the Supervisory Authorities and that
within ninety days capital will be increased in an amount sufficient to
meet the ratios agreed to herein.
(2) The Bank Board of Directors and management will develop specific plans
of action for each asset adversely classified as of December 31, 1996
in the amount of $200,000 or more.
10
<PAGE>
(3) The Bank will prepare and submit to Supervisory Authorities a
comprehensive budget and earnings forecast for each calendar year.
(4) The Bank will not pay any cash dividends without written consent from
Supervisory Authorities.
(5) The Bank will not accept, renew or roll over brokered deposits without
the prior consent of Supervisory Authorities.
(6) Quarterly, the Bank will submit progress reports to Supervisory
Authorities addressing each provision above.
On December 31, 1993, 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 Agreement addressed 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 Agreement also
includes provisions to monitor the Company's progress toward profitability. As
of September 30, 1997, management believes that the Company is in compliance
with all terms and provisions of the Agreement.
CAPITAL REQUIREMENTS
- --------------------
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
3.0% 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 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 September 30, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Tier I Capital
Company $ 2,664,338 $ 3,125,866
The Business Bank 3,512,253 2,553,369
Total qualifying capital
Company $ 4,104,706 $ 3,553,833
The Business Bank 3,902,091 2,968,896
Risk-weighted assets
Company $31,380,675 $34,149,778
The Business Bank 30,952,736 33,242,161
Quarterly average assets
Company $46,677,186 $43,813,864
The Business Bank 46,172,692 41,438,626
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Required
1997 1996 Minimum
----------- ----------- -----------
<S> <C> <C> <C>
Risk-based capital ratios:
Tier I Capital (Tier I capital/risk-weighted assets)
Company 8.49% 9.15% 4.00%
The Business Bank 11.35% 7.68% 4.00%
Total Capital (Total capital/risk-weighted assets)
Company 13.08% 10.41% 8.00%
The Business Bank 12.61% 8.93% 8.00%
Leverage ratio (Tier I capital/adjusted average assets)
Company 5.71% 7.13% 4.00%
The Business Bank 7.61% 6.00% ***6.00%
</TABLE>
***Minimum goal of the Board Resolution
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(6) On June 2, 1997, United Financial Banking Companies, Inc. filed
notification on Form 8-K that the FDIC terminated the Order to Cease and
Desist issued against the Bank on August 12, 1993. The content of the
June 2, 1997 8-K is disclosed on pages 10 and 11 (Regulatory Agreements
and Compliance) of this filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED FINANCIAL BANKING COMPANIES, INC.
By: /s/ HAROLD C. RAUNER
-----------------------------------------------
Harold C. Rauner
President and CEO
/s/ LISA M. PORTER
-----------------------------------------------
Lisa M. Porter
Chief Financial Officer
Date: November 11, 1997
--------------------
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB OF UNITED FINANCIAL BANKING COMPANIES, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,058,910
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 2,558,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,439,750
<INVESTMENTS-CARRYING> 1,279,717
<INVESTMENTS-MARKET> 2,441,882
<LOANS> 34,532,648
<ALLOWANCE> 660,340
<TOTAL-ASSETS> 45,412,972
<DEPOSITS> 41,081,931
<SHORT-TERM> 0
<LIABILITIES-OTHER> 358,571
<LONG-TERM> 0
1,306,000
0
<COMMON> 2,808,201
<OTHER-SE> (113,863)
<TOTAL-LIABILITIES-AND-EQUITY> 45,412,972
<INTEREST-LOAN> 2,166,851
<INTEREST-INVEST> 348,981
<INTEREST-OTHER> 7,478
<INTEREST-TOTAL> 2,523,310
<INTEREST-DEPOSIT> 1,126,340
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 1,396,970
<LOAN-LOSSES> 37,300
<SECURITIES-GAINS> 21,632
<EXPENSE-OTHER> 1,401,368
<INCOME-PRETAX> 27,996
<INCOME-PRE-EXTRAORDINARY> 27,996
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,008
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
<YIELD-ACTUAL> 9.07
<LOANS-NON> 315,047
<LOANS-PAST> 0
<LOANS-TROUBLED> 20,698
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 584,106
<CHARGE-OFFS> 80,053
<RECOVERIES> 18,988
<ALLOWANCE-CLOSE> 660,340
<ALLOWANCE-DOMESTIC> 660,340
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 447,928
</TABLE>
