<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, 1998.
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
831,590 SHARES OUTSTANDING
AS OF SEPTEMBER 30, 1998
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 - On December 31, 1997, United Financial Banking
Companies, Inc. adopted Statement of Financial Accounting Standards
No. 128, Earnings per share (SFAS 128), which supersedes Accounting
Principles Board Opinion No. 15. Under SFAS 128, earnings per common
share are computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the
potential dilution, if any, that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock. The $.02
dilutive effect for the nine month period ending September 30, 1998 is
shown in the report. There were no dilutive effects for the nine month
period ending September 30, 1997. Prior period amounts have been
restated, where appropriate, to conform to the requirements of SFAS
128.
Note 4 - On January 1, 1998, United Financial Banking Companies, Inc. adopted
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130). Under SFAS 130, each company is
required to present a `Statement of Comprehensive Income'.
Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-
owner sources such as foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. The required proforma
disclosure has not been presented because of an immaterial effect.
United Financial Banking Companies, Inc. has one comprehensive line
item, unrealized loss on investments in debt securities. For the first
quarter ended September 30, 1998, the unrealized gain totaled $11,851.
Note 5 - 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>
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
-------------------------------------- -------------------------------------
1998 1997 1998 1997
----------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans/leases $ 879,274 $ 755,007 $ 2,564,730 $ 2,166,851
Interest on investment securities 88,645 52,514 203,422 134,043
Interest on federal funds sold 90,295 75,431 263,444 214,938
Interest on interest-bearing deposits 1,710 1,435 4,581 7,478
----------------- ----------------- ------------------ ----------------
Total interest income 1,059,924 884,387 3,036,177 2,523,310
----------------- ----------------- ------------------ ----------------
Interest expense:
Interest on deposits 456,448 379,138 1,369,396 1,126,340
Interest on short-term borrowings - - 808 -
----------------- ----------------- ------------------ ----------------
Total interest expense 456,448 379,138 1,370,204 1,126,340
----------------- ----------------- ------------------ ----------------
Net interest income 603,476 505,249 1,665,973 1,396,970
Provision for loan/lease losses 23,900 40,200 118,900 137,300
----------------- ----------------- ------------------ ----------------
Net interest income after provision
for loan/lease losses 579,576 465,049 1,547,073 1,259,670
Noninterest income:
Gain (loss) on sale of real estate
owned and other earning assets 22,450 477 13,123 29,287
Loan servicing and other fees 23,427 18,770 72,756 56,357
Other income 84,924 28,092 165,461 84,050
----------------- ----------------- ------------------ ----------------
Total noninterest income 130,801 47,339 251,340 169,694
----------------- ----------------- ------------------ ----------------
Noninterest expense:
Salaries 210,579 190,951 646,575 567,811
Employee benefits 41,079 32,911 124,310 99,443
Occupancy 77,739 71,868 231,415 223,849
Furniture and equipment 21,610 18,119 54,871 43,457
Legal 7,921 6,148 30,282 17,828
FDIC Insurance 4,950 4,198 13,671 51,397
Data processing 28,844 24,470 83,462 70,560
Real estate owned holding expense 8,618 10,570 32,557 60,857
Provision for real estate owned losses 40,000 49,400 227,666 73,900
Other expense 79,101 56,733 212,130 207,254
----------------- ----------------- ------------------ ----------------
Total noninterest expense 520,441 470,306 1,656,939 1,416,356
----------------- ----------------- ------------------ ----------------
Income (loss) before income taxes 189,936 42,082 141,474 13,008
Provision (credit) for income taxes - - - -
----------------- ----------------- ------------------ ----------------
Net income (loss) $ 189,936 $ 42,082 $ 141,474 $ 13,008
================= ================= ================== ================
Basic income (loss) per share of common stock $ 0.30 $ 0.02 $ 0.14 $ (0.13)
================= ================= ================== ================
Dilutive income per share of common stock $ 0.28 $ 0.02 $ 0.12 $ (0.13)
================= ================= ================== ================
Weighted average number of shares outstanding
Basic 830,579 561,640 677,575 561,640
Dilutive 927,344 648,305 774,340 561,640
</TABLE>
3
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC., AND SUBSIDIARIES
Consolidated Balance Sheets / Financial Condition
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30 December 31
Assets 1998 1997
------ ------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 1,814,791 $ 2,282,418
Interest-bearing deposits in other banks 100,000 100,000
Federal funds sold 7,584,493 2,659,000
Investment Securities:
Available-for-sale (AFS) 4,588,825 1,700,876
Held-to-maturity (HTM) 1,763,157 1,082,773
Loans and lease financing, net of unearned
income of $15,408 and $40,702 36,203,361 38,084,861
Less: Allowance for loan/lease losses (767,686) (715,399)
------------------- -------------------
Net loans and lease financing 35,435,675 37,369,462
Real estate owned held for sale, net 1,817,548 2,368,104
Premises and equipment, net 157,421 164,018
Other assets 522,268 347,355
------------------- -------------------
Total assets $ 53,784,178 $ 48,074,006
=================== ===================
Liabilities and Stockholders' Equity
Deposits:
Demand $ 11,222,281 $ 7,778,077
Savings and NOW 2,494,872 2,508,666
Money market 8,704,995 7,568,652
Time deposits: -
Under $100,000 19,519,046 19,478,244
$100,000 and over 6,422,578 6,428,122
------------------- -------------------
Total deposits 48,363,772 43,761,761
------------------- -------------------
Short-term borrowings - -
Other liabilities 321,557 336,246
------------------- -------------------
Total liabilities 48,685,329 44,098,007
------------------- -------------------
Redeemable Preferred Stock:
Series A $-0- par value, authorized 900 shares, 800 shares
issued in 1998 and 1997, 10% cumulative dividend - 1,336,000
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 831,590 shares at 9/30/98 and 561,640 at 12/31/97 831,590 561,640
Capital in excess of par value 14,681,567 12,643,622
Retained earnings (10,426,159) (10,567,633)
Unrealized holding gain (loss) - AFS securities 11,851 2,370
------------------- -------------------
Total stockholders' equity 5,098,849 2,639,999
------------------- -------------------
Total liabilities and stockholders' equity $ 53,784,178 $ 48,074,006
=================== ===================
</TABLE>
4
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------------
September 30, 1998 September 30, 1997
---------------------- ----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 141,474 $ 13,008
Adjustment to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation & amortization 46,292 36,275
Provision for loan/lease losses 118,900 137,300
Provision for losses on real estate owned 227,666 73,900
Amortization of investment security discount (1,639) (4,946)
Amortization of loan fees and discounts, net (25,294) (10,423)
Net (gain) loss on sale of other real estate owned (13,123) (28,687)
Amortization of capitalized interest - (38,400)
(Increase) decrease in other assets (189,913) 128,610
Increase (decrease) in other liabilities (14,689) 2,777
---------------------- ----------------------
Net cash provided by (used in) operating activities 289,674 309,414
---------------------- ----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated - non-bank subsidiaries - -
Principal collected - non-bank subsidiaries 7,063 46,343
Loans and lease originations, net of collections 1,818,362 (4,213,300)
Loan fees and discounts deferred 14,756 -
Purchases of securities available-for-sale (4,281,100) (2,036,582)
Purchases of securities held-to-maturity (769,908) -
Investment made in other real estate owned (591,266) (1,147,371)
Proceeds received from maturity of securities available-for-sale 1,402,009 -
Proceeds received from maturity of securities held to maturity 91,786 720,125
Proceeds from real estate owned 942,279 1,857,960
Purchases of premises and equipment (39,695) (80,547)
---------------------- ----------------------
Net cash provided by (used in) investing activities (1,405,714) (4,853,372)
---------------------- ----------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, savings
accounts, NOW accounts and money market accounts 4,566,753 3,652,122
Certificates of deposit sold (matured), net 35,258 (304,767)
Net change in short-term borrowings - -
Proceeds from sale of common stock 2,357,895 -
Redeem preferred stock (1,386,000) -
Proceeds from issuance of redeemable preferred stock - 450,000
---------------------- ----------------------
Net cash provided by (used in) financing activities 5,573,906 3,797,355
---------------------- ----------------------
Net increase (decrease) in cash and cash equivalents 4,457,866 (746,603)
Cash and cash equivalents at beginning of the year 5,041,418 5,463,513
---------------------- ----------------------
Cash and cash equivalents at end of the quarter $ 9,499,284 $ 4,716,910
====================== ======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest on deposits and other borrowings $ 1,363,318 $ 1,174,729
Income taxes 12,655 14,786
NON-CASH ITEMS:
Effect on stockholders' equity of an unrealized gain (loss)
on debt and equity securities available-for-sale $ 9,481 $ 2,642
Increase in foreclosed properties and decrease in loans $ - $ 202,000
Accrued dividend on preferred stock - series A $ 50,000 $ 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
September 30, 1998 September 30, 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans/Leases:
Commercial $ 25,395,129 $ 1,879,053 9.89% $ 23,247,823 $ 1,653,785 9.51%
Real estate construction 2,553,497 182,697 9.57% 1,404,585 99,550 9.48%
Real estate mortgage 6,866,692 388,467 7.56% 4,867,230 273,933 7.52%
Installment 1,646,998 114,513 9.30% 2,039,896 139,584 9.15%
Leases 298,634 - - 364,650 - -
---------------- -------------- ----------------- ---------------
Total loans/leases 36,760,950 2,564,730 9.33% 31,924,184 2,166,852 9.07%
---------------- -------------- ----------------- ---------------
Interest-bearing deposits 100,000 4,581 6.12% 168,817 7,478 5.92%
Federal funds sold 6,314,045 263,444 5.58% 5,140,719 214,938 5.59%
Investment securities 4,751,580 203,422 5.72% 3,041,805 134,043 5.89%
---------------- -------------- ----------------- ---------------
Total earning assets 47,926,575 3,036,177 8.47% 40,275,525 2,523,311 8.38%
============== ===============
Noninterest-earning assets
Cash and due from banks 1,749,774 1,649,151
Other assets 2,732,154 3,886,394
Allowance for loan losses/lease (759,241) (597,800)
---------------- -----------------
Total assets $ 51,649,262 $ 45,213,270
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 2,272,102 40,300 2.37% 2,679,163 46,838 2.34%
Money market accounts 8,919,504 240,546 3.66% 6,657,654 164,398 3.30%
Time:
Under $100,000 19,743,867 815,600 5.52% 17,680,083 674,214 5.3*%
$100,000 and over 6,709,046 272,950 5.44% 6,052,609 240,891 5.32%
---------------- -------------- ----------------- ---------------
Total interest-bearing
deposits 37,644,519 1,369,396 4.88% 33,069,509 1,126,341 4.7*%
Short-term borrowings 54,629 808 1.98% - - -
---------------- -------------- ----------------- ---------------
Total interest-bearing
liabilities 37,699,148 1,370,204 4.87% 33,069,509 1,126,341 4.7*%
============== ===============
Non interest-bearing liabilities:
Demand deposits 9,452,394 7,850,006
Other liabilities 355,266 360,691
Redeemable preferred stock 604,888 1,266,000
Stockholders' equity 3,537,566 2,667,064
---------------- -----------------
Total liabilities and
stockholders' equity $ 51,649,262 $ 45,213,270
================ =================
Net interest income $ 1,665,973 $ 1,396,970
============== ===============
Net interest margin (1) 4.65% 4.64%
======== ========
Net interest spread (2) 3.61% 3.66%
======== ========
Fees included in loan income $ 71,127 $ 67,860
============== ===============
Taxable equivalent adjustment $ - $ -
============== ===============
<CAPTION>
For the Year Ended
December 31, 1997
- ---------------------------------------------------------------------------------------
Average Yield/
Balance Interest Rate
- --------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
Earning assets:
Loans/Leases:
Commercial $ 23,856,037 $ 2,269,847 9.51%
Real estate construction 1,562,737 150,606 9.64%
Real estate mortgage 5,148,096 391,356 7.60%
Installment 1,974,646 179,572 9.09%
Leases 364,385 - -
----------------- ----------------
Total loans/leases 32,905,901 2,991,381 9.09%
----------------- ----------------
Interest-bearing deposits 151,613 8,914 5.88%
Federal funds sold 4,516,220 246,707 5.46%
Investment securities 3,157,053 186,866 5.92%
----------------- ----------------
Total earning assets 40,730,787 3,433,868 8.43%
================
Noninterest-earning assets
Cash and due from banks 1,666,506
Other assets 3,700,273
Allowance for loan losses/lease (619,807)
=================
Total assets $ 45,477,759
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 2,598,967 60,902 2.34%
Money market accounts 6,918,458 231,789 3.35%
Time:
Under $100,000 17,579,511 884,041 5.4*%
$100,000 and over 5,976,740 318,472 5.33%
----------------- ----------------
Total interest-bearing
deposits 33,073,676 1,495,204 4.7*%
Short-term borrowings - - -
----------------- ----------------
Total interest-bearing
liabilities 33,073,676 1,495,204 4.7*%
================
Non interest-bearing liabilities:
Demand deposits 8,104,143
Other liabilities 351,408
Redeemable preferred stock 1,281,000
Stockholders' equity 2,667,532
-----------------
Total liabilities and
stockholders' equity $ 45,477,759
=================
Net interest income $ 1,938,664
================
Net interest margin (1) 4.76%
========
Net interest spread (2) 3.71%
========
Fees included in loan income $ 92,770
================
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 on real estate under development
of $38,400 on time deposits under $100,000 for the nine month period
ended September 30, 1997 and $64,700 on time deposits under $100,000
for the year ended December 31, 1997.
(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 NINE MONTHS ENDED SEPTEMBER 30, 1998, AS
----------------------------------------------------------------------
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------
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 $141,474 for the nine-month period ended September 30, 1998. This
compares with net income of $13,008 for the same period of 1997. Earnings
(loss) per share were $.14 for the first nine months ended September 30, 1998,
compared to ($.13) for the first nine months of 1997.
Earnings for the first nine months of 1998 are primarily due to increased
earning assets. During the past year, UFBC's primary subsidiary, The Business
Bank (the Bank), continued to increase the Company's earning asset base. At
September 30, 1998, average total earning assets increased $7,651,050 or 19.0%
when compared to the first nine months of September 30, 1997 (Consolidated
Average Balances table). The increase has favorably contributed to the Company's
operating earnings.
In March 1998, the Company began a Private Placement Offering (Offering).
The Company initiated the Offering to raise $3,500,000 of common equity for the
purpose of retiring the preferred stock - series A and accrued dividends and to
fund new growth opportunities for the Bank. The Company broke escrow on May 29,
1998. As of September 30, 1998, the Company has sold 269,950 shares of its
common stock at $8.75 per share. On May 31, 1998, $1,200,000 of the $2,362,062
Offering proceeds were used to redeem the Company's preferred stock - series A
and to pay the accrued dividends of $186,000. The parent invested $700,000 of
the proceeds into the Bank to support growth. Part of the proceeds were used to
pay off a $50,000 short-term note and the remainder has been held as working
capital for the parent. To date, costs of the Offering total approximately
$5,000. At March 31, 1998, UFBC's outstanding common shares totaled 561,640.
At September 30, 1998, UFBC's outstanding common shares total 831,590.
Subsequent to September 30, 1998, UFBC, Inc., a Bank subsidiary, received
preliminary notification regarding the cessation of its leveraged lease. The
leveraged lease consisted of two equipment leases. In August 1998, UFBC, Inc.
received payment from a lessor who exercised an option to purchase the
equipment. In late October, the second lessor tendered a preliminary offer to
purchase the equipment. The offer, if accepted, would result in a $204,000
charge to earnings during the fourth quarter of 1998.
NET INTEREST INCOME
- -------------------
For the nine-month period ended September 30, 1998, net interest income
increased $269,003 or 19.3% from $1,396,970 at September 30, 1997 to $1,665,973
at September 30, 1998. 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 $4,836,766 or 15.2% from
$31,924,184 at September 30, 1997 to $36,760,950 at September 30, 1998. Due to
the increased loan volume, interest and fees on loans rose $397,879 or 18.4% as
of the nine-month period ended September 30, 1998 when compared to the same
period of 1997 which favorably impacted net interest income.
For the same comparable nine-month period, interest income earned on
federal funds sold increased $48,506 or 22.6% (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 $69,379 or 51.8%.
The investment mix and the
7
<PAGE>
increased volume of securities accounted for the rise. As shown in the
Consolidated Average Balances table, average investment securities increased
$1,709,775 or 56.2% from $3,041,805 at September 30, 1997 to $4,751,580 at
September 30, 1998. Interest on deposits placed with other financial
institutions decreased 38.7% during the nine months ended September 30, 1998
when compared to the nine months ended September 30, 1997 due to decreased
volume.
Interest expense on deposits increased $243,056 or 21.6% at September 30,
1998 when compared to the nine month period ended September 30, 1997. The
increase is primarily due to an increased volume of interest-bearing deposits in
the Bank. At September 30, 1998, average total interest-bearing deposits
increased $4,575,010 or 13.4% when compared to the third quarter ended September
30, 1997.
PROVISION FOR LOAN/LEASE LOSSES
- -------------------------------
During the first nine months of 1998, the Bank funded its allowance for
loan/lease losses by charging $118,900 against earnings compared to $137,300
charged against earnings during the first nine months of 1997. The Company
charged off $77,303 in loans during the first nine months of 1998 compared to
$80,053 in loans during the first nine months of 1997.
NONINTEREST INCOME
- ------------------
Total noninterest income increased $83,462 or 176.3% for the three month
period ended September 30, 1998 compared to the same period of 1997. The
increase is primarily attributable to the recognition of deferred income as the
result of several loan payoffs and late charges paid on certain loans.
Correction of a prior period accounting error and gain on the sale of real
estate during the three month period ended September 30, 1998 also contributed
to the increase.
NONINTEREST EXPENSE
- -------------------
Total noninterest expense increased $240,583 or 17.0% during the first nine
months of 1998 when compared to the same period of 1997. The increase is due
principally to the $150,000 write-down on an REO property.
Salaries and employee benefits increased $103,631 or 15.5% from $667,254 at
September 30, 1997 to $770,885 at September 30, 1998. The rise is due to
additional staffing, a three percent cost of living adjustment and bonuses which
occurred in the first quarter of 1998.
Legal expense rose $12,454 or 69.9% during the nine-month period ended
September 30, 1998 when compared to the first nine months of 1997. During the
first nine months of 1998, the Bank incurred general legal fees associated with
collections in the normal course of business. In the opinion of management,
there were no legal matters pending as of September 30, 1998 which would have a
material adverse effect on the Company's financial statements.
Expense for the Bank's FDIC insurance decreased $37,726 or 73.4% during the
nine month period ended September 30, 1998 compared to the same period ended
September 30, 1997. The decline is attributable to an improved risk rating
assessed by the FDIC.
The provision for real estate owned (REO) losses increased $153,766 or
208.1% for the first nine months of 1998 compared to the same period of 1997.
The rise is due partially to Management's efforts to liquidate the Company's REO
in an expeditious manner. The $227,666 of write-downs during the first nine
months of 1998 expedited the sale of approximately $693,000 of real estate held
by the Bank. REO holding expense decreased $28,300 or 46.5% for the first nine
months of 1998 when compared to the first nine months of 1997. The Company's
liquidation of one large piece of property during 1997, which eliminated the
related holding costs, explains the decline.
8
<PAGE>
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 nine months ended
September 30, 1998.
B. FINANCIAL CONDITION AS OF SEPTEMBER 30, 1998
--------------------------------------------
ASSETS
- ------
Total assets grew $5,710,172 or 11.9% during the first nine months of 1998
when compared to the period ended December 31, 1997. The rise in assets is
primarily attributable to the Bank's increased volume of core deposits which
were invested in federal funds sold and investment securities. Federal funds
sold and investment securities increased $8,493,826 or 256.1% from $5,442,649 at
December 31, 1997 to $13,936,475 at September 30, 1998.
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, 1998 and December 31, 1997, the allowance was $767,686 and
$715,399, respectively, or 2.1% and 1.9% of total loans and leases.
Nonperforming loans for the nine-month period ended September 30, 1998 totaled
$202,707, of which $158,110 resided in the Bank and $44,597 in the parent. This
compares to a balance of $102,322 at December 31, 1997, of which $31,562 resided
in the Bank and $70,760 in the parent. The consolidated allowance for loan/lease
losses covers nonperforming loans 3.79 times at September 30, 1998, compared to
a coverage of 7.01 times at year end 1997.
LIABILITIES
- -----------
Total deposits increased $4,602,011 or 10.5% during the first nine months
of 1998 when compared to the year ended 1997. During the nine months ended
September 30, 1998, the deposit mix changed favorably as demand deposits and
money market accounts rose $4,580,547 or 129.9% from $15,346,729 at December 31,
1997 to $19,927,276 at September 30, 1998. The change is part of management's
continuing plan to increase core deposits to provide a base for the Bank's
growth.
LIQUIDITY AND INVESTMENT
- ------------------------
UFBC's operational needs were significantly reduced by the cancellation of
its debt to the FDIC in 1994, staff reduction and reduced professional fees.
For the near future, management projects that proceeds received from the
Offering, 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.
Consolidated average liquid assets were 25.0% of average total assets at
September 30, 1998 compared to 22.5% for the same period ended September 30,
1997 and 20.9% at December 31, 1997 (Consolidated Average Balances table). The
Company's liquidity needs exist primarily in the Bank
9
<PAGE>
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, state and municipal securities and equity securities. The
Bank is strategically growing its securities portfolio to ensure safe levels of
liquidity, to enhance the overall credit quality of its asset base, to generate
increased interest income, to balance assets and liabilities and to hedge
interest rate risk. 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, 1998, the Bank's investment portfolio consisted of the
following:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------ ----------------
<S> <C> <C>
U.S. Treasury 401,500 769,456
U.S. Government Agency 4,027,525 548,746
State and Municipal -- 444,955
Equity 159,800 --
</TABLE>
REDEEMABLE PREFERRED STOCK
- --------------------------
During the first nine months ended September 30, 1998, the Company accrued
$50,000 of dividends on the series A preferred stock. The preferred stock -
series A was redeemed and the accrued dividends were paid on May 31, 1998 by
using part of the proceeds from the 1998 Private Placement Offering.
REGULATORY AGREEMENTS AND COMPLIANCE
- ------------------------------------
On May 19, 1997, the Board of Directors of the Bank submitted a resolution
to the FDIC and to the SCC. The resolution addressed various areas of operation
and includes provisions to monitor the Bank's profitability. As of September
30, 1998, management believes that the Bank is in compliance with all terms of
the resolution.
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, 1998 and 1997.
10
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Tier I Capital
Company $ 5,086,998 $ 2,664,338
The Business Bank 4,763,345 3,512,253
Total qualifying capital
Company $ 5,138,437 $ 4,104,706
The Business Bank 5,209,985 3,902,091
Risk-weighted assets
Company $ 35,773,788 $ 31,380,675
The Business Bank 35,441,062 30,952,736
Quarterly average assets
Company $ 52,240,905 $ 46,677,186
The Business Bank 51,956,738 46,172,692
</TABLE>
<TABLE>
<CAPTION>
Required
Risk-based capital ratios: 1998 1997 Minimum
----------- ----------- -----------
<S> <C> <C> <C>
Tier I Capital (Tier I capital/risk-weighted assets)
Company 13.10% 8.49% 4.00%
The Business Bank 13.44% 11.35% 4.00%
Total Capital (Total capital/risk-weighted assets)
Company 14.36% 13.08% 8.00%
The Business Bank 14.70% 12.61% 8.00%
Leverage ratio (Tier I capital/adjusted average assets)
Company 8.97% 5.71% 5.00%
The Business Bank 9.17% 7.61% ***6.00%
***Minimum goal of the Board Resolution
</TABLE>
EARNINGS PER SHARE
- ------------------
The following table is a reconciliation of earnings per common share as
computed under SFAS 128. (See note 3).
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
<S> <C> <C> <C>
For the nine months ended September 30, 1998
Basic Earnings Per Share
Net Income $ 141,474
Less: Preferred Stock Dividends ( 50,000)
-----------
Basic earnings (loss) per common share:
Income available to common stockholders 91,474 677,575 $ .14
----------- ----------- -----------
Diluted Earnings Per Share
Effective of Dilutive Securities -- 96,765 $ ( .02)
----------- ----------- -----------
Income available to common stockholders $ 91,474 774,340 $ .12
=========== =========== ===========
For the nine months ended September 30, 1997
Net Income $ 13,008
Less: Preferred Stock Dividends (87,250)
-----------
Basic earnings (loss) per common share:
Income available to common stockholders $ (74,242) 561,640 $ (.13)
=========== =========== ===========
</TABLE>
11
<PAGE>
YEAR 2000
- ---------
Assuring that computer systems and applications are Year 2000 (Y2K)
compliant presents a complex managerial and technological challenge. Many
computer programs now in use have not been designed to properly recognize years
after 1999. If not corrected, these programs could fail or create erroneous
results. The Y2K issue affects the entire banking industry because of its
reliance on computers and other equipment that use computer chips, and may have
significant effects on the Company's customers and regulators. In recognition of
the potential adverse effects of the Y2K issue, management of the Company
created a Y2K project team and established a plan to prevent or mitigate
potential adverse effects of Y2K issue on the Company, its vendors and its
customers. The Y2K project team is headed by a senior management executive.
The Company's Y2K Plan consists of three phases. Phase I requires the
Company to assess its Y2K compliancy needs and to develop a plan to address
those needs. The assessment included testing the Company's current hardware,
software and material external vendors' compliancy. Phase I also included
assessing the impact Y2K compliancy could have on our existing and future
customers. The Company completed Phase I in December 1997. The Y2K project
team concluded that the Company would need to replace most of its computer
hardware and software. The Y2K project team also concluded that extensive
testing would be required of the Bank's data processing company to determine Y2K
compliancy. The assessment of the impact of Y2K on existing customers was
determined to be immaterial to the Company. An questionnaire and information
guide was established to assess Year 2000 compliancy of future customers. The
costs of Phase I, including salary allocations, were approximately $50,000.
Phase II requires all non-compliant hardware and software to be replaced
by April 1999. The new equipment must be re-tested for compliancy by June 1999.
The Company is in the process of completing Phase II. Approximately one-third
of the equipment and software has been replaced as of September 30, 1998. The
Company has included approximately $154,000 for Y2K compliancy costs, including
salary allocations, in its 1999 budget. Phase III requires monitoring and
review of Year 2000 issues that may have been overlooked. Management does not
anticipate material costs in this phase.
The Bank's primary supplier of data processing services also has adopted
a Y2K plan and timetable which also consists of three phases. The vendor has
completed Phase I and Phase II. Phase I problems have been corrected. Phase II
included testing key dates such as 12/31/99, 1/1/2000 and 2/29/2000 on a live
data base. The vendor is in the process of resolving discrepancies which were
detected during the testing. Management anticipates that the vendor will
complete its testing of Phase II Y2K compliancy by June 1999. Based on
information developed to date and representations from its data processing
supplier, the Phase II testing should resolve most Y2K issues and therefore
prevent any material problems which would impact the Company's business,
operations, liquidity, capital resources, or financial condition.
In a worse case scenario, the vendors providing power to the Company
would fail and the vendors providing data processing services for the Bank would
fail. The Company continues to enhance a contingency plan which would include a
limited back-up generator to provide power and manual calculations to service
customers. The Bank maintains a paper copy of most Bank documents. Hard copies
of customer records will be printed prior to 1/1/2000 to provide current
information. In order to plan for an unusually high cash demand, the Bank has
strategically purchased financial instruments and is developing a cash on hand
plan for customer withdrawals to ensure adequate liquidity. Management views
Y2K as an issue which requires on-going assessment. Management will make
assessments, modifications, and corrections to help ensure Y2K compliance.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(6) On July 6, 1998, United Financial Banking Companies, Inc. filed Form
8-K to disclose the status of its Private Placement Offering. Details
of the offering are discussed in the general information section of
this report.
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 13, 1998
-----------------
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000714286
<NAME> UNITED FINANCIAL BANKING COMPANIES, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,814,791
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 7,584,493
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,763,157
<INVESTMENTS-CARRYING> 4,576,974
<INVESTMENTS-MARKET> 4,588,825
<LOANS> 36,203,361
<ALLOWANCE> 767,686
<TOTAL-ASSETS> 53,784,178
<DEPOSITS> 48,363,772
<SHORT-TERM> 0
<LIABILITIES-OTHER> 321,557
<LONG-TERM> 0
0
0
<COMMON> 831,590
<OTHER-SE> 4,267,259
<TOTAL-LIABILITIES-AND-EQUITY> 53,784,178
<INTEREST-LOAN> 2,564,730
<INTEREST-INVEST> 468,866
<INTEREST-OTHER> 4,581
<INTEREST-TOTAL> 3,036,177
<INTEREST-DEPOSIT> 1,369,396
<INTEREST-EXPENSE> 808
<INTEREST-INCOME-NET> 1,655,973
<LOAN-LOSSES> 118,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,658,939
<INCOME-PRETAX> 141,474
<INCOME-PRE-EXTRAORDINARY> 141,474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141,474
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
<YIELD-ACTUAL> 9.33
<LOANS-NON> 202,708
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 715,399
<CHARGE-OFFS> 77,303
<RECOVERIES> 10,690
<ALLOWANCE-CLOSE> 767,686
<ALLOWANCE-DOMESTIC> 767,686
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 467,093
</TABLE>
