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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, 1997 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
Common Stock, $1.00 par value
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
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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.
---------
For the year ended December 31, 1997, United Financial Banking Companies, Inc.
reported net income of $16,299.
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was $2,209,715 as of March 1, 1998.
As of March 1, 1998, the registrant had 561,640 shares of outstanding common
stock, $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Company's 1997 Proxy Statement for the
Annual Meeting to be held June 5, 1998 is incorporated by reference into Part
III of this report, and information from the 1997 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, 1997, the Company had consolidated total assets of
$48,074,006, total deposits of $43,761,761, total loans of $38,084,861 and total
stockholders' equity of $2,639,999.
On March 1, 1998, the Company and its subsidiaries employed 21 full-time
employees.
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 Bank Insurance
Fund of the Federal Deposit Insurance Corporation (FDIC).
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
compliance with federal, state or local requirements related to the general
protection of the environment.
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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 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 10 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 (SCC) on December 31,
1993. On August 12, 1993, The Business Bank consented to the issuance of a
Cease and Desist Order (Order) by the FDIC and the Virginia Commissioner of
Financial Institutions. On June 2, 1997, the SCC terminated its participation
in the Order issued by the FDIC and the Written Agreement issued by the Federal
Reserve. Effective June 3, 1997, the FDIC terminated the Order issued against
the Bank. As of November 26, 1997, the Federal Reserve Bank terminated the
Written Agreement with UFBC. The Order and Agreement are discussed in further
detail in Note 10 to the consolidated financial statements.
ENFORCEMENT ACTIONS AND ADMINISTRATIVE SANCTIONS
Failure to comply with applicable laws and regulations 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
Act of 1991 ("FDIA") federal banking regulators are required to take prompt
corrective action in respect of depository institutions that do not meet minimum
capital requirements. FDIA 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. The Bank
meets the criteria of a well capitalized institution.
A depository institution is generally prohibited 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 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, 1997, the Company had no brokered deposits.
FDIC INSURANCE ASSESSMENTS
The bank is subject to FDIC deposit insurance assessments. The FDIC has
adopted a risk-based system for determining deposit insurance assessments. An
insured institution is assessed at rates 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.
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CONSERVATORSHIP AND RECEIVERSHIP POWERS OF FEDERAL BANKING AGENCIES
The authority of the federal banking regulators to place depository
institutions includes, 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 recent legislation 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 assets. At December 31, 1997 UFBC, Inc. held
one leveraged lease asset.
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 $61,293 and increases 3.0% per
year for the remainder of the lease. One hundred percent of the former
Operations Center space is sublet through the end of the lease term.
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. As of December 31, 1997, the future minimum lease
payments for the Bank lease, including the option period, totaled $1,875,258.
Further information regarding this transaction is discussed in Part III, item 12
of this report.
Management believes that the Company's current facilities adequate for
operating in the normal course of business.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is party to legal
proceedings. There is no litigation
5
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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
At a Special Meeting of Stockholders held on December 22, 1997, stockholders
approved an amendment to the Articles of Incorporation of UFBC effecting a one-
for-five reverse split of the outstanding shares of the Company's common stock.
The amendment became effective December 31, 1997 and each five shares of common
stock were combined and converted into one share of common stock. Stockholders
will receive cash in lieu of any fractional shares resulting from the reverse
split.
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 408 holders of record of the Registrant's common stock as of
December 31, 1997.
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, 1997.
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, 1997.
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,
1997.
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, 1997.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 5, 1998.
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 5, 1998.
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 5, 1998.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 5, 1998.
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 1997 Annual
Report to Shareholders as listed below:
<TABLE>
<CAPTION>
Page
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<S> <C>
Report of Independent Certified Public Accountants 1
Consolidated Balance Sheets--December 31, 1997 and 1996 2
Consolidated Statements of Income--
Years Ended December 31, 1997, 1996 and 1995 3
Consolidated Statements of Changes in Shareholders' Equity--
Years Ended December 31, 1997, 1996 and 1995 4
Consolidated Statements of Cash Flows--
Years Ended December 31, 1997, 1996 and 1995 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,
1997.
(C) EXHIBITS
EXHIBIT 3--ARTICLES OF INCORPORATION AND BYLAWS
Articles of incorporation for United Financial Banking Companies, Inc. as
amended December 31, 1997 are attached as exhibit 3. The bylaws for United
Financial Banking Companies, Inc. are incorporated by reference to Exhibit 3 of
Form 10-K for December 31, 1990.
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 1997 Annual Report.
EXHIBIT 13--ANNUAL REPORT TO SECURITY HOLDERS
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
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<S> <C> <C>
The Business Bank Virginia 100%
Business Venture Capital, Inc Virginia 100%
UFBC, Inc. Virginia 100%
Omni Homes, Inc. Virginia 100%
</TABLE>
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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 23 day of March, 1998.
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UNITED FINANCIAL BANKING COMPANIES, INC.
(Registrant)
By: /s/
--------------------------------------
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.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Chairman* /Director 3/23/98
- -------------------------------------- -------
Jeffery T. Valcourt
/s/ President, CEO/Director 3/23/98
- -------------------------------------- -------
Harold C. Rauner
/s/ Director 3/23/98
- -------------------------------------- -------
William J. McCormick, Jr.
/s/ Director 3/23/98
- -------------------------------------- -------
Dennis I. Meyer
/s/ Director 3/23/98
- -------------------------------------- -------
Edward H. Pechan
/s/ Director 3/23/98
- -------------------------------------- -------
Sharon A. Stakes
/s/ Principal Financial Officer 3/23/98
- -------------------------------------- Principal Accounting Officer -------
Lisa M. Porter
</TABLE>
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EXHIBIT 3
AMENDED DECEMBER 31, 1997
ARTICLES OF INCORPORATION
OF
UNITED FINANCIAL BANKING COMPANIES, INC.
1. The name of the corporation is
UNITED FINANCIAL BANKING COMPANIES, INC.
2. The purpose for which the corporation is organized is the business of
owning and controlling banks. In addition, the corporation shall be authorized
to transact any or all lawful business not required to be specifically stated in
these Articles of Incorporation for which corporations may be incorporated under
the Virginia Stock Corporation Act.
3. The aggregate number of shares of capital stock which the Corporation
shall have authority to issue shall be 3,500,000 shares of Common Stock, par
value $1 per share, and 5,000,000 shares of Preferred Stock, without par value.
At December 31, 1997, each five (5) issued and outstanding shares of Common
Stock of the Corporation shall automatically and without further action be
combined and converted into one (1) share of validly issued, fully paid and
nonassessable Common Stock of the Corporation. No fractional shares or scrip
for fractional shares shall be issued by reason of this conversion.
The Board of Directors is hereby empowered to cause the Preferred
Stock of the Corporation to be issued in series with such of the variations
permitted by clauses (a)-(k) below, as shall be determined by the Board of
Directors.
The shares of Preferred Stock may vary as to:
(a) the designation of such series, the number of shares to constitute
such series and the stated value thereof;
(b) whether the shares of such series shall have voting rights, in
addition to any voting rights provided by law, and, if so, the terms of such
voting rights, which (I) may be general or limited, and (ii) may permit more
than one vote per share;
(c) the rate or rates (which may be fixed or variable) at which
dividends shall be cumulative, and, if so, from what dates, the conditions and
dates upon which such dividends are payable, the preference or relation which
such dividends shall bear to the dividends payable on shares of Common Stock or
on any shares of any other series of Preferred Stock;
(d) whether the shares of such series shall be subject to redemption
by the Corporation, and, if so, the times, prices and other conditions of such
redemption;
(e) the amount or amounts payable upon shares of such series upon, and
the rights of the holders of such series in, the voluntary and involuntary
liquidation, dissolution or winding up, or upon any distribution of the assets,
of the Corporation;
(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund, and, if so, the extent to and manner
in which any such retirement or sinking fund shall be applied to the purchase or
redemption of the shares of such series for retirement or other corporate
purposes and the terms and provisions relative to the operation thereof;
(g) whether the shares of such series shall be convertible into, or
exchangeable for, shares of Common Stock or any other securities (including any
other series of Preferred Stock) and, if so, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of adjusting the same,
and any other terms and conditions of conversion or exchange;
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(h) the limitations and restrictions, if any, to be effective while
any shares of such series are outstanding upon the payment of dividends or the
making of other distributions on, and upon the purchase, redemption or other
acquisition by the Corporation of, the Common Stock or shares of any other
series of the Preferred Stock;
(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of the
Preferred Stock;
(j) the ranking (be it pari passu, junior or senior) or each series
---- -----
as to the payment of dividends, the distribution of assets and all other
matters; and
(k) any other powers, preferences and relative, participating,
optional and other special rights, and any qualifications, limitations and
restrictions thereof, insofar as they are not inconsistent with the provisions
of these Articles of Incorporation, to the full extent permitted in accordance
with the laws of the Commonwealth of Virginia.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid to or set aside for the holders of
the Preferred Stock the full preferential amounts to which they are respectively
entitled under the provisions of these Articles of Incorporation applicable to
the Preferred Stock, the holders of the Preferred Stock shall have no claim to
any of the remaining assets of the Corporation.
The power, preferences and relative, participating, optional and other
special rights of each series of Preferred Stock, and the qualifications,
limitations or restriction thereof, if any, may differ from those of any and all
other series at any time outstanding. All shares of Preferred Stock of each
series shall be equal in all respects.
"Series A Preferred Stock. (a) Designation. The series of preferred stock
shall be designated and known as "Series A Preferred Stock."
(b) Number of Shares. The Series A Preferred Stock shall consist of up to
nine hundred (900) shares of the authorized preferred stock, without par value,
of the Corporation.
(c) Dividends and Distributions. Subject to the prior or superior rights
of the holders of any shares of any series of preferred stock ranking prior or
superior to the Series A Preferred Stock with respect to dividends, whether now
existing or hereafter created, the holders of shares of Series A Preferred Stock
shall be entitled to receive, as and when declared by the Board of Directors,
prior to payment of any cash dividends on any class of Common Stock or other
class of stock junior to the Series A Preferred Stock during the quarter to
which such dividend relates, out of funds legally available therefore, dividends
in an amount per share equal to ten percent (10%) of the Original Purchase Price
of the Series A Preferred Stock (as hereinafter defined) divided by four.
Dividends shall be cumulative from the date of issuance, whether or not declared
by the Board of Directors, and shall be payable quarterly on the first day of
January, April, July and October of each year (each a "Dividend Payment Date")
commencing on the first Dividend Payment Date after the issuance of any shares
of Series A Preferred Stock. For purposes hereof the "Original Purchase Price
of the Series A Preferred Stock" shall be one thousand five hundred dollars
($1,500) per share of Series A Preferred Stock. In the event that the
corporation shall at any time declare and pay or effect in respect of the Series
A Preferred Stock any stock split, (whether or not in the form of a stock
dividend), reverse stock split, or other reclassification or combination of the
Series A Preferred Stock or other transaction (including a merger, consolidation
or share exchange) which has the effect of increasing or decreasing the number
of shares of Series A Preferred Stock, then the Original Purchase Price of the
Series A Preferred Stock shall be deemed to have been proportionately adjusted
to reflect such transaction or event. In the event that any share of Series A
Preferred Stock is outstanding for only a part of the quarterly period preceding
any Dividend Payment Date, then the dividend payable with respect to such share
shall be prorated for the period such share was outstanding during such period,
except that the dividend payable on January 1, 1997 shall not be so prorated and
shall consist of the full amount that would be payable if the shares of Series A
Preferred Stock had been outstanding for the entire quarterly period preceding
such date. Dividends declared and paid in an amount less than the total amount
payable on all shares of Series A Preferred Stock shall be allocated pro rata
among the shares of Series A Preferred Stock outstanding.
<PAGE>
(d) Voting Rights. Except as may be expressly required by the laws of
general applicability of the Commonwealth of Virginia, and except as otherwise
provided in this paragraph (d) the holders of the Series A Preferred Stock shall
not be entitled to vote on any matter submitted for the vote of stockholders,
including but not limited to the election of directors. In the event that there
shall have occurred an Event of Default (as hereinafter defined) then,
notwithstanding any other provision of the articles of incorporation of the
Corporation, the terms of office of the members of the Board of Directors of the
Corporation shall cease to be staggered, the term of office of each member of
the Board of Directors shall terminate at the next election of directors,
whether such election is at an annual meeting or at a special or extraordinary
meeting called for the purpose of the election of directors, and the holders of
the outstanding shares of Series A Preferred Stock, voting as a separate class,
by the action of the holders of a majority of such shares, shall be entitled to
elect that number of directors as shall constitute a majority of the Board of
Directors. Following the occurrence of an Event of Default, the holders of a
majority of the Series A Preferred Stock shall be entitled to call a special
meeting of shareholders for the purpose of the election of directors. For
purposes hereof, an "Event of Default" shall exist if the Corporation shall
fail, for any reason whatsoever, to redeem (or to call for redemption and
deposit sufficient funds for purposes of effecting the redemption with an
independent depositary or escrow agent) all outstanding shares of Series A
Preferred Stock, and to have paid all accrued dividends on the Series A
Preferred Stock, by September 30, 2001. The right of the Series A Preferred
Stock to elect a majority of the Board of Directors following the occurrence of
an Event of Default shall continue until the later of (I) September 30, 2001 or
(ii) the redemption of all outstanding shares of Series A Common Stock.
Notwithstanding anything contained herein to the contrary, the exercise of the
right of the Series A Preferred Stock to call a special meeting for the purpose
of the election of directors and to elect a majority of the Board of Directors
following the occurrence of an Event of Default shall be subject to the receipt
of any required consents or approvals of the Federal Reserve Board, the Virginia
Commissioner of Financial Institutions, or any other bank regulatory agency
having jurisdiction. Additionally, whether or not a vote of shareholders of any
class is required by law or by any other provision hereof, the affirmative vote
of the holders of not less than a majority of the outstanding shares of Series A
Preferred Stock shall be required prior to the issuance of any shares of a class
or series of stock which would have rights as to dividends or liquidation prior
or superior to the Series A Preferred Stock.
(e) Redemption. Shares of the Series A Preferred Stock may be redeemed, in
whole or in part, at the option and in the sole discretion only of the
Corporation, at any time or from time to time, without notice, at a redemption
price equal to the Original Purchase Price of the Series A Preferred Stock, as
adjusted in accordance with the provision of (c) above plus dividends accrued
but unpaid prior to the date of redemption (the "Redemption Price").
Additionally, all outstanding shares of the Series A Preferred Stock shall be
redeemed by the Corporation at the Redemption Price on September 30, 2001. Any
such redemption shall be subject to the receipt by the Corporation of any
required prior approval of the Federal Reserve Board or other regulatory agency
having jurisdiction over the Corporation and its subsidiaries. Provided that
sufficient funds to effect the redemption have been deposited with an
independent depositary or escrow agent, then at the time of such redemption as
specified in the resolution of the Board of Directors authorizing such
redemption or September 30, 2001, as applicable, all rights of the holders of
the Series A Preferred Stock redeemed shall terminate, except for the right to
receive the Redemption Price.
(f) Sinking Fund. The Corporation shall not be required to establish or
make payments into, and the Series A Preferred Stock shall not enjoy the benefit
of, any sinking, reserve or other segregated fund for the redemption of the
Series A Preferred Stock.
(g) Restrictions on Repurchase. The Corporation shall not, at any time
while any shares of Series A Preferred Stock are outstanding, purchase,
repurchase, redeem, or otherwise reacquire for value, any shares of Common Stock
or other class of stock junior to the Series A Preferred Stock, provided,
however, that nothing contained in this paragraph (g) shall prevent the
Corporation from acquiring any shares of Common Stock or other class of stock
junior to the Series A Preferred Stock as a result of, or in connection with the
satisfaction of a debt previously contracted in good faith.
(h) Conversion. The Series A Preferred Stock shall not be convertible into
or otherwise exchangeable for shares of any other class of stock or securities
of the Corporation.
(i) Liquidation, Dissolution or Winding Up. Subject to the prior or
superior rights of the holders of any series of preferred stock ranking prior or
superior to the Series A Preferred Stock with respect to liquidation, whether
now existing or hereafter created, upon any liquidation, dissolution or winding
up of the corporation, the holders of the Series A Preferred Stock
<PAGE>
shall be entitled to receive, prior to the payment of any amounts in
liquidation, dissolution or winding up in respect of any Common Stock or other
class of stock junior to the Series A Preferred Stock, but after the payment or
provision for all amounts due to creditors of the corporation, an amount per
share equal to the Original Purchase Price of the Series A Preferred Stock as
adjusted in accordance with the provisions of (c) above, plus the amount of any
dividends accrued but unpaid as of the date of such liquidation, dissolution or
winding up. Following receipt of such amount, the holders of the Series A
Preferred Stock shall have no right to receive any other amounts in connection
with the liquidation, dissolution or winding up of the corporation.
(j) Preemptive Rights. The holders of the Series A Preferred Stock shall
not have any preemptive or preferential right to acquire any shares of any class
of capital stock of the corporation, whether now or hereafter authorized, except
as the Board of Directors may specifically provide.
4. Stockholders of the corporation shall not have the preemptive right to
acquire unissued shares of the corporation.
5. The Corporation=s initial registered office shall be located in the
City of Richmond at Suite 1100, 707 East Main Street, Richmond, Virginia 23219.
The Corporation=s initial registered agent shall be Lathan M. Ewers, Jr., whose
address is the same as the corporations=s registered office and who is a
resident of Virginia and a member of the Virginia State Bar.
6. The business and affairs of the Corporation shall be managed by or
under the direction of a Board of Directors consisting of not less than six nor
more than twelve Directors, the exact number of Directors to be determined from
time to time by resolution adopted by the affirmative vote of a majority of the
Directors then in office or at least two-thirds of the shares entitled to vote
at a meeting of shareholders. The Directors shall be divided into three
classes, designated as Class I, Class II, and Class III. Each class shall
consist, as nearly as may be possible, of one-third of the total number of
Directors constituting the entire Board of Directors. At the 1990 Annual
Meeting of Shareholders, Class I Directors shall be elected for a one-year term,
Class II Directors for a two-year term and Class III Directors for a three-year
term. At each succeeding Annual Meeting of Shareholders beginning in 1991,
successors to the class of Directors whose term expires at that annual meeting
shall be elected for a three-year term. If the number of Directors has changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of Directors in each class as nearly equal as possible, but
in no case will a decrease in the number of Directors shorten the term of any
incumbent Director. A Director shall hold office until the annual meeting for
the year in which his term expires and until his successor shall be elected,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office. Notwithstanding the foregoing, whenever the holders of
Preferred Stock or one or more series of Preferred Stock issued by the
Corporation shall have the right, voting separately by class or series to elect
Directors at an annual or special meeting of shareholders, the election, term of
office, filling of vacancies and other features of such Directorships shall be
governed by the terms of these Articles of Incorporation applicable thereto, and
such Directors so elected shall not be divided into classes pursuant to this
Article 6 unless expressly provided by such terms. If the office of any
Director shall become vacant, the Directors, at the time in office, whether or
not a quorum, may, by majority vote of the Directors then in office, choose a
successor who shall hold office until the next annual meeting of shareholders.
In such event, the successor elected by the shareholders at that annual meeting
shall hold office for a term that shall coincide with the remaining term of the
class of Directors to which that person has been elected. Vacancies resulting
from the increase in the number of Directors shall be filled in the same manner.
Notwithstanding any other provision of the Articles of Incorporation or the
Bylaws, the affirmative vote of at lease two-thirds of the outstanding shares
entitled to vote shall be required to amend, alter, change or repeal, or to
adopt any provisions inconsistent with the purpose and intent of this Article 6.
7. Except as otherwise now or hereafter specifically provided for herein,
the vote of the Corporation=s Common Stock required to approve an amendment to
the Corporations=s Articles of Incorporation shall be a majority of all such
shares.
Amended December 31, 1997 ________________________________________________
<PAGE>
UNITED FINANCIAL BANKING
COMPANIES, INC. AND SUBSIDIARIES
FINANCIAL REPORT
DECEMBER 31, 1997
<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>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
United Financial Banking Companies, Inc. and Subsidiaries
We have audited the consolidated balance sheet of United Financial Banking
Companies, Inc., and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ending December 31, 1997, 1996 and 1995. 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.
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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for the years
ending December 31, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/
D.R. Maxfield & Company
January 21, 1998
<PAGE>
2
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------- --------------
<S> <C> <C>
Cash and due from banks (Note 10) $ 2,282,418 $ 4,265,513
Interest-bearing deposits in other banks 100,000 300,000
Federal funds sold 2,659,000 898,000
------------ -------------
Total cash and cash equivalents 5,041,418 5,463,513
------------ -------------
Securities available-for-sale (Note 2) 1,700,876 2,095,422
Securities held-to-maturity (Note 2) 1,082,773 300,000
------------ -------------
Total securities 2,783,649 2,395,422
------------ -------------
Loans and lease financing, net of unearned income of
$40,702 in 1997; $52,175 in 1996 (Notes 3, 4 and 9) 38,084,861 30,618,335
Less: Allowance for loan/lease losses (715,399) (584,106)
------------ -------------
Net loans and lease financing 37,369,462 30,034,229
Real estate owned, net (Note 5) 2,368,104 3,115,080
Premises and equipment, net (Note 6) 164,018 132,712
Other assets 347,355 460,733
------------ -------------
40,248,939 33,742,754
------------ -------------
Total assets $ 48,074,006 $ 41,601,689
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand $ 7,778,077 $ 7,897,677
Savings and NOW 2,508,666 2,779,982
Money market 7,568,652 3,970,348
Time:
Under $100,000 19,478,244 16,763,355
$100,000 and over 6,428,122 6,323,212
------------ -------------
Total deposits 43,761,761 37,734,574
Accounts payable and accrued expenses 336,246 360,295
------------ -------------
Total liabilities 44,098,007 38,094,869
------------ -------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)
REDEEMABLE PREFERRED STOCK (Note 15)
Series A $-0- par value, authorized 900 shares, 800 shares
issued in 1997 and 500 shares in 1996; 10% cumulative
dividend, redemption value @ 9/30/2001 $1,786,000 1,336,000 768,750
------------ -------------
STOCKHOLDERS' EQUITY (Notes 10, 13 and 16)
Preferred stock $-0- par value, authorized 5,000,000 shares,
issued 800 shares in 1997 and 500 shares in 1996 -- --
Common stock, par value $1; authorized 3,500,000
shares, issued 561,640 shares in 1997 and 1996 561,640 561,640
Surplus 12,643,622 12,760,872
Accumulated deficit (10,567,633) ( 10,583,932)
Unrealized holding gain (loss) on securities available-for-sale 2,370 (510)
------------ -------------
Total stockholders' equity 2,639,999 2,738,070
------------ -------------
Total liabilities and stockholders' equity $ 48,074,006 $ 41,601,689
============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES 3
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans/leases $2,991,380 $2,462,895 $ 1,823,798
Interest on investment securities 186,866 117,225 37,872
Interest on interest bearing deposits 8,914 23,351 8,793
Interest on federal funds sold 246,707 224,807 321,404
---------- ---------- -----------
3,433,867 2,828,278 2,191,867
---------- ---------- -----------
Interest expense:
Interest on deposits (Note 12) 1,495,204 1,498,089 1,341,370
Interest on short-term borrowings -- 64,762 347
Interest on long-term debt -- -- 1,879
---------- ---------- -----------
1,495,204 1,562,851 1,343,596
---------- ---------- -----------
Net interest income 1,938,663 1,265,427 848,271
Provision for loan/lease losses (Note 3) 249,300 694,203 (295)
---------- ---------- -----------
Net interest income after provision
for loan/lease losses 1,689,363 571,224 848,566
---------- ---------- -----------
Noninterest income (loss):
Other earning assets -- 11,000 8,250
Loan servicing and other fees 76,397 82,669 77,614
Gain on the sale of fixed assets (Notes 6 and 9) -- 734,641 --
Other income (Note 11) 148,319 (176,428) 145,932
---------- ---------- -----------
224,716 651,882 231,796
---------- ---------- -----------
Noninterest expense:
Salaries 760,032 746,352 762,478
Employee benefits (Note 13) 133,590 140,611 (21,447)
Occupancy (Note 6) 296,097 133,151 154,864
Furniture and equipment 60,304 45,697 103,857
Other (Note 14) 647,757 1,067,365 1,404,098
---------- ---------- -----------
1,897,780 2,133,176 2,403,850
---------- ---------- -----------
Income (loss) before income taxes 16,299 (910,070) (1,323,488)
Provision (credit) for federal income taxes (Note 7) -- (2,461) 2,598
---------- ---------- -----------
Net income (loss) $ 16,299 $ (907,609) $(1,326,086)
========== ========== ===========
Earnings (loss) per common share (Notes 1 and 16) $(.18) $(1.65) $(2.40)
========== ========== ===========
Weighted Average Common Shares Outstanding*
Basic 561,640 561,640 551,550
</TABLE>
*Common shares of stock and the associated price have been restated to reflect
the 1-for-5 reverse split (Note 16).
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Accumulated Unrealized
Stock Surplus Deficit Gain on AFS Total
--------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $541,768 $12,675,295 $ (8,350,237) $ -- $ 4,866,826
Net loss -- -- (1,326,086) -- (1,326,086)
Net proceeds from issuance
of shares of common
stock 19,872 104,327 -- -- 124,199
Change in unrealized
holding gain (loss) on
available-for-sale
securities (AFS), net
of taxes -- -- -- 5,108 5,108
--------- ----------- ------------ ----------- -----------
Balance, December 31, 1995 $561,640 $12,779,622 $ (9,676,323) $ 5,108 $ 3,670,047
--------- ----------- ------------ ----------- -----------
Net loss -- -- (907,609) -- (907,609)
Accrued dividend for
redeemable preferred
stock - series A (Note 15) -- (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 $561,640 $12,760,872 $(10,583,932) $ (510) $ 2,738,070
--------- ----------- ------------ ----------- -----------
Net income -- -- 16,299 -- 16,299
Accrued dividend for
redeemable preferred
stock - series A (Note 15) -- (117,250) -- -- (117,250)
Change in unrealized
holding gain (loss) on
available-for-sale
securities (AFS), net
of taxes -- -- -- 2,880 2,880
--------- ----------- ------------ ----------- -----------
Balance, December 31, 1997 $561,640 $12,643,622 $(10,567,633) $ 2,370 $ 2,639,999
========= =========== ============ =========== ===========
</TABLE>
* Common shares of stock and the associated price have been restated to
reflect the 1-for-5 reverse split (Note 16).
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 16,299 $ (907,609) $(1,326,086)
Adjustments to reconcile
net income (loss)
to net cash provided by
(used in) operating
activities:
Depreciation and
amortization 50,933 72,370 77,621
Provision for
loan/lease losses 249,300 694,203 295
Provision for losses on
real estate owned 114,805 168,187 488,000
Amortization of
investment security
discounts (7,218) (1,898) (13,488)
Amortization of loan fees
and discounts (85,923) (25,991) (78,468)
Net gain on disposal of
fixed assets -- (734,641) (10,653)
Net (gain) loss on real
estate owned (27,868) 306,969 (43,671)
(Increase) decrease in
other assets 113,379 13,908 (83,511)
Increase (decrease) in
other liabilities (24,048) (22,673) (698,738)
----------- ----------- -----------
Net cash provided
by (used in)
operating
activities 399,659 (437,175) (1,688,699)
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Principal collected -
non-bank subsidiaries 397,437 50,493 47,220
Bank loans and leases
repaid, net of
originations (8,173,931) (7,857,586) (9,852,649)
Loan fees and discounts
deferred 75,883 3,049 --
Purchases of securities
available-for-sale (698,270) (1,695,642) (584,528)
Purchases of securities
held-to-maturity (1,643,096) -- (300,376)
Investments made in real
estate owned (1,579,193) (5,178,439) (4,404,748)
Proceeds received from
maturity of securities
available-for-sale 1,100,000 200,000 --
Proceeds received from
maturity of securities
held-to-maturity 863,237 -- --
Proceeds received from
real estate owned 2,441,232 10,011,649 7,235,937
Purchases of premises and
equipment (82,239) (19,840) (79,370)
Proceeds from sale of
premises and equipment -- 1,968,521 17,236
----------- ----------- -----------
Net cash provided
by (used in)
investing
activities (7,298,940) (2,517,795) (7,921,278)
----------- ----------- -----------
<PAGE>
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase (decrease)
in demand
deposits, savings
accounts, NOW
accounts and money
market accounts 3,207,387 (1,276,263) 8,350,008
Certificates of deposit
sold (matured), net 2,819,799 1,535,603 3,088,918
Net change in short-term
borrowings -- (1,538,544) 804,544
Proceeds from issuance of
redeemable preferred
stock 450,000 750,000 --
Payments on long-term debt -- -- (84,948)
----------- ----------- -----------
Net cash provided
by (used in)
financing
activities 6,477,186 (529,204) 12,158,522
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents (422,095) (3,484,174) 2,548,545
Cash and cash equivalents
at beginning
of year 5,463,513 8,947,687 6,399,142
----------- ----------- -----------
Cash and cash equivalents
at end of year $ 5,041,418 $ 5,463,513 $ 8,947,687
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
6
Consolidated Statements of Cashflows (continued)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest on deposits and other
borrowings $1,571,590 $1,701,011 $1,513,210
========== ========== ==========
Income taxes $ 14,786 $ 11,471 $ 33,080
========== ========== ==========
NON-CASH ITEMS ===================================
Increase in foreclosed properties and
decrease in loans $ 202,000 $ 513,740 $ 486,974
Effect on stockholders' equity of an
unrealized gain (loss) on debt and
equity securities in available-for-sale 2,880 (5,618) 5,108
Accrued dividend on preferred stock - series A 117,250 18,750 --
Effect on common stock resulting from
the 1-for-5 reverse split (effective 12/31/97) 2,246,561 -- --
</TABLE>
See Notes to Consolidated Financial Statements
<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:
<TABLE>
<CAPTION>
<S> <C>
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 8
</TABLE>
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. At December 31, 1997 and 1996, the
Company held no securities classified as trading.
<PAGE>
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 gain or loss is included in operations
expense.
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, 1997, had no
transactions which were identified as meeting the criteria of SFAS
122.
<PAGE>
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 common share:
On December 31, 1997, the Company 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. There were no dilutive effects for the years presented. Prior
period amounts have been restated, where appropriate, to conform to
the requirements of SFAS 128 (see Note 16).
Reclassifications:
Certain amounts for fiscal year 1996 and 1995 have been reclassified
to conform to the presentation for fiscal year 1997.
* Common shares of stock and the associated price have been restated to
reflect the 1-for-5 reverse split (Note 16).
<PAGE>
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997:
U.S. Treasury $ 1,698,506 $ 3,047 $ (677) $1,700,876
-------------- ---------- ---------- ----------
Total $ 1,698,506 $ 3,047 $ (677) $1,700,876
============== ========== ========== ==========
December 31, 1996:
U.S. Treasury $ 2,095,932 $ -- $ (510) $2,095,422
-------------- ---------- ---------- ----------
Total $ 2,095,932 $ -- $ (510) $2,095,422
============== ========== ========== ==========
Securities Held-to-Maturity
- ---------------------------
December 31, 1997:
U.S. Treasury $ 249,639 $ 2,627 $ -- $ 252,266
U.S. Government Agencies 388,308 2,484 (178) 390,614
State and Municipal 444,826 1,199 -- 446,025
-------------- ---------- ---------- ----------
Total $ 1,082,773 $ 6,310 $ (178) $1,088,905
============== ========== ========== ==========
December 31, 1996:
U.S. Treasury $ -- $ -- $ -- $ --
U.S. Government Agencies 300,000 1,768 -- 301,768
State and Municipal -- -- -- --
-------------- ---------- ---------- ----------
Total $ 300,000 $ 1,768 $ -- $ 301,768
============== ========== ========== ==========
</TABLE>
<PAGE>
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities (continued)
The amortized cost and estimated fair value of securities at December
31, 1997, by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties:
<TABLE>
<CAPTION>
Securities Available-for-Sale Cost Fair Value
- ----------------------------- ---------- ----------
<S> <C> <C>
Due in one year or less $1,299,386 $1,299,813
Due after 1 year through 5 years 399,120 401,063
Due after 5 years through 10 years -- --
Due after 10 years -- --
---------- ----------
Total $1,698,506 $1,700,876
========== ==========
Securities Held-to-Maturity
- ---------------------------
Due in one year or less $ 91,786 $ 91,608
Due after 1 year through 5 years 990,987 997,297
Due after 5 years through 10 years -- --
Due after 10 years -- --
---------- ----------
Total $1,082,773 $1,088,905
========== ==========
</TABLE>
Securities with an amortized cost of $399,205 and $1,598,415 at
December 31, 1997, and 1996, 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 1997 or 1996.
Note 3. Loans and Lease Financing and Related Accounts
Loans and lease financing consists of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commercial $27,039,144 $21,868,684
Real estate construction 2,252,943 1,527,521
Real estate mortgage 6,743,695 4,418,814
Installment 1,744,437 2,438,674
Leveraged leases 304,642 364,642
----------- -----------
$38,084,861 $30,618,335
=========== ===========
</TABLE>
<PAGE>
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 were
reclassified as new leveraged leases since the lessees, lease term and
residual value also changed. The leases expire 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>
1997 1996
-------- ---------
<S> <C> <C>
Estimated residual value of leased assets $304,642 $366,700
Less: unearned and deferred income -- (2,058)
-------- --------
Investment in leveraged leases 304,642 364,642
Less: deferred taxes arising from leveraged leases -- --
-------- --------
Net investment in leveraged leases $304,642 $364,642
======== ========
</TABLE>
Deferred taxes arising from leveraged leases have been limited by the
carryforward of net operating losses. For the years ended December 31,
1997 and 1996 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>
1997 1996
-------- ---------
<S> <C> <C>
Non-accrual $102,012 $328,355
Restructured -- --
-------- --------
Total nonperforming 102,012 328,355
90 days or more past due -- --
-------- --------
$102,012 $328,355
======== ========
</TABLE>
The following is an analysis of approximate interest income related
to loans on non-accrual status:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Interest income that would have been recognized $ 21,000 $ 43,000
Amount recognized as interest income -- (17,000)
-------- --------
Difference $ 21,000 $ 26,000
======== ========
</TABLE>
There were no commitments to lend additional funds to customers whose
loans were classified as nonperforming at December 31, 1997.
Changes in the allowance for loan/lease losses are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Balance, beginning $ 584,106 $ 462,846
Provision charged to operations 249,300 694,203
Loans charged off (140,053) (594,140)
Recoveries 22,046 21,197
--------- ---------
Balance, ending $ 715,399 $ 584,106
========= =========
</TABLE>
<PAGE>
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 and 1996, the Company and its
subsidiaries had loans to such customers amounting to approximately
$2,888,000 and $4,019,000, 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, 1997,
the Company had uninsured cash of $130,580.
Note 5. Real Estate Owned
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Real estate owned $3,016,409 $ 4,452,905
Allowances for losses on real estate owned (648,305) (1,337,825)
---------- -----------
Real estate owned, net $2,368,104 $ 3,115,080
========== ===========
</TABLE>
Capitalized interest amounted to $64,700 and $144,000 for the years
ended December 31, 1997 and 1996, respectively.
Changes in the allowance for losses on real estate owned are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Balance, beginning $1,337,825 $ 3,745,303
Provision charged to operations 114,805 168,187
Losses charged to allowance (804,325) (2,575,665)
---------- -----------
Balance, ending $ 648,305 $ 1,337,825
========== ===========
</TABLE>
Note 6. Premises and Equipment
Major classifications of premises and equipment are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Leasehold improvements $ 242,485 $ 225,908
Furniture and equipment 700,243 634,581
--------- ---------
942,728 860,489
Accumulated depreciation and amortization (778,710) (727,777)
--------- ---------
$ 164,018 $ 132,712
========= =========
</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. At 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
strategic planning, Bank Management decided that the Bank would
require a significant capital expenditure. The projected expense
required Bank Management to analyze and to decide the best location
for the Bank for the
<PAGE>
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Premises and Equipment (continued)
immediate future. As a result of the analysis, Bank Management,
subsequent to December 31, 1996, chose to exercise the first option, a
nine year extension. As of December 31, 1997, the future minimum lease
payments for the Bank lease, including the option period, total
$1,875,258.
Future minimum lease payments for noncancellable operating leases with
initial or remaining terms of one year or more as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 271,494
1999 273,388
2000 241,850
2001 208,362
2002 208,362
Later years 833,448
----------
Total minimum lease payments $2,036,904
==========
</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 1995
the Bank sublet a portion of the headquarters building, the income of
which is netted against rent expense.
Rental expense for operating leases amounted to $198,324, $(17,074)
and $13,261 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Depreciation and amortization expense of $50,933 in 1997, $72,370 in
1996 and $77,621 in 1995, is included in occupancy expense or
furniture and equipment expense, depending upon the nature of the
asset.
Note 7. 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>
1997 1996 1995
----- -------- ------
<S> <C> <C> <C>
Current $ -- $(2,461) $2,598
Deferred -- -- --
----- ------- ------
$ -- $(2,461) $2,598
===== ======= ======
</TABLE>
The credit for income taxes for the years ended December 31, 1997,
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, 1997 and 1996, as illustrated in the following table:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liabilities $ (675,834) $(1,086,224)
Deferred tax assets 3,650,501 5,395,677
Deferred asset valuation allowance (2,974,667) (4,309,453)
----------- -----------
Net deferred tax assets (liabilities) $-- $--
=========== ===========
</TABLE>
<PAGE>
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Income Taxes (continued)
The principal sources of the deferred tax provisions were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Accelerated depreciation $ 242 $ 182,978 $ 65,151
Lease financing 159,291 285,950 109,694
Provision for loan losses 64,362 (185,201) (101)
Valuation adjustment of real properties (704,524) (851,512) (36,098)
Deferred compensation plans -- -- (65,867)
Supplemental retirement plans -- 1,632 1,513
Acquisition, development and construction loans (176,269) -- --
Net operating loss carryforward (683,824) (614,880) (628,677)
Limitation of net operating losses
and alternative minimum tax credits 1,333,648 1,195,450 585,839
Other 7,074 (14,417) (31,454)
---------- ---------- ---------
$ -- $ -- $ --
========== ========== =========
</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>
1997 1996 1995
-------- ---------- ------------
<S> <C> <C> <C>
Income (loss) before income taxes $16,299 $(910,070) $(1,323,488)
Applicable statutory income tax rate 34% 34% 34%
------- --------- -----------
Computed "expected" federal tax expense $(5,542) (309,424) (449,986)
Adjustments to federal income tax resulting from:
Net operating loss carryforward $ 5,542 309,424 449,986
Other -- (2,461) 2,598
------- --------- -----------
Provision for federal income tax $ -- $ (2,461) $ 2,598
======= ========= ===========
</TABLE>
At December 31, 1997 the Company has net operating loss carryforwards
for income tax purposes of $7,253,922 which will expire $518,977 in
2006, $1,066,398 in 2007, $1,849,246 in 2008, $1,829,709 in 2010 and
$1,989,592 in 2011. The Company also has an alternative minimum tax
credit carryforward of approximately $302,000 which may be carried
forward indefinitely.
Note 8. 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>
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. 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.
The UFBC Board of Directors and management decided to pursue the
appeal process on the recommendation of counsel. On October 6, 1997,
the U.S. Supreme Court issued an order denying Omni's request for
appeal.
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, 1997 which would have a material
adverse effect on the Company's financial statements.
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, 1997 and 1996,
commitments to extend credit under unused lines of credit amounted to
approximately $3,028,633 and $2,813,335, respectively.
The Company's outstanding standby letters of credit amounted to
approximately $505,474 and $531,528 as of December 31, 1997 and 1996,
respectively. The credit risk involved in issuing letters of credit is
essentially the same as that involved in making loans to customers.
Note 9. 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, 1995 $ 67,908
Additions 863,623
Reductions (48,144)
--------
Balance, December 31, 1996 $883,387
Additions 44,975
Reductions (69,293)
--------
Balance, December 31, 1997 $859,069
========
</TABLE>
<PAGE>
18
Note 9. Related Party Transactions (continued)
The December 31, 1997 balance consists of both secured and unsecured
loans. None of the loans to related parties were classified as non-
performing as of December 31, 1997.
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. In
1995, as a measure to comply with the Order (Note 10), 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 15).
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.
The terms of the sale were substantially the same as those prevailing
for similar sales within the market area that the foreclosed property
is located. 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 10. Regulatory Requirements and Restrictions
On August 12, 1993, 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, 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
(SCC). 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%.
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.
<PAGE>
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Regulatory Requirements and Restrictions (continued)
(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.
(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 June 2, 1997, the SCC terminated its participation in the Order to
Cease and Desist issued by the FDIC and the Written Agreement issued
by the Federal Reserve .
Effective June 3, 1997, the FDIC terminated the Order to Cease and
Desist issued against the Bank.
As of November 26, 1997, the Federal Reserve Bank terminated the
Agreement with UFBC.
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 Board
Resolution, the Bank is restricted from paying dividends until so
approved by the appropriate regulatory authorities. The Bank paid no
dividends in 1997, 1996 and 1995.
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
$3,713,000 at December 31, 1997; thus net assets of the Bank in excess
of approximately $371,300 were restricted from use by UFBC in the form
of loans or advances. UFBC had no such borrowings from the Bank in
1997 or 1996.
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, 1997 was $381,000.
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 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, 1997 and 1996.
<PAGE>
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Regulatory Requirements and Restrictions (continued)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Tier I Capital
Company $ 2,637,629 $ 2,737,560
The Business Bank 3,710,755 2,846,159
Total qualifying capital
Company $ 4,142,446 $ 3,862,590
The Business Bank 4,161,249 3,233,509
Risk-weighted assets
Company $35,994,010 $31,388,047
The Business Bank 35,824,784 30,987,987
Quarterly average assets
Company $46,219,323 $42,658,678
The Business Bank 45,533,315 41,014,942
</TABLE>
<TABLE>
<CAPTION>
Required
Risk-based capital ratios: 1997 1996 Minimum
---------- ----------- -----------
<S> <C> <C> <C>
Tier I capital (Tier I capital/risk-weighted assets)
Company 7.33% 8.72% 4.00%
The Business Bank 10.36% 9.18% 4.00%
Total capital (Total capital/risk-weighted assets)
Company 11.51% 12.31% 8.00%
The Business Bank 11.62% 10.43% 8.00%
Leverage ratio (Tier I capital/adjusted average assets)
Company 5.71% 6.42% 4.00%
The Business Bank 8.15% 6.94% *6.00%
</TABLE>
*Minimum required under Resolution of the Bank Board of Directors
Note 11. Other Income
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Service charges on deposits $ 98,840 $ 71,362 $ 65,795
Fees on letters of credit 5,580 7,433 5,188
Gain (loss) on sale of real estate owned 27,993 (306,969) 35,420
Other 15,906 30,294 39,529
Forfeited deposit on real estate owned -- 21,452 --
---------- ----------- -----------
$ 148,319 $ (176,428) $ 145,932
========== =========== ===========
Note 12. Interest on Deposits
1997 1996 1995
---------- ----------- -----------
Savings and NOW $ 60,902 $ 66,738 $ 46,248
Money market 231,789 163,612 155,577
Time:
Under $100,000 948,741 929,006 811,137
$100,000 and over 318,472 338,733 328,408
Less: capitalized interest (64,700) -- --
---------- ----------- -----------
$1,495,204 $ 1,498,089 $ 1,341,370
========== =========== ===========
</TABLE>
In 1997, interest was capitalized on certain ADC loans and certain
property classified as real estate owned (Note 5).
<PAGE>
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Employee Benefit Programs
(a) Retirement Plans
The Company has a 401(K) Plan which covers all employees who meet
specified age and employment requirements. The administrative expense
associated with the 401(K) Plan was approximately $1,500 in 1997,
$1,200 in 1996 and $0 in 1995. The Company made contributions to the
401(K) Plan of $5,000 in 1997 and $0 in 1996 and 1995. 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 SARs.
The Committee establishes the price of each option share granted. The
maximum number of shares issuable under the Plan currently is 61,782*
based on formula adjustments since adoption of the Plan. This amount
includes the 12,062* 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, 41,082* options to
purchase common stock had been granted. No options were granted during
the year ended December 31, 1997. Certain employee grants 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 8,000* 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 $7.50* per share. On July 1, 1996, five non-employee
directors received options to purchase 800* shares of Company Common
Stock. On July 1, 1997, five non-employee directors received options to
purchase 400* 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 400* shares of Common Stock on 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.
The following table summarizes the Company's stock option activity for
the years ended December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
Average
Price Per
Share* Options* Exercisable*
---------- --------- ------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 $ -- --
Granted 7.50 49,082
Exercised -- --
Canceled or expired -- --
--------- ------------
Outstanding at December 31, 1996 $ 7.50 49,082 28,252
Granted -- --
Exercised -- --
Canceled or expired -- (400)
--------- ------------
Outstanding at December 31, 1997 $ 7.50 48,682 35,449
========= ============
</TABLE>
*Common shares of stock and the associated price have been restated to
reflect the 1-for-5 reverse split (Note 16).
<PAGE>
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Employee Benefit Programs (continued)
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 was 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 14. Other Expense
<TABLE>
<CAPTION>
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Data processing $ 95,584 $ 90,088 $ 47,402
Professional fees 79,254 180,634 314,596
Stationery, printing and supplies 48,711 36,137 38,669
Insurance 89,980 144,232 111,910
Consulting and commissions 7,875 121,622 90,246
Telephone 13,300 15,956 29,574
Advertising 9,104 22,405 29,127
Travel, mileage, and lodging 10,166 11,909 1,151
Provision for losses on real estate owned, net 72,631 168,187 488,000
Real estate owned, holding expense 110,305 178,202 183,764
Other 110,847 97,993 69,659
-------- ---------- ----------
$647,757 $1,067,365 $1,404,098
======== ========== ==========
</TABLE>
<PAGE>
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Redeemable Preferred Stock
The Board of Directors has authorized the issuance of up to 900 shares
of Series A Preferred Stock in exchange for certain promissory notes
issued by the Company or for cash. The issuance of up to 36,000*
warrants, exercisable at $7.50* 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.
The Series A Preferred Stock balance of $1,336,000 at December 31,
1997 is projected to have a redemption value of $1,786,000 at
September 30, 2001.
Note 16. Shareholder's Equity
The Company has authorized 5,000,000 shares of no par value preferred
stock. At December 31, 1997 and 1996, there were 800 and 500 shares of
preferred stock outstanding, respectively. The preferred stock
discussed in Note 15 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 15.
The Company has authorized 3,500,000 shares of $1 par value common
stock. At December 31, 1996 and 1995, there were 561,640 common shares
outstanding. Common shares reserved by the Company for future issuance
(convertible notes, stock option plans and stock warrants) total
117,782.
One-For-Five Reverse Split
--------------------------
At a Special Meeting of Stockholders held on December 22, 1997,
stockholders approved an amendment to the Articles of Incorporation of
UFBC effecting a one-for-five reverse split of the outstanding shares
of the Company's common stock. The amendment became effective December
31, 1997 and each five shares of common stock were combined and
converted into one share of common stock. Stockholders will receive
cash in lieu of any fractional shares resulting from the reverse
split. Though there can be no assurance, the Board of Directors
believe that the one-for-five reverse split will make available
additional shares of common stock for issuance in capital raising
transactions. The Board of Directors also believes that the possible
increase in the market price of the common stock resulting from the
reverse split may increase the acceptability of the common stock to
potential investors.
*Common shares of stock and the associated price have been restated to
reflect the 1-for-5 reverse split (Note 16).
<PAGE>
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Shareholder's Equity (continued)
The following table shows the effect on stockholders' equity as the result of
the one-for-five reverse split.
<TABLE>
<CAPTION>
Prior to Restated
One-For-Five One-For-Five
Reverse Split Reverse Split
--------------- --------------
<S> <C> <C>
Total Stockholders' Equity:
Common Stock $ 2,808,201 $ 561,640
Surplus 10,397,061 12,643,622
Accumulated Deficit (10,567,633) (10,567,633)
Unrealized gain (loss) on securities AFS 2,370 2,370
------------ ------------
Total Stockholders' Equity at 12/31/97 $ 2,639,999 $ 2,639,999
============ ============
Common Stock $ 2,808,201 $ 561,640
Surplus 10,514,311 12,760,872
Accumulated Deficit (10,583,932) (10,583,932)
Unrealized gain (loss) on securities AFS (510) (510)
------------ ------------
Total Stockholders' Equity at 12/31/96 $ 2,738,070 $ 2,738,070
============ ============
</TABLE>
The following table is a reconciliation of earnings per common share as computed
under SFAS 128 (Note 1).
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
<S> <C> <C> <C>
For the year ended December 31, 1997
Net Income $ 16,299
Less: Preferred Stock Dividends (117,250)
-----------
Basic earnings (loss) per common share:
Income available to common stockholders (100,951) 561,640 $ (.18)
=========== ============ =========
For the year ended December 31, 1996
Net Income $ (907,609)
Less: Preferred Stock Dividends (18,750)
-----------
Basic earnings (loss) per common share:
Income available to common stockholders (926,359) 561,640 $(1.65)
=========== ============ =========
For the year ended December 31, 1995
Net Income $(1,326,086)
Less: Preferred Stock Dividends --
-----------
Basic earnings (loss) per common share:
Income available to common stockholders (1,326,086) 551,550 $(2.40)
=========== ============ =========
</TABLE>
*Common shares of stock and the associated price have been restated to
reflect the 1-for-5 reverse split
<PAGE>
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. 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, 1997.
The fair value of fixed maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
<TABLE>
<CAPTION>
1997 1996
---------------------- ------------------------
Book Fair Book Fair
Value Value Value Value
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term
investments 5,041,000 5,041,000 $ 5,463,000 $ 5,463,000
Investment Securities 2,784,000 2,790,000 2,395,000 2,397,000
Net loans 37,064,000 38,269,000 29,670,000 30,761,000
Financial Liabilities:
Deposits 43,762,000 43,904,000 37,735,000 37,551,000
</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>
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Parent Company Financial Statements
Condensed financial statements of the parent company, United Financial
Banking Companies, Inc., as of December 31, 1997 and 1996, and for the
years ended December 31, 1997, 1996 and 1995, follow:
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997 1996
---------- ----------
<S> <C> <C>
Cash on deposit with subsidiary bank $ 178,842 $ 132,832
Investment in The Business Bank 3,710,755 2,846,671
Investments in other subsidiaries 40,517 97,619
Loans and leases receivable 92,207 425,576
Real estate owned -- --
Other assets 45,076 44,874
---------- ----------
Total assets $4,067,397 $3,547,572
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 93,768 $ 40,242
---------- ----------
Total liabilities 93,768 40,242
---------- ----------
REDEEMABLE PREFERRED STOCK
Series A 1,336,000 768,750
STOCKHOLDERS' EQUITY 2,637,629 2,738,580
---------- ----------
Total liabilities and
stockholders' equity $4,067,397 $3,547,572
========== ==========
</TABLE>
STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Income:
Interest $ 39,611 $ 35,337 $ 40,257
Other (42,575) (73,051) 17,475
--------- --------- -----------
Total income (2,964) (37,714) 57,732
Expenses 247,524 946,093 394,463
--------- --------- -----------
Income (loss) before income taxes (250,488) (983,807) (336,731)
Federal income tax expense (benefit) -- (2,461) 2,598
--------- --------- -----------
Income (loss) (250,488) (981,346) (339,329)
Undistributed net gain (loss) of subsidiaries 266,787 73,737 (986,757)
--------- --------- -----------
Net income (loss) $ 16,299 $(907,609) $(1,326,086)
========= ========= ===========
</TABLE>
<PAGE>
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Company Financial Statements (continued)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 16,299 $ (907,609) $(1,326,086)
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
Depreciation and amortization -- -- 159
Provision for loan losses 91,100 498,800 (250,000)
Provision for losses on real estate owned -- 28,000 194,000
(Gain) loss on real estate owned -- 75,000 10,795
Undistributed net (gain) loss of:
The Business Bank (214,084) (154,460) 1,149,694
Other Subsidiaries (52,703) 80,723 (162,937)
(Increase) decrease in other assets (202) (1,609) 321,274
Increase (decrease) in other liabilities 53,526 11,730 (281,900)
--------- ---------- -----------
Net cash provided by (used in)
operating activities (106,064) (369,425) (345,001)
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on loans 397,437 50,493 47,220
Investments made in other real estate -- -- (2,037)
Proceeds received from real estate owned -- -- 564,241
Loans and leases purchased from subsidiary (155,168) (533,162) --
Real estate owned purchased from subsidiary -- (103,000) --
(Investment in) distributions from
subsidiaries (540,195) 1,349,491 (631,411)
--------- ---------- -----------
Net cash provided by (used in)
investing activities (297,926) 763,822 (21,987)
--------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings -- (600,000) 466,000
Proceeds from issuance of redeemable preferred stock 450,000 150,000 --
Retirement of long-term debt -- -- (84,948)
--------- ---------- -----------
Net cash provided by (used in)
financing activities 450,000 (450,000) 381,052
--------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 46,010 (55,603) 14,064
Cash and cash equivalents at beginning of year 132,832 188,435 174,371
--------- ---------- -----------
Cash and cash equivalents at end of year $ 178,842 $ 132,832 $ 188,435
========= ========== ===========
</TABLE>
<PAGE>
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Company Financial Statements (continued)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash paid during the years for:
Interest on borrowings $ -- $69,811 $98,723
======= ======= =======
Income taxes $14,786 $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 15 to consolidated financial statements.
In 1995, two convertible notes were converted into 19,872 shares of common
stock.
<PAGE>
29
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TABLE 1
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of operations:
Total interest income $ 3,433,867 $ 2,828,278 $ 2,191,867 $ 1,606,565 $ 1,964,012
Total interest expense 1,495,204 1,562,851 1,343,596 992,089 967,164
------------ ------------ ------------ ------------ ------------
Net Interest income 1,938,663 1,265,427 848,271 614,476 996,848
Provision for
loan/lease losses 249,300 694,203 (295) (238,727) (305,000)
------------ ------------ ------------ ------------ ------------
Net interest income after
provision for
loan/lease losses 1,689,363 571,224 848,566 853,203 1,301,848
Other income 224,716 651,882 231,796 579,788 1,404,099
Other expenses 1,897,780 2,133,176 2,403,850 3,661,756 8,221,780
------------ ------------ ------------ ------------ ------------
Income before 16,299 (910,070) (1,323,488) (2,228,765) (5,515,833)
income taxes and
extraordinary gain
Income tax
expense(benefit) - (2,461) 2,598 10,640 -
------------ ------------ ------------ ------------ ------------
Net income(loss) before 16,299 (907,609) (1,326,086) (2,239,405) (5,515,833)
extraordinary gain
Extraordinary gain, net of
state income tax effect
of $20,158 - - - 3,357,375 -
------------ ------------ ------------ ------------ ------------
Net income(loss) $ 16,299 $ (907,609) $ (1,326,086) $ 1,117,970 $ (5,515,833)
============ ============ ============ ============ ============
Earnings per share:
Income (loss) before
extraordinary gain $ (0.18) $ (1.65) $ (2.40) $ (11.01) $ (27.38)
Extraordinary gain - - - 16.51 -
------------ ------------ ------------ ------------ ------------
Net income(loss) $ (0.18) $ (1.65) $ (2.40) $ 5.50 $ (27.38)
============ ============ ============ ============ ============
Period-ending balances:
Total loans $ 38,084,861 $ 30,618,335 $ 23,874,982 $ 14,716,184 $ 17,922,719
Total assets 48,074,006 41,601,689 43,065,970 32,945,072 40,069,206
Total deposits 43,761,761 37,734,574 37,475,235 26,036,309 32,993,618
Shareholders' equity 2,639,999 2,738,070 3,670,047 4,866,826 1,730,756
Selected ratios:
Return on average
total assets 0.04% (2.07)% (3.45)% 3.15% (11.43)%
Return on average
earning assets 0.04% (2.68)% (5.23)% 5.61% (20.12)%
Return on average
shareholders' equity 0.61% (27.51)% (29.73)% 94.59% (91.47)%
Average shareholders'
equity to average
total assets 5.87% 7.54% 11.60% 3.33% 12.50%
</TABLE>
<PAGE>
30
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & 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 certain real estate for sale
and Omni Homes, Inc. (Omni) which holds certain real estate 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
assumptions 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 conducive 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 net income of $16,299 and net loss of $.18 per share
for the year ended December 31, 1997. Earnings per share for the year ended
December 31, 1997 is impacted by accrued dividends of $117,250 for the Company's
Series A preferred stock (Note 16 to the consolidated financial statements).
For the year ended December 31, 1996, the Company sustained a net loss of
$907,609, or $1.65 per share. Earnings per share for the year ended December
31, 1996 were impacted by accrued dividends of $18,750 for the Company's Series
A preferred stock (Note 16 to the consolidated financial statements). The
Company reported a net loss of $1,326,086, or $.48 per share for the year ended
December 31, 1995. Income for the year ended December 31, 1997 is primarily
attributable to income from the Bank subsidiary. Bank operating income
increased due to increased loan volume and the reduction of non-earning assets.
During 1997, management focused on the growth of earning assets in addition
to the liquidation of non-earning assets. Both are critical to the Company's
plan to return to profitability. Primarily due to the sale of real estate owned
(REO), non-earning assets decreased $830,000 or 22.4% from $3,709,000 at
December 31, 1996 to $2,879,000 at December 31, 1997 as shown in the
Consolidated Balance Sheets. Non-earning assets were 6.0% of total assets at
December 31, 1997 compared to 8.7% of total assets at December 31, 1996. The
decrease in non-earning assets contributed to the Company's growth in total
average earning assets which grew $6,941,000 or 20.5% during 1997 and produced a
53.0% increase in net interest income (Consolidated Average Balances, Table 2).
The Company's loss for the year ended December 31, 1996 was due to the
charge-off of a portion of a leveraged lease asset, losses on the sale of REO
and REO write-downs and REO holding costs. The Bank building was sold on
December 30, 1996 for a net gain of $734,291. As the result of REO sales, the
leveraged lease charge-off and the sale of the Bank building, non-earning assets
decreased 64.5% when compared to the year ended December 31, 1995. However, the
gain from the sale of the Bank building, the 33.4% increase in total average
earning assets and the 49.2% increase in net interest income during 1996 was
offset by provision expense due to charge-offs, losses on the sales of REO and
REO write-downs of approximately $1,174,000.
The Company's loss for the year ended December 31, 1995 was primarily
attributable to the high levels of non-earning assets, REO write-downs and REO
holding costs. Although total average earning assets grew 27.3% in 1995,
producing a 38.1% increase in net interest income, the $7,912,936 of REO held by
the Company at December 31, 1995, representing 31.2% of total average earning
assets hindered the Company's progress towards profitability.
<PAGE>
31
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
<TABLE>
<CAPTION>
TABLE 2
CONSOLIDATED AVERAGE BALANCES/NET INTEREST ANALYSIS/
YIELDS AND RATES
- -------------------------------------------------------------
For the Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
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 $23,856,037 $2,269,847 9.51% $19,112,191 $1,860,952 9.74% $14,437,231 $1,464,937 10.15%
Real estate construction 1,562,737 150,606 9.64% 2,031,003 175,921 8.66% 1,513,131 148,151 9.79%
Real estate mortgage 5,148,096 391,356 7.60% 2,762,087 215,294 7.79% 1,004,975 80,649 8.02%
Installment 1,974,646 179,572 9.09% 2,497,572 210,729 8.44% 1,343,754 130,061 9.68%
Leases 364,385 - - 807,442 - - 844,342 - 0.00%
------------------------ ----------------------- ------------------------
Total loans/leases 32,905,901 2,991,381 9.09% 27,210,295 2,462,896 9.05% 19,143,433 1,823,798 9.53%
------------------------ ----------------------- ------------------------
Interest-bearing deposits 151,613 8,914 5.88% 377,217 23,350 6.19% 154,379 8,793 5.70%
Federal funds sold 4,516,220 246,707 5.46% 4,203,072 224,807 5.35% 5,492,258 321,404 5.85%
Investment securities 3,157,053 186,866 5.92% 1,999,656 117,225 5.86% 563,027 37,872 6.73%
------------ ----------- -------------
Total earning assets 40,730,787 3,433,868 8.43% 33,790,240 2,828,278 8.37% 25,353,097 2,191,867 8.65%
============ ============ ===========
Noninterest-earning assets
Cash and due from banks 1,666,506 1,768,340 2,002,293
Other assets 3,700,273 8,678,803 11,667,430
Allowance for loan (619,807 (495,103) (572,666)
losses/lease
------------ ----------- -------------
Total assets $45,477,759 $43,742,280 $38,450,154
============ =========== =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Interest-bearing deposits:
Savings and NOW accounts 2,598,967 60,902 2.34% 2,717,904 66,738 2.46% 2,075,394 46,248 2.23%
Money market accounts 6,918,458 231,789 3.35% 5,106,331 163,612 3.20% 4,318,259 155,577 3.60%
Time:
Under $100,000 17,579,511 884,041 5.40% * 16,569,137 929,006 5.61% 14,195,288 811,137 5.71%
$100,000 and over 5,976,740 318,472 5.33% 6,237,825 338,733 5.43% 5,979,498 328,408 5.49%
------------------------ ----------------------- ------------------------
Total interest-bearing
deposits 33,073,676 1,495,204 4.72% * 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%
------------------------ ----------------------- ------------------------
Total interest-bearing
liabilities 33,073,676 1,495,204 4.72% * 32,255,304 1,562,851 5.29% * 27,824,010 $1,343,596 5.36%
============ ============ ===========
Non interest-bearing
liabilities:
Demand deposits 8,104,143 7,543,201 5,671,220
Other liabilities 351,408 470,137 494,575
Redeemable preferred stock 1,281,000 174,519 -
Stockholders' equity 2,667,532 3,299,119 4,460,349
------------ ----------- -------------
Total liabilities and
stockholders' equity $45,477,759 $43,742,280 $38,450,154
============ =========== =============
Net interest income $1,938,664 $1,265,427 $ 848,271
============ ============ ===================
Net interest margin (1) 4.76% 3.74% 3.35%
======= ======== ========
Net interest spread (2) 3.71% 3.08% 3.29%
======= ======== ========
Fees included in loan $ 92,770 $ 119,781 $ 133,990
income
============ ============ ===================
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 interest capitalized on real estate under development of $64,700 on
time deposits under $100,000 for the year ended December 31, 1997, and
$144,000 on short-term debt for the year December 31, 1996, and $147,800 on
short-term debt for the year ended December 31, 1995.
(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.
<PAGE>
32
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
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 loan fee income earned on earning
assets exceeds interest paid on interest-bearing liabilities. Net interest
income increased $672,000 or 53.0% from $1,265,000 at December 31, 1996 to
$1,937,000 at December 31, 1997. 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 $5,696,000 or 20.9% from
$27,210,000 at December 31, 1996 to $32,906,000 at December 31, 1997. Due to
the increased loan volume, interest and fees on loans rose $528,000 or 21.5%
during the year ended December 31,1997 when compared to the comparable period of
1996 which favorably impacted net interest income.
For the year ended December 31, 1997 when compared to the year ended
December 31, 1996, interest income from federal funds sold increased $22,000 or
9.7% as a result of the $313,000 increase in the average volume of federal funds
sold and the eleven basis points increase in the average rate as shown in Table
2. Changes in the investment mix, such as loans, securities or federal funds
sold, chosen by management during the compared years also contributed to the
increase in federal funds sold. As a result of the investment mix and 1997 rate
environment, interest income from investment securities and interest-bearing
deposits increased 55,000 or 39.2% when comparing the years ended December 31,
1997 and 1996.
Interest expense on total interest-bearing deposits decreased $3,000 or .2%
at December 31, 1997 when compared to the year ended December 31, 1996. Total
interest-bearing deposits increased $2,442,000 or 7.8% for the comparable
period. 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 and to manage the cost of funds. The implementation
of management's plan for the Bank's deposit mix contributed to the seventeen
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, 1996 to the year ended December 31,1997.
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. At
December 31, 1997, the net interest margin of 4.76% improved one hundred two
basis points from 3.74% at December 31, 1996. The 1997 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 on a tax equivalent basis. 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.
<PAGE>
33
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
<TABLE>
<CAPTION>
TABLE 3
Analysis of the Changes in the Components of Net Interest Income (TAX EQUIVALENT BASIS)
- -------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997 Compared to 1996 1996 Compared to 1995
-------------------------------------- -------------------------------------
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 $ 408,895 $ (53,013) $ 461,908 $ 396,015 $ (78,350) $ 474,365
Real estate - construction (25,315) 15,245 (40,560) 27,770 (22,935) 50,705
Real estate - mortgage 176,062 (9,918) 185,980 134,645 (6,363) 141,008
Installment (31,157) 12,964 (44,121) 80,668 (31,009) 111,677
Leases - - - - - -
--------- --------- ---------- --------- ---------- ---------
Total loans/leases 528,485 (34,722) 563,207 639,098 (138,657) 777,755
Interest-bearing deposits (14,436) (471) (13,965) 14,557 1,865 12,692
Federal funds sold 21,900 5,151 16,749 (96,597) (21,155) (75,442)
Investment securities 69,641 1,791 67,850 79,353 (17,282) 96,635
Total interest income 605,590 (28,250) 633,840 636,411 (175,229) 811,640
--------- --------- ---------- --------- ---------- ---------
INTEREST EXPENSE:
Savings and NOW accounts (5,836) (2,916) (2,920) 20,490 6,172 14,318
Money markets accounts 68,177 10,115 58,062 8,035 (20,357) 28,392
Time:
Under $100,000 19,735 (36,915) 56,650 117,869 (17,776) 135,645
$100,000 and over (20,261) (6,083) (14,178) 10,325 (3,863) 14,188
Short-term borrowings (208,762) - (208,762) 58,736 14,700 44,036
Long-term borrowings - - - - - -
Total interest expense (146,947) (35,799) (111,148) 215,455 (21,124) 236,579
--------- --------- ---------- --------- ---------- ---------
Net interest income $ 752,537 $ 7,549 $ 744,988 $ 420,956 $ (154,105) $ 575,061
========= ========= ========== ========= ========== =========
</TABLE>
<PAGE>
34
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
NONINTEREST INCOME
- ------------------
Total noninterest income declined 65.5% or $427,000 during 1997. In 1996,
the Bank building was sold for a gain of $734,291, which primarily accounts for
the decrease in total noninterest income when comparing the years ended December
31, 1997 and 1996. Sale of the Bank building also explains the 101.2% or
$422,000 increase in total noninterest income when comparing the years ended
December 31, 1996 and 1995.
Other income rose 184.1% or $325,000 at December 31, 1997 as compared to
the year ended December 31, 1996. Losses sustained on the sales of REO during
1996 significantly reduced other income. For the same reason, other income
decreased 220.9% or $322,000 for the year ended December 31, 1995 as compared to
the same period ended 1996.
Detail of other income is shown in Note 11 to the consolidated financial
statements.
NONINTEREST EXPENSE
- -------------------
Noninterest expense decreased 11.0% or $235,000 for the year ended December
31, 1997 as compared to the same period of 1996 as shown in Table 4.
Professional fees, insurance costs, the provision for REO losses and REO holding
expense accounts for the decline in noninterest expense when comparing years
ended December 31, 1997, 1996 and 1995.
Expense for professional fees declined 56.1% and 42.6%, respectively, when
comparing the years ending December 31, 1997 and 1996 and December 31, 1996 and
1995. The decline is principally attributable to reduced litigation expense in
UFBC during 1996 and 1995. In 1995 and 1996, UFBC, as plaintiff, incurred
substantial litigation expense associated with the Omni subsidiary. Omni
litigation is discussed in Note 8 to the consolidated financial statements.
Insurance expense decreased 37.6% at December 31, 1997 when compared to
December 31, 1996 and increased 28.9% at December 31,1996 when compared to
December 31,1995. The decrease during 1997 is primarily attributable to a
reduction in the Bank's FDIC insurance assessment during 1997 as a result of its
improved capital position. The FDIC's insurance assessment is affected by the
volume of deposits as well as capital position. The increase when comparing the
year ended December 31, 1995 and 1996 resulted from the Bank's deposit growth
during 1996.
Occupancy expense rose 122.3% for the year ending December 31, 1997
compared to the same period of 1996. The increase is due to rental expense
incurred on the Bank building which is discussed further in Note 6 to the
consolidated financial statements.
Furniture and equipment expense decreased $58,000 or 56.0% during 1996 when
compared to the same period of 1995 as a result of the Bank's decision to out
source a significant portion the Bank's bookkeeping proof operations. This
significantly reduced the cost of repairing aged equipment which was principally
associated with the Bank's bookkeeping 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.
<PAGE>
35
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
TABLE 4 NONINTEREST EXPENSE
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Percentage
increase (decrease)
1997 1996 1995 1997 / 96 1996 / 95
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits 893,622 886,963 741,031 0.75 19.69
Occupancy, net 296,097 133,151 154,864 122.38 (14.02)
Furniture and equipment 60,304 45,697 103,857 31.96 (56.00)
Professional fees 79,254 180,634 314,596 (56.12) (42.58)
Insurance 89,980 144,232 111,910 (37.61) 28.88
Provision for real estate owned 72,631 168,187 488,000 (56.82) (65.54)
Real estate owned holding expense 110,305 178,202 183,764 (38.10) (3.03)
Other expenses 295,587 396,110 305,828 (25.38) 29.52
-------------- --------------- ---------------
Total 1,897,780 2,133,176 2,403,850 (11.04) (11.26)
============== =============== ===============
</TABLE>
Total other expense as a percentage of :
<TABLE>
<S> <C> <C> <C>
Average assets 4.17 % 4.88 % 6.25 %
============== =============== ===============
Average earning assets 4.66 % 6.31 % 9.48 %
============== =============== ===============
Gross income 51.87 % 61.30 % 99.18 %
============== =============== ===============
</TABLE>
BALANCE SHEET ANALYSIS
- ----------------------
At December 31, 1997, total assets increased $6,472,000 or 15.6% from
December 31, 1996. Average total assets were $45,478,000 at December 31, 1997
compared to $43,742,000 at December 31, 1996 as shown in Table 2, Consolidated
Average Balances. The growth is primarily concentrated in loan and deposit
volume. Management believes that this change is necessary for the Company to
improve profitability. Additionally, management believes that developing a
diversified balance sheet is essential to supporting future growth. During
1997 and 1996, the Company authorized and sold redeemable preferred stock to
maintain the capital necessary for further growth. On December 22, 1997,
stockholders approved a one-for-five reverse split of the Company's outstanding
shares of common stock which became effective December 31, 1997. The year ended
December 31, 1996 has been restated to reflect this transaction. Further
details regarding the reverse split are provided in Note 16 to the consolidated
financial statements. Both the Company and the Bank remained above regulatory
capital requirements, although the Company's stockholders' equity decreased 3.6%
at December 31, 1997 as compared to December 31,1996.
LOAN PORTFOLIO
- --------------
Loans and leases are the largest component of total assets. Loans as a
percentage of total assets were 79.2% at the year ending December 31, 1997
compared to 74.6% at December 31, 1996.
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 and thereby promotes 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, including
extending new credit to real estate development related businesses. The primary
focus when extending credit is the borrower's ability to repay the loan from
expected cash flows.
<PAGE>
36
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
As the Bank continues to focus on expanding customer relationships,
management projects that the resulting blend of loans and deposits will continue
to become more diversified. The Bank's primary focus is providing short-term
loans to small and medium-sized businesses and professionals. Commercial loans,
therefore remain the most significant component of the portfolio, comprising
71.0% and 71.4% of total loans and leases at the end of 1997 and 1996,
respectively.
TABLE 5 LOAN DISTRIBUTION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 27,039,144 $ 21,868,684 $ 17,535,738 $ 10,991,625 $ 14,706,691
Real estate construction 2,252,943 1,527,521 1,979,587 1,500,816 1,979,680
Real estate mortgage 6,743,695 4,418,814 1,568,745 477,286 184,009
Installment 1,744,437 2,438,674 1,946,570 902,115 207,221
Lease financing - - - - 775
Leveraged leases 304,642 364,642 844,342 844,342 844,343
---------------- ------------- ------------- ------------- -------------
Total loans $ 38,084,861 $ 30,618,335 $ 23,874,982 $ 14,716,184 $ 17,922,719
================ ============= ============= ============= =============
</TABLE>
The loan portfolio is predominately short-term in nature which can work to
mitigate interest rate risk. The following chart shows the maturities of the
Company's two largest loan classes, commercial and mortgage.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
One Year One Through Over Five
or Less Five Years Years Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 11,544,040 $ 11,144,502 $ 4,655,244 $ 27,343,786
Real estate mortgage 409,892 1,725,503 4,608,300 6,743,695
---------------- ------------- ------------- -------------
Real estate construction $ 11,953,932 $ 12,870,005 $ 9,263,544 $ 34,087,481
================ ============= ============= =============
</TABLE>
At December 31, 1997, the loan portfolio had approximately $3,740,000 in
loans to customers in land, residential, or commercial real estate development,
compared to $4,019,000 at December 31, 1996. 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, 1997.
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.
ALLOWANCE FOR LOAN/LEASE LOSSES
- -------------------------------
The allowance for loan/lease losses is an estimated amount established to
absorb potential losses in the loan portfolio. The adequacy of the level of the
allowance is based on management's judgment as to the overall risk in the loan
portfolio. Management uses a credit risk grading process, as well as other
factors outlined in Note 1 to the consolidated financial statements to identify
and analyze potential loss. Conclusions are dependent upon estimates,
appraisals and judgments which may change quickly because of economic conditions
and other factors.
The allowance for loan/lease losses increased $131,300 or 22.5% during
1996. The ratio of allowance for loan/lease losses to total loans/leases on a
consolidated basis was 1.9% at the year ending December 31, 1997, 1996 and 1995.
UFBC replenished the allowance for loan/leases losses $91,000 during 1997. Of
this
<PAGE>
37
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
amount, $60,000 was associated with the leveraged lease asset. The Bank charged
$158,200 to provision expense during 1997. During 1996, UFBC purchased and
charged-off $479,700 of the leveraged lease asset due to a change in the
appraised value as of December 1996. UFBC charged $498,800 to provision expense
in 1996 as a result of the charge-off and risks associated with its loan/lease
portfolio. The Bank charged $195,400 to provision expense during 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TABLE 6 ALLOWANCE FOR LOAN/LEASE LOSSES
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Period Ending December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 584,106 $ 462,846 $ 700,666 $ 712,548 $ 1,568,223
------------- ------------- ------------- ------------- -------------
Charge-offs:
Installment (4,165) - (31,891) (3,670) (633)
Commercial (38,445) (114,440) (237,542) (394,501) (1,385,942)
Mortgage (14,643) - - - -
Construction (22,800) - - - -
Leveraged leases (60,000) (479,700) - - -
Recoveries:
Installment 2,508 3,011 6,522 8,392 2,155
Commercial 16,538 18,186 25,386 616,624 833,745
Construction 3,000 - - - -
Leveraged leases - - - - -
------------- ------------- ------------- ------------- -------------
Net charge-offs (118,007) (572,943) (237,525) 226,845 (550,675)
------------- ------------- ------------- ------------- -------------
Provision charged to operations 249,300 694,203 (295) (238,727) (305,000)
------------- ------------- ------------- ------------- -------------
Balance at end of period $ 715,399 $ 584,106 $ 462,846 $ 700,666 $ 712,548
============= ============= ============= ============= =============
Average total loans $ 32,905,901 $ 27,210,295 $ 19,143,433 $ 16,085,054 $ 20,835,808
============= ============= ============= ============= =============
Ratio of net charge-offs
to average total loans (0.35)% (2.10)% (1.24)% 1.41% (2.64%)
============= ============= ============= ============= =============
</TABLE>
A five-year history of the activity in the allowance for loan/lease losses
follows:
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>
- -------------------------------------------------------------------------------------------------------------------
Period ending December 31, 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 466,000 $ 385,000 $ 379,000 $ 550,000 $ 580,000
Real estate construction 34,000 23,000 29,000 35,000 55,000
Real estate mortgage 160,000 121,000 23,000 12,000 25,000
Installment 34,000 37,000 29,000 40,000 15,000
Leases 4,600 5,600 - 5,000 5,000
Unallocated 16,799 12,506 2,846 58,666 32,548
------------- ------------- ------------- ------------- -------------
$ 715,399 $ 584,106 $ 462,846 $ 700,666 $ 712,548
============= ============= ============= ============= =============
</TABLE>
<PAGE>
38
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
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, 1997, the Company had no
restructured loans. Nonaccrual loans are those on which the accrual of interest
has been discontinued and any accrued, but unpaid, interest income is reversed.
Loans are placed on nonaccrual status when management believes that the
collection of interest and/or principal is uncertain or when it is contractually
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 when there is uncertainty 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 1997 totaled $102,023. This compares to a
balance of $328,355 in nonaccrual loans at the end of 1996. The allowance for
loan/lease losses covers nonaccruing loans 7.0 times at year end 1997, compared
to a coverage of 1.2 times at year end 1996. Interest lost on nonaccruing loans
which would have been included in interest income had the loans been performing
amounted to approximately $44,000 in 1997, compared to $55,000 for 1996.
Interest income attributed to nonaccruing loans which was recognized on a cash
basis due to the nonaccruing status totaled approximately $10,000 in 1997 and
$17,000 in 1996. The decline in nonaccruing loans at December 31, 1997 when
compared to the year ended December 31, 1996 is due principally to better loan
quality, collections and charge-offs.
The following is a summary of nonperforming assets:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TABLE 7 NONPERFORMING ASSETS
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Period ending December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccruing loans (90 days or more past due) $ 102,023 $ 328,355 $ 403,318
Real estate owned 2,368,104 3,115,080 7,912,936
Total nonperforming assets $ 2,470,127 $ 3,443,435 $ 8,316,254
================= ================= =================
Nonaccruing loans as a % of total loans 0.27% 1.06% 1.69%
Reserve for loans losses to nonaccruing loans 701.21% 177.89% 114.76%
Nonperforming assets to total loans 6.49% 11.25% 34.83%
</TABLE>
REAL ESTATE OWNED
- -----------------
Real Estate Owned includes foreclosed properties in which the Company has
taken title. Accounting policies for real estate owned are outlined in Note 1 to
the consolidated financial statements.
At December 31, 1997 and 1996, REO comprised 4.9% and 7.5%, respectively,
of total assets of the Company. Of the Company's total REO, $2,338,000 is held
in the Bank, representing 4.9% 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 $2,368,080 at year end 1997, as compared to $3,115,000 at year end 1996,
and was comprised of six properties, five of which are in the Bank. The 31.5% or
$747,000 decline in the value of REO held by the Company is attributable to net
write-downs of $115,000, property sales of $2,441,000, investment of $1,579,000,
<PAGE>
39
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
net gains on sales of $28,000 and foreclosures totalling $202,000.
Two properties accounted for 90% of the Company's property sales; the Bank's
Culpeper project represented 56.8% and the sale of property located in Prince
William County, Virginia represented 33.2%. The Bank's Culpeper project
accounted for 91.9% of the Company's investment cost.
An aging of real estate owned and a breakdown by project type as of
December 31, 1997 and 1996 are presented in Table 8.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TABLE 8 REAL ESTATE OWNED
- ----------------------------------------------------------------------------
Aging of Foreclosed Properties
- ----------------------------------------------------------------------------
Period ending December 31, 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
From 1 to 6 months $ - $ -
From 7 to 12 months 157,103 -
From 13 to 24 months - 106,105
Over 24 months 2,211,001 3,008,975
$ 2,368,104 $ 3,115,080
========== ==========
Foreclosed Properties by Project Type
- ----------------------------------------------------------------------------
Period ending December 31, 1997 1996
- ----------------------------------------------------------------------------
Undeveloped land $ 1,995,054 $ 2,508,719
1 - 4 family dwelling 126,908 372,809
Developed land 246,142 233,552
$ 2,368,104 $ 3,115,080
========== ==========
</TABLE>
DEPOSITS
- --------
As shown in Table 10, deposits increased $6,027,000 or 16.0% at December 31,
1997 when compared to December 31, 1996. The increase shown in Table 10 and on
the consolidated balance sheets at December 31, 1997 is due in part to
management's plan for growth. Total average deposits, as shown in Table 9,
increased $3,003,000 for the year ended December 31, 1997 when compared to the
year ended December 31, 1996. By design, the deposit mix continues to change as
the Bank seeks to increase core deposits. Core deposits consist of demand,
savings, NOW, money market accounts and time deposits under $100,000. Total
average core deposits increased $5,723,000 or 17.9% from $31,937,000 at December
31, 1996 to $37,660,000 at December 31, 1997. When comparing average core
deposits at December 31, 1996 to December 31,1997, the change was as follows:
demand deposits increased $561,000 or 7.4%, money market deposits rose
$2,462,000 or 48.2%, time deposits under $100,000 grew 1,010,000 or 6.1% and
savings and NOW deposits decreased $209,000 or 7.7%
<PAGE>
40
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE 9 DEPOSITS BALANCE AND RATE
- ---------------------------------------------------------------------------------------------------------------------------------
Rates paid on each classification of deposits are shown below:
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $ 8,104,143 -% $ 7,543,201 -% $ 5,671,220 -% $ 4,066,104 -% $ 7,616,240 -%
Savings and NOW 2,598,967 2.43 2,717,904 2.46 2,075,394 2.23 1,990,225 2.24 2,693,948 2.46
accounts
Money market 6,918,458 3.35 5,106,331 3.20 4,318,259 3.60 1,912,205 3.05 4,012,324 2.72
accounts
Time:
Under $100,000 17,579,511 5.40* 16,569,137 5.61 14,195,288 5.71 14,417,108 4.52 15,796,522 4.46
$100,000 and over 5,976,740 5.33 6,237,825 5.43 5,979,498 5.49 6,502,668 4.48* 6,734,922 4.16*
----------- ----------- ----------- ----------- -----------
Total $41,177,819 3.63% $38,174,398 3.93% $32,239,659 4.16% $28,888,310 3.62% $36,853,956 3.16%
=========== =========== =========== =========== ===========
</TABLE>
* Rates for 1997, 1996, 1995, 1994, and 1993 are presented consistently with the
method within the Net Interest Analysis/Yield & Rate Table presented earlier.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
TABLE 10 DEPOSITS STRUCTURE AND CERTIFICATES OF DEPOSIT 100K AND OVER
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 7,778,077 17.77% $ 7,897,677 20.93% $ 7,033,571 18.77%
Savings and NOW accounts 2,508,666 5.73 2,779,982 7.37 2,966,721 7.92
Money market accounts 7,568,652 17.30 3,970,348 10.52 5,917,979 15.79
Time:
Under $100,000 19,478,244 44.51 16,763,355 44.42 15,139,336 40.40
$100,000 and over 6,428,122 14.69 6,323,212 16.76 6,417,628 17.12
------------ ------ ------------ ------ ------------ ------
Total $ 43,761,761 100.00% $ 37,734,574 100.00% $ 37,475,235 100.00%
============ ====== ============ ====== ============ ======
<CAPTION>
- -----------------------------------------------------------------------------
Year Ended December 31, 1994 1993
- -----------------------------------------------------------------------------
% of % of
Amount Total Amount Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand $ 3,666,226 14.10% $ 4,954,159 15.00%
Savings and NOW accounts 1,596,898 6.10 2,158,871 6.50
Money market accounts 2,305,139 8.90 2,067,123 6.30
Time:
Under $100,000 12,499,708 48.00 16,418,036 49.80
$100,000 and over 5,968,338 22.90 7,395,429 22.40
------------ ------ ------------ ------
Total $ 26,036,309 100.00% $ 32,993,618 100.00%
============ ====== ============ ======
</TABLE>
The maturity schedule that follows categorizes time deposits of $100,000 or more
as of December 31, 1997.
<TABLE>
<CAPTION>
Maturing Balance Percent
- ------------------------------------ ----------------------------------
<S> <C> <C>
Three months or less $ 1,438,790 22.38%
Over three months to six months 711,480 11.07
Over six months to twelve months 2,897,602 45.08
Over twelve months 1,380,250 21.47
------------ ------
Total $ 6,428,122 100.00%
============ ======
</TABLE>
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 details on securities are discussed in Note 2 to the consolidated
financial statements.
<PAGE>
41
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
LIQUIDITY AND INTEREST SENSITIVITY
- ----------------------------------
The Company's liquidity management is designed to achieve an appropriate
balance between the maturities and repricing 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 sources of liquidity. Average liquid
assets were 20.9% of average total assets for 1997 and 19.1% for 1996.
Additional sources of liquidity are available through a line of credit held by
the Bank, 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 in 1994, staff reduction and reduced professional fees in
1995, 1996 and 1997. 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
non-earning assets also significantly affects the analysis, limiting the amount
of assets available to reprice. As non-earning assets are returned to earning
status, the gap position will become more balanced throughout the time frames
measured. A negative gap position indicates that more liabilities than assets
will reprice, having a negative earnings impact in a rising rate environment.
<PAGE>
42
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
<TABLE>
<CAPTION>
TABLE 11 - INTEREST SENSITIVITY ANALYSIS
- -------------------------------------------------------
CURRENT 0-3 4-6 7-12
BALANCES MONTHS RATE MONTHS RATE MONTHS RATE
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
FEDERAL FUNDS SOLD 2,659,000 2,659,000 5.75%
AVAILABLE-FOR-SALE INVESTMENTS 1,700,875 602,145 5.10% 499,370 5.65% 200,240 5.25%
HELD-TO-MATURITY INVESTMENTS 1,082,773 91,786 6.00%
INTEREST BEARING DEPOSITS 100,000
LOANS, NET - FIXED 21,975,806 4,430,848 9.65% 919,651 8.95% 1,937,195 8.04%
LOANS, NET - VARIABLE 16,047,757 16,009,771 9.58% 383 7.95% 801 7.95%
----------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 43,566,211 23,793,550 8.89% 1,419,404 5.80% 2,138,236 7.78%
LOAN LOSS RESERVE (715,399)
NON-ACCRUAL LOANS 102,023
CASH AND DUE FROM BANKS 2,282,418
REAL ESTATE OWNED 2,368,104
FIXED ASSETS 164,018
OTHER NONINTEREST-BEARING ASSETS 306,631
----------------------------------------------------------------------------------------
TOTAL NONEARNING ASSETS 4,507,795 - - -
----------------------------------------------------------------------------------------
TOTAL ASSETS 48,074,006 23,793,550 1,419,404 2,138,236
========================================================================================
LIABILITIES
NOW ACCOUNTS 2,107,914 2,107,914 2.26%
MONEY MARKET ACCOUNTS 7,568,652 7,568,652 3.48%
SAVINGS ACCOUNTS 400,752
CERTIFICATES OF DEPOSIT
(less than or equal to) $100,000 19,478,244 3,367,935 5.29% 4,075,107 5.33% 7,738,405 5.55%
CERTIFICATES OF DEPOSIT
(greater than) $100,000 6,428,122 1,438,790 5.27% 711,480 5.24% 2,897,602 5.38%
----------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 35,983,684 14,483,291 3.90% 4,786,587 5.32% 10,636,007 5.50%
----------------------------------------------------------------------------------------
NONINTEREST-BEARING DEPOSITS 7,778,077
----------------------------------------------------------------------------------------
TOTAL DEPOSITS 43,761,761 14,483,291 4,786,587 10,636,007
TOTAL OTHER LIABILITIES 336,246
REDEEMABLE PREFERRED STOCK-SERIES A 1,336,000
TOTAL CAPITAL 2,639,999
----------------------------------------------------------------------------------------
TOTAL LIABILITIES & CAPITAL 48,074,006 14,483,291 4,786,587 10,636,007
========================================================================================
INTERVAL GAP/GAP SPREAD 9,310,259 4.98% (3,367,183) 0.48% (8,497,771) 2.27%
CUMULATIVE GAP 9,310,259 5,943,076 (2,554,695)
INTERVAL GAP/TOTAL ASSETS 19.37% -7.00% -17.68%
CUMULATIVE GAP/TOTAL ASSETS 19.37% 12.36% -5.31%
INTERVAL GAP/EARNING ASSETS 21.37% -7.73% -19.51%
CUMULATIVE GAP/EARNING ASSETS 21.37% 13.64% -5.86%
MATCHED 14,483,291 3.90% 1,419,404 5.32% 2,138,236 7.78%
OPEN 9,310,259 4.98% (3,367,183) 0.48% (8,497,771) 2.27%
</TABLE>
<TABLE>
<CAPTION>
TABLE 11 - INTEREST SENSITIVITY ANALYSIS
- -------------------------------------------------------
1-5 OVER 5
YEARS RATE YEARS RATE TOTAL
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
FEDERAL FUNDS SOLD 2,659,000
AVAILABLE-FOR-SALE INVESTMENTS 399,120 5.88% 1,700,875
HELD-TO-MATURITY INVESTMENTS 990,987 5.96% 1,082,773
INTEREST BEARING DEPOSITS 100,000 6.15% 100,000
LOANS, NET - FIXED 8,804,174 8.12% 5,883,939 7.85% 21,975,807
LOANS, NET - VARIABLE 36,802 7.95% 16,047,757
------------
TOTAL EARNING ASSETS 10,331,083 7.78% 5,883,939 7.85% 43,566,212
LOAN LOSS RESERVE
NON-ACCRUAL LOANS -
CASH AND DUE FROM BANKS -
REAL ESTATE OWNED -
FIXED ASSETS -
OTHER NONINTEREST-BEARING ASSETS -
-----------------------------------------------------------
TOTAL NONEARNING ASSETS - - -
------------
TOTAL ASSETS 10,331,083 5,883,939 43,566,212
===========================================================
LIABILITIES
NOW ACCOUNTS 2,107,914
MONEY MARKET ACCOUNTS 7,568,652
SAVINGS ACCOUNTS 400,752 2.88% 400,752
CERTIFICATES OF DEPOSIT
(less than or equal to) $100,000 4,296,797 5.72% 19,478,244
CERTIFICATES OF DEPOSIT
(greater than) $100,000 1,380,250 5.63% 6,428,122
-----------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 6,077,799 5.51% - 35,983,684
-----------------------------------------------------------
NONINTEREST-BEARING DEPOSITS -
-----------------------------------------------------------
TOTAL DEPOSITS 6,077,799 - 35,983,684
TOTAL OTHER LIABILITIES -
REDEEMABLE PREFERRED STOCK-SERIES A
TOTAL CAPITAL -
-----------------------------------------------------------
TOTAL LIABILITIES & CAPITAL 6,077,799 - 35,983,684
===========================================================
INTERVAL GAP/GAP SPREAD 4,253,284 2.27% 5,883,939 7.85%
CUMULATIVE GAP 1,698,589 7,582,528
INTERVAL GAP/TOTAL ASSETS 8.85% 12.24%
CUMULATIVE GAP/TOTAL ASSETS 3.53% 15.77%
INTERVAL GAP/EARNING ASSETS 9.76% 13.51%
CUMULATIVE GAP/EARNING ASSETS 3.90% 17.40%
MATCHED 10,331,083 7.78% - 0.00%
OPEN 4,253,284 2.27% 5,883,939 7.85%
</TABLE>
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 Written
Agreement (Agreement) with the Federal Reserve and SCC on December 31, 1993. On
June 2, 1997, the SCC terminated its participation in the Order issued by the
FDIC and the Agreement issued by the Federal Reserve. Effective June 3, 1997,
the FDIC terminated the Order against the Bank. On November 26, 1997, the
Federal Reserve Bank also terminated its Agreement with UFBC. The Order and
Agreement are discussed in further detail in Note 10 to the consolidated
financial statements.
<PAGE>
43
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
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 capital ratio of 3% must be
maintained for the most highly 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 10 to the consolidated financial statements.
YEAR 2000
- ----------
Assuring that computer systems and applications are Year 2000 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 Year 2000 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 Year 2000 issue, management of the
Company created a task force and established a plan to prevent or mitigate
potential adverse effects of the Year 2000 issue on the Company, its vendors and
its customers. The Company's primary supplier of data processing services also
has adopted a Year 2000 plan and timetable. Management believes that the cost
of resolving Year 2000 issues relating to the Company's computer programs and
those used by its supplier of significant data processing services will not be
material to the Company's business, operations, liquidity, capital resources, or
financial condition based on information developed to date and representations
from its data processing supplier. The Company's Year 2000 plan requires an
assessment of Year 2000 effects on its commercial lending and other customers.
The effects on individual, corporate and government customers of the Company and
on governmental authorities that regulate the Company and its subsidiaries, and
any resulting consequences to the Company, cannot yet be determined. The
Company has committed management resources deemed necessary to identify and
timely resolve all significant Year 2000 issues.
EFFECTS OF INFLATION
- --------------------
The effect of changing prices on financial institutions is different than that
of non-banking companies since substantially all assets and liabilities are
monetary in nature. Interest rates are affected by inflation. Neither the
timing nor the magnitude of the changes in interest rates is necessarily 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.
<PAGE>
44
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
<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.
President, Jordan Kitts Music, Inc. Sharon A. Stakes
Vice President
Dennis I. Meyer
Partner, Baker & McKenzie, Attorneys Lisa M. Porter
Controller/Chief Financial Officer
Edward H. Pechan
President, E. H. Pechan and Associates, Inc. F. Janette Collins
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
</TABLE>
ADVISORY BOARD MEMBERS - UNITED FINANCIAL BANKING COMPANIES, INC.
<TABLE>
<CAPTION>
<S> <C>
James K. Jeanblanc L. Lawton Rogers, III
Partner, Grove, Jaskiewicz & Cobert, Attorneys Partner, Rogers & Killeen, Attorneys
</TABLE>
ADVISORY BOARD MEMBERS - THE BUSINESS BANK
<TABLE>
<CAPTION>
<S> <C>
Dean G. Popps, Chairman William N. Ball
President/CEO, Crow Communications, Inc. Retired Banker
and Dallas Fort Worth Teleport
Carl M. Summerfield, Vice Chairman Deborah J. Dunn
President/CEO, Day & Night Printing President/CEO, Martha Weems, Ltd.
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
Robert W. Pitts
Partner, Pitts and Pitts
</TABLE>
<PAGE>
45
UNITED FINANCIAL BANKING COMPANIES, INC.
Management, Discussion & Analysis
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, 1997.
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS. THE EARNINGS PER SHARE REFLECTS A ONE (1) FOR FIVE (5) REVERSE
SPLIT EFFECTIVE 12/31/97. PRIOR FINANCIAL DATA SCHEDULES HAVE NOT BEEN RESTATED
TO REFLECT THE REVERSE SPLIT.
</LEGEND>
<CIK> 0000714286
<NAME> UNITED FINANCIAL BANKING COMPANIES, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,282,418
<INT-BEARING-DEPOSITS> 100,000
<FED-FUNDS-SOLD> 2,659,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,698,506
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1,336,000
0
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<INCOME-PRE-EXTRAORDINARY> 16,299
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<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
<YIELD-ACTUAL> 9.07
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<ALLOWANCE-CLOSE> 715,399
<ALLOWANCE-DOMESTIC> 715,399
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 16,799
</TABLE>
