<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 1999.
Or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________________ to ___________________
Commission File No. 0-13395
UNITED FINANCIAL BANKING COMPANIES, INC.
A Virginia Corporation IRS Employer Identification
No. 54-1201253
8399 Leesburg Pike, Vienna, Virginia 22182
Telephone: (703) 734-0070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Common Stock $1.00 Par Value
831,590 Shares Outstanding
as of March 31, 1999
Transitional Small Business Disclosure Format: Yes [_] No [X]
<PAGE>
Part 1. Financial Information
Item 1: Financial Statements
UNITED FINANCIAL BANKING COMPANIES, INC., AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income / Results of
Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------- -----------
1999 1998
----------- -----------
<S> <C> <C>
Interest income:
Interest and fees on loans/leases $803,102 $ 864,559
Interest on investment securities 99,655 46,053
Interest on federal funds sold 71,679 79,784
Interest on interest-bearing deposits 64 1,436
----------- -----------
Total interest income 974,500 991,832
----------- -----------
Interest expense:
Interest on deposits 397,715 456,481
Interest on short-term borrowings - -
----------- -----------
Total interest expense 397,715 456,481
----------- -----------
Net interest income 576,785 535,351
Provision for loan/lease losses 12,079 59,000
----------- -----------
Net interest income after provision
for loan/lease losses 564,706 476,351
Noninterest income:
Gain (loss) on sale of real estate
owned and other earning assets (2,964) -
Loan servicing and other fees 18,380 18,620
Other income 36,177 45,241
----------- -----------
Total noninterest income 51,593 63,861
----------- -----------
Noninterest expense:
Salaries 229,652 222,556
Employee benefits 46,663 42,237
Occupancy 78,921 77,309
Furniture and equipment 19,798 15,767
Legal 7,185 12,571
FDIC Insurance 4,897 4,215
Data processing 32,856 28,888
Real estate owned holding expense 7,661 14,882
Provision for real estate owned losses - 187,666
Other expense 80,898 65,780
----------- -----------
Total noninterest expense 508,531 671,871
----------- -----------
Income (loss) before income taxes 107,768 (131,659)
Provision (credit) for income taxes - -
----------- -----------
Net income (loss) $107,768 $(131,659)
=========== ===========
Net income (loss) per common share (Note 3)
Basic $ 0.13 $ (0.29)
=========== ===========
Diluted $ 0.13 $ -
=========== ===========
Comprehensive Income (Note 4)
Net income $107,768 $(131,659)
Other comprehensive income, net of tax
Unrealized gains (losses) on available-for-sale
securities (16,395) (7,658)
Other comprehensive income, net of tax
Preferred stock dividends - (30,000)
----------- -----------
Comprehensive income $ 91,373 $(169,317)
=========== ===========
2
</TABLE>
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC., AND SUBSIDIARIES
Consolidated Balance Sheets / Financial Condition
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, December 31,
Assets 1999 1998
------ ------------- -------------
<S> <C> <C>
Cash and due from banks $ 1,994,305 $ 2,267,417
Interest-bearing deposits in other banks - -
Federal funds sold 6,693,000 7,903,493
Investment Securities:
Available-for-sale (AFS) 5,834,365 5,130,213
Held-to-maturity (HTM) 909,341 1,763,891
Loans and lease financing, net of unearned
income of $15,408 and $12,560 36,379,588 36,962,213
-------
Less: Allowance for loan/lease losses (740,234) (747,374)
------------- -------------
Net loans and lease financing 35,639,354 36,214,839
Real estate owned held for sale, net 1,729,898 1,799,398
Premises and equipment, net 111,744 119,338
Other assets 380,793 374,483
------------- -------------
Total assets $ 53,292,800 $ 55,573,072
============= =============
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand $ 11,376,727 $ 14,264,071
Savings and NOW 4,725,842 3,051,446
Money market 8,840,200 7,524,516
Time deposits:
Under $100,000 16,617,317 18,048,129
$100,000 and over 6,268,048 7,297,297
------------- -------------
Total deposits 47,828,134 50,185,459
------------- -------------
Short-term borrowings - -
Other liabilities 297,585 311,905
------------- -------------
Total liabilities 48,125,719 50,497,364
------------- -------------
Stockholders' Equity:
Preferred stock of no par value, authorized
5,000,000 shares, no shares issued - -
Common Stock, par value $1; authorized 3,500,000 shares,
issued 831,590 shares at 3/31/99 and at 12/31/98 831,590 831,590
Capital in excess of par value 14,681,567 14,681,567
Retained earnings (10,346,632) (10,454,400)
Unrealized holding gain (loss) - AFS securities 556 16,951
------------- -------------
Total stockholders' equity 5,167,081 5,075,708
------------- -------------
Total liabilities and stockholders' equity $ 53,292,800 $ 55,573,072
============= =============
</TABLE>
3
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 107,768 $ (131,659)
Adjustment to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation & amortization 12,214 13,537
Provision for loan/lease losses 12,079 59,000
Provision for losses on real estate owned - 187,666
Amortization of investment security discount 1,509 (1,530)
Amortization of loan fees and discounts, net (1,998) (29,843)
Net (gain) loss on sale of other real estate owned 2,964 -
(Increase) decrease in other assets (6,312) (16,073)
Increase (decrease) in other liabilities (14,319) (44,350)
-------------- --------------
Net cash provided by (used in) operating activities 113,905 36,748
-------------- --------------
Cash flows from investing activities:
Loans originated - non-bank subsidiaries (50,000) -
Principal collected - non-bank subsidiaries 23,169 1,849
Loans and lease originations, net of collections 567,353 778,817
Loan fees and discounts deferred 24,882 13,935
Purchases of securities available-for-sale (1,511,047) (1,603,422)
Purchases of securities held-to-maturity - (750,938)
Investment made in other real estate owned - (196,552)
Proceeds received from maturity of securities available-for-sale 788,542 691,786
Proceeds received from maturity of securities held to maturity 855,000 -
Proceeds from real estate owned 66,536 -
Purchases of premises and equipment (4,620) (22,942)
-------------- --------------
Net cash provided by (used in) investing activities 759,815 (1,087,467)
-------------- --------------
Cash flow from financing activities:
Net increase (decrease) in demand deposits, savings
accounts, NOW accounts and money market accounts 102,736 4,267,018
Certificates of deposit sold (matured), net (2,460,061) 882,441
Net change in short-term borrowings - 50,000
-------------- --------------
Net cash provided by (used in) financing activities (2,357,325) 5,199,459
-------------- --------------
Net increase (decrease) in cash and cash equivalents (1,483,605) 4,148,740
Cash and cash equivalents at beginning of the year 10,170,910 5,041,418
-------------- --------------
Cash and cash equivalents at end of the quarter $ 8,687,305 $ 9,190,158
============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest on deposits and other borrowings $ 152,604 $ 460,309
Income taxes 10,885 4,005
Non-Cash Items:
Effect on stockholders' equity of an unrealized gain (loss)
on debt and equity securities available-for-sale $ (16,395) $ 7,658
Increase in foreclosed properties and decrease in loans $ - $ -
Accrued dividend on preferred stock - series A $ - $ 30,000
</TABLE>
4
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
Note 1 - The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-QSB and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles for complete financial
statements. The interim financial statements have been prepared
utilizing the interim basis of reporting and, as such, reflect all
adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the periods presented. The
results of operations for the interim periods are not necessarily
indicative of the results for the full year.
Note 2 - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Note 3 - 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 dilutive effect for the three month period ended March
31, 1999 is shown within this report. The calculation for the three
month period ended March 31, 1998 was anti-dilutive. Prior period
amounts have been restated, where appropriate, to conform to the
requirements of SFAS 128.
Note 4 - On January 1, 1998, United Financial Banking Companies, Inc. adopted
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130). Under SFAS 130, each company is
required to present a 'Statement of Comprehensive Income'.
Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-
owner sources such as foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities.
5
<PAGE>
----------------------------------------------------
UNITED FINANCIAL BANKING COMPANIES, INC.
CONSOLIDATED AVERAGE BALANCES/NET INTEREST ANALYSIS/
YIELDS AND RATES
----------------------------------------------------
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Year Ended
March 31, 1999 March 31, 1998 December 31, 1998
----------------------------------------------------------------------------------------------------------------------------------
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 $24,073,891 $543,310 9.15% $26,714,036 $639,282 9.71% $25,163,714 $2,462,453 9.79%
Real estate construction 3,775,617 86,864 9.33% 2,334,383 54,353 9.44% 2,756,519 264,084 9.58%
Real estate mortgage 6,963,211 137,668 8.02% 6,825,207 129,988 7.72% 6,950,303 527,037 7.58%
Installment 1,589,676 35,260 9.00% 1,750,134 40,939 9.49% 1,641,652 151,500 9.23%
Leases - - - 304,642 - - 273,446 - -
----------- -------- ----------- -------- ----------- ----------
Total loans/leases 36,402,395 803,102 8.95% 37,928,402 864,562 9.24% 36,785,634 3,405,074 9.26%
----------- -------- ----------- -------- ----------- ----------
Interest-bearing deposits - - - 100,000 1,436 5.82% 88,056 5,491 6.24%
Federal funds sold 6,039,474 71,743 4.82% 5,885,502 79,784 5.50% 6,229,522 339,393 5.45%
Investment securities 6,851,191 99,655 5.90% 3,164,177 46,051 5.90% 5,264,914 305,462 5.80%
----------- -------- ----------- -------- ----------- ----------
Total earning assets 49,293,060 974,500 8.02% 47,078,081 991,833 8.54% 48,368,126 4,055,420 8.38%
======== ======== ==========
Noninterest-earning assets
Cash and due from banks 1,991,707 2,005,259 1,768,063
Other assets 2,198,575 2,870,289 2,682,471
Allowance for loan losses/lease (722,777) (746,749) (763,834)
----------- ----------- -----------
Total assets $52,760,565 $51,206,880 $52,054,826
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 3,823,875 21,073 2.24% 2,345,836 13,640 2.36% 2,360,360 56,526 2.39%
Money market accounts 8,386,297 63,650 3.08% 8,824,953 80,938 3.72% 8,817,006 317,462 3.60%
Time:
Under $100,000 17,355,482 224,742 5.25% 19,873,943 270,265 5.52% 19,638,531 1,078,163 5.49%
$100,000 and over 6,883,052 88,250 5.20% 6,889,905 91,639 5.39% 6,636,143 360,829 5.44%
----------- -------- ----------- -------- ----------- ----------
Total interest-bearing
deposits 36,448,706 397,715 4.43% 37,934,637 456,482 4.88% 37,452,040 1,812,980 4.84%
Short-term borrowings - - - 16,667 - - 40,972 808 1.97%
----------- -------- ----------- -------- ----------- ----------
Total interest-bearing
liabilities 36,448,706 397,715 4.43% 37,951,304 456,482 4.88% 37,493,012 1,813,788 4.84%
======== ======== ==========
Non interest-bearing liabilities:
Demand deposits 10,931,431 9,098,260 9,843,027
Other liabilities 334,659 325,346 361,048
Redeemable preferred stock - 1,356,000 453,667
Stockholders' equity 5,045,769 2,475,970 3,904,072
----------- ----------- -----------
Total liabilities and
stockholders' equity $52,760,565 $51,206,880 $52,054,826
=========== =========== ===========
Net interest income $576,785 $535,351 $2,241,632
======== ======== ==========
Net interest margin (1) 4.75% 4.61% 4.63%
===== ===== =====
Net interest spread (2) 3.59% 3.67% 3.54%
===== ===== =====
Fees included in loan income $ 27,486 $ 29,843 $ 103,364
======== ======== ==========
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.
(1) Net interest income divided by total earning assets.
(2) Average rate earned on total earning assets less average rate paid for
interest-bearing liabilities.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward looking statements. This discussion contains forward looking
statements, including statements of goals, intentions and expectations as to
future trends, plans, or results of Company operations and policies and
regarding general economic conditions. These statements are based upon current
and anticipated economic conditions, nationally and in the Company's market,
interest rates and interest rate policy, competitive factors, statements by
suppliers of data processing equipment and services, government agencies and of
third parties, as to Year 2000 compliance, and other conditions which, by their
nature, are not susceptible to accurate forecast, and are subject to significant
uncertainty. Because of these uncertainties and the assumptions on which this
discussion and the forward looking statements are based, actual future
operations and results may differ materially from those indicated herein.
A. Results of Operations for the Three Months Ended March 31, 1999, as
-------------------------------------------------------------------
Compared to the Three Months Ended March 31, 1998
-------------------------------------------------
General
- -------
The following discussion provides an overview of the financial condition
and results of operations of United Financial Banking Companies, Inc. (UFBC) and
its subsidiaries, The Business Bank and Business Venture Capital, Inc., which is
presented on a consolidated basis. UFBC reported net income of $107,768 for the
three-month period ended March 31, 1999. This compares with net loss of
$131,659 for the same period of 1998. Earnings (loss) per share were $.13 for
the first three months ended March 31, 1999, compared to ($.29) for the first
three months of 1998.
Earnings for the first three months of 1999 are primarily due to increased
earning assets. During the past year, UFBC's primary subsidiary, The Business
Bank (the Bank), continued to increase the Company's earning asset base. At
March 31, 1999, average total earning assets increased $2,214,979 or 4.7% when
compared to the first three months of March 31, 1998 (Consolidated Average
Balances table). The increase has favorably contributed to the Company's
operating earnings.
In February, the Company signed a lease for a branch site at 1451 Chain
Bridge Road (Route 123) in McLean, Virginia. The location is the former branch
of a competitor bank that closed as a result of a bank merger. This opportunity
gives the Bank a low cost entree into a proven market well known to management.
The Bank has received all the necessary regulatory approvals and the branch is
expected to open in June 1999.
Net Interest Income
- -------------------
For the three-month period ended March 31, 1999, net interest income
increased $41,434 or 7.7% from $535,351 at the three-month period ended March
31, 1998 to $576,785 at three-month period ended March 31, 1999. The increase is
primarily attributable to decreased interest expense as a result of the Bank's
asset liability management. As shown in the Consolidated Average Balances table,
average total interest-bearing deposits decreased $1,485,931 or 3.9% from
$37,934,637 at March 31, 1998 to $36,448,706 at March 31, 1999. Rate sensitive
deposits (customers without an established banking relationship) were allowed to
runoff as they matured during the first quarter of 1999. Interest expense on
deposits decreased $58,766 or 12.9% at March 31, 1999 when compared to the three
month period ended March 31, 1998.
For the same comparable three-month period, interest income earned on loans
decreased $61,457 or 7.1% (Consolidated Statements of Income). The decreased
volume of loans due to unexpected payoffs accounts for the decline. As shown in
the Consolidated Average Balances table, the average total loan/lease volume
decreased $1,526,007 or 4.0% from $37,934,637 at March 31, 1998 to $36,402,395
at March 31, 1999. The decreased loan volume caused a change in the investment
mix, such as loans, securities or federal funds, chosen by management during the
comparable periods. Interest earned on investment securities increased $53,602
or 116.4%. The investment mix and the increased volume of securities accounted
for the rise. As shown in the Consolidated Average Balances table, average
investment securities increased $3,687,014 or 116.5% from $3,164,177 at March
31, 1998 to $6,851,191 at March 31, 1999.
7
<PAGE>
Provision for Loan/Lease Losses
- -------------------------------
Provision expense declined $46,921 or 79.5% from $59,000 at March 31, 1998
to $12,079 at March 31, 1999. During the first three months of 1999, the Bank
funded its allowance for loan/lease losses by charging $22,200 against earnings
compared to $59,000 charged against earnings during the first three months of
1998. During the first quarter of 1999, the parent company, UFBC, sold its only
booked loan which resulted in a $19,529 charge to its allowance of $30,940. The
remaining UFBC allowance of $11,411 was reversed as a credit to the Company's
provision expense.
Noninterest Income
- ------------------
Total noninterest income decreased $12,268 or 19.2% for the three month
period ended March 31, 1999 compared to the same period of 1998. The decrease
is primarily attributable to the recognition of $9,600 of deferred income as the
result of a loan payoff during the first quarter of 1998.
Noninterest Expense
- -------------------
Total noninterest expense decreased $163,340 or 24.3% during the first
three months of 1999 when compared to the same period of 1998. The decrease is
explained by the real estate owned (REO) write-downs totaling $187,666, in
connection with the disposition of REO, which occurred in the quarter ended
March 31, 1998. REO holding expense declined $7,221 or 48.5% for the comparable
periods and also contributed to the decrease in total noninterest expense. The
liquidation of REO property during 1998, which eliminated the related holding
costs, explains the decline.
Legal expense declined $5,386 or 42.8% during the nine-month period ended
March 31, 1998 when compared to the first three months of 1998. During the
first three months of 1999, the Bank incurred general legal fees associated with
collections in the normal course of business. In the opinion of management,
there were no legal matters pending as of March 31, 1999 which would have a
material adverse effect on the Company's financial statements.
Other expense rose $15,118 or 22.9% during the three-month period ended
March 31, 1999 when compared to the first three months of 1998. During the
first three months of 1999, the Bank incurred approximately $12,000 of one-time
fees associated with Year 2000 compliance and state tax assessments.
Salaries and employee benefits increased $11,522 or 4.4% from $264,793 at
March 31, 1998 to $276,315 at March 31, 1999. The rise is due to additional
staffing.
Income Taxes
- ------------
In 1993, the rate that UFBC accrued its tax benefit differed from the
statutory tax rate based on the inability of UFBC to use its losses to reduce
deferred taxes or to record a tax benefit. At the end of 1993, all of UFBC's
accrued tax benefits were eliminated due to UFBC's inability to demonstrate
capacity for their future use. As a result, until such time that UFBC
demonstrates a capacity for their future use, UFBC will not be able to accrue
tax benefits. UFBC accrued no tax benefits for the three months ended March 31,
1999.
B. Financial Condition as of March 31, 1999
----------------------------------------
Assets
- ------
Total assets decreased $2,280,272 or 4.1% during the first three months of
1999 when compared to the period ended December 31, 1998. The drop in assets is
primarily attributable to the Bank's decreased volume of certificates of
deposits which had been invested in loans, federal funds sold and investment
securities. Federal funds sold and investment securities decreased $1,360,891
or 90.8% from $14,797,597 at December 31, 1998 to $13,436,706 at March 31, 1999.
Loans decreased $582,625 or 1.58% during the first quarter ended March 31, 1999
due to rate driven payoffs.
Allowance for Loan/Lease Losses
- -------------------------------
The allowance for loan/lease losses (allowance) represents an amount which
management believes will be adequate to absorb potential losses inherent in the
loan/lease portfolio. The provision for loan losses represents the charge to
earnings during the year to fund the allowance to cover potential future losses.
The amount charged to expense during the year is dependent upon management's and
the Board of Directors' assessment of the adequacy
8
<PAGE>
of the allowance. Principal factors used in evaluation include prior loss
experience, changes in the composition and volume of the portfolio, overall
portfolio quality, the value of underlying collateral, reviews of portfolio
quality by state and federal supervisory authorities, specific problem loans,
and current and anticipated economic conditions that may affect a borrower's
ability to repay.
At March 31, 1999 and December 31, 1998, the allowance was $740,234 and
$747,374, respectively, or 2.0% of total loans and leases. Nonperforming loans
for the three-month period ended March 31, 1999 totaled $15,781, which resided
in the subsidiary, Business Venture Capital, Inc. (BVCI). This compares to a
balance of $60,378 at December 31, 1998, of which $15,781 resided in the BVCI
and $44,597 in the parent. The consolidated allowance for loan/lease losses
covers nonperforming loans 46.9 times at March 31, 1999, compared to a coverage
of 12.4 times at year end 1998.
Liabilities
- -----------
Total deposits decreased $2,357,325 or 4.7% during the first three months
of 1999 when compared to the year ended 1998. During the three months ended
March 31, 1999, the deposit mix changed favorably in response to the rate
environment and the Bank's liquidity and investment requirements. Rate
sensitive certificates of deposits were repriced as they matured during the
first quarter which resulted in runoff. Certificates of deposits declined
$2,460,061 or 9.7% from $25,345,426 at December 31, 1998 to $22,885,365 at March
31, 1999.
Liquidity and Investment
- ------------------------
UFBC's operational needs were significantly reduced by the cancellation of
its debt to the FDIC in 1994, staff reduction and reduced professional fees.
For the near future, management projects that proceeds received from the May
1998 Private Offering, earning assets, the liquidation of non-Bank REO and the
sale of non-Bank assets will provide sufficient cash flow for UFBC's continuing
operational needs.
Consolidated average liquid assets were 28.2% of average total assets at
March 31, 1999 compared to 27.1% for the same period ended March 31, 1998 and
31.4% at December 31, 1998 (Consolidated Average Balances table). The Company's
liquidity needs exist primarily in the Bank subsidiary. To maintain adequate
liquidity, the Bank purchases certain traditional assets such as government and
other investment securities. The Bank's securities portfolio comprises U.S.
Treasury securities, U.S. Government agency securities, state and municipal
securities and equity securities. The Bank is strategically growing its
securities portfolio to ensure safe levels of liquidity, to enhance the overall
credit quality of its asset base, to generate increased interest income, to
balance assets and liabilities and to hedge interest rate risk. The securities
portfolio includes both instruments available-for-sale and held-to-maturity.
Securities classified as available-for-sale may be sold in response to changes
in market interest rates, changes in prepayment or extension risk, management of
the federal tax position, liquidity needs and other asset/liability management
issues. Securities classified as held-to-maturity are intended for investment
purposes.
At March 31, 1999, the Bank's investment portfolio consisted of the
following:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------ ----------------
<S> <C> <C>
U.S. Treasury -- 769,341
U.S. Government Agency 5,667,965 --
State and Municipal -- 140,000
Equity 166,400 --
</TABLE>
Capital Requirements
- --------------------
The Federal Reserve Board issued risk-based capital guidelines for bank
holding companies. The guidelines initially defined a two-tier capital
framework. Tier I Capital consists of common and qualifying preferred
shareholders' equity less intangible assets. Tier II Capital consists of
mandatory convertible, subordinated and other qualifying debt, preferred stock
not qualifying as Tier I Capital and the reserve for loan losses up to 1.25
percent of risk-weighted assets. Under these guidelines, one of four risk
weights is applied to the different on-balance sheet assets. Off-balance sheet
items such as loan commitments are also applied a risk weight after conversion
to balance sheet equivalent amounts. Tier I and Tier II Capital require a
minimum ratio of 4.0% and 8.0%, respectively. The Federal Reserve issued
another guideline, a minimum Leverage ratio, which measures the ratio of Tier I
Capital to quarterly average assets less
9
<PAGE>
intangible assets. A Leverage ratio of 3.0% must be maintained for highly rated
banks. Otherwise, the minimum leverage ratio, based upon the institution's
overall financial condition, must be at least 100 to 200 basis points above the
minimum. These guidelines were also adopted by the Federal Deposit Insurance
Corporation and therefore applies to the Company's banking subsidiary.
Additionally, the Federal Reserve Board requires bank holding companies to meet
a minimum ratio of qualifying Total (combined Tier I and Tier II) capital to
risk-weighted assets of 8.0%, at least half of which must be composed of core
(Tier I) capital elements. The following table presents the Company and the
Bank's capital position and related ratios as of March 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C> <C>
Tier I Capital
Company $ 5,166,525 $ 2,475,970
The Business Bank 4,992,367 3,756,696
Total qualifying capital
Company $ 5,619,074 $ 3,684,816
The Business Bank 5,443,625 4,220,057
Risk-weighted assets
Company $35,916,223 $36,975,956
The Business Bank 36,100,618 36,807,924
Quarterly average assets
Company $52,760,565 $51,206,880
The Business Bank 52,657,301 51,200,042
Required
Risk-based capital ratios: 1999 1998 Minimum
--------- ----------- -----------
Tier I Capital (Tier I capital/risk-weighted assets)
Company 14.38% 6.70% 4.00%
The Business Bank 13.94% 10.21% 4.00%
Total Capital (Total capital/risk-weighted assets)
Company 15.64% 9.97% 8.00%
The Business Bank 15.20% 11.47% 8.00%
Leverage ratio (Tier I capital/adjusted average assets)
Company 9.79% 4.84% 5.00%
The Business Bank 9.48% 7.34% 5.00%
</TABLE>
Earnings Per Share
- ------------------
The following table is a reconciliation of earnings per common share as
computed under SFAS 128. (See note 3).
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ------------ -----------
<S> <C> <C> <C>
Basic Earnings Per Share:
For the three months ended March 31, 1999
Net Income $ 107,768
Income available to common stockholders $ 107,678 831,590 $ .13
========= =========== ===========
For the three months ended March 31, 1998
Net Income $(131,659)
Less: Preferred Stock Dividends (30,000)
---------
Income available to common stockholders $(161,659) 561,640 $ (.29)
========= =========== ===========
</TABLE>
10
<PAGE>
Diluted Earnings Per Share:
<TABLE>
<S> <C> <C> <C>
For the three months ended March 31, 1999
Net Income available to common stockholders $ 107,768 831,590
Add: Contracts to issue common stock
Warrants - expire 12/31/99 267
Warrants - expire 9/30/01 609
Options - expire 12/31/05 - 6/30/08 878
-----------
Weighted-average diluted shares outstanding 1,754
Diluted earnings per common share: $ 107,768 833,344 $ .13
========= =========== ===========
</TABLE>
Year 2000
- ---------
Assuring that computer systems and applications are Year 2000 (Y2K)
compliant presents a complex managerial and technological challenge. Many
computer programs now in use have not been designed to properly recognize years
after 1999. If not corrected, these programs could fail or create erroneous
results. The Y2K issue affects the entire banking industry because of its
reliance on computers and other equipment that use computer chips, and may have
significant effects on the Company's customers and regulators. In recognition
of the potential adverse effects of the Y2K issue, management of the Company
created a Y2K project team and established a plan to prevent or mitigate
potential adverse effects of Y2K issue on the Company, its vendors and its
customers. The Y2K project team is headed by a senior management executive.
The Company's Y2K Plan consists of three phases. Phase I required the
Company to assess its Y2K compliance needs and to develop a plan to address
those needs. The assessment included testing the Company's current hardware,
software and material external vendors' compliance. Phase I also included
assessing the impact Y2K compliance could have on our existing and future
customers. The Company completed Phase I in December 1997. The Y2K project
team concluded that the Company would need to replace and/or update most of its
computer hardware and software. The Y2K project team also concluded that
extensive testing would be required of the Bank's data processing company to
determine Y2K compliance. The assessment of the impact of Y2K on existing
customers was determined to be immaterial to the Company. A questionnaire and
information guide was established to assess Year 2000 compliance of future
customers. The costs of Phase I, including salary allocations, were
approximately $50,000.
Phase II requires all non-compliant hardware and software to be replaced
by May 1999. Approximately one-half of the equipment and software had been
replaced as of March 31, 1999. The new equipment and software must be re-tested
for compliance by June 1999. The Company has included approximately $154,000
for Y2K compliance costs, including salary allocations, in its 1999 budget.
Phase III requires monitoring and review of Year 2000 issues that may have been
overlooked. Management does not anticipate material costs in Phase III.
The Bank's primary supplier of data processing services also has adopted
a Y2K plan and timetable which also consists of three phases. The vendor has
completed Phase I and Phase II. Phase I problems have been corrected. Phase II
included testing key dates such as 12/31/99, 1/1/2000 and 2/29/2000 on a live
data base. The vendor is in the process of resolving discrepancies which were
detected during the testing. Based on representations from its vendor,
management anticipates that the vendor will complete its testing of Phase II Y2K
compliance by June 1999. Also, based on information developed to date and
representations from its data processing supplier, Phase II testing should
resolve most Y2K issues and therefore prevent any material problems which would
impact the Company's business, operations, liquidity, capital resources, or
financial condition.
In a worse case scenario, the vendors providing power to the Company
would fail and the vendors providing data processing services for the Bank would
fail. The Company has adopted and continues to enhance a contingency plan which
would include limited back-up power and manual systems and processing to service
customers. The Bank maintains a paper copy of most Bank documents. Hard copies
of customer records will be printed prior to 1/1/2000 to provide current
information. In order to plan for an unusually high cash demand, the Bank has
strategically purchased financial instruments and is developing a cash on hand
plan for customer withdrawals to ensure adequate liquidity. Management views
Y2K as an issue which requires on-going assessment. Management will make
assessments, modifications, and corrections to help ensure Y2K compliance.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(6) None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED FINANCIAL BANKING COMPANIES, INC.
By: /s/ HAROLD C. RAUNER
--------------------------------------------
Harold C. Rauner
President and CEO
/s/ LISA M. PORTER
--------------------------------------------
Lisa M. Porter
Chief Financial Officer
Date: May 7 1999
----------------
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-QSB and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,994,305
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,693,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,834,365
<INVESTMENTS-CARRYING> 6,743,706
<INVESTMENTS-MARKET> 5,834,365
<LOANS> 36,379,588
<ALLOWANCE> 740,234
<TOTAL-ASSETS> 53,292,800
<DEPOSITS> 47,828,134
<SHORT-TERM> 0
<LIABILITIES-OTHER> 297,585
<LONG-TERM> 0
0
0
<COMMON> 831,590
<OTHER-SE> 4,335,491
<TOTAL-LIABILITIES-AND-EQUITY> 53,292,800
<INTEREST-LOAN> 803,102
<INTEREST-INVEST> 171,334
<INTEREST-OTHER> 64
<INTEREST-TOTAL> 974,500
<INTEREST-DEPOSIT> 397,715
<INTEREST-EXPENSE> 397,715
<INTEREST-INCOME-NET> 179,070
<LOAN-LOSSES> 12,079
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 508,531
<INCOME-PRETAX> 107,768
<INCOME-PRE-EXTRAORDINARY> 107,768
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,768
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 8.02
<LOANS-NON> 15,781
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 133,800
<ALLOWANCE-OPEN> 747,374
<CHARGE-OFFS> 19,212
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 740,234
<ALLOWANCE-DOMESTIC> 740,234
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 470,905
</TABLE>
