<PAGE>
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, 1998 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
----- -----
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, 1998, United Financial Banking Companies, Inc.
reported net income of $113,233.
The aggregate market value of the Common Stock held by non-affiliates of the
registrant was $2,825,664 as of March 1, 1999.
As of March 1, 1999, the registrant had 831,590 shares of outstanding common
stock, $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Company's 1998 Proxy Statement for the Annual
Meeting to be held June 4, 1999 is incorporated by reference into Part III of
this report, and information from the 1998 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.
<PAGE>
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 holds and has developed certain foreclosed real estate.
Collectively, UFBC, the Bank and BVCI 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, 1998, the Company had consolidated total assets of
$55,573,072, total deposits of $50,185,459, total loans of $36,962,213 and total
stockholders' equity of $5,075,708.
On March 1, 1999, the Company and its subsidiaries employed 23 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. Business accounts are less costly than consumer accounts as they
usually require 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 to the owners and
employees of the businesses. It is the Bank's belief that this augmentation
will help maintain the Bank's core accounts and will enable the organization to
diversify asset growth.
By emphasizing individualized 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.
2
<PAGE>
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 subsidiary 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 11 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
At December 31, 1998, neither UFBC nor it subsidiaries were subject to any
formal supervisory agreements with their regulators. On May 19, 1997, the Board
of Directors of the Bank submitted an informal resolution to the FDIC and to the
Virginia Commissioner of Financial Institutions (SCC). The resolution addresses
specific areas of Bank operations. The resolution is discussed in further
detail in Note 11 to the consolidated financial statements. Subsequent to
December 31, 1998, the FDIC and the SCC informed the Bank that the resolution
and its agreements were no longer necessary.
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.
3
<PAGE>
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. 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 not 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, 1998, 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.
4
<PAGE>
Conservatorship and Receivership Powers of Federal Banking Agencies
The authority of the federal banking regulators over 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.
Item 2. Properties
The main offices of the Company and the Bank are located at 8399 Leesburg
Pike, Vienna, Virginia 22182. 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 1998 under the lease
totaled $63,132 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.
At December 31, 1998, the Bank had no branches. Subsequent to December 31,
1998, the Company entered into a lease for a Bank branch location pending
regulatory approval. The lease term is for ten years and two months, commencing
April 1, 1999. The future minimum lease payments for the branch operating lease
total $722,127.
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, 1998, the future minimum lease
payments for the Bank lease, including the option period, totaled $1,666,896.
Further information regarding this transaction is discussed in Part III, item 12
of this report.
Management believes that the Company's current facilities are 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 currently pending against the Company or
any of its subsidiaries which individually or in the aggregate would have a
material adverse affect on the Company's financial condition or results of
operation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders during the fourth quarter of
the Company's fiscal year.
5
<PAGE>
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 345 holders of record of the Registrant's common stock as of
December 31, 1998.
C. The Company's cash dividend history is incorporated by reference to the
section entitled "Corporate Information" appearing on page 43 of the Annual
Report to Shareholders for the year ended December 31, 1998.
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 26 of
the Annual Report to Shareholders for the year ended December 31, 1998.
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 27
through 41 of the Annual Report to Shareholders for the year ended December 31,
1998.
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 25 of the Annual Report to Shareholders
for the year ended December 31, 1998.
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 4, 1999.
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 4, 1999.
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 4, 1999.
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 4, 1999.
6
<PAGE>
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 1998 Annual
Report to Shareholders as listed below:
Page
----
Report of Independent Certified Public Accountants 1
Consolidated Balance Sheets--December 31, 1998 and 1997 2
Consolidated Statements of Income--
Years Ended December 31, 1998, 1997 and 1996 3
Consolidated Statements of Changes in Shareholders' Equity--
Years Ended December 31, 1998, 1997 and 1996 4
Consolidated Statements of Cash Flows--
Years Ended December 31, 1998, 1997 and 1996 5
Notes to Financial Statements 6-25
(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,
1998.
(c) Exhibits
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 1998 Annual Report.
Exhibit 13--Annual Report to Security Holders
Exhibit 21--Subsidiaries of the Registrant
Jurisdiction Percent of
under laws Voting Security
of which owned by
Name of Subsidiary organized Immediate Parent
------------------ --------- ----------------
The Business Bank Virginia 100%
Business Venture Capital, Inc Virginia 100%
7
<PAGE>
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 31st day of March, 1999.
--------- -----
UNITED FINANCIAL BANKING COMPANIES, INC.
(Registrant)
By: /s/ JEFFERY T. VALCOURT
-----------------------------------
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.
/s/ JEFFERY T. VALCOURT Chairman/Director 3/31/99
- ------------------------------- -------
Jeffery T. Valcourt
/s/ HAROLD C. RAUNER President, CEO/Director 3/31/99
- ------------------------------- -------
Harold C. Rauner
/s/ MANUEL V. FERNANDEZ Director 3/31/99
- ------------------------------- -------
Manuel V. Fernandez
/s/ WILLIAM J. MCCORMICK, JR. Director 3/31/99
- ------------------------------- -------
William J. McCormick, Jr.
/s/ DENNIS I. MEYER Director 3/31/99
- ------------------------------- -------
Dennis I. Meyer
/s/ EDWARD H. PECHAN Director 3/31/99
- ------------------------------- -------
Edward H. Pechan
/s/ SHARON A. STAKES Director 3/31/99
- ------------------------------- -------
Sharon A. Stakes
/s/ LISA M. PORTER Principal Financial Officer 3/31/99
- ------------------------------- -------
Lisa M. Porter Principal Accounting Officer
8
<PAGE>
UNITED FINANCIAL BANKING
COMPANIES, INC. AND SUBSIDIARIES
FINANCIAL REPORT
DECEMBER 31, 1998
<PAGE>
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income and comprehensive income 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5
Notes to financial statements 6- 25
<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, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for the years ending December 31, 1998, 1997 and 1996.
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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for the years
ending December 31, 1998, 1997 and 1996 in conformity with generally accepted
accounting principles.
/s/
D.R. Maxfield & Company
Fairfax, Virginia
January 26, 1999
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
--------------------- ----------------------
<S> <C> <C>
CASH AND DUE FROM BANKS (NOTE 11) $ 2,267,417 $ 2,282,418
INTEREST-BEARING DEPOSITS IN OTHER BANKS -- 100,000
FEDERAL FUNDS SOLD 7,903,493 2,659,000
------------------- ---------------------
TOTAL CASH AND CASH EQUIVALENTS 10,170,910 5,041,418
------------------- ---------------------
SECURITIES AVAILABLE-FOR-SALE (NOTE 2) 5,130,213 1,700,876
SECURITIES HELD-TO-MATURITY (NOTE 2) 1,763,891 1,082,773
------------------- ---------------------
TOTAL SECURITIES 6,894,104 2,783,649
------------------- ---------------------
LOANS AND LEASE FINANCING, NET OF UNEARNED INCOME OF
$12,560 IN 1998; 40,702 IN 1997 (NOTES 3, 4 AND 10) 36,962,213 38,084,861
LESS: ALLOWANCE FOR LOAN/LEASE LOSSES (747,374) (715,399)
------------------- ---------------------
NET LOANS AND LEASE FINANCING 36,214,839 37,369,462
REAL ESTATE OWNED, NET (NOTE 5) 1,799,398 2,368,104
PREMISES AND EQUIPMENT, NET (NOTE 6) 119,338 164,018
OTHER ASSETS 374,483 347,355
------------------- ---------------------
38,508,058 40,248,939
------------------- ---------------------
TOTAL ASSETS $ 55,573,072 $ 48,074,006
=================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
DEPOSITS:
Demand $ 14,264,071 $ 7,778,077
SAVINGS AND NOW 3,051,446 2,508,666
MONEY MARKET 7,524,516 7,568,652
TIME:
UNDER $100,000 18,048,129 19,478,244
$100,000 AND OVER 7,297,297 6,428,122
------------------- ---------------------
TOTAL DEPOSITS (NOTE 7) 50,185,459 43,761,761
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 311,905 336,246
------------------- ---------------------
TOTAL LIABILITIES 50,497,364 44,098,007
------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 9)
REDEEMABLE PREFERRED STOCK (NOTE 16)
SERIES A $-0- PAR VALUE, AUTHORIZED 900 SHARES, -0- SHARES
ISSUED IN 1998 AND 800 SHARES IN 1997 -- 1,336,000
------------------- ---------------------
STOCKHOLDERS' EQUITY (NOTES 11, 14 AND 17)
PREFERRED STOCK $-0- PAR VALUE, AUTHORIZED 4,999,100 SHARES,
ISSUED -0- SHARES IN 1998 AND 800 SHARES IN 1997 -- --
COMMON STOCK, PAR VALUE $1; AUTHORIZED 3,500,000
SHARES, ISSUED 831,590 SHARES IN 1998 AND 561,640 SHARES IN 1997 831,590 561,640
SURPLUS 14,681,567 12,643,622
ACCUMULATED DEFICIT (10,454,400) (10,567,633)
ACCUMULATED OTHER COMPREHENSIVE INCOME 16,951 2,370
------------------- ---------------------
TOTAL STOCKHOLDERS' EQUITY 5,075,708 2,639,999
------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,573,072 $ 48,074,006
=================== =====================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME:
INTEREST AND FEES ON LOANS/LEASES $ 3,405,074 $ 2,991,380 $ 2,462,895
INTEREST ON INVESTMENT SECURITIES 305,462 186,866 117,225
INTEREST ON INTEREST BEARING DEPOSITS 5,491 8,914 23,351
INTEREST ON FEDERAL FUNDS SOLD 339,393 246,707 224,807
-------------- ------------- -------------
4,055,420 3,433,867 2,828,278
-------------- ------------- -------------
INTEREST EXPENSE:
INTEREST ON DEPOSITS (NOTE 13) 1,812,980 1,495,204 1,498,089
INTEREST ON SHORT-TERM BORROWINGS 808 -- 64,762
-------------- ------------- -------------
1,813,788 1,495,204 1,562,851
-------------- ------------- -------------
NET INTEREST INCOME 2,241,632 1,938,663 1,265,427
PROVISION FOR LOAN/LEASE LOSSES (NOTE 3) 323,500 249,300 694,203
-------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN/LEASE LOSSES 1,918,132 1,689,363 571,224
-------------- ------------- -------------
NONINTEREST INCOME (LOSS):
OTHER EARNING ASSETS -- -- 11,000
LOAN SERVICING AND OTHER FEES 93,605 76,397 82,669
GAIN ON THE SALE OF FIXED ASSETS (NOTES 6 AND 10) 100 -- 734,641
OTHER INCOME (NOTE 12) 306,483 148,319 (176,428)
-------------- ------------- -------------
400,188 224,716 651,882
-------------- ------------- -------------
NONINTEREST EXPENSE:
SALARIES 893,146 760,032 746,352
EMPLOYEE BENEFITS (NOTE 14) 168,513 133,590 140,611
OCCUPANCY (NOTE 6) 322,956 296,097 133,151
FURNITURE AND EQUIPMENT 76,563 60,304 45,697
OTHER (NOTE 15) 734,691 647,757 1,067,365
-------------- ------------- -------------
2,195,869 1,897,780 2,133,176
-------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 122,451 16,299 (910,070)
PROVISION (CREDIT) FOR FEDERAL INCOME TAXES (NOTE 8) 9,218 -- (2,461)
-------------- ------------- -------------
NET INCOME (LOSS) $ 113,233 $ 16,299 $ (907,609)
============== ============= =============
NET INCOME (LOSS) PER COMMON SHARE (NOTES 1 AND 17)
BASIC $ 0.09 $ (0.18) $ (1.65)
============== ============= =============
DILUTED $ 0.08 $ (0.18) $ (1.65)
============== ============= =============
COMPREHENSIVE INCOME (NOTE 1)
===================================
NET INCOME 113,233 16,299 (907,609)
OTHER COMPREHENSIVE INCOME, NET OF TAX
UNREALIZED GAINS (LOSSES) ON AVAILABLE-FOR-SALE SECURITIES 14,581 2,880 (5,618)
-------------- ------------- -------------
COMPREHENSIVE INCOME $ 127,814 $ 19,179 $ (913,227)
============== ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Accumulated Comprehensive
Stock Surplus Deficit Income Total
------------ ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
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 16) -- (18,750) -- -- (18,750)
Change in unrealized
holding gain (loss) on
available-for-sale
securities (AFS), net
of taxes -- -- -- (5,618) (5,618)
----------- ------------ ------------- -------------- -----------
Balance December 31, 1996 $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 16) -- (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
----------- ------------ ------------- -------------- -----------
Net income -- -- 113,233 -- 113,233
Net proceeds from issuance
of shares of common
stock 269,950 2,087,945 -- -- 2,357,895
Accrued dividend for
redeemable preferred
stock - series A (Note 16) -- (50,000) -- -- (50,000)
Change in unrealized
holding gain (loss) on
available-for-sale
securities (AFS), net
of taxes -- -- -- 14,581 14,581
----------- ------------ ------------- -------------- -----------
Balance December 31, 1998 $ 831,590 $ 14,681,567 $(10,454,400) $ 16,951 $5,075,708
=========== ============ ============= ============== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 113,233 $ 16,299 $ (907,609)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 94,572 50,933 72,370
Provision for loan/lease losses 323,500 249,300 694,203
Provision for losses on real estate owned 227,666 114,805 168,187
Amortization of investment security discounts (879) (7,218) (1,898)
Amortization of loan fees and discounts (18,953) (85,923) (25,991)
Net gain on disposal of fixed assets (100) -- (734,641)
Net (gain) loss on real estate owned (104,657) (27,868) 306,969
(Increase) decrease in other assets (27,126) 113,379 13,908
Increase (decrease) in other liabilities (24,342) (24,048) (22,673)
-------------- ---------------- ---------------
Net cash provided by (used in)
operating activities 582,914 399,659 (437,175)
-------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected - non-bank subsidiaries 7,498 397,437 50,493
Bank loans and leases repaid, net of originations 694,422 (8,173,931) (7,857,586)
Loan fees and discounts deferred 28,156 75,883 3,049
Purchases of securities available-for-sale (5,298,526) (698,270) (1,695,642)
Purchases of securities held-to-maturity (769,908) (1,643,096) --
Investments made in real estate owned (571,266) (1,579,193) (5,178,439)
Proceeds received from maturity of securities
available-for-sale 1,881,651 1,100,000 200,000
Proceeds received from maturity of securities
held-to-maturity 91,787 863,237 --
Proceeds received from real estate owned 1,136,963 2,441,232 10,011,649
Purchases of premises and equipment (49,892) (82,239) (19,840)
Proceeds from sale of premises and equipment 100 -- 1,968,521
-------------- ---------------- ---------------
Net cash provided by (used in)
investing activities (2,849,015) (7,298,940) (2,517,795)
-------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand
deposits, savings accounts, NOW
accounts and money market accounts 6,984,638 3,207,387 (1,276,263)
Certificates of deposit sold (matured), net (560,940) 2,819,799 1,535,603
Proceeds from issuance of common stock 2,357,895 -- (1,538,544)
Proceeds from issuance of redeemable preferred stock -- 450,000 750,000
Redemption of preferred stock & accrued dividend (1,386,000) -- --
-------------- ---------------- ---------------
Net cash provided by (used in)
financing activities 7,395,593 6,477,186 (529,204)
-------------- ---------------- ---------------
Net increase (decrease) in cash and cash equivalents 5,129,492 (422,095) (3,484,174)
Cash and cash equivalents at beginning
of year 5,041,418 5,463,513 8,947,687
-------------- ---------------- ---------------
Cash and cash equivalents at end of year $ 10,170,910 $ 5,041,418 $ 5,463,513
============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the years for:
Interest on deposits and other borrowings $ 1,373,372 $ 1,571,590 $ 1,701,011
============== ================ ===============
Income taxes $ -- $ -- $ --
============== ================ ===============
NON-CASH ITEMS
Increase in foreclosed properties and
decrease in loans $ 120,000 $ 202,000 $ 513,740
Effect on stockholders' equity of an
unrealized gain (loss) on debt and
equity securities in available-for-sale 14,581 2,880 (5,618)
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>
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of accounting:
The accounting and reporting policies used in preparing these
financial statements conform to generally accepted accounting
principles and to general practices within the commercial banking
industry.
Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of United Financial Banking Companies, Inc. and
subsidiaries (the Company). Following is a summary of each
subsidiary and its primary business activity:
The Business Bank and Subsidiaries Commercial Bank
(the Bank)
Business Venture Capital, Inc. (BVCI) Develop certain real
estate held for sale
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, 1998 and 1997, the Company held no securities
classified as trading.
<PAGE>
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.
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 is maintained at a level, which
in management's judgment, is adequate to absorb credit losses
inherent in the existing loan/lease portfolio. The amount of the
allowance is based on management's evaluation of the collectibility
of the loan/lease portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience,
specific impaired loans, economic conditions and other risks
inherent in the portfolio. Allowances for impaired loans are
generally determined based on collateral values or the present
value of estimated cash flows. Although management uses available
information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values and
future cash flows on impaired loans, it is reasonably possible that
a material change could occur in the allowance for loan/lease
losses in the near term. However, the amount of the change that is
reasonably possible cannot be estimated. The allowance is increased
by a provision for loan/lease losses, which is charged to expense
and reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the
provision for loan/lease.
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (continued)
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
noninterest income.
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.
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. The dilutive effect for the year ending
December 31, 1998 is shown in Note 16. There were no dilutive
effects for the years 1997 and 1996. Prior period amounts have been
restated, where appropriate, to conform to the requirements of SFAS
128.
Comprehensive income:
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.
This adjustment is presented in the Consolidated Statements of
Income and Comprehensive Income.
Reclassifications:
Certain amounts for fiscal year 1997 and 1996 have been
reclassified to conform to the presentation for fiscal year 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Securities
The amortized cost, gross unrealized gains and losses, and fair value
related to the securities portfolio are as follows:
Securities Available-for-Sale
-----------------------------
Gross Gross
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
December 31, 1998:
U.S. Treasury $ 399,863 $ 1,008 $ -- $ 400,871
U.S. Government Agencies 4,553,599 23,013 (7,070) 4,569,542
Equity 159,800 -- -- 159,800
---------- ------- ------- ----------
Total $5,113,262 $24,021 $(7,070) $5,130,213
========== ======= ======= ==========
December 31, 1997:
U.S. Treasury $1,698,506 $ 3,047 $ (677) $1,700,876
U.S. Government Agencies -- -- -- --
Equity -- -- -- --
---------- ------- ------- ----------
Total $1,698,506 $ 3,047 $ (677) $1,700,876
========== ======= ======= ==========
Securities Held-to-Maturity
---------------------------
December 31, 1998:
U.S. Treasury $ 769,397 $ 6,503 $ -- $ 775,900
U.S. Government Agencies 549,495 2,945 -- 552,440
State and Municipal 444,999 1,093 -- 446,092
---------- ------- ----- ----------
Total $1,763,891 $10,541 $ -- $1,774,432
========== ======= ===== ==========
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
========== ======= ===== ==========
<PAGE>
Note 2. Securities (continued)
The amortized cost and estimated fair value of securities at December 31, 1998
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:
Securities Available-for-Sale Amortized Cost Fair Value
----------------------------- -------------- ----------
Due in one year or less $2,379,675 $2,388,488
Due after 1 year through 5 years 2,136,670 2,146,300
Due after 5 years through 10 years -- --
Due after 10 years 596,917 595,425
---------- ----------
Total $5,113,262 $5,130,213
========== ==========
Securities Held-to-Maturity
---------------------------
Due in one year or less $1,513,891 $1,522,232
Due after 1 year through 5 years -- --
Due after 5 years through 10 years 250,000 252,200
Due after 10 years -- --
---------- ----------
Total $1,763,891 $1,774,432
========== ==========
Securities with an amortized cost of $699,307 and $399,205 at December 31,
1998 and 1997, respectively, were pledged as collateral for treasury, tax and
loan and a letter of credit at Community Bankers Bank.
No gross gains or gross losses were realized in 1998 or 1997.
Note 3. Loans and Lease Financing and Related Accounts
Major classifications of loans and lease financing are summarized as follows:
1998 1997
------------ ------------
Commercial $24,722,636 $27,072,549
Real estate construction 3,508,361 2,256,394
Real estate mortgage 7,081,130 6,748,670
Installment 1,662,646 1,743,308
Leveraged leases -- 304,642
----------- -----------
36,974,773 38,125,563
Less unearned discount (12,560) (40,702)
----------- -----------
36,962,213 38,084,861
Allowance for loan/lease losses (747,374) (715,399)
----------- -----------
Loans and lease financing, net $36,214,839 $37,369,462
=========== ===========
<PAGE>
Note 3. Loans and Lease Financing and Related Accounts (continued)
Changes in the allowance for loan/lease losses were as follows:
1998 1997 1996
---------- ---------- ----------
Balance, beginning of year $ 715,399 $ 584,106 $ 462,846
Provision charged to operations 323,500 249,300 694,203
Loans charged off (302,139) (140,053) (594,140)
Recoveries 10,614 22,046 21,197
--------- --------- ---------
Balance, end of year $ 747,374 $ 715,399 $ 584,106
========= ========= =========
Impaired loans are loans where it is probable that a borrower will not be
able to pay all amounts due according to the contractual terms of the loan.
Impaired loans are summarized as follows:
1998 1997
-------- --------
Non-accrual $60,378 $102,012
Restructured -- --
Other impaired loans -- --
------- --------
Total impaired loans $60,378 $102,012
======= ========
The allowance for loan losses related to impaired loans amounted to
approximately $34,140, $54,167 and $65,670 at December 31, 1998, 1997 and
1996, respectively.
The following is an analysis of approximate interest income related to
impaired loans which is recognized on a cash basis:
1998 1997 1996
------ ------- ---------
Interest that would have
been accrued as income $8,000 $12,000 $ 43,000
Interest paid and recognized
as interest income -- -- (17,000)
------ ------- --------
Interest forgone $8,000 $12,000 $ 26,000
====== ======= ========
There were no commitments to lend additional funds to customers whose loans
were classified as nonperforming at December 31, 1998.
The Company's net investment in leveraged leases is composed of the following
elements:
1998 1997
----- --------
Estimated residual value of leased assets $ -- $304,642
Less: unearned and deferred income -- --
----- --------
Investment in leveraged leases -- 304,642
Less: deferred taxes arising from leveraged leases -- --
----- --------
Net investment in leveraged leases $ -- $304,642
===== ========
<PAGE>
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 activity is to customers who have purchased residential
homes built on land acquired through a Bank foreclosure in 1990. As of
December 31, 1998 and 1997, the Company and its subsidiaries had loans to
such customers amounting to approximately $4,577,465 and $4,482,355,
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 personal 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, 1998, the Company had
uninsured cash of $46,306.
Note 5. Real Estate Owned
1998 1997
---------- -----------
Real estate owned $2,456,703 $3,016,409
Allowances for losses on real estate owned (657,305) (648,305)
---------- ----------
Real estate owned, net $1,799,398 $2,368,104
========== ==========
Capitalized interest amounted to $-0- and $64,700 for the years ended
December 31, 1998 and 1997, respectively.
Changes in the allowance for losses on real estate owned are summarized as
follows:
1998 1997
---------- ----------
Balance, beginning $ 648,305 $1,337,825
Provision charged to operations 77,666 114,805
Losses charged to allowance (68,666) (804,325)
---------- ----------
Balance, ending $ 657,305 $ 648,305
========== ==========
Note 6. Premises and Equipment
Major classifications of premises and equipment are summarized as follows:
1998 1997
---------- ----------
Leasehold improvements $ 242,485 $ 242,485
Furniture and equipment 705,255 700,243
--------- ---------
947,740 942,728
Accumulated depreciation and amortization (828,402) (778,710)
--------- ---------
$ 119,338 $ 164,018
========= =========
Depreciation and amortization expense of $94,572 in 1998, $50,933 in 1997 and
$72,370 in 1996, is included in occupancy expense or furniture and equipment
expense, depending upon the nature of the asset. During 1998, the useful
life of computer related equipment was adjusted from five years to three
years. Also during 1998, the useful life of leasehold improvements for the
operations center was adjusted resulting in $24,000 of additional
amortization expense.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Premises and Equipment (continued)
Future minimum lease payments for noncancellable operating leases with
initial or remaining terms of one year or more as of December 31, 1998, are
as follows:
1999 $ 273,388
2000 241,850
2001 208,362
2002 208,362
2003 208,362
Later years 625,086
----------
Total minimum lease payments $1,765,410
==========
Subsequent to December 31, 1998, the Company entered into a lease for a Bank
branch location pending regulatory approval. The lease term is for ten years
and two months, commencing April 1, 1999. The future minimum lease payments
for the branch operating lease total $722,127.
Rental expense for operating leases amounted to $193,912, $198,324, and
$(17,074) for the years ended December 31, 1998, 1997 and 1996, respectively.
Note 7. Deposits
Deposit account balances at December 31, 1998 and 1997 are summarized as
follows:
1998 1997
----------- -----------
Noninterest bearing $14,264,071 $ 7,778,077
Interest-bearing demand 10,105,072 9,676,566
Savings deposits 470,890 400,752
Certificates of deposits 25,345,426 25,906,366
----------- -----------
$50,185,459 $43,761,761
=========== ===========
Certificates maturing in years ending December 31, as of December 31, 1998:
1999 $13,100,179
2000 9,883,469
2001 1,857,917
2002 131,538
2003 and thereafter 372,323
-----------
$25,345,426
===========
Overdrafts of $236,258 have been reclassed and are included in commercial
loans.
Note 8. Income Taxes
Provision (credit) for income taxes in the consolidated statements of income
are summarized as follows:
1998 1997 1996
------ ----- --------
Current $9,218 $ -- $(2,461)
Deferred -- -- --
------ ----- -------
$9,218 $ -- $(2,461)
====== ===== =======
The credit for income taxes for the years ended December 31, 1998, 1997 and
1996, is limited due to the Company's inability to utilize net operating
losses and alternative minimum tax credits.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes (continued)
There were no net deferred income tax assets (liabilities) as of December 31,
1998 and 1997, as illustrated in the following table:
1998 1997
------------ -----------
Deferred tax liabilities $( 4,958) $( 675,834)
Deferred tax assets 2,562,670 3,650,501
Deferred asset valuation allowance (2,557,712) (2,974,667)
----------- -----------
Net deferred tax assets (liabilities) $ -- $ --
=========== ===========
The principal sources of the deferred tax provisions were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Accelerated depreciation $ 11,792 $ 242 $ 182,978
Lease financing 208,387 159,291 285,950
Provision for loan losses 40,929 64,362 (185,201)
Valuation adjustment of real properties 3,060 (704,524) (851,512)
Deferred compensation plans (15,235) -- --
Supplemental retirement plans (9,568) -- 1,632
Acquisition, development and construction loans -- (176,269) --
Net operating loss carryforward (243,373) (683,824) (614,880)
Limitation of net operating losses
and alternative minimum tax credits -- 1,333,648 1,195,450
Other 4,008 7,074 (14,417)
--------- ---------- ----------
$ -- $ -- $ --
========= ========== ==========
</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>
1998 1997 1996
--------- -------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes $122,451 $16,299 $(910,070)
Applicable statutory income tax rate 34% 34% 34%
-------- ------- ---------
Computed "expected" federal tax expense $ 41,633 $ 5,542 $(309,424)
Adjustments to federal income tax resulting from:
Net operating loss carryforward $(32,415) $(5,542) 309,424
Other -- (2,461)
-------- ------- ---------
Provision for federal income tax $ 9,218 $ -- $ (2,461)
======== ======= =========
Other comprehensive income $ 14,581 $ 2,880 $ (5,618)
Applicable tax 4,958 979 (1,910)
Net operating loss carryforward (4,958) (979) 1,910
-------- ------- ---------
Other comprehensive income, net of tax $ 14,581 $ 2,880 $ 5,618
======== ======= =========
</TABLE>
At December 31, 1998 the Company has net operating loss carryforwards for
regular income tax purposes of $6,403,759 which will expire $735,013 in 2007,
$1,849,246 in 2008, $1,829,709 in 2010 and $1,989,791 in 2011. The Company
also has an alternative minimum tax credit carryforward of approximately
$311,000 which may be carried forward indefinitely.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Commitments and Contingencies
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, 1998 which would have a material adverse effect on the Company's
financial statements.
Year 2000
The Company has considered the impact of Year 2000 issues on our computer
systems and applications and have developed a remediation plan. Conversion
activities, including testing, are in process. The Company anticipates such
activities to be completed by June 1999. The Board of Directors and
management view Year 2000 as an issue which requires on-going assessment.
The Company will make assessments, modifications, and corrections to ensure
Year 2000 compliance.
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, 1998 and 1997, commitments to extend credit under
unused lines of credit amounted to approximately $2,243,703 and $3,028,633,
respectively.
The Company's outstanding standby letters of credit amounted to approximately
$618,474 and $505,474 as of December 31, 1998 and 1997, respectively. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in making loans to customers.
Note 10. Related Party Transactions
Directors and officers of the Company were customers of, and entered into
transactions with, the Company in the ordinary course of business. Loan
transactions with directors and officers were made on substantially the same
terms as those prevailing for comparable loans to other persons and did not
involve more than normal risk of collectibility or present other unfavorable
features. Loans to directors and officers, including family members or
businesses in which they have 5 percent or more beneficial ownership, are
summarized as follows:
Balance, December 31, 1996 $1,309,857
Additions 144,547
Reductions (322,081)
----------
Balance, December 31, 1997 $1,132,323
Additions 450,257
Reductions (281,272)
----------
Balance, December 31, 1998 $1,301,308
==========
The December 31, 1998 balance consists of both secured and unsecured loans.
None of the loans to related parties were classified as non-performing as of
December 31, 1998.
The Bank held related party deposits of approximately $1,934,000 and
$1,751,000 at December 31, 1998 and 1997, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Related Party Transactions (continued)
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 and as of June 5, 1998 a
director of UFBC, 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 and as of June 5, 1998 a director
of UFBC, 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.
During 1996, certain shareholders and directors holding $600,000 of the
Company's secured notes chose to convert their notes to redeemable preferred
stock (Note 16). The redeemable preferred stock and accrued dividends were
paid in May 1998 from proceeds of the Company's private offering (Offering).
Certain directors and shareholders then purchased 213,427 shares of common
stock in the Offering.
Note 11. Regulatory Requirements and Restrictions
On May 19, 1997, the Board of Directors of the Bank submitted a resolution to
the FDIC and to the SCC which required certain specific peformance and
reporting actions by the Bank. These included maintenance of a Tier 1
Leverage Capital ratio of 6.0% and a Total Risk Base Capital of 8.0%. It
also included a restriction on the payment of dividends requiring specific
consent of supervisory authority before dividends could be paid. Subsequent
to December 31, 1998, performance and reporting actions under this resolution
were no longer required by the FDIC and the SCC. The Bank is only required
to meet the general safety and soundness operating requirements as
promulgated by regulatory authorities and as further discussed in the
remainder of this footnote.
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. The Bank paid no dividends in 1998, 1997 and 1996.
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 $4,884,000 at December 31, 1998;
thus net assets of the Bank in excess of approximately $488,400 were
restricted from use by UFBC in the form of loans or advances. UFBC had no
such borrowings from the Bank in 1998 or 1997.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Regulatory Requirements and Restrictions (continued)
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,
1998 was $301,000.
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 4% 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. Failure to meet the minimum
regulatory capital requirements can initiate certain mandatory, and possible
additional discretionary actions by regulators, that if undertaken, could
have a direct material affect on the Company and the consolidated financial
statements. The following table presents the Company and the Bank's capital
position and related ratios as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C> <C>
Tier I Capital
Company $ 5,058,757 $ 2,637,629
The Business Bank 4,866,918 3,710,755
Total qualifying capital $ 5,531,388 $ 4,142,446
The Business Bank 5,328,278 4,161,249
Risk-weighted assets $36,789,046 $35,994,010
The Business Bank 36,656,953 35,824,784
Quarterly average assets
Company $54,522,051 $46,219,323
The Business Bank 53,072,771 45,533,315
Required
Risk-based capital ratios: 1998 1997 Minimum
----- ----------- -----------
Tier I capital (Tier I capital/risk-weighted assets)
Company 13.75% 7.33% 4.00%
The Business Bank 13.28% 10.36% 4.00%
Total capital (Total capital/risk-weighted assets)
Company 15.01% 11.51% 8.00%
The Business Bank 14.54% 11.62% 8.00%
Leverage ratio (Tier I capital/adjusted average assets)
Company 9.28% 5.71% 5.00%
The Business Bank 9.17% 8.15% *6.00%
</TABLE>
*Minimum required under Resolution of the Bank Board of Directors
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Note 12. Other Income
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Service charges on deposits $ 113,836 $ 98,840 $ 71,362
Fees on letters of credit 6,280 5,580 7,433
Gain (loss) on sale of real estate owned 104,657 27,993 (306,969)
Forfeited deposit on real estate owned -- -- 21,452
Gain on sale of loans 39,818 -- --
Other 41,892 15,906 30,294
---------- ---------- ----------
$ 306,483 $ 148,319 $ (176,428)
========== ========== ==========
Note 13. Interest on Deposits
1998 1997 1996
---------- ---------- ----------
Savings and NOW $ 56,526 $ 60,902 $ 66,738
Money market 312,769 231,789 163,612
Time:
Under $100,000 1,082,856 948,741 929,006
$100,000 and over 360,829 318,472 338,733
Less: capitalized interest -- (64,700) --
---------- ---------- ----------
$1,812,980 $1,495,204 $1,498,089
========== ========== ==========
</TABLE>
In 1997, interest was capitalized on certain property classified as real
estate owned (Note 5).
Note 14. 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 $1,600 in 1998,
$1,500 in 1997 and $1,200 in 1996. The Company made contributions to
the 401(K) Plan of $24,000 in 1998, $5,000 in 1997 and $0 in 1996.
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 69,880
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, 1998, 49,182 options to
purchase common stock had been granted. Certain employee grants vest
over a four year span.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Employee Benefit Programs (continued)
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 and 1998, five non-employee
directors received options to purchase 400 shares of Company Common Stock.
No options may be granted pursuant to the Directors Plan after July 1, 1998.
The following table summarizes the Company's stock option activity for the
years ended December 31, 1998 and December 31, 1997:
Average
Price Per
Share Options Exercisable
--------- -------- -----------
Outstanding at December 31, 1996 $ 7.50 45,082 28,233
Granted 7.50 4,000
Exercised -- --
Canceled or expired 7.50 (400)
------
Outstanding at December 31, 1997 $ 7.50 48,682 37,449
Granted 8.75 10,100
Exercised -- --
Canceled or expired 7.89 (4,400)
------
Outstanding at December 31, 1998 $ 7.71 54,382 48,765
====== ======
The Company has elected to account for stock-based compensation under the
intrinsic value guidelines of APB 25. 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. The Company's policy is to grant options at the current
market value. Accordingly, no compensation expense associated with the
options granted was recognized as of December 31, 1998, 1997 and 1996.
Note 15. Other Expense
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------- ----------
<S> <C> <C> <C>
Data processing $114,938 $ 95,584 $ 90,088
Professional fees 83,169 79,254 180,634
Stationery, printing and supplies 49,357 48,711 36,137
Insurance 56,429 89,980 144,232
Consulting and commissions -- 7,875 121,622
Telephone 16,463 13,300 15,956
Advertising 7,411 9,104 22,405
Travel, mileage, and lodging 7,557 10,166 11,909
Provision for losses on real estate owned, net 227,666 72,631 168,187
Real estate owned, holding expense 49,914 110,305 178,202
Other 121,787 110,847 97,993
-------- -------- ----------
$734,691 $647,757 $1,067,365
======== ======== ==========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 16. Redeemable Preferred Stock
In 1996, the Board of Directors 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, was also authorized. At December 31, 1996, 500 shares of Series A
Preferred Stock and warrants to purchase 20,000 shares of common stock
were outstanding. At December 31, 1997, 800 shares of Series A
Preferred Stock and warrants to purchase 32,000 shares of common stock
were outstanding. The Series A Preferred Stock bore a ten percent (10%)
cumulative annual dividend. The Series A Preferred Stock was
mandatorily redeemable, 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 Series A Preferred Stock was redeemed and accumulated dividends
were paid by the Company on May 31, 1998 with proceeds from the
Company's Private Offering (Note 17). On May 31, 1998, the Series A
Preferred Stock and accumulated dividends totaled $1,386,000. Warrants
to purchase 32,000 shares of common stock are outstanding, exercisable
at $7.50 per warrant and expire on September 30, 2001.
Note 17. Shareholder's Equity
The Company has authorized 5,000,000 shares of no par value preferred
stock. At December 31, 1998 and 1997, there were -0- and 800 shares of
preferred stock outstanding, respectively. The preferred stock
discussed in Note 16 was prohibited from being classified as
shareholders' equity by the Security and Exchange Commission (SEC) due
to its mandatory redemption requirement.
The Company has authorized 3,500,000 shares of $1 par value common
stock. At December 31, 1998 and 1997, there were 831,590 and 561,640
common shares outstanding, respectively. Common shares reserved by the
Company for future issuance (convertible notes, stock option plans and
stock warrants) total 125,580.
Private Offering
During 1998, the Company completed a Private Placement Offering
(Offering) to raise $3,500,000 of common equity for the purpose of
retiring the Preferred Stock and accrued dividends, and to fund new
growth opportunities for the Bank. The Company sold 269,950 shares of
its common stock at $8.75 per share. On May 31, 1998, $1,200,000 of the
$2,362,062 Offering proceeds were used to redeem the Company's
Preferred Stock - Series A and to pay the accrued dividends totaling
$186,000. UFBC invested $700,000 of the proceeds into the Bank to
support growth. UFBC also used $150,000 to purchase a participation in
a Bank asset and used $50,000 to pay off a short-term note. The
remainder of the proceeds has been held as working capital for UFBC.
Offering costs totaled approximately $5,000.
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 received cash in
lieu of any fractional shares resulting from the reverse split.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. 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>
Basic Earnings Per Share
- ------------------------
For the year ended December 31, 1998
Net Income $ 113,233
Less: Preferred Stock Dividends ( 50,000)
---------
Basic earnings (loss) per common share:
Income available to common stockholders $ 63,233 716,395 $ .09
========= ============ =========
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)
========= ============ =========
Diluted Earnings Per Share
- --------------------------
For the year ended December 31, 1998
Net Income available to common stockholders $ 63,233 716,395
Add: Contracts to issue common stock
Warrants - expire 12/31/99 14,000
Warrants - expire 9/30/01 32,000
Options - expire 12/31/05 - 6/30/08 52,357
------------
Weighted-average diluted shares outstanding 814,752
Diluted earnings per common share: $ 63,233 814,752 $ .08
========= ============ =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 18. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments (SFAS 107), requires disclosure of the
estimated fair values of financial instruments which is defined as the amount
at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. In cases where
quoted market prices are not available, fair values are based on estimates
using discounted cash flow analyses or other valuation techniques. Those
techniques involve subjective judgment and are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. The estimation methods for individual classifications of financial
instruments are more fully described below. Accordingly, the net realizable
values could be materially different from the estimates presented below.
Cash and short-term investments
The carrying value of cash and short-term investments is a reasonable
estimate of fair value.
Investment Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans
For certain homogeneous categories of loans, such as some residential
mortgages and other consumer loans, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans
is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
Deposits
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at December 31, 1998 and 1997. The
fair value of fixed maturity certificates of deposit is estimated using the
rates currently offered for deposits of similar remaining maturities.
1998 1997
----------------------- ------------------------
Book Fair Book Fair
Value Value Value Value
----------- ----------- ----------- -----------
Financial Assets:
Cash and short-term
investments $10,170,000 $10,170,000 $ 5,041,000 $ 5,041,000
Investment securities 6,894,000 6,905,000 2,784,000 2,790,000
Net loans 36,215,000 37,923,000 37,064,000 38,269,000
Financial Liabilities:
Deposits 50,186,000 50,491,000 43,762,000 43,904,000
SFAS 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amount presented should not be interpreted as representing the
underlying value of the Company.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Company Financial Statements
Condensed financial statements of the parent company, United Financial
Banking Companies, Inc. as of December 31, 1998 and 1997, and for the years
ended December 31, 1998, 1997 and 1996, follow:
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
---------- ----------
Cash on deposit with subsidiary bank $ 38,134 $ 178,842
Investment in The Business Bank 4,866,917 3,710,755
Investments in other subsidiaries 152,570 40,517
Loans and leases receivable, net 44,709 92,207
Other assets 3,251 45,076
---------- ----------
Total assets $5,105,581 $4,067,397
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 46,824 $ 93,768
---------- ----------
Total liabilities 46,824 93,768
---------- ----------
REDEEMABLE PREFERRED STOCK
Series A -- 1,336,000
STOCKHOLDERS' EQUITY 5,058,757 2,637,629
---------- ----------
Total liabilities and stockholders' equity $5,105,581 $4,067,397
========== ==========
STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Interest $ 8,472 $ 39,611 $ 35,337
Other 48 (42,575) (73,051)
--------- --------- ---------
Total income 8,520 (2,964) (37,714)
Expenses 454,285 247,524 946,093
--------- --------- ---------
Income (loss) before income taxes (445,765) (250,488) (983,807)
Federal income tax expense (benefit) 9,218 -- (2,461)
--------- --------- ---------
Income (loss) (454,983) (250,488) (981,346)
Undistributed net gain (loss) of subsidiaries 568,216 266,787 73,737
--------- --------- ---------
Net income (loss) $ 113,233 $ 16,299 $(907,609)
========= ========= =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Company Financial Statements (continued)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 113,233 $ 16,299 $ (907,609)
Adjustments to reconcile net income
(loss) to net cash used in operating activities:
Provision for loan losses 180,000 91,100 498,800
Provision for losses on real estate owned -- -- 28,000
(Gain) loss on real estate owned -- -- 75,000
Undistributed net (gain) loss of:
The Business Bank (456,163) (214,084) (154,460)
Other Subsidiaries (112,053) (52,703) 80,723
(Increase) decrease in other assets 41,826 (202) (1,609)
Increase (decrease) in other liabilities (46,944) 53,526 11,730
----------- --------- ----------
Net cash provided by (used in)
operating activities (280,101) (106,064) (369,425)
----------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on loans 7,498 397,437 50,493
Loans and leases purchased from subsidiary (140,000) (155,168) (533,162)
Real estate owned purchased from subsidiary -- -- (103,000)
(Investment in) distributions from
subsidiaries (700,000) (540,195) 1,349,491
----------- --------- ----------
Net cash provided by (used in)
investing activities (832,502) (297,926) 763,822
----------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings -- -- (600,000)
Proceeds from issuance of redeemable preferred stock 450,000 150,000
Proceeds from issuance of common stock 2,357,895 -- --
Redemption of preferred stock & accrued dividend (1,386,000) -- --
----------- --------- ----------
Net cash provided by (used in)
financing activities 971,895 450,000 (450,000)
----------- --------- ----------
Net increase (decrease) in cash and cash equivalents (140,708) 46,010 (55,603)
Cash and cash equivalents at beginning of year 178,842 132,832 188,435
----------- --------- ----------
Cash and cash equivalents at end of year $ 38,134 $ 178,842 $ 132,832
=========== ========= ==========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 19. Parent Company Financial Statements (continued)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION 1998 1997 1996
----- ----- -------
Cash paid during the years for:
Interest on borrowings $ 808 $ -- $69,811
----- ===== =======
Income taxes $ -- $ -- $ --
===== ===== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
In 1997, $117,250 was accrued for dividends payable on the preferred stock -
series A.
In 1996, $600,000 of short-term borrowings were converted into 400 shares of
redeemable preferred stock.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE 1 Selected Consolidated Financial Data
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- ---------------------------- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Results of operations:
Total interst income $ 4,055,420 $ 3,433,867 $ 2,828,278 $ 2,191,867 $ 1,606,565
Total interest expense 1,813,788 1,495,204 1,562,851 1,343,596 992,089
------------------ ------------ ------------ ------------ ------------
Net Interest income 2,241,632 1,938,663 1,265,427 848,271 614,476
Provision for
loan/lease losses 323,500 249,300 694,203 (295) (238,727)
------------------ ------------ ------------ ------------ ------------
Net interest income after
provision for
loan/lease losses 1,918,132 1,689,363 571,224 848,566 853,203
Other income 400,188 224,716 651,882 231,796 579,788
Other expenses 2,195,869 1,897,780 2,133,176 2,403,850 3,661,756
------------------ ------------ ------------ ------------ ------------
Income before
income taxes and
extraordinary gain 122,451 16,299 (910,070) (1,323,488) (2,228,765)
Income tax
expense(benefit) 9,218 - (2,461) 2,598 10,640
------------------ ------------ ------------ ------------ ------------
Net income(loss) before
extraordinary gain 113,233 16,299 (907,609) (1,326,086) (2,239,405)
Extraordinary gain, net of
state income tax effect
of $20,158 - - - - 3,357,375
------------------ ------------ ------------ ------------ ------------
Net income(loss) $ 113,233 $ 16,299 $ (907,609) $ (1,326,086) $ 1,117,970
================== ============ ============ ============ ============
Earnings per share:
Net income 113,233 16,299 (907,609) (1,326,086) (2,239,405)
Less: preferred stock dividends (50,000) (117,250) (18,750) - -
------------------ ------------ ------------ ------------ ------------
Income available to common
stockholders before
extraordinary gain: 63,233 (100,951) (926,359) (1,326,086) (2,239,405)
Basic earnings
(loss) per common share: $ 0.09 $ (0.18) $ (1.65) $ (2.40) $ (11.02)
Diluted earnings
(loss) per common share: $ 0.08 $ - * $ (1.65) $ (2.40) $ -
Add: extraordinary gain - - - - 3,357,375
------------------ ------------ ------------ ------------ ------------
Income available to
common stockholders 63,233 (100,951) (926,359) (1,326,086) 1,117,970
Basic earnings
(loss) per common share: $ 0.09 $ (0.18) $ (1.65) $ (2.40) $ 5.50
Diluted earnings
(loss) per common share: $ 0.08 $ - * $ (1.65) $ (2.40) $ 5.30
Average weighted
shares outstanding:
Basic 716,395 561,640 561,640 551,550 203,305
Diluted 814,752 585,873 561,640 551,550 211,080
Period-ending balances:
Total loans $ 36,962,213 $ 38,084,861 $ 30,618,335 $ 23,874,982 $ 14,716,184
Total assets 55,573,072 48,074,006 41,601,689 43,065,970 32,945,072
Total deposits 50,185,459 43,761,761 37,734,574 37,475,235 26,036,309
Shareholders' equity 5,075,708 2,639,999 2,738,070 3,670,047 4,866,826
Selected ratios:
Return on average
total assets 0.22% 0.04% (2.07)% (3.45)% 3.15%
Return on average
earning assets 0.23% 0.04% (2.68)% (5.23)% 5.61%
Return on average
shareholder's equity 2.90% 0.61% (27.51)% (29.73)% 94.59%
Average shareholders'
equity to average
total assets 7.50% 5.87% 7.54% 11.60% 3.33%
</TABLE>
* anti-dilutive
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
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). UFBC also wholly owns Business Venture Capital,
Inc. (BVCI) which holds certain real estate for sale. Collectively, UFBC, the
Bank, and BVCI 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 and other sections of this
report 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, Year 2000 compliancy 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 $113,233 or $.09 per share for the year
ended December 31, 1998. Earnings per share for the year ended December 31, 1998
is impacted by paid dividends of $50,000 for the Company's Series A preferred
stock (Note 16 to the consolidated financial statements). For the year ended
December 31, 1997, the Company reported net income $16,299 and net loss of $.18
per share. Earnings per share for the year ended December 31, 1997 was impacted
by accrued dividends of $117,250 for the Company's Series A preferred stock
(Note 17 to the consolidated financial statements). The Company reported a net
loss of $907,609, or $1.65 per share for the year ended December 31, 1996.
Income for the year ended December 31, 1998 is primarily attributable to income
from the Bank subsidiary. Bank operating income improved during 1998 due to
increased earning assets.
Growth was the key influence on income for 1998. Total assets increased
$7,499,000 or 15.6% during 1998. Average earning assets increased $7,637,000 or
18.8% during 1998 despite significant loan payoffs (Consolidated Average
Balances, Table 2). Contributing to the volume of earning assets, non-earning
assets decreased $586,000 or 20.4% from $2,879,000 at December 31, 1997 to
$2,293,000 at December 31, 1998 as shown in the Consolidated Balance Sheets.
Non-earning assets were 4.1% of total assets at December 31, 1998 compared to
6.0% of total assets at December 31, 1997.
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.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
<TABLE>
<CAPTION>
TABLE 2
CONSOLIDATED AVERAGE BALANCES/NET INTEREST ANALYSIS/
YIELDS AND RATES
- -------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans/Leases:
Commercial $ 25,163,714 $ 2,462,453 9.79% $ 23,856,037 $ 2,269,847 9.51% $19,112,191 $1,860,952 9.74%
Real estate construction 2,756,519 264,084 9.58% 1,562,737 150,606 9.64% 2,031,003 175,920 8.66%
Real estate mortgage 6,950,303 527,037 7.58% 5,148,096 391,356 7.60% 2,762,087 215,294 7.79%
Installment 1,641,652 151,500 9.23% 1,974,646 179,571 9.09% 2,497,572 210,729 8.44%
Leases 273,446 - - 364,385 - - 807,442 - 0.00%
------------- ------------ ------------- ------------ ------------ ---------
Total loans/leases 36,785,634 3,405,074 9.26% 32,905,901 2,991,380 9.09% 27,210,295 2,462,895 9.05%
------------- ------------ ------------- ------------ ------------ ---------
Interest-bearing deposits 88,056 5,491 6.24% 151,613 8,914 5.88% 377,217 23,351 6.19%
Federal funds sold 6,229,522 339,393 5.45% 4,516,220 246,707 5.46% 4,203,072 224,807 5.35%
Investment securities 5,264,914 305,462 5.80% 3,157,053 186,866 5.92% 1,999,656 117,225 5.86%
------------- ------------ ------------- ------------ ------------ ---------
Total earning assets 48,368,126 4,055,420 8.38% 40,730,787 3,433,867 8.43% 33,790,240 2,828,278 8.37%
============ ============ =========
Noninterest-earning assets
Cash and due from banks 1,768,063 1,666,506 1,768,340
Other assets 2,682,471 3,700,273 8,678,803
Allowance for loan losses/lease (763,834) (619,807) (495,103)
------------- ------------- ------------
Total assets $ 52,054,826 $ 45,477,759 $43,742,280
============= ============= ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 2,360,360 56,526 2.39% 2,598,967 60,902 2.34% 2,717,904 66,738 2.46%
Money market accounts 8,817,006 317,462 3.60% 6,918,458 231,789 3.35% 5,106,331 163,612 3.20%
Time:
Under $100,000 19,638,531 1,078,163 5.49% 17,579,511 884,041 5.40%(1)16,569,137 929,006 5.61%
$100,000 and over 6,636,143 360,829 5.44% 5,976,740 318,472 6.33% 6,237,825 338,733 5.43%
------------- ------------ ------------- ------------ ------------ ----------
Total interest-bearing
deposits 37,452,040 1,812,980 4.84% 33,073,676 1,495,204 4.72%(1)30,631,197 1,498,089 4.89%
Short-term borrowings 40,972 808 1.97% - - 0.00% 1,624,107 64,762 12.82%(1)
------------- ------------ ------------- ------------ ----------- ----------
Total interest-bearing
liabilities 37,493,012 1,813,788 4.84% 33,073,676 1,495,204 4.72%(1)32,255,304 $1,562,851 5.29%(1)
============ ============ ==========
Non interest-bearing liabilities:
Demand deposits 9,843,027 8,104,143 7,543,201
Other liabilities 361,048 351,408 470,137
Redeemable preferred stock 453,667 1,281,000 174,519
Stockholders' equity 3,904,072 2,667,532 3,299,119
------------- ------------- ------------
Total liabilities and
stockholders' equity $ 52,054,826 $ 45,477,759 $43,742,280
============= ============= ============
Net interest income $ 2,241,632 $ 1,938,663 $1,265,427
============ ============ ==========
Net interest margin (2) 4.63% 4.76% 3.74%
==== ===== ======
Net interest spread (3) 3.54% 3.71% 3.08%
==== ===== ======
Fees included in loan income $ 103,364 $ 92,770 $119,781
============ ============ ==========
Taxable equivalent adjustment $ - $ - $ -
============ ============ ==========
</TABLE>
Average balances for the years presented are calculated on a monthly
basis. Nonaccruing loans are included in the average loan balance.
(1) 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 CODs under $100,000 for the year ended December 31, 1997, and
$144,000 on short-term debt for the year December 31, 1996.
(2) Net interest income divided by total earning assets.
(3) Average rate earned on total earning assets less average rate paid for
interest-bearing liabilities.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
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 $303,000 or 15.6% from $1,939,000 at December 31, 1997 to
$2,242,000 at December 31, 1998. The increase is attributable to the increased
average volume of loans and other earning assets in the Bank. As shown in Table
2, Consolidated Average Balances, the average total loan/lease volume increased
$3,880,000 or 11.8% from $32,906,000 at December 31, 1997 to $36,786,000 at
December 31, 1998. Average earning assets other than loans increased $3,758,000
or 48% from $7,825,000 at December 31, 1997 to $11,583,000 at December 31, 1998.
Due to increased average volumes, interest and fees on loans rose $414,000
or 21.5%, interest from investments grew $119,000 or 63.5% and interest on
federal funds increased $93,000 or 37.6%. All of these items favorably impacted
net interest income and are illustrated in Tables 2 and 3. As needed,
management changes the Company's investment mix, such as loans, securities or
federal funds sold, in an effort to safely maximize income and to maintain
adequate liquidity.
Interest expense on total interest-bearing deposits increased $318,000 or
21.2% at December 31, 1998 when compared to the year ended December 31, 1997.
Both rate and volume account for the increase as shown in Table 3, Analysis of
the Changes in the Components of Net Interest Income. Total average interest-
bearing deposits increased $4,378,000 or 13.2% 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.
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. During
1998, rate was a key factor affecting net interest income and the net interest
margin compared to 1997 which was primarily affected by volume as shown in
Tables 2 and 3. At December 31, 1998, the net interest margin of 4.63%
decreased thirteen basis points compared to the net interest margin of 4.76% at
December 31, 1997 which had improved one hundred two basis points from 3.74% at
December 31, 1996.
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>
UNITED FINANCIAL BANKING COMPANIES, INC.
- --------------------------------------------------------------------------------
TABLE 3
ANALYSIS OF THE CHANGES IN THE COMPONENTS OF NET INTEREST INCOME (TAX
EQUIVALENT BASIS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998 Compared to 1997 1997 Compared to 1996
--------------------------------------------- -----------------------------------------------
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 $ 192,606 $ 68,184 $ 124,422 $ 408,895 $ (53,013) $ 461,908
Real estate - construction 113,478 (1,571) 115,049 (25,315) 15,245 (40,560)
Real estate - mortgage 135,681 (1,322) 137,003 176,062 (9,918) 185,980
Installment (28,072) 2,210 (30,282) (31,157) 12,964 (44,121)
------------ ------------ ------------- ------------ ------------- ------------
Total loans/leases 413,693 67,501 346,192 528,485 (34,722) 563,207
Interest-bearing deposits (3,423) 314 (3,737) (14,436) (471) (13,965)
Federal funds sold 92,686 51,787 40,899 (37,941) (54,690) 16,749
Investment securities 118,596 (63,263) 181,859 129,482 61,632 67,850
------------ ------------ ------------- ------------ ------------- ------------
Total interest income 621,552 56,339 565,213 605,590 (28,250) 633,840
------------ ------------ ------------- ------------ ------------- ------------
INTEREST EXPENSE:
Savings and NOW accounts (4,376) 1,215 (5,591) (5,836) (2,916) (2,920)
Money markets accounts 85,673 22,066 63,607 68,177 10,115 58,062
Time:
Under $100,000 194,122 90,578 103,544 (44,965) (101,615) 56,650
$100,000 and over 42,357 7,221 35,136 (20,261) (6,083) (14,178)
Short-term borrowings 808 808 - (208,762) - (208,762)
------------ ------------ ------------- ------------ ------------- ------------
Total interest expense 318,584 121,888 196,696 (211,647) (100,499) (111,148)
------------ ------------ ------------- ------------ ------------- ------------
Net interest income $ 302,968 $ (65,549) $ 368,517 $ 817,237 $ 72,249 $ 744,988
============ ============ ============= ============ ============= ============
</TABLE>
NONINTEREST INCOME
Total noninterest income increased $175,000 or 78.1% at year end 1998
compared to year end 1997. Total noninterest income declined 65.5% or $427,000
at year end 1997 compared to year end 1996. The 1998 rise is principally due to
other income which increased $158,000 or 106.6% during 1998. 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.
Net gains of $104,657 on the sales of REO in the BVCI subsidiary primarily
accounts for the increase in other income during 1998. Gains on the sales of
loans and one time recognition of deferred fees also contributed to the 1998
improvement. 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.
Detail of other income is shown in Note 12 to the consolidated financial
statements.
NONINTEREST EXPENSE
Noninterest expense increased $298,000 or 15.7% during the year ending 1998
as compared to 1997 and decreased 11.0% or $235,000 during the year ended 1997
as compared to 1996 as shown in Table 4 Noninterest Expense. Salaries and
benefits and the provision for REO are the primary reasons for the 1998
increase. Professional fees, insurance costs, the provision for REO and REO
holding expense account for the decline in noninterest expense when comparing
years ended December 31, 1997 and 1996.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES
Salaries and employee benefits rose $168,000 or 18.8% at December 31, 1998
as compared to December 31, 1997. During 1998, the Bank required additional
staffing to support growth. For the same comparable period, the provision for
REO increased $155,000 due to write-downs.
Expense for professional fees declined 56.1% when comparing the years
ending December 31, 1997 and 1996. The decline is principally attributable to
reduced litigation expense in UFBC during 1996. In 1996, UFBC, as plaintiff,
incurred substantial litigation expense associated with a liquidated subsidiary.
Insurance expense decreased 37.3% at December 31, 1998 when compared to
December 31, 1997 and decreased 37.6% at December 31, 1997 when compared to
December 31, 1996. The decreases during 1998 and 1997 is primarily
attributable to a reduction in the Bank's FDIC insurance assessment 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.
Occupancy expense rose 9.1% for the year ending December 31, 1998 compared
to December 31, 1997 and rose 122.3% for the comparable periods of 1997 and
1996. The 1998 rise is due to repair costs at the Bank building and the sublet
operations location. The 1997 increase is due to rental expense incurred on the
Bank building which is discussed further in Notes 6 and 10 to the consolidated
financial statements.
REO holding expense decreased 54.8% and 38.1% for the years ending December
31, 1998 compared to December 31, 1997 and for the comparable periods of 1997
and 1996, respectively. The Company benefitted from the liquidation and sale of
several REO properties during 1998 and 1997.
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.
TABLE 4 NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Percentage
Increase (decrease)
1998 1997 1996 1998 / 97 1997 / 96
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits 1,061,659 893,622 886,963 18.80 0.75
Occupancy, net 322,956 296,097 133,151 9.07 122.38
Furniture and equipment 76,463 60,304 45,697 26.80 31.96
Professional fees 83,169 79,254 180,634 4.94 (56.12)
Insurance 56,429 89,980 144,232 (37.29) (37.61)
Provision for real estate owned 227,666 72,631 168,187 213.46 (56.82)
Real estate owned holding expense 49,914 110,305 178,202 (54.75) (38.10)
Other expenses 317,513 295,587 396,110 7.42 (25.38)
------------ ----------- -----------
Total 2,195,769 1,897,780 2,133,176 15.70 (11.04)
============ =========== ===========
Noninterest expense as a percentage of :
Average assets 4.22 % 4.17 % 4.88 %
============ =========== ===========
Average earning assets 4.54 % 4.66 % 6.31 %
============ =========== ===========
Gross income 49.28 % 51.87 % 61.30 %
============ =========== ===========
</TABLE>
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
BALANCE SHEET ANALYSIS
At December 31, 1998, total assets increased $7,499,000 or 15.6% from
December 31, 1997. Average total assets were $52,055,000 at December 31, 1998
compared to $45,478,000 at December 31, 1997 as shown in Table 2, Consolidated
Average Balances. Growth was spurred by an increased deposit volume during 1998
which was invested in federal funds sold, securities and loans. Deposits
increased $6,424,000 or 14.7% during 1998. Management believes that growth 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 Company authorized and sold 269,950 shares of common stock through a
Private Offering during 1998. The proceeds were used to redeem the Company's
preferred stock. Further details regarding the Private Offering and the
reverse split are provided in Notes 16 and 17 to the consolidated financial
statements. Both the Company and the Bank remained above regulatory capital
requirements for the years ending December 31, 1998 and 1997. The Company's
common stockholders' equity increased 92.3% at December 31, 1998 as compared to
December 31, 1997.
LOAN PORTFOLIO
Loans and leases are the largest component of total assets. Loans as a
percentage of total assets were 66.5% at the year ending December 31, 1998
compared to 79.2% at December 31, 1997. Though the average volume of loans and
leases increased during 1998 when compared to 1997, the actual balances declined
$1,123,000 for the comparable period. The decrease is attributable to an
inordinate number of loan payoffs, primarily due to primary refinancings to take
advantage of lower short and long term interest rates.
All of the leases within the Leverage Lease subsidiary, UFBC, Inc., expired
in 1998. The value of these assets were determined each year by an independent
appraisal obtained through a third party. At maturity, both leases were
converted to sales as the lessees elected to exercise their purchase options.
As a result of the final disposition of these assets, the Bank charged $23,145
to its allowance for loan/lease losses and the Company charged $180,000 to its
allowance for loan/lease losses.
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.
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
66.9% and 71.0% of total loans and leases at the end of 1998 and 1997,
respectively.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
<TABLE>
<CAPTION>
TABLE 5 - LOAN PORTFOLIO
- -------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 24,721,939 $ 27,039,144 $ 21,868,684 $ 17,535,738 $ 10,991,625
Real estate construction 3,499,723 2,252,943 1,527,521 1,979,587 1,500,816
Real estate mortgage 7,076,032 6,743,695 4,418,814 1,568,745 477,286
Installment 1,664,519 1,744,437 2,438,674 1,946,570 902,115
Leveraged leases - 304,642 364,642 844,342 844,342
------------ ------------ ------------- ------------ ------------
Total loans $ 36,962,213 $ 38,084,861 $ 30,618,335 $ 23,874,982 $ 14,716,184
============ ============ ============= ============ ============
</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 $ 10,073,993 $ 11,153,035 $ 3,494,911 $ 24,721,939
Real estate mortgage 1,043,007 1,429,607 4,603,418 7,076,032
------------ ------------- ------------ ------------
$ 11,117,000 $ 12,582,642 $ 8,098,329 $ 31,797,971
============ ============= ============ ============
</TABLE>
At December 31, 1998, the loan portfolio had approximately $4,787,000 in
loans to customers in land, residential, or commercial real estate development,
compared to $$3,740,000 at December 31, 1997. The increase 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, 1998.
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 increased $32,000 or 4.5% during 1998.
The ratio of allowance for loan/lease losses to total loans and leases was 2.0%
and 1.9% at the years ending December 31, 1998 and 1997, respectively. During
1998, the Company charged $323,500 to provision expense to replenish the
allowance for loan/lease losses. UFBC charged $180,000 to expense in order to
charge off its participation in the leveraged lease. The Bank charged $140,300
to provision expense during 1998 while BVCI charged $3,200 to provision expense.
During 1997, the Company charged $249,300 to provision expense to replenish the
allowance. UFBC replenished the allowance for loan/lease losses $91,000. Of
this amount, $60,000 was associated with the leveraged lease asset. The Bank
charged $158,200 to provision expense during 1997 to replenish its allowance for
loan/lease losses.
A five-year history of the activity in the allowance for loan/lease losses
follows:
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 6 ALLOWANCE FOR LOAN/LEASE LOSSES
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Period Ending December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 715,399 $ 584,106 $ 462,846 $ 700,666 $ 712,548
============ =========== =========== ============ ===========
Charge-offs:
Installment (5,787) (4,165) - (31,891) (3,670)
Commercial (88,486) (38,445) (114,440) (237,542) (394,501)
Mortgage (4,743) (14,643) - - -
Construction - (22,800) - - -
Leveraged leases (203,201) (60,000) (479,700) - -
Recoveries:
Installment 392 2,508 3,011 6,522 8,392
Commercial 10,300 16,538 18,186 25,386 616,624
Construction - 3,000 - - -
Leveraged leases - - - - -
============ =========== =========== ============ ===========
Net charge-offs (291,525) (118,007) (572,943) (237,525) 226,845
============ =========== =========== ============ ===========
Provision charged to operations 323,500 249,300 694,203 (295) (238,727)
============ =========== =========== ============ ===========
Balance at end of period $ 747,374 $ 715,399 $ 584,106 $ 462,846 $ 700,666
============ =========== =========== ============ ===========
Average total loans $ 36,785,634 $ 32,905,901 $ 27,210,295 $ 19,143,433 $ 16,085,054
============ =========== =========== ============ ===========
Ratio of net charge-offs
to average total loans (0.79)% (0.35)% (2.10)% (1.24)% 1.41%
============ =========== =========== ============ ===========
</TABLE>
The allowance for loan losses is a general allowance applicable to all loan
categories. The following allocation of the allowance for loan/lease losses 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, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 480,000 $ 466,000 $ 385,000 $ 379,000 $ 550,000
Real estate construction 52,000 34,000 23,000 29,000 35,000
Real estate mortgage 165,000 160,000 121,000 23,000 12,000
Installment 32,000 34,000 37,000 29,000 40,000
Leases - 4,600 5,600 - 5,000
Unallocated 18,374 16,799 12,506 2,846 58,666
============ =========== =========== ============ ===========
$ 747,374 $ 715,399 $ 584,106 $ 462,846 $ 700,666
============ =========== =========== ============ ===========
</TABLE>
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
NONPERFORMING ASSETS
Nonperforming assets are assets on which income recognition has been
discontinued. Nonperforming assets include nonaccrual loans, restructured loans
and foreclosed real estate.
Nonaccruing loans at year end 1998 totaled $60,378. This compares to a
balance of $102,012 in nonaccrual loans at the end of 1997. The decline in
nonaccruing loans at December 31, 1998 when compared to the year ended December
31, 1997 is due principally to better loan quality, collections and charge-offs.
At December 31, 1998 and 1997, the Company had no restructured loans.
Foreclosed real estate is discussed in Real Estate Owned.
The following is a summary of nonperforming assets:
===============================================================================
TABLE 7 NONPERFORMING ASSETS
===============================================================================
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Period ending December 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccruing loans (90 days or more past due) $ 60,378 $ 102,012 $ 328,355
Real estate owned 1,799,398 2,368,104 3,115,080
Total nonperforming assets $ 1,859,776 $ 2,470,116 $ 3,443,435
================= ================= =================
Nonaccruing loans as a % of total loans 0.16% 0.27% 1.06%
Reserve for loans losses to nonaccruing loans 1237.83% 701.29% 177.89%
Nonperforming assets to total loans 5.03% 6.49% 11.25%
</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, 1998 and 1997, REO comprised 3.2% and 4.9%, respectively,
of the Company's total assets. The book value of the Company's REO was
$1,799,000 at year end 1998 compared to $2,368,000 at year end 1997, and was
comprised of two properties. Of the Company's total REO, $1,730,000 is held in
the Bank, representing 3.1% of the Bank's total assets. REO is comprised of a
property located in Culpeper, Virginia valued at $1,730,000 and another located
in Warrenton, Virginia valued at $69,000. The 24.0% or $569,000 decline in the
value of REO held by the Company is attributable to net write-downs of $228,000,
property sales of $1,137,000, investment of $571,000, net gains on sales of
$105,000 and foreclosures totaling $120,000.
Subsequent to December 31, 1998, the Company sold the property located in
Warrenton, Virginia. The Bank continues to sell lots and residential homes in
Culpeper, Virginia. Frequently, the Bank provides first trust financing for the
sales.
An aging of real estate owned and a breakdown by project type as of
December 31, 1998 and 1997 are presented in Table 8.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
============================================================================
TABLE 8 REAL ESTATE OWNED
============================================================================
Aging of Foreclosed Properties
Period ending December 31, 1998 1997
- ----------------------------------------------------------------------------
From 1 to 6 months $ 120,000 $ -
From 7 to 12 months - 157,103
From 13 to 24 months - -
Over 24 months 1,679,398 2,211,001
------------ ------------
$ 1,799,398 $ 2,368,104
============ ============
Foreclosed Properties by Project Type
- ---------------------------------------------------------------------------
Period ending December 31, 1998 1997
- ---------------------------------------------------------------------------
Undeveloped land $ 437,198 $ 1,995,054
1 - 4 family dwelling 278,700 126,908
Developed land 1,083,500 246,142
------------ ------------
$ 1,799,398 $ 2,368,104
============ ============
DEPOSITS
As shown in Table 10, deposits increased $6,424,000 or 14.7% at December 31,
1998 when compared to December 31, 1997. The increase shown in Table 10 and on
the consolidated balance sheets at December 31, 1998 is due in part to
management's plan for growth. Total average deposits, as shown in Table 9,
increased $6,117,000 for the year ended December 31, 1998 when compared to the
year ended December 31, 1997. 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.
Additionally, management seeks to maintain an even balance between time deposits
and other deposit accounts. As shown in Table 10, time deposits represented
50.50% of total deposits while other deposit accounts represented 49.50%. Total
average core deposits increased $3,277,000 or 9.3% from $35,201,000 at December
31, 1997 to $38,478,000 at December 31, 1998. When comparing average core
deposit growth from December 31, 1997 to December 31,1998, the change was as
follows: demand deposits increased $1,739,000 or 21.5%, money market deposits
decreased $282,000 or 4.1%, time deposits under $100,000 grew 2,059,000 or 11.7%
and savings and NOW deposits decreased $239,000 or 9.1%.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
TABLE 9 DEPOSITS BALANCE AND RATE
- -----------------------------------------------------------------------------------------------------------------------------------
Rates paid on each classification of deposits are shown below:
Year Ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand $ 9,843,027 - % $ 8,104,143 - % $ 7,543,201 - % $ 5,671,220 - % $ 4,066,104 - %
Savings and NOW 2,360,360 2.39 2,598,967 2.43 2,717,904 2.46 2,075,394 2.23 1,990,225 2.24
accounts
Money market 8,817,006 3.60 6,918,458 3.35 5,106,331 3.20 4,318,259 3.60 1,912,205 3.05
accounts
Time:
Under $100,000 19,638,531 5.49 * 17,579,511 5.40 16,569,137 5.61 14,195,288 5.71 14,417,108 4.52
$100,000 and over 6,636,143 5.44 5,976,740 5.33 6,237,825 5.43 5,979,498 5.49 * 6,502,668 4.48 *
----------- ----------- ----------- ----------- -----------
Total $47,295,067 3.84 % $41,177,819 3.63 % $38,174,398 3.93 % $32,239,659 4.16% $28,888,310 3.62 %
=========== =========== =========== =========== ===========
</TABLE>
* Rates for 1998, 1997, 1996, 1995, and 1994 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, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
- -----------------------------------------------------------------------------------------------------------------------------------
Demand $ 14,264,071 28.43% $ 7,778,077 17.77% $ 7,897,677 20.93% $ 7,033,571 18.77% $ 3,666,226 14.10%
Savings and NOW accounts 3,051,446 6.08 2,508,666 5.73 2,779,982 7.37 2,966,721 7.92 1,596,898 6.10
Money market accounts 7,524,516 14.99 7,568,652 17.30 3,970,348 10.52 5,917,979 15.79 2,305,139 8.90
Time:
Under $100,000 18,048,129 35.96 19,478,244 44.51 16,763,355 44.42 15,139,336 40.40 12,499,708 48.00
$100,000 and over 7,297,297 14.54 6,428,122 14.69 6,323,212 16.76 6,417,628 17.12 5,968,338 22.90
------------ ------ ------------ ------ ----------- ------ ----------- ------ ----------- -------
Total $ 50,185,459 100.00% $ 43,761,761 100.00% $37,734,574 100.00% $37,475,235 100.00% $26,036,309 100.00%
============ ====== ============ ====== =========== ====== =========== ====== =========== =====
</TABLE>
The maturity schedule that follows categorizes time deposits of $100,000 or more
as of December 31, 1998.
- ---------------------------------------------------------------------------
Maturing Balance Percent
- ---------------------------------------------------------------------------
Three months or less $ 1,857,358 25.45%
Over three months to six months 992,466 13.60
Over six months to twelve months 2,781,293 38.11
Over twelve months 1,666,180 22.83
------------- ------
Total $ 7,297,297 100.00%
============= ======
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>
UNITED FINANCIAL BANKING COMPANIES, INC.
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 40.7% of average total assets for 1998 and 20.9% for 1997.
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 positive gap position indicates that more assets than liabilities
will reprice, having a negative earnings impact in a falling rate environment.
<PAGE>
<TABLE>
<CAPTION>
TABLE 11 - INTEREST SENSITIVITY ANALYSIS
========================================
CURRENT 0-3 4-6 7-12
BALANCES MONTHS RATE MONTHS RATE MONTHS
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
FEDERAL FUNDS SOLD 7,903,493 7,903,493 4.81%
AVAILABLE-FOR-SALE INVESTMENTS 5,130,213 416,817 5.88% - - 1,835,261
HELD-TO-MATURITY INVESTMENTS 1,763,891 604,494 5.96% 249,916 6.38% 659,481
LOANS, NET - FIXED 22,189,808 3,774,410 9.31% 1,544,656 9.03% 2,096,833
LOANS, NET - VARIABLE 14,724,587 14,688,449 8.82% 422 7.95% 877
--------------------------------------------------------------------------
TOTAL EARNING ASSETS 51,711,992 27,387,663 7.62% 1,794,994 8.66% 4,592,452
LOAN LOSS RESERVE (747,374)
NON-ACCRUAL LOANS 60,378
CASH AND DUE FROM BANKS 2,267,417
REAL ESTATE OWNED 1,799,398
FIXED ASSETS 119,338
OTHER NONINTEREST-BEARING ASSETS 361,923
----------------------------------------------------------------------------
TOTAL NONEARNING ASSETS 3,861,080 - - -
---------------------------------------------------------------------------
TOTAL ASSETS 55,573,072 27,387,663 1,794,994 4,592,452
===========================================================================
LIABILITIES
NOW ACCOUNTS 2,580,556 2,580,556 2.27%
MONEY MARKET ACCOUNTS 7,524,516 7,524,516 3.16%
SAVINGS ACCOUNTS 470,890
CERTIFICATES OF DEPOSIT - $100,000 18,048,129 3,933,584 5.47% 3,634,333 5.37% 6,550,157
CERTIFICATES OF DEPOSIT - $100,000 7,297,297 1,978,147 5.38% 871,677 5.22% 2,781,293
---------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 35,921,388 16,016,803 3.86% 4,506,010 5.34% 9,331,450
---------------------------------------------------------------------------
NONINTEREST-BEARING DEPOSITS 14,264,071
---------------------------------------------------------------------------
TOTAL DEPOSITS 50,185,459 16,016,803 4,506,010 9,331,450
TOTAL OTHER LIABILITIES 311,905
TOTAL CAPITAL 5,075,708
---------------------------------------------------------------------------
TOTAL LIABILITIES & CAPITAL 55,573,072 16,016,803 4,506,010 9,331,450
===========================================================================
INTERVAL GAP/GAP SPREAD 11,370,860 3.76% (2,711,016) 3.32% (4,738,998)
CUMULATIVE GAP 11,370,860 8,659,844 3,920,846
INTERVAL GAP/TOTAL ASSETS 20.46% (4.88)% (8.53)
CUMULATIVE GAP/TOTAL ASSETS 20.46% 15.58% 7.06
INTERVAL GAP/EARNING ASSETS 21.99% (5.24)% (9.16)
CUMULATIVE GAP/EARNING ASSETS 21.99% 16.75% 7.58
MATCHED 16,016,803 3.86% 1,794,994 5.34% 4,592,452
OPEN 11,370,860 3.76% (2,711,016) 3.32% (4,738,998)
</TABLE>
<TABLE>
<CAPTION>
1-5 OVER 5
RATE YEARS RATE YEARS RATE TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
FEDERAL FUNDS SOLD 7,903,493
AVAILABLE-FOR-SALE INVESTMENTS 5.87% 2,136,669 6.35% 741,466 6.23% 5,130,213
HELD-TO-MATURITY INVESTMENTS 5.74% - - 250,000 6.00% 1,763,891
LOANS, NET - FIXED 8.53% 11,614,033 8.54% 3,159,876 7.39% 22,189,808
LOANS, NET - VARIABLE 7.95% 34,839 7.95% - - 14,724,587
-------------------------
TOTAL EARNING ASSETS 7.07% 13,785,541 8.20% 4,151,342 7.10% 51,711,992
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 13,785,541 4,151,342 51,711,992
======================================================================
LIABILITIES
NOW ACCOUNTS 2,580,556
MONEY MARKET ACCOUNTS 7,524,516
SAVINGS ACCOUNTS 470,890 2.98% 470,890
CERTIFICATES OF DEPOSIT - $100,000 5.30% 3,930,055 5.34% 18,048,129
CERTIFICATES OF DEPOSIT - $100,000 5.23% 1,666,180 5.32% 7,297,297
----------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS 5.28% 6,067,125 5.15% - 35,921,388
----------------------------------------------------------------------
NONINTEREST-BEARING DEPOSITS -
----------------------------------------------------------------------
TOTAL DEPOSITS 6,067,125 - 35,921,388
TOTAL OTHER LIABILITIES -
TOTAL CAPITAL -
----------------------------------------------------------------------
TOTAL LIABILITIES & CAPITAL 6,067,125 - 35,921,388
======================================================================
INTERVAL GAP/GAP SPREAD 1.79% 7,718,416 3.05% 4,151,342 7.10%
CUMULATIVE GAP 11,639,262 15,790,604
INTERVAL GAP/TOTAL ASSETS 13.89% 7.47%
CUMULATIVE GAP/TOTAL ASSETS 20.94% 28.41%
INTERVAL GAP/EARNING ASSETS 14.93% 8.03%
CUMULATIVE GAP/EARNING ASSETS 22.51% 30.54%
MATCHED 7.07% 13,785,541 8.20% - 0.00%
OPEN 1.79% 7,718,416 3.05% 4,151,342 7.10%
</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.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
The Company's Y2K Plan consists of three phases. Phase I required the
Company to assess its Y2K compliancy needs and to develop a plan to address
those needs. The assessment included testing the Company's current hardware,
software and material external vendors' compliancy. Phase I also included
assessing the impact Y2K compliancy could have on our existing and future
customers. The Company completed Phase I in December 1997. The Y2K project
team concluded that the Company would need to replace 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 compliancy. 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 compliancy of future
customers. The costs of Phase I, including salary allocations, were
approximately $50,000.
Phase II requires all non-compliant hardware and software to be replaced
by April 1999. Approximately one-half of the equipment and software had been
replaced as of December 31, 1998. The new equipment and software must be re-
tested for compliancy by June 1999. The Company has included approximately
$154,000 for Y2K compliancy costs, including salary allocations, in its 1999
budget. Phase III requires monitoring and review of Year 2000 issues that may
have been overlooked. Management does not anticipate material costs in 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
compliancy 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.
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 and de-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>
UNITED FINANCIAL BANKING COMPANIES, INC.
DIRECTORS OFFICERS
Jeffery T. Valcourt Harold C. Rauner
Chairman of the Board President/CEO
United Financial Banking Companies, Inc.
President/CEO, Valcourt Building Services, Inc. Sharon A. Stakes
Vice President
Manuel V. Fernandez
Vice Chairman
United Financial Banking Companies, Inc. Lisa M. Porter
President, 650 Water Street, Inc. Chief Financial
Officer/Controller
William J. McCormick, Jr. Deborah E. Glakas
President, Jordan Kitts Music, Inc. Corporate Secretary
Dennis I. Meyer F. Janette Collins
Partner, Baker & McKenzie, Attorneys Assistant Secretary
Edward H. Pechan
President, E. H. Pechan and Associates, Inc.
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.
Executive Vice President, The Business Bank
The Business Bank Board of Directors
Harold C. Rauner Jeffery T. Valcourt
Chairman of the Board Vice Chairman
The Business Bank The Business Bank
President/CEO, The Business Bank President/CEO, Valcourt
President/CEO, United Financial Building Services, Inc
Banking Companies, Inc.
Robert E. Carpenter Charles S. Evans
Partner, Weller and Scott President, Computerware
Robert W. Pitts
Partner, Pitts and Pitts
Sharon A. Stakes
Executive Vice President, The Business Bank
Vice President, United Financial Banking Companies, Inc.
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC.
CORPORATE INFORMATION
The Company did not accrue or pay dividends during the years ended December 31,
1998 and 1997. The Company will not resume the issuance of stock dividends until
retained earnings are returned to a positive level.
The Company had 345 shareholders of record as of December 31, 1998.
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.
</LEGEND>
<CIK> 0000714286
<NAME> UNITED FINANCIAL BANKING COMPANIES, INC.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,267,417
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,903,493
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,763,891
<INVESTMENTS-CARRYING> 5,113,262
<INVESTMENTS-MARKET> 5,130,213
<LOANS> 36,962,213
<ALLOWANCE> 747,374
<TOTAL-ASSETS> 55,573,072
<DEPOSITS> 50,185,459
<SHORT-TERM> 0
<LIABILITIES-OTHER> 311,905
<LONG-TERM> 0
0
0
<COMMON> 831,590
<OTHER-SE> 4,244,118
<TOTAL-LIABILITIES-AND-EQUITY> 55,573,072
<INTEREST-LOAN> 3,405,074
<INTEREST-INVEST> 644,855
<INTEREST-OTHER> 5,491
<INTEREST-TOTAL> 4,055,420
<INTEREST-DEPOSIT> 1,812,980
<INTEREST-EXPENSE> 808
<INTEREST-INCOME-NET> 2,241,632
<LOAN-LOSSES> 323,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,195,869
<INCOME-PRETAX> 122,451
<INCOME-PRE-EXTRAORDINARY> 122,451
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 113,233
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
<YIELD-ACTUAL> 9.26
<LOANS-NON> 60,378
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 715,399
<CHARGE-OFFS> 280,504
<RECOVERIES> 10,690
<ALLOWANCE-CLOSE> 747,374
<ALLOWANCE-DOMESTIC> 747,374
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 474,251
</TABLE>
