<PAGE>
As filed with the Securities and Exchange Commission on September 3, 1999
Registration No. 333-82845
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
UNITED FINANCIAL BANKING COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1201253
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
8399 Leesburg Pike
Vienna, Virginia 22182
(703) 734-0070
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Harold C. Rauner
President and Chief Executive Officer
United Financial Banking Companies, Inc.
8399 Leesburg Pike
Vienna, Virginia 22182
(703) 734-0070
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
David H. Baris, Esquire
Noel M. Gruber, Esquire
Kennedy, Baris & Lundy, L.L.P.
4719 Hampden Lane, Suite 300
Bethesda, Maryland 20814
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If the registrant elects to deliver a copy of its latest annual report to
securityholders or a complete and legible facsimile thereof, pursuant to item
11(a)(1) of this form, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Prospectus
170,000 Shares of Common Stock
Minimum Subscription - 100 Shares
UNITED FINANCIAL BANKING COMPANIES, INC.
United Financial Banking Companies, Inc. is offering 170,000 newly
issued shares of its common stock, through the efforts of its directors and
officers, with the limited assistance of Mr. Brian L. Slagle, a registered
securities agent, in order to comply with the securities laws of the
jurisdictions in which the common stock will be offered. UFBC may also sell up
to an additional 17,000 shares of common stock if the number of shares
subscribed for exceeds the number of shares offered. UFBC is the holding company
for The Business Bank, Vienna, Virginia.
-----------------
Shares of UFBC's common stock are not deposits, savings accounts, or other
obligations of a depository institution and are not insured by the
Federal Deposit Insurance Corporation or any other governmental agency.
Investing in common stock involves investment risks.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the common stock or determined if this
prospectus is accurate or adequate. Any representation to the contrary is a
criminal offense.
------------------
Consider carefully the "Risk Factors" beginning on page 4 of this
prospectus.
<TABLE>
<CAPTION>
Per share Total
---------------- -----------------
<S> <C> <C>
Price to public $9.00 $1,530,000
Underwriting discounts and commissions None None
Net proceeds of the offering (before expenses) $9.00 $1,530,000
</TABLE>
The date of this prospectus is September __, 1999
<PAGE>
SUMMARY
This summary presents selected information from this prospectus. You
should carefully read this entire document and the documents to which the
prospectus refers in order to understand this offering. See "Additional
Information" (page 23). Items in this summary include page references that
direct you to more complete descriptions in this document of the topics
discussed.
The Offering
United Financial Banking Companies, Inc. is offering to sell up to
170,000 newly issued shares of its common stock in this offering at a price of
$9.00 per share. After the offering, there will be 1,001,590 shares of common
stock outstanding, if all shares are sold (or 1,018,590 if the oversubscription
shares are sold). The net proceeds of the offering to UFBC will be approximately
$1,480,800, if all shares are sold (or $1,633,800 if the oversubscription shares
are sold), after deduction of estimated expenses of the offering.
There is no minimum total number of shares which must be sold in the
offering. Directors of UFBC and The Business Bank currently intend to purchase
more than half of the shares being offered. See "Risk Factors Consummation of
Offering Not Subject to Minimum Subscription" (page 4) and "Substantial
Ownership Concentration" (page 4); and "The Offering - No Minimum Offering "
(page 11) and "Intentions of Directors, Executive Officers and Others" (page
11). The minimum number of shares which may be subscribed for by any person is
100 shares.
The offering will run until November 24, 1999, or such later date as
the Board of Directors may determine, but not later than December 24, 1999.
Until a subscription is accepted, subscription funds will be held in an escrow
account at The Business Bank under the control of an independent escrow agent.
If the offering is not completed, or if your subscription is not accepted, your
subscription funds will be returned without interest or deduction. See "The
Offering Escrow Agreement - No Interest on Subscription Funds"(Page 12)
To subscribe for shares, you should complete the order form accompanying this
prospectus and submit it, along with payment in full for the shares, to Mr.
Brian L. Slagle, the subscription agent for the offering, prior to the
expiration of the offering. You should carefully follow the instructions
contained in this prospectus under the caption "The Offering" (page 11) and
those included on the order form.
UFBC intends to use the net proceeds from the offering for general
corporate purposes, which will include a contribution to The Business Bank, its
subsidiary bank, for use in its lending and investment activities. Pending such
investment, the net proceeds may be invested in a variety of short-term,
interest-bearing assets including federal funds transactions, interest-bearing
deposits in other banks, and similar investments.
Reasons for the Offering
UFBC is selling additional shares of common stock in order to obtain
additional capital for use in expanding its core banking business. UFBC believes
that expanding the scale of The Business Bank's operations and size is the best
strategy for profitable and independent operations in the future. The offering
will enable The Business Bank to establish additional branch locations and
expand into desirable market areas. UFBC will use $1,000,000 of the proceeds (or
at least two thirds of the amount raised, if less than all of the shares are
sold) of the offering for an immediate contribution to The Business Bank, which
will use the contribution to expand its lending and investing operations. See
"Use of Proceeds" (page 8).
United Financial Banking Companies, Inc.
United Financial Banking Companies, Inc. (page 16)
8399 Leesburg Pike
Vienna, Virginia 22182
(703)-734-0070
UFBC is a one-bank holding company headquartered in Vienna, Virginia.
It provides commercial and consumer banking services through its banking
subsidiary, The Business Bank. UFBC was organized in 1982 to be the holding
company for The Business Bank, and acquired all of the stock of the Bank in July
1983. The Business Bank was chartered under Virginia law in 1980 and began full
scale operations in 1982. At June 30, 1999, UFBC had total assets of $54.5
million, deposits of $47.8 million, and shareholders' equity of $5.2 million.
Shareholders' equity in 1998 increased as a result of the sale in a private
placement transaction of 269,950 shares of common stock.
The Business Bank, UFBC's primary subsidiary, conducts a general
commercial banking business and specializes in offering banking services to
businesses and professionals. 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 collections
processing. The Business Bank is an insured state
3
<PAGE>
bank which is not a member or the Federal Reserve System, and its deposits are
insured by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation.
The Business Bank markets its services to professionals and small and
medium sized businesses in its service area of Northern Virginia and surrounding
communities, through its main office in Vienna, Virginia and one branch office
located in McLean, Virginia, which opened in June 1999. The bank believes that
professionals and small businesses represent a profitable market segment whose
needs have not been met by many retail banks. In order to fully meet the banking
needs of its business and professional customer base, and to remain competitive
in the current market, the services offered by The Business Bank also include
products such as consumer installment and mortgage loans. The Business Bank
expects that this expanded product line will help it maintain its core accounts
and enable it to diversify asset growth.
The Business Bank intends to establish additional branches in the
communities surrounding its main office in Tysons Corner, as a means of
enhancing the attractiveness of its services to professionals and businesses in
the Northern Virginia area, and of expanding its consumer oriented retail
banking business. We cannot be certain as to when or if suitable locations will
be found, whether regulatory approval for additional branches will be obtained,
or if such additional branches will be profitable.
History of Operating Losses
Beginning in 1990 and continuing through 1996, UFBC experienced a
consistent pattern of operating losses. These losses resulted primarily from
high levels of non-performing assets, and related provisions for loan losses and
charge-offs resulting from defaulted real estate acquisition, development and
construction loans and investments. As a result of the substantial economic
downturn in the Northern Virginia real estate related markets in the late 1980's
and early 1990's, a significant portion of UFBC's and The Business Bank's loan
portfolios became non-performing. Since that time, UFBC and The Business Bank
have reduced their exposure to these types of loans.
The Business Bank has recorded operating profits in every quarter since
June 1996. UFBC had consolidated earnings of $16,299 in 1997 (before accrued
dividends of $117,250 to the then outstanding class of preferred stock) and
$113,233 in 1998. UFBC had consolidated earnings of $187,943 in the first six
months of 1999. At December 31, 1998, the level of nonperforming assets had been
reduced to $1,859,776, representing 3.35% of UFBC's total assets, and at June,
30, 1999, the level of nonperforming assets was $1,550,531, or 2.85% of total
assets.
Tax Effect of Net Operating Loss Carryforwards
As a result of the operating losses accumulated between 1990 and 1996,
UFBC had a net operating loss carryforward of $6,403,759 at December 31, 1998,
which can be used to offset tax liabilities in future years. The ability to use
the net operating loss carryforwards may be limited if an "ownership change" of
the company occurs for tax purposes. See "Risk Factors -Possible Limitation of
Tax Benefits" (page 5) and "United Financial Banking Companies, Inc. Certain
Federal Tax Issues; Net Operating Loss Carryforwards" (page 17).
4
<PAGE>
RISK FACTORS
You should carefully consider the risk factors listed below. These risk
factors may cause UFBC's future earnings to be less or its financial condition
to be less favorable than it expects. You should read this section together with
the other information in this prospectus and the documents that are incorporated
into the prospectus by reference.
No Active Public Market for the Common Stock
Shareholders may not be able to easily sell their common stock.
There is currently no active public trading market for the common
stock. While one market maker currently indicates a willingness to make a market
in the common stock, and a second has applied for authority to act as a market
maker in the common stock, the common stock trades on an infrequent basis. There
can be no assurance that prices quoted for the common stock in such market
currently, or in the future, will accurately reflect the value of the common
stock. Because it does not currently meet the listing requirements of any
exchange or Nasdaq, there are no current plans to obtain trading privileges for
the common stock. There can be no assurance that an active market will develop
for the common stock following completion of the offering, or, if such a market
develops, that it will continue, or that the price of the common stock will be
higher or lower than the offering price. See "Market for Common Stock and
Dividends."
Non-Underwritten Offering; Subscriptions Binding on Subscribers
Subscribers will be required to purchase shares even if less than all
of the shares offered are sold.
The common stock will be offered and sold by certain of the directors
and executive officers of UFBC with the assistance of a registered securities
agent as required by law. Because the offering is not being underwritten, there
is no commitment by any person or entity to purchase any part of the shares
being offered. As a result, there is no assurance that all or any portion of the
funds sought will be raised.
Once made, subscriptions will not be revocable by subscribers, and UFBC
intends to accept suscriptions even if the offering has not been fully
subscribed to. See "The Offering" (page 11).
Consumation of Offering Not Subject to Minimum Subscription
There is no minimum number of shares that must be sold in the offering,
and subscriptions, once received, are irrevocable. The offering may be completed
even if substantially less than the total number of shares offered is sold. If
this happens, UFBC's capital would not be increased to the extent it would be if
all shares offered hereby were sold. See "The Offering" (page 15).
History of Operating Losses
From 1990 to 1996, UFBC incurred losses of over $12.5 million.
Commencing in 1990 and continuing through 1996, UFBC experienced a
consistent pattern of operating losses. These losses, over $12.5 million in all,
resulted primarily from high levels of non-performing assets, and related
provisions for loan losses and charge-offs resulting from defaulted real estate
acquisition, development and construction loans and investments. As a result of
the substantial economic downturn in the Northern Virginia real estate related
market in the late 1980's and early 1990's, a significant portion of UFBC's and
The Business Bank's loan portfolios became non-performing. Although UFBC and The
Business Bank have reduced their exposure to these types of loans, they cannot
be sure that adverse changes in economic conditions will not cause them to have
losses in the future. See "Risk Factors Credit Risk" (page 5) and "-Competition"
(page 7).
Substantial Ownership Concentration
At least 47% of the common stock outstanding after the offering will be
owned by directors of UFBC and The Business Bank.
Members of the Boards of Directors of UFBC and The Business Bank and
their immediate families collectively will own at least 47% of the outstanding
shares of the common stock after the offering, even if they do not buy any
shares in the offering. As a result of this ownership, they can exert
significant influence over the election of UFBC's Board of Directors and other
corporate actions requiring shareholder approval. This may increase the
likelihood that current management will continue to have effective control of
UFBC. It is expected that some of these persons will purchase additional shares
in the offering. See "Beneficial Ownership of Securities" (page 19).
Possible Limitation of Tax Benefits.
Changes in ownership of common stock could cause a limitation of UFBC's
ability to take advantage of its tax benefits.
Purchase of common stock by people who are not currently holders of the
common stock, or by current holders whose acquisition would increase their
equity ownership in the company above certain levels during a specified period,
could result in an "ownership change" for federal income tax purposes. If an
"ownership change" occurs, an annual limitation would be imposed on UFBC's
ability to deduct (i) its net operating loss carryforwards ($6,403,759 from its
1996 and prior taxable years) and (ii) certain built in losses which have not
yet been recognized for tax purposes if certain threshold limitations on the
amount of such unrecognized losses were exceeded. Although UFBC does not
anticipate that the offering will result in an "ownership change," there can be
no assurance that an "ownership change" will not occur as a result of the
offering, or in the future as a result of the cumulative effect of the offering
and other acquisitions and transfers of common stock. See "United Financial
Banking Companies, Inc. - Certain Federal Tax Issues, Net Operating Loss
Carryforwards" (page 17).
Dilution
The book value of a share of common stock after the offering will be
lower than the price paid for the shares in the offering.
If all of the shares being offered are sold, then pro forma book value
per share at June 30, 1999, after
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<PAGE>
giving effect to completion of the offering, will increase to $6.66 per share.
The post-offering book value is less than the offering price of $9.00 per share,
and accordingly, investors in the offering will experience dilution of $2.34, or
26%, per share, calculated on the basis of the difference between the offering
price and book value. See "Capitalization" (page 15).
Management Will Have Discretion in Allocating a Substantial Portion of the
Proceeds
The Boards of Directors of UFBC and The Business will have substantial
discretion in the use of the proceeds of the offering among the purposes
indicated, subject to the requirements of safe and sound banking practices.
Delay in Closing of the Offering and Loss of Use of Funds
UFBC reserves the right to extend the period for the offering from
November 24, 1999 to as late as December 24, 1999, or to terminate the offering
in its entirety at any time prior to delivery of shares of common stock pursuant
to the offering. A period of time may elapse between the submission of an order
form and receipt of certificates for common stock. No interest will be paid on
funds delivered to the subscription agent for the offering, even if the offering
is terminated
Credit Risk
Loan charge-offs or problem loans could be higher than expected, which
would adversely affect UFBC's earnings and financial condition.
The loan portfolio contains a high percentage of commercial and
commercial real estate loans in relation to its total loans and total assets.
Commercial and commercial real estate loans are generally viewed as having more
risk of default than residential real estate loans or other loans or
investments. These types of loans are also typically larger than residential
real estate loans and other consumer loans. Because the loan portfolio contains
a significant number of commercial and commercial real estate loans with
relatively large balances, the deterioration of one or a few of these loans may
cause a significant increase in nonperforming assets. An increase in
nonperforming loans could result in: a loss of earnings from these loans; an
increase in the provision for loan losses, which would reduce operating income;
and an increase in loan charge-offs.
At any time, there are loans included in the loan portfolio that will
result in losses, but that have not been identified as nonperforming or
potential problem loans. UFBC and The Business Bank have procedures that they
use to help identify potential problem loans at a time when they can be worked
out with minimal loss. However, UFBC and The Business Bank cannot be sure that
they will be able to identify deteriorating loans before they become
nonperforming assets, or that they will be able to limit losses on those loans
that are identified.
Local Economic Conditions
Changes in local economic conditions could reduce UFBC's income and
growth, and could lead to higher levels of problem loans and charge-offs.
UFBC makes loans, and most of its assets are located, in the Northern
Virginia portion of the metropolitan Washington D.C. market. Adverse changes in
economic conditions in that area could hurt its ability to collect loans, could
reduce the demand for loans, and otherwise could negatively affect UFBC's
performance and financial condition.
Loan Portfolio Concentration
Adverse changes in the real estate market could lead to higher levels
of problem loans and charge-offs, and adversely affect UFBC's earnings and
financial condition.
UFBC has a substantial amount of commercial real estate loans and loans
to individuals and businesses involved in the construction industry. At June 30,
1999, 26% of UFBC's loans were commercial real estate loans and 11% involved
loans to individuals and businesses in the construction industry. Additionally,
13% of UFBC's loans are to purchasers in a single development being operated by
the company in resolution of a piece of REO. These concentrations expose UFBC
and the Bank to the risk that adverse developments in the real estate market
could increase the levels of nonperforming loans and charge-offs, and reduce
loan demand and deposit growth. In each case, however, the concentrations are
spread among a large number of borrowers with relatively low loan balances. UFBC
does not have any concentrations of loans to a single individual or business or
related group of more than 2.1% of total loans.
Interest Rate Risk
Changes in interest rates may adversely
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affect UFBC's earnings and financial condition.
UFBC's net income depends to a great extent upon the level of its net
interest income. Changes in interest rates can increase or reduce net interest
income and net income. Net interest income is the difference between the
interest income UFBC earns on its loans, investments and other interest-earning
assets, and the interest it pays on its interest-bearing liabilities, such as
deposits and borrowings. Because different types of assets and liabilities owned
by UFBC may react differently, and at different times, to changes in market
interest rates, net interest income is affected by changes in market interest
rates. When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a period, an increase in market rates of interest
could reduce net interest income. Similarly, when interest-earning assets mature
or reprice more quickly than interest-bearing liabilities, falling interest
rates could reduce net interest income.
Changes in market interest rates are affected by many factors beyond
the company's control, including inflation, unemployment, money supply,
international events, and events in world financial markets. UFBC attempts to
manage its risk from changes in market interest rates by adjusting the rates,
maturity, repricing, and balances of the different types of interest-earning
assets and interest-bearing liabilities, but interest rate risk management
techniques are not exact. As a result, a rapid increase or decrease in interest
rates could have an adverse effect on the net interest margin and results of
operations.
Provisions that Could Discourage Acquisitions of the Company
Virginia law and UFBC's Articles of Incorporation contain provisions
that could prevent a takeover.
The Virginia Stock Corporation Law includes provisions that make an
acquisition of UFBC more difficult. These provisions may prevent a future
takeover attempt in which shareholders of the Company otherwise might receive a
substantial premium for their shares over then-current market prices.
These provisions include supermajority vote requirements for the
approval of certain business combinations and limitations on the voting of
certain acquirors of substantial blocks of the common stock. The Articles of
Incorporation also authorize the issuance of additional shares without
shareholder approval on terms or in circumstances that could deter a future
takeover attempt. See "Description of the Capital Stock" (page 21).
Dividend Restrictions
UFBC's ability to pay dividends is limited by law.
UFBC's ability to pay dividends on the common stock largely depends on
its receipt of dividends from The Business Bank. The amount of dividends that
The Business Bank may pay is limited by state and federal laws and regulations.
UFBC and The Business Bank may decide, and they presently intend, to limit the
payment of dividends even where they have the legal ability to pay them, in
order to retain earnings for use in expansion activities. See "Market for Common
Stock and Dividends" (page 15).
Competition
UFBC may not be able to sucessfully compete with others for
business.
UFBC competes for loans, deposits, and investment dollars with other
banks and other kinds of financial institutions and enterprises, such as
securities firms, insurance companies, savings and loan associations, credit
unions, mortgage brokers, and private lenders, many of which have substantially
greater resources. In addition, non-depository institution competitors are
generally not subject to the extensive regulations applicable to UFBC and The
Business Bank. The differences in resources and regulations may make it harder
for UFBC and The Business Bank to compete profitably, reduce the rates that they
can earn on loans and investments, increase the rates they must offer on
deposits and other funds, and adversely affect UFBC's overall financial
condition and earnings. See "United Financial Banking Companies, Inc.
Competition "(page 17)
Year 2000 Risk
The year 2000 problem could have material adverse effects on UFBC and
its customers.
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 after December 31, 1999. The year 2000 ("Y2K") issue
affects the entire banking industry because of the industry's reliance on
computers and other equipment that use computer chips, and may have significant
effects on banking customers, bank regulators, and the general economy.
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We have developed a Y2K plan to prevent or limit adverse effects of the Y2K
issue on UFBC and its customers. Although we have substantially completed our
Y2K compliance programs and testing, we cannot be certain that all necessary
steps have been taken, or that unforeseen events with respect to our internal
systems, the systems of our data processing suppliers or our customers will not
result in Y2K problems. Although we believe that total expenditures will be less
than $200,000, Y2K compliance may cost more than estimated, and may cause a
decrease in net income.
UFBC believes it will be able to successfully complete the
implementation of its Y2K plan. The belief that UFBC and its principal suppliers
of software and data processing services will achieve Y2K compliance is based on
assumptions that may not prove accurate, and on statements made by its data
processing suppliers and other third parties, and is subject to uncertainty.
Although we have undertaken a customer awareness program, customer concerns
about the Y2K issue may adversely impact UFBC. The actual effects on individual
customers, on governmental authorities that regulate UFBC and The Business Bank,
the financial markets and economy in general, and any resulting consequences to
UFBC, cannot be estimated with any assurance. Because of these uncertainties, it
cannot be assured that Y2K compliance will be achieved.
UFBC, its principal software and data processing suppliers, and its
customers may not achieve Y2K compliance in spite of their efforts. The failure
of UFBC, its principal software suppliers, the payments system of banks and the
Federal Reserve System, and the telecommunications and power suppliers upon
which they rely to achieve Y2K compliance, could cause disruptions in service to
UFBC's customers. Failure by borrowers to achieve Y2K compliance could have
adverse financial effects on them, and make it more difficult for them to pay
their loans, which in turn may result in reduced income or additional loan
losses for UFBC. See "Management's Discussion and Analysis - Year 2000" (page
18).
Regulatory Risk
Government regulation significantly affects UFBC's business, and could
adversely affect UFBC in the Future.
The banking industry is heavily regulated. Banking regulations are
primarily intended to protect the federal deposit insurance funds and
depositors, not shareholders. The Business Bank is subject to regulation and
supervision by the Federal Deposit Insurance Corporation and the Virginia Bureau
of Financial Institutions. UFBC is subject to regulation and supervision by the
Board of Governors of the Federal Reserve System. The burden imposed by federal
and state regulations puts banks at a competitive disadvantage compared to less
regulated competitors such as finance companies, mortgage banking companies and
leasing companies. Changes in the laws, regulations and regulatory practices
affecting the banking industry could impose additional costs on UFBC, or could
hurt its ability to compete profitably with other financial institutions.
8
<PAGE>
CAUTION ABOUT FORWARD LOOKING STATEMENTS
We make forward looking statements in this prospectus that are subject
to risks and uncertainties. These forward looking statements include:
. Statements of goals, intentions, and expectations;
. Estimates of risks and of future costs and benefits;
. Statements of the ability to achieve "Y2K" compliance; and
. Statements of the ability to achieve financial and other
goals.
These forward looking statements are subject to significant
uncertainties because they are based upon or are affected by:
. Management's estimates and projections of future interest rates and
other economic conditions;
. Statements by suppliers of data processing equipment and services,
government agencies, and other third parties as to "Y2K" compliance
and costs;
. Future laws and regulations; and
. A variety of other matters.
Because of these uncertainties, the actual future results may be
materially different from the results indicated by these forward looking
statements. In addition, our past results of operations do not necessarily
indicate future results.
USE OF PROCEEDS
UFBC will receive net proceeds of approximately $1.48 million from the
offering ($1.63 million if the oversubscription shares are all sold), after
deduction of all estimated expenses of the offering. See "Capitalization."
The proceeds of the offering will strengthen UFBC's capital base and
position it to continue to exceed minimum regulatory capital ratios, which will
allow for future growth through expansion of its existing businesses. we plan to
use the net proceeds for general corporate purposes, which will include
immediate contribution of $1,000,000 of the proceeds to The Business Bank,
where they will be available for general corporate purposes and for use in its
lending establish additional branch locations and to expand into desirable
market areas. There are no additional branch sites which have been identified,
and there can be no assurance that any additional branches will be established,
or if established that they will be successful. Remaining proceeds of the
offering will be retained by UFBC for use as working capital for holding company
operations and/or possible future contribution to the Business Bank in support
of its expansion activities. Pending such investment, the net proceeds may be
invested in a variety of short-term, interest-bearing assets including federal
funds transactions, interest-bearing deposits in other banks and similar
investments.
9
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SELECTED CONSOLIDATED FINANCIAL DATA
The following table shows selected historical consolidated financial
data for UFBC. You should read it in connection with the historical consolidated
financial information contained in the Annual Report to Shareholders for the
year ended December 31, 1998 and the Quarterly Report on Form 10-QSB for the
period ended June 30, 1999 included in this prospectus and with the other
information provided and incorporated by reference in this prospectus. See
"Additional Information" (page 23).
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------------- ------------ ---------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Results of operations:
Total interest income $ 1,944,347 $ 1,976,253 $ 4,055,420 $ 3,433,867 $ 2,828,278 $ 2,191,867 $ 1,606,565
Total interest expense 781,124 913,756 1,813,788 1,495,204 1,562,851 1,343,596 992,089
Net Interest income 1,163,223 1,062,497 2,241,632 1,938,663 1,265,427 848,271 614,476
Provision for loan/lease losses 34,279 95,000 323,500 249,300 694,203 (295) (238,727)
Net interest income after provision
for loan/lease losses 1,128,944 967,497 1,918,132 1,689,363 571,224 848,566 853,203
Other income 101,711 120,539 400,188 224,716 651,882 231,796 579,788
Other expenses 1,038,104 1,136,798 2,195,869 1,897,780 2,133,176 2,403,850 3,661,756
Income before income taxes and
extraordinary gain 192,551 (48,762) 122,451 16,299 (910,070) (1,323,488) (2,228,765)
Income tax expense(benefit) 4,608 - 9,218 - (2,461) 2,598 10,640
Net income(loss) before extraordinary
gain 187,943 (48,762) 113,233 16,299 (907,609) (1,326,086) (2,239,405)
Extraordinary gain, net of state
income tax - - - - - - 3,357,375
Net income(loss) 187,943 (48,762) 113,233 16,299 (907,609) (1,326,086) 1,117,970
Earnings per share:
Net Income (loss) before
extraordinary gain 187,943 (48,762) 113,233 16,299 (907,609) (1,326,086) (2,239,405)
Less: preferred stock dividends - (50,000) (50,000) (117,250) (18,750) - -
Income available to common stock
holders before extraordinary
gain: 187,943 (98,762) 63,233 (100,951) (926,359) (1,326,086) (2,239,405)
Basic earnings (loss) per common
share 0.23 (0.16) 0.09 (0.18) (1.65) (2.40) (11.01)
Diluted earnings (loss) per common
share 0.22 -(1) 0.08 (0.18) (1.65) (2.40) -
Add: extraordinary gain - - - - - - 3,357,375
Income available to common
shareholders 187,943 (98,762) 63,233 (100,951) (926,359) (1,326,086) 1,117,970
Basic earnings (loss) per common
share 0.23 (0.16) 0.09 (0.18) (1.65) (2.40) 5.50
Diluted earnings (loss) per common
share 0.22 -(1) 0.08 - (1) (1.65) (2.40) 5.30
Period-ending balances:
Total loans 36,451,550 35,866,773 36,962,213 38,084,861 30,618,335 23,874,982 14,716,184
Total assets 54,458,397 51,485,118 55,573,072 48,074,006 41,601,689 43,065,970 32,945,072
Total deposits 47,824,081 46,422,470 50,185,459 43,761,761 37,734,574 37,475,235 26,036,309
Shareholders' equity 5,191,993 4,682,835 5,075,708 2,639,999 2,738,070 3,670,047 4,866,826
Shareholders' equity per share 6.10 4.70 4.88 6.53 8.98
Average weighted shares outstanding
at period end:
Basic 831,590 599,805 716,395 561,640 561,640 551,550 203,305
Diluted 844,973 612,902 814,752 585,873 561,640 551,550 211,080
Asset Quality Ratios:
Allowance for loan losses to loans 2.09 % 2.06 % 2.02 % 1.88 % 1.91 % 1.94 % 4.76 %
Nonperforming loans to loans 0.04 % 0.31 % 0.16 % 0.27 % 1.06 % 1.69 % 3.95 %
Allowance for loan losses to
nonperforming loans 4,833.24 % 660.38 % 1,237.83 % 701.29 % 177.89 % 114.76 % 120.47 %
Nonperforming assets to loans and
other real estate 4.08 % 5.49 % 4.80 % 6.11 % 10.21 % 26.16 % 44.43 %
Net loan charge-offs to average loans 0.02 % 0.19 % 0.80 % 0.36 % 2.11 % 1.24 % (1.41)%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
----------------------------- -----------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------------- ------------ ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Ratios:
Tier I risk-based capital ratio 14.46 % 13.33 % 13.75 % 7.33 % 8.72 % 11.00 % 18.70 %
Total risk-based capital ratio 15.72 % 14.59 % 15.01 % 11.51 % 12.31 % 12.20 % 20.00 %
Leverage ratio 9.93 % 9.05 % 9.28 % 5.71 % 6.42 % 8.40 % 13.70 %
Selected ratios:
Return on average total assets 0.73 % (0.19) % .22 % 0.04 % (2.07) % (3.45) % 3.15 %
Return on average earning assets 0.78 % (0.21) % .23 % 0.04 % (2.68) % (5.23) % 5.61 %
Return on average shareholders' 7.47 % (3.45) %
equity 2.90 % 0.61 % (27.51) % (29.73) % 94.59 %
Average shareholders' equity to
average total assets 9.79 % 5.58 % 7.50 % 5.87 % 7.54 % 11.60 % 3.33 %
</TABLE>
(1) Anti-dilutive
11
<PAGE>
THE OFFERING
Background of the Offering
UFBC is offering shares of common stock to strengthen its capital base
and position The Business Bank to continue to remain a "well-capitalized"
institution under federal banking regulations, while allowing UFBC and The
Business Bank to pursue future growth opportunities through expansion of their
existing businesses and into related businesses, and possible acquisitions. The
Business bank opened its first branch, in McLean, Virginia, in June 1999. While
we expect The Business Bank to establish additional branches in the communities
surrounding the main office in Tysons Corner, Virginia, there are no specific
plans, arrangements, agreements or understandings with any other person for UFBC
or The Business Bank to make any acquisitions at the current time or to enter
into any new businesses. There can be no assurance when or if The Business Bank
will be able to establish any additional branches, or whether any such branches
will be profitable.
UFBC also expects that the offering will attract additional
shareholders, which should help increase the liquidity of the common stock and
attract additional business for The Business Bank. The net proceeds will be used
for general corporate purposes, including use in branch expansion, lending, and
investment activities. On an interim basis, the net proceeds received in the
offering will be invested in a variety of short-term, interest-bearing assets
including federal funds transactions, interest-bearing deposits in other banks,
and similar investments. The Board of Directors determined that the existing
shareholders would be best served by the offering, as presently structured,
because the offering affords a way to grow capital and attract additional
shareholders in order to stimulate community involvement.
Securities Offered
UFBC is offering up to 170,000 newly issued shares of its common stock
to the public at the offering price of $9.00 per share. If subscriptions are
received for more than 170,000 shares, UFBC may sell up to an additional 17,000
shares, at the price of $9.00 per share. The minimum number of shares of common
stock that may be purchased is 100. The number of shares that may be purchased
may be limited by UFBC as necessary to avoid the occurrence of an "ownership
change" for federal tax purposes, or otherwise in the discretion of UFBC. See
"United Financial Banking Companies Certain Federal Tax Issues; Net Operating
Loss Carryforwards." Current shareholders are entitled to subscribe, but will
not be given preemptive rights.
UFBC retains the right to reject any subscription, in whole or in part,
for any reason in its sole discretion. Any excess funds paid by a subscriber for
shares not issued will be returned without interest promptly following the
rejection of any subscription in whole or in part.
Expiration Time
The offering will expire at 5:00 p.m., Eastern Time, on November 24,
1999, unless the expiration time is extended at the discretion of the Board of
Directors to a date not later than December 24, 1999.
No Minimum Offering
There is no minimum number of shares that must be sold in the offering.
The offering will be consummated if any valid subscriptions are received before
the expiration time, unless the Board of Directors has terminated the offering.
Individual subscriptions are subject to a minimum subscription of 100 shares.
Procedure for Subscribing for Common Stock in the Offering
To subscribe for shares of common stock in the offering, the order form
must be properly completed, and delivered together with payment in full of the
offering price for each subscribed share of common stock. Such payment must be
by check (cashier's, treasurer's, certified or uncertified) drawn upon a U.S.
bank, in each case payable to "United Financial Banking Companies, Inc. Escrow
Account." The offering price will be deemed to have been received by the
subscription agent only upon (i) clearance of any uncertified check, or (ii)
receipt by the subscription
12
<PAGE>
agent of any cashier's, treasurer's or certified check drawn upon a U.S. bank.
Funds paid by uncertified personal check may take at least five business days to
clear. Therefore, persons who wish to pay the offering price by means of an
uncertified personal check are urged to make payment sufficiently in advance of
the expiration time to ensure that payment is received and clears by such date
and are urged to consider payment by means of a certified, treasurer's or
cashier's check or money order. The subscription agent will perform the
administrative tasks associated with the offering.
Once a Subscription is made, a subscriber may not revoke it.
The order form and payment of the offering price must be delivered to
the address and in the manner described below.
REGISTERED MAIL, RETURN RECEIPT REQUESTED, OVERNIGHT COURIER, OR HAND
DELIVERY:
Brian L. Slagle, Subscription Agent for
United Financial Banking Companies, Inc.
8399 Leesburg Pike
Vienna, Virginia 22182
Delivery to an address and in a manner other than those indicated above
does not constitute good delivery to the subscription agent.
If the aggregate offering price paid is insufficient to purchase the
number of shares of common stock indicated as being subscribed for, or if the
subscription does not specify the number of shares of common stock to be
purchased, then the subscription will be used to purchase shares of common stock
to the full extent of the payment tendered (subject only to reduction to the
extent necessary to comply with any regulatory limitation or conditions imposed
by UFBC in connection with the offering). If the aggregate offering price paid
exceeds the amount necessary to purchase the number of shares of common stock
allocated to the subscription, then the difference will be returned to the full
extent of the excess payment tendered.
The instructions accompanying the order form should be read carefully
and followed in detail. Order forms should be sent with payment to the
subscription agent.
The method of delivery of order forms and payment of the offering price
to the subscription agent will be at the election and risk of subscribers, but
if sent by mail it is recommended that such order forms and payments be sent by
registered mail, with return receipt requested and that a sufficient number of
days be allowed to ensure delivery to the subscription agent and clearance of
payment prior to the expiration time. Because uncertified personal checks may
take five business days to clear, you are strongly urged to pay, or arrange for
payment, by means of a certified, treasurer's or cashier's check.
All questions concerning the timeliness, validity, form and eligibility
of order forms received will be determined by UFBC, whose determinations will be
final and binding. UFBC in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject any purported subscription for shares of
common stock. Order forms will not be deemed to have been received or accepted
until all irregularities have been waived or cured within such time as UFBC
determines in its sole discretion. Neither UFBC nor the subscription agent will
be under any duty to give notification of any defect or irregularity in
connection with the submission of order forms or incur any liability for failure
to give such notification.
Escrow Agreement; No Interest On Subscription Funds
All funds received in payment of the offering price shall be promptly
deposited into an escrow account at The Business Bank subject to the control of
Stuart H. Gary, Escrow Agent, until consummation or termination of the offering.
Such escrow account will be invested in short-term obligations of the United
States government or a sweep account collateralized by US government or agency
securities. Subscription funds will be released from the escrow account to UFBC
only upon receipt by the escrow agent of the certification of the President of
UFBC that subscriptions relating to such funds have been accepted and that
shares of common stock will issued to subscribers in respect of such
subscriptions. Earnings on such funds in the escrow account will be retained by
UFBC whether or not the offering is consummated.
Subscriptions for common stock which are received by the subscription
agent may not be revoked. No interest will be paid to subcribers on subscription
funds, even in the event that the offering is terminated in its entirety or an
individual subscription is rejected.
13
<PAGE>
Method of Offering
Certain directors and executive officers of UFBC will assist UFBC in
the offering. None of such directors and executive officers will receive
compensation for such services. Such directors and officers are not authorized
to make statements about UFBC or The Business Bank unless such information is
set forth in this prospectus, nor will they render investment advice. None of
such directors and executive officers are registered as securities brokers or
dealers under the federal or applicable state securities laws, nor are any of
such persons affiliated with any broker or dealer, other than the subscription
agent, who is a registered agent and an employee of the Bank. Because such
persons are not in the business of either effecting securities transactions for
others or buying and selling securities for their own account, they are not
required to register as brokers or dealers under the federal securities laws. In
addition, the proposed activities of such directors and executive officers are
excepted from registration pursuant to a specific safe-harbor provision under
Rule 3a4-1 under the Securities Exchange Act of 1934, as amended. Substantially
similar exemptions from registration are available under applicable state
securities laws.
Determination of Offering Price
The offering price has been determined by the Board of Directors of
UFBC after consideration of various factors which it deemed relevant. These
factors included, among other things, UFBC's current financial condition and
operating performance as presented in its financial statements, recent trades of
the common stock, the market value of the common stock of other banking
organizations, and UFBC's pro forma financial position after giving effect to
the offering. Neither the Board of Directors nor management has expressed an
opinion or has made any recommendation as to whether anyone should purchase
shares of common stock in the offering. Any decision to invest in the common
stock must be made by each investor based upon his or her own evaluation of the
offering in the context of his or her best interests.
There can be no assurance that following completion of the offering and
the issuance of the common stock sold pursuant thereto a shareholder will be
able to sell shares purchased in the offering at a price equal to or greater
than the offering price. Moreover, until certificates for shares of common stock
are delivered, shareholders may not be able to sell the shares of common stock
that they have purchased in the offering. See "-- Issuance of Common Stock,"
below.
Intention of Directors, Executive Officers and Others
Directors and executive officers of UFBC and The Business Bank and
their affiliates have indicated that they intend to subscribe for an aggregate
of 93,784 shares of common stock in the offering. Any shares purchased by
directors and executive officers are intended to be held as an investment. These
intentions are not commitments and could change based upon individual
circumstances. See "United Financial Banking Companies, Inc. -- Beneficial
Ownership of Securities."
Regulatory Limitation
UFBC will not be required to issue shares of common stock pursuant to
the offering to any person who, in the opinion of UFBC, would be required to
obtain prior clearance or approval from any state or federal bank regulatory
authority to own or control such shares if, at the expiration time, such
clearance or approval has not been obtained or any required waiting period has
not expired.
Right to Amend or Terminate the Offering
UFBC expressly reserves the right to amend the terms and conditions of
the offering. In the event of a material change to the terms of the offering,
UFBC will file an amendment to its registration statement, of which this
prospectus is a part, and resolicit subscribers to the extent required by the
SEC. In the event of such a resolicitation, all proceeds received by UFBC will
be returned promptly to any subscriber who does not provide the subscription
agent with an affirmative reconfirmation of the subscription. UFBC expressly
reserves the right, at any time prior to delivery of shares of common stock
offered hereby, to terminate the offering if the offering is prohibited by law
or regulation or
14
<PAGE>
if the Board of Directors concludes in its judgment, that it is not in the best
interests of UFBC to complete the offering under the circumstances. The offering
may be terminated by UFBC giving oral or written notice thereof to the
subscription agent and making a public announcement thereof. If the offering is
so terminated, all funds received will be promptly refunded, without interest.
Issuance of Common Stock
Certificates representing shares of common stock purchased pursuant to
the offering will be delivered to purchasers as soon as practicable after the
expiration time and after all prorations and adjustments contemplated by the
offering have been effected. No fractional shares will be issued in the
offering.
Requests for Additional Information
If you have questions or require additional information concerning the
offering, contact Harold C. Rauner, President and Chief Executive Officer,
United Financial Banking Companies, Inc., 8399 Leesburg Pike, Vienna, Virginia
22182, (703) 734-0070.
15
<PAGE>
CAPITALIZATION
The following table shows (i) the consolidated capitalization of UFBC
at June 30, 1999, and (ii) the consolidated capitalization of UFBC on a pro
forma basis giving effect to the issuance of 170,000 shares and the receipt of
the net proceeds from the offering of such shares, after deduction of all
estimated expenses of the offering, as if the sale of the shares had been
consummated on June 30, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------------------------
Pro Forma
Actual (1)(2)
------------- ----------------
(dollars in thousands)
<S> <C> <C>
Shareholders' Equity:
Preferred Stock, no par value;
5,000,000 shares authorized,
none outstanding actual and pro forma $ - $ -
Common stock, par value $1.00 per share;
3,500,000 shares authorized;
831,590 shares issued and outstanding
actual, and 1,001,590 shares
issued and outstanding pro forma 831,590 1,001,590
Capital surplus 14,681,567 15,992,367
Retained earnings (10,266,457) (10,266,457)
Accumulated other comprehensive income (54,707) (54,707)
------------- ----------------
Total shareholders' equity $ 5,191,993 $ 6,672,793
============= ================
Book value per share $ 6.24 $ 6.66
Capital Ratios:
Leverage ratio(3) 9.93 % 12.74 %
Tier 1 capital (to risk - weighted assets) 14.46 % 18.54 %
Total capital (to risk - weighted assets) 15.72 % 19.80 %
</TABLE>
(1) Reflects estimated expenses of the offering of $49,200
(2) If the oversubscription shares were all sold in the offering, pro forma
total shareholders' equity would be $6,825,793, and the pro forma
Leverage ratio, Tier 1 Capital and Total Capital ratios would be 13.03%
18.96% and 20.22%.
(3) The Leverage ratio is Tier 1 capital divided by quarterly average total
assets less intangibles.
MARKET FOR COMMON STOCK AND DIVIDENDS
Market for Common Stock. There is no established trading market for the
common stock, which is traded infrequently in the over the counter market under
the symbol "UFBC". One market maker currently indicates a willingness to make a
market in the common stock, and a second firm has applied for authority to make
a market in the common stock. As of June 30, 1999, the common stock was held by
approximately 410 shareholders of record.
As of June 30, 1999, there were outstanding options to purchase 68,480
shares of common stock pursuant to UFBC's stock option plan, of which 49,382
were presently exercisable, outstanding warrants to purchase 46,000 shares of
common stock, all of which are exercisable, and additional non-incentive options
to purchase 2,000 shares of common stock, all of which are presently
exercisable. As of June 30, 1999, 642,470 shares of common stock issued in
private placement transactions were eligible to be sold in accordance with the
provisions of Rule 144. UFBC has not agreed to register under the Securities Act
of 1933 any shares of common stock held by any shareholder. Following
commencement of this offering, UFBC expects that it will effect an exchange
offer with holders of shares issued in private placement transactions, pursuant
to which such shares will be exchanged for registered shares.
Dividends. Holders of the common stock are entitled to receive dividends as
and when declared by the Board of Directors. The Company has not paid cash
dividends since its organization.
UFBC and The Business Bank are subject to regulatory capital
requirements that may limit dividends. Regulatory capital ratios may be a factor
in the determination of the Boards of Directors, or the ability of The Business
Bank, to pay dividends. Even if sufficient funds for the payment of dividends
are available, there can be no assurance
16
<PAGE>
that the Board of Directors will elect to pay dividends, as opposed to retaining
earnings to fund growth or expansion, or for other corporate purposes. It is the
Board of Directors' present intention to retain any earnings for use in the
expansion of the company's business.
Set forth below are the high and low bid prices for the common stock
for each quarter of 1997 and 1998, and for 1999 through June 30, 1999. These
prices reflect inter-dealer prices without retail mark-up, mark-down or
commission, and may not represent actual trades. UFBC did not pay any cash
dividends in 1997, 1998 or 1999.
<TABLE>
<CAPTION>
1999 1998 1997
------------------ -------------------- ---------------------
For the Quarter Ended High Low High Low High Low
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
March 31 $4.50 $4.50 $5.00 $5.00 $ 2.50 $2.50
June 30 $5.00 $5.00 $9.50 $9.00 $10.00 $8.75
September 30 $7.35 $7.35 $ 5.00 $5.00
December 31 $5.00 $5.00 $ 5.00 $5.00
</TABLE>
UNITED FINANCIAL BANKING COMPANIES, INC.
United Financial Banking Companies, Inc. 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,
a banking company organized under the laws of the Commonwealth of Virginia. UFBC
also wholly owns Business Venture Capital, Inc. (BVCI), a subsidiary which holds
and has developed certain foreclosed real estate and other assets.
The Business Bank was organized in 1980. In October 1981, it commenced
limited operations and began full scale operations in August 1982, when its main
office building was completed.
As of June 30, 1999, UFBC had consolidated total assets of $54,458,397
total deposits of $47,824,081 total loans of $36,451,550, and total
shareholders' equity of $5,191,993. On June 30, 1999, UFBC and its subsidiaries
employed 29 full-time employees.
The Business Bank
The Business Bank, UFBC's primary subsidiary, is a state banking
corporation engaging in a general commercial banking business and specializing
in offering banking services to businesses and professionals. 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 Business Bank is a
federally insured state bank which is not a member of the Federal Reserve
System, and its deposits are insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation (FDIC).
The Business Bank operates out of its main office, located at 8399
Leesburg Pike, Vienna, Virginia, and its one branch office, located at 1451
Dolley Madison Blvd., McLean, Virginia, which opened in June 1999.
The Business Bank markets its services to professionals and small and
medium sized businesses in its service area of Northern Virginia and surrounding
communities. The Bank believes that professionals and small businesses represent
a market segment whose needs have not been met by many retail banks. By
emphasizing individual 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. In order to fully meet the banking needs of its
business and professional customer base, and to remain competitive in the
current market, the services offered by the bank also include products such as
consumer installment and mortgage loans. The Bank expects that this expanded
product line will help it maintain its core
17
<PAGE>
accounts and enable it to diversify asset growth.
The Business Bank intends to establish additional branches in the
communities surrounding its main office in Tysons Corner (Vienna, McLean and the
Reston/Herndon area in Virginia), as a means of enhancing the attractiveness of
its services to professionals and businesses in the Northern Virginia area, and
of expanding its banking franchise. There can be no assurance, however, as to
when or if suitable locations will be found, that The Business Bank will obtain
regulatory approval for additional branches, or that such additional branches
will prove profitable.
Competition
UFBC experiences a high degree of competition in the Washington
Metropolitan area. All of its 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 UFBC and its
subsidiaries. As a result of federal and state legislation regarding interstate
branching and mergers, additional competitors not currently in the Company'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.
Certain Federal Tax Issues; Net Operating Loss Carryforwards
For federal income tax purposes, the amount of the net operating loss
carryforwards that a corporation may utilize to offset future taxable income or
income tax payable in any taxable year may be limited under Section 382 of the
Internal Revenue Code if an "ownership change" occurs with respect to such
corporation. In addition, if the corporation has a net built-in loss on the date
it undergoes an ownership change, any built-in losses it recognizes in any
taxable year that includes any day in the three-year period beginning on the
date of the ownership change will be subject to limitation under Section 382
until the amount of such recognized built-in losses exceeds the amount of the
net built-in loss. Ownership changes will result in certain limitations being
imposed on the amount of taxable income generated in a future year that may be
offset by net operating losses incurred prior to such ownership changes. In
addition to reducing the amount of net operating loss carryforwards that may be
used in any single year, the limitations may result in net operating losses
expiring prior to being utilized. At December 31, 1998, UFBC had net operating
loss carryforwards for income tax purposes of $6,403,759.
The determination of whether an "ownership change" has occurred is made
by (i) determining, in the case of any direct or indirect holder of 5% or more
of a corporation's stock (for this purpose all holders of less than 5% are
collectively treated as a single holder, although in certain circumstances such
holders may be segregated into separate groups, each of which would be treated
as a 5% shareholder) (referred to herein as a "5% shareholder"), the increase,
if any, in the percentage ownership of such shareholder at the end of any
three-year testing period relative to such shareholder's lowest percentage
ownership at any time during such testing period, and expressing such increase
in terms of percentage points rather than as a percentage (for example, a
shareholder whose percentage ownership increased from 5% to 20% during the
testing period will be considered to have had an increase of 15 percentage
points), and (ii) aggregating such percentage point increases for all 5%
shareholders during the applicable testing period. An "ownership change " will
occur as of the end of any three-year testing period if the aggregate percentage
point increases for such testing period exceeds 50 percentage points.
UFBC intends to carefully monitor the sale of shares in the offering
and the sale of equity interests in any future offering in order to minimize the
risk that an "ownership change" and the consequent limitation of tax benefits
will occur. There can be no assurance, however, that the Company will be able to
accurately monitor and restrict the distributions of its equity securities, or
have sufficient information available to avoid an "ownership change."
18
<PAGE>
Year 2000
Many computer programs now in use have not been designed to properly
recognize years after 1999. If not corrected, these programs could fail or
create erroneous results. The Year 2000 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips. This problem is not limited to computer systems. Y2K issues may
affect every system that has an embedded microchip, such as automated teller
machines, elevators, vaults, heating, air conditioning, and security systems.
Y2K issues may also affect the operation of third parties with whom UFBC does
business such as vendors, suppliers, utility companies, and customers.
Risks Related To Year 2000. The Y2K issue poses certain risks to UFBC
and its operations. Some of these risks are present because UFBC purchases
technology and information system applications from other parties who also face
Y2K challenges. Other risks are specific to the banking industry.
Commercial banks may experience a deposit base reduction if customers
withdraw significant amounts of cash in anticipation of Y2K. Such a deposit
contraction could cause an increase in interest rates, require UFBC to locate
alternative sources of funding or sell investment securities or other liquid
assets to meet liquidity needs, and may reduce future earnings. To reduce
customer concerns regarding Y2K noncompliance, a customer awareness plan has
been implemented which is directed towards making deposit customers
knowledgeable about UFBC's Y2K compliance efforts.
UFBC lends significant amounts to businesses and individuals in its
marketing areas. If these borrowers are adversely affected by Y2K problems, they
may not be able to repay their loans in a timely manner. This increased credit
risk could adversely affect UFBC's financial performance. In an effort to
identify any potential loan loss risk because of borrower Y2K noncompliance, all
loan customers with loans or commitments exceeding $200,000 were asked to
complete a Y2K questionnaire. Where the customer does not reply, the loan
officer will personally contact the customer. UFBC has purchased software to
assist it in interpreting the responses, and is in the process of analyzing the
results and any risks identified. UFBC has also modified its loan underwriting
controls to ensure that potential borrowers are carefully evaluated for Y2K
compliance before any new loan is approved.
UFBC's operations, like those of many other companies, can be adversely
affected by Y2K triggered failures which may be experienced by third parties
upon whom it relies for processing transactions. UFBC has identified all
critical third-party service providers and vendors and is monitoring their Y2K
compliance programs. UFBC's primary supplier of data processing services has
adopted a Y2K compliance plan which includes a timetable for making changes
necessary to be able to provide services in the year 2000. That supplier has
provided written assurances regarding its progress toward Y2K compliance and has
been examined for Y2K readiness by federal bank examiners. UFBC's operations may
also be adversely affected by Y2K related failures of third party providers of
electricity, telecommunications services and other utility services. The Y2K
compliance of these providers is largely beyond the control of UFBC. UFBC's
contingency plan includes alternate utility services and manual processing of
customer transactions.
UFBC's State of Readiness. UFBC has created a task force to establish a
Y2K plan to prevent or mitigate the adverse effects of the Y2K issue on the
company and its customers. Goals of the Y2K plan include identifying Y2K risks,
information systems and equipment used by UFBC, informing customers of Y2K
issues and risks, establishing a contingency plan for operating if Y2K issues
cause important systems or equipment to fail, implementing changes necessary to
achieve Y2K compliance, and verifying that these changes are effective. The FDIC
has examined the Y2K compliance plan and UFBC's progress in implementation. In
addition, the Board of Directors is carefully monitoring progress under the plan
on a monthly basis.
The plan to address the Y2K issues involves several phases, described
below:
. Awareness - In this phase, the Y2K plan and project team were
established, the overall Y2K approach was identified, compliance
standards were defined, and responsibility for corrective action was
assigned. This phase has been completed.
19
<PAGE>
. Assessment - During this phase, UFBC gathered and analyzed
information to determine the size and the impact of the Y2K problem
and then made decisions to modify, re-engineer, or replace existing
systems and programs. This phase has been completed.
. Renovation - This phase involves obtaining and implementing upgraded
software applications provided by UFBC's vendors, modifying system
codes, reengineering Y2K vulnerable systems and programs, developing
bridges for systems which cannot be reengineered, and changing files
and databases as necessary. This phase has been completed.
. Validation - During the validation phase, UFBC is testing systems
and software for Y2K compliance in an effort to identify and correct
any errors that may be identified in the renovation phase. This
phase has been completed.
. Implementation - In this phase all new and revised systems will be
implemented, data exchange issues will be resolved, and back up and
recovery plans will be tested. This phase has been completed. UFBC
will continue to monitor its systems and operations and make any
necessary modifications.
Based on information developed to date, management believes that the
cost of remediation will not be material to UFBC's business, operations,
liquidity, capital resources, or financial condition. UFBC estimates that total
cash outlays in connection with Y2K compliance will be less than $200,000,
excluding costs of employees involved in Y2K compliance activities. More than
two thirds of this amount had been expended as of June 30, 1999. Y2K
expenditures are being funded through continuing operations.
All designated personnel will report to work on January 1 and 2, 2000,
(Saturday and Sunday) to assess the proper functioning of critical and
non-critical systems. In the event that some or all systems experience failure,
UFBC has developed a detailed contingency plan. This plan calls for manual
processing of bank transactions at designated locations. Delays in processing
transactions could result if UFBC is forced to process transactions manually.
These delays could disrupt normal business activities of UFBC and its customers.
Forward Looking Statements. The discussion above regarding issues
associated with Y2K includes certain "forward looking statements". UFBC's
ability to predict results or effects of issues related to the Y2K issue is
inherently uncertain and is subject to factors that may cause actual results to
differ materially from those projected. Factors that could affect the actual
results include the following:
. The possibility that protection procedures, contingency plans, and
remediation efforts will not operate as intended;
. The failure to timely or completely identify all software or
hardware applications requiring remediation;
. Unexpected costs;
. The uncertainty associated with the impact of Y2K issues on the
banking industry and UFBC's customers, vendors, and others with whom
it conducts business;
. The general economy.
Beneficial Ownership of Securities
The following table shows the common stock owned by directors and
executive officers of UFBC and The Business Bank and persons known by UFBC to
beneficially own more than 5% of the outstanding common stock as of June 30,
1999, and the number and percentage of shares which such persons will own
following the offering, based upon the preliminary indications of officers and
directors regarding purchasing shares in the offering. The directors and
20
<PAGE>
officers are not obligated to purchase the number of shares indicated, and may
purchase a greater or lesser number of shares.
This information has been prepared based upon the SEC's "beneficial
ownership" rules. Under these rules a person is deemed to be a beneficial owner
of a security if that person has or shares voting power, which includes the
power to vote or to direct the voting of a security, or investment power, which
includes the power to dispose or to direct the disposition of a security. More
than one person may be deemed to be a beneficial owner of the same securities. A
person is deemed to be a beneficial owner of any security that the person has
the right to acquire within 60 days. The shares of common stock issuable upon
exercise of options exercisable within 60 days are assumed to be outstanding for
the purpose of determining the percentage of shares beneficially owned by that
person. The SEC's rules sometimes cause the total percentage ownership disclosed
to be less than the sum of the individual ownership percentages.
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to the After the
Name Offering(1) Percent of Class Offering(1) Percent of Class
- --------------------------- -------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Directors of the Company
Manuel V. Fernandez(2) 110,398 13.12% 132,906 13.14%
650 Water Street, SW
Washington, DC 20024
William J. McCormick, Jr.(3) 25,599 3.07% 31,154 3.10%
Dennis I. Meyer(4) 106,446 12.70% 123,446 12.24%
6307 Olmi Landrith Drive
Alexandria, VA 22307
Edward H. Pechan(5) 9,466 1.13% 9,466 0.94%
Harold C. Rauner(6) 38,081 4.43% 38,581 3.75%
Sharon A. Stakes(7) 7,200 0.80% 7,200 0.71%
Jeffery T. Valcourt(8) 228,744 26.94% 270,410 26.53%
1001 N. Highland Street
Suite 200
Arlington, Virginia 22201
Bank Directors
Robert E. Carpenter(9) 17,933 2.15% 18,933 1.88%
Charles S. Evans 5,715 0.69% 5,715 0.57%
Robert W. Pitts 6,669 0.80% 12,224 1.22%
Executive Officers
Lisa M. Porter(10) 3,300 0.40% 3,300 0.33%
All Directors and 559,551 61.19% 653,335 60.24%
Executive Officers as a
group (11 persons)(11)
Other Holders of More
than 5% of Common Stock
Robert F. Long 59,369 7.14% 59,369 5.93%
300 Belvedere Street
Carlisle, PA 17013
Rita M. Meyer(12) 106,446 12.70% 123,446 12.24%
6307 Olmi Landrith Drive
Alexandria, VA 22307
JNV Limited Partnership II(8) 228,744 26.94% 270,410 26.53%
Jeffery T. Valcourt
1001 N. Highland Street
Suite 200
Arlington, VA 22201
</TABLE>
- ---------------------------
(Footnotes appear on the following page)
21
<PAGE>
(Footnotes from prior page)
(1) A person is deemed to be the beneficial owner of shares as to which he owns
or shares voting or investment power. Except as otherwise indicated, all
shares are owned directly. Ownership prior to the offering is based on
831,590 shares of common stock. Ownership after the offering is based on
1,001,590 shares of common stock, assuming the sale of 170,000 shares. In
calculating the percentage of shares owned for warrant and option holders,
the total number of shares outstanding is deemed to include the warrant and
option shares granted and exercisable within sixty days of June 30, 1999.
(2) Includes warrants to purchase 9,666 shares of common stock.
(3) Includes warrants to purchase 1,333 shares of common stock owned by a
company of which Mr. McCormick is the owner and President. Also includes
options to purchase 1,600 shares of common stock pursuant to UFBC's 1996
Nonqualified Stock Option Plan for Non-Employee Directors (the "Directors
Plan").
(4) Includes 175 shares owned by each of Mr. Meyer's five children (875 shares
in the aggregate), 239 shares owned by Mr. Meyer and 21,639 shares owned by
Rinnis Associates, Inc., of which Mr. Meyer is President and Director.
Includes options to purchase 1,600 shares of common stock pursuant to the
Directors Plan and warrants to purchase 4,000 shares of common stock owned
by one of Mr. Meyer's children. Also includes 77,093 shares of common stock
and warrants to purchase 1,000 shares of common stock beneficially owned by
his spouse, Rita M. Meyer.
(5) Includes options to purchase 1,600 shares of common stock pursuant to the
Directors Plan. Also includes warrants to purchase 3,666 shares of common
stock owned by a retirement trust of which Mr. Pechan is a trustee.
(6) Includes options to purchase 28,081 shares of common stock pursuant to
UFBC's 1990 Executive Stock Plan.
(7) Includes options to purchase 7,000 shares of common stock pursuant to the
Executive Stock Plan.
(8) Includes 1,000 shares of common stock owned by Mr. Valcourt and options to
purchase 1,600 shares of common stock pursuant to the Directors Plan. Also
includes 210,144 shares of common stock and warrants to purchase 16,000
shares of common stock owned by JNV Limited Partnership II, of which Mr.
Valcourt is the general partner.
(9) Includes 3,500 shares of common stock beneficially owned by Mr. Carpenter's
spouse. Includes options to purchase 1,600 shares of common stock pursuant
to the Directors Plan and warrants to purchase 1,333 shares of common
stock.
(10) Includes options to purchase 2,800 shares of common stock pursuant to the
Executive Stock Plan.
(11) Includes options to purchase 8,000 shares outstanding pursuant to the
Directors Plan, options to purchase 37,881 shares outstanding pursuant to
the Executive Stock Plan and warrants to purchase 36,998 shares of common
stock.
(12) Includes 175 shares owned by each of Mrs. Meyer's five children (875 shares
in the aggregate), 239 shares owned by her spouse, Dennis I. Meyer and
21,639 shares owned by Rinnis Associates, Inc., of which Mr. Meyer is
President and Director. Includes options to purchase 1,600 shares of common
stock owned by Mr. Meyer pursuant to the Directors Plan and warrants to
purchase 4,000 shares of common stock owned by one of Mrs. Meyer's
children.
DESCRIPTION OF CAPITAL STOCK
The Company has 8,500,000 shares of capital stock authorized, of which
3,500,000 are shares of common stock, and 5,000,000 are shares of serial
preferred stock. As of June 30, 1999, there were 831,590 shares of common stock,
and no shares of serial preferred stock, issued and outstanding.
Common Stock
Each share of common stock is entitled to one vote on all matters
submitted to shareholders. Cumulative voting is not permitted in the election of
directors.
Holders of shares of common stock do not have preemptive rights to
subscribe for shares of common stock or any other class of stock that may be
issued in the future. The shares of common stock are not subject to redemption
and, upon receipt of the full purchase price thereof, will be fully paid and
nonassessable.
22
<PAGE>
Each share of common stock participates equally in dividends which are
payable when, as and if declared by the Board of Directors out of funds legally
available for such purpose, and is entitled to share equally in the assets of
UFBC available for distribution to common shareholders in the event of
liquidation of UFBC. If any shares of preferred stock are outstanding, such
shares may have priority in dividends or liquidation over the common stock.
Preferred Stock
The Board of Directors of UFBC is authorized to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof. The serial preferred stock may rank prior to the shares as
to dividend rights or liquidation preferences, or both, and may have full or
limited voting rights.
The ability of the company to issue additional shares of common stock
and preferred stock could be construed as having an anti-takeover effect because
it can dilute the voting or other rights of the proposed acquiror or create a
substantial voting block in institutional or other hands.
State Anti-Takeover Statutes.
Virginia has two anti-takeover statutes in force, the Affiliated
Transactions Statute and the Control Share Acquisitions Statute.
Affiliated Transactions. The Virginia Stock Corporation Act contains
provisions governing "affiliated transactions" (including, among other various
transactions, mergers, share exchanges, sales, leases, or other dispositions of
material assets, issuances of securities, dissolutions, and similar
transactions) with an "interested shareholder" (generally the beneficial owner
of more than 10% of any class of the corporation's outstanding voting shares).
During the three years following the date a shareholder becomes an interested
shareholder, any affiliated transaction with the interested shareholder must be
approved by both a majority of the "disinterested directors" (those directors
who were directors before the interested shareholder became an interested
shareholder or who were recommended for election by a majority of disinterested
directors) and by the affirmative vote of the holders of two-thirds of the
corporation's voting shares other than shares beneficially owned by the
interested shareholder. The foregoing requirements do not apply to affiliated
transactions if, among other things, a majority of the disinterested directors
approve the interested shareholder's acquisition of voting shares making such a
person an interested shareholder prior to such acquisition. Beginning three
years after the shareholder becomes an interested shareholder, the corporation
may engage in an affiliated transaction with the interested shareholder if (i)
the transaction is approved by the holders of two-thirds of the corporation's
voting shares, other than shares beneficially owned by the interested
shareholder, (ii) the affiliated transaction has been approved by a majority of
the disinterested directors, or (iii) subject to certain additional
requirements, in the affiliated transaction the holders of each class or series
of voting shares will receive consideration meeting specified fair price and
other requirements designed to ensure that all shareholders receive fair and
equivalent consideration, regardless of when they tendered their shares.
Control Share Acquisitions. Under the Virginia Stock Corporation Act's
control share acquisitions law, voting rights of shares of stock of a Virginia
corporation acquired by an acquiring person at ownership levels of 20%, 33 1/3%,
and 50% of the outstanding shares may, under certain circumstances, be denied
unless conferred by a special shareholder vote of a majority of the outstanding
shares entitled to vote for directors, other than shares held by the acquiring
person and officers and directors of the corporation or, among other exceptions,
such acquisition of shares is made pursuant to a merger agreement with the
corporation or the corporation's articles of incorporation or by-laws permit the
acquisition of such shares prior to the acquiring person's acquisition thereof.
If authorized in the corporation's articles of incorporation or by-laws, the
statute also permits the corporation to redeem the acquired shares at the
average per share price paid for them if the voting rights are not approved or
if the acquiring person does not file a "control share acquisition statement"
with the corporation within sixty days of the last acquisition of such shares.
If voting rights are approved for control shares comprising more than fifty
percent of the corporation's outstanding stock, objecting shareholders may have
the right to have their shares repurchased by the corporation for "fair value".
23
<PAGE>
The provisions of the Affiliated Transactions Statute and the Control
Share Acquisition Statute are only applicable to public corporations that have
more than 300 shareholders. UFBC has not elected to opt-out of the Control Share
Acquisitions Statute.
Board of Directors Divided Into Classes
UFBC's Articles of Incorporation and Bylaws provide that the Board of
Directors shall be divided into three classes which shall be as nearly equal in
number as possible. The directors of each class hold office following their
election for a period of three years, with only one-third (1/3) of the directors
coming up for re-election each year. Each director serves until his or her
successor is elected and qualified. Although such provisions may have the effect
of making it more difficult and time consuming for a shareholder to gain control
of the company , the Board of Directors believes these provisions provide
greater continuity and stability in the management of UFBC and provide the Board
with greater ability to negotiate with respect to any proposal for a business
combination, corporate restructuring or other significant transaction in order
to help assure that favorable terms are made available to all of the company's
shareholders.
The Articles of Incorporation authorizes UFBC to issue 3,500,000 shares
of common stock and 5,000,000 shares of preferred stock, from time to time as
approved by the Board of Directors, without the approval of shareholders.
LEGAL MATTERS
The validity of the shares offered hereby and certain other legal
matters will be passed upon for UFBC by the law firm of Kennedy, Baris & Lundy,
L.L.P., Bethesda, Maryland.
EXPERTS
The consolidated financial statements at December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 included and
incorporated by reference in this prospectus have been audited by D.R. Maxfield
& Company, independent auditors, as stated in their reports, which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
ADDITIONAL INFORMATION ABOUT UFBC
AND DOCUMENTS INCLUDED WITH THIS PROSPECTUS
This prospectus includes and is being delivered with copies of UFBC's
Annual Report to Shareholders for the year ended December 31, 1998, and its
Quarterly Report on Form 10-QSB for the period ended June 30, 1999.
UFBC files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that UFBC files with the SEC at the SEC's public reference
room at 450 Fifth Street, NW, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. The SEC
maintains a World Wide Web site on the Internet at "http://www.sec.gov" that
contains reports, proxy and information statements, and other information
regarding companies, including UFBC, that file electronically with the SEC.
UFBC filed a Registration Statement on Form S-2 (the "Registration
Statement") to register the common stock to be sold in the offering. This
prospectus is a part of that Registration Statement. As allowed by SEC rules,
this prospectus does not contain all the information you can find in the
Registration Statement or the exhibits to that Registration Statement. SEC
regulations allow us to "incorporate by reference" information into this
prospectus, which means that UFBC can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered part of this prospectus.
24
<PAGE>
Information incorporated by reference from earlier documents is superceded by
information that has been incorporated by reference from more recent documents.
This prospectus incorporates by reference the documents listed below
that UFBC has previously filed with the SEC (file no. 0-13395). These documents
contain important information about UFBC and its finances. Some of these filings
have been amended by later filings, which are also listed.
(1) Annual Report on Form 10-KSB for the year ended December 31, 1998;
(2) Annual Report to Shareholders for the year ended December 31,
1998; and
(3) Quarterly Report on Form 10-QSB for the quarters ended March 31,
1999 and June 30, 1999.
Also incorporated by reference are additional documents that may be
filed with the SEC by UFBC after the date of this prospectus and before the
termination of the offering. These additional documents shall be deemed to be
incorporated by reference in this prospectus and to be a part hereof from the
date of filing of such documents. These include periodic reports, such as Annual
Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB, and Current Reports on
Form 8-K.
You can obtain any of the documents incorporated by reference through
UFBC, the SEC or the SEC's Internet web site as described above. Documents
incorporated by reference are available from UFBC without charge, including any
exhibits, specifically incorporated by reference therein. You may obtain
documents incorporated by reference in this prospectus by requesting them in
writing or by telephone from UFBC at the following address:
Lisa Porter, Chief Financial Officer
United Financial Banking Companies, Inc.
8399 Leesburg Pike
Vienna, Virginia 22182
Telephone (703) 734-0070
You should rely only on the information contained or incorporated by
reference in this prospectus. UFBC has not authorized anyone to provide you with
information that is different from what is contained in this prospectus. This
prospectus is dated September __, 1999. You should not assume that the
information contained in this prospectus is accurate as of any date other than
that date.
25
<PAGE>
Annual Report to Shareholders
for the year ended 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
<PAGE>
Quarterly Report on Form 10-QSB
for the period ended June 30, 1999
<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
___
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
___ Exchange Act of 1934.
For the quarterly period ended June 30, 1999.
Or
___
Transition Report Pursuant to Section 13 or 15(d) of the Securities
___ Exchange Act of 1934.
For the transition period from _______________ to _______________
Commission File No. 0-13395
UNITED FINANCIAL BANKING COMPANIES, INC.
A Virginia Corporation IRS Employer Identification
No. 54-1201253
8399 Leesburg Pike, Vienna, Virginia 22182
Telephone: (703) 734-0070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Common Stock $1.00 Par Value
831,590 Shares Outstanding
as of June 30, 1999
Transitional Small Business Disclosure Format: Yes No X
---- ----
<PAGE>
Part 1. Financial Information
Item 1: Financial Statements
UNITED FINANCIAL BANKING COMPANIES, INC., AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income / Results of
Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans/leases $814,828 $820,897 $ 1,617,930 $ 1,685,456
Interest on investment securities 104,567 68,724 204,222 114,777
Interest on federal funds sold 50,271 93,365 121,950 173,149
Interest on interest-bearing deposits 181 1,435 245 2,871
-------------- -------------- ------------- -------------
Total interest income 969,847 984,421 1,944,347 1,976,253
-------------- -------------- ------------- -------------
Interest expense:
Interest on deposits 376,075 456,467 773,790 912,948
Interest on short-term borrowings 7,334 808 7,334 808
-------------- -------------- ------------- -------------
Total interest expense 383,409 457,275 781,124 913,756
-------------- -------------- ------------- -------------
Net interest income 586,438 527,146 1,163,223 1,062,497
Provision for loan/lease losses 22,200 36,000 34,279 95,000
-------------- -------------- ------------- -------------
Net interest income after provision
for loan/lease losses 564,238 491,146 1,128,944 967,497
Noninterest income:
Gain (loss) on sale of real estate
owned and other earning assets 500 (9,327) (2,464) (9,327)
Loan servicing and other fees 18,174 30,709 36,554 49,329
Other income 31,444 35,296 67,621 80,537
-------------- -------------- ------------- -------------
Total noninterest income 50,118 56,678 101,711 120,539
-------------- -------------- ------------- -------------
Noninterest expense:
Salaries 247,558 213,440 477,210 435,996
Employee benefits 46,285 40,994 92,948 83,231
Occupancy 94,201 76,367 173,122 153,676
Furniture and equipment 19,113 17,494 38,911 33,261
Legal 5,484 9,790 12,669 22,361
FDIC Insurance 4,979 4,506 9,876 8,721
Data processing 29,523 25,730 62,379 54,618
Real estate owned holding expense 853 9,057 8,514 23,939
Provision for real estate owned losses - - - 187,666
Other expense 81,577 68,301 162,475 133,029
-------------- -------------- ------------- -------------
Total noninterest expense 529,573 465,679 1,038,104 1,136,498
-------------- -------------- ------------- -------------
Income (loss) before income taxes 84,783 82,145 192,551 (48,462)
Provision (credit) for income taxes 4,608 (1,052) 4,608 -
-------------- -------------- ------------- -------------
Net income (loss) $ 80,175 $ 83,197 $ 187,943 $ (48,462)
============== ============== ============= =============
Net income (loss) per common share (Note 3)
Basic $ 0.10 $ 0.13 $ 0.23 $ (0.16)
============== ============== ============= =============
Diluted $ 0.09 $ - * $ 0.22 $ -
============== ============== ============= =============
*anti-dilutive
Comprehensive Income (Note 4)
- -----------------------------
Net income $ 80,175 $ 83,197 $ 187,943 $ (48,462)
Other comprehensive income, net of tax
Unrealized gains (losses) on available-for-sale
securities (55,263) 815 (71,658) (6,843)
============== ============== ============= =============
Comprehensive income $ 24,912 $ 84,012 $ 116,285 $ (55,305)
============== ============== ============= =============
</TABLE>
2
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC., AND SUBSIDIARIES
Consolidated Balance Sheets / Financial Condition
<TABLE>
<CAPTION>
(Unaudited) (Audited)
June 30, December 31,
Assets 1999 1998
------ ------------------ -------------------
<S> <C> <C>
Cash and due from banks $ 1,698,176 $ 2,267,417
Interest-bearing deposits in other banks 5,291 -
Federal funds sold 7,246,000 7,903,493
Investment Securities:
Available-for-sale (AFS) 7,005,107 5,130,213
Held-to-maturity (HTM) 659,226 1,763,891
Loans and lease financing, net of unearned
income of $31,038 and $12,560 36,451,550 36,962,213
Less: Allowance for loan/lease losses (762,734) (747,374)
------------------ -------------------
Net loans and lease financing 35,688,816 36,214,839
Real estate owned held for sale, net 1,534,750 1,799,398
Premises and equipment, net 206,614 119,338
Other assets 414,417 374,483
------------------ -------------------
Total assets $ 54,458,397 $ 55,573,072
================== ===================
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand $ 12,563,897 $ 14,264,071
Savings and NOW 2,214,910 3,051,446
Money market 10,531,505 7,524,516
Time deposits:
Under $100,000 16,235,549 18,048,129
$100,000 and over 6,278,220 7,297,297
----------------- -------------------
Total deposits 47,824,081 50,185,459
------------------ -------------------
Short-term borrowings 1,100,000 -
Other liabilities 342,323 311,905
------------------ -------------------
Total liabilities 49,266,404 50,497,364
------------------ -------------------
Stockholders' Equity:
Preferred stock of no par value, authorized
5,000,000 shares, no shares issued - -
Common Stock, par value $1; authorized 3,500,000 shares,
issued 831,590 shares at 6/30/99 and at 12/31/98 831,590 831,590
Capital in excess of par value 14,681,567 14,681,567
Retained earnings (10,266,457) (10,454,400)
Unrealized holding gain (loss) - AFS securities (54,707) 16,951
------------------ -------------------
Total stockholders' equity 5,191,993 5,075,708
------------------ -------------------
Total liabilities and stockholders' equity $ 54,458,397 $ 55,573,072
================== ===================
</TABLE>
3
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
June 30, 1999 June 30, 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 187,943 $ (48,462)
Adjustment to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation & amortization 24,322 27,459
Provision for loan/lease losses 34,279 95,000
Provision for losses on real estate owned - 187,666
Amortization of investment security discount 3,608 (2,093)
Amortization of loan fees and discounts, net (48,396) (44,812)
Net (gain) loss on sale of other real estate owned 2,964 6,732
(Increase) decrease in other assets (39,936) (238,863)
Increase (decrease) in other liabilities 30,419 45,698
---------------------- ----------------------
Net cash provided by (used in) operating activities 195,203 28,325
---------------------- ----------------------
Cash flows from investing activities:
Loans originated - non-bank subsidiaries (50,000) -
Principal collected - non-bank subsidiaries 23,169 4,901
Loans and lease originations, net of collections 557,574 2,175,351
Loan fees and discounts deferred 9,397 11,523
Purchases of securities available-for-sale (2,969,945) (3,781,000)
Purchases of securities held-to-maturity - (750,937)
Investment made in other real estate owned (41,552) (440,802)
Proceeds received from maturity of securities available-for-sale 1,019,451 1,100,000
Proceeds received from maturity of securities held to maturity 1,105,000 91,786
Proceeds from real estate owned 303,236 648,687
Purchases of premises and equipment (111,598) (27,771)
---------------------- ----------------------
Net cash provided by (used in) investing activities (155,268) (968,262)
---------------------- ----------------------
Cash flow from financing activities:
Net increase (decrease) in demand deposits, savings
accounts, NOW accounts and money market accounts 470,279 2,239,522
Certificates of deposit sold (matured), net (2,831,657) 421,187
Net change in short-term borrowings 1,100,000 -
Proceeds from sale of common stock - 2,148,141
Redeem preferred stock - (1,386,000)
---------------------- ----------------------
Net cash provided by (used in) financing activities (1,261,378) 3,422,850
---------------------- ----------------------
Net increase (decrease) in cash and cash equivalents (1,221,443) 2,482,913
Cash and cash equivalents at beginning of the year 10,170,910 5,041,418
---------------------- ----------------------
Cash and cash equivalents at end of the quarter $ 8,949,467 $ 7,524,331
====================== ======================
Supplemental disclosures of cash flow information: Cash paid during the years
for:
Interest on deposits and other borrowings $ 800,804 $ 904,475
Income taxes 10,885 4,005
Non-Cash Items:
Effect on stockholders' equity of an unrealized gain (loss)
on debt and equity securities available-for-sale $ 71,658 $ (6,843)
Increase in foreclosed properties and decrease in loans $ - $ -
Accrued dividend on preferred stock - series A $ - $ 50,000
</TABLE>
4
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
Note 1 - The accompanying unaudited consolidated financial statements have
been prepared in accordance with the instructions for Form 10-QSB and,
therefore, do not include all information and footnotes required by
generally accepted accounting principles for complete financial
statements. The interim financial statements have been prepared
utilizing the interim basis of reporting and, as such, reflect all
adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the periods presented. The results
of operations for the interim periods are not necessarily indicative of
the results for the full year.
Note 2 - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Note 3 - On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings per share (SFAS 128), which
supersedes Accounting Principles Board Opinion No. 15. Under SFAS 128,
earnings per common share are computed by dividing net income (loss)
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
reflects the potential dilution, if any, that could occur if securities
or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock. There
dilutive effect for the six month period ended June 30, 1999 is shown
within this report. The calculation for the six month period ended June
30, 1998 was anti-dilutive. Prior period amounts have been restated,
where appropriate, to conform to the requirements of SFAS 128.
Note 4 - On January 1, 1998, United Financial Banking Companies, Inc.
adopted Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130). Under SFAS 130, each company is
required to present a `Statement of Comprehensive Income'.
Comprehensive income is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner
sources such as foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in
debt and equity securities.
5
<PAGE>
----------------------------------------------------
UNITED FINANCIAL BANKING COMPANIES, INC.
CONSOLIDATED AVERAGE BALANCES/NET INTEREST ANALYSIS/
YIELDS AND RATES
----------------------------------------------------
<TABLE>
<CAPTION>
For the Six Month Period Ended
June 30, 1999 June 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans/Leases:
Commercial $23,939,845 $ 1,065,581 8.98% $25,994,505 $ 1,236,510 9.59%
Real estate construction 3,854,964 196,381 10.27% 2,396,255 112,270 9.45%
Real estate mortgage 7,163,116 286,306 8.06% 6,831,601 260,409 7.69%
Installment 1,578,338 69,662 8.90% 1,628,586 76,267 9.44%
Leases - - - 304,642 - -
--------------- -------------- -------------- --------------
Total loans/leases 36,536,263 1,617,930 8.93% 37,155,589 1,685,456 9.15%
--------------- -------------- -------------- --------------
Interest-bearing deposits - - - 100,000 2,871 5.79%
Federal funds sold 5,200,585 122,195 4.74% 6,229,813 173,149 5.60%
Investment securities 7,066,139 204,222 5.83% 4,002,306 114,777 5.78%
--------------- -------------- -------------- --------------
Total earning assets 48,802,987 1,944,347 8.03% 47,487,708 1,976,253 8.39%
============== ==============
Noninterest-earning assets
Cash and due from banks 1,924,608 1,803,888
Other assets 2,156,443 2,825,492
Allowance for loan losses/lease (739,055) (763,647)
--------------- --------------
Total assets $52,144,983 $51,353,441
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 3,480,845 38,861 2.25% 2,297,645 26,929 2.36%
Money market accounts 8,828,378 134,981 3.08% 8,872,391 161,839 3.68%
Time:
Under $100,000 16,932,376 436,097 5.19% 19,846,643 540,321 5.49%
$100,000 and over 6,484,373 163,851 5.10% 6,827,608 183,859 5.43%
--------------- -------------- -------------- --------------
Total interest-bearing
deposits 35,725,972 773,790 4.37% 37,844,287 912,948 4.86%
Short-term borrowings 300,000 7,334 4.93% 81,944 808 1.99%
--------------- -------------- -------------- --------------
Total interest-bearing
liabilities 36,025,972 781,124 4.37% 37,926,231 913,756 4.86%
============== ==============
Non interest-bearing liabilities:
Demand deposits 10,691,024 9,278,747
Other liabilities 323,077 377,076
Redeemable preferred stock - 907,333
Stockholders' equity 5,104,910 2,864,054
--------------- --------------
Total liabilities and
stockholders' equity $52,144,983 $51,353,441
=============== ==============
Net interest income $ 1,163,223 $ 1,062,497
============== ==============
Net interest margin (1) 4.81% 4.51%
======== ========
Net interest spread (2) 3.66% 3.53%
======== ========
Fees included in loan income $ 73,888 $ 47,914
============== ==============
Taxable equivalent adjustment $ - $ -
============== ==============
<CAPTION>
For the Year Ended
December 31, 1998
------------------------------------------
Average Yield/
Balance Interest Rate
------------------------------------------
ASSETS
<S> <C> <C> <C>
Earning assets:
Loans/Leases:
Commercial $25,163,714 $2,462,453 9.79%
Real estate construction 2,756,519 264,084 9.58%
Real estate mortgage 6,950,303 527,037 7.58%
Installment 1,641,652 151,500 9.23%
Leases 273,446 - -
-------------- -------------
Total loans/leases 36,785,634 3,405,074 9.26%
-------------- -------------
Interest-bearing deposits 88,056 5,491 6.24%
Federal funds sold 6,229,522 339,393 5.45%
Investment securities 5,264,914 305,462 5.80%
-------------- -------------
Total earning assets 48,368,126 4,055,420 8.38%
=============
Noninterest-earning assets
Cash and due from banks 1,768,063
Other assets 2,682,471
Allowance for loan losses/lease (763,834)
==============
Total assets $52,054,826
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 2,360,360 56,526 2.39%
Money market accounts 8,817,006 317,462 3.60%
Time:
Under $100,000 19,638,531 1,078,163 5.49%
$100,000 and over 6,636,143 360,829 5.44%
-------------- -------------
Total interest-bearing
deposits 37,452,040 1,812,980 4.84%
Short-term borrowings 40,972 808 1.97%
-------------- -------------
Total interest-bearing
liabilities 37,493,012 1,813,788 4.84%
=============
Non interest-bearing liabilities:
Demand deposits 9,843,027
Other liabilities 361,048
Redeemable preferred stock 453,667
Stockholders' equity 3,904,072
--------------
Total liabilities and
stockholders' equity $52,054,826
==============
Net interest income $2,241,632
=============
Net interest margin (1) 4.63%
========
Net interest spread (2) 3.54%
========
Fees included in loan income $ 103,364
=============
Taxable equivalent adjustment $ -
=============
</TABLE>
Average balances for the years presented are calculated on a monthly
basis. Nonaccruing loans are included in the average loan balance.
(1) Net interest income divided by total earning assets.
(2) Average rate earned on total earning assets less average rate paid for
interest-bearing liabilities.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward looking statements. This discussion contains forward looking statements,
including statements of goals, intentions and expectations as to future trends,
plans, or results of Company operations and policies and regarding general
economic conditions. These statements are based upon current and anticipated
economic conditions, nationally and in the Company's market, interest rates and
interest rate policy, competitive factors, statements by suppliers of data
processing equipment and services, government agencies and of third parties, as
to Year 2000 compliance, and other conditions which, by their nature, are not
susceptible to accurate forecast, and are subject to significant uncertainty.
Because of these uncertainties and the assumptions on which this discussion and
the forward looking statements are based, actual future operations and results
may differ materially from those indicated herein.
A. Results of Operations for the Six Months Ended June 30, 1999 as Compared
------------------------------------------------------------------------
to the Six Months Ended June 30, 1998
-------------------------------------
General
- -------
The following discussion provides an overview of the financial
condition and results of operations of United Financial Banking Companies, Inc.
(UFBC) and its subsidiaries, The Business Bank and Business Venture Capital,
Inc., which is presented on a consolidated basis. UFBC reported net income of
$187,943 for the six-month period ended June 30, 1999. This compares with net
loss of $48,462 for the same period of 1998. Basic earnings (loss) per share
were $.23 for the first six months ended June 30, 1999 compared to ($.16) for
the first six months of 1998.
Earnings for the first six months of 1999 are primarily due to
increased earning assets. During the past year, UFBC's primary subsidiary, The
Business Bank (the Bank), continued to increase the Company's earning asset
base. At June 30, 1999, average total earning assets increased $1,315,279 or
2.8% when compared to the first six months of June 30, 1998 (Consolidated
Average Balances table). The increase has favorably contributed to the Company's
operating earnings.
On July 14,1999, the Company filed a registration statement with the
Securities and Exchange Commission to offer 170,000 shares of United Financial
Banking Companies, Inc. common stock at $9.00 per share. The offering includes a
10% over line in the event of over subscription.
In February, the Company signed a lease for a branch site at 1451 Chain
Bridge Road (Route 123) in McLean, Virginia. The location is the former branch
of a competitor bank that closed as a result of a bank merger. The branch opened
June 23, 1999.
Net Interest Income
- -------------------
For the six-month period ended June 30, 1999, net interest income
increased $100,726 or 9.5% from $1,062,497 at the six-month period ended June
30, 1998 to $1,163,223 at the six-month period ended June 30, 1999. The increase
is primarily attributable to decreased interest expense as a result of the
Bank's asset liability management. As shown in the Consolidated Average Balances
table, average total interest-bearing deposits decreased $2,118,315 or 11.2%
from $37,844,287 at June 30, 1998 to $35,725,972 at June 30, 1999. Rate
sensitive deposits (customers without an established banking relationship) were
allowed to runoff as they matured during the first and second quarters of 1999
as loan payoffs exceeded loan demand during the first six months. Interest
expense on deposits decreased $139,158 or 15.2% at June 30, 1999 when compared
to the six month period ended June 30, 1998. Interest expense on short-term
borrowings increased $6,526 or 807.7% as a result of the Bank's 1,100,000 in
borrowings from the Federal Home Loan Bank of Atlanta. Total interest expense
declined $132,632 or 14.5% when comparing June 30, 1999 to June 30, 1998. The
decreased interest expense contributed favorably to net interest income.
For the same comparable six-month period, interest and fee income
earned on loans decreased $67,526 or 4.0% (Consolidated Statements of Income).
The decreased volume of loans due to unexpected payoffs accounts for the
decline. As shown in the Consolidated Average Balances table, the average total
loan/lease volume decreased $619,326 or 1.7% from $37,155,589 at June 30, 1998
to $35,536,263 at June 30, 1999. The decreased loan volume
7
<PAGE>
caused a change in the investment mix, such as loans, securities or federal
funds, chosen by management during the comparable periods. Interest earned on
investment securities increased $89,445 or 77.9%. The investment mix and the
increased volume of securities accounted for the rise. As shown in the
Consolidated Average Balances table, average investment securities increased
$3,063,833 or 76.6% from $4,002,306 at June 30, 1998 to $7,066,139 at June 30,
1999.
Provision for Loan/Lease Losses
- -------------------------------
Provision expense declined $60,721 or 63.9% from $95,000 at June 30,
1998 to $34,279 at June 30, 1999. During the first six months of 1999, the Bank
funded its allowance for loan/lease losses by charging $44,400 against earnings
compared to $95,000 charged against earnings during the first six months of
1998. The Bank charged-off a $53,000 commercial loan during the first six months
of 1998. During the first quarter of 1999, the parent company, UFBC, sold its
only booked loan which resulted in a $19,529 charge to its allowance of $30,940.
The remaining UFBC allowance of $11,411 was reversed and credited to the
Company's provision expense.
Noninterest Income
- ------------------
Total noninterest income decreased $18,828 or 15.6% for the six month
period ended June 30, 1999 compared to the same period of 1998. The decrease is
primarily attributable to the recognition of $9,600 of deferred income as the
result of a loan payoff during the first quarter of 1998. The attrition of loans
which generated servicing income also contributed to the decline.
Noninterest Expense
- -------------------
Total noninterest expense decreased $98,394 or 8.7% during the first
six months of 1999 when compared to the same period of 1998. The decrease is
explained by the real estate owned (REO) write-downs totaling $187,666, in
connection with the disposition of REO, which occurred in the quarter ended
March 31, 1998. REO holding expense declined $15,425 or 64.4% for the comparable
periods and also contributed to the decrease in total noninterest expense. The
liquidation of REO property during 1998, which eliminated the related holding
costs, explains the decline.
Total noninterest expense increased $63,894 or 13.7% during the three
month period ended June 30, 1999 when compared to the same period of 1998.
During the comparable period, salaries increased $34,118 or 15.9%, employee
benefits increased 5,291 or 12.9% and occupancy increased $17,834 or 23.4%. The
increases were due to staffing and other costs associated with the McLean
branch.
Legal expense declined $9,692 or 43.3% during the six-month period
ended June 30, 1999 when compared to the first six months of 1998. The Bank
incurred approximately $3,000 of litigation expense in the first six months of
1998. Also in the first six months of 1998, UFBC incurred costs associated with
non-recurring regulatory filings. During the first six months of 1999, the Bank
incurred general legal fees associated with collections in the normal course of
business. In the opinion of management, there were no legal matters pending as
of June 30, 1999 which would have a material adverse effect on the Company`s
financial statements.
Salaries and employee benefits increased $50,931 or 9.8% from $519,227
at June 30, 1998 to $570,158 at June 30, 1999. The rise is due to additional
staffing as the Company expands its banking operations.
Other expense rose $29,446 or 22.1% during the six-month period ended
June 30, 1999 when compared to the first six months of 1998. During the first
six months of 1999, the Bank incurred approximately $12,000 of one-time fees
associated with Year 2000 compliance and state tax assessments. One-time costs
associated with opening the new McLean branch also contributed to the increase.
Income Taxes
- ------------
In 1993, the rate that UFBC accrued its tax benefit differed from the
statutory tax rate based on the inability of UFBC to use its losses to reduce
deferred taxes or to record a tax benefit. At the end of 1993, all of UFBC's
accrued tax benefits were eliminated due to UFBC's inability to demonstrate
capacity for their future use. As a result, until such time that UFBC
demonstrates a capacity for their future use, UFBC will not be able to accrue
tax benefits. UFBC accrued no tax benefits for the six months ended June 30,
1999.
8
<PAGE>
B. Financial Condition as of June 30, 1999
---------------------------------------
Assets
- ------
Total assets decreased $1,114,675 or 2.0% during the first six months
of 1999 when compared to the period ended December 31, 1998. The drop in assets
is primarily attributable to the Bank's decreased volume of loans and the
liquidation of real estate owned. Loans decreased $510,663 or 1.4 from
$36,962,213 at December 31, 1998 to $36,451,550 at June 30, 1999 due to rate
driven payoffs. Real estate owned decreased $264,648 or 14.7% during the first
six months ended June 30, 1999 due to sales.
Allowance for Loan/Lease Losses
- -------------------------------
The allowance for loan/lease losses (allowance) represents an amount
which management believes will be adequate to absorb potential losses inherent
in the loan/lease portfolio. The provision for loan losses represents the charge
to earnings during the year to fund the allowance to cover potential future
losses. The amount charged to expense during the year is dependent upon
management's and the Board of Directors' assessment of the adequacy of the
allowance. Principal factors used in evaluation include prior loss experience,
changes in the composition and volume of the portfolio, overall portfolio
quality, the value of underlying collateral, reviews of portfolio quality by
state and federal supervisory authorities, specific problem loans, and current
and anticipated economic conditions that may affect a borrower's ability to
repay.
At June 30, 1999 and December 31, 1998, the allowance was $762,734 and
$747,374, respectively, or 2.0% of total loans and leases. Nonperforming loans
for the six-month period ended June 30, 1999 totaled $15,781, which resided in
the subsidiary, Business Venture Capital, Inc. (BVCI). This compares to a
balance of $60,378 at December 31, 1998, of which $15,781 resided in the BVCI
and $44,597 in the parent. The consolidated allowance for loan/lease losses
covers nonperforming loans 48.3 times at June 30, 1999, compared to a coverage
of 12.4 times at year end 1998.
Premises and equipment, net of accumulated depreciation, increased
$87,276 or 73.1% during the first six months of 1999. The increase was due to
purchases and build out associated with the McLean branch. Purchases of Year
2000 compliant equipment for the main branch also contributed to the increase.
Liabilities
- -----------
Total deposits decreased $2,361,378 or 4.7% during the first six months
of 1999 when compared to the year ended 1998. During the six months ended June
30, 1999, the deposit mix changed favorably in response to the rate environment
and the Bank's liquidity and investment requirements. Rate sensitive
certificates of deposits were repriced as they matured during the first and
second quarters of 1999 which resulted in runoff. Certificates of deposits
declined $2,831,657 or 11.2% from $25,345,426 at December 31, 1998 to
$22,513,769 at June 30, 1999. Core deposits such as demand deposits and money
market accounts rose $1,306,815 or 6.0% from $21,788,587 at December 31, 1998 to
$23,095,402 at June 30, 1999. The change is part of management's continuing plan
to increase core deposits to provide a base for the Bank's growth.
The Bank borrowed $1,100,000 from the Federal Home Loan Bank of Atlanta
in May 1999. The short-term borrowings mature in November 1999. The transaction
tested the Bank's borrowing process should the need arise for Year 2000
concerns. The funds also supplement liquidity while the McLean branch builds a
deposit base.
Liquidity and Investment
- ------------------------
UFBC's operational needs were significantly reduced by the cancellation
of its debt to the FDIC in 1994, staff reduction and reduced professional fees.
For the near future, management projects that proceeds received from the May
1998 Private Offering, earning assets, the liquidation of non-Bank REO and the
sale of non-Bank assets will provide sufficient cash flow for UFBC's continuing
operational needs.
Consolidated average liquid assets were 27.2% of average total assets
at June 30, 1999 compared to 23.6% for the same period ended June 30, 1998 and
31.4% at December 31, 1998 (Consolidated Average Balances table). The Company's
liquidity needs exist primarily in the Bank subsidiary. To maintain adequate
liquidity, the Bank
9
<PAGE>
purchases certain traditional assets such as government and other investment
securities. The Bank's securities portfolio comprises U.S. Treasury securities,
U.S. Government agency securities, state and municipal securities and equity
securities. The Bank is strategically growing its securities portfolio to ensure
safe levels of liquidity, to enhance the overall credit quality of its asset
base, to generate increased interest income, to balance assets and liabilities
and to hedge interest rate risk. The securities portfolio includes both
instruments available-for-sale and held-to-maturity. Securities classified as
available-for-sale may be sold in response to changes in market interest rates,
changes in prepayment or extension risk, management of the federal tax position,
liquidity needs and other asset/liability management issues. Securities
classified as held-to-maturity are intended for investment purposes.
At June 30, 1999, the Bank's investment portfolio consisted of the
following:
Available-for-Sale Held-to-Maturity
------------------ ----------------
U.S. Treasury -- 519,226
U.S. Government Agency 6,838,707 --
State and Municipal -- 140,000
Equity 166,400 --
Capital Requirements
- --------------------
The Federal Reserve Board issued risk-based capital guidelines for bank
holding companies. The guidelines initially defined a two-tier capital
framework. Tier I Capital consists of common and qualifying preferred
shareholders' equity less intangible assets. Tier II Capital consists of
mandatory convertible, subordinated and other qualifying debt, preferred stock
not qualifying as Tier I Capital and the reserve for loan losses up to 1.25
percent of risk-weighted assets. Under these guidelines, one of four risk
weights is applied to the different on-balance sheet assets. Off-balance sheet
items such as loan commitments are also applied a risk weight after conversion
to balance sheet equivalent amounts. Tier I and Tier II Capital require a
minimum ratio of 4.0% and 8.0%, respectively. The Federal Reserve issued another
guideline, a minimum Leverage ratio, which measures the ratio of Tier I Capital
to quarterly average assets less intangible assets. A Leverage ratio of 3.0%
must be maintained for highly rated banks. Otherwise, the minimum leverage
ratio, based upon the institution's overall financial condition, must be at
least 100 to 200 basis points above the minimum. These guidelines were also
adopted by the Federal Deposit Insurance Corporation and therefore applies to
the Company's banking subsidiary. Additionally, the Federal Reserve Board
requires bank holding companies to meet a minimum ratio of qualifying Total
(combined Tier I and Tier II) capital to risk-weighted assets of 8.0%, at least
half of which must be composed of core (Tier I) capital elements. The following
table presents the Company and the Bank's capital position and related ratios as
of June 30, 1999 and 1998.
1999 1998
---------- ----------
Tier I Capital
Company $ 5,246,700 $ 4,687,308
The Business Bank 5,098,617 4,473,641
Total qualifying capital
Company $ 5,704,078 $ 5,130,509
The Business Bank 5,554,609 4,914,427
Risk-weighted assets
Company $ 36,284,871 $ 35,160,031
The Business Bank 36,177,150 34,995,336
Quarterly average assets
Company $ 52,815,096 $ 51,778,396
The Business Bank 51,406,043 51,335,964
<TABLE>
<CAPTION>
Required
Risk-based capital ratios: 1999 1998 Minimum
-------- -------- --------
<S> <C> <C> <C>
Tier I Capital (Tier I capital/risk-weighted assets)
Company 14.46% 13.33% 4.00%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The Business Bank 14.09% 12.78% 4.00%
Total Capital (Total capital/risk-weighted assets)
Company 15.72% 14.59% 8.00%
The Business Bank 15.35% 14.04% 8.00%
Leverage ratio (Tier I capital/adjusted average assets)
Company 9.93% 9.05% 5.00%
The Business Bank 9.92% 8.71% 5.00%
Earnings Per Share
- ------------------
The following table is a reconciliation of earnings per common share as
computed under SFAS 128. (See note 3).
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic Earnings Per Share:
For the six months ended June 30, 1999
Net Income $ 187,943
Income available to common stockholders $ 187,943 831,590 $ .23
========= ========= =========
For the six months ended June 30, 1998
Net Income $ (48,642)
Less: Preferred Stock Dividends (50,000)
----------
Income available to common stockholders $ (98,462) 599,805 $ (.16)
========= ========= =========
Diluted Earnings Per Share:
For the six months ended June 30, 1999
Net Income available to common stockholders $ 187,943 831,590
Add: Contracts to issue common stock
Warrants - expire 12/31/99 2,000
Warrants - expire 9/30/01 4,571
Options - expire 12/31/05 - 6/30/08 6,812
---------
Weighted-average diluted shares outstanding 13,383
Diluted earnings per common share: $ 187,943 844,973 $ .22
========= ========= =========
</TABLE>
Year 2000
- ---------
Assuring that computer systems and applications are Year 2000
(Y2K) compliant presents a complex managerial and technological challenge. Many
computer programs now in use have not been designed to properly recognize years
after 1999. If not corrected, these programs could fail or create erroneous
results. The Y2K issue affects the entire banking industry because of its
reliance on computers and other equipment that use computer chips, and may have
significant effects on the Company's customers and regulators. In recognition of
the potential adverse effects of the Y2K issue, management of the Company
created a Y2K project team and established a plan to prevent or mitigate
potential adverse effects of Y2K issue on the Company, its vendors and its
customers. The Y2K project team is headed by a senior management executive.
The Company's Y2K Plan consists of three phases. Phase I required
the Company to assess its Y2K compliance needs and to develop a plan to address
those needs. The assessment included testing the Company's current hardware,
software and material external vendors' compliance. Phase I also included
assessing the impact Y2K compliance could have on our existing and future
customers. The Company completed Phase I in December 1997. The Y2K project team
concluded that the Company would need to replace and/or update most of its
computer hardware and software. The Y2K project team also concluded that
extensive testing would be required of the Bank's data processing company to
determine Y2K compliance.
11
<PAGE>
The assessment of the impact of Y2K on existing customers was determined to be
immaterial to the Company. A questionnaire and information guide was established
to assess Year 2000 compliance of future customers. The costs of Phase I,
including salary allocations, were approximately $50,000.
Phase II requires all non-compliant hardware and software to be
replaced by May 1999. All of the equipment and software identified in Phase I
had been replaced as of June 30, 1999. The new equipment and software must be
re-tested for compliance by August 1999. The Company has included approximately
$154,000 for Y2K compliance costs, including salary allocations, in its 1999
budget.
Phase III requires monitoring and review of Year 2000 issues that
may have been overlooked. Management does not anticipate material costs in Phase
III.
The Bank's primary supplier of data processing services also has
adopted a Y2K plan and timetable which also consists of three phases. The vendor
has completed Phase I and Phase II. Phase I problems have been corrected. Phase
II included testing key dates such as 12/31/99, 1/1/2000 and 2/29/2000 on a live
data base. The vendor has resolved the discrepancies which were detected during
the testing. Based on representations from its vendor, management anticipates
that the vendor has completed its testing of Phase II Y2K compliance. Also,
based on information developed to date and representations from its data
processing supplier, Phase II testing should have resolved most Y2K issues and
therefore should prevent any material problems which could 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 includes 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.
PART II. OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(4) At the United Financial Banking Companies, Inc. Annual Meeting of
Shareholders held on June 4, 1999, the shareholders elected Dennis I.
Meyer, Sharon A. Stakes and Jeffery T. Valcourt to serve as Class
Three directors until the 2002 Annual Meeting of Shareholders and
Manuel V. Fernandez to serve as a Class One successor director until
the 2000 Annual Meeting of Shareholders. The shareholders also voted
to approve the 1999 Directors Stock Plan and the 1999 Executive Stock
Plan.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(6) None.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED FINANCIAL BANKING COMPANIES, INC.
By: /s/ HAROLD C. RAUNER
------------------------------------------
Harold C. Rauner
President and CEO
/s/ LISA M. PORTER
------------------------------------------
Lisa M. Porter
Chief Financial Officer
Date: August 12, 1999
-----------------------
13
<PAGE>
===============================================================
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Page
Summary..................................................2
Risk Factors.............................................4
No Active Public Market for the Common Stock.......4
Non-Underwritten Offering;
Subscriptions Binding on Subscribers..............4
Consummation of offering
Not Subject to Minimum Subscription...............4
History of Operating Losses........................4
Substantial Ownership Concentration................4
Possible Limitation of Tax Benefits................5
Dilution...........................................5
Management Will Have Discretion in Allocating
a Substantial Portion of Proceeds.................5
Delay in Closing and Loss of Use of Funds..........5
Credit Risk........................................5
Local Economic Conditions..........................6
Loan Portfolio Concentration.......................6
Interest Rate Risk.................................6
Provisions that Could Discourage Acquisition
of the Company....................................6
Dividend Restrictions..............................7
Competition........................................7
Year 2000 Risk.....................................7
Regulatory Risk....................................7
Caution About Forward Looking Statements.................8
Use of Proceeds..........................................8
Selected Consolidated Financial Data.....................9
The Offering.............................................11
Capitalization...........................................15
Market For Common Stock and Dividends....................15
United Financial Banking Companies, Inc..................16
Description of Capital Stock.............................21
Legal Matters............................................23
Experts..................................................23
Additional Information About UFBC and Documents
Included With This Prospectus.......................23
</TABLE>
----------------
UFBC has not authorized anyone to give any information or make any
representation about the offering that differs from, or adds to, the information
in this prospectus or in its documents that are publicly filed with the
Securities and Exchange Commission. Therefore, if anyone does give you different
or additional information, you should not rely on it. The delivery of this
prospectus and/or the sale of shares of common stock do not mean that there have
not been any changes in UFBC's condition since the date of this prospectus. If
you are in a jurisdiction where it is unlawful to offer to sell, or to ask for
offers to buy, the securities offered by this prospectus, or if you are a person
to whom it is unlawful to direct such activities, then the offer presented by
this prospectus does not extend to you. This prospectus speaks only as of its
date except where it indicates that another date applies. Documents that are
incorporated by reference in this prospectus speak only as of their date, except
where they specify that other dates apply.
170,000 Shares
United Financial Banking Companies, Inc.
Common Stock
Prospectus
September __, 1999
___________________
================================================================================
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses payable by the Company in connection with the Offering
described in this Registration Statement (other than underwriting discounts and
commissions) are as follows:
<TABLE>
<S> <C>
Registration Fee...........................................................$468
*Blue Sky Filing Fees and Expenses (Including counsel fees)...............2,500
*Legal Fees..............................................................25,000
*Printing, Engraving and Edgar...........................................13,000
*Accounting Fees and Expenses.............................................5,000
*Other Expenses...........................................................3,232
Total.................................................$49,200
=======
</TABLE>
--------
* Estimated
Item 15. Indemnification of Directors and Officers
UFBC's Bylaws provide that the Company shall, to the full extent required or
permitted by the Virginia Stock Corporation Act or other applicable law,
indemnify an officer or director of the company who is or was a party to any
proceeding by reason of the fact of service as an officer or director, or
service at UFBC's request as an officer, director, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise.
The Virginia Stock Corporation Act provides in relevant part as
follows:
ss. 13.1-696
Definitions
In this article:
"Corporation" includes any domestic or foreign predecessor entity of a
corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction. "Director" means an
individual who is or was a director of a corporation or an individual who, while
a director of a corporation, is or was serving at the corporation's request as a
director, officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. A director is considered to be serving an employee benefit
plan at the corporation's request if his duties to the corporation also impose
duties on, or otherwise involve services by, him to the plan or to participants
in or beneficiaries of the plan. "Director" includes, unless the context
requires otherwise, the estate or personal representative of a director.
"Expenses" includes counsel fees. "Liability" means the obligation to pay a
judgment, settlement, penalty, fine, including any excise tax assessed with
respect to an employee benefit plan, or reasonable expenses incurred with
respect to a proceeding. "Official capacity" means, (i) when used with respect
to a director, the office of director in a corporation; or (ii) when used with
respect to an individual other than a director, as contemplated in ss.13.1-702,
the office in a corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of the corporation.
"Official capacity" does not include service for any other foreign or domestic
corporation or any partnership, joint venture, trust, employee benefit plan, or
other enterprise. "Party" includes an individual who was, is, or is threatened
to be made a named defendant or respondent in a proceeding. "Proceeding" means
any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative or investigative and whether formal or informal.
ss. 13.1-697
Authority to indemnify
A. Except as provided in subsection D of this section, a corporation may
indemnify an individual made a party to a
II-1
<PAGE>
proceeding because he is or was a director against liability incurred in the
proceeding if:
1. He conducted himself in good faith; and
2. He believed:
a. In the case of conduct in his official capacity with the corporation, that
his conduct was in its best interests; and
b. In all other cases, that his conduct was at least not opposed to its best
interests; and
3. In the case of any criminal proceeding, he had no reasonable cause to believe
his conduct was unlawful. B. A director's conduct with respect to an employee
benefit plan for a purpose he believed to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of subdivision 2 b of subsection A of this section.
C. The termination of a proceeding by judgment, order, settlement or conviction
is not, of itself, determinative that the director did not meet the standard of
conduct described in this section.
D. A corporation may not indemnify a director under this
section:
1. In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation; or
2. In connection with any other proceeding charging improper personal benefit to
him, whether or not involving action in his official capacity, in which he was
adjudged liable on the basis that personal benefit was improperly received by
him.
E. Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
ss. 13.1-698
Mandatory indemnification
Unless limited by its articles of incorporation, a corporation shall indemnify a
director who entirely prevails in the defense of any proceeding to which he was
a party because he is or was a director of the corporation against reasonable
expenses incurred by him in connection with the proceeding.
ss. 13.1-699
Advance for expenses
A. A corporation may pay for or reimburse the reasonable expenses incurred by a
director who is a party to a proceeding in advance of final disposition of the
proceeding if:
1. The director furnishes the corporation a written statement of his good faith
belief that he has met the standard of conduct described in ss. 13.1-697;
2. The director furnishes the corporation a written undertaking,
executed personally or on his behalf, to repay the advance if it is ultimately
determined that he did not meet the standard of conduct; and
3. A determination is made that the facts then known to those making the
determination would not preclude indemnification under this article.
B. The undertaking required by subdivision 2 of subsection A of this section
shall be an unlimited general obligation of the director but need not be secured
and may be accepted without reference to financial ability to make repayment.
C. Determinations and authorizations of payments under this section shall be
made in the manner specified in ss.13.1-701.
ss. 13.1-700.1
Court orders for advances, reimbursement or indemnification
A. An individual who is made a party to a proceeding because he is or was a
director of a corporation may apply to a court for an order directing the
corporation to make advances or reimbursement for expenses or to provide
indemnification. Such application may be made to the court conducting the
proceeding or to another court of competent jurisdiction.
B. The court shall order the corporation to make advances and/or reimbursement
for expenses or to provide indemnification if it determines that the director is
entitled to such advances, reimbursement or indemnification and shall also order
the corporation to pay the director's reasonable expenses incurred to obtain the
order.
C. With respect to a proceeding by or in the right of the corporation, the court
may (i) order indemnification of the director to the extent of his reasonable
expenses if it determines that, considering all the relevant circumstances, the
director is entitled to indemnification even though he was adjudged liable to
the corporation and (ii) also order the
II-2
<PAGE>
corporation to pay the director's reasonable expenses incurred to obtain the
order of indemnification.
D. Neither (i) the failure of the corporation, including its board of directors,
its independent legal counsel and its shareholders, to have made an independent
determination prior to the commencement of any action permitted by this section
that the applying director is entitled to receive advances and/or reimbursement
nor (ii) the determination by the corporation, including its board of directors,
its independent legal counsel and its shareholders, that the applying director
is not entitled to receive advances and/or reimbursement or indemnification
shall create a presumption to that effect or otherwise of itself be a defense to
that director's application for advances for expenses, reimbursement or
indemnification.
ss. 13.1-701
Determination and authorization of indemnification
A. A corporation may not indemnify a director under ss.13.1-697 unless
authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because he
has met the standard of conduct set forth in ss.13.1-697.
B. The determination shall be made:
1. By the board of directors by a majority vote of a quorum consisting of
directors not at the time parties to the proceeding;
2. If a quorum cannot be obtained under subdivision 1 of this subsection, by
majority vote of a committee duly designated by the board of directors (in which
designation directors who are parties may participate), consisting solely of two
or more directors not at the time parties to the proceeding;
3. By special legal counsel:
a. Selected by the board of directors or its committee in the manner prescribed
in subdivisions 1 and 2 of this subsection;
b. If a quorum of the board of directors cannot be obtained under subdivision 1
of this subsection and a committee cannot be designated under subdivision 2 of
this subsection, selected by majority vote of the full board of directors, in
which selection directors who are parties may participate; or 4. By the
shareholders, but shares owned by or voted under the control of directors who
are at the time parties to the proceeding may not be voted on the determination.
C. Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under subdivision 3
of subsection B of this section to select counsel.
ss. 13.1-702
Indemnification of officers, employees and agents
Unless limited by a corporation's articles of incorporation, 1. An officer of
the corporation is entitled to mandatory indemnification under ss.13.1-698 and
is entitled to apply for court-ordered indemnification under ss.13.1-700.1, in
each case to the same extent as a director; and
2. The corporation may indemnify and advance expenses under this article to an
officer, employee, or agent of the corporation to the same extent as to a
director.
ss. 13.1-703
Insurance
A corporation may purchase and maintain insurance on behalf of an individual who
is or was a director, officer, employee, or agent of the corporation, or who,
while a director, officer, employee, or agent of the corporation, is or was
serving at the request of the corporation as a director, officer, partner,
trustee, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
against liability asserted against or incurred by him in that capacity or
arising from his status as a director, officer, employee, or agent, whether or
not the corporation would have power to indemnify him against the same liability
under ss.13.1-697 or ss.13.1-698.
ss. 13.1-704
Application of article
A. Unless the articles of incorporation or bylaws expressly provide otherwise,
any authorization of indemnification
II-3
<PAGE>
in the articles of incorporation or bylaws shall not be deemed to prevent the
corporation from providing the indemnity permitted or mandated by this article.
B. Any corporation shall have power to make any further indemnity, including
indemnity with respect to a proceeding by or in the right of the corporation,
and to make additional provision for advances and reimbursement of expenses, to
any director, officer, employee or agent that may be authorized by the articles
of incorporation or any bylaw made by the shareholders or any resolution
adopted, before or after the event, by the shareholders, except an indemnity
against (i) his willful misconduct, or (ii) a knowing violation of the criminal
law. Unless the articles of incorporation, or any such bylaw or resolution
expressly provide otherwise, any determination as to the right to any further
indemnity shall be made in accordance with ss.13.1-701 B. Each such indemnity
may continue as to a person who has ceased to have the capacity referred to
above and may inure to the benefit of the heirs, executors and administrators of
such a person.
C. No right provided to any person pursuant to this section may be reduced or
eliminated by any amendment of the articles of incorporation or bylaws with
respect to any act or omission occurring before such amendment.
Item 16. Exhibits and Financial Statement Schedules.
The exhibits filed as part of this registration statement are as
follows:
(a) List of Exhibits
Number Description
------ -----------
5 Form of Opinion of Kennedy, Baris & Lundy, L.L.P. previously
filed
11 Statement Regarding Computation of Earnings Per Share
23.1 Consent of D.R. Maxfield & Company, Independent Auditors
23.2 Consent of Kennedy, Baris & Lundy, L.L.P. (included in Exhibit 5)
- ----------------------------
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
II-4
<PAGE>
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933 (the "Act"), each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Vienna, Commonwealth of Virginia, on September 2,
1999.
UNITED FINANCIAL BANKING COMPANIES, INC.
By: /s/ Harold C. Rauner
-------------------------------
Harold C. Rauner
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Manuel V. Fernandez Vice Chairman of the Board September 2, 1999
- --------------------------------------
Manuel V. Fernandez of Directors
/s/ William J. McCormick, Jr. Director September 2, 1999
- --------------------------------------
William J. McCormick, Jr.
/s/ Dennis I. Meyer Director September 2, 1999
- --------------------------------------
Dennis I. Meyer
/s/ Edward H. Pechan Director September 2, 1999
- --------------------------------------
Edward H. Pechan
/s/ Harold C. Rauner President, Chief Executive Officer September 2, 1999
- -------------------------------------- and Director (Principal Executive
Harold C. Rauner Officer)
/s/ Sharon A. Stakes Executive Vice President and Director September 2, 1999
- --------------------------------------
Sharon A. Stakes
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
/s/ Jeffery T. Valcourt Chairman of the Board of Directors September 2, 1999
- --------------------------------------
Jeffery T. Valcourt
/s/ Lisa M. Porter Chief Financial Officer (Principal September 2, 1999
- --------------------------------------
Lisa M. Porter Accounting and Financial
Officer)
</TABLE>
II-7
<PAGE>
Exhibit 11
Statement Regarding Computation of Earnings Per Share
Six Months Ended
June 30, 1999
Net Income Available to Common Shareholders $187,943
Earnings (loss) Per Common Share
Basic $0.23
Average Shares 831,590
Diluted $0.22
Average Shares 844,973
<PAGE>
[Letterhead of D.R. Maxfield & Company]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the use in this Pre Effective Amendment No. 1 to Registration
Statement on Form S-2 (No. 333-82845) of our report included herein dated
January 26, 1999, relating to the consolidated financial statements of United
Financial Banking Companies and subsidiaries, to the incorporation by reference
of such report included in the Company's 1998 annual report on Form 10-KSB and
to the reference to our Firm under the caption "Experts" in the Prospectus.
/s/ D.R. Maxfield & Company
D.R. MAXFIELD & COMPANY
Fairfax, Virginia
September 3, 1999
