<PAGE>
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
- ----
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- ---- Act of 1934.
For the quarterly period ended September 30, 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
873,257 Shares Outstanding
as of September 30, 1999
Transitional Small Business Disclosure Format: Yes No X
-------- ---------
1
<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
September 30,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Interest income:
Interest and fees on loans/leases $ 814,172 $ 879,274
Interest on investment securities 120,867 88,645
Interest on federal funds sold 67,108 90,295
Interest on interest-bearing deposits - 1,710
------------------ ------------------
Total interest income 1,002,147 1,059,924
------------------ ------------------
Interest expense:
Interest on deposits 393,038 456,448
Interest on short-term borrowings 14,664 -
------------------ ------------------
Total interest expense 407,702 456,448
------------------ ------------------
Net interest income 594,445 603,476
Provision for loan/lease losses 22,200 23,900
------------------ ------------------
Net interest income after provision
for loan/lease losses 572,245 579,576
Noninterest income:
Gain (loss) on sale of real estate
owned and other earning assets 82,492 22,450
Loan servicing and other fees 18,041 23,427
Other income 37,214 84,924
------------------ ------------------
Total noninterest income 137,747 130,801
------------------ ------------------
Noninterest expense:
Salaries 267,547 210,579
Employee benefits 50,725 41,079
Occupancy 93,593 77,739
Furniture and equipment 28,772 21,610
Legal 9,687 7,921
FDIC Insurance 1,328 4,950
Data processing 31,367 28,844
Real estate owned holding expense 3,863 8,618
Provision for real estate owned losses - 40,000
Other expense 97,324 79,101
------------------ ------------------
Total noninterest expense 584,206 520,441
------------------ ------------------
Income (loss) before income taxes 125,786 189,936
Provision (credit) for income taxes 2,304 -
------------------ ------------------
Net income (loss) $ 123,482 $ 189,936
================== ==================
Net income (loss) per common share (Note 3)
Basic
Diluted
Comprehensive Income (Note 4)
Net income $ 123,482 $ 189,936
Other comprehensive income, net of tax
Unrealized gains (losses) on available-for-sale securities (19,274) 16,324
------------------ ------------------
Comprehensive income $ 104,208 $ 206,260
================== ==================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Interest income:
Interest and fees on loans/leases $ 2,432,102 $ 2,564,730
Interest on investment securities 325,089 203,422
Interest on federal funds sold 189,058 263,444
Interest on interest-bearing deposits 245 4,581
------------------ ------------------
Total interest income 2,946,494 3,036,177
------------------ ------------------
Interest expense:
Interest on deposits 1,166,828 1,369,396
Interest on short-term borrowings 21,998 808
------------------ ------------------
Total interest expense 1,188,826 1,370,204
------------------ ------------------
Net interest income 1,757,668 1,665,973
Provision for loan/lease losses 56,479 118,900
------------------ ------------------
Net interest income after provision
for loan/lease losses 1,701,189 1,547,073
Noninterest income:
Gain (loss) on sale of real estate
owned and other earning assets 80,028 13,123
Loan servicing and other fees 54,595 72,756
Other income 104,835 165,461
------------------ ------------------
Total noninterest income 239,458 251,340
------------------ ------------------
Noninterest expense:
Salaries 744,757 646,575
Employee benefits 143,673 124,310
Occupancy 264,315 231,415
Furniture and equipment 67,683 54,871
Legal 22,356 30,282
FDIC Insurance 11,204 13,671
Data processing 93,746 83,462
Real estate owned holding expense 12,377 32,557
Provision for real estate owned losses - 227,666
Other expense 262,199 212,130
------------------ ------------------
Total noninterest expense 1,622,310 1,656,939
------------------ ------------------
Income (loss) before income taxes 318,337 141,474
Provision (credit) for income taxes 6,912 -
------------------ ------------------
Net income (loss) $ 311,425 $ 141,474
================== ==================
Net income (loss) per common share (Note 3)
Basic $ 0.37 $ 0.14
================== ==================
Diluted $ 0.37 $ 0.13
================== ==================
Comprehensive Income (Note 4)
Net income $ 311,425 $ 141,474
Other comprehensive income, net of tax
Unrealized gains (losses) on available-for-sale securities (90,932) (6,843)
------------------ ------------------
Comprehensive income $ 220,493 $ 134,631
================== ==================
</TABLE>
2
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC., AND SUBSIDIARIES
Consolidated Balance Sheets / Financial Condition
<TABLE>
<CAPTION>
(Unaudited) (Audited)
September 30, December 31
Assets 1999 1998
------ ------------------ -------------------
<S> <C> <C>
Cash and due from banks $ 1,975,239 $ 2,267,417
Federal funds sold 4,551,000 7,903,493
Investment Securities:
Available-for-sale (AFS) 7,666,483 5,130,213
Held-to-maturity (HTM) 640,130 1,763,891
Loans and lease financing, net of unearned
income of $34,046 and $12,560 38,108,088 36,962,213
Less: Allowance for loan/lease losses (769,425) (747,374)
------------------ -------------------
Net loans and lease financing 37,338,663 36,214,839
Real estate owned held for sale, net 1,575,180 1,799,398
Premises and equipment, net 258,451 119,338
Other assets 460,518 374,483
------------------ -------------------
Total assets $ 54,465,664 $ 55,573,072
================== ===================
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand $ 9,782,281 $ 14,264,071
Savings and NOW 3,091,987 3,051,446
Money market 12,309,769 7,524,516
Time deposits:
Under $100,000 16,502,263 18,048,129
$100,000 and over 5,655,616 7,297,297
------------------ -------------------
Total deposits 47,341,916 50,185,459
------------------ -------------------
Short-term borrowings 1,100,000 -
Other liabilities 352,548 311,905
------------------ -------------------
Total liabilities 48,794,464 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 873,257 shares at 9/30/99 and 831,590 at 12/31/98 873,257 831,590
Capital in excess of par value 15,014,899 14,681,567
Retained earnings (10,142,975) (10,454,400)
Unrealized holding gain (loss) - AFS securities (73,981) 16,951
------------------ -------------------
Total stockholders' equity 5,671,200 5,075,708
------------------ -------------------
Total liabilities and stockholders' equity $ 54,465,664 $ 55,573,072
================== ===================
</TABLE>
3
<PAGE>
UNITED FINANCIAL BANKING COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------
September 30, 1999 September 30, 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 311,425 $ 141,474
Adjustment to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation & amortization 39,733 46,292
Provision for loan/lease losses 56,479 118,900
Provision for losses on real estate owned - 227,666
Amortization of investment security discount 5,491 (1,639)
Amortization of loan fees and discounts, net (43,228) (25,294)
Net (gain) loss on sale of other real estate owned (80,476) (13,123)
(Increase) decrease in other assets (86,037) (189,913)
Increase (decrease) in other liabilities 40,644 (14,689)
---------------------- ----------------------
Net cash provided by (used in) operating activities 244,031 289,674
---------------------- ----------------------
Cash flows from investing activities:
Loans originated - non-bank subsidiaries (50,000) -
Principal collected - non-bank subsidiaries 23,673 7,063
Loans and lease originations, net of collections (1,136,130) 1,818,362
Loan fees and discounts deferred 25,382 14,756
Purchases of securities available-for-sale (4,040,724) (4,281,100)
Purchases of securities held-to-maturity - (769,908)
Investment made in other real estate owned (225,907) (591,266)
Proceeds received from maturity of securities available-for-sale 1,410,823 1,402,009
Proceeds received from maturity of securities held to maturity 1,120,970 91,786
Proceeds from real estate owned 530,601 942,279
Purchases of premises and equipment (178,846) (39,695)
---------------------- ----------------------
Net cash provided by (used in) investing activities (2,520,158) (1,405,714)
---------------------- ----------------------
Cash flow from financing activities:
Net increase (decrease) in demand deposits, savings
accounts, NOW accounts and money market accounts 344,004 4,566,753
Certificates of deposit sold (matured), net (3,187,547) 35,258
Net change in short-term borrowings 1,100,000 -
Proceeds from sale of common stock 374,999 2,357,895
Redeem preferred stock - (1,386,000)
---------------------- ----------------------
Net cash provided by (used in) financing activities (1,368,544) 5,573,906
---------------------- ----------------------
Net increase (decrease) in cash and cash equivalents (3,644,671) 4,457,866
Cash and cash equivalents at beginning of the year 10,170,910 5,041,418
====================== ======================
Cash and cash equivalents at end of the quarter $ 6,526,239 $ 9,499,284
====================== ======================
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest on deposits and other borrowings $ 1,206,666 $ 1,363,318
Income taxes 10,885 12,655
Non-Cash Items:
Effect on stockholders' equity of an unrealized gain (loss)
on debt and equity securities available-for-sale $ 90,932 $ 9,481
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 nine month
period ended September 30, 1999 is shown within this report. 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 Nine Month Period Ended
September 30, 1999 September 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 $23,720,733 $ 1,622,506 9.15% $25,395,129 $ 1,879,053 9.89%
Real estate construction 4,019,759 276,186 9.19% 2,553,497 182,697 9.57%
Real estate mortgage 7,410,499 429,853 7.76% 6,866,692 388,467 7.56%
Installment 1,563,362 103,557 8.86% 1,646,998 114,513 9.30%
Leases -- -- -- 298,634 -- --
------------- ------------- ------------- -------------
Total loans/leases 36,714,353 2,432,102 8.86% 36,760,950 2,564,730 9.33%
------------- ------------- ------------- -------------
Interest-bearing deposits -- -- -- 100,000 4,581 6.12%
Federal funds sold 5,186,830 189,058 4.87% 6,314,045 263,444 5.58%
Investment securities 7,415,244 325,089 5.86% 4,751,580 203,422 5.72%
------------- ------------- ------------- -------------
Total earning assets 49,316,427 2,946,249 7.99% 47,926,575 3,036,177 8.47%
============= =============
Noninterest-earning assets
Cash and due from banks 1,907,990 1,749,774
Other assets 2,211,556 2,732,154
Allowance for loan losses/lease (746,334) (759,241)
------------- -------------
Total assets $52,689,639 $51,649,262
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW accounts 3,314,078 56,448 2.28% 2,272,102 40,300 2.37%
Money market accounts 9,559,792 224,713 3.14% 8,919,504 240,546 3.66%
Time:
Under $100,000 16,802,962 648,439 5.16% 19,743,867 815,600 5.52%
$100,000 and over 6,378,328 238,479 5.00% 6,709,046 272,950 5.44%
------------- ------------- ------------- -------------
Total interest-bearing
deposits 36,055,160 1,168,079 4.33% 37,644,519 1,369,396 4.88%
Short-term borrowings 566,667 21,998 5.19% 54,629 808 1.98%
------------- ------------- ------------- -------------
Total interest-bearing
liabilities 36,621,827 1,190,077 4.34% 37,699,148 1,370,204 4.87%
============= =============
Non interest-bearing liabilities:
Demand deposits 10,609,167 9,452,394
Other liabilities 329,234 355,266
Redeemable preferred stock - 604,888
Stockholders' equity 5,129,411 3,537,566
------------- -------------
Total liabilities and
stockholders' equity $52,689,639 $51,649,262
============= =============
Net interest income $ 1,756,172 $ 1,665,973
============= =============
Net interest margin (1) 4.76% 4.65%
======= =======
Net interest spread (2) 3.65% 3.61%
======= =======
Fees included in loan income $ 73,888 $ 71,127
============= =============
Taxable equivalent adjustment $ -- $ --
============= =============
</TABLE>
Average balances for the years presented are calculated on a monthly basis.
Nonaccruing loans are included in the average loan balance.
(1) Net interest income divided by total earning assets.
(2) Average rate earned on total earning assets less average rate paid for
interest-bearing liabilities.
6
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward looking statements. This discussion contains forward looking statements,
including statements of goals, intentions and expectations as to future trends,
plans, or results of Company operations and policies and regarding general
economic conditions. These statements are based upon current and anticipated
economic conditions, nationally and in the Company's market, interest rates and
interest rate policy, competitive factors, statements by suppliers of data
processing equipment and services, government agencies and of third parties, as
to Year 2000 compliance, and other conditions which, by their nature, are not
susceptible to accurate forecast, and are subject to significant uncertainty.
Because of these uncertainties and the assumptions on which this discussion and
the forward looking statements are based, actual future operations and results
may differ materially from those indicated herein.
A. Results of Operations for the Nine Months Ended September 30, 1999 as
---------------------------------------------------------------------
Compared to the Nine Months Ended September 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 $311,425 for the
nine-month period ended September 30, 1999. This compares with net income of
$141,474 for the same period of 1998. Basic earnings (loss) per share were $.37
for the first nine months ended September 30, 1999 compared to $.14 for the
first nine months of 1998.
Earnings for the first nine months of 1999 are primarily due to increased
earning assets and a decreased cost of funds. During the past year, UFBC's
primary subsidiary, The Business Bank (the Bank), continued to increase the
Company's earning asset base. At September 30, 1999, average total earning
assets increased $1,389,852 or 2.9% when compared to the first nine months of
September 30, 1998 (Consolidated Average Balances table). The increase has
favorably contributed to the Company's operating earnings. Total interest
expense declined $181,378 or 13.2% when comparing September 30, 1999 to
September 30, 1998. The decline has contributed favorably to the Company's net
income.
During the third quarter of 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.
Net Interest Income
- -------------------
For the nine-month period ended September 30, 1999, net interest income
increased $91,695 or 5.5% from $1,665,973 at the nine-month period ended
September 30, 1998 to $1,757,668 at the nine-month period ended September 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
$1,589,359 or 4.2% from $37,644,519 at September 30, 1998 to $36,055,160 at
September 30, 1999. Rate sensitive deposits (customers without an established
banking relationship) were allowed to runoff as they matured during the first
three quarters of 1999. Also, as shown in the Consolidated Average Balances
table, the cost of interest-bearing deposits declined 55 basis points from 4.88%
at September 30, 1998 to 4.33% at September 30, 1999. Interest expense on
deposits decreased $202,568 or 14.8% at September 30, 1999 when compared to the
nine month period ended September 30, 1998. The decreased interest expense
contributed favorably to net interest income. Interest expense on short-term
borrowings increased $21,190 as a result of the Bank's $1,100,000 in borrowings
from the Federal Home Loan Bank of Atlanta. The increase did not significantly
impact net interest income.
For the same comparable nine-month period, interest and fee income earned
on loans decreased $132,628 or 5.2% (Consolidated Statements of Income). The
decrease is primarily due to a 47 basis point decline in the yield on the loan
portfolio when comparing 1999 and 1998. A significant portion of the portfolio
turned over during the declining rate environment of 1998.
7
<PAGE>
During the past year, the investment mix, such as loans, securities or
federal funds, selected by management changed in response to the competitive
economic and rate sensitive environment. Interest earned on investment
securities increased $121,667 or 59.8%, while interest earned on federal funds
decreased $74,386 or 28.2% during the comparable nine month periods ended
September 1999 and September 1998. The increased volume of securities and the
decreased volume of federal funds sold primarily account for the earning
variances. As shown in the Consolidated Average Balances table, average
investment securities increased $2,663,664 or 56.1% from $4,751,580 at September
30, 1998 to $7,415,244 at September 30, 1999. Federal funds sold decreased
$1,127,215 or 17.9% from $6,314,045 at September 30, 1998 to $5,186,830 at
September 30, 1999. In relation to the volume changes, a yield increase of 16
basis points on investment securities and a decrease of 71 basis points on
federal funds sold for the comparable periods also contributed to the increased
net interest income.
Provision for Loan/Lease Losses
- -------------------------------
Provision expense declined $62,421 or 52.5% from $118,900 at September 30,
1998 to $56,479 at September 30, 1999. During the nine months ended September
30, 1999, the Bank funded its allowance for loan/lease losses by charging
$66,600 against earnings compared to $118,900 charged against earnings during
the first nine months of 1998. The Bank charged-off a $53,000 commercial loan
during the first nine 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 $11,882 or 4.7% for the nine month
period ended September 30, 1999 compared to the same period of 1998. The
decrease is primarily attributable to a $40,000 gain on the sale of a loan
during 1998. Recognition of $21,800 of deferred income as the result of loan
payoffs during 1998 also contributed to the decline.
Noninterest Expense
- -------------------
Total noninterest expense decreased $34,629 or 2.1% during the nine months
ended September 30, 1999 when compared to the same period of 1998. In connection
with the disposition of real estate owned (REO), 1998 write-downs totaling
$227,666 primarily explain the decrease. REO holding expense declined $20,180 or
61.9% for the comparable period 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 $63,765 or 12.3% during the three month
period ended September 30, 1999 when compared to the same period of 1998. During
the comparable period, salaries increased $56,968 or 27.1%, employee benefits
increased 9,646 or 23.5% and occupancy increased $15,854 or 20.4%. The increases
were due to staffing and other costs associated with the McLean branch.
Legal expense declined $7,926 or 26.2% during the nine-month period ended
September 30, 1999 when compared to the first nine months of 1998. The Bank
incurred approximately $3,000 of litigation expense in the first nine months of
1998. Also in the first nine months of 1998, UFBC incurred costs associated with
non-recurring regulatory filings. During the nine months ended September 30,
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 September 30, 1999 which would have a material adverse
effect on the Company's financial statements.
Salaries and employee benefits increased $117,545 or 15.3% from $770,885 at
September 30, 1998 to $888,430 at September 30, 1999. The rise is due to
additional staffing as the Company expands its banking operations.
Other expense rose $50,069 or 23.6% during the nine-month period ended
September 30, 1999 when compared to the first nine months of 1998. During the
first nine months of 1999, the Bank incurred approximately $40,000 of one-time
fees associated with Year 2000 compliance, the McLean branch start-up and state
tax assessments.
Income Taxes
- ------------
In 1993, the rate that UFBC accrued its tax benefit differed from the
statutory tax rate based on the inability of
8
<PAGE>
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
nine months ended September 30, 1999.
B. Financial Condition as of September 30, 1999
--------------------------------------------
Assets
- ------
Total assets decreased $1,107,408 or 2.0% during the first nine 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 deposits which
decreased the volume of assets available for investment. Deposits decreased
$2,843,543 or 5.7% from $50,185,459 at December 31, 1998 to $47,341,916 at
September 30, 1999 due to rate driven payoffs.
Allowance for Loan/Lease Losses
- -------------------------------
The allowance for loan/lease losses (allowance) represents an amount which
management believes will be adequate to absorb potential losses inherent in the
loan/lease portfolio. The provision for loan losses represents the charge to
earnings during the year to fund the allowance to cover potential future losses.
The amount charged to expense during the year is dependent upon management's and
the Board of Directors' assessment of the adequacy 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 September 30, 1999 and December 31, 1998, the allowance was $769,425 and
$747,374, respectively, or 2.0% of total loans and leases. Nonperforming loans
for the nine-month period ended September 30, 1999 totaled $282,7214, of which
$266,433 resided in the Bank and of which $15,781 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 2.7 times at September 30, 1999, compared to a coverage of 12.4 times at
year end 1998.
Premises and equipment, net of accumulated depreciation, increased $139,113
or 116.6% during the nine months ended September 30, 1999. The increase was
primarily 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 and Equity
- ----------------------
Total deposits decreased $2,843,543 or 5.7% during the first nine months of
1999 when compared to the year ended 1998. During the nine months ended
September 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 three
quarters of 1999 which resulted in runoff. Certificates of deposits declined
$3,187,547 or 12.6% from $25,345,426 at December 31, 1998 to $22,157,879 at
September 30, 1999.
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.
Stockholders' equity increased $595,492 or 11.73% during the nine months
ended September 30, 1999 when compared to the year ended 1998. As of September
30, 1999, the Company sold 41,667 shares of common stock or $375,003 in its
public offering. The offering is expected to close on November 24, 1999.
Liquidity and Investment
- ------------------------
UFBC's operational needs were significantly reduced by the cancellation of
its debt to the FDIC in 1994, staff reduction and reduced professional fees. For
the near future, management projects that proceeds received from the May 1998
Private Offering, earning assets, the liquidation of non-Bank REO and the sale
of non-Bank assets will provide sufficient cash flow for UFBC's continuing
operational needs.
9
<PAGE>
Consolidated average liquid assets were 27.5% of average total assets at
September 30, 1999 compared to 25.0% for the same period ended September 30,
1998 and 31.5% at December 31, 1998 (Consolidated Average Balances table). The
Company's liquidity needs exist primarily in the Bank subsidiary. To maintain
adequate liquidity, the Bank purchases certain traditional assets such as
government and other investment securities. The Bank's securities portfolio
comprises U.S. Treasury securities, U.S. Government agency securities, state and
municipal securities and equity securities. The Bank is strategically growing
its securities portfolio to ensure safe levels of liquidity, to enhance the
overall credit quality of its asset base, to generate increased interest income,
to balance assets and liabilities and to hedge interest rate risk. The
securities portfolio includes both instruments available-for-sale and held-to-
maturity. Securities classified as available-for-sale may be sold in response to
changes in market interest rates, changes in prepayment or extension risk,
management of the federal tax position, liquidity needs and other
asset/liability management issues. Securities classified as held-to-maturity are
intended for investment purposes.
At September 30, 1999, the Bank's investment portfolio consisted of the
following:
Available-for-Sale Held-to-Maturity
------------------ ----------------
U.S. Treasury -- 500,130
U.S. Government Agency 7,500,083 --
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 September 30, 1999 and 1998.
1999 1998
----------- -----------
Tier I Capital
Company $ 5,745,181 $ 5,086,998
The Business Bank 5,542,687 4,763,345
Total qualifying capital
Company $ 6,214,868 $ 5,138,437
The Business Bank 6,010,770 5,209,985
Risk-weighted assets
Company $37,275,209 $35,773,788
The Business Bank 37,149,816 35,441,062
Quarterly average assets
Company $53,948,950 $52,240,905
The Business Bank 53,654,853 51,956,738
10
<PAGE>
Required
Risk-based capital ratios: 1999 1998 Minimum
-------------- ------------- -----------
Tier I Capital (Tier I
capital/risk-weighted assets)
Company 15.41% 13.10% 4.00%
The Business Bank 14.92% 13.44% 4.00%
Total Capital (Total
capital/risk-weighted assets)
Company 16.67% 14.36% 8.00%
The Business Bank 16.18% 14.70% 8.00%
Leverage ratio (Tier I
capital/adjusted average assets)
Company 10.65% 8.97% 5.00%
The Business Bank 10.33% 9.17% 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 nine months ended
September 30, 1999
Net Income $ 311,425
Income available to
common stockholders $ 311,425 831,743 $ .37
========= ======== ==========
For the nine months ended
September 30, 1998
Net Income $ 141,474
Less: Preferred Stock
Dividends ( 50,000)
---------
Income available to
common stockholders $ 91,474 677,575 $ .14
========= ======== ==========
Diluted Earnings Per Share:
For the nine months ended
September 30, 1999
Net Income available to common
stockholders $ 311,425 831,743
Add: Contracts to issue
common stock
Warrants - expire 12/31/9 2,334
Warrants - expire 9/30/01 5,334
Options - expire 12/31/05 -
6/30/08 8,132
--------
Weighted-average diluted
shares outstanding 15,800
Diluted earnings per
common share: $ 311,425 847,543 $ .37
========= ======== ==========
For the nine months ended
September 30, 1998
Net Income available to common
stockholders $ 91,474 677,575
Add: Contracts to issue
common stock
Warrants - expire 12/31/99
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: $ 91,474 690,958 $ .13
========= ======== ==========
11
<PAGE>
Year 2000
- ---------
Assuring that computer systems and applications are Year 2000 (Y2K)
compliant presents a complex managerial and technological challenge. Many
computer programs now in use have not been designed to properly recognize years
after 1999. If not corrected, these programs could fail or create erroneous
results. The Y2K issue affects the entire banking industry because of its
reliance on computers and other equipment that use computer chips, and may have
significant effects on the Company's customers and regulators. In recognition of
the potential adverse effects of the Y2K issue, management of the Company
created a Y2K project team and established a plan to prevent or mitigate
potential adverse effects of Y2K issue on the Company, its vendors and its
customers. The Y2K project team is headed by a senior management executive.
The Company's Y2K Plan consists of three phases. Phase I required the
Company to assess its Y2K compliance needs and to develop a plan to address
those needs. The assessment included testing the Company's current hardware,
software and material external vendors' compliance. Phase I also included
assessing the impact Y2K compliance could have on our existing and future
customers. The Company completed Phase I in December 1997. The Y2K project team
concluded that the Company would need to replace and/or update most of its
computer hardware and software. The Y2K project team also concluded that
extensive testing would be required of the Bank's data processing company to
determine Y2K compliance. The assessment of the impact of Y2K on existing
customers was determined to be immaterial to the Company. A questionnaire and
information guide was established to assess Year 2000 compliance of future
customers. The costs of Phase I, including salary allocations, were
approximately $50,000.
Phase II requires all non-compliant hardware and software to be replaced
by May 1999. All of the equipment and software identified in Phase I had been
replaced as of June 30, 1999. The new equipment and software has been re-tested
for compliance as of September 30, 1999. The Company has incurred approximately
$154,000 for Y2K compliance costs, including salary allocations during 1999.
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 in order to maintain
accurate account information in the event of a power and data processing
failure. In order to plan for an unusually high cash demand, the Bank has
strategically purchased financial instruments and has developed 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 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: November 12, 1999
------------------------
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000714286
<NAME> UNITED FINANCIAL BANKING COMPANIES, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,975,239
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,551,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,666,483
<INVESTMENTS-CARRYING> 8,306,613
<INVESTMENTS-MARKET> 8,306,613
<LOANS> 38,108,088
<ALLOWANCE> 769,425
<TOTAL-ASSETS> 54,465,664
<DEPOSITS> 47,341,916
<SHORT-TERM> 1,100,000
<LIABILITIES-OTHER> 352,548
<LONG-TERM> 0
0
0
<COMMON> 873,257
<OTHER-SE> 4,797,943
<TOTAL-LIABILITIES-AND-EQUITY> 54,465,664
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<LOAN-LOSSES> 56,479
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<EXPENSE-OTHER> 1,622,310
<INCOME-PRETAX> 318,337
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<EXTRAORDINARY> 0
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<NET-INCOME> 318,337
<EPS-BASIC> 0.37
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<YIELD-ACTUAL> 7.99
<LOANS-NON> 282,214
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