<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
<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 REFERNCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000714286
<NAME> UNITED FINANCIAL BANKING COMPANIES, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,703,467
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7,246,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,005,107
<INVESTMENTS-CARRYING> 7,664,333
<INVESTMENTS-MARKET> 7,005,107
<LOANS> 36,451,550
<ALLOWANCE> 762,734
<TOTAL-ASSETS> 54,458,397
<DEPOSITS> 47,824,081
<SHORT-TERM> 1,100,000
<LIABILITIES-OTHER> 342,323
<LONG-TERM> 0
0
0
<COMMON> 831,590
<OTHER-SE> 4,360,403
<TOTAL-LIABILITIES-AND-EQUITY> 54,458,397
<INTEREST-LOAN> 1,617,930
<INTEREST-INVEST> 326,417
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,944,347
<INTEREST-DEPOSIT> 773,790
<INTEREST-EXPENSE> 7,334
<INTEREST-INCOME-NET> 1,163,223
<LOAN-LOSSES> 34,279
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,040,504
<INCOME-PRETAX> 192,551
<INCOME-PRE-EXTRAORDINARY> 192,551
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187,943
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 8.03
<LOANS-NON> 15,781
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 850,331
<ALLOWANCE-OPEN> 747,374
<CHARGE-OFFS> 19,519
<RECOVERIES> 600
<ALLOWANCE-CLOSE> 762,734
<ALLOWANCE-DOMESTIC> 762,734
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 468,045
</TABLE>
