<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995
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Commission File Number 0-16595
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SUBURBAN BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in charter)
<TABLE>
<S> <C>
Delaware 54-1319441
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
7505 Greenway Center Drive, Greenbelt, Maryland 20770
- ------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(301) 474-6694
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
Common Stock $.01 Par Value Outstanding at November 6, 1995
- --------------------------- -------------------------------
(Class)
9,091,663 Shares
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<PAGE> 2
SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
September 30, 1995
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
<S> <C> <C>
Item 1. Condensed Financial Statements
Consolidated Balance Sheets (unaudited)
September 30, 1995 & December 31, 1994 3
Consolidated Statements of Operations
(unaudited)
Nine months ended September 30, 1995 and
September 30, 1994 4
Consolidated Statements of Operations
(unaudited)
Three months ended September 30, 1995 and
September 30, 1994 5
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30, 1995 and
September 30, 1994 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-21
</TABLE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE> 3
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
In thousands September 30, December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,745 $ 7,005
Interest bearing deposits with banks 365 245
Federal funds sold 14,955 13,560
Investment securities available for sale 13,503 19,252
Investment securities held to maturity 4,859 4,821
(aggregate market value of $4,948 and $4,654
at September 30, 1995 and December 31, 1994)
Loans held for sale 2,952 2,044
Loans 60,489 64,525
Less: Allowance for loan losses (2,290) (2,750)
Loans, net 58,199 61,775
Premises and equipment, net 965 1,156
Other real estate owned 1,288 3,018
Accrued interest receivable 636 645
Other assets 403 708
TOTAL ASSETS $105,870 $114,229
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 18,169 $ 24,360
Interest-bearing deposits 76,644 80,042
Total Deposits 94,813 104,402
Securities sold under agreements to repurchase 0 691
Accrued expenses and other liabilities 411 549
Total liabilities 95,224 105,642
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding --- ---
Common stock, $.01 par value; 20,000,000 shares authorized;
shares issued and outstanding: 9,091,663 at September 30, 1995
and 9,054,459 at December 31, 1994 91 91
Paid-in capital - stock options 534 172
Additional paid-in capital 23,418 23,380
Accumulated deficit (13,422) (14,584)
Net unrealized gain (loss) on securities available for sale 25 (472)
Total shareholders' equity 10,646 8,587
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $105,870 $114,229
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
In thousands, except per share data 1995 1994
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $4,870 $3,894
Taxable interest on securities available for sale 698 631
Taxable interest on securities held to maturity 251 72
Interest on Federal funds sold 404 445
Interest on deposits with banks 9 8
Total interest income 6,232 5,050
INTEREST EXPENSE
Interest on deposits 2,245 1,697
Interest on short-term borrowings 13 15
Total interest expense 2,258 1,712
NET INTEREST INCOME 3,974 3,338
Provision for loan losses 57 145
Net interest income after provision for loan losses 3,917 3,193
NONINTEREST INCOME
Service charges on deposit accounts 331 373
Net realized gain on sales of available for sale securities -- 114
Net gain (loss) on sales of other real estate owned 85 (25)
Net gain on sales of loans -- 129
Gain on sale of assets and transfer of liabilities 1,000 --
Other income 151 187
Total noninterest income 1,567 778
NONINTEREST EXPENSE
Salaries and employee benefits 2,122 1,741
Occupancy expense 438 505
Furniture and equipment expense 101 144
Other expense 1,656 1,508
Total noninterest expense 4,317 3,898
Income before income taxes 1,167 73
Income taxes 4 --
NET INCOME $ 1,163 $ 73
Income Per Common Share
Primary $0.12 $0.01
Fully Diluted 0.12 0.01
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
In thousands, except per share data 1995 1994
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 1,591 $1,380
Taxable interest on securities available for sale 200 264
Taxable interest on securities held to maturity 84 72
Interest on Federal funds sold 174 122
Interest on deposits with banks 5 3
Total interest income 2,054 1,841
INTEREST EXPENSE
Interest on deposits 781 604
Interest on short-term borrowings 1 5
Total interest expense 782 609
NET INTEREST INCOME 1,272 1,232
Provision for loan losses 22 15
Net interest income after provision for loan losses 1,250 1,217
NONINTEREST INCOME
Service charges on deposit accounts 108 119
Net realized loss on sales of available for sale securities -- (3)
Net gain (loss) on sales of other real estate owned 1 (26)
Net gain on sales of loans -- 23
Other income 54 66
Total noninterest income 163 179
NONINTEREST EXPENSE
Salaries and employee benefits 574 580
Occupancy expense 92 168
Furniture and equipment expense 24 47
Other expense 495 530
Total noninterest expense 1,185 1,325
Income before income taxes 228 71
Income taxes 4 --
NET INCOME $ 224 $ 71
Income Per Common Share
Primary $0.02 $0.01
Fully Diluted 0.02 0.01
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
SUBURBAN BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months ended September 30,
1995 1994
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,163 $ 73
Adjustments to reconcile net income to net cash (used) provided by
operating activities:
Depreciation 115 171
Provision for loan losses 57 145
Provision for OREO losses 95 29
Stock option compensation expense 362 90
Originations of loans held for sale (1,874) (3,834)
Proceeds from loan sales 0 4,722
Gain on sale of loans 0 (340)
Net realized gain on available for sale securities 0 (114)
Net accretion on securities (84) (76)
(Decrease) increase in deferred loan fees (31) 96
Decrease in accrued income and other assets 47 238
(Decrease) increase in accrued expenses and other liabilities (113) 13
Income tax refunds received 185 12
(Gain) loss on sale of other real estate owned (85) 25
Gain on sale of assets and transfer of liabilities (1,000) 0
Fixed assets charged off on closing of offices 104 0
Net cash (used) provided by operating activities (1,059) 1,250
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in deposits with other banks (120) 384
Net (Increase) decrease in federal funds sold (3,685) 4,870
Purchases of available for sale securities (6,576) (19,770)
Proceeds from sales of available for sale securities 709 5,922
Proceeds from maturities of available for sale securities 10,450 8,000
Proceeds from prepayments of principal on securities 52 557
Purchases of held to maturity securities 0 (4,799)
Net increase in loans (8,449) (5,455)
Net purchases of premises and equipment (73) (121)
Proceeds from sale of other real estate owned 1,720 270
Cash transferred on sale of assets and transfer of liabilities (1,346) 0
Consideration paid on sale of assets and transfer of liabilities (754) 0
Net cash used in investing activities (8,072) (10,142)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 9,411 10,249
Net increase (decrease) in securities sold under agreements to repurchase 423 (130)
Net proceeds from sale of issuance of common stock 37 30
Net cash provided by financing activities 9,871 10,149
Net increase in cash and due from banks 740 1,257
Cash and due from banks at beginning of period 7,005 7,299
Cash and due from banks at end of period $ 7,745 $ 8,556
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 2,247 $ 1,708
Income taxes paid 4 0
Loans transferred to other real estate owned 0 273
Loans transferred to loans held for sale 0 1,488
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
SUBURBAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited consolidated financial statements, which
include the accounts of Suburban Bancshares, Inc. (Bancshares or the Company)
and its wholly-owned subsidiary, Suburban Bank of Maryland (Suburban Maryland),
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the disclosures required by generally accepted accounting
principles. A former subsidiary, Suburban Bank of Virginia, N.A., a National
Bank in Liquidation ("Suburban Virginia"), was merged into Suburban Maryland on
August 18, 1995 (see Notes F & G). All adjustments which, in the opinion of
management, are necessary to a fair presentation of the results for the interim
periods presented have been made; all of these adjustments are of a normal and
recurring nature. The results of operations for the nine months ended
September 30, 1995, are not necessarily indicative of results that may be
expected for the entire year ending December 31, 1995.
NOTE A - ACCOUNTING POLICIES AND OTHER DATA
Reference should be made to the Notes to Consolidated Financial
Statements included in the Company's Annual Report to Shareholders for the year
ended December 31, 1994, which contain the Company's accounting policies and
other data.
NOTE B - INVESTMENT SECURITIES
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Under SFAS No. 115, the Company is required to
classify its debt and marketable equity securities in one of three categories:
trading, available for sale, or held to maturity. At the time of purchase,
management determines the appropriate designation for securities.
The following table shows the amortized cost and estimated fair value
of investment securities classified as available for sale at September 30, 1995
(in thousands):
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 7,578 $ 26 $ (10) $ 7,594
Federal Agencies 4,526 33 (8) 4,551
Mortgage-backed obligations of federal agencies 328 4 (2) 330
Collateralized mortgage obligations 46 --- --- 46
Other 1,000 --- (18) 982
Total investment securities $13,478 $ 63 $ (38) $13,503
</TABLE>
7
<PAGE> 8
The amortized cost and estimated fair value of securities in the held
to maturity classification at September 30, 1995 are shown in the schedule
which follows (in thousands):
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 2,905 $ 52 $ --- $ 2,957
Federal Agencies 1,954 37 --- 1,991
Total investment securities held to maturity $ 4,859 89 $ --- $ 4,948
</TABLE>
The schedule below shows the amortized cost and estimated fair value
of investment securities classified as available for sale at December 31, 1994
(in thousands):
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Notes $12,080 --- (253) $11,827
Federal Agencies 5,913 --- (134) 5,779
Mortgage-backed obligations of federal agencies 375 1 (10) 366
Collateralized mortgage obligations 52 1 --- 53
Other 1,304 --- (77) 1,227
Total securities available for sale $19,724 2 (474) $19,252
</TABLE>
The amortized cost and estimated fair value of securities in the held
to maturity classification at December 31, 1994 is shown in the schedule which
follows (in thousands):
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Notes $ 2,878 $ --- $ (96) $ 2,782
Federal Agencies 1,943 --- (71) 1,872
Total investment securities held to maturity $ 4,821 --- $ (167) $ 4,654
</TABLE>
The amortized cost and estimated fair value for securities at
September 30, 1995, by contractual maturity are shown in the following tables.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay certain obligations with or without call
premiums or prepayment penalties.
8
<PAGE> 9
Investment Securities Available for Sale:
<TABLE>
<CAPTION>
Amortized Estimated
In thousands Cost Fair Value
<S> <C> <C>
Due in one year or less $ 4,491 $ 4,486
Due after one year through 5 years 8,613 8,641
Due after 5 years through 10 years -- --
Due after 10 years 46 46
Mortgage-backed securities 328 330
No set maturity -- --
Total $13,478 $13,503
</TABLE>
Investment Securities Held to Maturity:
<TABLE>
<CAPTION>
Amortized Estimated
In thousands Cost Fair Value
<S> <C> <C>
Due after one year through 5 years $ 4,859 $ 4,948
Total $ 4,859 $ 4,948
</TABLE>
Proceeds from the sale of available-for-sale securities in the nine
months ended September 30, 1994, were $5,922,000 which included gross gains of
$120,000 and gross losses of $6,000. In the first nine months of 1995,
proceeds from sales of available for sale securities were $709,000, including
gross gains of $3,000 and gross losses of $3,000. The net unrealized holding
gain on available for sale securities, which is shown as a separate component
of shareholders' equity in the accompanying Consolidated Balance Sheets, was
$25,000 at September 30, 1995; at December 31, 1994, the net unrealized holding
loss was $472,000.
NOTE C - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1995
----------------------
<S> <C>
Balance at beginning of period $ 2,750
Provision for loan losses 57
Loans charged-off (759)
Recoveries 242
----------------------
Balance at end of period $ 2,290
======================
</TABLE>
NOTE D - NONPERFORMING ASSETS
Nonperforming assets consist of loans on which interest is no longer
accrued, real estate acquired through foreclosure and real estate on which
deeds in lieu of foreclosure have been accepted. Restructured loans are loans
on which the borrower has been granted a concession as to rate or term as a
result of financial difficulty.
9
<PAGE> 10
Generally, the accrual of interest on a loan is discontinued when the
full collection of principal or interest is in doubt, or when the payment of
principal or interest has become contractually 90 days past due, unless the
obligation is both well secured and in the process of collection. Loans may be
placed on nonaccrual status when past due less than 90 days if collection
becomes uncertain based upon an evaluation of the fair value of the collateral
and the financial strength of the borrower. When a loan is placed on
nonaccrual status, interest income in the current period is reduced by the
amount of any accrued and uncollected interest. Subsequent payments are
applied as a reduction of principal when concern exists as to the ultimate
collection of principal, otherwise such payments are recognized as interest
income. Loans are removed from nonaccrual status when they have demonstrated a
period of performance and when concern no longer exists as to the
collectibility of principal or interest.
Other real estate owned has been written down to fair value less
estimated selling costs, based upon current market conditions and expected cash
flows.
The Company has no obligations to make further extensions of credit
under loans classified as troubled debt restructurings or nonaccrual at
September 30, 1995 or December 31, 1994. Nonaccrual and restructured loans are
classified as loans in the accompanying Consolidated Balance Sheets.
The table below shows nonperforming assets and troubled debt
restructurings (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonaccrual loans $ 2,547 $ 3,720
Other real estate owned 1,288 3,018
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 3,835 $ 6,738
===============================================================================================================================
Loans classified as nonaccrual but contractually current $ 1,021 $ 2,083
- -------------------------------------------------------------------------------------------------------------------------------
Restructured loans classified as nonaccrual 88 713
Restructured loans accruing 1,179 1,312
- -------------------------------------------------------------------------------------------------------------------------------
Total restructured loans $ 1,267 $ 2,025
===============================================================================================================================
</TABLE>
There were no loans past due 90 days or more and still accruing at
September 30, 1995 or December 31, 1994.
10
<PAGE> 11
The following schedule presents a breakdown, by type of property, of
other real estate owned (in thousands):
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------- -------------------------
<S> <C> <C>
Commercial land $ 546 $ 671
Residential land 254 1,416
Commercial property 567 1,098
Residential property, 1-4 family 147 581
------------------------- -------------------------
Total 1,514 3,766
Allowance for losses (226) (748)
------------------------- -------------------------
TOTAL FAIR VALUE $1,288 $3,018
========================= =========================
</TABLE>
Activity in the allowance for losses on other real estate owned for
the nine months ended September 30, 1995 is as follows (in thousands):
<TABLE>
<S> <C>
Beginning balance 748
Provision for OREO losses 95
Dispositions, net (617)
Charge-offs net of recoveries 0
-------
Ending balance 226
</TABLE>
NOTE E - REGULATORY MATTERS
Under the guidelines of FDICIA, a financial institution is considered
"well capitalized" if it has a total risk-based capital ratio of at least 10%,
a Tier 1 risk-based capital ratio of at least 6%, and a leverage ratio of 5% or
greater, and it is not subject to any written agreement, order or directive
issued by the FDIC. To be considered "adequately capitalized" an institution
must generally have a leverage ratio of at least 4%, a Tier 1 risk-based
capital ratio of at least 4%, and a total risk-based capital ratio of at least
8%.
In accordance with the provisions of FDICIA, Suburban Maryland is
classified as well capitalized as of September 30, 1995 and December 31, 1994.
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------- -------------------
<S> <C> <C>
Tier 1/Average Assets 8.76% 6.18%
Tier 1/Risk-weighted Assets 13.31% 9.35%
Total Capital/Risk-Weighted Assets 14.59% 10.63%
</TABLE>
NOTE F - SALE OF ASSETS
On May 12, 1995, Suburban Bancshares, Inc. completed the disposition
of most of the assets and all of the liabilities of its subsidiary, Suburban
Bank of Virginia, N.A. ("Suburban Virginia") to Tysons Financial Corporation
and its subsidiary, Tysons National Bank ("Tysons") in McLean, Virginia.
11
<PAGE> 12
Assets transferred to Tysons included all cash and cash equivalents,
investments, loans (excluding nonperforming and other loans totaling $3.1
million) and interest receivable associated with those loans, and fixed assets
in one of Suburban Virginia's two branches. Liabilities assumed by Tysons
included all deposit accounts, securities sold under agreements to repurchase,
and interest payable associated with those liabilities.
At closing, Suburban paid Tysons $752,000 in cash, representing (1)
the amount by which the liabilities transferred exceeded the assets
transferred, less (2) the $1 million premium Tysons had agreed to pay Suburban
for the assets acquired.
NOTE G - MERGER OF SUBSIDIARIES
On August 18, 1995, the remaining assets and liabilities of Suburban
Bank of Virginia, N.A., a National Bank in Liquidation ("Suburban Virginia"),
were merged into Suburban Maryland. Assets of Suburban Virginia on that date
were $2,823,000 and capital was $2,756,000.
NOTE H - OTHER EVENTS
On October 17, 1995, Suburban Bancshares, Inc. announced the
termination of negotiations with Financial Institutions Holding Corporation
("FIHC") regarding a merger of the two bank holding companies. After the
signing of a letter of intent on August 21, 1995, the parties were unable to
reach agreement on the terms of a definitive agreement.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary provides an overview of the financial
condition, significant changes in the financial condition, and the results of
operations of Suburban Bancshares, Inc. and its subsidiaries ("Bancshares" or
the "Company") for the nine months ended September 30, 1995 and 1994.
Throughout this review, the subsidiary of Suburban Bancshares, Inc., Suburban
Bank of Maryland ("Suburban Maryland") may be referred to as the "Bank". A
former subsidiary, Suburban Bank of Virginia, N.A., a National Bank in
Liquidation ("Suburban Virginia"), was merged into Suburban Maryland on August
18, 1995. This discussion should assist readers in their analysis of the
consolidated financial statements and supplemental financial information which
appear elsewhere in this report.
OVERVIEW
Suburban Bancshares, Inc. reported total assets of $105.9 million at
September 30, 1995, an $8.3 million, or 7.3%, decrease from $114.2 million at
December 31, 1994. The decline was the net result of the sale of most of
Suburban Virginia's assets, a decrease of $24 million from December 31, 1994
and asset growth in Suburban Maryland of $16.0 million or 18.9%. Loans
decreased from $66.6 million at December 31, 1994 to $63.4 million at September
30, 1995, a $3.2 million, or 4.7%, decline also attributable to the sale of
Suburban Virginia's loans offset by growth of $10.7 million, or 21.7%, in
Suburban Maryland.
Average assets fell to $102.7 million for the first nine months of
1995, a $691,000, or 0.7%, decrease from average assets of $103.4 million in
the first nine months of 1994. Average loans rose to $64.2 million in the
three quarters of 1995, $4.8 million or 8.1% above the $59.4 million in average
loans in the same period of 1994.
The Company reported a profit of $1,163,000 for the nine months ending
September 30, 1995, a marked improvement over the $73,000 reported in the same
period of 1994. Earnings in the third quarter of 1995 were $224,000, also a
significant increase over earnings of $71,000 recorded in the same period in
1994. Increasing loan volume and improving loan quality resulted in
significantly higher net interest income, a primary contributor to the profit
improvement for both the third quarter and the first nine months of 1995. The
year-to-date profits were impacted by sale of assets and the assumption of
liabilities of the Virginia subsidiary in May 1995 which resulted in a premium,
net of associated costs, of $740,000. This one-time gain in the second quarter
was partially offset by a charge of $327,000 to recognize the remainder of
compensation expense for options which became exercisable during the period.
SALE OF ASSETS
On May 12, 1995, Suburban Bancshares, Inc. completed the disposition
of most of the assets and all of the liabilities of its subsidiary, Suburban
Bank of Virginia, N.A. ("Suburban Virginia") to Tysons Financial Corporation
and its subsidiary, Tysons National Bank ("Tysons") in McLean, Virginia.
13
<PAGE> 14
Assets transferred to Tysons included all cash and cash equivalents,
investments, loans (excluding nonperforming and other loans totalling $3.1
million) and interest receivable associated with those loans, and fixed assets
in one of Suburban Virginia's two branches. Liabilities assumed by Tysons
included all deposit accounts, securities sold under agreements to repurchase
and interest payable associated with those liabilities.
At closing, Suburban paid Tysons $752,000 in cash, representing (1)
the amount by which the liabilities transferred exceeded the assets
transferred, less (2) the $1 million premium Tysons had agreed to pay Suburban
for the assets acquired.
MERGER OF SUBSIDIARIES
On August 18, 1995, the assets remaining in Suburban Virginia, a total
of $2.8 million, were merged into Suburban Maryland in a pooling of interests
transaction. Total capital transferred to Suburban Maryland from the Virginia
bank was $2,756,000.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income is defined as the difference between income earned
on assets and the cost of funds supporting those assets. Earning assets are
composed primarily of loans and investments while deposits and short-term
borrowings, in the form of securities sold under repurchase agreements,
represent interest-bearing liabilities. Noninterest bearing checking deposits
are another component of funding sources. Variations in the volume and mix of
these assets and liabilities, as well as changes in the yields earned and rates
paid, are determinants of changes in net interest income.
Net interest income increased $636,000 or 19.0%, to $3,974,000 in the
first nine months of 1995 from $3,338,000 in the same period of 1994. This
increase was the result of changes in the composition of earning assets and
funding sources and higher rates.
The net interest margin represents the Company's net yield on its
earning assets and is calculated as net interest income divided by average
earning assets. In the first nine months of 1995, the net interest margin was
5.62%, rising 82 basis points from 4.80% in the same period of 1994, a result
of the change in the mix of earning assets and higher rates.
Changes in the volume of earning assets and interest bearing funds
impact both interest income and interest expense. A small increase in average
earning assets coupled with a decrease in interest bearing liabilities was one
factor in producing higher net interest income in the nine months ending
September 30, 1995. Average earning assets rose $1.6 million, or 1.8%, from
$92.9 million in 1994 to $94.5 million in 1995; as a percent of average total
assets, earning assets increased to 92.0% in the first nine months of 1995,
from 89.8% in 1994. Average interest bearing liabilities, on the other hand,
decreased $703,000 or 0.9%, reaching $73.5 million in the first nine months of
1995 from $74.2 million in the same period of 1994.
Changes in the mix of earning assets were key determinants of the
change in net interest income in the first nine months of 1995 as compared to
the same period in 1994. The mix of funding sources remained
14
<PAGE> 15
fairly stable. During 1995, average loans were 67.9% of average earning
assets, rising 4.0 percentage points from 63.9% in 1994; average investment
securities and Federal funds sold fell correspondingly, to 32.1% of average
earning assets in the first nine months of 1995 from 36.1% in 1994. This
increased volume of loans, which earn higher yields than bank investments,
resulted in substantially higher interest income.
Shifts in the interest rate environment impacted the margin
significantly. In 1994, interest rates rose throughout the year and continued
into early 1995, as the Federal Reserve attempted to keep inflation under
control. Rates have remained fairly stable during 1995, with only one
relatively small decrease in the prime rate. Loan yields rose 137 basis points
on average, from 8.77% in the first nine months of 1994 to 10.14% in 1995, as
national prime rates, on which most loans are priced, increased significantly.
The yield produced by Federal funds sold and deposits with other banks rose 205
basis points, from 3.83% in the first nine months of 1994 to 5.88% in 1995. As
the yields on earning assets rose, the cost of funds followed, though at a
slower pace, creating a wider spread between the income earned on assets and
the cost to fund those assets. The net interest spread, which is the
difference between the earning asset yield and the cost of funds, rose to 5.55%
in the first three quarters of 1995 from 4.84% in the same period of 1994.
Net interest income rose $40,000 or 3.3%, from $1,232,000 in the
quarter ending September 30, 1994 to $1,272,000 in the same period of 1995.
This improvement is the result of higher market interest rates and a higher
percentage of average earning assets in loans, which earn higher yields than
other earning assets.
15
<PAGE> 16
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
AVERAGE BALANCES AND NET INTEREST EARNING ANALYSIS
(In thousands)
<TABLE>
<CAPTION>
Nine Months ended September 30, 1995 1994
ASSETS AVERAGE AVERAGE
AVERAGE YIELD AVERAGE YIELD
BALANCE INTEREST OR RATE BALANCE INTEREST OR RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning assets:
Loans $ 64,187 $4,870 10.14% $ 59,385 $ 3,894 8.77%
Investment securities 20,952 949 6.06% 17,702 703 5.31%
Fed funds sold & other deposits 9,390 413 5.88% 15,807 453 3.83%
---------- ----------- --------- ---------- -------- --------
Total interest earning assets 94,529 6,232 8.81% 92,894 5,050 7.27%
Non-Interest Earning assets:
Cash and due from banks 6,133 6,706
Bank property and equipment 1,041 1,231
Other assets 3,395 5,164
Less: Allowance for loan losses (2,372) (2,578)
---------- ----------
Total non-interest earning
assets 8,197 10,523
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $102,726 $103,417
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Checking, money market &
savings $ 49,774 1,301 3.49% $ 50,475 $ 950 2.52%
Time deposits 23,336 944 5.41% 23,044 747 4.33%
Other borrowings 348 13 4.99% 642 15 3.12%
---------- ----------- --------- ---------- -------- --------
Total interest-bearing
liabilities: 73,458 2,258 4.11% 74,161 1,712 3.09%
Non-interest bearing
liabilities:
Non-interest bearing deposits 19,055 20,133
---------- ----------- --------- ---------- -------- --------
Total funding sources 92,513 2,258 3.26% 94,294 1,712 2.43%
Other liabilities 545 767
---------- ----------
TOTAL LIABILITIES 93,058 95,061
Shareholders' Equity 9,668 8,356
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $102,726 $103,417
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $3,974 $ 3,338
Net interest spread 5.55% 4.84%
Net interest income as a % of
average earning assets 5.62% 4.80%
</TABLE>
16
<PAGE> 17
PROVISION FOR LOAN LOSSES
The provision for loan losses is the annual cost of maintaining an
allowance or reserve for anticipated future losses on loans. The allowance for
loan losses reflects management's judgment as to the level considered
appropriate to absorb such losses and is based upon a review of many factors,
including historical loss experience, economic conditions and trends, loan
portfolio volume and mix, loan performance trends, the value and adequacy of
collateral, and the Company's internal credit review process. Based on this
ongoing evaluation, management determines the provision expense necessary to
maintain an appropriate allowance.
The provision for loan losses for the first nine months of 1995 was
$57,000, a decrease from the provision of $145,000 set aside for the same
period of 1994. The lower provision is the result of an improved general
economy and steadily improving loan quality. Nonaccruing loans fell $1.4
million, or 35.8%, to $2.5 million at September 30, 1995 from $3.9 million at
September 30, 1994. As the quality of the loan portfolio improved, the reserve
requirement abated and, therefore, the addition to the reserves through the
provision was reduced.
NONINTEREST INCOME
Noninterest income increased $789,000, or 101.4%, in the first nine
months of 1995 to $1,567,000 from $778,000 in the same period of 1994. A
significant portion of the increase is the $1,000,000 premium paid for the
Virginia assets and a net gain on the sale of other real estate owned of
$85,000 during the first three quarters of 1995. In the same period of 1994,
gains of $114,000 and $129,000, respectively, were realized from the sale of
available for sale securities and from the sale of loans in the secondary
market, neither of which recurred in 1995. Fee income declined $42,000 as the
earnings credit for deposit accounts increased, offsetting a larger amount of
service charges.
In the third quarter, noninterest income fell $16,000 from $179,000 in
1994 to $163,000 in 1995, the result of the premium recognized on the sale of
loans in 1994, which did not recur in 1995.
NONINTEREST EXPENSES
Noninterest expenses increased in the first nine months of 1995 as
compared to the same period of 1994, from $3,898,000 to $4,317,000, an increase
of $419,000 or 10.7%. Salaries and benefits increased $381,000 or 21.9%, the
result of merit increases in 1995 and a $327,000 charge to compensation expense
as stock options became exercisable in the second quarter. Other expenses rose
$148,000, or 9.8%, when comparing the first nine months of 1995 to 1994,
primarily due to the costs associated with the sale of the Virginia bank's
assets and the closing of the McLean, Virginia office.
Noninterest expenses were $140,000, or 10.6%, lower in the third
quarter of 1995 compared to the same period in 1994, the result of cost savings
after the sale of Suburban Virginia and general cost controls.
17
<PAGE> 18
ASSET QUALITY
NONPERFORMING ASSETS
Nonperforming assets are loans on nonaccrual status and real estate
acquired through foreclosure or deed in lieu of foreclosure. Troubled debt
restructurings are loans which contain concessions as to rate or term, or both.
At September 30, 1995, nonperforming assets were $3.8 million, a
substantial decrease of $2.9 million or 43.1%, from $6.7 million at December
31, 1994. Nonaccrual loans were $2.5 million and $3.7 million at September 30,
1995 and December 31, 1994, respectively. Of the amount on nonaccrual status
on those dates, approximately $1.0 million and $2.1 million, respectively, were
not contractually past due as to principal or interest. Other real estate
owned decreased $1.7 million, or 57.3%, from sales of properties in the first
nine months of 1995 to $1.3 million from $3.0 million at December 31, 1994.
Troubled debt restructurings were $1.3 million at September 30, 1995,
and $2.0 million at December 31, 1994, a decrease of approximately $758,000, or
37.4%, the result of principal paydowns.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management
believes is adequate to absorb the losses on existing loans, based upon their
evaluation of many factors, including actual credit losses during the period,
loan performance measures and trends, volume and mix of loans within the
portfolio, and other internal and external factors which may affect the quality
and loss experience within the portfolio.
The allowance at September 30, 1995 was $2,290,000, a decrease of
$460,000 from $2,750,000 at December 31, 1994. Activity in the allowance for
loan losses for the first nine months of 1995 included a provision of $57,000,
charge-offs of $759,000 and recoveries of $242,000. As a percentage of total
loans, the allowance was 3.6% and 4.1% at September 30, 1995 and December 31,
1994, respectively.
Based on current expectations relative to loan portfolio performance
and loss projections, management believes that the level of the allowance for
loan losses is adequate. Internal loan review procedures will continue to be
utilized by the Company in order to insure that potential problem loans are
identified early, thereby lessening any negative impact on the allowance and/or
earnings.
LIQUIDITY MANAGEMENT
Liquidity is the ability to generate and maintain sufficient cash
flows to fund operations and to meet financial obligations to depositors and
borrowers promptly and in a cost-effective manner. Asset liquidity is provided
primarily by maturing loans and investments and by cash received from
operations. Other sources of asset liquidity include readily marketable assets
that can serve as collateral for borrowings, and sales of loans and other real
estate owned. On the liability side of the balance sheet, liquidity is
affected by the timing of maturing liabilities and the ability to generate new
deposits or borrowings as needed.
18
<PAGE> 19
In the first three quarters of 1995, the Company's liquidity position
changed somewhat as loan volume increased and marketable securities declined.
As a percentage of total average earning assets, loans were 67.9% for the first
nine months of 1995 and 63.9% in the same period of 1994, while marketable
securities and overnight investments were 32.1% and 36.1%, respectively. This
shift in the mix of earning assets to a lower percentage of readily marketable
assets has reduced the Company's overall liquidity slightly on average.
A typically stable source of liquidity is the core deposit base. Core
deposits are normally noninterest checking accounts, interest checking and
money market accounts, and savings accounts. The stability of these core
deposits is reflected in the ratio of these deposits to total funding sources,
which averaged 74.4% in the first three quarters of 1995 and 74.9% in 1994.
Time deposits under $100,000, which are also considered to be stable funding
sources, were 22.0% of funding sources in the first nine of 1995 and 20.3% in
1994. Additional funding is generated from short-term borrowings (securities
sold under repurchase agreements) and large CDS. These funds, which are
considered to be volatile or rate sensitive, even though they are provided by
local customers, have decreased as a percentage of average total funding
sources from 3.7% in the first three quarters of 1994 to 3.6% in 1995.
Other sources of liquidity and cash flow in the first nine months of
1994 were from the sales of available for sale securities which generated
proceeds of $5.9 million and the sales of SBA loans in the secondary market,
generating cash inflow of $4.7 million. The proceeds from these sales were
reinvested in similar liquid instruments. In the first nine months of 1995, no
loans were sold in the secondary market and securities sold generated only
$709,000; however, sales of properties obtained through foreclosure generated
cash of $1.7 million during the period.
Further, $6 million of reverse repurchase lines of credit are
currently maintained by the Bank as an additional source of short-term
liquidity. All of the Bank's correspondents meet regulatory capital
requirements for adequately or well capitalized financial institutions, thereby
minimizing the risk that might be associated with this level of interbank
exposure. The Banks have not needed to utilize these backup lines, as
internally generated liquidity has provided sufficient resources.
CAPITAL RESOURCES AND ADEQUACY
Shareholders' equity increased $2,059,000, or 24.0%, from $8,587,000
at December 31, 1994 to $10,646,000 at September 30, 1995. The increase was a
combination of earnings of $1,163,000 for the nine months, improvement in the
estimated fair value of the available for sale securities of $497,000,
increases in paid-in capital from the stock options, and the exercise of 37,000
warrants.
One measure of capital adequacy is the ratio of regulatory capital to
risk-adjusted assets. Total capital is composed of both core capital (Tier 1)
and supplemental capital (Tier 2). The Bank's Tier 1 capital consists of
common equity and Tier 2, of a qualifying portion of the allowance for loan
losses. Assets, both on- and off- balance sheet items, are weighted according
to the underlying risk associated with the item and are assigned a risk
weighting ranging from 0 to 100%. Banks are expected to meet a minimum ratio
of total qualifying capital to risk-weighted assets of 8%, with at least half
of that percentage (4%) in the form of core capital. This minimum capital
requirement applies to the Company's bank subsidiary and will apply to
19
<PAGE> 20
Bancshares at such time as its total assets reach $150 million. At September
30, 1995, Suburban Maryland reported at Tier 1 risk-based capital ratio of
13.31% and a ratio of 14.59% based on total capital.
Other capital adequacy measures are the leverage capital ratio and the
tangible equity ratio. These ratios are calculated by dividing average total
assets for the most recent quarter into core capital (Tier 1) for the leverage
ratio or into tangible capital (core capital less goodwill) for the tangible
equity ratio. The Bank's core capital and tangible capital are the same. The
regulatory minimum for these ratios is 3%, with most banks required to maintain
a ratio of at least 4% to 5%, depending upon risk profiles and other factors.
At September 30, 1995, the Tier 1 and tangible capital ratios for Suburban
Maryland were 8.76%.
A combination of the leverage ratio and the risk-based capital ratio
is used to categorize banks as well-capitalized, adequately-capitalized, or
under-capitalized financial institutions under the guidelines of FDICIA. A
financial institution is considered "well capitalized" if it has a total
risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of
at least 6%, and a leverage ratio of 5% or greater, and it is not subject to
any written agreement, order or directive. To be considered "adequately
capitalized", an institution must generally have a leverage ratio of at least
4% and a total risk-based capital ratio of at least 8%. At September 30, 1995,
Suburban Maryland was categorized as "well capitalized".
Transferrable warrants to purchase 2,014,705 shares of common stock at
$1.00 per share were issued in conjunction with the stock offering in 1993.
These warrants were exercisable during two windows in 1994 and one window in
the second quarter of 1995, in which 90,294 shares were issued. The remaining
warrants expire on December 15, 1995 and may be exercised from November 15 to
December 15 in 1995.
SUBSEQUENT EVENTS
On October 17, 1995, Suburban Bancshares, Inc. announced the
termination of negotiations between Bancshares and Financial Institutions
Holding Corporation ("FIHC"), regarding a merger of the two bank holding
companies. Bancshares and FIHC had earlier announced the signing of a letter
of intent providing for a merger of FIHC with and into Bancshares. The
parties were unable to reach agreement on the terms of a definitive contract.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this
report.
Exhibit # Description
11.0 Computation of per share earnings
27.0 Financial Data Schedule
(b) No reports on Form 8K were filed in the quarter ended
September 30, 1995.
21
<PAGE> 22
PART II. OTHER INFORMATION (continued)
SIGNATURES
Pursuant to the requirement 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.
SUBURBAN BANCSHARES, INC.
(Registrant)
Date: November 13, 1995 William R. Johnson
------------------ ------------------------------
William R. Johnson
President and Chief Operating Officer
Date: November 13,1995 Sibyl S. Malatras
----------------- ------------------------------
Sibyl S. Malatras
Senior Vice President and Treasurer
(Principal Financial Officer)
22
<PAGE> 1
Exhibit 11.0
Computation of per share earnings
<PAGE> 2
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
SEPTEMBER 30, 1995 Page 1
STOCK PRICES - Closing Bid
<TABLE>
<CAPTION>
Daily End of
Average Quarter
<S> <C> <C>
First quarter 1995 1.34 1.25
Second quarter 1995 1.43 1.63
Third quarter 1995 1.83 2.00
For Warrants exercised:
April 1 thru May 17, 1995 1.32 1.44
</TABLE>
20% TEST
<TABLE>
<CAPTION>
# of Shares (1) 20%
<S> <C> <C>
First quarter 1995 9,054,459 1,810,892
Second quarter 1995 9,091,663 1,818,333
Third quarter 1995 9,091,663 1,818,333
</TABLE>
(1) Outstanding at end of period
EQUIVALENT SHARES - Description
(A) WARRANTS - 2,014,705 outstanding at January 1, 1994
exercisable at $1.00 per share
April 15 - May 15 and
November 15 - Dec 15 in 1994 and 1995
- 28,105 exercised and issued 5/20/94
- 1,400 exercised and issued 6/20/94
- 23,585 exercised and issued 12/15/94
- 37,204 exercised and issued 5/17/95
(B) OPTIONS - 350,000 exercisable at $0.10 per share when
Company attains a net income of
$500,000 (i.e. contingent shares, the
conditions of which are currently
being met)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
<TABLE>
<S> <C> <C> <C>
First quarter 1995: 9,054,459 for 90 days = 9,054,459
Second quarter 1995: 9,054,459 for 46 days = 4,576,979
9,091,663 for 45 days = 4,495,877
---------
9,072,857
Third quarter 1995 9,091,663 for 92 days = 9,091,663
Weighted average common shares outstanding year-to-date 9,073,129
</TABLE>
<PAGE> 3
SUBURBAN BANCSHARES, INC. EXHIBIT 11
EARNINGS PER SHARE CALCULATION PAGE 2
SEPTEMBER 30, 1995
INCREMENTAL SHARE CALCULATIONS
WEIGHTED AVERAGE WARRANTS (w) AND OPTIONS (o) OUTSTANDING:
<TABLE>
<S> <C> <C> <C> <C> <C>
First Qtr 1995: 1,961,615 (w) for 90 days = 1,961,615
350,000 (o) for 90 days = 350,000
Second Qtr 1995: 1,961,615 (w) for 46 days = 991,586
issued 5/17 1,924,411 (w) for 45 days = 951,632
350,000 (o) for 91 days = 350,000
Third Qtr 1995: 1,924,411 (w) for 92 days = 1,924,411
350,000 (o) for 92 days = 350,000
</TABLE>
INCREMENTAL SHARES (2)
<TABLE>
<S> <C> <C>
First Qtr 1995:
Common and equivalent shares (primary)
Unexercised warrants thru period 497,723
497,723
Fully diluted
Unexercised warrants thru period 392,323
392,323
Second Qtr 1995:
Common and equivalent shares (primary)
Unexercised warrants thru period 298,169
Warrants exercised 5/17 230,699
528,868
Fully diluted
Unexercised thru period 383,251
Exercised 5/17 290,776
674,027
Third Qtr 1995:
Common and equivalent shares (primary)
Unexercised warrants thru period 872,820
872,820
Fully Diluted
Unexercised warrants thru period 962,206
962,206
</TABLE>
-------------------------------
(2) Calculation of incremental shares: (a) average market price
primary = ((a-b)/a)*d (b) exercise price
fully diluted = ((c-b)/c)*d (c) market price at end of
period
(d) weighted average common
stock equivalent shares
<PAGE> 4
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
JUNE 30, 1995 Page 3
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
1995
COMMON AND EQUIVALENT SHARES (PRIMARY) 3QTR95 YEAR-TO-DATE
<S> <C> <C>
EARNINGS 223,737 1,162,539
SHARES & EQUIVALENT SHARES
Common Shares 9,091,663 9,073,129
Incremental Shares (warrants) 872,820 633,137
Contingent Shares (options) 350,000 350,000
---------- ----------
TOTAL 10,314,483 10,056,266
EPS 0.021692 0.115603
FULLY DILUTED
EARNINGS 223,737 1,162,539
SHARES & EQUIVALENT SHARES
Common Shares 9,091,663 9,073,129
Incremental Shares (warrants) 962,206 676,185
Contingent shares (options) 350,000 350,000
------------ ---------
TOTAL 10,403,869 10,099,314
EPS 0.021505 0.115111
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 7,745
<INT-BEARING-DEPOSITS> 365
<FED-FUNDS-SOLD> 14,955
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4,859
<INVESTMENTS-MARKET> 14,955
<LOANS> 63,441
<ALLOWANCE> 2,290
<TOTAL-ASSETS> 105,870
<DEPOSITS> 94,813
<SHORT-TERM> 0
<LIABILITIES-OTHER> 411
<LONG-TERM> 0
<COMMON> 91
0
0
<OTHER-SE> 10,555
<TOTAL-LIABILITIES-AND-EQUITY> 105,870
<INTEREST-LOAN> 4,870
<INTEREST-INVEST> 949
<INTEREST-OTHER> 413
<INTEREST-TOTAL> 6,232
<INTEREST-DEPOSIT> 2,245
<INTEREST-EXPENSE> 2,258
<INTEREST-INCOME-NET> 3,974
<LOAN-LOSSES> 57
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,317
<INCOME-PRETAX> 1,167
<INCOME-PRE-EXTRAORDINARY> 1,163
<EXTRAORDINARY> 0
<CHANGES> 9
<NET-INCOME> 1,163
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<YIELD-ACTUAL> 5.62
<LOANS-NON> 2,547
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,267
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,750
<CHARGE-OFFS> 759
<RECOVERIES> 242
<ALLOWANCE-CLOSE> 2,290
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
