<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1995
-----------------------------------------------------
Commission File Number 0-16595
-----------------------------------------------------
SUBURBAN BANCSHARES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant's as specified in its charter)
Delaware 54-1319411
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7505 Greenway Center Drive Greenbelt, Maryland 20770
- -------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive office)
(301) 474-6694
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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(Former address if changed since last report)
Common Stock, Par Value $0.01 per share
- -------------------------------------------------------------------------------
(Title of Class)
Name of each Exchange on which registered: N/A
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
The aggregate market value of the Company's voting stock held by non-affiliates
on March 1, 1996, based on the average of the closing bid and asked prices of
such stock on that date: Approximately $18,480,180
-----------------------------
Common Stock $0.01 Par Value Outstanding at March 1, 1996
- ------------------------------ ----------------------------
(class) 10,951,218
1
<PAGE> 2
Documents Incorporated by Reference
Portions of the Corporation's 1995 Annual Report to Shareholders are
incorporated by reference in Part II to the extent provided in Items 5, 6, 7
and 8 hereof.
Portions of the Corporation's definitive proxy statement relating to the 1996
annual meeting of shareholders are incorporated by reference in Part III to the
extent provided in Items 10, 11, 12 and 13 hereof.
PART I
ITEM 1. Business
GENERAL
SUBURBAN BANCSHARES, INC. (the "Company" or "Bancshares"), which is
headquartered in Greenbelt, Maryland, was formed under the general corporation
laws of the State of Delaware in 1985 and is registered as a bank holding
company. The Company formed two national banking associations in Northern
Virginia: Bank 2000, N.A. and BankStar, N.A., which were merged into a single
bank in March 1991 under the name of Suburban Bank of Virginia, N.A. ("Suburban
Virginia"). In April 1990, the Company acquired Jefferson Bank and Trust
Company, a state-chartered bank with four offices that had been serving the
Maryland suburbs of Washington, D.C. for more than ten years. In March 1991,
Jefferson's name was changed to Suburban Bank of Maryland ("Suburban
Maryland").
On February 19, 1993, the Company entered into an Agreement and Plan
of Reorganization and Recapitalization (the "Plan") with Winfield M. Kelly,
Jr., which provided for a restructure of the Company's Board of Directors and
management, a centralization of operational functions, and the commencement of
a public offering to raise between $4 and $7 million in new capital. In
connection with the implementation of the Plan, Mr. Kelly was elected Chairman
of the Board of Directors of the Company and each of the Banks, and the
Company's Board of Directors was restructured. William R. Johnson, President
and Chief Executive Officer of Suburban Maryland, was named President and Chief
Operating Officer of the Company and President and Chief Executive Officer of
Suburban Virginia. All operational and management functions of the Banks were
centralized, enhancing efficiency throughout the organization.
On July 14, 1993, the Company commenced a public offering of up to 7
million shares of common stock. The offering was successfully concluded on
September 27, 1993, with the sale of 5,756,294 shares with total proceeds to
the Company totaling $5,613,237. Transferable warrants to purchase an
additional 2,014,705 shares of common stock accompanied the new shares. These
warrants were exercisable at $1 per share during two windows in 1994 and two
windows in 1995, in which an aggregate of 1,949,849 shares, or 97% of the
shares underlying the outstanding warrants, were issued.
On May 12, 1995, the Company completed the disposition of most of the
assets and all of the deposit liabilities of Suburban Virginia to Tysons
Financial Corporation and its subsidiary, Tysons National Bank ("Tysons") in
McLean, Virginia. 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,
the Company paid Tysons $754,000 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 the Company for the assets acquired.
On August 18, 1995, the remaining assets and liabilities of Suburban
Virginia were merged into Suburban Maryland (the "Bank") in a pooling of
interests transaction. Assets of Suburban Virginia on that date were
$2,823,000 and capital was $2,756,000.
Currently the Company has a total of five offices located in the
Maryland suburbs of Washington, D.C. in the communities of Greenbelt, Capitol
Heights, Clinton, Oxon Hill and Rockville. The counties of Prince George's and
Montgomery are the Company's primary markets, but also served are the
surrounding counties in Maryland and the District of Columbia.
The Bank provides a variety of general commercial and retail banking
services, which include lending, depositary, and related financial services to
business and professional customers, as well as retail customers, on a
personalized basis. The primary focus of the Bank is toward the small
businesses and professionals and their employees in their market service areas,
providing such services as SBA (Small Business Administration) loans,
commercial loans, asset-based lending, commercial and residential real estate
loans, and consumer-type loans such as home equity, vehicle, home improvement
and personal loans. The Bank also offers ATM access, credit cards and other
financial services.
2
<PAGE> 3
ITEM 1. Business (continued)
The Company is not dependent upon a single customer, or a few
customers, the loss of one or more of which would have a material adverse
effect on its operations. The operations and earnings of the Company are not
materially affected by seasonal changes or by Federal, state or a local
environmental laws or regulations.
COMPETITION
The Bank operates in a highly competitive environment in which it must
share its market with large regional banks as well as institutions not subject
to the regulatory restrictions of banks and bank holding companies, such as
money market and other mutual funds. The Bank encounters competition from
diversified financial institutions, ranging in size from small banks to the
mega-banks operating in this region, and include commercial banks, savings and
loan associations, credit unions and other lending institutions.
The principal competitive factors among the Company's competitors can
be classified into two categories: pricing and services. Interest rates on
deposits, especially time deposits, and interest rates and fees charged to
customers on loans are very competitive. From a service perspective, financial
institutions compete against each other in convenience of location, types of
services, service costs and banking hours. The Company is generally
competitive with institutions in its primary service areas with respect to
interest rates paid on deposit accounts, charges for services provided, and
interest rates and fees charged on loans.
EMPLOYEES
As of March 1, 1996, the Company employed 58 full-time equivalent
employees. The employees of the Company are not represented by any collective
bargaining group. Management of the Company considers relations with its
employees to be satisfactory.
SUPERVISION AND REGULATION
OVERVIEW
The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, and, as such, is subject to regulation
and supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board" or "FRB"). The Company is required to file quarterly
reports of its operations with the FRB.
Suburban Maryland is a Maryland state-chartered non-member bank and is
subject primarily to regulation and examination by the Bank Commissioner of the
State of Maryland (the "Commissioner") and by the Federal Deposit Insurance
Corporation (the "FDIC"), which insures Suburban Maryland's deposits to the
maximum extent permitted by law.
BANK HOLDING COMPANY REGULATIONS
As a bank holding company, the Company can engage in banking-related
activities as permitted by the Federal Reserve Board, directly or through
newly-formed subsidiaries or by acquiring companies already established in such
activities subject to the FRB regulations relating to those activities.
However, except for activities related to its operation as the holding company
of the Bank, the Company does not anticipate engag ing in any other
banking-related activity in the foreseeable future.
CAPITAL RESOURCES
The FRB and the FDIC have adopted capital adequacy guidelines pursuant
to which they assess the adequacy of capital in examining and supervising banks
and bank holding companies and in analyzing applications to the FRB under the
Bank Holding Company Act.
One measure of capital adequacy is the risk-based capital ratio, or
the ratio of total 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, excluding unrealized gains or losses
on available for sale securities, and Tier 2 capital consists 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 Bank and will apply
to Bancshares at such time as its total assets reach $150 million. At December
31, 1995, Suburban Maryland reported a Tier 1 risk-based capital ratio of
13.07% and a ratio of 14.33% based on total capital. Both ratios were well
above the general regulatory minimums of 4% and 8%, respectively.
3
<PAGE> 4
ITEM 1. Business (continued)
Another capital adequacy measure is the leverage capital ratio, which
is calculated by dividing average total assets for the most recent quarter into
core (Tier 1) capital. The regulatory minimum for this ratio is 3%, with most
banks required to maintain a ratio of at least 4% to 5%, depending upon risk
profiles and other factors. At December 31, 1995, the leverage capital ratio
for Suburban Maryland was 8.72%.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
Regulations implementing the prompt corrective action provisions of
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
became effective on December 19, 1992. FDICIA required the regulators to
stratify institutions into five quality tiers based upon their respective
capital strengths and to increase progressively the degree of regulation over
the weaker ones, limited the pass-through deposit insurance treatment of
certain types of accounts, adopted a "Truth in Savings" program, called for the
adoption of risk-based premiums on deposit insurance and required banks to
observe insider credit underwriting procedures no less strict than those
applied to comparable non-insider transactions.
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.
On December 3,1 1995, Suburban Maryland was considered a "well capitalized"
financial institution.
The Bank's capital ratios at December 31, 1995 and 1994 are shown
below. The 1994 capital ratios have been restated to reflect the merger of
Suburban Maryland and Suburban Virginia.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1995 1994
- ----------------------------------------------------------------
<S> <C> <C>
Tier I/Leverage Ratio 8.72% 6.18%
- ----------------------------------------------------------------
Tier I/Risk-Weighted Assets 13.07% 9.35%
- ----------------------------------------------------------------
Total Capital/Risk-Weighted Assets 14.33% 10.63%
- ----------------------------------------------------------------
</TABLE>
4
<PAGE> 5
ITEM 1. Business (continued)
STATISTICAL INFORMATION
The following tables present statistical information relating to
Suburban Bancshares, Inc. and its subsidiaries on a consolidated basis.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The table presented below shows average balances, net interest income
and net interest margin:
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
Assets Average Interest Average Average Interest Average Average Interest Average
Balance Yield or Balance Yield or Balance Yield or
Rate Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $64,616 $6,525 10.10% $60,577 $5,511 9.10% $62,244 $5,476 8.80%
Investment securities 20,235 1,229 6.07% 19,155 1,043 5.45% 9,831 607 6.17%
Fed funds sold & other deposits 10,377 604 5.82% 14,932 602 4.03% 16,351 492 3.01%
Total interest-earning assets 95,228 8,358 8.78% 94,664 7,156 7.56% 88,426 6,575 7.44%
Noninterest-earning assets:
Cash and due from banks 6,322 6,716 6,437
Bank property and equipment 1,045 1,220 1,385
Other assets 3,124 5,102 6,204
Less: Allowance for loan losses (2,342) (2,565) (2,841)
Total noninterest-earning assets 8,149 10,473 11,185
TOTAL ASSETS $103,377 $105,137 $99,611
Liabilities and shareholders' equity
Interest-bearing liabilities:
Checking, money market & savings $50,455 $1,816 3.60% $50,687 $1,300 2.56% $47,038 $1,205 2.56%
Time deposits 23,416 1,290 5.51% 23,713 1,056 4.45% 25,369 1,143 4.51%
Other borrowings 261 13 4.83% 605 21 3.45% 1,294 37 2.86%
Total interest-bearing liabilities 74,132 3,119 4.21% 75,005 2,377 3.17% 73,701 2,385 3.24%
Noninterest-bearing liabilities:
Noninterest-bearing deposits 18,612 20,635 19,084
Total funding sources 92,744 3,119 3.36% 95,640 2,377 2.49% 92,785 2,385 2.57%
Other liabilities 553 763 934
Total liabilities 93,297 96,403 93,719
Shareholders' equity 10,080 8,734 5,892
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $103,377 $105,137 $99,611
Net interest income $5,239 $4,779 $4,190
Net interest spread 5.42% 5.07% 4.87%
Net interest margin 5.50% 5.05% 4.74%
</TABLE>
Basis of preparation: Amounts are in thousands; balances are presented as
annualized daily averages; nonaccrual loans are included in the loan category
as earning assets.
5
<PAGE> 6
ITEM 1. Business (continued)
The following table presents the dollar amount of change in interest
income and expense and the corresponding amounts attributable to changes in
rate and to changes in volume:
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
1995 OVER 1994 1994 OVER 1993
---------------------------------------------------------------------------------------
(in thousands) INCREASE CHANGE DUE TO INCREASE CHANGE DUE TO
-------------------------- ---------------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans 1,014 631 383 35 184 (149)
Taxable investment securities 186 125 61 436 (79) 515
Money market investments 2 219 (217) 110 156 (46)
---------------------------------------------------------------------------------------
Total Interest-Earning Assets 1,202 975 227 581 261 320
Interest-Bearing Liabilities:
Checking, savings & money markets 516 522 (6) 95 2 93
Time deposits 234 247 (13) (87) (13) (74)
Fed funds purchased/repurchase
agreements (8) 6 (14) (16) 6 (22)
Total Interest-Bearing Liabilities 742 775 (33) (8) (5) (3)
=======================================================================================
NET INTEREST INCOME 460 200 260 589 266 323
=======================================================================================
</TABLE>
NOTE: The rate/volume change is allocated between volume change and rate
change using the ratio each of the components bears to the absolute
value of their total.
INTEREST RATE SENSITIVITY AND RISK MANAGEMENT
Interest rate sensitivity is an important factor in the management of
the composition and maturity configurations of the Company's earning assets and
funding sources. The Bank's Asset/Liability Management Committee manages the
interest rate sensitivity position of the Bank in order to maintain an
appropriate balance between the maturity and repricing characteristics of
assets and liabilities that are consistent with the Bank's liquidity, growth
and capital adequacy goals. The Bank's policies are to maximize net interest
margins during periods of volatile, as well as stable, interest rates, to
attain earnings growth and to maintain sufficient liquidity to satisfy
depositors' requirements and meet credit needs of customers in light of local
competitive factors. The Bank's policies reflect a goal of maintaining a
relatively neutral position to limit the volatility in interest income
resulting from rate fluctuations.
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1995. The table shows the Company's interest sensitivity gap
(i.e., interest-earning assets less interest-bearing liabilities maturing
within the same time frame), and the cumulative interest sensitivity gap ratio
(i.e., cumulative interest sensitivity gap as a percentage of total assets).
The Company's cumulative gap ratios at December 31, 1995 were negative up to
one (1) year. A negative interest sensitivity gap for any time period means
that more interest-bearing liabilities will reprice or mature during that time
period than interest-earning assets. During periods of falling interest rates,
a short-term negative interest sensitivity gap position would generally
increase earnings, and during periods of rising interest rates, a short-term
negative interest sensitivity gap position would generally decrease earnings.
Because the table below shows a static position at a single point in
time, it is limited in quantifying the total impact of rate changes on the
margin and it may not be indicative of the Company's position over time.
Market rate changes do not affect all earning assets and interest bearing
liabilities equally or simultaneously. It is, therefore, important to consider
these points along with the analysis.
6
<PAGE> 7
ITEM 1. Business (continued)
Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
BALANCES SUBJECT TO RATE CHANGE
December 31, 1995
greater than greater than greater
3 mos. 3 mos. 6 mos. to 1 than
(in thousands) or less to 6 mos. yr. 1 yr. Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS (RSA)
---------------------
Fixed Rate Loans 5,373 2,300 2,617 13,052 23,342
Adjustable Rate Loans 31,210 2,519 5,552 2,206 41,487
-------- -------- -------- -------- --------
Total Loans (1) $36,583 $ 4,819 $ 8,169 $15,258 $64,829
Federal Funds Sold & Deposits with Other Banks 18,710 -- -- -- 18,710
Fixed Rate Investments 1,005 2,005 3,654 11,048 17,712
Adjustable Rate Investments 355 -- -- -- 355
-------- --------- ---------- ----------- ---------
Total Investments $ 1,360 $ 2,005 $ 3,654 $11,048 $18,067
-------- -------- -------- -------- --------
Total Rate Sensitive Assets $56,653 $ 6,824 $11,823 $ 26,306 $101,606
Cumulative RSA $56,653 $63,477 $75,300 $101,606
RATE SENSITIVE LIABILITIES (RSL)
--------------------------
Interest Bearing Deposits $69,387 $ 3,776 $ 3,680 $ 7,246 $ 84,089
Securities Sold Under Agreements to -- -- -- -- --
Repurchase
------ ------- -------- -------- --------
Total Rate Sensitive Liabilities $69,387 $ 3,776 $ 3,680 $ 7,246 $84,089
Cumulative RSL $69,387 $73,163 $76,843 $84,089
GAP $ $(12,734) $ 3,048 $ 8,143 $19,060
Cumulative GAP $ $(12,734) $(9,686) $(1,543) $17,517
Cumulative GAP (RSA/RSL) 0.82 0.87 0.98 1.21
GAP as % of Total Assets -11.03% -8.39% -1.34% 15.18%
</TABLE>
(1) Includes loans held for sale of $3,292 and excludes nonaccrual loans of
$1,592.
7
<PAGE> 8
ITEM 1. Business (continued)
The following table presents the contractual maturity distribution and
interest-rate sensitivity of the Company's commercial and real estate loans at
December 31, 1995 (in thousands). The Company's experience indicates that
certain loans, on an individual basis, will be renewed, rescheduled or repaid
prior to scheduled maturity. Accordingly, the table should not be regarded as
a forecast of future cash collections.
<TABLE>
<CAPTION>
REMAINING MATURITIES
----------------------------------------------------------------------
1 YEAR OR LESS 1 TO 5 YEARS DUE AFTER 5 YEARS TOTALS
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSTRUCTION 2,652 1,350 459 4,461
REAL ESTATE 6,904 12,290 12,904 32,098
COMMERCIAL 9,871 7,713 2,446 20,030
----------------------------------------------------------------------
TOTAL 19,427 21,353 15,809 56,589
======================================================================
INTEREST RATE SENSITIVITY
VARIABLE RATE 13,107 12,862 12,402 38,371
FIXED RATE 6,320 8,491 3,407 18,218
----------------------------------------------------------------------
TOTAL 19,427 21,353 15,809 56,589
======================================================================
</TABLE>
II. INVESTMENT PORTFOLIO
The following table shows the book value of the investment portfolio
of the Company by category at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury $9,638 $14,705 $7,381
Federal Agencies 7,079 7,722 2,164
Mortgage-back obligations 311 366 2,358
Collateralized mortgage obligations 44 53 203
Other 995 1,227 958
--------- --------- ---------
TOTAL $18,067 $24,073 $13,064
========= ========= =========
</TABLE>
See NOTE D to the Consolidated Financial Statements for a breakdown by
classification as to available for sale and held to maturity.
The table presented below sets forth by type and maturity the
Company's investment securities as of December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Maturity - estimated fair value U.S. Federal MBO's CMO's Other Total Yield
Treasuries Agencies
- ------------------------------------- ------------ ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year or less 4,100 1,966 0 0 597 6,663 5.75%
> 1 to 5 Years 5,538 5,113 0 0 398 11,049 6.45%
> 5 to 10 Years 0 0 140 0 0 140 8.50%
Over 10 Years 0 0 171 44 0 215 7.02%
------------ ---------- -------- -------- -------- -------- --------
Total estimated fair value 9,638 7,079 311 44 995 18,067 6.21%
============ ========== ======== ======== ======== ======== ========
Yield 6.06% 6.50% 7.73% 6.70 5.20% 6.21%
Weighted Average Maturity in Years 1.32 1.87 12.82 21.82 1.63 1.80
</TABLE>
8
<PAGE> 9
ITEM 1. Business (continued)
III. LOAN PORTFOLIO
The following table presents the major categories of the Company's
loan portfolio at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Construction $ 4,461 $ 1,353 $ 1,663
Real Estate 32,098 40,327 34,832
Commercial 20,030 17,246 16,355
Individual 4,622 5,349 3,382
Other 1,811 250 916
----------- ----------- -----------
$63,022 $64,525 $57,148
Less: Allowance for loan losses (1,467) (2,750) (2,486)
----------- ----------- -----------
Total loans, net $61,555 $61,775 $54,662
=========== =========== ===========
</TABLE>
Nonperforming Assets
Nonperforming assets consist of loans on which interest is no longer
accrued, real estate acquired through foreclosure or insubstance 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.
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 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 of interest 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.
Foreclosed real estate is recorded at the lower of cost or fair value
at acquisition date. Subsequent to acquisition, foreclosed real estate is
carried at lower of cost or fair value less estimated selling costs, based upon
periodic evaluation by management. Costs relating to property improvements are
capitalized to the extent that they are recoverable, and costs relating to
holding property are expensed when incurred. Gains or losses on the sale of
foreclosed real estate are recognized upon disposition of the property.
The Company has no obligation to make further extensions of credit
under loans classified as troubled debt restructurings or nonaccrual at
December 31, 1995, 1994, or 1993. Nonaccrual and restructured loans are
classified as loans in the accompanying schedules and the Consolidated Balance
Sheets.
9
<PAGE> 10
ITEM 1. Business (continued)
The table below shows nonperforming assets and troubled debt
restructurings (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $1,592 $3,720 $3,113
Foreclosed real estate 1,152 3,018 3,607
----- ----- -----
Total nonperforming assets $2,744 $6,738 $6,720
- -----------------------------------------------------------------------------------------------------
Loans classified as nonaccrual but contractually current $105 $2,083 $1,614
- -----------------------------------------------------------------------------------------------------
Restructured loans classified as nonaccrual 88 713 760
Restructured loans accruing 1,173 1,312 1,970
----- ----- -----
Total restructured loans $1,261 $2,025 $2,730
- -----------------------------------------------------------------------------------------------------
</TABLE>
There were no loans past due 90 days or more and still accruing at December 31,
1995, 1994 or 1993.
The gross interest income that would have been received during the
year ended December 31, 1995 on nonaccrual and accruing restructured loans had
such loans been current in accordance with their original terms throughout the
year was approximately $421,000 and $136,000, respectively. Recorded interest
income was approximately $100,700 on troubled debt restructurings. No interest
income was recorded on loans classified as nonaccrual in 1995.
The following schedule presents a breakdown by type of property of
foreclosed real estate (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial land $ 546 $ 671 $ 993
Residential land 254 1,416 1,416
Commercial property 567 1,098 1,003
1-4 family residential 147 581 1,042
- ---------------------------------------------------------------------------------------------
Total 1,514 3,766 4,454
Allowance for losses (362) (748) (847)
- ---------------------------------------------------------------------------------------------
Total estimated fair value $ 1,152 $ 3,018 $ 3,607
=============================================================================================
</TABLE>
Activity in the allowance for losses on foreclosed real estate is as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 748 $ 847 $ 896
Provision for losses 231 264 74
Dispositions, net (597) (41) (123)
Charge-offs, net of recoveries (20) (322) 0
- -----------------------------------------------------------------------------------
Balance at end of year $ 362 $ 748 $ 847
- -----------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
ITEM 1. Business (continued)
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is an estimate of uncollectible loans
and reduces the gross amount of loans outstanding. Each loan deemed to involve
significant risk of loss is considered individually to determine the possible
amount of such loss and the remaining loans are evaluated in the aggregate.
The allowance for loan losses is increased through charges to
operations in the form of a provision for loan losses and is reduced by
reversals of previous years' provisions. Charge-offs are made against the
allowance and subsequent recoveries, if any, are credited to the allowance. The
allowance is maintained at a level that management believes will be adequate to
absorb losses on existing loans that may become uncollectible. Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the
timing of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to
significant change.
Management believes that the allowances for losses on loans and
foreclosed real estate are adequate given current circumstances and conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in economic conditions.
The following table shows activity affecting the allowance for
possible loan losses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $2,750 $2,486 $3,132
Provision (recovery) for loan losses (260) 39 1,133
Loans charged off:
Construction 0 0 0
Real Estate 657 152 141
Commercial 639 200 1,858
Individual 44 60 87
Other 0 0 4
------- ------ -------
Total loans charged off $1,340 $412 $2,090
Recoveries
Construction 0 0 0
Real Estate 38 25 19
Commercial 243 497 188
Individual 36 115 104
Other 0 0 0
----- ------ -----
Total recoveries $317 $637 $311
Total allowance at end of period $1,467 $2,750 $2,486
======== ======== ========
Net loans charged off as a % of
average loans outstanding 1.58% -0.37% 2.86%
======== ======== ========
</TABLE>
The following is a breakdown of the allowance for loan losses by loan
category (dollars in thousands). This breakdown represents management's best
judgment as to the allocation of the allowance based on the risk
characteristics associated with each category of loans.
11
<PAGE> 12
ITEM 1. Business (continued)
The allowance is allocated to specific categories of loans for analysis
purposes only.
<TABLE>
<CAPTION>
12/31/95 12/31/94 12/31/93
Allowance Distribution Allowance Distribution Allowance Distribution
Allocation of Loans Allocation of Loans Allocation of Loans
==========================================================================================
<S> <C> <C> <C> <C> <C> <C>
Construction $ 62 7.08% $ 20 2.09% $ 45 2.91%
Real Estate 884 50.93% 1,702 62.50% 1,264 60.95%
Commercial 432 31.78% 861 26.73% 1,075 28.62%
Individual 64 7.34% 160 8.29% 79 5.92%
Other 25 2.87% 7 0.39% 23 1.60%
------------------------------------------------------------------------------------------
$1,467 100.00% $2,750 100.00% $2,486 100.00%
==========================================================================================
</TABLE>
V. DEPOSITS
The following table provides a breakdown by category of deposits of
the Company on a daily average basis at the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
Year ending December 31, 1995 1994 1993
----------------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $18,612 0.00% $20,635 0.00% $19,084 0.00%
Money market, savings, and interest
checking 50,455 3.60% 50,687 2.56% 47,038 2.56%
Time deposits 23,416 5.51% 23,713 4.45% 25,369 4.51%
------------- ------------ -----------
TOTAL DEPOSITS $92,483 $95,035 $91,491
============= ============ ===========
</TABLE>
Maturities of certificates of deposit and other time deposits greater
than $100,000 outstanding at December 31, 1995 are presented below (dollars in
thousands):
<TABLE>
<CAPTION>
Certificates of Deposit Other Time Deposits
-------------------------- --------------------------
<S> <C> <C>
Three months or less $1,446 $103
Over 3 through 6 months 325 0
Over 6 through 12 months 875 0
Over 12 months 570 702
-------------------------- --------------------------
TOTAL $3,216 $805
========================== ==========================
</TABLE>
12
<PAGE> 13
ITEM 1. Business (continued)
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity, and certain other ratios for the periods indicated
follow:
<TABLE>
<CAPTION>
Year ended December 31, 1995 1994 1993
--------------------------------------------------------------
<S> <C> <C> <C>
Return on Average Assets 1.49% 0.21% (1.40)%
Return on Average Equity 15.29% 2.51% (23.63)%
Average Equity to Average Assets 9.75% 8.31% 5.92%
Dividend Payout Ratio - - -
</TABLE>
VII. SHORT-TERM BORROWINGS
The table below shows balances and rates paid on short-term
borrowings:
<TABLE>
<CAPTION>
1995 1994 1993
(in thousands) Amount Rate Amount Rate Amount Rate
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
At year end:
Securities sold under repurchase agreements $ - - $ 691 4.86% $ 512 2.43%
- ------------------------------------------------------------------------------------------------------------------------------
Average for the year:
Securities sold under repurchase agreements $261 4.83% $605 3.45% $1,169 2.38%
Federal funds purchased - - - - 2 3.18%
Other borrowings - - - - 123 10.00%
--- ----- --- ------ ----- ------
Total $261 4.83% $605 3.45% $1,294 3.10%
- ------------------------------------------------------------------------------------------------------------------------------
Maximum month-end balance:
Securities sold under repurchase agreements $1,321 $1,221 $2,038
Other borrowings - - 233
----- ----- -----
Total $1,321 $1,221 $2,271
==============================================================================================================================
</TABLE>
ITEM 2. Properties
Suburban Maryland owns and occupies a one-story building located in
Capitol Heights, Maryland and occupies leased office and banking space in its
other four Maryland locations (Greenbelt, Oxon Hill, Clinton and Rockville).
The Greenbelt lease had a five-year initial term which expired May 31, 1991,
and is currently in the first of three five-year renewal option terms. The
Oxon Hill lease also had a five-year initial term which expired June 30, 1992,
at which time the first of three five-year renewal options was exercised (see
"Item 13. Certain Relationships and Related Transactions"). The Rockville
lease is currently in its ten-year initial term which expires April 12, 2000
and contains two five-year renewal options, and the Clinton lease is currently
in its initial term of seven years, expiring January 1, 2003, and has one
five-year renewal option.
ITEM 3. Legal Proceedings
As of March 1, 1996, there were no material legal proceedings against
Suburban Bancshares, Inc. or its subsidiary.
ITEM 4. Submission of Matters to Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
13
<PAGE> 14
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information contained under the heading "Market for Common Stock"
in the Company's 1995 Annual Report to Shareholders is incorporated herein by
reference thereto.
ITEM 6. Selected Financial Data
The information contained under the heading "Summary Financial
Information" in the Company's 1995 Annual Report to Shareholders is
incorporated herein by reference thereto.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1995 Annual Report to Shareholders is incorporated herein by reference thereto.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements together with the
report of Stegman & Company thereon appearing in the Company's 1995 Annual
Report to Shareholders are incorporated herein by reference thereto. See ITEM
14 for a list of financial statements and notes thereto so incorporated.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On April 20, 1994, the Board of Directors of Suburban Bancshares,
Inc., upon the recommendation of the Audit Committee, approved the dismissal of
KPMG Peat Marwick LLP, effective April 29, 1994, as the Company's principal
independent accountant. KPMG Peat Marwick LLP served in this capacity from
1989 through 1993. There were no disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope of
procedures, which disagreements if not resolved to their satisfaction would
have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. The audit report of KPMG Peat Marwick LLP
on the consolidated financial statements of Suburban Bancshares, Inc. and
subsidiaries as of and for the year ended December 31, 1993, did not contain
any adverse opinion or disclaimer of opinion, nor was it qualified or modified
as to uncertainty, audit scope of accounting principles.
Effective April 29, 1994, the Board of Directors of Suburban
Bancshares, Inc., upon the recommendation of the Audit Committee, selected
Stegman & Company as the independent accounting firm for the Company for the
year ending December 31, 1994. During the Company's two most recent fiscal
years and any subsequent interim period prior to engaging Stegman & Company,
the Company or its representatives did not consult with Stegman & Company on
the application of accounting principles to a specified transaction, or the
type of audit opinion that might be rendered, or any matter that was the
subject of a disagreement or reportable event.
PART III
ITEM 10. Directors and Executive Officers
The information contained under the heading "Directors and Executive
Officers" in the Company's definitive proxy statement relating to the Company's
1996 meeting of shareholders is incorporated herein by reference thereto.
ITEM 11. Compensation of Executive Officers and Directors
The information contained under the heading "Executive Compensation"
in the Company's definitive proxy statement relating to the Company's 1996
meeting of shareholders is incorporated herein by reference thereto.
14
<PAGE> 15
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Beneficial Ownership of
Common Stock" in the Company's definitive proxy statement relating to the
Company's 1996 meeting of shareholders is incorporated herein by reference
thereto.
ITEM 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement relating to
the Company's 1996 meeting of shareholders is incorporated herein by reference
thereto.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
As listed in the index to financial statements on
page 18 hereof.
2. Financial Statement Schedules
Schedule I Indebtedness of and to Related
Parties - included in Note N to the
Consolidated Financial Statements.
Schedule II Guaranties of Securities and Other
Issuers has been omitted because the
required information is not
applicable.
Schedule III Report of a Predecessor Accountant
3. Exhibits
As listed in the Index to Exhibits on pages 20 and 21
hereof.
(b) No reports on Form 8-K were filed during the fourth quarter of
1995.
(c) See Item 14.(a)3. above
(d) See Item 14.(a)2. above
15
<PAGE> 16
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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.
By: Winfield M. Kelly, Jr.
-------------------------------------------
Winfield M. Kelly, Jr.
Chairman of the Board/CEO
(Principal Executive Officer and Director)
Date: March 15, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: William R. Johnson
--------------------------------------------
William R. Johnson
President and Chief Operating Officer
(Principal Executive Officer)
Date: March 15, 1996
By: Sibyl S. Malatras
-----------------------------------------------
Sibyl S. Malatras
Senior Vice President and Treasurer
(Principal Financial and Accounting Officer)
Date: March 15, 1996
By: Raymond G. LaPlaca
-----------------------------------------
Raymond G. LaPlaca
Director
Date: March 15, 1996
By: Barbara M. DiNenna
------------------------------------------
Barbara M. DiNenna
Director
Date: March 15, 1996
By: Vincent D. Palumbo
------------------------------------------
Vincent D. Palumbo
Director
Date: March 15, 1996
By: Kenneth H. Michael
------------------------------------------
Kenneth H. Michael
Director
March 15, 1996
16
<PAGE> 17
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report on 1995 Consolidated Financial Statements *
Consolidated Balance Sheets at December 31, 1995 and 1994 *
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 *
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993 *
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 *
Notes to Consolidated Financial Statements *
</TABLE>
- -----------------------------------------------
* Incorporated by reference to the Company's 1995 Annual Report to
Shareholders. See ITEM 8 of this report on Form 10-K.
17
<PAGE> 18
SCHEDULE III
REPORT OF A PREDECESSOR ACCOUNTANT
18
<PAGE> 19
KPMG Peat Marwick LLP SCHEDULE III
2001 M Street, N.W.
Washington, D. C. 20036
The Board of Directors and Shareholders
Suburban Bancshares, Inc.
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity, and cash flows of Suburban Bancshares, Inc. and
subsidiaries ("Suburban Bancshares, Inc.") for the year ended December 31,
1993. These consolidated financial statements are the responsibility of
Suburban Bancshares, Inc.'s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Suburban Bancshares, Inc. and subsidiaries for the year ended December 31,
1993, in conformity with generally accepted accounting principles.
/s/
KPMG Peat Marwick LLP
Washington, D.C.
February 11, 1994
19
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization between Bancshares 2000, Inc. and Jefferson Bank and Trust Company dated February 21,
1989 (Incorporated by reference to Exhibit 2.1 of the 1988 Annual Report on Form 10-K)
2.2 Agreement and Plan of Reorganization and Recapitalization between Suburban Bancshares, Inc. and Winfield M. Kelly, Jr.
dated February 19, 1993 (Incorporated by reference to Exhibit 2.2 to Registration Statement No. 33-63286)
2.3 Amendment to Agreement and Plan of Reorganization and Recapitalization between Suburban Bancshares, Inc. and Winfield M.
Kelly, Jr. dated March 31, 1993 (Incorporated by reference to Exhibit 2.3 to Registration Statement No. 33-63286)
2.4 Amendment to Agreement and Plan of Reorganization and Recapitalization between Suburban Bancshares, Inc. and Winfield M.
Kelly, Jr., dated November 17, 1993 (Incorporated by reference to Exhibit 2.4 of the 1993 Annual Report on Form 10-K)
3.0 Restated Certificate of Incorporation of Bancshares 2000, Inc., as amended, dated August 10, 1988 (Incorporated by
reference to Exhibit 3.4 of the 1988 Annual Report on Form 10-K)
3.1 Amendment to Certificate of Incorporation of Bancshares 2000, Inc. as adopted at the Stockholders' Meeting held on October
3, 1989 (Incorporated by reference to Exhibit 3.11 of the 1989 Annual Report on Form 10-K)
3.2 Amendment to Certificate of Incorporation of Bancshares 2000, Inc. as adopted at the Stockholders' Meeting held on June 26,
1991 (Incorporated by reference to Exhibit 3.2 of the 1992 Annual Report on Form 10-K)
3.3 Amendment to Certificate of Incorporation of Suburban Bancshares, Inc. as adopted at the Stockholders' Meeting held on June
2, 1993 (Incorporated by reference to Exhibit 3.3a to Registration Statement No. 33-63286)
3.4 Amended and Restated By-Laws of Suburban Bancshares, Inc. (Incorporated by reference to Exhibit 3.4 to Registration
Statement No. 33-63286)
4.0 Form of Common Stock Certificate of Bancshares 2000, Inc. (Incorporated by reference to Exhibit 4. to Registration
Statement No. 33-11380)
4.1 Form of Common Stock Certificate of Suburban Bancshares, Inc. (Incorporated by reference to Exhibit 4.1 of the 1992 Annual
Report on Form 10-K)
4.2 Form of Common Stock Warrant Certificate of Suburban Bancshares, Inc. (Incorporated by reference to Exhibit 4.3 to
Registration Statement No. 33-63286)
10.3 Incentive Stock Option Plan, as adopted by the Board of Directors of Bancshares 2000, Inc., on December 18, 1986
(Incorporated by reference to Exhibit 10.5 to Registration Statement No. 33-11380)
10.4 Incentive Stock Option Plan, as amended, as adopted at the stockholders' meeting held on October 3, 1989 (Incorporated by
reference to Exhibit 10.3 to Registration Statement No. 33-30727)
10.4a Amendment to Incentive Stock Option Plan, as adopted by the Board of Directors of Suburban Bancshares, Inc., on February
14, 1992 (Incorporated by reference to Exhibit 3.13 of the 1991 Annual Report on Form 10-K)
10.5 Employment Agreement with William R. Johnson dated September 4, 1987 (Incorporated by reference to Exhibit 10.5 of the 1991
Annual Report on Form 10-K)
10.6 Employment Agreement with Winfield M. Kelly, Jr. dated February 18, 1993 (Incorporated by reference to Exhibit 10.4 to
Registration Statement No. 33-63286)
11. Computation of per share earnings (loss)
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
13. Suburban Bancshares, Inc. 1995 Annual Report to Stockholders (Furnished for the information of the Securities and Exchange
Commission only and not to be deemed filed as part of this Annual Report on Form 10-K except for the portions thereof which
are specifically incorporated herein by reference)
16. Letter re change in certifiying accountant (Incorporated by reference to Exhibit A of the Current Report of Form 8K dated
April 29, 1994)
21. List of Subsidiaries of Suburban Bancshares, Inc.
23.1a Consent of KPMG Peat Marwick LLP
23.1b Consent of Stegman and Company
27. Financial Data Schedule
</TABLE>
21
<PAGE> 1
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
DECEMBER 31, 1995 Page 1
<TABLE>
<CAPTION>
STOCK PRICES - Closing Bid Daily Average End of Quarter
------------
<S> <C> <C>
First quarter 1995 1.34 1.25
Second quarter 1995 1.43 1.63
Third quarter 1995 1.85 2.06
Fourth quarter 1995 1.70 1.56
For Warrants exercised:
April 1 thru May 17, 1995 1.32 1.44
October 1 thru December 15, 1995 1.72 1.81
</TABLE>
<TABLE>
<CAPTION>
20% TEST # 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
Fourth quarter 1995 10,951,218 2,190,244
</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 - December 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
- 1,859,555 exercised and issued 12/15/95
(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>
First Qtr 1995: 9,054,459 for 90 days = 9,054,459
Second Qtr 1995: 9,054,459 for 46 days = 4,576,979
9,091,663 for 45 days = 4,495,877
---------
9,072,857
Third Qtr 1995: 9,091,663 for 92 days = 9,091,663
Fourth Qtr 1995: 9,091,663 for 76 days = 7,510,504
10,951,218 for 16 days = 1,904,560
---------
9,415,064
Weighted average common shares outstanding year-to-date 9,159,315
</TABLE>
<PAGE> 2
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE EXHIBIT 11
DECEMBER 31, 1995 Page 2
INCREMENTAL SHARE CALCULATIONS
WEIGHTED AVERAGE WARRANTS (w) AND OPTIONS (o) OUTSTANDING:
<TABLE>
<S> <C>
First Quarter 1995: 1,961,615 (w) for 90 days = 1,961,615
350,000 (o) for 90 days = 350,000
Second Quarter 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 Quarter 1995: 1,924,411 (w) for 92 days = 1,924,411
350,000 (o) for 92 days = 350,000
Fourth Quarter 1995: 1,924,411 (w) for 76 days = 1,589,731
350,000 (o) for 92 days = 350,000
</TABLE>
INCREMENTAL SHARES (2)
<TABLE>
<S> <C> <C>
First Quarter 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 Quarter 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 Quarter 1995:
Common and equivalent shares (primary)
Unexercised warrants thru period 884,189
884,189
Fully Diluted
Unexercised warrants thru period 990,231
990,231
Fourth Quarter 1995:
Common and equivalent shares (primary)
Unexercised warrants thru 12/15/95 664,770 664,770
Fully Diluted
Unexercised warrants thru 12/15/95 712,638 712,638
</TABLE>
--------------------------------------
(2) Calculation of incremental shares:
<TABLE>
<S> <C> <C>
primary = ((a-b)/a)*d (a) average market price
(b) exercise price
fully diluted = ((c-b)/c)*d (c) market price at end of period
(d) weighted average common stock equivalent shares
</TABLE>
<PAGE> 3
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
DECEMBER 31, 1995 Page 3
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
1995
COMMON AND EQUIVALENT SHARES (PRIMARY) 4QTR95 YEAR-TO-DATE
--------------------------------------
<S> <C> <C>
EARNINGS 378,493 1,541,033
SHARES & EQUIVALENT SHARES
Common Shares 9,415,064 9,159,315
Incremental Shares (warrants) 664,770 643,887
Contingent Shares (options) 350,000 350,000
----------- -------------
TOTAL 10,429,834 10,153,202
EPS 0.036289 0.151778
FULLY DILUTED
-------------
EARNINGS 378,493 1,541,033
SHARES & EQUIVALENT SHARES
Common Shares 9,415,064 9,159,315
Incremental Shares (warrants) 712,638 692,305
Contingent Shares (options) 350,000 350,000
----------- ------------
TOTAL 10,477,702 10,201,620
EPS 0.036124 0.151058
</TABLE>
<PAGE> 1
EXHIBIT 13
Suburban Bancshares, Inc.
Annual Report 1995
<PAGE> 2
Suburban Bank
We Take Your
Business Banking
Personally ...
<PAGE> 3
This page of the 1995 Annual Report to Shareholders contains four pictures that
are vertical parallelograms. The captions and a description of each picture
follow:
(1) "SBA Preferred Lender": The picture shows Joseph A. Ruth, Vice
President of Suburban Bank of Maryland, giving a speech at one of our
SBA Seminars.
(2) "Loan Decisions Made Locally": The picture shows a customer and Joseph
E. Burnett, Senior Vice President and Senior Lender, shaking hands as
the customer leaves one of our offices.
(3) "Small Business Employee Banking": The picture shows our ATM card in
use.
(4) "Officers and Directors in the Community": The picture shows Harold J.
Koch, Senior Vice President, talking with a student club at a local
high school.
page 2
- --------------------------------------------------------------------------------
This page of the 1995 Annual Report to Shareholders contains three pictures.
Two are square and one is a rectangle. The bold print runs down the left
margin of the page with the other verbage running down the right hand side of
the page. The pictures are in the middle.
TAKING ACTION ON OUR COMMITMENT TO SMALL BUSINESS & THE COMMUNITY: 1995 IN
REVIEW
CashFlow Lending Unit Started - Clinton Branch Opened - New Government
Contractor Lending Program Begun - Record Earnings over Prior Years - Suburban
OnLine Computer Access Initiated - Accredited for SBA CapLine Revolving Line of
Credit for Small Businesses - Sponsor of the New Government Contractor Resource
Center on the Internet at http://www.govcon.com
(1) This picture shows a professional baker at one of our customer's
sites, the Chesapeake Bagel Bakery.
(2) This picture shows the inside of our newest office in Clinton,
Maryland
(3) This picture shows Annette L. Pointer, Assistant Vice President, at
the computer helping a customer with our new product, Suburban OnLine.
page 3
<PAGE> 4
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
in thousands, except per share data 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Results of Operations
---------------------
Interest income $8,358 $7,156 $6,575 $8,096 $12,371
Interest expense 3,119 2,377 2,385 3,649 7,062
Net interest income 5,239 4,779 4,190 4,447 5,309
Provision (recovery) for loan losses (260) 39 1,133 1,867 1,878
Noninterest income 1,722 1,070 1,313 1,890 782
Noninterest expense 5,674 5,591 5,762 7,334 7,965
Income tax expense 6 -- -- -- --
Net income (loss) 1,541 219 (1,392) (2,864) (3,752)
Per Share Data
--------------
Net income (loss):
Primary $0.15 $0.02 $(0.29) $(0.88) $(1.16)
Fully diluted 0.15 0.02 (0.29) (0.88) (1.16)
Book value per share 1.20 0.95 0.96 1.54 2.42
Financial Condition (December 31)
---------------------------------
Total Assets $115,431 $114,229 $101,922 $109,414 $129,614
Net Loans 61,555 61,775 54,662 65,502 77,484
Total Deposits 101,889 104,402 92,021 101,848 118,122
Total Equity 13,096 8,587 8,649 4,995 7,859
Ratios
------
Return on Average Assets 1.49% 0.21% (1.40)% (2.48)% (2.74)%
Return on Average Equity 15.29 2.51 (23.63) (39.44) (36.59)
Net Yield on Earning Assets 5.50 5.05 4.74 4.32 4.13
Average Equity to Average Assets 9.75 8.31 5.92 6.28 7.48
Average Loans to Average Deposits 69.87 63.74 68.03 73.45 77.99
Average Balances
----------------
Assets $103,377 $105,137 $99,611 $115,564 $137,068
Loans 64,616 60,577 62,244 77,330 95,798
Earning Assets 95,228 94,664 88,426 102,890 128,681
Deposits 92,483 95,035 91,491 105,280 122,834
Equity 10,080 8,734 5,892 7,262 10,254
</TABLE>
4
<PAGE> 5
Dear Stockholders, Customers and Employees:
We are pleased to report that Suburban Bancshares has completed another very
successful year with record earnings and a profitable consolidation within our
Maryland marketplace. The strategies of larger banks, by merging and dividing
the community market share, offered many opportunities for our new customer
growth. Suburban Bank readily provided the personal services that small
businesses were seeking.
In 1995, our earnings reached $1,541,000 ($.15 per share) compared to our
earnings in 1994 of $219,000 ($.02 per share). A few extraordinary events such
as the sale of the Virginia bank, a one-time stock option expense and opening a
new branch affected earnings. However, our normal operating income continues
to exceed 1% return on average assets based on strong net interest margin and
cost controls.
The balance sheet has been strengthened by additions to capital through the
Warrant Exchange Program and earnings retention. Shareholder support of the
Company was demonstrated as 97% of our warrants were exchanged for new stock,
which increased our capital by $1,950,000.
Small business owners looking for a bank that would give them personal
attention found that response at Suburban Bank. Our asset and deposit growth
from new customers showed an increase in excess of 25% over the prior year.
Our future growth, in an economy that continues to support strong loan demand,
will come from customers who also demand local personal service. Our new
office in Clinton, as well as other potential branches, will expand our
relationships throughout our Maryland communities.
With our new products and services, such as OnLine computer access and CashFlow
lending via the Internet, we look forward to gaining a reputation as the
leading small business bank in our market area. The support we have received
from you, our stockholders, customers and employees, has been gratifying and we
pledge to respond with continued earnings, a strong financial condition and
leadership in the banking community.
We thank you for your continuing support.
/s/ /s/
Winfield M. Kelly, Jr. William R. Johnson
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
Note: A picture of the Chairman and the President appears in the top left
corner of this page in the 1995 Annual Report to Shareholders.
5
<PAGE> 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following commentary provides an overview of the financial condition and
significant changes in the results of the operations of Suburban Bancshares,
Inc. and its subsidiary ("Bancshares" or "the Company") for the years 1993
through 1995. Throughout this review the subsidiary of Suburban Bancshares,
Inc., Suburban Bank of Maryland, is referred to as "Suburban Maryland" or "the
Bank". This discussion should assist readers in their analysis of the
accompanying consolidated financial statements.
ORGANIZATIONAL BACKGROUND
Suburban Bancshares, Inc. is a bank holding company formed under the general
corporation laws of the State of Delaware in 1985 and is headquartered in
Greenbelt, Maryland. The Company formed and acquired a national banking
association located in McLean, Virginia (Bank 2000, N.A.), in October 1985, and
formed and acquired a national banking association located in Reston, Virginia
(BankStar, N.A.), in February 1988. These banks merged and began operating as
Suburban Bank of Virginia, N.A. ("Suburban Virginia") in March 1991. In April
1990, Suburban Maryland (formerly Jefferson Bank and Trust Company), a four
branch state-chartered bank located in Prince George's County, Maryland, was
merged into the Company.
On February 19, 1993, the Company entered into an Agreement and Plan of
Reorganization and Recapitalization (the "Plan") with Winfield M. Kelly, Jr.,
which provided for a restructure of the Company's Board of Directors and
management, a centralization of operational functions, and the commencement of
a public offering to raise between $4 and $7 million in new capital. In
connection with the implementation of the Plan, Mr. Kelly was elected Chairman
of the Board of Directors of the Company and each of the banks, and the
Company's Board of Directors was restructured. William R. Johnson, President
and Chief Executive Officer of Suburban Maryland, was named President and Chief
Operating Officer of the Company and President and Chief Executive Officer of
Suburban Virginia. All operational and management functions of the banks were
centralized, enhancing efficiency throughout the organization.
On July 14, 1993, the Company commenced a public offering of up to seven
million shares of common stock. The offering was successfully concluded on
September 27, 1993, with the sale of 5,756,294 shares with total proceeds to
the Company totaling $5,613,237. Transferable warrants to purchase an
additional 2,014,705 shares of common stock accompanied the new shares. These
warrants were exercisable at $1 per share during two windows in 1994 and two
windows in 1995, in which 1,949,849 shares, or 97% of the warrants outstanding,
were issued. (See Note B to the Consolidated Financial Statements.)
On May 12, 1995, the Company completed the disposition of most of the assets
and all of the deposit liabilities of Suburban Virginia to Tysons Financial
Corporation and its subsidiary, Tysons National Bank, in McLean, Virginia. On
August 18, 1995, the remaining assets and liabilities of Suburban Virginia were
merged into Suburban Maryland in a pooling of interests transaction. (See Note
C to the Consolidated Financial Statements.)
RESULTS OF OPERATIONS
Overview
Suburban Bancshares, Inc. reported record earnings for 1995 of $1,541,000, a
604% increase from $219,000 in 1994. Net income per common share increased to
$0.15 in 1995 from $0.02 in the prior year. Return on average assets and
return on average equity reached record highs for the Company in 1995 at 1.49%
and 15.29%, respectively. Key factors affecting the Company's 1995 earnings
performance were:
- - An increase in net interest income of $460,000, the result of higher
rates and a strong demand for loans,
- - Overall improvement in asset quality, which permitted a reversal of
previous years' provision for loan losses to reduce an excess in the
allowance for loan losses, and
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<PAGE> 7
- - The disposition of the assets and deposits of Suburban Virginia for a
premium of $1 million, which was partially offset by costs of the sale
totaling $260,000.
Assets at the end of 1995 were $115.4 million, rising just $1.2 million or 1.1%
from $114.2 million at the end of 1994. Real growth in assets, however, was
27.3% or approximately $25 million, after considering the Suburban Virginia
assets sold during the year.
Growth in loans and deposits was significant in 1995, although the consolidated
statements reflect a slight decline. The loan assets of Suburban Virginia that
were sold during the year totaled $13 million at the beginning of 1995, and the
deposits transferred were $24 million. During 1995, all of those assets and
deposits were replaced with new loans and new account balances, effectively
increasing loans by 23.8% and deposits by 27.3%.
Solid growth, expense control and improving asset quality have contributed to a
strong increase in core profitability for the Company. Core profitability is
defined here as earnings from normal operations, excluding non-recurring income
and expenses of which the major items were the disposition of Suburban
Virginia's assets and liabilities, the recognition of compensation expense for
the management stock options (see Note O), and the reversal of the provision
for loan losses. Each of these items is explained in the appropriate sections
of this discussion. Core earnings for the Company were $1,053,000 in 1995, for
an adjusted return on average assets of 1.02% and a 381% improvement over
1994's results.
Net Interest Income and Net Interest Margin
Net interest income, the largest contributor to the Company's earnings, is
defined as the difference between income 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 rose $460,000, or 9.6%, in 1995 to $5,239,000 from
$4,779,000 in 1994 due to higher average interest rates for both loans and
deposits and an increase in loans as a percentage of earning assets. In 1994,
net interest income rose 14.1%, or $589,000, due to an overall increase in
volume coupled with rising interest rates throughout the year.
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 1995, the net interest margin reached 5.50%, an increase of 45
basis points from 5.05% for the prior year, as the increase in earning asset
yields outpaced rising funding costs. In 1994, the net interest margin
improved 31 basis points from 4.74% in 1993, the result of rising interest
rates on earning assets, higher volume and a stable cost of funds.
Changes in the volume of earning assets and interest-bearing funds impact both
interest income and interest expense. In 1995, average earning assets grew
only $564,000, or 0.6%; however, as a percentage of average assets, earning
assets rose from 90.0% to 92.1%, due to both declining levels of nonperforming
assets and a strong loan growth. Average loans grew $4.0 million, or 6.7%,
partially funded from a shift of funds out of short-term investments, and, as
average foreclosed real estate fell approximately $2.2 million, or 62.0%, from
$3.6 million in 1994 to $1.4 million in 1995, funds supporting these nonearning
assets were shifted into earning assets. While average earning assets were
growing, average interest-bearing liabilities declined $873,000, or 1.2%, from
$75.0 million in 1994 to $74.1 million in 1995, which helped to mitigate the
negative impact on the margin of rising deposit costs.
In 1994, growth of earning assets was a primary factor in producing higher
interest income; an increase in funding sources, however, did not result in a
corresponding increase in interest expense. Average earning assets rose $6.2
million, or 7.1%, from $88.4 million in 1993 to $94.7 million in 1994. Average
interest-bearing liabilities, on the other hand, increased only $1.3 million,
or 1.8%, reaching $75.0 million in 1994 from $73.7 million in 1993. A
significant
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<PAGE> 8
portion of the earning asset growth occurred in the second half of the year as
interest rates were rising, while the increase in interest-bearing liabilities
was more evenly distributed throughout the year, with interest rates remaining
relatively stable.
Changes in the mix of both earning assets and funding sources were key
determinants of the change in net interest income in 1994 and continued to play
an important role in 1995. During 1995, average loans were 67.9% of average
earning assets, a positive shift of 3.9 percentage points from 64.0% in 1994,
as average loans rose $4.0 million while Federal funds and other short-term
investments and nonearning foreclosed real estate dropped. Interest-bearing
funding sources declined as a percentage of average earning assets, falling
from 79.2% in 1994 to 77.8% in 1995. Both of these changes in the mix of
interest-bearing uses and sources of funds are reflected in a higher net
interest margin.
In 1994, average loans fell from 70.4% in 1993 to 64.0% of average earning
assets while interest-bearing funding sources fell to a lesser degree from
83.3% in 1993 to 79.2% in 1994. A favorable change in the mix of deposits in
1994 helped to offset the negative impact on net interest income of the decline
in average loans, which fell to $60.6 million from $62.2 million. Growth of
$3.5 million in average deposits during 1994 was primarily in lower cost
deposit accounts, while higher yielding certificates of deposit and individual
retirement accounts declined.
Shifts in the interest rate environment impacted the margin significantly in
1995 and 1994, even though the shifts were in opposite directions. During 1994,
interest rates rose throughout the year as the Federal Reserve attempted to
keep inflation under control. The rates peaked in June 1995 and began a slow,
but steady decline in the last half of that year. Earning asset yields rose
122 basis points in 1995, reaching 8.78% from 7.56% in 1994. Loan yields rose
100 basis points in 1995 from 9.10% in 1994 to 10.10% in 1995, as national
prime rates, on which most loans are priced, remained high; investment yields
climbed 116 basis points during the same period. As the yields on these
earning assets increased, the cost of funds was also under pressure, though not
to the same extent. The average cost of total funding sources moved in 1995 to
3.36%, an 87 basis point increase from 2.49% in 1994.
In 1994, loan yields rose 30 basis points on average and Federal funds sold and
deposits with other banks, which were 15.8% of average earning assets, rose 102
basis points. As the yields on these earning assets rose, the cost of funds
was stable, creating a wider spread between the income earned on assets and the
cost to fund those assets.
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<PAGE> 9
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1995 1994 1993
Assets Average Interest Average Average Interest Average Average Interest Average
Balance Yield or Balance Yield or Balance Yield or
Rate Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $64,616 $6,525 10.10% $60,577 $5,511 9.10% $62,244 $5,476 8.80%
Investment securities 20,235 1,229 6.07% 19,155 1,043 5.45% 9,831 607 6.17%
Fed funds sold & other deposits 10,377 604 5.82% 14,932 602 4.03% 16,351 492 3.01%
Total interest-earning assets 95,228 8,358 8.78% 94,664 7,156 7.56% 88,426 6,575 7.44%
Noninterest-earning assets:
Cash and due from banks 6,322 6,716 6,437
Bank property and equipment 1,045 1,220 1,385
Other assets 3,124 5,102 6,204
Less: Allowance for loan losses (2,342) (2,565) (2,841)
Total noninterest-earning assets 8,149 10,473 11,185
TOTAL ASSETS $103,377 $105,137 $99,611
Liabilities and shareholders'
equity
Interest-bearing liabilities:
Checking, money market &
savings $50,455 $1,816 3.60% $50,687 $1,300 2.56% $47,038 $1,205 2.56%
Time deposits 23,416 1,290 5.51% 23,713 1,056 4.45% 25,369 1,143 4.51%
Other borrowings 261 13 4.83% 605 21 3.45% 1,294 37 2.86%
Total interest-bearing
liabilities 74,132 3,119 4.21% 75,005 2,377 3.17% 73,701 2,385 3.24%
Noninterest-bearing liabilities:
Noninterest-bearing deposits 18,612 20,635 19,084
Total funding sources 92,744 3,119 3.36% 95,640 2,377 2.49% 92,785 2,385 2.57%
Other liabilities 553 763 934
Total liabilities 93,297 96,403 93,719
Shareholders' equity 10,080 8,734 5,892
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $103,377 $105,137 $99,611
Net interest income $5,239 $4,779 $4,190
5.42% 5.07% 4.87%
Net interest spread
Net interest margin 5.50% 5.05% 4.74%
</TABLE>
Provision for Loan Losses
The provision or reversal for loan losses is the effect 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 based upon a review of many factors,
including historical loss experience, adverse situations that may affect the
borrower's ability to repay (including the timing of future payments), economic
conditions and trends, loan portfolio volume and mix, loan performance trends,
the value and adequacy of collateral, and the Company's internal
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<PAGE> 10
credit review process. Based on this ongoing evaluation, management determines
the provision or reversal necessary to maintain an appropriate allowance.
In 1995, the Company recognized a reverse provision of $260,000 to reduce an
excess in the allowance for loan losses created by the disposition of Suburban
Virginia loans and a sharp drop in nonperforming loans. This reversal
increased income and decreased the allowance available to absorb future losses.
The provision for loan losses in 1994 was $39,000, a substantial drop from the
$1,133,000 set aside in 1993. Recoveries on loans previously charged off
increased significantly in 1994, as loan quality improved and charge-offs
declined.
Noninterest Income
Noninterest income climbed $652,000, or 60.9%, reaching $1,722,000 in 1995 from
$1,070,000 in 1994. The $1 million premium recognized on the sale of assets
and transfer of liabilities of Suburban Virginia was the reason for this
significant increase. Offsetting this premium increase was a decrease in gains
on sales of securities and loans, which totaled $323,000 in 1994 but did not
recur in 1995.
In 1994, noninterest income declined $243,000, or 18.5%, from $1,313,000 in
1993, the result of lower rental income on foreclosed real estate, a $90,000
decrease in gains on sale of foreclosed real estate, and a decline in premiums
recognized on the sale of loans.
Noninterest Expenses
Noninterest expenses rose modestly in 1995 to $5,674,000 from $5,591,000 in
1994, an increase of $83,000, or 1.5%. While most expenses declined in 1995,
several nonrecurring events precipitated the recognition of additional expenses
totaling $772,000. These events were the divestiture and subsequent closing of
Suburban Virginia, which cost approximately $260,000, a charge to compensation
expense of $362,000 as the management stock options became exercisable, merger
and acquisition expenses of $113,000 and the opening expenses of a fifth branch
office of $37,000 at the end of the year. Decreases in most expense categories
are attributable to the closing of the two Virginia offices, reductions in the
cost of maintaining properties obtained through foreclosure, improving loan
quality which led to lower loan collection costs, a reduction in the premium
banks pay for FDIC insurance, and overall expense control.
Noninterest expenses declined in 1994 to $5,591,000, a $171,000, or 3.0%,
decrease from $5,762,000 in 1993. In 1994, salaries and employee benefits and
other operating expenses remained stable, while changes in leased office space
and lower depreciation on office equipment accounted for most of the reduction
in expenses.
See Note K to the Consolidated Financial Statements for a breakdown of Other
Expenses.
Deferred Tax Assets
At December 31, 1995, the Company had net deferred tax assets of $4,360,000
including approximately $4.2 million representing tax loss carryforwards. A
valuation allowance has been established eliminating all net deferred tax
assets because realization of these assets is dependent on future taxable
income. Management periodically reviews this valuation allowance in light of
anticipated earnings capacity. Any future reductions in the allowance will
have a positive impact on earnings.
ASSET QUALITY
In 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan
("SFAS No. 114"), as amended by SFAS No. 118. SFAS No. 114 and No. 118 apply
to loans for which it is probable that the creditor will not collect all
principal and interest payments according to the loan's contractual terms. The
impairment of a loan is measured at the present value of expected future cash
flows
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<PAGE> 11
using the loan's effective interest rate, or as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. Interest income on impaired loans is recognized on a
cash basis. Restructured loans are loans on which the borrower has been
granted a concession as to rate or term as a result of financial difficulty.
Nonaccrual loans are those loans on which the accrual of interest 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 of interest 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.
The recorded investment in loans that were considered impaired under SFAS No.
114 at December 31, 1995 was $1,592,000. At December 31, 1994, the Company had
nonaccrual loans of $3,720,000 (all of which would be considered impaired under
SFAS No. 114). This decrease in nonperforming, or impaired, loans of
$2,128,000, or 57.2%, was the result of an improving economy, aggressive loan
collection efforts and charge-downs.
The recorded investment in loans that were restructured prior to the adoption
of SFAS No. 114 and which were performing according to the new terms was
$1,173,000 at December 31, 1995 and $1,312,000 at the end of 1994. This 10.6%
decrease was the result of normal principal payments and loan payoffs.
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at fair value less estimated selling costs, based upon current market
conditions and expected cash flows. Foreclosed real estate declined
$1,866,000, or 61.8%, to $1,152,000 at December 31, 1995 from $3,018,000 at
December 31, 1994. This substantial decline was the result of sales of nine
properties, on which net profits of $85,000 were realized, and market value
adjustments on remaining properties.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change.
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against
the allowance for loan losses, and subsequent recoveries, if any, are credited
to the allowance. Under the new SFAS No. 114, the 1995 allowance for loan
losses related to loans that are identified as impaired was based on discounted
cash flows using the loan's initial effective interest rate or the fair value
of the collateral for certain collateral dependent loans. Prior to 1995, the
allowance for loan losses related to these loans was based on undiscounted cash
flows or the fair value of the collateral for collateral dependent loans.
The allowance for loan losses declined to $1,467,000 at the end of 1995 from
$2,750,000 at December 31, 1994, a decrease of $1,283,000, or 46.7%. As asset
quality improved and Suburban Virginia loans were sold, the required reserve
was significantly reduced, and the Company recognized a reverse provision of
$260,000 in 1995. Loans charged off during the year totaled $1,340,000 and
recoveries were $317,000. The activity in the allowance for loan losses is
shown in the following schedule:
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<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $2,750 $2,486 $3,132
Provision (recovery) for loan losses (260) 39 1,133
Loans charged off (1,340) (412) (2,090)
Recoveries 317 637 311
-------- ------- -------
Balance at end of year $1,467 $2,750 $2,486
</TABLE>
In 1994, the allowance for loan losses rose $264,000, or 10.6%, as recoveries
of $637,000 exceeded charge-offs of $412,000 and a provision of only $39,000
was required for the maintenance of an adequate allowance for loan losses.
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 foreclosed real estate. 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.
In 1993 and 1994, the Company's liquidity position increased as the mix of
earning assets shifted to a higher concentration of marketable securities and
other liquid assets while loans declined. In 1995, this trend toward a more
liquid position did not change, as loans and investments decreased slightly,
while highly marketable loans held for sale and overnight investments rose. A
reclassification of investment securities from held to maturity to available
for sale in 1995 also contributed to a more liquid position. Liquid assets,
defined as cash, available for sale securities and other short-term
investments, and loans held for sale, were $50.0 million, or 43.3% of total
assets, at year-end 1995. At the end of 1994, liquid assets totaled $42.1
million, or 36.9% of assets.
The Company's liquidity position is enhanced by a relatively stable deposit
base. These core deposits are composed of noninterest checking accounts,
interest checking and money market accounts, and savings accounts and
individual retirement accounts. At December 31, 1995, this core deposit base
was $83.2 million, or 81.7% of total funding sources; in 1994, core deposits
were 79.5% of total funds, or $83.6 million.
Other sources of liquidity and cash flow in 1995 were from the sales of
available for sale securities which generated proceeds of $709,000, the sales
of foreclosed real estate, generating cash inflow of $1,720,000, and the
exercise of the remaining warrants outstanding, which produced $1,897,000 in
additional capital. In 1994, sales of available for sale securities yielded
cash of $5.9 million, and the sales of SBA loans in the secondary market
generated $4.7 million in cash.
As an additional source of short-term liquidity, the Bank maintains $6 million
of reverse repurchase lines of credit with correspondent banks. These
correspondents meet regulatory capital requirements for well capitalized
financial institutions, thereby minimizing the risk that might be associated
with this level of interbank exposure. The Bank has not needed to utilize
these backup lines as internally generated liquidity has provided ample
resources.
CAPITAL RESOURCES AND ADEQUACY
Shareholders' equity increased $4,509,000, or 52.5%, in 1995 to $13,096,000 at
the end of the year from $8,587,000 at December 31, 1994. Earnings of
$1,541,000, coupled with additional capital generated from the exercise of
1,897,000 warrants at $1.00 each, were the primary contributors to this
increase. Other sources of shareholder equity were the
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<PAGE> 13
paid-in capital from the management stock options of $362,000 and an increase
in the market value of the Company's available for sale securities of $709,000.
In 1994, shareholders' equity declined slightly, a $62,000 decrease, from
$8,649,000 at the end of 1993. The new rules for accounting for unrealized
losses on securities classified as available for sale, which were adopted in
1994, resulted in a decrease in equity of $472,000. Offsetting the negative
impact of these accounting changes were increases of $219,000 from earnings,
$138,000 in paid-in capital from deferred compensation on stock options and
$53,000 in proceeds from the exercise of warrants during the year.
A combination of a leverage capital ratio and risk-based capital ratios is used
to categorize banks as well capitalized, adequately capitalized, or under
capitalized financial institutions under the guidelines established by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("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 a
written agreement, order, or directive. At December 31, 1995 and 1994,
Suburban Maryland was considered to be a well capitalized financial
institution.
One measure of capital adequacy is the risk-based capital ratio or the ratio of
total 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, excluding unrealized gains or losses on available
for sale securities, 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 Bank and will apply to the Company at such time as
its total assets reach $150 million. At December 31, 1995, Suburban Maryland
reported a Tier 1 risk-based capital ratio of 13.07% and a ratio of 14.33%
based on total capital. Both ratios were well above the general regulatory
minimums of 4% and 8%, respectively.
Another capital adequacy measure is the leverage capital ratio, which is
calculated by dividing average total assets for the most recent quarter into
core (Tier 1) capital. The regulatory minimum for this ratio is 3%, with most
banks required to maintain a ratio of at least 4% to 5%, depending upon risk
profiles and other factors. At December 31, 1995, the leverage capital ratio
for Suburban Maryland was 8.72%.
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1995 1994
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,931 $ 7,005
Interest-bearing deposits with banks 2,220 245
Federal funds sold 16,490 13,560
Investment securities available for sale 18,067 19,252
Investment securities held to maturity - fair value $4,654 (1994) -- 4,821
Loans held for sale 3,292 2,044
Loans 63,022 64,525
Less: Allowance for loan losses (1,467) (2,750)
Loans, net 61,555 61,775
Premises and equipment, net 1,191 1,156
Foreclosed real estate 1,152 3,018
Accrued interest receivable 607 645
Other assets 926 708
TOTAL ASSETS $115,431 $114,229
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 17,800 $ 24,360
Interest-bearing deposits 84,089 80,042
Total deposit 101,889 104,402
Short-term borrowings -- 691
Accrued expenses and other liabilities 446 549
Total liabilities 102,335 105,642
Commitments and Contingent Liabilities -- --
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: 10,951,218 at December 31,
1995 and 9,054,459 at December 31, 1994 109 91
Paid-in capital -- stock options 534 172
Additional paid-in capital 25,259 23,380
Accumulated deficit (13,043) (14,584)
Net unrealized gain (loss) on securities available for sale 237 (472)
Total shareholders' equity 13,096 8,587
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $115,431 $114,229
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands, except per share data 1995 1994 1993
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $6,525 $5,511 $5,476
Taxable interest on securities 1,229 1,043 607
Interest on Federal funds sold 589 590 486
Interest on deposits with banks 15 12 6
Total interest income 8,358 7,156 6,575
INTEREST EXPENSE
Interest on deposits 3,106 2,356 2,348
Interest on short-term borrowings 13 21 37
Total interest expense 3,119 2,377 2,385
NET INTEREST INCOME 5,239 4,779 4,190
Provision (recovery) for loan losses (260) 39 1,133
Net interest income after (recovery) provision for loan losses 5,499 4,740 3,057
NONINTEREST INCOME
Service charges on deposit accounts 440 487 536
Gains on sale of securities -- 114 --
Net gains on sale of foreclosed real estate 85 -- 90
Net gains on sale of loans -- 209 288
Gain on sale of assets and transfer of liabilities 1,000 -- --
Other income 197 260 399
Total noninterest income 1,722 1,070 1,313
NONINTEREST EXPENSE
Salaries and employee benefits 2,735 2,371 2,364
Occupancy expense 549 669 817
Furniture and equipment expense 133 187 250
Other expense 2,257 2,364 2,331
Total noninterest expense 5,674 5,591 5,762
Income (loss) before income taxes 1,547 219 (1,392)
Income tax expense 6 -- --
NET INCOME (LOSS) $1,541 $219 $(1,392)
Income (loss) per common share
Primary $0.15 $0.02 $(0.29)
Fully diluted 0.15 0.02 (0.29)
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,541 $ 219 $(1,392)
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation 139 226 275
(Recovery) provision for loan losses (260) 39 1,133
Provision for foreclosed real estate losses 231 264 74
Stock option compensation expense 362 138 34
Originations of loans held for sale (2,214) (4,938) (1,523)
Proceeds from loan sales -- 4,722 3,070
Gain on sale of loans -- (340) (266)
Net realized gain on available for sale securities -- (114) --
Net (accretion) amortization on securities (100) (105) 12
(Decrease) increase in deferred loan fees (25) 132 (25)
(Increase) decrease in accrued income and other assets (448) 135 (152)
Decrease in accrued expenses and other liabilities (78) (191) (152)
Income tax refunds received 185 141 62
(Gain) loss on sale of foreclosed real estate (85) 25 (90)
Gain on sale of assets and transfer of liabilities (1,000) -- --
Loss on write-off of fixed assets 104 -- --
Net cash (used) provided by operating activities (1,648) 353 1,060
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in deposits with other banks (1,975) 353 (598)
Net (increase) decrease in Federal funds sold (5,220) 6,250 (4,925)
Purchases of available for sale securities (7,076) (21,483) --
Proceeds from sale of available for sale securities 709 5,922 --
Proceeds from maturities of available for sale securities 11,450 8,500 --
Proceeds from payments of principal on securities 75 620 1,694
Purchases of held to maturity securities -- (4,821) (8,009)
Proceeds from maturities of held to maturity securities -- -- 3,260
Net (increase) decrease in loans (11,493) (9,047) 10,660
Net purchases of premises and equipment (322) (129) (20)
Proceeds from sale of foreclosed real estate 1,720 575 1,234
Other changes in foreclosed real estate -- -- 157
Cash transferred on sale of assets and transfer of liabilities (1,346) -- --
Consideration paid on sale of assets and transfer of liabilities (754) -- --
Net cash (used) provided in investing activities (14,232) (13,260) 3,453
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in total deposits 16,486 12,381 (9,827)
Net increase (decrease) in securities sold under agreements to repurchase 423 179 (1,034)
Net decrease in borrowed funds -- -- (133)
Net proceeds from sale or issuance of common stock 1,897 53 5,012
Net cash provided (used) by financing activities 18,806 12,613 (5,982)
Net increase (decrease) in cash and due from banks 2,926 (294) (1,469)
Cash and due from banks at beginning of period 7,005 7,299 8,768
Cash and due from banks at end of period $9,931 $7,005 $7,299
Interest paid $3,090 $2,370 $2,450
Income taxes paid 6 -- --
Loans transferred to foreclosed real estate -- 274 127
Loans transferred to loans held for sale -- 1,488 --
Investments transferred from held to maturity to available for sale $4,872 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
in thousands Common Additional Accumulated Unrealized Gain Total
Stock Paid-In Deficit (Loss) on Available
Capital for Sale Securities
<S> <C> <C> <C> <C>
Balance, January 1, 1993 $32 $18,374 $(13,411) -- $4,995
Net loss for 1993 -- -- (1,392) -- (1,392)
Issuance of common stock; 5,756,294 shares 58 4,954 -- -- 5,012
Paid-in capital - stock options -- 34 -- -- 34
Balance, December 31, 1993 90 23,362 (14,803) -- 8,649
Net income for 1994 -- -- 219 -- 219
Cumulative effect of initial adoption of SFAS No. 115 -- -- -- 256 256
Issuance of common stock upon exercise of warrants 1 52 -- -- 53
Paid-in capital - stock options -- 138 -- -- 138
Unrealized loss on securities available for sale -- -- -- (728) (728)
Balance, December 31, 1994 91 23,552 (14,584) (472) 8,587
Net income for 1995 -- -- 1,541 -- 1,541
Issuance of Common stock upon exercise of warrants 18 1,879 -- -- 1,897
Paid-in capital - stock options -- 362 -- -- 362
Unrealized loss on securities available for sale -- -- -- 709 709
Balance, December 31, 1995 $109 $25,793 $(13,043) $237 $13,096
</TABLE>
MARKET FOR COMMON STOCK
Suburban Bancshares, Inc.'s common stock is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") under the NASDAQ Symbol "SBNK". The following
table sets forth the range of actual high and low bid prices for Suburban
Bancshares, Inc.'s common stock reported by NASDAQ. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
No dividends were paid during such periods. The approximate number of Suburban
Bancshares, Inc. shareholders of record as of March 1, 1996 was 1066.
COMMON STOCK -- SBNK
<TABLE>
<CAPTION>
1995 1994
High Low High Low
<S> <C> <C> <C> <C>
1st quarter 1 1/2 1-3/16 1 3/4 1 3/8
2nd quarter 1 3/4 1 1/4 1 3/4 1 3/8
3rd quarter 2 1/8 1 5/8 1 1/2 1 1/8
4th quarter 2 1 1/8 1 1/4 1
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Suburban Bancshares, Inc. and its subsidiary, Suburban Bank of Maryland,
provide a variety of banking services to businesses, professionals and
individuals through five branches located in Prince George's and Montgomery
Counties in Maryland. In addition to commercial and personal depository
services, Suburban Bank of Maryland offers lending products such as commercial
loans, commercial real estate loans, Small Business Administration loans, asset
based lending and consumer loan products, including vehicle, home equity and
personal loans.
17
<PAGE> 18
NOTE A ACCOUNTING POLICIES
The accounting and reporting policies of Suburban Bancshares, Inc. and its
subsidiary ("the Company") are in conformity with generally accepted accounting
principles and conform to general practices within the banking industry.
Certain reclassifications have been made to conform the prior year's financial
statements to the 1995 presentation. The following is a summary of the
significant policies:
(1) PRINCIPLES OF CONSOLIDATION
In 1995, the consolidated financial statements of Suburban Bancshares, Inc.
include the accounts of Suburban Bancshares, Inc. and its wholly-owned banking
subsidiary, Suburban Bank of Maryland ("Suburban Maryland" or "the Bank"). A
former subsidiary, Suburban Bank of Virginia, N.A. ("Suburban Virginia") was
merged into Suburban Maryland on August 18, 1995 in a pooling of interests
transaction (see Note C). Financial statements for prior years include both
subsidiaries, collectively referred to as the "Banks". All significant
intercompany balances and transactions have been eliminated in consolidation.
In the condensed financial statements of Suburban Bancshares, Inc. ("Parent")
(see Note S), the investment in the subsidiary (ies) is stated as equity in the
net assets of such subsidiary (ies).
(2) BASIS OF PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and revenues and expenses for the period. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses and the evaluation of real
estate acquired in connection with foreclosures or in satisfaction of loans.
Actual results could differ from those estimates.
(3) CASH AND DUE FROM BANKS
The Bank is required to maintain reserves against its deposits with the Federal
Reserve Bank. The balances of such reserves at December 31, 1995 and 1994 were
$967,000 and $1,154,000, respectively. At December 31, 1995, Suburban Maryland
had secured reverse repurchase lines of credit aggregating $6,000,000 for
short-term financing, all of which was available at that date. None of these
financing arrangements required compensating balances. For purposes of the
Consolidated Statements of Cash Flows, the Company considers cash and due from
banks to be cash and cash equivalents.
(4) INVESTMENT SECURITIES
In 1993, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS No. 115"). The Statement required the Company to
classify its securities in one of three categories: trading, held to maturity
or available for sale. The Company adopted the Statement on January 1, 1994.
Management determines the appropriate classification of securities at the time
of purchase. Held to maturity securities are those securities in which the
Company has the ability and the intent to hold until maturity and are reported
at cost, adjusted for amortization of premium and accretion of discounts using
a method which approximates the interest method over the term of the
securities. All other securities not included in trading or held to maturity
are classified as available for sale and are reported at fair value, with
unrealized gains and losses, net of taxes, reported as a separate component of
shareholders' equity. Securities available for sale will be used as part of
the Company's interest rate risk management strategy and may be sold in
response to changes in interest rates, changes in prepayment risk and other
factors.
Realized gains or losses on securities are recognized at the time of sale using
the specific identification method and are classified as securities gains or
losses in the accompanying Consolidated Statements of Operations.
18
<PAGE> 19
(5) LOANS HELD FOR SALE
The Company originates loans to customers under the Small Business
Administration ("SBA") program that generally provides for SBA guarantees of
75% to 90% of each loan. The Company may sell the guaranteed portion of each
loan to a third party and retain the unguaranteed portion in its own portfolio.
Those loans to be sold are classified as loans held for sale and are carried at
the lower of aggregate cost or market. A gain is recognized on the sale of
these loans through collection of a premium over the adjusted carrying value,
and through retention of an ongoing rate differential as a normal servicing fee
between the rate paid by the borrower to the Company and the rate paid by the
Company to the purchaser (excess servicing fee). The Company's investment in
an SBA loan is based upon a relative fair market value allocation between the
portion of the loan sold, the portion of the loan retained and any excess
servicing retained. The gain on the sold portion of the loan is recognized,
the carrying value of the retained portion of the loan is reduced, thereby
increasing the future yield, and any excess servicing is recorded as an asset
and subsequently amortized to servicing income. The Company utilizes a 1%
normal servicing fee and has not recorded any excess servicing assets.
(6) LOANS
Loans generally are stated at their outstanding, unpaid principal balances net
of any deferred fees or costs, or unamortized premiums or discounts on
purchased loans. Interest income is accrued on the unpaid principal balance.
Discounts and premiums are amortized to income using the interest method. Loan
origination fees net of certain direct origination costs are deferred and
recognized as an adjustment of the yield (interest income) of the related
loans.
Nonaccrual loans -- Generally, a loan is classified as nonaccrual and the
accrual of interest on such loan is discontinued when the contractual payment
of principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a
loan is placed on nonaccrual status, unpaid interest credited to income is
reversed and the recognition of deferred fees or costs is discontinued.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's judgment as
to the collectibility of principal. Generally, loans are restored to accrual
status when the obligation is brought current, has performed in accordance with
the contractual terms for a reasonable period of time, and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
Allowance for Loan losses -- The allowance for loan losses is increased through
provisions for credit losses charged against income and reduced by reversals of
previous years' provisions. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
Beginning in 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS No.
114"). Under the new standard, the 1995 allowance for loan losses related to
loans that are identified for evaluation in accordance with SFAS No. 114 is
based on discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent loans.
Prior to 1995, the allowance for loan losses related to these loans was based
on undiscounted cash flows or the fair value of the collateral for collateral
dependent loans.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on loans
that may be susceptible to significant change.
19
<PAGE> 20
(7) FORECLOSED REAL ESTATE
Foreclosed real estate is comprised of property acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure and loans classified
as insubstance foreclosure. In accordance with SFAS No. 114, a loan is
classified as insubstance foreclosure when the Company has taken possession of
the collateral regardless of whether formal foreclosure proceedings take place.
Foreclosed assets initially are recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management, and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell. Costs relating to
property improvements are capitalized to the extent that they are recoverable
and costs relating to holding property are expensed when incurred. Gains or
losses on the sale of foreclosed real estate are recognized upon disposition of
the property.
(8) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the
straight-line method and are included in noninterest expense in the
accompanying Consolidated Statements of Operations. Premises and equipment are
depreciated over the estimated useful lives of the assets (generally five to
ten years), except for leasehold improvements which are amortized over the
terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
(9) INCOME TAXES
Under the asset and liability method of accounting for income taxes, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are recognized for future
deductible temporary differences and tax loss carryforwards if their
realization is "more than likely".
(10) NET INCOME (LOSS) PER COMMON SHARE
Primary net income (loss) per common share is computed by dividing net income
or loss by the weighted average number of common shares outstanding during the
year, including any dilutive average common stock equivalent shares. Fully
diluted net income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
year including any dilutive average common stock equivalent shares and
contingent shares outstanding.
(11) FAIR VALUES OF FINANCIAL INSTRUMENTS
In 1995, the Company adopted the Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial Instruments ("SFAS No.
107"). The Statement was effective for companies with assets of at least $150
million for years ending after December 15, 1992; for those companies with less
than $150 million, the Statement became effective in 1995. SFAS No. 107
requires disclosure of the fair value of on- and off-balance sheet financial
instruments, including both financial assets and liabilities. The fair value
disclosures presented in Note R represent estimates at a point in time and may
not necessarily be relevant in predicting future earnings and cash flows.
NOTE B RECAPITALIZATION
In 1993, a stock offering resulted in the sale of 5,756,294 shares totaling
$5,613,237. Total transferable warrants to purchase an additional 2,014,705
shares at the offering price of $1.00 per share were issued along with the new
shares.
20
<PAGE> 21
The warrants were exercisable during two windows in 1994, when 53,090 shares
were issued and two windows in 1995, when 1,896,759 shares were issued.
Warrants exercised prior to the December 15, 1995 expiration date represent 97%
of the total warrants issued.
NOTE C SALE OF ASSETS AND MERGER OF SUBSIDIARIES
On May 12, 1995, the Company completed the disposition of most of the assets
and all of the liabilities of its subsidiary, Suburban Virginia, to Tysons
Financial Corporation and its subsidiary, Tysons National Bank ("Tysons"), in
McLean, Virginia.
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, the Company paid Tysons $754,000 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 the Company for the
assets acquired.
On August 18, 1995, the remaining assets and liabilities of Suburban Virginia
were merged into Suburban Maryland in a pooling of interests transaction.
Assets of Suburban Virginia on that date were $2,823,000 and capital was
$2,756,000.
NOTE D INVESTMENTS
The following table shows the amortized cost and estimated fair value of
investment securities classified as available for sale at December 31, 1995:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Estimated Fair
in thousands Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $9,495 $144 $(1) $9,638
Federal agencies 6,984 97 (2) 7,079
Mortgage-backed obligations of Federal agencies 308 5 (2) 311
Collateralized mortgage obligations 43 1 --- 44
Other 1,000 --- (5) 995
----- ----- --- ---
Total $17,830 $247 $(10) $18,067
</TABLE>
In November 1995, the Financial Accounting Standards Board issued a Special
Report, A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities. The Report announced a one-time
window of opportunity for the reassessment and reclassification of securities
categorized as held to maturity. On December 31, 1995, the Company transferred
all securities previously classified as held to maturity to the available for
sale classification. The amortized cost of those securities transferred was
$4,872,000 and the estimated fair value was $5,007,000 on that date, resulting
in the addition of $135,000 to shareholders' equity.
The schedule below shows the amortized cost and estimated fair value of
investment securities classified as available for sale at December 31, 1994:
21
<PAGE> 22
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Estimated Fair
in thousands Cost Gains Losses Value
<S> <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 $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 are shown in the schedule which
follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ---------------- Estimated Fair
in thousands 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 $4,821 $ --- $(167) $4,654
</TABLE>
The amortized cost and estimated fair value for securities available for sale
at December 31, 1995, by contractual maturity are shown in the following table.
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.
<TABLE>
<CAPTION>
in thousands Amortized Cost Estimated Fair Value
<S> <C> <C>
Due in one year or less $ 6,632 $ 6,663
Due after 1 year through 5 years 10,847 11,049
Due after 5 years through 10 years --- ---
Due after 10 years 43 44
Mortgage-backed securities 308 311
--------- ---------
Total $17,830 $18,067
</TABLE>
The amortized cost and estimated fair value of securities pledged as collateral
to secure certain deposits and short-term borrowings were $1,442,000 and
$1,493,000, respectively at December 31, 1995, as compared to $2,088,000 and
$2,074,000, respectively, at December 31, 1994.
Proceeds from the sale of available for sale securities were $709,000, which
included gross gains of $3,000 and gross losses of $2,600; in 1994, proceeds
from sales were $5,922,000, which included gross gains of $120,000 and gross
losses of $6,000. There were no sales of securities in 1993.
22
<PAGE> 23
NOTE E LOANS
Loans, net of amortized deferred fees, are summarized by type as follows:
<TABLE>
<CAPTION>
in thousands December 31,
1995 1994
<S> <C> <C>
Commercial $20,030 $17,246
Real Estate 32,098 40,327
Construction 4,461 1,353
Individual 4,622 5,349
Other 1,811 250
-------- --------
Total loans 63,022 64,525
Less: Allowance for loan losses (1,467) (2,750)
------- -------
Loans, net $61,555 $61,775
</TABLE>
NOTE F IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company adopted the provisions of Statements of Financial Accounting
Standards No. 114 and No. 118, Accounting by Creditors for Impairment of a Loan
("SFAS No. 114 and No. 118") on January 1, 1995. SFAS No. 114 and No. 118
apply to loans for which it is probable that the creditor will not collect all
principal and interest payments according to the loan's contractual terms. The
impairment of a loan is measured at the present value of expected future cash
flows using the loan's effective interest rate, or as a practical expedient, at
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Interest income on impaired loans is recognized
on a cash basis. Restructured loans are loans on which the borrower has been
granted a concession as to rate or term as a result of financial difficulty.
At December 31, 1995, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $1,592,000, for which the related allowance
for loan losses is $313,000. The average recorded investment in impaired loans
during the year ended December 31, 1995 was approximately $2,561,000. For the
year ended December 31, 1995, there was no interest income recognized on
impaired loans during the time within that period that the loans were impaired.
At December 31, 1994, the Company had nonaccrual loans of $3,720,000 (all of
which would be considered impaired under SFAS No. 114). The Company recorded
$146,000 in interest income on these loans in 1994. Interest income in the
amount of $428,000 would have been recorded during the period on these loans
according to their original terms.
The recorded investment in loans that were restructured prior to the adoption
of SFAS No. 114 and which were performing according to the new terms was
$1,173,000 at December 31, 1995 and $1,312,000 at December 31, 1994. Interest
income that would have been recognized on these loans if they were performing
according to their original terms was $136,000 in 1995 and $131,000 in 1994;
income recorded was $100,700 and $128,000 in 1995 and 1994, respectively. The
Company has no obligation to make further extensions of credit under loans
classified as troubled debt restructurings.
The provision for loan losses is determined by analyzing the status of
individual loans, reviewing historical loss experience and reviewing the
delinquency of principal and interest payments where pertinent. Management
believes that uncollectible amounts have been charged off and that the
allowance is adequate to cover losses inherent in the portfolio at December 31,
1995. Increases and decreases in the allowance include changes in the
measurement of impaired loans.
23
<PAGE> 24
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $2,750 $2,486 $3,132
Provision (recovery) for loan losses (260) 39 1,133
Loans charged off (1,340) (412) (2,090)
Recoveries 317 637 311
-------- -------- --------
Balance at end of year $1,467 $2,750 $2,486
</TABLE>
NOTE G FORECLOSED REAL ESTATE
Foreclosed real estate is carried at the lower of cost or fair value less
estimated selling costs, based upon current market conditions and expected cash
flows.
The following schedule presents a breakdown by type of property of foreclosed
real estate:
<TABLE>
<CAPTION>
December 31,
in thousands 1995 1994 1993
<S> <C> <C> <C>
Commercial land $ 546 $ 671 $ 993
Residential land 254 1,416 1,416
Commercial property 567 1,098 1,003
1-4 family residential 147 581 1,042
------- ------- ------
Total 1,514 3,766 4,454
Less: Allowance for losses (362) (748) (847)
------- ------- -------
Total estimated fair value $1,152 $3,018 $3,607
</TABLE>
Activity in the allowance for losses on foreclosed real estate is as follows:
<TABLE>
<CAPTION>
in thousands 1995 1994 1993
<S> <C> <C> <C>
Beginning at beginning of year $ 748 $ 847 $ 896
Provision for losses 231 264 74
Dispositions, net (597) (41) (123)
Charge-offs, net of recoveries (20) (322) ---
------- ------- ---------
Balance at end of year $ 362 $ 748 $ 847
</TABLE>
24
<PAGE> 25
NOTE H PREMISES AND EQUIPMENT
Premises and equipment include the following:
<TABLE>
<CAPTION>
December 31,
in thousands 1995 1994 1993
<S> <C> <C> <C>
Land $ 237 $ 237 $ 237
Buildings and improvements 470 464 440
Leasehold improvements 839 1,339 1,339
Furniture and equipment 977 1,672 1,596
Less: Accumulated depreciation and amortization (1,332) (2,556) (2,359)
------- ------- -------
Total premises and equipment $ 1,191 $ 1,156 $ 1,253
</TABLE>
The Company occupies banking and office space in four locations under
noncancellable lease arrangements accounted for as operating leases. The
initial lease periods range from five to ten years and provide for one or more
five-year renewal options. The leases provide for percentage annual rent
escalations and require that the lessee pay certain operating expenses
applicable to the leased space. Rent expense applicable to operating leases
amounted to $346,000, $413,000 and $577,000, in 1995, 1994 and 1993,
respectively. At December 31, 1995, future minimum lease payments under
noncancellable operating leases having an initial term in excess of one year
are as follows (in thousands):
Years ending December 31,
<TABLE>
<S> <C>
1996 $ 300
1997 304
1998 304
1999 304
2000 304
Thereafter 1,975
-----
Total minimum lease payments $3,491
</TABLE>
NOTE I DEPOSITS
Total deposits are summarized by type as follows:
<TABLE>
<CAPTION>
December 31,
in thousands 1995 1994
<S> <C> <C>
Noninterest-bearing deposits $17,800 $24,360
Interest-bearing:
Interest checking deposits 11,791 19,107
Money market and savings deposits 48,926 34,928
Certificates of deposit of $100,000 or more 3,816 3,438
Other time deposits 19,556 22,569
------ ------
Total interest-bearing deposits 84,089 80,042
------ ------
Total deposits $101,889 $104,402
</TABLE>
25
<PAGE> 26
NOTE J SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under repurchase agreements,
which are securities sold to the Bank's customers, at the customer's request,
under a continuing "roll-over" contract that matures in one business day. The
underlying securities sold are U.S. Treasury Notes or Federal agencies which
are segregated in the Bank's Federal Reserve Bank account from the Company's
other investment securities. At December 31, 1994, both the carrying amount
and fair value of the underlying securities was approximately $992,600; at
December 31, 1995, there were no short-term borrowings. The following table
presents certain information for short-term borrowings:
<TABLE>
<CAPTION>
1995 1994
in thousands Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements:
At year end --- --- $ 691 4.86%
Average for the year $ 261 4.83% $ 605 3.45%
Maximum month-end balance $1,321 $1,221
</TABLE>
NOTE K OTHER EXPENSE
Other expense in the Consolidated Statements of Operations include the
following:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1995 1994 1993
<S> <C> <C> <C>
Professional fees and services $ 505 $ 326 $ 432
Printing and office expenses 197 208 190
Franchise taxes, filing fees and assessments 161 275 327
Outside data service fees 242 261 253
Marketing and advertising 86 107 103
Insurance 124 163 216
Loan and foreclosed real estate expenses 532 719 550
Bank operations 137 164 127
Other 273 141 133
-------- -------- --------
Total other expenses $2,257 $2,364 $2,331
</TABLE>
NOTE L INCOME TAXES
Federal and state income tax expense consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1995 1994 1993
<S> <C> <C> <C>
Current Federal income tax expense $ 6 $ -- $ --
Current state income tax expense -- -- --
Deferred Federal income tax expense -- -- --
Deferred state income tax expense -- -- --
----- ------ ------
Total income tax expense $ 6 $ -- $ --
</TABLE>
26
<PAGE> 27
The following chart is a summary of the tax effects of temporary differences
that give rise to significant portions of deferred tax assets:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1995 1994
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 66 $ 427
Deferred loan fees and costs 42 47
Allowance for losses on foreclosed real estate 140 289
Deferred rent 5 59
Premises and equipment -- 112
Net operating loss carryforwards 4,151 4,233
----- -----
Gross deferred tax assets 4,404 5,167
Less valuation allowance (4,360) (5,167)
------- -------
Total deferred tax assets 44
Deferred tax liabilities:
Premises and equipment (44) ---
-------- -------
Net deferred tax assets $ --- $ ---
</TABLE>
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
Benefit not recorded due to net operating loss carryforward position (33.6) (34.0) (34.0)
Effective tax rates .4% --- ---
</TABLE>
At December 31, 1995, the Company had approximately $10.7 million of net
operating loss carryforwards for Federal income tax purposes available to
offset future taxable income, expiring at various dates from 2003 through 2008.
The net operating loss available for any one year may be limited if the Company
is subject to the Alternative Minimum Tax.
NOTE M INCOME (LOSS) PER COMMON SHARE
The weighted average number of shares outstanding used in the determination of
primary and fully diluted income (loss) per share are shown in the following
table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Primary 10,153,202 9,538,535 4,749,751
Fully diluted 10,201,620 9,584,840 4,749,751
</TABLE>
The warrants outstanding were considered common stock equivalents for the
purpose of computing net income (loss) per share and were included in the
computation for both primary and fully diluted earnings per share only when
they had a dilutive effect. The management stock options outstanding (Note O)
were included in the calculation of fully diluted earnings per share when they
were dilutive. Common stock equivalents were included in the weighted shares
outstanding in 1995 and 1994.
27
<PAGE> 28
NOTE N RELATED PARTY TRANSACTIONS
Certain directors, officers and principal shareholders of the Company and its
subsidiary(ies), including their immediate families and companies in which they
have significant ownership, were loan customers during 1995 and 1994. Such
loans were made in the ordinary course of business and on substantially the
same credit terms, including interest rates, maturities and collateralization,
as those prevailing at the time for comparable transactions with other persons,
and did not involve more than normal risk of collectibility or present other
unfavorable features. At December 31, 1995, all of the loans were current and
performing according to agreement.
Total loans outstanding for each year indicated and activity in those loans are
shown below:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1995 1994
<S> <C> <C>
Outstanding at beginning of year $ 846 $1,343
New loans and principal advances 980 398
Repayments (1,024) (590)
Resignations (23) (305)
---------- -------
Outstanding at end of year $ 779 $ 846
</TABLE>
An individual who was a director of the Company's subsidiary during 1995 is a
general partner in a partnership which leases a branch facility to Suburban
Maryland. The initial five year lease term expired June 30, 1992, and was
renewed under the first of three five-year renewal options at a minimum annual
rate of approximately $75,600. A director of the Company and its subsidiary is
the Chairman of the Board of a company that provided services associated with
the management and disposition of certain properties obtained through
foreclosure. Fees and commissions for these services were approximately
$84,000 in 1995 and $12,000 in 1994. Management believes that the services
provided and the terms of the foregoing lease are no more and no less favorable
to the Company than those which could have been received from unaffiliated
parties.
NOTE O EMPLOYEE BENEFIT PLANS
The Company has adopted an Incentive Stock Option Plan for certain officers and
key employees and has reserved 404,235 shares of common stock for options to be
granted under the plan. The purchase price of the shares covered by an option
must be equal to the fair market value on the grant date. The plan authorizes
both qualified and non-qualified options; the characteristics are the same
except that qualified options will have a term of no more than ten years while
non-qualified options will have a term of eleven years. No options were
granted under this plan in 1995, 1994 or 1993.
In 1993, upon the successful completion of the stock offering, 350,000
Management Stock Options were granted to the Chairman of the Board, the Vice
Chairman and a major stockholder under the terms of the Plan of Reorganization
and Recapitalization. These options are exercisable at a purchase price of
$.10 per share and have a term of five years, expiring in March of 1998.
Deferred compensation expense has been recognized and the offset, recorded to
paid-in capital-stock options.
The Company has a 401(k) plan covering all full-time employees who have reached
the age of 21 and have completed at least one year of service as defined by the
plan. The Company made contributions to the plan of approximately $41,000,
$32,000 and $28,000 in 1995, 1994 and 1993, respectively. These amounts are
included in salaries and employee benefits in the accompanying Consolidated
Statements of Operations.
Changes in options outstanding under the Incentive Stock Option Plan and the
Management Stock Option Plan are as follows:
28
<PAGE> 29
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
Number of Price Number of Price Number of Price
in thousands Shares Range Shares Range Shares Range
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 430,000 $0.10-5.63 430,000 $0.10-5.63 195,560 $4.00-7.13
Granted --- --- --- --- 350,000 0.10-0.10
Exercised --- --- --- --- --- ---
Expired/canceled --- --- --- --- 115,560 4.00-7.13
End of year 430,000 $0.10-5.63 430,000 $0.10-5.63 430,000 $0.10-5.63
- -------------------------------------------------------------------------------------------------------
</TABLE>
Options exercisable at December 31, 1995 were 430,000; at December 31, 1994 and
1993, 80,000 options were exercisable.
NOTE P REGULATORY MATTERS
Under the guidelines of the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("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 is not subject to any written agreement, order or directive issued
by a regulatory agency.
The Bank's capital ratios at December 31, 1995 and 1994 are shown below. The
1994 capital ratios have been restated to reflect the merger of Suburban
Maryland and Suburban Virginia.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Tier I/Leverage Ratio 8.72% 6.18%
Tier I/Risk-Weighted Assets 13.07% 9.35%
Total Capital/Risk-Weighted Assets 14.33% 10.63%
</TABLE>
NOTE Q COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company incurs certain commitments and
contingent liabilities, that are not reflected in the accompanying Consolidated
Financial Statements. These off-balance sheet items include various
commitments to extend credit and standby letters of credit. No material losses
are expected to result from these transactions. At December 31, 1995 and 1994,
commitments under standby letters of credit totaled approximately $630,000 and
$869,000, respectively. Unfunded loan commitments totaled approximately
$8,203,000 and $8,656,000 at December 31, 1995 and 1994, respectively.
The Company's subsidiary is, at times, and in the ordinary course of banking
business, subject to legal actions. Management is of the opinion that losses,
if any, resulting from current legal actions will not have a material adverse
effect on the financial condition of the Company.
Because most of the Company's business activity is with customers located in
the Washington, D.C. metropolitan area, a geographic concentration of credit
risk exists within the loan portfolio, and, as such, its performance will be
influenced by the economy of the region. In addition, the majority of the
total foreclosed real estate is located in the same market or its surrounding
areas; accordingly, the recovery of a substantial portion of the carrying
amount of foreclosed real estate is susceptible to changes in market conditions
in the Washington metropolitan area. The loan portfolio is diversified with no
single industry or customer comprising more than 7.7% of the total portfolio.
The largest concentration of borrowers within general types of industries, as
classified by Standard Industrial Codes ("SIC"), is in the
Finance/Insurance/Real Estate group, which is 22.8% of the total portfolio.
29
<PAGE> 30
The Company sells excess funds overnight (Federal funds sold) to correspondent
banks. At December 31, 1995, a total of $16.5 million was invested with three
banks, the largest exposure being $6.0 million. All of these correspondent
banks are considered well capitalized under the guidelines of FDICIA, and,
therefore, little, if any, credit risk is present.
NOTE R FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS No. 107"), requires disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
the fair value for its financial instruments as defined by SFAS No. 107.
CASH AND DUE FROM BANKS: The carrying amount approximates fair value.
INTEREST BEARING DEPOSITS WITH BANKS AND FEDERAL FUNDS SOLD: The carrying
amount approximates fair value.
INVESTMENT SECURITIES AVAILABLE FOR SALE: Fair values are based on published
market prices or dealer quotes.
LOANS: For loans with short-term or variable characteristics, such as home
equity or personal lines of credit and variable-rate commercial and real estate
loans, the carrying value approximates fair value. This amount excludes any
value related to account relationships. The fair value of other types of loans
is estimated by discounting the future cash flows using the comparable
risk-free rate, adjusted for credit risk and operating expenses.
INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates fair
value.
NONINTEREST-BEARING DEPOSITS: The fair value of these instruments, by the SFAS
No. 107 definition, is the amount payable at the reporting date.
INTEREST-BEARING DEPOSITS: The fair value of demand deposits, savings accounts
and money market deposits with no defined maturity, by SFAS No. 107 definition,
is the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash flows using
the current rates at which similar deposits would be made.
At December 31, 1995, the Company had outstanding letters of credit and
commitments to extend credit of $630,000 and $8,203,000, respectively. The
fair value of these off-balance-sheet financial instruments, based on fees that
would be charged to enter similar arrangements, is immaterial.
30
<PAGE> 31
The estimated fair values of the Company's financial instruments required to be
disclosed under SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
1995
Carrying Fair
in thousands Amount Value
<S> <C> <C>
Assets:
Cash and due from banks $ 9,931 $ 9,931
Interest-bearing deposits with banks 2,220 2,220
Federal funds sold 16,490 16,490
Investment securities available for sale 18,067 18,067
Net loans (including loans held for sale) 64,847 66,388
Interest receivable 607 607
Liabilities:
Noninterest-bearing deposits 17,800 17,800
Interest-bearing deposits 84,089 85,065
Interest payable 70 70
</TABLE>
NOTE S PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
In 1995 and 1994, all costs of operating the Bank were allocated directly to
the Bank. Condensed financial statements of Suburban Bancshares, Inc. only
(the "Parent") follows:
CONDENSED BALANCE SHEETS
Parent Company
<TABLE>
<CAPTION>
December 31,
in thousands 1995 1994
<S> <C> <C>
ASSETS
Cash $ 48 $ 36
Interest bearing deposits with banks 2,220 245
Investment securities available for sale 1,578 2,019
Investment in subsidiaries 8,994 6,620
Other assets 17 23
-------- --------
W Total Assets $ 12,857 $ 8,943
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 5 $ 7
Shareholders' equity:
Common stock 109 91
Paid-in capital -- stock options 534 172
Additional paid-in capital 25,259 23,380
Accumulated deficit (13,043) (14,584)
Net unrealized loss on securities available for sale (7) (123)
-------- --------
Total shareholders' equity 12,852 8,936
-------- --------
Total Liabilities and Shareholders' Equity $ 12,857 $ 8,943
</TABLE>
31
<PAGE> 32
CONDENSED STATEMENTS OF OPERATIONS
Parent Company
<TABLE>
<CAPTION>
December 31,
in thousands 1995 1994 1993
<S> <C> <C> <C>
Interest on deposits $ 18 $ 13 $ 16
Interest on investments 95 106 5
Other income 6 2 ---
-------- -------- --------
Total income 119 121 21
Total expense 552 208 117
Loss before income taxes and equity in undistributed
income (loss) of subsidiaries (433) (87) (96)
Income tax expense --- --- ---
------- ------ -------
Loss before equity in undistributed income (loss) of subsidiaries (433) (87) (96)
Equity in undistributed income (loss) of subsidiaries 1,974 306 (1,296)
------- ------ -------
Income (loss) $ 1,541 $ 219 $ (1,392)
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
Parent Company
<TABLE>
<CAPTION>
December 31,
in thousands 1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,541 $ 219 $(1,392)
Adjustments to reconcile net income to net cash used by operating activities:
Equity in (income) loss of subsidiaries (1,974) (306) 1,296
Stock option compensation expense 362 138 34
Accretion on securities (4) (10) ---
Decrease (increase) in other assets 6 (12) (6)
Decrease in other liabilities (2) (43) (83)
-------- ------- --------
Net cash used by operating activities (71) (14) (151)
Net cash used by investing activities (1,814) (83) (4,794)
Net cash provided by financing activities 1,897 53 5,012
Net increase (decrease) in cash and cash equivalents 12 (44) 67
Cash and cash equivalents at beginning of year 36 80 13
Cash and cash equivalents at end of year $ 48 $ 36 $ 80
</TABLE>
32
<PAGE> 33
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Suburban Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Suburban
Bancshares, Inc. and subsidiaries (Suburban Bancshares, Inc.) as of December
31, 1995 and 1994, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for the years then ended.
These consolidated financial statements are the responsibilitity of the
Company's management. Our responsibilitity is to express an opinion on these
consolidated financial statements based on our audits. The consolidated
financial statements of Suburban Bancshares, Inc. for the year ended December
31, 1993 were audited by other auditors whose report dated February 11, 1994,
expressed an unqualified opinion on those consolidated statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material missstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the 1995 and 1994 consolidated financial statements referred to
above present fairly, in all matieral respects, the consolidated financial
position of Suburban Bancshares, Inc. and subsidiaries as of December 31, 1995
and 1994, and the results of their operations and their cash flows for the
years then ended in confirmity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for investment securities in 1994.
/s/
Stegman & Company
Towson, Maryland
January 16, 1996
- ------------------------------------------------------------------------------
BOARD OF DIRECTORS
Suburban Bancshares, Inc. (1)
Suburban Bank of Maryland (2)
GLEN H. BALLOWE (1,2)
President, Ballowe Corporation
(property management)
SAMUEL Y. BOTTS (2)
Partner, Jessamy, Fort & Botts
(law firm)
ELIZABETH J. BUCK (1,2)
President, Buck Distributing Co., Inc.
(beverage distribution)
ALBERT G. DECESARIS (2)
Vice President, Vendemia & DeCesaris Builders, Inc.
ROBERT G. DEPEW (2)
President, Robert G. Depew & Associates, Inc.
(real estate leasing and management)
33
<PAGE> 34
BARBARA M. DINENNA (1,2)
Chairman, DiNenna & Associates, C.P.A.
FRANK K. HALLEY, JR. (2)
President, Carrollton Realty, Inc.
(real estate sales and management)
MARLIN K. HUSTED (1,2)
VICE CHAIRMAN (1)
WILLIAM R. JOHNSON (2)
PRESIDENT
WINFIELD M. KELLY, JR. (1,2)
CHAIRMAN
President & CEO, Dimensions Health Corporation
(health care management)
RAYMOND G. LAPLACA (1,2)
VICE CHAIRMAN (2)
Partner, Reichelt, Nussbaum, LaPlaca and Miller
(law firm)
ROBERT L. LONG (2)
Chairman, Long Fence Company
(commercial and residential fencing)
FRANK LUCENTE, JR. (2)
President, Lucente Enterprises
(real estate development)
KENNETH H. MICHAEL (1,2)
Chairman, The Michael Companies, Inc.
(real estate sales and management)
ATA O. MOSHYEDI, M.D. (2)
Physician, Gastroenterology
VINCENT D. PALUMBO, D.D.S. (1,2)
President, V.D. Palumbo, P.A.
(oral and maxillofacial surgery)
LEO VONDAS (2)
General Partner, Park Road Associates
(real estate development)
OFFICERS
Suburban Bancshares, Inc.
WINFIELD M. KELLY, JR.
Chairman and Chief Executive Officer
MARLIN K. HUSTED
Vice Chairman
WILLIAM R. JOHNSON
President and Chief Operating Officer
SIBYL S. MALATRAS
Senior Vice President and Treasurer
SUSAN J. HANSEN
Corporate Secretary
34
<PAGE> 35
Suburban Bank of Maryland
WINFIELD M. KELLY, JR.
Chairman
RAYMOND G. LAPLACA
Vice Chairman
WILLIAM R. JOHNSON
President and Chief Executive Officer
JOSEPH E. BURNETT
Senior Vice President and Chief Lending Officer
CESAR O. CABREJAS
Senior Vice President and Branch Administrator
HAROLD J. KOCH
Senior Vice President
SIBYL S. MALATRAS
Senior Vice President and Treasurer
STEVEN M. BRUNN
Vice President
CHARLES E. CARNS
Vice President and Controller
GEOFFREY J. GROSVENOR
Vice President
JOSEPH A. RUTH
Vice President
PATRICK J. VAN DER HAM
Vice President
JEFFREY S. WAGNER
Vice President
N. LEE WALTZ, JR.
Vice President
SPECIAL THANKS
Thank you to our customers and friends who consented to being featured in our
photographs:
Patricia Hopkins, Hopkins Associates
Larry Coleman and Staff, Chesapeake Bagel Bakery
The Interact Club, Eleanor Roosevelt High School
Kathy McPartland, Teacher/Advisor
Cheryl Hamilton, Club Advisor, Greenbelt Rotary
Al Way, Jubilee USA Training & Development
35
<PAGE> 36
BRANCH LOCATIONS AND GENERAL INFORMATION
Suburban Bank of Maryland
Capitol Heights 8703 Central Avenue
Capitol Heights, MD 20743-3689
(301) 350-8100
Clinton 7600 Old Branch Avenue
Clinton, MD 20735-1603
(301) 868-1215
Greenbelt 7505 Greenway Center Drive
P. O. Box 298
Greenbelt, MD 20768-0298
(301) 220-0733
Oxon Hill 6196 Oxon Hill Road
Oxon Hill, MD 20745-3130
(301) 567-2650
Rockville 30 West Gude Drive
Rockville, MD 20850-1170
(301) 309-1771
General Information
Corporate Office
7505 Greenway Center Drive
P. O. Box 298
Greenbelt, MD 20768-0298
(301) 474-6694
(301) 474-9103 fax
Corporate Publications
Suburban Bancshares, Inc.'s Form 10-K and quarterly reports are available upon
request at no charge by writing or calling the Corporate Office.
Registrar
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
36
<PAGE> 1
EXHIBIT 21
List of subsidiaries of Suburban Bancshares, Inc.
Suburban Bank of Maryland
7505 Greenway Center Drive
Greenbelt, Maryland 20770
<PAGE> 1
EXHIBIT 23.1(a)
KPMG Peat Marwick LLP
2001 M Street, N. W.
Washington, D. C. 20036
The Board of Directors and Shareholders
Suburban Bancshares, Inc.:
We consent to incorporation by reference in the registration statement No.
33-35558 Post Effective Amendment No. 1 on Form S-8 of Suburban Bancshares,
Inc. and subsidiaries of our report dated February 11, 1994, relating to the
statements of operations, changes in shareholders' equity, and cash flows of
Suburban Bancshares, Inc. and subsidiaries for the year ended December 31,
1993, which report is incorporated by reference in the December 31, 1995 annual
report on Form 10-K of Suburban Bancshares, Inc.
/s/
KPMG Peak Marwick LLP
Washington, D. C.
March 21, 1996
<PAGE> 1
EXHIBIT 23.1(b)
Stegman & Company
Suite 200
405 East Joppa Road
Baltimore, Maryland 21286
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Form 10-K
of Suburban Bancshares, Inc. for the year ended December 31, 1995 of our report
dated January 16, 1996 which appears on page 24 of the 1995 Annual Report to
Shareholders.
/s/
Stegman & Company
Towson, Maryland
March 19, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 9,931
<INT-BEARING-DEPOSITS> 2,220
<FED-FUNDS-SOLD> 16,490
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 18,607
<LOANS> 66,314
<ALLOWANCE> 1,467
<TOTAL-ASSETS> 115,431
<DEPOSITS> 101,889
<SHORT-TERM> 0
<LIABILITIES-OTHER> 446
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 13,205
<TOTAL-LIABILITIES-AND-EQUITY> 115,431
<INTEREST-LOAN> 6,525
<INTEREST-INVEST> 1,229
<INTEREST-OTHER> 604
<INTEREST-TOTAL> 8,358
<INTEREST-DEPOSIT> 3,106
<INTEREST-EXPENSE> 3,119
<INTEREST-INCOME-NET> 5,239
<LOAN-LOSSES> (260)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,674
<INCOME-PRETAX> 1,547
<INCOME-PRE-EXTRAORDINARY> 1,541
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,541
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
<YIELD-ACTUAL> 5.50
<LOANS-NON> 1,592
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,261
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,750
<CHARGE-OFFS> 1,340
<RECOVERIES> 317
<ALLOWANCE-CLOSE> 1,467
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
