<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996
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Commission File Number 0-16595
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SUBURBAN BANCSHARES, INC .
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(Exact name of Registrant as specified in charter)
<TABLE>
<S> <C>
Delaware 54-1319441
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
<TABLE>
<S> <C>
7505 Greenway Center Drive, Greenbelt, Maryland 20770
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(Address of principal executive offices) (Zip Code)
</TABLE>
(301) 474-6694
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Common Stock $.01 Par Value Outstanding at August 7, 1996
- --------------------------- -----------------------------
(Class)
10,951,218 Shares
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1
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SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
June 30, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1. Condensed Financial Statements
Consolidated Balance Sheets (unaudited)
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations (unaudited)
Six months ended June 30, 1996 and June 30, 1995 4
Consolidated Statements of Operations (unaudited)
Three months ended June 30, 1996 and June 30, 1995 5
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1996 and June 30, 1995 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-16
PART II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
In thousands 1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,146 $ 9,931
Interest-bearing deposits with banks 1,199 2,220
Federal funds sold 11,615 16, 490
Investment securities 16,246 18,067
Loans held for sale 4,928 3,292
Loans 68,728 63,022
Less: Allowance for loan losses (1,498) (1,467)
Loans, net 67,230 61,555
Premises and equipment, net 1,191 1,191
Foreclosed real estate 1,152 1,152
Accrued interest receivable 711 607
Other assets 1,425 926
TOTAL ASSETS $116,843 $115,431
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 19,369 $ 17,800
Interest-bearing deposits 83,595 84,089
Total deposits 102,964 101,889
Accrued expenses and other liabilities 401 446
Total liabilities 103,365 102,335
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; 10,951,218 shares issued
and outstanding at June 30, 1996 & December 31, 1995 109 109
Paid-in capital - stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (12,429) (13,043)
Net unrealized gain on securities available for sale 5 237
Total shareholders' equity 13,478 13,096
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $116,843 $115,431
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
In thousands, except per share data 1996 1995
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $3,443 $3,279
Taxable interest on securities 564 665
Interest on Federal funds sold 256 230
Interest on deposits with banks 36 4
Total interest income 4,299 4,178
INTEREST EXPENSE
Interest on deposits 1,598 1,464
Interest on short-term borrowings -- 12
Total interest expense 1,598 1,476
NET INTEREST INCOME 2,701 2,702
Provision for loan losses 0 35
Net interest income after provision for loan losses 2,701 2,667
NONINTEREST INCOME
Service charges on deposit accounts 208 223
Gains on sale of foreclosed real estate 1 84
Gain on sale of assets and transfer of liabilities -- 1,000
Other income 69 97
Total noninterest income 278 1,404
NONINTEREST EXPENSE
Salaries and employee benefits 1,274 1,548
Occupancy expense 235 346
Furniture and equipment expense 67 77
Other expense 790 1,161
Total noninterest expense 2,366 3,132
Income before income taxes 613 939
Income taxes -- --
NET INCOME $613 $939
Income Per Common Share
Primary $0.05 $0.09
Fully Diluted 0.05 0.09
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
In thousands, except per share data 1996 1995
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,784 $1,647
Taxable interest on securities 278 321
Interest on Federal funds sold 130 110
Interest on deposits with banks 16 1
Total interest income 2,208 2,079
INTEREST EXPENSE
Interest on deposits 797 732
Interest on short-term borrowings -- 7
Total interest expense 797 739
NET INTEREST INCOME 1,411 1,340
Provision for loan losses -- (10)
Net interest income after provision for loan losses 1,411 1,350
NONINTEREST INCOME
Service charges on deposit accounts 108 111
Gains on sale of foreclosed real estate 1 84
Gain on sale of assets and transfer of liabilities -- 1,000
Other income 33 43
Total noninterest income 142 1,238
NONINTEREST EXPENSE
Salaries and employee benefits 637 951
Occupancy expense 118 182
Furniture and equipment expense 37 34
Other expense 435 650
Total noninterest expense 1,227 1,817
Income before income taxes 326 771
Income tax -- --
NET INCOME $326 $771
Income Per Common Share
Primary $0.03 $0.08
Fully Diluted 0.03 0.08
</TABLE>
See accompanying notes to consolidated financial statements
5
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) Six Months Ended June 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 613 $ 939
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Depreciation 61 91
Provision for loan losses 0 35
Stock option compensation expense 0 362
Originations of loans held for sale (1,636) (1,305)
Net accretion on securities (28) (68)
Increase (decrease) in deferred loan fees 32 (39)
(Increase) decrease in accrued income and other assets (602) 33
Decrease in accrued expenses and other liabilities (45) (111)
Gains on sale of foreclosed real estate 0 (84)
Gain on sale of assets and transfer of liabilities 0 (1,000)
Loss on write-off of fixed assets 0 104
Net cash used by operating activities (1,605) (1,043)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in deposits with other banks 1,021 223
Net decrease (increase) in Federal funds sold 4,875 (3,200)
Purchases of available for sale securities (1,594) (6,576)
Proceeds from sales of available for sale securities 0 709
Proceeds from maturities of available for sale securities 3,100 9,950
Proceeds from prepayments of principal on securities 111 18
Net increase in loans (5,708) (6,205)
Net purchases of premises and equipment (61) (47)
Proceeds from sale of foreclosed real estate 0 1,638
Cash transferred on sale of assets & transfer of liabilities 0 (1,346)
Consideration paid on sale of assets & transfer of liabilities 0 (752)
Net cash provided (used) in investing activities 1,744 (5,588)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 1,076 6,521
Net increase in securities sold under agreements to repurchase 0 423
Proceeds from sale or issuance of common stock 0 37
Net cash provided by financing activities 1,076 6,981
Net increase in cash and due from banks 1,215 350
Cash and due from banks at beginning of period 9,931 7,005
Cash and due from banks at end of period 11,146 7,355
Interest paid 1,605 1,477
Income taxes paid 0 0
</TABLE>
See accompanying notes to consolidated financial statements
6
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SUBURBAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited consolidated financial statements, which
include the accounts of Suburban Bancshares, Inc. ("Bancshares" or "the
Company") and its wholly-owned subsidiary, Suburban Bank of Maryland ("Suburban
Maryland"), have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the disclosures required by generally accepted
accounting principles. A former subsidiary, Suburban Bank of Virginia, N.A., a
National Bank in Liquidation ("Suburban Virginia"), was merged into Suburban
Maryland on August 18, 1995. All adjustments which, in the opinion of
management, are necessary to a fair presentation of the results for the interim
periods presented have been made; all of these adjustments are of a normal and
recurring nature. The results of operations for the six months ended June 30,
1996 are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1996.
NOTE A - ACCOUNTING POLICIES AND OTHER DATA
Reference should be made to the Notes to Consolidated Financial
Statements included in the Company's Annual Report to Shareholders for the year
ended December 31, 1995, which contain the Company's accounting policies and
other data.
NOTE B - INVESTMENT SECURITIES
Under SFAS No. 115, the Company is required to classify its debt and
marketable equity securities in one of three categories: trading, available
for sale, or held to maturity. At the time of purchase, manage-ment determines
the appropriate designation for securities.
The following table shows the amortized cost and estimated fair value
of investment securities classified as available for sale at June 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 8,412 $ 44 $ (15) $ 8,441
Federal agencies 6,591 27 (40) 6,578
Mortgage-backed obligations of federal agencies 199 3 (3) 199
Collateralized mortgage obligations 39 --- --- 39
Other 1,000 --- (11) 989
Total investment securities $16,241 $ 74 $ (69) $16,246
</TABLE>
The schedule below shows the amortized cost and estimated fair value
of investment securities classified as available for sale at December 31, 1995
(in thousands):
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gross Unrealized Estimated Fair
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 securities available for sale $17,830 $247 $(10) $18,067
</TABLE>
The amortized cost and estimated fair value for securities at June 30,
1996, by contractual maturity are shown in the following
7
<PAGE> 8
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 $ 6,914 $ 6,934
Due after one year through 5 years 9,089 9,074
Due after 5 years through 10 years --- ---
Due after 10 years 39 39
Mortgage-backed securities 199 199
Total $16,241 $16,246
</TABLE>
There were no sales of securities in the six months ended June 30,
1996; in the same period of 1995, proceeds from sales of available for sale
securities were $709,000, including gross gains of $3,000 and gross losses of
$3,000. The net unrealized holding gain on available for sale securities,
which is shown as a separate component of shareholders' equity in the
accompanying Consolidated Balance Sheets, was $5,000 at June 30, 1996 and
$237,000 at December 31, 1995.
NOTE C - 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.
The recorded investment in loans that were considered to be impaired
under SFAS No. 114 was $1,924,000 and $1,592,000 at June 30, 1996 and December
31, 1995, respectively, for which the related allowance for loan losses was
$250,000 and $313,000, respectively. The average recorded investment in
impaired loans during the six months ended June 30, 1996 was $1,631,000, and
during the year ended December 31, 1995, the average was approximately
$2,561,000. For the first six months of 1996 and 1995, there was no interest
income recognized on impaired loans during the time within that period that the
loans were impaired.
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 $1,141,000 at June 30, 1996 and $1,173,000 at December 31, 1995. 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 June 30,
1996. Increases and decreases in the allowance include changes in the
measurement of impaired loans.
Activity in the allowance for losses is summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended
in thousands June 30, 1996
-----------------
<S> <C>
Balance at beginning of period $ 1,467
Provision for loan losses 0
Loans charged off ( 72)
Recoveries 103
--------------
Balance at end of period $ 1,498
=============
</TABLE>
8
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NOTE D - 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 (in thousands):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------- -------------------
<S> <C> <C>
Commercial land $ 546 $ 546
Residential land 254 254
Commercial property 567 567
Residential property, 1-4 family 147 147
------------------- -------------------
Total 1,514 1,514
Allowance for losses (362) (362)
------------------- -------------------
TOTAL FAIR VALUE $1,152 $1,152
=================== ===================
</TABLE>
Activity in the allowance for losses on foreclosed real estate for the
six months ended June 30, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
beginning balance $362
Provision for losses 0
Dispositions, net 0
Charge-offs, net of recoveries 0
----
Ending balance $362
</TABLE>
NOTE E - 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 it is not subject to any written agreement, order or directive
issued by a regulatory agency.
In accordance with the provisions of FDICIA, Suburban Maryland was
classified as well capitalized as of June 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
--------------- -------------------
<S> <C> <C>
Tier 1/Average Assets 9.06% 8.72%
Tier 1/Risk-weighted Assets 12.97% 13.07%
Total Capital/Risk-Weighted Assets 14.23% 14.33%
</TABLE>
NOTE F - 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 nonfiancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
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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 June 30, 1996, the Company had outstanding letters of credit and
commitments to extend credit of $632,000 and $9,265,000, respectively. The
fair value of these off-balance-sheet financial instruments, based on fees that
would be charged to enter similar arrangements, is immaterial.
The estimated fair values of the Company's financial instruments
required to be disclosed under SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
In thousands Carrying Amount Fair Value Carrying Amount Fair Value
------------------------------------ --------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $11,146 $11,146 $ 9,931 $ 9,931
Interest-bearing deposits with banks 1,199 1,199 2,220 2,220
Federal funds sold 11,615 11,615 16,490 16,490
Investment securities available for sale 16,246 16,246 18,067 18,067
Net loans
(including loans held for sale) 72,158 73,473 64,847 66,388
Interest receivable 711 711 607 607
Liabilities:
Noninterest-bearing deposits 19,369 19,369 17,800 17,800
Interest-bearing deposits 83,595 83,206 84,089 85,065
Interest payable 63 63 70 70
</TABLE>
10
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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 six
months ended June 30, 1996 and 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.
OVERVIEW
Suburban Bancshares, Inc. reported earnings of $613,000 for the six
months ending June 30, 1996, a decrease of $326,000, or 34.7%, from the
$939,000 reported for the first six months of 1995. Extraordinary items in
1995 totaling $506,000 included the sale of the Virginia bank subsidiary, a
stock option expense and gains on nonperforming assets. The 1996 earnings for
the first half of the year are 41.6% above core earnings in 1995.
Total assets reached $116.8 million at June 30, 1996, a $14.1 million,
or 13.7%, increase from $102.7 million at June 30, 1995. Although asset and
deposit growth has leveled off in the first six months of 1996 as compared to
the December 31, 1995 totals, loans continued to climb, reaching $73.7 million
at June 30, 1996, $7.3 million, or 11.1% above total loans of $66.3 million at
year-end.
Average assets were $107.8 million for the first six months of 1996,
$3.6 million or 3.5% above average assets of $104.2 million for the same period
of 1995. This increase reflects that in addition to the growth of $3.6
million, the assets and deposits of the Virginia subsidiary that were sold
during 1995 have been replaced with new loans and new deposits averaging $18.8
million.
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 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 fell only $1,000, from $2,702,000 for the first
six months of 1995 to $2,701,000 in 1996, the net result of lower market rates,
higher loan volume and changes in the composition of funding sources.
The net interest margin represents the Company's net yield on its
earning assets and is calculated as net interest income divided by average
earning assets. In the first six months of 1996, the net interest margin was
5.48%, falling 21 basis points from 5.69% in the same period of 1995, the
result of a stable yield on earning assets offset by rising funding costs.
Changes in the volume of earning assets and interest bearing funds
impact both interest income and interest expense. Both total average earning
assets and total average interest bearing funds rose in the first half of 1996
as compared to 1995. Average earning assets rose $3.4 million, or 3.5%, from
$95.7 million in 1995 to $99.1 million in 1996, and average interest bearing
funds rose $2.1 million, or 2.8%, from $74.3 million to $76.4 million for the
same periods. As a percentage of average assets, earning assets remained
stable at 91.8% for both periods; however, average interest bearing funding
sources rose from 78.8% of total funding sources in the first half of 1995 to
81.2% in the same period in 1996, resulting in a higher cost of funds.
Changes in the mix of both earning assets and funding sources were key
determinants of the changes in net interest income in the first six months of
both 1996 and 1995. Although there was a small change in the volume of total
average earning assets and interest-bearing funding sources in 1996, the mix of
those assets and liabilities changed significantly. Average loans rose to
70.4% of average earning assets for the first half of 1996 from 68.5% in 1995,
while investment securities and other short-term investments, which
characteristically earn lower yields, declined from 31.5% of earnings assets in
1995 to 29.6% in 1996. Changes in the mix of interest-bearing funds were more
pronounced as funds shifted from higher-cost time deposits and lower-cost
savings and interest checking deposits into money market deposit accounts.
Time deposits declined $474,000 on average from the first half of 1995 to the
same period of 1996. Offsetting the decrease in interest expense resulting
from this volume decline, a rate increase of 50 basis
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<PAGE> 12
points caused a net increase in interest expense. The cost of savings and
interest checking accounts decreased significantly in 1996 from the first six
months of 1995, as average balances fell $6.7 million from $22.8 million in
1995 to $16.1 million in 1996 and rates paid on these accounts declined
somewhat, from 2.63% in 1995 to 2.54% in 1996. These time deposits and savings
and interest checking deposits shifted into money market deposit accounts which
increased $9.8 million from an average of $26.8 million in the first half of
1995, or 36.0% of average interest-bearing funds, to $36.6 million, or 47.8%,
in 1996. This large shift of balances was accompanied by a rate decrease of 10
basis points, which helped to mitigate the significant increase in the cost of
funds resulting from the volume increase.
Shifts in the interest rate environment and competitive factors
affected the rates paid for funds as well as the yields earned on assets. Loan
yields decreased only 16 basis points, from 10.08% for the first half of 1995
to 9.92% in 1996, even though national prime rates, on which most loans are
priced, fell 75 basis points from June 30, 1995 to June 30, 1996, and average
prime was 62 basis points lower in the first half of 1996 than in the first
half of 1995. Investment yields rose 16 basis points from 6.05% for the first
six months of 1995 to 6.21% in 1996 as lower yielding securities matured and
were replaced at higher yields, and the average yield on Federal funds dropped
59 basis points, corresponding to the drop in prime. As market rates were
rising in 1995, the cost of funds moved up more slowly, but in early 1996, as
market rates began to decline, the change in the cost of funds was again
lagging. This delay tended to narrow the spread between the income earned on
assets, which changes with market rate changes, and the cost to fund those
assets as rates were falling. The net interest spread, the difference between
the earning asset yield and the cost of funds, fell to 5.31% in the first half
of 1996 from 5.65% in the same period of 1995.
Net interest income rose $71,000, or 5.3%, from $1,340,000 in the
quarter ending June 30, 1995 to $1,411,000 in the same period of 1996. This
improvement is the result of a higher percentage of average earning assets in
loans, which earn higher yields than other earning assets.
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<PAGE> 13
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(In thousands)
<TABLE>
<CAPTION>
Six Months ended June 30, 1996 1995
AVERAGE AVERAGE
AVERAGE YIELD AVERAGE YIELD
ASSETS BALANCE INTEREST OR RATE BALANCE INTEREST OR RATE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $69,777 $3,443 9.92% $65,589 $3,279 10.08%
Investment securities 18,283 564 6.21% 22,149 665 6.05%
Fed funds sold & other deposits 11,012 292 5.34% 7,969 234 5.93%
Total interest-earning assets 99,072 4,299 8.73% 95,707 4,178 8.80%
Noninterest-earning assets:
Cash and due from banks 6,878 5,998
Bank property and equipment 1,189 1,082
Other assets 2,200 3,845
Less: Allowance for loan losses (1,490) (2,422)
Total noninterest-earning assets 8,777 8,503
TOTAL ASSETS $107,849 $104,210
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking, money market & savings $52,641 $918 3.51% $49,553 $832 3.39%
Time deposits 23,790 680 5.75% 24,264 632 5.25%
Other borrowings --- --- --- 526 12 4.83%
Total interest-bearing liabilities 76,431 1,598 4.21% 74,343 1,476 4.00%
Noninterest-bearing liabilities:
Noninterest-bearing deposits 17,704 19,993
Total funding sources 94,135 1,598 3.41% 94,336 1,476 3.16%
Other liabilities 440 593
TOTAL LIABILITIES 94,575 94,929
Shareholders' equity 13,274 9,281
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $107,849 $104,210
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $2,701 $2,702
Net interest spread 5.31% 5.65%
Net interest margin 5.48% 5.69%
</TABLE>
13
<PAGE> 14
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 credit review process. Based on this ongoing evaluation, management
determines the provision or reversal necessary to maintain an appropriate
allowance.
In the first six months of 1995, the provision for loan losses was
$35,000, and in the second quarter of 1995, there was a reversal of $10,000.
In the same periods of 1996, there was no provision set aside, as loan quality
continued to improve and recoveries of $103,000 offset loans charged off of
$72,000.
NONINTEREST INCOME
Noninterest income was $278,000 in the first half of 1996 and
$1,404,000 in the same period of 1995. In the second quarter, noninterest
income was $142,000 in 1996 and $1,238,000 in 1995. The significant change
from 1995 to 1996 is the result of second quarter 1995 recognition of a
premium of $1,000,000 on the sale of the Virginia subsidiary and gains on the
sale of foreclosed real estate totaling $84,000. Also, as foreclosed real
estate declined in 1995, rental income from those properties was reduced.
Deposit account service charges have fallen as a result of the disposition of
the accounts transferred from the Virginia subsidiary.
NONINTEREST EXPENSES
Noninterest expenses decreased $766,000, or 24.5%, in the first six
months of 1996 as compared to the same period of 1995, from $3,132,000 to
$2,366,000, primarily the result of the closed offices of our former subsidiary
in Virginia and the costs associated with the sale in 1995. Salaries and
benefits have decreased $274,000 from last year's first half, the result of a
$327,000 charge to compensation expense in the second quarter of 1995 as stock
options became exercisable, partially offset by merit increases in 1996.
In the quarter ending June 30, noninterest expenses fell from
$1,817,000 in 1995 to $1,227,000 in 1996 as both the sale of the Virginia
subsidiary and the stock option expense occurred in the second quarter.
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 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 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 is 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 was $1,924,000 and $1,592,000 at June 30, 1996 and December 31,
1995, respectively. 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 $1,141,000 at June 30, 1996 and $1,173,000 at December 31,
1995.
14
<PAGE> 15
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 was
$1,152,000 at June 30, 1996, unchanged from December 31, 1995.
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 allowance
for loan losses related to loans that are identified as impaired was based on
discounted cash flows using the loans' initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans.
The allowance for loan losses was $1,498,000 at June 30,1996, a slight
increase from $1,467,000 at December 31, 1995. Activity in the allowance for
loan losses during the first half of 1996 included recoveries of $103,000 and
charge-offs of $72,000.
LIQUIDITY MANAGEMENT
Liquidity is the ability to generate and maintain sufficient cash
flows to fund operations and to meet financial obligations to depositors and
borrowers promptly and in a cost-effective manner. Asset liquidity is provided
primarily by maturing loans and investments and by cash received from
operations. Other sources of asset liquidity include readily marketable assets
that can serve as collateral for borrowings, and sales of loans and other real
estate. 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 the first six months of 1996, the Company's liquidity position
changed somewhat as loan volume increased and marketable securities declined;
however, the impact has been moderated since almost a quarter of the growth in
loans was in loans held for sale, which are readily marketable assets. As a
percentage of total earning assets, loans, excluding loans held for sale, rose
to 66.9% at June 30, 1996 from 61.1% at December 31, 1995, while marketable
securities, overnight investments and loans held for sale fell to 33.1% from
38.9%, respectively. This shift in the mix of earning assets to a lower
percentage of readily marketable assets has reduced the Company's overall
liquidity slightly.
A typically stable source of liquidity is the core deposit base. Core
deposits are normally noninterest checking accounts, interest checking and
money market accounts, and savings accounts. The stability of these core
deposits is reflected in the ratio of these deposits to total funding sources,
which averaged 74.7% in the first half of 1996 and 73.7% in 1995. Time
deposits under $100,000, which are also considered to be stable funding
sources, were 21.2% of funding sources in the first six months of 1996 and
22.5% in 1995. Additional funding is generated from short-term borrowings
(securities sold under repurchase agreements) and large CDS. These funds,
which are considered to be volatile or rate sensitive, even though they are
provided by local customers, have increased slightly as a percentage of average
total funding sources from 3.3% in the first half of 1995 to 4.0% in 1996.
Other sources of liquidity and cash flow in the first six months of
1995, were from the sales of properties obtained through foreclosure which
generated cash of $1,638,000 and from maturing securities which provided cash
inflow of $9.9 million. In 1996, maturing securities generated cash of $3.1
million.
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.
15
<PAGE> 16
CAPITAL RESOURCES AND ADEQUACY
Shareholders' equity increased $382,000, or 2.9%, in the first six
months of 1996 to $13,478,000 at June 30, 1996 from $13,096,000 at December 31,
1995. Earnings of $613,000 were partially offset by a decrease of $232,000 in
the net unrealized gain on securities available for sale.
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
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
June 30, 1996, 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 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 June 30, 1996, Suburban Maryland
reported at Tier 1 risk-based capital ratio of 12.97% and a ratio of 14.23%
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 of this ratio is 3%, with most
bank's required to maintain a ratio of at least 4% to 5%, depending upon risk
profiles and other factors. At June 30, 1996, the leverage capital ratio for
Suburban Maryland was 9.06%.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of the shareholders (the "Meeting")
was held on May 9, 1996. The following matters were submitted
to a vote of shareholders either by proxy or in person:
1. Three directors were elected to the class of
directors whose terms expired at the Meeting to serve for
terms expiring at the 1999 annual meeting of shareholders or
until their successors are elected and qualify (the "1999
Class").
Barbara M. DiNenna, Marlin K. Husted and Raymond G.
LaPlaca were elected to the 1999 Class. Mrs. DiNenna was
elected with 8,725,573 votes for and 25,132 votes withheld;
Mr. Husted, with 8,579,323 votes for and 171,382 votes
withheld; and Mr. LaPlaca, with 8,720,573 votes for and 30,132
votes withheld.
Other directors whose terms continued after the
Meeting were Winfield M. Kelly, Jr. and Kenneth H. Michael,
members of the class whose term expires at the end of the 1998
annual meeting of shareholders and Glen H. Ballowe, Elizabeth
J. Buck and Vincent D. Palumbo, members of the class whose
term expires at the 1997 annual meeting of shareholders or
until their successors are elected and qualify.
2. The shareholders ratified the selection of Stegman &
Company as the Company's independent public accountants for
1996 with 8,667,915 votes for, 39,520 votes against and 43,270
abstentions.
3. The shareholders approved an amendment to the
Incentive Stock Option Plan to extend the term of the Plan to
January 1, 2007 with 8,312,724 votes for, 326,986 votes
against and 110,995 abstentions.
16
<PAGE> 17
PART II. OTHER INFORMATION (continued)
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this
report.
<TABLE>
<CAPTION>
Exhibit # Description
--------- -----------
<S> <C>
11.0 Computation of per share earnings
27.0 Financial Data Schedule
</TABLE>
(b) No reports on Form 8K were filed in the quarter ended
June 30, 1996.
17
<PAGE> 18
PART II. OTHER INFORMATION (continued)
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUBURBAN BANCSHARES, INC.
(Registrant)
Date: August 9, 1996 William R. Johnson
---------------------------- ----------------------------------
William R. Johnson
President and Chief Operating
Officer
Date: August 9, 1996 Sibyl S. Malatras
---------------------------- ----------------------------------
Sibyl S. Malatras
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
17
<PAGE> 1
Exhibit 11.0
Computation of per share earnings
<PAGE> 2
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
JUNE 30, 1996
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
2nd Quarter 1996 1996 Year-to-Date
<S> <C> <C>
COMMON AND EQUIVALENT SHARES (PRIMARY)
- --------------------------------------
EARNINGS $ 325,524 $ 613,150
SHARES & EQUIVALENT SHARES
Common Shares 10,951,218 10,951,218
Exercisable Options 350,000 350,000
------------- ------------
TOTAL 11,301,218 11,301,218
EPS $ 0.028804 $ 0.054255
FULLY DILUTED
- -------------
EARNINGS $ 325,524 $ 613,150
SHARES & EQUIVALENT SHARES
Common Shares 10,951,218 10,951,218
Exercisable Options 350,000 350,000
----------- -----------
TOTAL 11,301,218 11,301,218
EPS $ 0.028804 $ 0.054255
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<CASH> 11,146
<INT-BEARING-DEPOSITS> 1,199
<FED-FUNDS-SOLD> 11,615
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 16,246
<LOANS> 73,656
<ALLOWANCE> 1,498
<TOTAL-ASSETS> 116,843
<DEPOSITS> 102,964
<SHORT-TERM> 0
<LIABILITIES-OTHER> 401
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 13,369
<TOTAL-LIABILITIES-AND-EQUITY> 116,843
<INTEREST-LOAN> 3,443
<INTEREST-INVEST> 564
<INTEREST-OTHER> 292
<INTEREST-TOTAL> 4,299
<INTEREST-DEPOSIT> 1,598
<INTEREST-EXPENSE> 1,598
<INTEREST-INCOME-NET> 2,701
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,366
<INCOME-PRETAX> 613
<INCOME-PRE-EXTRAORDINARY> 613
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 613
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
<YIELD-ACTUAL> 5.48
<LOANS-NON> 1,924
<LOANS-PAST> 608
<LOANS-TROUBLED> 1,141
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,467
<CHARGE-OFFS> 72
<RECOVERIES> 103
<ALLOWANCE-CLOSE> 1,498
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
