<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 March 31, 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>
7505 Greenway Center Drive, Greenbelt, Maryland 20770
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(Address of principal executive offices) (Zip Code)
(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
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<TABLE>
<CAPTION>
Common Stock $.01 Par Value Outstanding at May 3, 1996
- --------------------------- --------------------------------
<S> <C>
(Class)
10,951,218 Shares
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</TABLE>
1
<PAGE> 2
SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
March 31, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1. Condensed Financial Statements
Consolidated Balance Sheets (unaudited) 3
March 31, 1996 and December 31, 1995
Consolidated Statements of Operations (unaudited) 4
Three months ended March 31, 1996 and March 31, 1995
Consolidated Statements of Cash Flows (unaudited) 5
Three months ended March 31, 1996 and March 31, 1995
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
</TABLE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE> 3
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
In thousands 1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,659 $ 9,931
Interest-bearing deposits with banks 1,149 2,220
Federal funds sold 12,320 16,490
Investment securities available for sale 18,502 18,067
Loans held for sale 4,502 3,292
Loans 64,943 63,022
Less: Allowance for loan losses (1,476) (1,467)
Loans, net 63,467 61,555
Premises and equipment, net 1,174 1,191
Foreclosed real estate 1,152 1,152
Accrued interest receivable 710 607
Other assets 958 926
TOTAL ASSETS $115,593 $115,431
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 17,263 $ 17,800
Interest-bearing deposits 84,704 84,089
Total Deposits 101,967 101,889
Accrued expenses and other liabilities 399 446
Total liabilities 102,366 102,335
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 March 31, 1996 & December 31, 1995 109 109
Paid-in capital - stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (12,755) (13,043)
Net unrealized gain on securities available for sale 80 237
Total shareholders' equity 13,227 13,096
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $115,593 $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>
Three months ended March 31,
In thousands, except per share data 1996 1995
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,659 $1,632
Taxable interest on securities 286 344
Interest on Federal funds sold 126 120
Interest on deposits with banks 20 3
Total interest income 2,091 2,099
INTEREST EXPENSE
Interest on deposits 801 732
Interest on short-term borrowings 0 5
Total interest expense 801 737
NET INTEREST INCOME 1,290 1,362
Provision for loan losses 0 45
Net interest income after provision for loan losses 1,290 1,317
NONINTEREST INCOME
Service charges on deposit accounts 100 112
Other income 36 54
Total noninterest income 136 166
NONINTEREST EXPENSE
Salaries and employee benefits 637 597
Occupancy expense 117 164
Furniture and equipment expense 29 43
Other expense 355 511
Total noninterest expense 1,138 1,315
Income before income taxes 288 168
Income tax -- --
NET INCOME $288 $168
Income Per Common Share
Primary $0.03 $0.02
Fully Diluted 0.03 0.02
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) QUARTER ENDED MARCH 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 288 $ 168
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation 29 54
Provision for loan losses 0 45
Stock option compensation expense 0 14
Originations of loans held for sale (1,211) (1,337)
Net accretion on securities (14) (37)
Net decrease (increase) in deferred loan fees 24 (16)
Increase in accrued income and other assets (134) (133)
Decrease in accrued expenses and other liabilities (47) (8)
Loss on sale of foreclosed properties 0 4
Net cash used by operating activities (1,065) (1,246)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in deposits with other banks 1,071 130
Decrease in Federal funds sold 4,170 3,750
Purchases of available for sale securities (1,594) (1,389)
Proceeds from maturities of available for sale securities 1,000 3,500
Proceeds from prepayments of principal on securities 16 14
Net increase in loans (1,937) (1,711)
Net purchases of premises and equipment (12) (7)
Proceeds from sale of foreclosed real estate 0 766
2,714 5,053
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease (increase) in total deposits 79 (1,837)
Net increase in securities sold under agreements to repurchase 0 (69)
Net cash provided (used) by financing activities 79 (1,906)
Net increase in cash and due from banks 1,728 1,901
Cash and due from banks at beginning of period 9,931 7,005
Cash and due from banks at end of period 11,659 8,906
Interest paid 806 737
Income taxes paid 0 0
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
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 three months ended March
31, 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, management determines
the appropriate designation for securities.
The following table shows the amortized cost and estimated fair value
of investment securities classified as available for sale at March 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 9,901 $ 74 $ (8) $ 9,967
Federal agencies 7,186 52 (31) 7,207
Mortgage-backed obligations of federal agencies 293 3 (1) 295
Collateralized mortgage obligations 42 --- --- 42
Other 1,000 --- (9) 991
Total investment securities $18,422 $129 $ (49) $18,502
</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 Gross Unrealized Gross Unrealized Estimated Fair
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 securities available for sale $17,830 $247 $(10) $18,067
</TABLE>
6
<PAGE> 7
The amortized cost and estimated fair value for securities at March
31, 1996, 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 $ 6,911 $ 6,932
Due after one year through 5 years 11,176 11,233
Due after 5 years through 10 years --- ---
Due after 10 years 42 42
Mortgage-backed securities 293 295
Total $18,422 $18,502
</TABLE>
There were no sales of securities in the three months ended March 31,
1996 or 1995. 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 $80,000 at March 31, 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 $1,612,000 and $1,592,000 at March 31, 1996 and December
31, 1995, respectively, for which the related allowance for loan losses was
$185,000 and $313,000, respectively. The average recorded investment in
impaired loans during the quarter ended March 31, 1996 was $1,595,000, and
during the year ended December 31, 1995, the average was approximately
$2,561,000. For the first quarters 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 $1,158,000 at March 31, 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 March 31,
1996. Increases and decreases in the allowance include changes in the
measurement of impaired loans.
7
<PAGE> 8
Activity in the allowance for losses is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
in thousands March 31, 1996
------------------------
<S> <C>
Balance at beginning of period $ 1,467
Provision for loan losses 0
Loans charged off ( 32)
Recoveries 41
------------------------
Balance at end of period $ 1,476
========================
</TABLE>
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>
March 31, 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
three months ended March 31, 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.
8
<PAGE> 9
In accordance with the provisions of FDICIA, Suburban Maryland was
classified as well capitalized as of March 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------------- ----------------------
<S> <C> <C>
Tier 1/Average Assets 9.05% 8.72%
Tier 1/Risk-weighted Assets 12.98% 13.07%
Total Capital/Risk-Weighted Assets 14.24% 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.
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 March 31, 1996, the Company had outstanding letters of credit and
commitments to extend credit of $663,000 and $10,360,000, respectively. The
fair value of these off-balance-sheet financial instruments, based on fees that
would be charged to enter similar arrangements, is immaterial.
9
<PAGE> 10
The estimated fair values of the Company's financial instruments
required to be disclosed under SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
March 31, 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 $11,659 $11,659 $ 9,931 $ 9,931
Interest-bearing deposits with banks 1,149 1,149 2,220 2,220
Federal funds sold 12,320 12,320 16,490 16,490
Investment securities available for sale 18,502 18,502 18,067 18,067
Net loans (including loans held for sale) 67,969 69,405 64,847 66,388
Interest receivable 710 710 607 607
Liabilities:
Noninterest-bearing deposits 17,263 17,263 17,800 17,800
Interest-bearing deposits 84,704 85,345 84,089 85,065
Interest payable 64 64 70 70
</TABLE>
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
three months ended March 31, 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 $288,000 for the three
months ending March 31, 1996, an increase of $120,000, or 71.4%, over the
$168,000 reported for the first quarter of 1995. Improvement in earnings is
attributed to a strong demand for loans, high yields and reduced operating
expenses.
Total assets reached $115.6 million at March 31, 1996, a $2.8 million,
or 2.5%, increase from $112.8 million at March 31, 1995. After adjusting for
the asset sale of our Virginia subsidiary in the second quarter of 1995, real
growth for the twelve-month period was approximately 27%. Although asset and
deposit growth has leveled off in the first quarter of 1996 as compared to the
December 31, 1995 totals, loans continued to climb, reaching $69.4 million at
March 31, 1996, $3.1 million, or 4.7% above total loans of $66.3 million at
year-end.
Average assets were $106.2 million for the first three months of 1996,
$1.1 million or 1.1% below average assets of $107.3 million for the same period
of 1995. This small decline reflects that the assets and deposits of the
Virginia subsidiary that were sold during 1995 have been replaced with new
loans and new deposits.
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-
10
<PAGE> 11
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 $72,000, or 5.3%, from $1,362,000 for the
first quarter of 1995 to $1,290,000 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 three months of 1996, the net interest margin was
5.33%, falling 28 basis points from 5.61% 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 declined only slightly in the
first quarter of 1996 as compared to 1995. Average earning assets fell $1.1
million, or 1.1%, from $98.5 million in 1995 to $97.4 million in 1996, and
average interest bearing funds declined $992,000, or 1.3%, from $76.6 million
to $75.6 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 78.3% of total funding sources in
the first quarter of 1995 to 81.7% 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 three months of
both 1996 and 1995. Although there was only a slight 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 69.6% of average earning assets for the first quarter of 1996 from 67.9% in
1995, while investment securities and other short-term investments, which
characteristically earn lower yields, declined from 32.1% of earnings assets in
1995 to 30.4% 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 $2.3 million on average from the first quarter of 1995
to the same period of 1996. Offsetting the decrease in interest expense
resulting from this volume decline, a rate increase of 71 basis points caused a
net increase in interest expense. The cost of savings and interest checking
accounts decreased significantly in 1996 from the first three months of 1995,
as average balances fell $8.1 million from $23.7 million in 1995 to $15.6
million in 1996 and rates paid on these accounts declined somewhat, from 2.63%
in 1995 to 2.45% in 1996. These time deposits and savings and interest
checking deposits shifted into money market deposit accounts which increased
$9.9 million from an average of $26.5 million in the first quarter of 1995, or
34.5% of average interest-bearing funds, to $36.4 million, or 48.1%, in 1996.
This large shift of balances was accompanied by a rate increase of 22 basis
points, both of which increased the cost of funds significantly.
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 6 basis points, from 9.90% for the first quarter of 1995
to 9.84% in 1996, even though national prime rates, on which most loans are
priced, fell 75 basis points from March 31, 1995 to March 31, 1996, and average
price was 48 basis points lower in the first quarter of 1996 than in the first
quarter of 1995. Investment yields rose 11 basis points from 6.04% for the
first three months of 1995 to 6.15% in 1996 as lower yielding securities
matured and were replaced at higher yields, and the average yield on Federal
funds dropped 47 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 5.15% in the
first quarter of 1996 from 5.59% in the same period of 1995.
11
<PAGE> 12
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(In thousands)
<TABLE>
<CAPTION>
Three Months ended March 31, 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 $67,818 $1,659 9.84% $66,870 $1,632 9.90%
Investment securities 18,694 286 6.15% 23,084 344 6.04%
Fed funds sold & other deposits 10,912 146 5.38% 8,524 123 5.85%
Total interest-earning assets 97,424 2,091 8.63% 98,478 2,099 8.64%
Noninterest-earning assets:
Cash and due from banks 6,884 5,945
Bank property and equipment 1,187 1,138
Other assets 2,152 4,356
Less: Allowance for loan losses (1,493) (2,619)
Total noninterest-earning assets 8,730 8,820
TOTAL ASSETS $106,154 $107,298
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking, money market & savings $51,957 $459 3.55% $50,215 $405 3.27%
Time deposits 23,679 342 5.81% 25,995 327 5.10%
Other borrowings --- --- --- 418 5 4.77%
Total interest-bearing liabilities 75,636 801 4.26% 76,628 737 3.90%
Noninterest-bearing deposits 16,917 21,186
Total funding sources 92,553 801 3.48% 97,814 737 3.05%
Other liabilities 383 655
TOTAL LIABILITIES 92,936 98,469
Shareholders' equity 13,218 8,829
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $106,154 $107,298
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $1,290 $1,362
Net interest spread 5.15% 5.59%
Net interest margin 5.33% 5.61%
</TABLE>
12
<PAGE> 13
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 three months of 1995, the provision for loan losses was
$45,000. In the same period of 1996, there was no provision set aside, as loan
quality continued to improve and recoveries of $41,000 offset loans charged off
of $32,000.
NONINTEREST INCOME
Noninterest income declined $30,000, or 18.1%, in the first quarter of
1996 to $136,000 from $166,000 in the same period of 1995. As foreclosed real
estate has declined, rental income on those properties has been reduced.
Deposit account service charges have declined as a result of the disposition of
the accounts transferred from our former Virginia subsidiary.
NONINTEREST EXPENSES
Noninterest expenses decreased $177,000, or 13.5%, in the first three
months of 1996 as compared to the same period of 1995, from $1,315,000 to
$1,138,000, primarily the result of the closed offices of our former subsidiary
in Virginia. Salaries and benefits have increased slightly over last year's
first quarter, the result of merit increases and staffing for a new branch
offsetting the decrease resulting from the sale of the Virginia subsidiary.
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 $1,612,000 and $1,592,000 as March 31,1996 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 $1,158,000 at March 31, 1996 and $1,173,000 at December 31,
1995.
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 March 31, 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
13
<PAGE> 14
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 $1,476,000 at March 31,1996, a
slight increase from $1,467,000 at December 31, 1995. Activity in the
allowance for loan losses during the first quarter of 1996 included recoveries
of $41,000 and charge-offs of $32,000.
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 quarter of 1996, the Company's liquidity position changed
somewhat as loan volume increased and marketable securities declined; however,
the impact has not been significant since almost half 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 64.0% at March 31, 1996 from 61.1% at December 31, 1995, while marketable
securities, overnight investments and loans held for sale fell to 36.0% 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 74.4% in the first quarter of 1996 and 73.0% in 1995. Time
deposits under $100,000, which are also considered to be stable funding
sources, were 21.3% of funding sources in the first three months of 1996 and
23.2% 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 3.8% in the first quarter of 1995 to 4.3% in 1996.
Other sources of liquidity and cash flow in the first three months of
1995, were from the sales of properties obtained through foreclosure which
generated cash of $766,000 and from maturing securities which provided cash
inflow of $4.5 million. In 1996, maturing securities generated cash of $1.0
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.
CAPITAL RESOURCES AND ADEQUACY
Shareholders' equity increased $131,000, or 1.0%, in the first three
months of 1996 to $13,227,000 at March 31, 1996 from $13,096,000 at December
31, 1995. Earnings of $288,000 were partially offset by a decrease of $157,000
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
March 31, 1996, Suburban Maryland was
14
<PAGE> 15
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 March 31, 1996, Suburban Maryland
reported at Tier 1 risk-based capital ratio of 12.98% and a ratio of 14.24%
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 March 31, 1996, the leverage capital ratio for
Suburban Maryland was 9.05%.
PART II. OTHER INFORMATION
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
March 31, 1996.
15
<PAGE> 16
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: May 10, 1996 William R. Johnson
-------------------------- -------------------------------------
William R. Johnson
President and Chief Operating Officer
Date: May 10 , 1996 Sibyl S. Malatras
--------------------------- -------------------------------------
Sibyl S. Malatras
Senior Vice President and Treasurer
(Principal Financial Officer)
16
<PAGE> 1
Exhibit 11.0
Computation of per share earnings
<PAGE> 2
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
MARCH 31, 1996
<TABLE>
<CAPTION>
EARNINGS PER SHARE CALCULATION
==============================
1st Quarter 1996 1996 Year-to-Date
<S> <C> <C>
COMMON AND EQUIVALENT SHARES (PRIMARY)
--------------------------------------
EARNINGS $ 287,626 $ 287,626
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 $ 0.025451 $ 0.025451
FULLY DILUTED
-------------
EARNINGS $ 287,626 $ 287,626
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 $ 0.025451 $ 0.025451
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 11,659
<INT-BEARING-DEPOSITS> 1,149
<FED-FUNDS-SOLD> 12,320
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 18,502
<LOANS> 69,445
<ALLOWANCE> 1,476
<TOTAL-ASSETS> 115,593
<DEPOSITS> 101,967
<SHORT-TERM> 0
<LIABILITIES-OTHER> 399
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 13,118
<TOTAL-LIABILITIES-AND-EQUITY> 115,593
<INTEREST-LOAN> 1,659
<INTEREST-INVEST> 286
<INTEREST-OTHER> 146
<INTEREST-TOTAL> 2,091
<INTEREST-DEPOSIT> 801
<INTEREST-EXPENSE> 801
<INTEREST-INCOME-NET> 1,290
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,138
<INCOME-PRETAX> 288
<INCOME-PRE-EXTRAORDINARY> 288
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 288
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<YIELD-ACTUAL> 5.33
<LOANS-NON> 1,612
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,158
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,467
<CHARGE-OFFS> 32
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 1,476
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
