<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996
--------------------------------------------------------------
Commission File Number 0-16595
----------------------------------------------------------
SUBURBAN BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in charter)
<TABLE>
<S> <C>
Delaware 54-1319441
- ---------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
<TABLE>
<S> <C>
7505 Greenway Center Drive, Greenbelt, Maryland 20770
- ---------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(301) 474-6694
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Common Stock $.01 Par Value Outstanding at November 1, 1996 (Class)
- --------------------------- ---------------------------------------
(Class)
10,951,218 Shares
-----------------
1
<PAGE> 2
SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
September 30, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
<S> <C> <C>
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 (AUDITED) 3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
</TABLE>
2
<PAGE> 3
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
In thousands (unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,085 $ 9,931
Interest-bearing deposits with banks 1,062 2,220
Federal funds sold 22,344 16,490
Investment securities 15,915 18,067
Loans held for sale 5,516 3,292
Loans 73,411 63,022
Less: Allowance for loan losses (1,585) (1,467)
Loans, net 71,826 61,555
Premises and equipment, net 1,186 1,191
Foreclosed real estate 1,012 1,152
Accrued interest receivable 696 607
Other assets 427 926
TOTAL ASSETS $129,069 $115,431
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 25,179 $ 17,800
Interest-bearing deposits 89,470 84,089
Total deposits 114,649 101,889
Accrued expenses and other liabilities 543 446
Total liabilities 115,192 102,335
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 September 30, 1996 & December 31, 1995 109 109
Paid-in capital - stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (12,035) (13,043)
Net unrealized gain on securities available for sale 10 237
Total shareholders' equity 13,877 13,096
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $129,069 $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>
Nine months ended September 30,
In thousands, except per share data 1996 1995
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $5,375 $4,870
Taxable interest on securities 806 949
Interest on Federal funds sold 410 404
Interest on deposits with banks 49 9
Total interest income 6,640 6,232
INTEREST EXPENSE
Interest on deposits 2,448 2,245
Interest on short-term borrowings 0 13
Total interest expense 2,448 2,258
NET INTEREST INCOME 4,192 3,974
Provision for loan losses 0 57
Net interest income after provision for loan losses 4,192 3,917
NONINTEREST INCOME
Service charges on deposit accounts 301 331
Gain on sale of assets and transfer of liabilities 0 1,000
Other income 102 151
Total noninterest income 403 1,482
NONINTEREST EXPENSE
Salaries and employee benefits 1,930 2,122
Occupancy expense 358 438
Furniture and equipment expense 110 101
Other expense 1,189 1,571
Total noninterest expense 3,587 4,232
Income before income taxes 1,008 1,167
Income taxes -- 4
NET INCOME $1,008 $1,163
Income Per Common Share
Primary $0.09 $0.12
Fully Diluted 0.09 0.12
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
In thousands, except per share data 1996 1995
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,932 $1,591
Taxable interest on securities 242 284
Interest on Federal funds sold 154 174
Interest on deposits with banks 13 5
Total interest income 2,341 2,054
INTEREST EXPENSE
Interest on deposits 850 781
Interest on short-term borrowings 0 1
Total interest expense 850 782
NET INTEREST INCOME 1,491 1,272
Provision for loan losses 0 22
Net interest income after provision for loan losses 1,491 1,250
NONINTEREST INCOME
Service charges on deposit accounts 93 108
Other income 33 54
Total noninterest income 126 162
NONINTEREST EXPENSE
Salaries and employee benefits 656 574
Occupancy expense 123 92
Furniture and equipment expense 43 24
Other expense 400 494
Total noninterest expense 1,222 1,184
Income before income taxes 395 228
Income tax -- 4
NET INCOME $395 $224
Income Per Common Share
Primary $0.03 $0.02
Fully Diluted 0.03 0.02
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited) Nine Months Ended September 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,008 $ 1,163
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation 93 115
Provision for loan losses 0 57
Provision for losses on foreclosed real estate 0 95
Stock option compensation expense 0 362
Originations of loans held for sale (2,224) (1,874)
Net accretion on securities (41) (84)
Increase (decrease) in deferred loan fees 28 (31)
Decrease in accrued income and other assets 410 47
Increase (decrease) in accrued expenses and other liabilities 99 (113)
Income tax refunds received 0 185
Loss (gain) on sale of foreclosed real estate 12 (85)
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 (615) (1,059)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in deposits with other banks 1,158 (120)
Net increase in Federal funds sold (5,854) (3,685)
Purchases of available for sale securities (3,179) (6,576)
Proceeds from sales of available for sale securities 0 709
Proceeds from maturities of available for sale securities 5,000 10,450
Proceeds from prepayments of principal on securities 146 52
Net increase in loans (10,300) (8,449)
Net purchases of premises and equipment (88) (73)
Proceeds from sale of foreclosed real estate 126 1,720
Cash transferred on sale of assets & transfer of liabilities 0 (1,346)
Consideration paid on sale of assets & transfer of liabilities 0 (754)
Net cash used in investing activities (12,991) (8,072)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 12,760 9,411
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 12,760 9,871
Net (decrease) increase in cash and due from banks (846) 740
Cash and due from banks at beginning of period 9,931 7,005
Cash and due from banks at end of period 9,085 7,745
Interest paid 2,465 2,247
Income taxes paid 0 4
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
SUBURBAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited consolidated financial statements, which
include the accounts of Suburban Bancshares, Inc. ("Bancshares" or "the
Company") and its wholly-owned subsidiary, Suburban Bank of Maryland ("Suburban
Maryland"), have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the disclosures required by generally accepted
accounting principles. A former subsidiary, Suburban Bank of Virginia, N.A., a
National Bank in Liquidation ("Suburban Virginia"), was merged into Suburban
Maryland on August 18, 1995. All adjustments which, in the opinion of
management, are necessary to a fair presentation of the results for the interim
periods presented have been made; all of these adjustments are of a normal and
recurring nature. The results of operations for the nine months ended
September 30, 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 September 30, 1996
(in thousands):
<TABLE>
<CAPTION> Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 7,922 $ 35 $ (12) $ 7,945
Federal agencies 6,793 28 (34) 6,787
Mortgage-backed obligations of federal agencies 168 1 (3) 166
Collateralized mortgage obligations 35 --- --- 35
Other 987 3 (8) 982
Total investment securities $15,905 $ 67 $ (57) $15,915
</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>
Gross Gross Estimated
Amortized Unrealized Unrealized 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>
The amortized cost and estimated fair value for securities at
September 30, 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.
7
<PAGE> 8
<TABLE>
<CAPTION>
In thousands Amortized Cost Estimated Fair Value
<S> <C> <C>
Due in one year or less $ 7,013 $ 7,031
Due after one year through 5 years 8,689 8,683
Due after 5 years through 10 years --- ---
Due after 10 years 35 35
Mortgage-backed securities 168 166
Total $15,905 $15,915
</TABLE>
There were no sales of securities in the nine months ended September
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 $10,000 at September 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 $2,228,000 and $1,592,000 at September 30, 1996 and
December 31, 1995, respectively, for which the related allowance for loan
losses was $284,000 and $313,000, respectively. The average recorded
investment in impaired loans during the nine months ended September 30, 1996
was $1,757,470, and during the year ended December 31, 1995, the average was
approximately $2,561,000. For the first nine 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 $1,129,000 at September 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 September
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>
Nine Months Ended
in thousands September 30, 1996
------------------
<S> <C>
Balance at beginning of period $ 1,467
Provision for loan losses 0
Loans charged off ( 72)
Recoveries 190
------------------
Balance at end of period $ 1,585
==================
</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.
8
<PAGE> 9
The following schedule presents a breakdown, by type of property, of
foreclosed real estate (in thousands):
<TABLE>
<CAPTION>
September 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 0 147
------------------ -----------------
Total 1,366 1,514
Allowance for losses (354) (362)
------------------ -----------------
TOTAL FAIR VALUE $1,012 $1,152
================== =================
</TABLE>
Activity in the allowance for losses on foreclosed real estate for
the nine months ended September 30, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
Beginning balance $362
Provision for losses 0
Dispositions, net (8)
Charge-offs, net of recoveries 0
-----
Ending balance $354
</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 September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Tier 1/Average Assets 9.03% 8.72%
Tier 1/Risk-weighted Assets 12.44% 13.07%
Total Capital/Risk-Weighted Assets 13.70% 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 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.
9
<PAGE> 10
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 September 30, 1996, the Company had outstanding letters of credit
and commitments to extend credit of $594,000 and $9,069,000, 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>
September 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 $ 9,085 $ 9,085 $ 9,931 $ 9,931
Interest-bearing deposits with banks 1,062 1,062 2,220 2,220
Federal funds sold 22,344 22,344 16,490 16,490
Investment securities available for 15,915 15,915 18,067 18,067
sale
Net loans 77,342 78,627 64,847 66,388
(including loans held for sale) 696 696 607 607
Interest receivable
Liabilities:
Noninterest-bearing deposits 25,179 25,179 17,800 17,800
Interest-bearing deposits 89,470 90,181 84,089 85,065
Interest payable 54 543 70 70
</TABLE>
NOTE G - SIGNIFICANT EVENT
William R. Johnson, President and Chief Operating Officer of Suburban
Bancshares, Inc. and President and Chief Executive Officer and Director of
Suburban Bank of Maryland, has announced that he will step down from those
positions at the beginning of 1997. He will serve in his current capacities
until that time, after which he will serve as an advisor to the Chairman and
the Boards of Directors.
A search for Mr. Johnson's replacement is underway.
10
<PAGE> 11
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
nine months ended September 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 $1,008,000 for the nine
months ending September 30, 1996, a decrease of $155,000, or 13.3%, from the
$1,163,000 reported for the first nine 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 nine months of the year are 53.4% above core earnings in 1995.
Total assets reached $129.1 million at September 30, 1996, a $23.2
million, or 21.9%, increase from $105.9 million at September 30, 1995 and $13.6
million or 11.8% above total assets of $115.4 million at December 31, 1995.
Loans continued to climb, reaching $78.9 million at September 30, 1996, $12.6
million, or 19.0% above total loans of $66.3 million at year-end.
Average assets were $109.9 million for the first nine months of 1996,
$7.2 million or 7.0% above average assets of $102.7 million for the same period
of 1995. This increase was achieved in spite of the sale of substantially all
of the assets and deposits of the Virginia subsidiary during the same period in
1995. The Company has replaced those assets and deposits of approximately
$12.5 million and has exceeded year ago average assets by $7.2 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 rose $218,000, or 5.5%, from $3,974,000 for the
first nine months of 1995 to $4,192,000 in 1996, the net result of higher loan
volume offset in part by lower yields on loans and a higher cost of funds.
Most of this increase in net interest income occurred in the third quarter of
1996.
The net interest margin represents the Company's net yield on its
earning assets and is calculated as net interest income divided by average
earning assets. In the first nine months of 1996, the net interest margin was
5.55%, falling 7 basis points from 5.62% in the same period of 1995, the result
of a relatively stable yield on total 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 nine months
of 1996 as compared to 1995. Average earning assets rose $6.4 million, or
6.8%, from $94.5 million in 1995 to $100.9 million in 1996, and average
interest bearing funds rose $4.1 million, or 5.6%, from $73.4 million to $77.5
million for the same periods. As a percentage of average assets, earning
assets remained stable at 92% for both periods; however, average interest
bearing funding sources rose from 79.4% of total funding sources in the first
nine months of 1995 to 80.8% 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 nine months of
both 1996 and 1995. Although the change in the volume of total average earning
assets and interest-bearing funding sources in 1996 was only 6.8% and 5.6%
respectively, the mix of those assets and liabilities changed significantly.
Average loans rose to 71.5% of average earning assets for the first nine months
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
earning assets in 1995 to 28.5% in 1996. Changes in the mix of
interest-bearing funds were also notable as the primary growth in funding
sources was in money market deposit accounts while lower-cost savings and
interest checking declined. Time deposits and borrowed funds were unchanged
from the first nine months of 1995 to the same period of 1996; however,
interest expenses increased as the rate paid for these deposits increased 30
basis points. The cost of savings and interest checking accounts
decreased slightly in 1996 from the first nine months of 1995; as average
balances fell $4.9 million from $22.1 million in 1995 to $17.2 million in 1996,
rates paid on these accounts rose from 2.62% in 1995 to 2.87% in 1996
offsetting the volume decrease. As other account balances declined or remained
stable, money
11
<PAGE> 12
market deposit account balances grew substantially, reaching an average of
$36.6 million for the nine months ending September 30, 1996, an $9.0 million,
or 32.4%, increase from $27.6 million in 1995. Money market accounts were
47.2% of average interest bearing funds in 1996, a significant increase over
1995 at 37.6%. The overall shift in the mix of interest bearing funds was
accompanied by a rate increase of 11 basis points, both of which contributed to
a higher interest expense.
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 19 basis points, from 10.14% for the first nine months of
1995 to 9.95% in 1996, even though national prime rates, on which most loans
are priced, were 59 basis points lower in the first nine months of 1996 than in
the same period of 1995. Investment yields rose 16 basis points from 6.06% for
the first nine months of 1995 to 6.22% in 1996 as lower yielding securities
matured and the average yield on Federal funds dropped 54 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 5.38% in the first half of 1996 from 5.55% in the same
period of 1995.
Net interest income rose $219,000, or 17.2%, from $1,272,000 in the
quarter ending September 30, 1995 to $1,491,000 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.
12
<PAGE> 13
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(In thousands)
<TABLE>
<CAPTION>
Nine Months ended September 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 $72,157 $5,375 9.95% $64,187 $4,870 10.14%
Investment securities 17,319 806 6.22% 20,952 949 6.06%
Fed funds sold & other deposits 11,487 459 5.34% 9,390 413 5.88%
Total interest-earning assets 100,963 6,640 8.78% 94,529 6,232 8.81%
Noninterest-earning assets:
Cash and due from banks 7,052 6,133
Bank property and equipment 1,188 1,041
Other assets 2,178 3,395
Less: Allowance for loan losses (1,503) (2,372)
Total noninterest-earning assets 8,915 8,197
TOTAL ASSETS $109,878 $102,726
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking, money market & savings $53,789 $1,434 3.56% $49,774 $1,301 3.49%
Time deposits 23,760 1,014 5.70% 23,336 944 5.41%
Other borrowings --- --- --- 348 13 4.99%
Total interest-bearing liabilities 77,549 2,448 4.22% 73,458 2,258 4.11%
Noninterest-bearing liabilities:
Noninterest-bearing deposits 18,452 19,055
Total funding sources 96,001 2,448 3.41% 92,513 2,258 3.26%
Other liabilities 460 545
TOTAL LIABILITIES 96,461 93,058
Shareholders' equity 13,417 9,668
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $109,878 $102,726
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $4,192 $3,974
Net interest spread 5.38% 5.55%
Net interest margin 5.55% 5.62%
</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 nine months of 1995, the provision for loan losses was
$57,000, and in the third quarter of 1995, there was a provision of $22,000.
In the same periods of 1996, there was no provision set aside, as loan quality
continued to improve and recoveries of $190,000 offset loans charged off of
$72,000.
NONINTEREST INCOME
Noninterest income was $403,000 in the first three quarters of 1996
and $1,482,000 in the same period of 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. Also, as foreclosed real
estate declined during 1995 and 1996, 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.
In the third quarter, noninterest income fell $36,000, or 22.2%, from
$162,000 in 1995 to $126,000 in 1996, as both service charges on deposit
accounts and rental income from foreclosed properties declined.
NONINTEREST EXPENSES
Noninterest expenses decreased $645,000, or 15.2%, in the first nine
months of 1996 as compared to the same period of 1995, from $4,232,000 to
$3,587,000, 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 $192,000, the result of a $327,000 charge to
compensation expense in the second quarter of 1995 as stock options became
exercisable, which was partially offset by merit increases in 1996. During
1995, sales of foreclosed properties resulted in a gain of $85,000; in 1996,
however, a loss of $12,000 was realized.
In the quarter ending September 30, 1996, noninterest expenses rose
from $1,184,000 in 1995 to $1,222,000 in 1996, an increase of $38,000 or 3.2%.
Employee costs were $82,000 higher in 1996 than in 1995 while other expenses
were lower by $108,000.
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 $2,228,000 and $1,592,000 at September 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 $1,129,000 at September 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
$1,012,000 at September 30, 1996, and $1,152,000 at 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 rates or the
fair value of the collateral for certain collateral dependent loans.
The allowance for loan losses was $1,585,000 at September 30,1996, an
increase of $118,000 from $1,467,000 at December 31, 1995. Activity in the
allowance for loan losses during the first nine months of 1996 included
recoveries of $190,000 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 nine 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 third of the growth in
average loans was in loans held for sale, which are readily marketable assets.
As a percentage of average assets, loans rose to 65.7% for the nine months
ending September 30, 1996 from 62.5% in 1995, while marketable securities and
overnight investments fell to 26.2% from 29.5%, respectively. This shift in
the mix of assets to a lower percentage of readily marketable assets has
resulted in a modest reduction in the Company's overall liquidity.
The Company's liquidity position is strengthened by a relatively
stable core deposit base. Core deposits are noninterest checking accounts,
interest checking and money market accounts, and savings accounts. The
stability of this deposit base is reflected in a relatively consistent ratio of
core deposits to total funding sources; this ratio averaged 75.3% in the first
three quarters of 1996, and 74.4% in 1995. Time deposits under $100,000, which
are also considered to be stable funding sources, were 20.8% of funding sources
in the first nine months of 1996 and 22.2% in 1995. Additional funding is
generated from short-term borrowings (securities sold under repurchase
agreements) and large certificates of deposit. 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 3.6% in the first nine months of 1995 to 3.9% in 1996.
Other sources of liquidity and cash flow in the first nine months of
1995, were from the sales of properties obtained through foreclosure which
generated cash of $1,720,000 and from securities sales and maturities which
provided cash inflow of $11.2 million. In 1996, maturing securities generated
cash of $5.0 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 $781,000, or 6.0%, in the first nine
months of 1996 to $13,877,000 at September 30, 1996 from $13,096,000 at
December 31, 1995. Earnings of $1,008,000 were partially offset by a decrease
of $227,000 in the net unrealized gain on securities available for sale.
15
<PAGE> 16
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
September 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 September 30, 1996, Suburban Maryland
reported at Tier 1 risk-based capital ratio of 12.44% and a ratio of 13.70%
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 September 30, 1996, the leverage capital ratio
for Suburban Maryland was 9.03%.
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 September 30, 1996.
16
<PAGE> 17
PART II. OTHER INFORMATION (continued)
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUBURBAN BANCSHARES, INC.
(Registrant)
Date: November 12, 1996 William R. Johnson
----------------------- ----------------------------------------
William R. Johnson
President and Chief Operating Officer
Date: November 12, 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
SEPTEMBER 30, 1996 EXHIBIT 11
<TABLE>
<CAPTION>
EARNINGS PER SHARE CALCULATION
==============================
3rd Quarter 1996 1996 Year-to-Date
<S> <C> <C>
COMMON AND EQUIVALENT SHARES (PRIMARY)
--------------------------------------
EARNINGS $ 394,554 $ 1,007,705
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 $ 0.034913 $ 0.089168
FULLY DILUTED
-------------
EARNINGS $ 394,554 $ 1,007,705
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 $ 0.034913 $ 0.089168
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,085
<INT-BEARING-DEPOSITS> 1,062
<FED-FUNDS-SOLD> 22,344
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 15,915
<LOANS> 78,927
<ALLOWANCE> 1,585
<TOTAL-ASSETS> 129,069
<DEPOSITS> 114,649
<SHORT-TERM> 0
<LIABILITIES-OTHER> 543
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 13,768
<TOTAL-LIABILITIES-AND-EQUITY> 129,069
<INTEREST-LOAN> 5,375
<INTEREST-INVEST> 806
<INTEREST-OTHER> 459
<INTEREST-TOTAL> 6,640
<INTEREST-DEPOSIT> 2,448
<INTEREST-EXPENSE> 2,448
<INTEREST-INCOME-NET> 4,192
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,575
<INCOME-PRETAX> 1,008
<INCOME-PRE-EXTRAORDINARY> 1,008
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,008
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<YIELD-ACTUAL> 5.55
<LOANS-NON> 2,228
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,129
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,467
<CHARGE-OFFS> 72
<RECOVERIES> 190
<ALLOWANCE-CLOSE> 1,585
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
