<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
-----------------------------------------------------
Commission File Number 0-16595
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SUBURBAN BANCSHARES, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant's as specified in its charter)
<TABLE>
<S> <C>
Delaware 54-1319411
- -------------------------------------------------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
7505 Greenway Center Drive Greenbelt, Maryland 20770
- -------------------------------------------------------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
</TABLE>
(301) 474-6694
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(Registrant's telephone number, including area code)
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(Former address if changed since last report)
Common Stock, Par Value $0.01 per share
- -------------------------------------------------------------------------------
(Title of Class)
Name of each Exchange on which registered: N/A
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
The aggregate market value of the Company's voting stock held by non-affiliates
on March 3, 1997, based on the average of the closing bid and asked prices of
such stock on that date: Approximately $22,189,480
--------------------------
Common Stock $0.01 Par Value Outstanding at March 3, 1997
- ------------------------------ ----------------------------
(class) 10,951,218
<PAGE> 2
Documents Incorporated by Reference
Portions of the Corporation's 1996 Annual Report to Shareholders are
incorporated by reference in Part II to the extent provided in Items 5, 6, 7
and 8 hereof.
Portions of the Corporation's definitive proxy statement relating to the 1997
annual meeting of shareholders are incorporated by reference in Part III to the
extent provided in Items 10, 11, 12 and 13 hereof.
PART I
ITEM 1. Business
GENERAL
SUBURBAN BANCSHARES, INC. (the "Company" or "Bancshares"), which is
headquartered in Greenbelt, Maryland, was formed under the general corporation
laws of the State of Delaware in 1985 and is registered as a bank holding
company. The Company formed two national banking associations in Northern
Virginia: Bank 2000, N.A. and BankStar, N.A., which were merged into a single
bank in March 1991 under the name of Suburban Bank of Virginia, N.A. ("Suburban
Virginia"). In April 1990, the Company acquired Jefferson Bank and Trust
Company, a state-chartered bank with four offices that had been serving the
Maryland suburbs of Washington, D.C. for more than ten years. In March 1991,
Jefferson's name was changed to Suburban Bank of Maryland ("Suburban
Maryland").
On February 19, 1993, the Company entered into an Agreement and Plan
of Reorganization and Recapitalization (the "Plan") with Winfield M. Kelly,
Jr., which provided for a restructure of the Company's Board of Directors and
management, a centralization of operational functions, and the commencement of
a public offering to raise between $4 and $7 million in new capital. In
connection with the implementation of the Plan, Mr. Kelly was elected Chairman
of the Board of Directors of the Company and each of the Banks, and the
Company's Board of Directors was restructured. All operational and management
functions of the Banks were centralized, enhancing efficiency throughout the
organization.
On July 14, 1993, the Company commenced a public offering of up to 7
million shares of common stock. The offering was successfully concluded on
September 27, 1993, with the sale of 5,756,294 shares with total proceeds to
the Company totaling $5,613,237. Transferable warrants to purchase an
additional 2,014,705 shares of common stock accompanied the new shares. These
warrants were exercisable at $1 per share during two windows in 1994 and two
windows in 1995, in which an aggregate of 1,949,849 shares, or 97% of the
shares underlying the outstanding warrants, were issued.
On May 12, 1995, the Company completed the disposition of most of the
assets and all of the deposit liabilities of Suburban Virginia to Tysons
Financial Corporation and its subsidiary, Tysons National Bank ("Tysons") in
McLean, Virginia. Assets transferred to Tysons included all cash and cash
equivalents, investments, loans (excluding non-performing and other loans
totaling $3.1 million) and interest receivable associated with those loans, and
fixed assets in one of Suburban Virginia's two branches. Liabilities assumed
by Tysons included all deposit accounts, securities sold under agreements to
repurchase and interest payable associated with those liabilities. At closing,
the Company paid Tysons $754,000 in cash, representing (1) the amount by which
the liabilities transferred exceeded the assets transferred, less (2) the $1
million premium Tysons had agreed to pay the Company for the assets acquired.
On August 18, 1995, the remaining assets and liabilities of Suburban
Virginia were merged into Suburban Maryland (the "Bank") in a transaction
accounted for as a pooling of interests. Assets of Suburban Virginia on that
date were $2,823,000 and capital was $2,756,000.
In October 1996, William R. Johnson, President and Chief Operating
Officer of the Company and President and Chief Executive Officer and Director
of the Bank, announced that he would step down from those positions at the
beginning of 1997, after which he would serve as an advisor to the Chairman and
the Board of Directors. On January 2, 1997, Stephen A. Horvath was named
President and Chief Operating Officer of Suburban Bancshares, Inc. and
President and Chief Executive Officer of Suburban Bank of Maryland. Mr.
Horvath will also serve as a Director on the Boards of Directors of the Company
and the Bank.
Currently the Company has a total of six offices located in the
Maryland suburbs of Washington, D.C. in the communities of Greenbelt, Capitol
Heights, Clinton, Oxon Hill, Rockville and Bethesda. The counties of Prince
George's and Montgomery are the Company's primary markets, but also served are
the surrounding counties in Maryland and the District of Columbia.
2
<PAGE> 3
ITEM 1. Business (continued)
The Bank provides a variety of general commercial and retail banking
services, which include lending, depository, and related financial services to
business and professional customers, as well as retail customers, on a
personalized basis. The primary focus of the Bank is toward the small
businesses and professionals and their employees in their market service areas,
providing such services as SBA (Small Business Administration) loans,
commercial loans, asset-based and government contract loans, commercial and
residential real estate loans, and consumer-type loans such as home equity,
vehicle, home improvement and personal loans. The Bank also offers ATM access,
credit cards and other financial services.
The Company is not dependent upon a single customer, or a few
customers, the loss of one or more of which would have a material adverse
effect on its operations. The operations and earnings of the Company are not
materially affected by seasonal changes or by Federal, state or a local
environmental laws or regulations.
COMPETITION
The Bank operates in a highly competitive environment in which it must
share its market with large regional banks as well as institutions not subject
to the regulatory restrictions of banks and bank holding companies, such as
money market and other mutual funds. The Bank encounters competition from
diversified financial institutions, ranging in size from small banks to the
mega-banks operating in this region, and include commercial banks, savings and
loan associations, credit unions and other lending institutions.
The principal competitive factors among the Company's competitors can
be classified into two categories: pricing and services. Interest rates on
deposits, especially time deposits, and interest rates and fees charged to
customers on loans are very competitive. From a service perspective, financial
institutions compete against each other in convenience of location, types of
services, service costs and banking hours. The Company is generally
competitive with institutions in its primary service areas with respect to
interest rates paid on deposit accounts, charges for services provided, and
interest rates and fees charged on loans.
EMPLOYEES
As of March 3, 1997, the Company employed 62.5 full-time equivalent
employees. The employees of the Company are not represented by any collective
bargaining group. Management of the Company considers relations with its
employees to be satisfactory.
SUPERVISION AND REGULATION
OVERVIEW
The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, and, as such, is subject to regulation
and supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board" or "FRB"). The Company is required to file quarterly
reports of its operations with the FRB.
Suburban Maryland is a Maryland state-chartered non-member bank and is
subject primarily to regulation and examination by the Commissioner of
Financial Regulation for the State of Maryland (the "Commissioner") and by the
Federal Deposit Insurance Corporation (the "FDIC"), which insures Suburban
Maryland's deposits to the maximum extent permitted by law.
BANK HOLDING COMPANY REGULATIONS
As a bank holding company, the Company can engage in banking-related
activities as permitted by the Federal Reserve Board, directly or through
newly-formed subsidiaries or by acquiring companies already established in such
activities subject to the FRB regulations relating to those activities.
However, except for activities related to its operation as the holding company
of the Bank, the Company does not anticipate engaging in any other
banking-related activity in the foreseeable future.
CAPITAL ADEQUACY
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
3
<PAGE> 4
ITEM 1. Business (continued)
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or event since that notification that management believes have
changed the Bank's category.
The Bank's actual capital amounts and ratios are presented in the
table below:
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES CAPITALIZED
$ in thousands AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk-weighted assets): $12,292 15.36% $6,397 8.00% $7,996 10.00%
Tier 1 capital (to risk-weighted assets): 11,286 14.10 3,198 4.00 4,798 6.00
Tier 1 capital (to average assets): 11,286 9.47 4,766 4.00 5,958 5.00
As of December 31, 1995:
Total capital (to risk-weighted assets): $ 9,862 14.33% $5,506 8.00% $6,883 10.00%
Tier 1 capital (to risk-weighted assets): 8,994 13.07 2,753 4.00 4,130 6.00
Tier 1 capital (to average assets): 8,994 8.72 4,125 4.00 5,156 5.00
</TABLE>
4
<PAGE> 5
ITEM 1. Business (continued)
STATISTICAL INFORMATION
The following tables present statistical information relating to
Suburban Bancshares, Inc. and its subsidiaries on a consolidated basis.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The table presented below shows average balances, net interest income
and net interest margin:
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
Assets Average Interest Average Average Interest Average Average Interest Average
Balance Yield or Balance Yield or Balance Yield or
Rate Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $74,014 $7,409 10.01% $64,616 $6,525 10.10% $60,577 $5,511 9.10%
Investment securities 17,325 1,080 6.23% 20,235 1,229 6.07% 19,155 1,043 5.45%
Fed funds sold & other
deposits 13,017 687 5.28% 10,377 604 5.82% 14,932 602 4.03%
Total interest-earning
assets 104,356 9,176 8.79% 95,228 8,358 8.78% 94,664 7,156 7.56%
Noninterest-earning
assets:
Cash and due from banks 7,073 6,322 6,716
Bank property and
equipment 1,213 1,045 1,220
Other assets 2,155 3,124 5,102
Less: Allowance for loan
losses (1,525) (2,342) (2,565)
Total noninterest-earning
assets 8,916 8,149 10,473
TOTAL ASSETS $113,272 $103,377 $105,137
Liabilities and
shareholders' equity
Interest-bearing
liabilities:
Checking, money market &
savings $56,186 $2,030 3.61% $50,455 $1,816 3.60% $50,687 $1,300 2.56%
Time deposits 23,499 1,332 5.67% 23,416 1,290 5.51% 23,713 1,056 4.45%
Other borrowings -- -- -- 261 13 4.83% 605 21 3.45%
Total interest-bearing
liabilities 79,685 3,362 4.22% 74,132 3,119 4.21% 75,005 2,377 3.17%
Noninterest-bearing
liabilities:
Noninterest-bearing
deposits 19,332 18,612 20,635
Total funding sources 99,017 3,362 3.39% 92,744 3,119 3.36% 95,640 2,377 2.49%
Other liabilities 495 553 763
TOTAL LIABILITIES 99,512 93,297 96,403
Shareholders' equity 13,760 10,080 8,734
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $113,272 $103,377 $105,137
Net interest income $5,814 $5,239 $4,779
Net interest spread 5.40% 5.42% 5.07%
Net interest margin 5.57% 5.50% 5.05%
</TABLE>
Basis of preparation: Amounts are in thousands; balances are presented as
annualized daily averages; nonaccrual loans are included in the loan category
as earning assets.
5
<PAGE> 6
ITEM 1. Business (continued)
The following table presents the dollar amount of change in interest
income and expense and the corresponding amounts attributable to changes in
rate and to changes in volume:
NET INTEREST INCOME ANALYSIS
<TABLE>
<CAPTION>
1996 OVER 1995 1995 OVER 1994
------------------------------------------------------------------------------
(in thousands) INCREASE CHANGE DUE TO INCREASE CHANGE DUE TO
---------------------- ---------------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans $ 885 $ (56) $ 941 $ 1,014 $ 631 $ 383
Taxable investment securities (150) 31 (181) 186 125 61
Money market investments 83 (60) 143 2 219 (217)
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Total Interest-Earning Assets 818 (85) 903 1,202 975 227
Interest-Bearing Liabilities:
Checking, savings & money markets 214 7 207 516 522 (6)
Time deposits 42 37 5 234 247 (13)
Fed funds purchased/repurchase agreements (13) -- (13) (8) 6 (14)
------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 243 44 199 742 775 (33)
==============================================================================
NET INTEREST INCOME $ 575 $ (129) $ 704 $ 460 $ 200 $ 260
==============================================================================
</TABLE>
NOTE: The rate/volume change is allocated between volume change and rate change
using the ratio each of the components bears to the absolute value of
their total.
INTEREST RATE SENSITIVITY AND RISK MANAGEMENT
Interest rate sensitivity is an important factor in the management of
the composition and maturity configurations of the Company's earning assets and
funding sources. The Bank's Asset/Liability Management Committee manages the
interest rate sensitivity position of the Bank in order to maintain an
appropriate balance between the maturity and repricing characteristics of
assets and liabilities that are consistent with the Bank's liquidity, growth,
risk, profitability and capital adequacy goals. The Bank's policies are to
maximize net interest margins during periods of volatile, as well as stable,
interest rates, to attain earnings growth and to maintain sufficient liquidity
to satisfy depositors' requirements and meet credit needs of customers in light
of local competitive factors. The Bank's policies reflect a goal of
maintaining a relatively neutral position to limit the volatility in interest
income resulting from rate fluctuations.
The following table summarizes the anticipated maturities or repricing
of the Company's interest-earning assets and interest-bearing liabilities as of
December 31, 1996. The table shows the Company's interest sensitivity gap
(i.e., interest-earning assets less interest-bearing liabilities maturing
within the same time frame), and the cumulative interest sensitivity gap ratio
(i.e., cumulative interest sensitivity gap as a percentage of total assets).
The Company's cumulative gap ratios at December 31, 1995 were negative up to
one (1) year. A negative interest sensitivity gap for any time period means
that more interest-bearing liabilities will reprice or mature during that time
period than interest-earning assets. During periods of falling interest rates,
a short-term negative interest sensitivity gap position would generally
increase earnings, and during periods of rising interest rates, a short-term
negative interest sensitivity gap position would generally decrease earnings.
Because the table below shows a static position at a single point in
time, it is limited in quantifying the total impact of rate changes on the
margin and it may not be indicative of the Company's position over time.
Market rate changes do not affect all earning assets and interest bearing
liabilities equally or simultaneously. It is, therefore, important to consider
these points along with the analysis.
6
<PAGE> 7
ITEM 1. Business (continued)
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1996
3 months or Over 3 months Over 6 Over 1 year Total
less to 6 months months to 1
in thousands year
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 12,215 $ -- $ -- $ -- $ 12,215
Investments 1,411 2,008 2,006 15,865 21,290
Loans (1) 48,063 6,375 7,475 16,828 78,741
Total interest-earning assets 61,689 8,383 9,481 32,693 112,246
Interest-bearing liabilities:
Interest checking deposits $ 8,944 $ -- $ -- $ -- $ 8,944
Money market & savings deposits 55,419 -- -- -- 55,419
Time deposits 8,195 4,218 4,263 5,389 22,065
Total interest-bearing liabilities 72,558 4,218 4,263 5,389 86,428
CUMULATIVE GAP $(10,869) $(6,704) $(1,486) $25,818 $25,818
CUMULATIVE GAP TO TOTAL ASSETS -8.62% -5.32% -1.18% 20.48% 20.48%
</TABLE>
(1) Includes loans held for sale of $5,933 and excludes nonaccrual
loans of $771.
The following table presents the contractual maturity distribution and
interest-rate sensitivity of the Company's commercial and real estate loans at
December 31, 1996 (in thousands). The Company's experience indicates that
certain loans, on an individual basis, will be renewed, rescheduled or repaid
prior to scheduled maturity. Accordingly, the table should not be regarded as
a forecast of future cash collections.
<TABLE>
<CAPTION>
REMAINING MATURITIES
------------------------------------------------------------------------------
1 YEAR OR LESS 1 TO 5 YEARS DUE AFTER 5 YEARS TOTALS
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSTRUCTION $ 4,671 $ 2,893 $ 2,380 $ 9,944
REAL ESTATE 9,190 15,277 10,690 35,157
COMMERCIAL 11,677 7,793 2,471 21,941
------------------------------------------------------------------------------
TOTAL $ 25,538 $ 25,963 $ 15,541 $ 67,042
==============================================================================
INTEREST RATE SENSITIVITY
VARIABLE RATE $ 20,123 $ 16,096 $ 12,474 $ 48,693
FIXED RATE 5,415 9,867 3,067 18,349
------------------------------------------------------------------------------
TOTAL $ 25,538 $ 25,963 $ 15,541 $ 67,042
==============================================================================
</TABLE>
7
<PAGE> 8
ITEM 1. Business (continued)
II. INVESTMENT PORTFOLIO
The following table shows the estimated fair value of the investment
portfolio of the Company by category at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury $ 7,379 $ 9,638 $14,705
Federal Agencies 12,921 7,079 7,722
Mortgage-back obligations ("MBO") 166 311 366
Collateralized mortgage obligations ("CMO") 34 44 53
Other 790 995 1,227
------- ------- -------
TOTAL $21,290 $18,067 $24,073
======= ======= =======
</TABLE>
See NOTE D to the Consolidated Financial Statements for a breakdown by
classification as to available for sale and held to maturity.
The table presented below sets forth by type and contractual maturity
the Company's investment securities as of December 31, 1996 (dollars in
thousands). 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>
Maturity - estimated U.S. Federal MBO's CMO's Other Total Yield
fair value Treasuries Agencies
- ----------------------- ------------ ---------- --------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1 Year or less $3,008 $ 2,284 $ - $ - $ - $ 5,292 6.22%
greater than
1 to 5 Years 4,371 9,650 58 - 790 14,869 6.28%
greater than
5 to 10 Years - 987 108 - - 1,095 6.55%
Over 10 Years - - - 34 - 34 6.42%
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total estimated
fair value $7,379 $12,921 $ 166 $ 34 $ 790 $21,290 6.28%
========== ========== ========== ========== ========== ========== ==========
Yield 6.23% 5.80% 7.50% 6.42% 6.25% 6.28%
Weighted Average
Maturity in Years 1.40 2.86 12.98 20.82 2.61 2.45
</TABLE>
III. LOAN PORTFOLIO
The following table presents the major categories of the Company's
loan portfolio at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Construction $ 9,944 $ 4,461 $ 1,353
Real Estate 35,157 32,098 40,327
Commercial 21,941 20,030 17,246
Individual 5,046 4,622 5,349
Other 1,360 1,811 250
--------- --------- ---------
$73,448 $63,022 $64,525
Less: Allowance for loan losses (1,508) (1,467) (2,750)
--------- --------- ---------
Total loans, net $71,940 $61,555 $61,775
========= ========= =========
</TABLE>
8
<PAGE> 9
ITEM 1. Business (continued)
Nonperforming Assets
Nonperforming assets consist of loans on which interest is no longer
accrued, real estate acquired through foreclosure or insubstance foreclosure,
and real estate on which deeds in lieu of foreclosure have been accepted.
Restructured loans are loans on which the borrower has been granted a
concession as to rate or term as a result of financial difficulty.
Generally, the accrual of interest on a loan is discontinued when the
full collection of principal or interest is in doubt, or when the payment of
principal or interest has become contractually 90 days past due, unless the
obligation is both well secured and in the process of collection. Loans may be
placed on nonaccrual status when past due less than 90 days if collection
becomes uncertain based upon an evaluation of the fair value of the collateral
and the financial strength of borrower. When a loan is placed on nonaccrual
status, interest income in the current period is reduced by the amount of any
accrued and uncollected interest. Subsequent payments of interest are applied
as a reduction of principal when concern exists as to the ultimate collection
of principal, otherwise such payments are recognized as interest income. Loans
are removed from nonaccrual status when they have demonstrated a period of
performance and when concern no longer exists as to the collectibility of
principal or interest.
Foreclosed real estate is recorded at the lower of cost or fair value
at acquisition date. Subsequent to acquisition, foreclosed real estate is
carried at lower of cost or fair value less estimated selling costs, based upon
periodic evaluation by management. Costs relating to property improvements are
capitalized to the extent that they are recoverable, and costs relating to
holding property are expensed when incurred. Gains or losses on the sale of
foreclosed real estate are recognized upon disposition of the property.
The Company has no obligation to make further extensions of credit
under loans classified as troubled debt restructurings or nonaccrual at
December 31, 1996, 1995 or 1994. Nonaccrual and restructured loans are
classified as loans in the accompanying schedules and the Consolidated Balance
Sheets.
The table below shows nonperforming assets and troubled debt
restructurings (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 771 $1,592 $3,720
Foreclosed real estate 212 1,152 3,018
----- ----- -----
Total nonperforming assets $ 983 $2,744 $6,738
- ---------------------------------------------------------------------------------------------------------------------
Loans classified as nonaccrual but contractually current $ 1 $ 105 $2,083
- ---------------------------------------------------------------------------------------------------------------------
Restructured loans classified as nonaccrual -- 88 713
Restructured loans accruing 1,088 1,173 1,312
----- ----- -----
Total restructured loans $1,088 $1,261 $2,025
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
There were two loans past due 90 days or more and still accruing at December
31, 1996 totaling $35,000 There were no loans past due 90 days or more and
still accruing at December 31, 1995 or 1994.
The gross interest income that would have been received during the
year ended December 31, 1996 on nonaccrual and accruing restructured loans had
such loans been current in accordance with their original terms throughout the
year was approximately $266,000 and $119,000, respectively. Recorded interest
income was approximately $136,000 on troubled debt restructurings. No interest
income was recorded on loans classified as nonaccrual in 1996.
9
<PAGE> 10
ITEM 1. Business (continued)
The following schedule presents a breakdown by type of property of
foreclosed real estate (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial land $ -- $ 546 $ 671
Residential land -- 254 1,416
Commercial property 265 567 1,098
1-4 family residential -- 147 581
- ---------------------------------------------------------------------------------------------
Total 265 1,514 3,766
Allowance for losses (53) (362) (748)
- ---------------------------------------------------------------------------------------------
Total estimated fair value $ 212 $1,152 $3,018
=============================================================================================
</TABLE>
Activity in the allowance for losses on foreclosed real estate is as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 362 $ 748 $ 847
Provision for losses -- 231 264
Dispositions, net (309) (597) (41)
Charge-offs, net of recoveries -- (20) (322)
- ---------------------------------------------------------------------------------------------
Balance at end of year $ 53 $ 362 $ 748
- ---------------------------------------------------------------------------------------------
</TABLE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is an estimate of uncollectible loans
and reduces the gross amount of loans outstanding. Each loan deemed to involve
significant risk of loss is considered individually to determine the possible
amount of such loss and the remaining loans are evaluated in the aggregate.
The allowance for loan losses is increased through charges to
operations in the form of a provision for loan losses and is reduced by
reversals of previous years' provisions. Charge-offs are made against the
allowance and subsequent recoveries, if any, are credited to the allowance.
The allowance is maintained at a level that management believes will be
adequate to absorb losses on existing loans that may become uncollectible.
Management's periodic evaluation of the adequacy of the allowance is based on
the Company's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay
(including the timing of future payments), the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is inherently
subjective as it requires material estimates including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
susceptible to significant change.
Management believes that the allowances for losses on loans and
foreclosed real estate are adequate given current circumstances and conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in economic conditions.
10
<PAGE> 11
ITEM 1. Business (continued)
The following table shows activity affecting the allowance for
possible loan losses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $1,467 $2,750 $2,486
Provision for loan losses (227) (260) 39
Loans charged off:
Construction 0 0 0
Real Estate 228 657 152
Commercial 168 639 200
Individual 48 44 60
Other 0 0 0
------ ------ ------
Total loans charged off $444 $1,340 $412
Recoveries
Construction 0 0 0
Real Estate 182 38 25
Commercial 517 243 497
Individual 13 36 115
Other 0 0 0
------ ------ ------
Total recoveries $712 $317 $637
Total allowance at end of period $1,508 $1,467 $2,750
====== ====== ======
Net loans charged off as a % of
average loans outstanding -0.36% 1.58% -0.37%
====== ====== ======
</TABLE>
The following is a breakdown of the allowance for loan losses by loan
category (dollars in thousands). This breakdown represents management's best
judgment as to the allocation of the allowance based on the risk
characteristics associated with each category of loans. The allowance is
allocated to specific categories of loans for analysis purposes only.
<TABLE>
<CAPTION>
12/31/96 12/31/95 12/31/94
Allowance Distribution Allowance Distribution Allowance Distribution
Allocation of Loans Allocation of Loans Allocation of Loans
================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Construction $ 150 13.54% $ 62 7.08% $ 20 2.09%
Real Estate 828 47.87% 884 50.93% 1,702 62.50%
Commercial 427 29.87% 432 31.78% 861 26.73%
Individual 81 6.87% 64 7.34% 160 8.29%
Other 22 1.85% 25 2.87% 7 0.39%
------------------------------------------------------------------------------------------------
$1,508 100.00% $1,467 100.00% $2,750 100.00%
================================================================================================
</TABLE>
11
<PAGE> 12
ITEM 1. Business (continued)
V. DEPOSITS
The following table provides a breakdown by category of deposits of
the Company on a daily average basis at the dates indicated (dollars in
thousands):
<TABLE>
<CAPTION>
Year ending December 31, 1996 1995 1994
-----------------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $19,332 0.00% $18,612 0.00% $20,635 0.00%
Money market, savings, and interest
checking 56,186 3.61% 50,455 3.60% 50,687 2.56%
Time deposits 23,499 5.67% 23,416 5.51% 23,713 4.45%
--------------- ------------- -----------
TOTAL DEPOSITS $99,017 $92,483 $95,035
=============== ============= ===========
</TABLE>
Maturities of certificates of deposit and other time deposits greater
than $100,000 outstanding at December 31, 1996 are presented below (dollars in
thousands):
<TABLE>
<CAPTION>
Certificates of Deposit Other Time Deposits
--------------------------- --------------------------
<S> <C> <C>
Three months or less $ 434 $ 0
Over 3 through 6 months 419 0
Over 6 through 12 months 985 187
Over 12 months 286 838
--------------------------- --------------------------
TOTAL $2,124 $1,025
=========================== ==========================
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity, and certain other ratios for the periods indicated
follow:
<TABLE>
<CAPTION>
Year ended December 31, 1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Return on Average Assets 4.42% 1.49% 0.21%
Return on Average Equity 36.35% 15.29% 2.51%
Average Equity to Average Assets 12.15% 9.75% 8.31%
Dividend Payout Ratio - - -
</TABLE>
12
<PAGE> 13
ITEM 1. Business (continued)
VII. SHORT-TERM BORROWINGS
The table below shows balances and rates paid on short-term
borrowings:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands) Amount Rate Amount Rate Amount Rate
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
At year end:
Securities sold under repurchase agreements $ - $ - $ - - $ 691 4.86%
- --------------------------------------------------------------------------------------------------------------------------
Average for the year:
Securities sold under repurchase agreements $ - $ - $ 261 4.83% $ 605 3.45%
- --------------------------------------------------------------------------------------------------------------------------
Maximum month-end balance:
Securities sold under repurchase agreements $1,321 $1,221
==========================================================================================================================
</TABLE>
ITEM 2. Properties
Suburban Maryland owns and occupies a one-story building located in
Capitol Heights, Maryland and occupies leased office and banking space in its
other five Maryland locations (Greenbelt, Oxon Hill, Clinton, Bethesda and
Rockville). The Greenbelt lease had a five-year initial term which expired
May 31, 1991, and is currently in the first of three five-year renewal option
terms. The Oxon Hill lease also had a five-year initial term which expired
June 30, 1992, at which time the first of three five-year renewal options was
exercised (see "Item 13. Certain Relationships and Related Transactions"). The
Rockville lease is currently in its ten-year initial term which expires April
12, 2000 and contains two five-year renewal options, and the Clinton lease is
currently in its initial term of seven years, expiring January 1, 2003, and has
one five-year renewal option. The Bethesda lease is currently in its initial
term of six years which expires September 30, 2002 and includes one five-year
renewal option.
ITEM 3. Legal Proceedings
As of March 3, 1997, there were no material legal proceedings against
Suburban Bancshares, Inc. or its subsidiary.
ITEM 4. Submission of Matters to Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
13
<PAGE> 14
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information contained under the heading "Market for Common Stock"
in the Company's 1996 Annual Report to Shareholders is incorporated herein by
reference thereto.
ITEM 6. Selected Financial Data
The information contained under the heading "Summary Financial
Information" in the Company's 1996 Annual Report to Shareholders is
incorporated herein by reference thereto.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information contained under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1996 Annual Report to Shareholders is incorporated herein by reference thereto.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements together with the
report of Stegman and Company thereon appearing in the Company's 1996 Annual
Report to Shareholders are incorporated herein by reference thereto. See ITEM
14 for a list of financial statements and notes thereto so incorporated.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on matters
of accounting principles or practices or financial statement disclosures in
1996.
PART III
ITEM 10. Directors and Executive Officers
The information contained under the heading "Directors and Executive
Officers" in the Company's definitive proxy statement relating to the Company's
1997 meeting of shareholders is incorporated herein by reference thereto.
ITEM 11. Compensation of Executive Officers and Directors
The information contained under the heading "Executive Compensation"
in the Company's definitive proxy statement relating to the Company's 1997
meeting of shareholders is incorporated herein by reference thereto.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Beneficial Ownership of
Common Stock" in the Company's definitive proxy statement relating to the
Company's 1997 meeting of shareholders is incorporated herein by reference
thereto.
ITEM 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement relating to
the Company's 1997 meeting of shareholders is incorporated herein by reference
thereto.
14
<PAGE> 15
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
As listed in the index to financial statements on
page 17 hereof.
2. Financial Statement Schedules
Schedule I Indebtedness of and to Related
Parties - included in Note N to the
Consolidated Financial Statements.
Schedule II Guaranties of Securities and Other
Issuers has been omitted because the
required information is not
applicable.
3. Exhibits
As listed in the Index to Exhibits on page 17 hereof.
(b) No reports on Form 8-K were filed during the fourth quarter of
1996.
(c) See Item 14.(a)3. above
(d) See Item 14.(a)2. above
15
<PAGE> 16
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SUBURBAN BANCSHARES, INC.
By: Winfield M. Kelly, Jr.
------------------------------------
Winfield M. Kelly, Jr.
Chairman of the Board/CEO
Date: March 15, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: Winfield M. Kelly, Jr.
------------------------------------
Winfield M. Kelly, Jr.
Chairman of the Board/CEO
(Principal Executive Officer and Director)
Date: March 15, 1997
By: Marlin K. Husted
------------------------------------
Marlin K. Husted
Vice Chairman of the Board
Date: March 15, 1997
By: Stephen A. Horvath
------------------------------------
Stephen A. Horvath
President, Chief Operating Officer, and Director
Date: March 15, 1997
By: Sibyl S. Malatras
------------------------------------
Sibyl S. Malatras
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 15, 1997
By: Raymond G. LaPlaca
------------------------------------
Raymond G. LaPlaca, Director
Date: March 15, 1997
By: Barbara M. DiNenna
------------------------------------
Barbara M. DiNenna, Director
Date: March 15, 1997
By: Vincent D. Palumbo
------------------------------------
Vincent D. Palumbo, Director
Date: March 15, 1997
16
<PAGE> 17
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report on 1996 Consolidated Financial Statements *
Consolidated Balance Sheets at December 31, 1996 and 1995 *
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 *
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994 *
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 *
Notes to Consolidated Financial Statements *
- ---------
* Incorporated by reference to the Company's 1996 Annual Report to
Shareholders. See ITEM 8 of this report on Form 10-K.
INDEX TO EXHIBITS
Exhibit Number Description
2.1 Agreement and Plan of Reorganization between Bancshares 2000,
Inc. and Jefferson Bank and Trust Company dated February 21,
1989 (Incorporated by reference to Exhibit 2.1 of the 1988
Annual Report on Form 10-K)
2.2 Agreement and Plan of Reorganization and Recapitalization
between Suburban Bancshares, Inc. and Winfield M. Kelly, Jr.
dated February 19, 1993 (Incorporated by reference to Exhibit
2.2 to Registration Statement No. 33-63286)
2.3 Amendment to Agreement and Plan of Reorganization and
Recapitalization between Suburban Bancshares, Inc. and
Winfield M. Kelly, Jr. dated March 31, 1993 (Incorporated by
reference to Exhibit 2.3 to Registration Statement No. 33-
63286)
2.4 Amendment to Agreement and Plan of Reorganization and
Recapitalization between Suburban Bancshares, Inc. and
Winfield M. Kelly, Jr., dated November 17, 1993 (Incorporated
by reference to Exhibit 2.4 of the 1993 Annual Report on Form
10-K)
3.0 Restated Certificate of Incorporation of Bancshares 2000,
Inc., as amended, dated August 10, 1988 (Incorporated by
reference to Exhibit 3.4 of the 1988 Annual Report on Form
10-K)
3.1 Amendment to Certificate of Incorporation of Bancshares 2000,
Inc. as adopted at the Stockholders' Meeting held on October
3, 1989 (Incorporated by reference to Exhibit 3.11 of the 1989
Annual Report on Form 10-K)
3.2 Amendment to Certificate of Incorporation of Bancshares 2000,
Inc. as adopted at the Stockholders' Meeting held on June 26,
1991 (Incorporated by reference to Exhibit 3.2 of the 1992
Annual Report on Form 10-K)
3.3 Amendment to Certificate of Incorporation of Suburban
Bancshares, Inc. as adopted at the Stockholders' Meeting held
on June 2, 1993 (Incorporated by reference to Exhibit 3.3a to
Registration Statement No. 33-63286)
3.4 Amended and Restated By-Laws of Suburban Bancshares, Inc.
(Incorporated by reference to Exhibit 3.4 to Registration
Statement No. 33-63286)
17
<PAGE> 18
4.0 Form of Common Stock Certificate of Bancshares 2000, Inc.
(Incorporated by reference to Exhibit 4. to Registration
Statement No. 33-11380)
4.1 Form of Common Stock Certificate of Suburban Bancshares, Inc.
(Incorporated by reference to Exhibit 4.1 of the 1992 Annual
Report on Form 10-K)
10.3 Incentive Stock Option Plan, as adopted by the Board of
Directors of Bancshares 2000, Inc., on December 18, 1986
(Incorporated by reference to Exhibit 10.5 to Registration
Statement No. 33-11380)
10.4 Incentive Stock Option Plan, as amended, as adopted at the
stockholders' meeting held on October 3, 1989 (Incorporated by
reference to Exhibit 10.3 to Registration Statement No.
33-30727)
10.4a Amendment to Incentive Stock Option Plan, as adopted by the
Board of Directors of Suburban Bancshares, Inc., on February
14, 1992 (Incorporated by reference to Exhibit 3.13 of the
1991 Annual Report on Form 10-K)
10.5a Employment Agreement with William R. Johnson dated December
27, 1996 and effective January 1, 1997
10.5b Deferred Compensation Agreement with William R. Johnson dated
December 27, 1996
10.5c Trust Under Deferred Compensation Agreement with William R.
Johnson dated December 27, 1996
10.6 Services Agreement with Winfield M. Kelly, Jr. dated January
29, 1997 and effective January 1, 1997
10.7 Employment Agreement with Stephen A. Horvath dated December 9,
1996 and effective January 1, 1997
11. Computation of per share earnings (loss)
13. Suburban Bancshares, Inc. 1996 Annual Report to Stockholders
(furnished for the information of the Securities and Exchange
Commission only and not to be deemed filed as part of this
Annual Report on Form 10-K except for the portions thereof
which are specifically incorporated herein by reference)
21. List of Subsidiaries of Suburban Bancshares, Inc.
23 Consent of Stegman and Company
27. Financial Data Schedule
18
<PAGE> 1
EXHIBIT 10.5a
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter this "Agreement") is entered
into on this 27 day of December, 1996, by and between William R. Johnson (the
"Employee") and Suburban Bank of Maryland (the "Employer").
RECITAL
The Employee has been employed as President and Chief Executive
Officer of Suburban Bank under the terms of a September 4, 1987 Employment
Agreement (the "Prior Employment Agreement") by and between the Employee and
Jefferson Bank and Trust Company (the predecessor to Suburban Bank). This
Agreement is intended to terminate the Prior Employment Agreement and to retain
the Employee's services to assist the Employee's board of directors and
Employer's new President and Chief Executive Officer for a transition period of
three (3) years.
NOW THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Definitions. As used in this Agreement, the following terms
have the meanings set forth below:
(a) Commencement Date: January 1, 1997.
(b) Bank Regulatory Agency. As used in this Agreement,
"Bank Regulatory Agency" shall mean any governmental authority, regulatory
agency, ministry, department, statutory corporation, central bank or other body
of the United States or of any other country or of any state or other political
subdivision of any of them having jurisdiction over the Employer or any
transaction contemplated, undertaken or proposed to be undertaken by the
Employer. Bank Regulatory Agency shall include, but not necessarily be limited
to:
(1) The Federal Deposit Insurance Corporation or
any other federal or state depository insurance organization or fund; and
(2) The Federal Reserve System, the Comptroller
of the Currency, the Maryland Division of Financial Regulation, or any other
federal or state bank regulatory or commissioner's office; and
(3) Any corporation, bridge bank, fund
association, or other entity established, organized, owned (in whole or in
part) or controlled by any of the foregoing; and
(4) Any predecessor, successor or assignee of the
foregoing.
2. Acceptance of Offer; Term.
(a) Construction of Agreement. For all purposes
contained herein, this Agreement shall, unless and until accepted as provided
for herein by the Employee, be considered to be a contingent offer of
employment by the Employer, and until properly accepted by the Employee, this
Agreement shall not become operative and shall not constitute an agreement for
the employment of the Employee (provided, however, that all prior agreements
between the Employee and the Employer shall remain fully in effect according to
their respective terms). Accordingly, unless and until properly accepted by
the Employee, this Agreement shall impose no duties or obligations on either
party hereto.
(b) Manner of Acceptance. Execution of this Agreement by
both the Employee and the Employer.
(c) Commencement of Time to Accept Offer. This Agreement
shall be accepted within Fifteen (15) days after its presentation to the
Employee.
(d) End of Time to Accept; Lapse of Offer. If the
Employee does not accept the offer contained herein in the manner set forth
above, the offer contained in this Agreement shall lapse and will thereafter be
of no further force and effect.
<PAGE> 3
(e) Term of Accepted Agreement. The term of this
Agreement shall expire on December 31, 1999.
3. Duties of the Employee.
(a) Nature and Substance. Upon acceptance hereof by the
Employee, the Employer will employ the Employee as a consultant and adviser.
The Employee shall report directly to, and be under the direction of, the
Chairman of the Board of Directors (the "Chairman") and the President. The
specific powers and duties of the Employee shall be established, determined and
modified by and within the discretion of the Board of Directors of Suburban
Bank (the "Board of Directors"), and at a minimum will include (but not
necessarily be limited to):
(1) Assistance and advice relative to the efforts
of the Employer to achieve and maintain any and all necessary and/or
appropriate Bank Regulatory Agency approvals and permissions prerequisite to
its successful continued operation.
(2) Assistance and advice relative to the promotion
of the reputation and business of the Employer within the community.
(3) Assistance and advice relative to the
advancement of the business purposes of the Employer, including, but not
limited to business development, customer, depositor and public relations.
(4) Assistance and advice relative to retainage of
the current status of the Employer as a qualified Small Business Administration
lender.
(5) Transitional assistance in coordination with
the incoming President and Chief Executive Officer of the Employer.
(6) The Employee further agrees to be accessible
in person or by telephone during normal business hours,as may be necessary and
appropriate to work for the Employer and to assist the operations of the
Employer upon such terms, conditions, rules, policies and regulations as may be
set by the Board of Directors of the Employer from time to time. The Employee
agrees to devote sufficient time and attention and best efforts toward the
successful operation of Suburban Bank.
(b) Performance of Services. The Employee shall
discharge his duties to the best of his ability for and on behalf of the
Employer. The Employee shall comply with all laws, statutes, ordinances, rules
and regulations relating to his employment and duties. During the first year
of the term of this Agreement,the Employee shall not at any time or place
directly or indirectly engage or agree to engage in any business or practice
related to any banking business in Maryland, the District of Columbia or
Northern Virginia, other than to the extent required by the terms and
conditions of this Agreement.
(c) Additional Services to Suburban Bancshares, Inc. The
Employee shall also, at the request by the Employer perform services to
Suburban Bancshares,Inc., the parent corporation of Suburban Bank, without
additional compensation to that set forth hereinbelow, such services to include
such items as described in paragraph 3(a) above.
4. Payment Amount; Terms. As full compensation for all services
rendered pursuant to this Agreement and the covenants contained herein, the
Employer shall pay to the Employee the following:
(a) Base Compensation. Base compensation of One Hundred
Forty-Thousand and 00/100 Dollars ($140,000.00) payable as set forth below.
(1) Base Salary Rate. Salary to begin on the
Commencement Date at the above rate, throughout the first one (1) year only of
the term of this Agreement.
(2) Bonuses. None.
(3) Method of Payment. The Employer shall pay
the Employee's salary in accordance with its regular payroll periods as may be
set by it from time to time, but at least twice monthly. Payment of all salary
shall be
<PAGE> 4
subject to the customary withholding tax and other employment taxes as required
with respect to compensation paid by an employer to an employee.
(b) Vacation and Leave. The Employee shall be entitled
to such vacation and leave as may be provided for under the current and future
leave and vacation policies of the Employer for part-time personnel.
(c) Office Space. The Employer will provide customary
office space and office support, as and when needed, to the Employee beginning
on the Commencement Date.
(d) Car or Car Allowance. None.
(e) Insurance. The Employer will provide the Employee
with such health, life, disability and other insurance benefits as the Employer
may determine appropriate and proportionately similar to that which it arranges
for all part-time personnel.
(f) Expense Account. Employer will reimburse Employee for
all reasonable out-of-pocket expenses incurred by the Employee in the
performance of any duties as provided in Paragraph 3, above, subject to advance
approval by the Employer.
(g) 401(k) Plan. The Employee shall not be entitled to
participate further in any retirement programs of the Employer, but shall
retain his current interest in the 401(k) plan of the Employer.
(h) Split Dollar Life Insurance. The Employee is the owner
of a life insurance policy issued through Provident Life and Accident Insurance
Company which policy has been collaterally assigned to the Employer under the
terms of a split dollar arrangement. Such split dollar is being terminated by
execution of that certain Termination Agreement of even date herewith.
(i) Deferred Compensation. In lieu and replacement of the
retirement and Split Dollar funding provisions of the Prior Employment
Agreement, the Employee does hereby accept the benefits of the deferred
compensation agreement described in this paragraph, as follows:
(1) Funding Level. The Employee shall be entitled
to deferred compensation as follows: $11,250 on December 31, 1996 and three
installments of $79,291, each on December 31, 1997; December 31, 1998; and
December 31, 1999, payable to the trust established under the terms of that
certain Deferred Compensation Agreement of even date herewith.
(2) Accrual Vesting. All amounts paid under the
terms of paragraph 4(h)(i)(1) above shall be fully vested as and when paid to
said trust.
(3) Terms and Payment. All other terms and
conditions of such deferred compensation arrangement are as set forth in that
certain Deferred Compensation Agreement of even date herewith by and between
the Employer and the Employee.
(j) Merger or Buy-out Termination or Non-renewal
Compensation. None.
(k) Officers and Directors Liability Insurance. Not
Applicable.
5. Conditions Subsequent to Continued Operation and Effect of
Agreement. This Agreement shall be subject to the following conditions
subsequent to its continued operation and effect:
(a) Approval by Bank Regulatory Agencies. This Agreement
and all of its terms and conditions and the selection of the Employee named
herein, and the continued operation and effect of this Agreement and the
Employer's continuing obligations hereunder shall at all times be subject to
the continuing approval of any and all Bank Regulatory Agencies whose approval
is a necessary prerequisite to the continued operation of the Employer.
<PAGE> 5
(b) Compliance With Bank Regulatory Agency Requirements.
Should any terms or conditions of this Agreement, upon subsequent detailed
review by any Bank Regulatory Agency, be found to be not in compliance with
federal or state bank regulations, or should any terms or conditions required
to be included herein by any such Bank Regulatory Agency be absent, this
Agreement may be rescinded by the Employer if the parties hereto cannot in good
faith agree upon such additions, deletions, or modifications as may be deemed
necessary or appropriate under such federal or state regulations and the
interpretations thereof. Any term or condition of this Agreement which
violates or is deemed to violate any then-applicable rule, regulation, order or
understanding promulgated by any Bank Regulatory Agency, or any payment,
compensation, or other consideration provided for hereunder shall be modified
or deleted to conform to any such Bank Regulatory Agency rule, regulation,
order or understanding.
6. Rights to Terminate Agreement.
(a) Termination by Employee. The Employee may terminated
this Agreement at any time upon thirty (30) days written notice to the
Employer, with or without cause.
(b) Termination by Employer: The Employer may only
terminate this agreement with cause, as provided in paragraph 6 (c) below.
(c) Termination With Cause; Procedure.
(1) Termination of Compensation. If the Employer
terminates the Employee for cause as set forth in this paragraph, then the
compensation payments provided for herein shall cease.
(2) Definition of Cause: Under this Agreement,
"cause" shall be defined to be:
(A) Any willful act or action on the
part of the Employee done in connection with or associated with the services
rendered by the Employee under this Agreement for which a criminal prosecution
(other than traffic and misdemeanor actions) is commenced by the prosecuting
authorities in the jurisdiction in which such act or action occurred. For the
purposes of this Agreement, the commencement of a criminal prosecution shall be
deemed to have occurred upon the filing of a criminal information against the
Employee or the indictment of the Employee by any local, state or federal
authority.
(B) Any act of theft, fraud, intentional
misrepresentation, assault or battery done by the Employee in connection with
or associated with the services rendered by the Employee to the Employer under
this Agreement.
(C) Any act, action, failure to act or
omission which constitutes gross misconduct or gross negligence in connection
with or associated with the services rendered by the Employee under this
Agreement, provided that the procedures of paragraph 6(c)(3) are followed.
(3) Procedure for Termination With Cause: The procedure
for termination with cause shall be as follows:
(A) For any reason specified in
paragraph 6(c)(2)(A), the Employee shall be terminated upon the commencement of
prosecution, as of the date of the act to which that paragraph applies.
(B) For any reason specified in
Paragraphs 6(c)(2)(B)or 6(c)(2)(C),unless ordered by or agreed to differently
between the Employer and a Bank Regulatory Agency, the Employer shall give the
Employee written notice of the cause alleged to be the basis for the Employee's
termination. The Employee shall thereafter have a period of Thirty (30) days
from the date of the receipt of the Employer's written notice in which to
dispute and/or explain the situation(s) referred to in the Employer's written
notice, including, if appropriate, a response to Bank Regulatory Agencies. If
the Employee does not respond to the Employer's notice, the Employee shall be
deemed to have agreed to the Employer's and/or the Bank Regulatory Agency's
allegations and the termination shall be effective as of the date of the
Employer's written notice. If the Employee disputes the allegations contained
in the Employer's and/or the Bank Regulatory Agency's
<PAGE> 6
notice, the Employee shall notify the Employer in writing within the time
period set forth above and the Employer and the Employee shall set a meeting to
discuss a resolution of the dispute. If the parties and/or any Bank Regulatory
Agency do not (after good faith efforts) reach agreement as to the Employee's
termination, within Forty-five (45) days of the Employer's notice, the
Employer, by a majority of its Board of Directors, shall have the right to
terminate the Employee and to discontinue the compensation payments to the
Employee. If the Employee nevertheless still disagrees that his termination
was proper under the terms of this Agreement, both parties hereto by their
execution hereof agree, unless otherwise ordered by or agreed to differently
between any Bank Regulatory Agency and the Employer, to submit the matter to
binding arbitration under the rules, regulations and procedures of the American
Arbitration Association.
(d) Death or Disability: If the Employee should be
unable to perform his professional duties due to death or disability (as
defined in the Employer's then in effect disability insurance policy covering
officers of the Employer), then the compensation provided for hereinabove shall
cease upon the Employee's death or at the end of the Employer's disability
insurance policy elimination period, and if the disability is temporary, shall
resume upon the Employee's availability for employment and the end of payments,
if any, to the Employee under the Employer's disability insurance policy.
7. Representations and Warranties of the Employee. The Employee
represents and warrants to the Employer the following:
(a) Prior Employment Agreements. The Employee is not now
a party to or bound by any employment, consulting or other type of agreement,
nor has he been a party to or bound by any such agreement, which would be
breached by, or of which the Employee would be in default, by virtue of any
provision contained in this Agreement with the Employer, nor is the Employee a
party to any such agreement which would compete with or constitute a conflict
of interest with this Agreement and the Employee's duties and obligations to
the Employer.
8. Covenants of the Employee.
(a) Agreement Not to Compete. For a period of time
defined as the "non-competition period", the Employee covenants and agrees that
the Employee:
(1) Shall not accept employment by or on behalf
of any bank with the majority of branches located in Montgomery and Prince
George's County, Maryland, nor in such capacity shall he directly or indirectly
request or advise any present or future investors, depositors or customers of
the Employer to curtail or discontinue their business with the Employer, nor in
this capacity shall the Employee directly or indirectly induce, or attempt to
induce any employee of the business to terminate his employment with the
Employer.
(2) Shall not directly or indirectly disparage
the business of the Employer, nor disclose any information relating to the
Employer's business, processes, trade secrets, procedures, computer software or
any other information learned as an employee of the Employer, to any person,
firm or corporation, whether such person, firm or corporation shall be a
present or former customer or employee of the Employer;
(3) Shall not directly or indirectly discuss or
disclose to any other person, firm or corporation the names of past, present or
future customers or employees of the Employer.
(b) "Non-competition Period" Defined. The
non-competition period shall be the second and third years of the term of this
Agreement provided, however, that in the event that this Agreement is
terminated prior to the expiration of its term, then such non-competition
period shall nevertheless continue for what would have been the remaining term
of this Agreement.
(c) Termination or Non-renewal by the Employer.
Notwithstanding the foregoing provisions of this Paragraph 8, in the event the
Employer terminates or declines to renew this Agreement, the non-competition
covenant and agreement referred to in this Section shall not apply.
9. Confidential Information.
<PAGE> 7
(a) Proprietary Information. The Employee acknowledges
that upon acceptance of employment hereunder, the Employee will be making use
of, acquiring and adding to the Employer's confidential and proprietary
information of a special and unique nature and value relating to such matters
as, but not limited to the Employer's business operations, internal structure,
financial affairs, programs, software, systems, procedures, manuals,
confidential reports, and sales and marketing methods, as well as the amount,
nature and type of services, equipment and methods used and preferred by the
Employer's suppliers, and customers, all of which shall be deemed to be
confidential information. The Employee acknowledges that such confidential
information has been and will continue to be of central importance to the
business of the Employer and that disclosure of it or its use by others could
cause substantial loss to the Employer. In consideration of his anticipated
and thereafter continued employment by the Employer, upon acceptance hereof,
the Employee agrees that during the entire period of his employment with the
Employer, and upon and after leaving the employ of the Employer for any reason
whatsoever, the Employee shall not, for any purpose whatsoever, directly or
indirectly, divulge, reveal, report, publish, transfer, or disclose to any
person or entity any of such confidential information which was obtained by the
Employee as a result of the Employee's employment with the Employer, nor shall
the Employee reveal to any person or entity any trade secrets of the Employer,
but the Employee shall hold all of the same confidential and inviolate.
(b) Property of the Employer. All contracts, agreements,
forms, financial books, records, instruments and documents, supplier lists,
memoranda, data, reports, programs, software, tapes, rolodexes, telephone and
address books, letters, research, listings, programming, and any other
instruments, records or documents relating or pertaining to the Employer
(hereinafter referred to as "Records") shall at all times be and remain the
property of the Employer. Upon termination of the Employee's employment with
the Employer for any reason whatsoever, the Employee shall return to the
Employer all Records (whether furnished by the Employer, by a third party or
prepared by the Employee), and the Employee shall neither make nor retain any
copies of any such Records after such termination.
(c) Inventions and Creations. All inventions and other
creations, whether or not patentable or copyrightable, and all ideas, reports
and other creative works, including, without limitation, innovations, manuals
or other materials, made or conceived in whole or in part by the Employee while
employed by the Employer, which relate in any manner whatsoever to the
business, existing or proposed of the Employer or any other business or
research development effort in which the Employer or any of its subsidiaries or
affiliates engages during the Employee's employment by the Employer, will be
disclosed promptly by the Employee to the Employer and shall be the sole and
exclusive property of the Employer.
10. Breach; Remedies.
(a) Right to Cure; Default. In the event either party
shall be alleged to be in material breach of this Agreement, written notice
shall be given by the other party and a Thirty (30) day opportunity to cure
shall be provided. After such Thirty (30) day cure period, if the breach is
not cured and remains as alleged, the breaching party shall be deemed in
default and this Agreement may be terminated by written notice to the breaching
or defaulting party.
(b) Injunctive Relief. In the event of a breach of this
Agreement, the Employer shall be entitled to seek injunctive relief restraining
the Employee from taking or continuing any action which would constitute a
breach of the covenants contained herein.
11. Entire Agreement: This Agreement represents the entire
agreement of the parties relating to the services of the Employee. All prior
negotiations between the parties are merged into this Agreement and there are
no understandings or agreements other than those incorporated herein.
12. Miscellaneous.
(a) Severability; Court Enforcement. The parties hereto
covenant and agree that to the extent any provisions or portion of this
Agreement shall be held, found or deemed to be unreasonable, unlawful or
unenforceable, by any Court of law, then the parties hereto expressly covenant
and agree that any such provision or portion thereof shall be modified to the
extent necessary in order that any such provision or portion thereof shall be
legally enforceable to the fullest extent permitted by applicable law and that
any court of competent jurisdiction shall, and the parties hereto do hereby
expressly authorize any court of competent jurisdiction to, enforce any such
provision or portion thereof or to modify any such provision thereof shall be
enforced by such court to the fullest extent permitted by applicable law.
<PAGE> 8
(b) Waiver. The Employer and the Employee each reserve
the right to waive any of the terms of this Agreement which benefits the party
waiving same. Any such waiver must be in a writing signed by the party waiving
the same.
(c) Choice of Law. It is the intention of the parties
hereto that this Agreement shall be governed by the laws of the State of
Maryland.
(d) Successors. The terms of this Agreement shall inure
to the benefit of and be binding upon the Employer, its successors and assigns,
and upon the Employee, his heirs, guardians and personal and legal
representatives.
(e) Gender. The use of the masculine gender herein shall
be deemed to be or include the feminine gender, wherever appropriate.
(f) Notices. All notices, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally or if sent registered or certified mail,
return receipt requested, properly addressed and postage prepaid to the
addresses set forth hereinabove.
(g) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
(h) Headings. The Section and paragraph headings used
herein are for convenience and reference only and shall not enter into the
interpretation hereof.
(i) Representation by Counsel.
(1) Counsel for the Employer. The parties hereto
acknowledge that Stephen C. Hosea, of the law firm of McNamee, Hosea, Jernigan
& Kim, P.A., Suite 200, 6411 Ivy Lane, Greenbelt, Maryland 20770 has acted as
counsel to the Employer in this matter.
(2) Counsel for the Employee. The parties hereto
acknowledge that the Employee, for the purposes of this Agreement, has sought
and obtained, or acknowledges his right and opportunity to seek and obtain the
advice of his independent legal counsel with regard to the contents and
interpretation of this Agreement and each party hereto is fully and
independently apprised of the meaning and legal effect of this Agreement.
(j) Modifications. There shall be no modification or
amendment of this Agreement except by written amendment hereto signed by both
parties.
IN WITNESS WHEREOF this Agreement has been executed by the
parties of the day and year first above written.
WITNESS: SUBURBAN BANK
/s/ /s/
Kathleen Kinter By: Winfield M. Kelly, Jr.
- ----------------------- -----------------------------------------
Winfield M. Kelly, Jr., Chairman
/s/ /s/
Stephen C. Hosea By: William R. Johnson
- --------------------- -----------------------------------------
William R. Johnson, President
<PAGE> 1
EXHIBIT 10.5b
<PAGE> 2
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT is made this 27 day of December, 1996, by and between
Suburban Bank of Maryland, a Maryland corporation (the "Company") and William
R. Johnson (the "Employee").
WITNESSETH:
WHEREAS, the Company wishes to promote in its employees increased
efficiency in their work and the strongest interest in the successful operation
of the Company, and to provide the its employees with benefits upon their
retirement, death or other termination of employment; and
WHEREAS, in order to achieve these goals the Company is entering into
this Agreement with the Employee and is entering into similar agreements with
other executive employees of the Company;
NOW THEREFORE, it is agreed as follows:
1. Definitions:
A. Administrative Committee - "Administrative Committee"
shall mean the committee appointed pursuant to Section 4.
B. Age. - "Age" shall mean the Employee's age as of his last
birth date.
C. Benefit Schedule - "Benefit Schedule" shall mean the
separate schedule setting forth the Employee's benefits under this Agreement.
D. Compensation - "Compensation" shall mean all cash
remuneration due the Employee.
E. Normal Benefit - "Normal benefit" shall mean the entire
remaining principal and interest balance of the Trust, payable in the
installments described in Section 3.1, below.
F. Retirement Date - "Retirement Date" shall mean the earlier
of (i), the Employee's attaining the age of SIXTY-FIVE (65) years, or (ii), the
Employee's death prior to attaining such age.
G. Termination of Employment - "Termination of Employment"
shall mean the Employee's ceasing to be employed by the Company of any reason
whatsoever, voluntary or involuntary, including by reason of death or
disability. A leave of absence granted by the Administrative Committee in
accordance with uniform rules applied in a non-discriminatory manner shall not
constitute Termination of Employment.
H. Trust - The "Trust" shall mean the Trust under Deferred
Compensation Agreement of even date herewith.
J. Trustee - The "Trustee" shall mean the Trustee provided
of the Trust as therein.
2. Participant Compensation Deferral.
2.1 Deferral and Reduction of Compensation.
a. Funding. The Employee shall be entitled to
the funding of deferred compensation as provided in Paragraph 4 (i) (1) of the
Employee's Employment Agreement of even date herewith.
b. Manner of Funding. The Employee's compensation
deferral shall be automatic, not requiring any further act by the Employee.
2.3 Maximum Deferrals. The Employee does hereby elect to defer under the
Agreement all of that Deferred Compensation described in paragraph 4 (i) of
the Employee's Employment Agreement of even date herewith.
<PAGE> 3
3. Payment of Benefits.
3.1 Benefits Upon Retirement. Upon the Retirement Date, the Company shall
cause the Trustee to pay to him the Normal Benefit in 120 monthly installments
commencing on the first day of the month coincident with or next following the
Employee's Termination of Employment and continuing on the first day of each
month thereafter for 119 months.
3.2 Benefits upon Termination of Employment. N/A
3.3 Survivorship Benefits. In the event of the Employee's death, the
Company shall cause the Trustee to begin to pay the monthly normal benefit
payments (or the then remaining unpaid payments) to his beneficiary; in the
installments provided in Paragraph 3.1, above.
3.4 Recipients of Payments: Designation of Beneficiary. The Employee
shall designate a beneficiary by filing a written notice of such designation
with the Administrative Committee in such form as the Administrative Committee
may prescribe. The Employee may revoke or modify said designation at any time
by a further written designation. The Employee's beneficiary designation shall
be deemed automatically revoked int the event of the death of the beneficiary
or, if the beneficiary is the Employee's spouse, in the event of dissolution of
marriage. If the Employee's Compensation constitutes community property, then
any beneficiary designation made by the Employee other than a designation of
his spouse shall not be effective if any such beneficiary or beneficiaries are
to receive more than fifty percent (50%) of the aggregate benefits payable
hereunder unless such spouse shall approve such designation in writing. If no
designation shall be in effect at the time when any benefits payable under this
Agreement shall become due, the beneficiary shall be the spouse of the
Employee, or if no spouse is them living, the Employee's children and their
issue by right of representation or, if none, the legal representatives of
the Employee's estate.
In the event a benefit is payable to a minor or person declared
incompetent or to a person incapable of handling the disposition of his
property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incompetent
or person. The Administrative Committee may require proof of incompetency,
minority or guardianship as it may deem appropriate prior to distribution of
the benefit. Such distribution shall completely discharge the Administrative
Committee and the Company from all liability with respect to such benefit.
4. Administration and Interpretation of this Agreement. The Board of
Directors of The Company shall appoint an Administrative Committee consisting
of THREE (3) or more persons to administer and interpret this Agreement.
Interpretation by the Administrative Committee shall be final and binding upon
the Employee subject to the Employee's right to seek review thereof as provided
in Paragraph 6 below. The Administrative Committee may adopt rules and
regulations relating to and consistent with the terms of this Agreement as it
may deem necessary or advisable for the administration of this Agreement.
5. Claims Procedure. If the Employee or the Employee's beneficiary
(hereinafter referred to as a "Claimant") is denied all or a portion of an
expected benefit under this Agreement for any reason, he or she may file a
claim with the Administrative Committee. The Administrative Committee shall
notify the Claimant within sixty (60) days of allowance or denial of the claim,
unless the Claimant receives written notice from the Administrative Committee
prior to the end of the sixty (60) -day period stating that special
circumstances require an extension of the time for decision. The notice of the
Administrative Committee's decision shall be in writing, sent by mail to
Claimant's last known address, and, if a denial of the claim, must contain the
following information:
a. The specific reason for the denial;
b. Specific reference to pertinent provisions of this
Agreement on which the denial is based; and
c. If applicable, a description of any additional
information or material necessary to perfect the claim, an
explanation of why such information or material is necessary,
and an explanation of the claims review procedure.
6. Review Procedure.
a. A Claimant is entitled to request a review of any
denial of his claim or a review of any
<PAGE> 4
Administrative Committee interpretation or Administration of
this Agreement by the Administrative Committee. The request
for review must be submitted in writing within sixty (60) days
of mailing of notice of the denial of any claim or notice of
any such act of interpretation or administration. Absent a
request for review within the sixty (60) -day period, the
claim will be deemed to be conclusively denied. The Claimant
or his representative shall be entitled to review all
pertinent documents, and to submit issues and comments orally
and in writing.
b. The review shall be conducted by the Administrative
Committee, which shall afford the Claimant a hearing and the
opportunity to review all pertinent documents and submit
issues and comments orally and in writing and shall render a
review decision in writing, all within sixty (60) days after
receipt of a request for a review, provided that, in special
circumstances (such as the necessity of holding a hearing) the
Administrative Committee may extend the time for decision by
not more than sixty (60) days upon written notice to the
Claimant. The Claimant shall receive written notice of the
Administrative Committee's review decision, together with
specific reasons for the decision and reference to the
pertinent provisions of this Agreement.
c. The Claimant may further appeal any decision of the
Administrative Committee by arbitration before the American
Arbitration Association notice of election to arbitrate to be
filed by the Claimant within Thirty (30) days of Claimant's
receipt of such decision.
7. Life Insurance and Funding. The Company in its discretion may apply
for and procure as owner and for its own benefit insurance on the life of the
Employee in such amounts and in such forms as the Company may choose. The
Employee shall have no interest whatsoever in any such policy or policies, but
at the request of the Company shall submit to medical examinations and supply
such information and execute such documents as may be required by the insurance
company or companies to whom the Company has applied for insurance.
The rights of the Employee, or his beneficiary, or estate, to benefits
under this Agreement shall be solely those of an unsecured creditor of the
Company. Any insurance policy or other assets acquired by or held by the
Company in connection with the liabilities assumed by it pursuant to this
Agreement shall not be deemed to be held under any trust for the benefit of the
Employee, his beneficiary, or his estate, or to be security for the performance
of the obligations of the Company but shall be, and remain, a general,
unpledged, and unrestricted asset of the Company.
8. Assignment of Benefits. Neither the Employee nor any beneficiary
under this Agreement shall have any right to assign the right to receive any
benefits hereunder, and in the event of any attempted assignment or transfer,
the Company shall have no further liability hereunder.
9. Miscellaneous.
a. Employment Not Guaranteed. Neither this Agreement
nor any action taken hereunder shall be construed as giving
the Employee the right to be retained as an employee of the
Company for any period.
b. Taxes. The Company shall deduct from all payments
made hereunder all applicable federal or state taxes required
by law to be withheld from such payments.
c. Amendment and Termination. The Board of Directors of
the Company together with the Employee (or his surviving
beneficiary) may, at any time, amend or terminate this
Agreement.
d. Tax Consequences. The Employee has been advised by
the Company to consult the Employee's own tax advisor
concerning the income and estate tax consequences of
deferring Compensation and receiving benefits under this
Agreement, and the Company makes no representations or
warranties in that respect.
e. Construction. The Plan shall be construed according
to the laws of the State of Maryland.
f. Form of Communication. Any election, application,
claim, notice or other communication required or permitted to
be made by the Employee to the Administrative Committee shall
be made in writing and in such form as the Administrative
Committee shall prescribe. Such communication shall
<PAGE> 5
be effective upon mailing, if sent by first class mail,
postage pre-paid, and addressed to the Company's offices at
7505 Greenway Center Drive, P.O. Box 298, Greenbelt, Maryland
20768-0298.
g. Captions. The captions at the head of a section or a
paragraph of this Agreement are designed for convenience of
reference only and are not to be resorted to for the purpose
of interpreting any provision of this Plan.
h. Severability. The invalidity of any portion of this
Agreement shall not invalidate the remainder thereof, and said
remainder shall continue in full force and effect.
i. Binding Agreement. The provisions of this Agreement
shall be binding upon the Employee and the Company and their
successors, assigns, heirs, executors and beneficiaries.
j. Costs. All costs of administration under this
Agreement shall be borne by the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first above written.
ATTEST: SUBURBAN BANK OF MARYLAND
/s/ /s/
Susan J. Hansen Winfield M. Kelly, Jr.
- ----------------------------- --------------------------------------
SECRETARY ITS CHAIRMAN
WITNESS:
/s/ /s/
Stephen C. Hosea William R. Johnson
- ----------------------------- --------------------------------------
WILLIAM R. JOHNSON
<PAGE> 1
EXHIBIT 10.5c
<PAGE> 2
TRUST UNDER DEFERRED COMPENSATION AGREEMENT
This Trust Agreement is made this 27th day of December by and between
Suburban Bank of Maryland (the "Company") and Sibyl S. Malatras (the "Trustee").
WHEREAS, Company wishes to establish a trust (herein after called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's creditors in the event of Company's
insolvency as herein defined, until paid to William R. Johnson (the
"Employee") under the deferred Compensation Agreement of even date herewith
(the "Deferred Compensation Agreement") and his beneficiaries in such manner
and at such times as specified therein;
WHEREAS, is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Deferred Compensation Agreement as an unfunded plan maintained for the purpose
of providing deferred compensation for a select group of management or highly
compensated employees for purposes of Title 1 of the Employee Retirement Income
Security Act of 1974;
WHEREAS, it is the intention of Company to make contributions to that
trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Deferred Compensation Agreement;
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF TRUST
(a) Company shall deposit the sums stated in Paragraph 4(i) of that
certain Employment Agreement of William R. Johnson even date herewith, which
shall become the principal of the Trust to be held, administered and disposed
of by Trustee as provided in the Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is
the grantor, within the meaning of subpart E, part 1, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be
held separate and apart from other funds of Company and shall be used
exclusively for the uses and purposes described in the Deferred Compensation
Agreement and general creditors of the Company as herein set forth. The
Employee (sometimes herein also referred to as the "Beneficiary") shall have no
preferred claim on, or any beneficial ownership interest in, any assets of the
Trust. Any rights created under the Deferred Compensation Agreement and this
Trust Agreement shall be more unsecured contractual rights of the Employee and
his beneficiaries against Company. Any assets held by the Trustee will be
subject to the claims of Company's general creditors under federal and state
law in the event of Insolvency, as defined in Section (a) herein.
(e) The Company, in its sole discretion may at any time, or from time
to time, make additional deposits of cash or other property in trust with
Trustee to augment the principal to be held, administered and disposed of by
Trustee as provided in this Trust Agreement. Neither Trustee nor the Employee
shall have any right to compel such additional deposits except as provided in
the Deferred Compensation Agreement.
SECTION 2. PAYMENTS TO THE EMPLOYEE AND HIS BENEFICIARIES.
(a) The Company shall deliver to the Trustee written instructions
that indicate the amounts payable in respect of the Employee (and his or her
beneficiaries), that provides a formula or other instructions acceptable to the
Trustee for determining the amounts so payable, the form in which such amount
is to be paid (as provided for or available under the the Deferred Compensation
Agreement, and the time of commencement for payment of such amounts. Except as
otherwise provided herein, the Trustee shall make payments to the Employee and
his beneficiaries in accordance with such instructions. The Trustee shall make
provision for the reporting and withholding of any federal, state or local
taxes that may be required to be withheld with respect to the payment of
benefits pursuant to the terms of the Deferred Compensation Agreement and shall
pay amounts withheld to the appropriate taxing authorities or determine that
such amount have been reported, withheld and paid by Company.
<PAGE> 3
(b) The entitlement of an Employee or his or her beneficiaries to
benefits shall be determined by Company or such party as it shall designate,
and any claim for such benefits shall be considered and reviewed under the
procedures set out in the Deferred Compensation Agreement.
(c) The Company may make payment of benefits directly to the Employee
or his beneficiaries as they become due under the terms of the Deferred
Compensation Agreement. The Company shall notify the Trustee of its decision
to make payment of benefits directly prior to the time amounts are payable to
the Employee or his beneficiaries. In addition, if the principal of the
Trust, and any earnings thereon are not sufficient to make payments of benefits
in accordance with the terms of the Deferred Compensation Agreement, the
Company shall make the balance of each such payment as it falls due. The
Trustee shall notify the Company where principal and earnings are not
sufficient.
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY WHEN
COMPANY IS INSOLVENT.
(a) The Trustee shall cease payment of benefits to the Employee and
his beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposed of this Trust Agreement if (i) the Company is unable
to pay its debts as they become due, or (ii) the Company is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1 (b) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of the Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of the Company's
Insolvency. If a person claiming to be a creditor of the Company alleges in
writing to Trustee that the Company has become Insolvent, then the Trustee
shall determine whether the Company is Insolvent and, pending such
determination, the Trustee shall discontinue payment of benefits to the
Employee or his beneficiaries.
(2) Unless the Trustee has actual knowledge of the Company's
Insolvency, or has received notice from the Company or a person claiming to be
a creditor alleging that the Company is Insolvent, the Trustee shall have no
duty to inquire whether the Company is Insolvent. The Trustee may in all
events rely on such evidence concerning the Company's solvency as may be
furnished to the Trustee and that provides the Trustee with a reasonable basis
for making a determination concerning the Company's solvency.
(3) If at any time the Trustee has determined that the
Company is Insolvent, then the Trustee shall discontinue payments to the
Employee or his beneficiaries and shall hold the assets of the Trust for the
benefit of the Company's general creditors with respect to benefits due under
the Deferred Compensation Agreement or otherwise.
(4) The Trustee shall resume the payment of benefits to the
Employee or his beneficiaries in accordance with Section 2 of this Trust
Agreement only after the Trustee has determined that the Company is not
Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee
discontinues the payment benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to the
Employee or his beneficiaries by the Company in lieu of the payments provided
for hereunder during any such period of discontinuance.
SECTION 4. PAYMENTS TO COMPANY.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, the Company shall have no right or power to direct the Trustee to
return to the Company or to divert to others any of the Trust assets before all
payment of benefits have been made to the Employee and his beneficiaries
pursuant to the terms of the Deferred Compensation Agreement.
SECTION 5. INVESTMENT AUTHORITY.
In no event may the Trustee Invest in securities (including stock or
rights to acquire stock) or obligations issued by the Company, other than a de
minimis amounts held in common investment vehicles in which the Trustee
invests. All rights associated with assets of the Trust shall be exercised by
the Trustee or the person designated by the Trustee, and shall in no event be
exercisable by or rest with the Employee.
<PAGE> 4
SECTION 6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net
of expenses and taxes, shall be accumulated and reinvested.
SECTION 7. ACCOUNTING BY TRUSTEE.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between the
Company and the Trustee. Within 60 days following the close of each calendar
year and within 60 days after the removal or resignation of the Trustee, the
Trustee shall deliver to the Company a written account of its administration
of the Trust during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting forth all
investment, receipts, disbursements and other transactions effected by it,
including a description if all securities and investments purchased and sold
with the cost or net proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately), and showing all cash, securities and
other property held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be.
SECTION 8. RESPONSIBILITY OF TRUSTEE.
(a) The Trustee shall act with the care, skill, prudence and
diligence under the circumstances then prevailing that a prudent person acting
in like capacity and familiar with such matter s would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that the
Trustee shall incur no liability to any person for any action taken pursuant to
a direction, request or approval given by the Company which is contemplated by,
and in conformity with, the terms of the Deferred Compensation Agreement or
this trust and is given in writing by the Company. In the event of a dispute
between the Company and a party, Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify the Trustee against
the Trusts's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If the Company does not pay such costs, expenses and
liabilities in a reasonably timely manner, the Trustee may obtain payment from
the Trust.
(c) The Trustee may consult with legal counsel (who may also be
counsel for the Company generally) with respect to any of its duties or
obligations hereunder.
(d) The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) The Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the
Trust, then the Trustee shall have no power to name a beneficiary of the
policy other then the Trust, to assign the policy (as distinct from conversion
of the policy to a different form) other than to a successor Trustee, or to
loan to any persons the proceeds of any borrowing against such policy.
(f) However, notwithstanding the provisions of Section 8(e) above,
the Trustee may loan to the Company the proceeds of any borrowing against an
insurance policy held as an asset of the Trust.
(g) Notwithstanding any powers granted to Trustee pursuant to the
Trust Agreement, or applicable law, the Trustee shall no have any power that
could give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of Section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue code.
SECTION 9. COMPENSATION AND EXPENSES OF TRUSTEE.
The Company shall pay all administrative and Trustee's fees and
expenses. If not so paid, the fees and expenses shall be paid from the Trust.
SECTION 10. RESIGNATION AND REMOVAL OF TRUSTEE.
<PAGE> 5
(a) The Trustee may resign at any time by written notice to the
Company, which shall be effective, 60 days after receipt of such notice unless
the Company and the Trustee agree otherwise.
(b) The Trustee may be removed by the Company on 60 days notice or
upon shorter notice accepted by the Trustee.
(c) Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within 60 days after
receipt of notice of resignation, removal or transfer, unless the Company
extends the time limit.
(d) If the Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date
resignation or removal under paragraph(s) (a) or (b) of this section. If no
such appointment has been made, then the Trustee may apply to a court of
competent jurisdiction for appointment of a successor or for instructions.
SECTION 11. APPOINTMENT OF SUCCESSOR.
(a) If the Trustee resigns or is removed in accordance with Section
10 (a) or (b) hereof, then the Company may appoint a third party, such as a
bank trust department or other party that may be granted corporate Trustee
powers under state law, as a successor to replace the Trustee upon resignation
or removal. The appointment shall be effective when accepted in writing by the
new Trustee, who shall have all of the rights and powers of the former
Trustee, including ownership rights in the Trust assets. The former Trustee
shall execute any instrument necessary or reasonable requested by the Company
or the successor Trustee to evidence the transfer.
SECTION 12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument
executed by the Trustee and the Company. Notwithstanding the foregoing, no
such amendment shall conflict with the terms of the Deferred Compensation
Agreement or shall make the Trust revocable after it has become irrevocable in
accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which the
Employee and his beneficiaries are no longer entitled to benefits pursuant to
the term of the Deferred Compensation Agreement. Upon termination of the Trust,
any assets remaining in the Trust shall be returned to the Company.
SECTION 13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to the Employee and his beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of Maryland.
SECTION 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be December 26, 1996.
Witness/ Attest: Suburban Bank of Maryland
/s/ /s/
Susan J. Hansen Winfield M. Kelly, Jr.
- ------------------------------- --------------------------------------
Secretary
/s/ /s/
Stephen C. Hosea Sibyl S. Malatras
- ------------------------------- --------------------------------------
Trustee
<PAGE> 1
EXHIBIT 10.6
<PAGE> 2
SUBURBAN BANCSHARES, INC.
CHIEF EXECUTIVE OFFICER/BOARD CHAIRMAN'S SERVICES AGREEMENT
THIS SERVICES AGREEMENT (hereinafter this "Agreement") is entered into
on this 29 day of January, 1997, by and between:
(1) Winfield M. Kelly, Jr.
12404 Pleasant Prospect Road
Mitchellville, Maryland 20721
(hereinafter "KELLY") and
(2) Suburban Bancshares, Inc.
7505 Greenway Center Drive
P. O. Box 298
Greenbelt, Maryland 20768
(hereinafter the "COMPANY"), and its subsidiary, Suburban Bank of Maryland
(hereinafter "SUBURBAN/MARYLAND").
WITNESSETH:
WHEREAS, the COMPANY desires to provide to KELLY and KELLY desires to
receive from the COMPANY a continuing services agreement so as to retain and
secure KELLY's services as Chief Executive Officer and Chairman of the Board of
Directors of the COMPANY and Chairman of the Board of Directors of
SUBURBAN/MARYLAND, upon the terms and conditions set forth in this Agreement.
NOW THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. DEFINITIONS. As used in this Agreement, the following terms
have the meanings set forth below:
(a) Commencement Date. January 1, 1997.
(b) Bank Regulatory Agency As used in this Agreement,
"Bank Regulatory Agency" shall mean any governmental authority, regulatory
agency, ministry, department, statutory corporation, central bank or other body
of the United States or of any other country or of any state or other political
subdivision of any of them having jurisdiction over the COMPANY or any
transaction contemplated, undertaken or proposed to be undertaken by the
COMPANY hereunder or under the PLAN or otherwise. Bank Regulatory Agency shall
include, but not necessarily be limited to:
(1) The Federal Deposit Insurance Corporation or
any other federal or state depository insurance organization or fund; and
(2) The Federal Reserve System, the Comptroller
of the Currency, The Maryland Division of Financial Regulation, or any other
federal or state bank regulatory or commissioner's office; and
(3) The Resolution Trust Corporation, the
Resolution Funding Corporation, the Financing Corporation or any other entity
created pursuant to The Financial Institutions Reform, Recovery and Enforcement
Act of 1989, as amended from time to time; and
(4) Any corporation, bridge bank, fund
association, or other entity established, organized, owned (in whole or in
part) or controlled by any of the foregoing; and
(5) Any predecessor, successor or assignee of the
foregoing.
2. TERM.
(a) Initial Term. Except as provided for below under
"Rights to Terminate Agreement", the Initial
<PAGE> 3
Term of this Agreement shall expire upon the expiration of Kelly's current term
as a director of the COMPANY.
(1) Renewals and Extensions; Subsequent Annual
Terms. After the Initial Term of this Agreement, this Agreement shall
automatically renew with the reelection of KELLY as BOARD CHAIRMAN in
accordance with the COMPANY's Bylaws and Charter, unless:
(A) KELLY provides notice to the COMPANY
at least on or before the end of any term that the he does not wish to renew
the contract for an additional annual term, in which event this Agreement will
expire at the end of the contract term in which KELLY gives such notice to the
COMPANY; or
(B) KELLY fails to be reelected as BOARD
CHAIRMAN in accordance with the COMPANY's Bylaws and Charter.
3. DUTIES AND AUTHORITY OF KELLY.
(a) Nature and Substance. In his role as CEO of the
COMPANY, KELLY shall report directly to the Board of Directors and shall be
under the direction of the Board of Directors. The specific powers and duties
of KELLY as CEO shall be established, determined and modified by and within the
discretion of the Board of Directors of the COMPANY, and at a minimum will
include (but not necessarily be limited to):
(1) The coordination and leadership of the
efforts of the COMPANY to achieve and maintain any and all necessary and/or
appropriate Bank Regulatory Agency approvals and permissions prerequisite to
the successful continued operation of the COMPANY, including coordination with
COMPANY's counsel, accountants and bank consultants.
(2) The provision of any and all services
necessary, appropriate and/or helpful to operations of the COMPANY at a minimum
of additional cost or overhead to the COMPANY.
(3) The provision of updates, status reports and
such other data and information as may be reasonably required by the COMPANY
and Bank Regulatory Agencies.
(4) Subject to guidelines and/or criteria
established by the COMPANY, the hiring, promotion, supervision, retention and
discharge of all employees (with Board approval, where required by regulatory
provisions applicable to the COMPANY), and, subject to any requisite approval
of the Board of Directors, the hiring, supervision and discharge of the
COMPANY's counsel, accountants and consultants.
(5) The formulation and implementation of
employee personnel policies and benefits, subject to approval by the Board of
Directors of the COMPANY.
(6) The promotion of the reputation and business
of the COMPANY within the community.
(7) The advancement of the business purposes of
the COMPANY, including, but not limited to business development, customer,
depositor and public relations.
(8) Participation in and service upon such
committees and subcommittees as may be directed by the Board of Directors of
the COMPANY without additional compensation to that set forth hereinbelow.
(9) Supervision of the maintenance of the books
and accounts and the supervision and maintenance of accounts payable and
expenses of the COMPANY and the reporting of the status thereof to the COMPANY
at each scheduled or called meeting of the Board of Directors or any committee
thereof. Provided, however, that all expenditures on behalf of the COMPANY
shall be approved in accordance with the terms and conditions of procedures
established by the COMPANY.
(10) KELLY further agrees to be available as and
when needed at the Offices of the COMPANY and to perform services on behalf of
the COMPANY elsewhere (when appropriate) to assist, direct or supervise the
operations and employees of the COMPANY upon such terms, conditions, rules,
policies and regulations as may be set by the Board of Directors of the
COMPANY, from time to time. KELLY agrees to devote sufficient time and
attention and best efforts toward the successful operation of the COMPANY.
<PAGE> 4
(b) Performance of Services. KELLY shall discharge his
duties to the best of his ability for and on behalf of the COMPANY. KELLY
shall comply with all laws, statutes, ordinances, rules and regulations
relating to his services and duties. During the term of this Agreement, KELLY
shall not at any time or place directly or indirectly engage or agree to engage
in any business or practice related to the banking business with or for any
other person or entity to any extent whatsoever, other than to the extent
required by the terms and conditions of this Agreement.
(c) Constructive Termination. Excepting any action
precipitated by reason of regulatory requirements as provided in Section 5(b)
below, substantial curtailment of the duties and authority of KELLY hereunder
by the COMPANY shall constitute a termination without cause in breach of this
Agreement.
(d) KELLY shall also, as part of this Agreement, perform
services as Chairman of the Board of Directors of SUBURBAN/MARYLAND without
additional compensation to that set forth hereinbelow, such services to include
such items as described in Paragraph 3 (a) above.
4. Payment Amount; Terms. As full compensation for all services
rendered to the COMPANY pursuant to this Agreement and the covenants contained
herein, the COMPANY shall pay to KELLY the following:
(a) Base Compensation. KELLY's base compensation (the
"Base Compensation") shall be One Hundred Ten Thousand and 00/100 Dollars
($110,000.00) per annum. The Board of Directors shall review such base
compensation at least annually and may grant such raises as in its discretion
are deemed warranted.
(1) Base Compensation Rate. Compensation to begin
on the Commencement Date at the above annual rate.
(2) Method of Payment. The COMPANY shall pay
KELLY's said base compensation in equal monthly installments or more
frequently.
(b) Vacation and Leave. KELLY shall be entitled to such
vacation and leave as may be provided for under the current and future leave
and vacation policies of the COMPANY for executive officers.
(c) Office Space. The COMPANY will provide customary
executive office space and executive office support to KELLY beginning on the
Commencement Date.
(d) D & O Insurance. The COMPANY will provide KELLY with
directors and officers liability insurance coverage on terms comparable to
that provided to the COMPANY'S other officers and directors.
(e) Merger or Buy-Out Termination or Non-renewal
Compensation. In the event this Agreement is terminated or not renewed at the
next opportunity for termination or non-renewal as a result of any sale or
exchange of stock in the COMPANY (or any of its subsidiaries) with any third
party which results in a change in a controlling interest of the COMPANY (or
any of its subsidiaries), the COMPANY shall thereupon immediately pay to KELLY
the sum of Two Hundred Thousand and 00/100 Dollars ($200,000.00) as severance
compensation to KELLY; being equal to his Base Compensation for approximately a
Twenty-Two (22) month period. In addition, should such change in a controlling
interest occur prior to the time when KELLY shall have become fully vested in
any stock option plan established for his benefit, KELLY shall thereupon also
become immediately vested in all options theretofore issued to him or accrued
to his benefit. For purposes of construing the foregoing, the term "change in
a controlling interest" shall be defined as provided in applicable Federal
Reserve Board regulations.
5. CONDITIONS SUBSEQUENT TO CONTINUED OPERATION AND EFFECT OF
AGREEMENT. This Agreement shall be subject to the following conditions
subsequent to its continued operation and effect:
(a) Approval by Bank Regulatory Agencies. This Agreement
and all of its terms and conditions and the selection of KELLY named herein,
and the continued operation and effect of this Agreement and the COMPANY's
continuing obligations hereunder shall at all times be subject to the
continuing approval of any and all Bank Regulatory Agencies whose approval of
the COMPANY and/or its operations or stock offerings is a necessary
prerequisite to the continued operation of the COMPANY.
(b) Compliance With Bank Regulatory Agency Requirements.
Should any terms or conditions of this Agreement, upon subsequent detailed
review by any Bank Regulatory Agency, be found to be not in compliance with
<PAGE> 5
federal or state bank regulations, or should any terms or conditions required
to be included herein by any such Bank Regulatory Agency be absent, this
Agreement may be rescinded by the COMPANY if the parties hereto cannot agree
upon such additions, deletions, or modifications as may be deemed necessary or
appropriate under such federal or state regulations and the interpretations
thereof. Any term or condition of this Agreement which violates or is deemed
to violate any then-applicable rule, regulation, order or understanding
promulgated by any Bank Regulatory Agency, or any payment, compensation, or
other consideration provided for hereunder shall be modified or deleted to
conform to any such Bank Regulatory Agency rule, regulation, order or
understanding.
6. RIGHTS TO TERMINATE AGREEMENT.
(a) Breach or Default Under Agreement. Either party may
terminate this Agreement for breach or default as provided hereinbelow.
(b) Termination Without Cause/Severance. KELLY may
terminate this Agreement in accordance with Paragraph 2(a)(1)(A), above. The
COMPANY may terminate this Agreement in accordance with Paragraph 2(a)(1)(B),
above. Otherwise, if KELLY is not in breach or default of this Agreement and
the COMPANY terminates KELLY's services for any reason and under any procedures
other than those specified in paragraph (c), below, then the COMPANY shall
thereupon immediately pay to KELLY the sum of One Hundred Ten Thousand and
00/100 Dollars ($110,000.00) as severance compensation to KELLY; being equal to
his Base Compensation for a Twelve (12) month period. In addition, should such
termination occur prior to the time when KELLY shall have become fully vested
in any stock option plan established for his benefit, KELLY shall thereupon
also become immediately vested in all options theretofore issued to him or
accrued to his benefit.
(c) Termination of KELLY With Cause; Procedure.
(1) Termination of Compensation. If the COMPANY
terminates KELLY for cause as set forth in this paragraph, then the
compensation payments provided for herein shall cease.
(2) Definition of Cause: Under this Agreement,
"cause" shall be defined to be:
(A) Any willful act or action on the
part of KELLY done in connection with or associated with the services rendered
by KELLY under this Agreement for which a criminal prosecution (other than
traffic and misdemeanor actions) is commenced by the prosecuting authorities in
the jurisdiction in which such act or action occurred. For the purposes of
this Agreement, the commencement of a criminal prosecution shall be deemed to
have occurred upon the filing of a criminal information against KELLY or the
indictment of KELLY by any local, state or federal authority.
(B) Any act of theft, fraud, deceit,
material misrepresentation, assault or battery done by KELLY in connection with
or associated with the services rendered by KELLY to the COMPANY under this
Agreement.
(C) Any act, action, failure to act or
omission which constitutes gross misconduct or gross negligence in connection
with or associated with the services rendered by KELLY under this Agreement,
provided that the procedures of paragraph 6(c)(3) are followed.
(D) Any termination following a default
of this Agreement by KELLY, pursuant to the provisions of Paragraph 11 below.
(E) Any Bank Regulatory Agency action
with respect to this Agreement, or any failure of this Agreement to comply with
any Bank Regulatory Agency requirements, unless revisions or modifications are
agreed to as set forth in Paragraph 5, above.
(3) Procedure for Termination With Cause: The
procedure for termination with cause shall be as follows:
(A) For any reason specified in
paragraph 6(c)(2)(A), KELLY shall be terminated upon the commencement of
prosecution, as of the date of the act to which that paragraph applies.
<PAGE> 6
(B) For any reason specified in
Paragraphs 6(c)(2)(B), 6(c)(2)(C), 6(c)(2)(D) or 6(c)(2)(E), unless ordered by
or agreed to differently between the COMPANY and a Bank Regulatory Agency, or
unless a criminal prosecution has commenced as provided in Paragraphs
6(c)(2)(A) and 6(c)(3)(A) above, the COMPANY shall give KELLY written notice of
the cause alleged to be the basis for KELLY's termination. KELLY shall
thereafter have a period of Thirty (30) days from the date of the receipt of
the COMPANY's written notice in which to dispute and/or explain the
situation(s) referred to in the COMPANY's written notice, including, if
appropriate, a response to Bank Regulatory Agencies. If KELLY does not respond
to the COMPANY's notice, KELLY shall be deemed to have agreed to the COMPANY's
and/or the Bank Regulatory Agency's allegations and the termination shall be
effective as of the date of the COMPANY's written notice. If KELLY disputes
the allegations contained in the COMPANY's and/or the Bank Regulatory Agency's
notice, KELLY shall notify the COMPANY in writing within the time period set
forth above and the COMPANY and KELLY shall set a meeting to discuss a
resolution of the dispute. If the parties and/or any Bank Regulatory Agency do
not reach agreement as to KELLY's termination, within Forty-five (45) days of
the COMPANY's notice, the COMPANY, by a majority of its Board of Directors,
shall have the right to terminate KELLY and to discontinue the compensation
payments to KELLY. If KELLY nevertheless still disagrees that his termination
was proper under the terms of this Agreement, both parties hereto by their
execution hereof agree, unless otherwise ordered by or agreed to differently
between any Bank Regulatory Agency and the COMPANY, to submit to binding
arbitration under the rules, regulations and procedures of the American
Arbitration Association.
(d) Termination of Agreement by KELLY for Cause: If the
COMPANY shall become in breach or default of any of the material provisions
hereof, including especially any constructive termination [as provided in
Paragraph 3(c), above] and fails to cure such breach as provided in Paragraph
11, below, then KELLY may, at his option at any time thereafter, elect to
terminate this Agreement for cause, in which event the COMPANY shall thereupon
immediately pay to KELLY the sum of One Hundred Ten Thousand and 00/100
Dollars ($110,000) as severance compensation to KELLY; being equal to his Base
Compensation for a Twelve (12) months period. In addition, should such
termination occur prior to the time when KELLY shall have become fully vested
in any stock option plan established for his benefit, KELLY shall thereupon
also become immediately vested in all options theretofore issued to him or
accrued to his benefit.
(e) Death or Disability: If KELLY should be unable to
perform his professional duties due to disability, then the compensation
provided for hereinabove shall continue at its full level for a period not to
exceed one hundred twenty (120) days and, if the disability is temporary, shall
resume upon KELLY's return to his duties hereunder. In the event of KELLY's
death, such compensation payments shall cease.
(f) Survival of Restrictions. In the event of a
termination of the offer set forth in this Agreement, or in the event of a
termination of this Agreement after acceptance hereof by KELLY, all covenants
and restrictions contained herein shall survive the termination and shall
continue in full force and effect as provided for herein.
7. REPRESENTATIONS AND WARRANTIES OF KELLY. KELLY represents and
warrants to the COMPANY the following:
(a) Information Supplied to the COMPANY. All information
and data, including but not limited to, personal data, work histories, salaries
and responsibilities, represented and provided to the COMPANY by KELLY in his
application for the position provided for herein are true and correct in all
material respects and KELLY has not stated any facts or circumstances, nor has
he failed to disclose any facts or circumstances to the COMPANY the statement
or omission of which would cause KELLY's application to be false or misleading
in any material respect.
(b) Prior Agreements. KELLY is not now a party to or
bound by any employment, consulting or other type of agreement, nor has he been
a party to or bound by any such agreement, which would be breached by, or of
which KELLY would be in default, by virtue of any provision contained in this
Agreement with the COMPANY, nor is KELLY a party to any such agreement which
would compete with or constitute a conflict of interest with this Agreement and
KELLY's duties and obligations to the COMPANY.
(c) Bank Regulatory Agency Approval. To the best of
KELLY's knowledge, information and belief, there are no facts or circumstances
contained in KELLY's personal or professional history which are likely to, or
which in fact will, cause any Bank Regulatory Agency having jurisdiction over
the COMPANY to withdraw, suspend or substantially modify its approval of KELLY
as CEO or BOARD CHAIRMAN of the COMPANY.
8. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
<PAGE> 7
To the best of the COMPANY's knowledge, information and belief, there
are no facts or circumstances to which the COMPANY is privy, which are likely
to, or which in fact will, cause any Bank Regulatory Agency having jurisdiction
over the COMPANY to withdraw, suspend or substantially modify its approval of
KELLY as CEO or BOARD CHAIRMAN of the COMPANY.
9. RESTRICTIVE COVENANTS.
(a) Proprietary Information. KELLY acknowledges that
upon acceptance of this Agreement, KELLY will be making use of, acquiring and
adding to the COMPANY's confidential and proprietary information of a special
and unique nature and value relating to such matters as, but not limited to the
COMPANY's business operations, internal structure, financial affairs, programs,
software, systems, procedures, manuals, confidential reports, and sales and
marketing methods, as well as the amount, nature and type of services,
equipment and methods used and preferred by the COMPANY's suppliers, and
customers, all of which shall be deemed to be confidential information. KELLY
acknowledges that such confidential information has been and will continue to
be of central importance to the business of the COMPANY and that disclosure of
it or its use by others could cause substantial loss to the COMPANY. In
consideration of his anticipated and thereafter continued contract with the
COMPANY, upon acceptance hereof, KELLY agrees that during the entire term of
this Agreement, and upon and for a period of Two (2) years after such term,
KELLY shall not, for any purpose whatsoever, directly or indirectly, divulge,
reveal, report, publish, transfer, or disclose to any person or entity any of
such confidential information which was obtained by KELLY as a result of
KELLY's services to the COMPANY, nor shall KELLY reveal to any person or
entity any trade secrets of the COMPANY, but KELLY shall hold all of the same
confidential and inviolate. For purposes of construing the foregoing,
"proprietary information" shall not be construed to include information
generally available in the public domain through sources other than KELLY.
(b) Property of the COMPANY. All contracts, agreements,
forms, financial books, records, instruments and documents, supplier lists,
memoranda, data, reports, programs, software, tapes, rolodexes, telephone and
address books, letters, research, listings, programming, and any other
instruments, records or documents relating or pertaining to the COMPANY
(hereinafter referred to as "Records") shall at all times be and remain the
property of the COMPANY. Upon termination or exipiration of the term of this
Agreement for any reason whatsoever, KELLY shall return to the COMPANY all
Records (whether furnished by the COMPANY, by a third party or prepared by
KELLY), and KELLY shall neither make nor retain any copies of any such Records
after such termination.
(c) Inventions and Creations. All inventions and other
creations, whether or not patentable or copyrightable, and all ideas, reports
and other creative works, including, without limitation, innovations, manuals
or other materials, made or conceived in whole or in part by KELLY during the
term of this Agreement, which relate in any manner whatsoever to the business,
existing or proposed of the COMPANY or any other business or research
development effort in which the COMPANY or any of its subsidiaries or
affiliates engages during the term of this Agreement, will be disclosed
promptly by KELLY to the COMPANY and shall be the sole and exclusive property
of the COMPANY.
(d) Non-Solicitation of Customers and Employees.
KELLYagrees during the term of this Agreement and for a period of Two (2)
years immediately following the expiration of the term hereof, that he shall
not for his account or on behalf of any other person or legal entity, hire or
solicit to hire any employee of the COMAPNY (or any of its affiliates or
subsidiaries) or solicit the banking business of any person or entity known to
him to be a customer of the COMPANY (or any of its affiliates or subsidiaries).
10. INDEMNIFICATION. KELLY agrees to indemnify and hold harmless
the COMPANY from and against any and all claims made against the COMPANY by any
party by virtue of KELLY's past employment, whether such claims are made by a
past employer or by another party with whom KELLY has dealt in the past. The
COMPANY agrees to indemnify and hold harmless KELLY from and against any and
all claims made against KELLY arising directly or indirectly from any fact or
matter which contradicts (or as alleged would contradict) any representation or
warranty of the COMPANY hereunder. Promptly after receipt of any party hereto
(the "Indemnitee") of notice of any demand, claim or circumstance which, or
which with the lapse of time, would or might give rise to a claim or the
commencement (or threatened commencement) of any action, proceeding pr
investigation (an "Asserted Liability") that may result in a loss, the
Indemnitee shall give notice thereof (the "Claims Notice") to the other party
(the "indemnifying Party"). The Claims Notice shall describe the Asserted
Liability in reasonable detail, and shall indicate the amount (estimated, if
necessary and to the extent feasible) of the loss that has been or may be
suffered by the Indemnitee. The Indemnifying Party may elect to assume
responsibility for and to compromise or defend, at its own expense and by its
own counsel (which counsel shall be reasonably satisfactory to the Indemnitee),
any Asserted Liability, unless in the reasonable judgment of the Indemnitee
there may be one or more legal defenses available to it that are different from
or in addition to those available to the Indemnifying Party and, therefore,
<PAGE> 8
it is advisable for the Indemnitee to be represented by separate counsel. Then,
in such event, the Indemnitee shall have the right to employ separate counsel
to represent it (which shall be reasonably satisfactory to the Indemnifying
Party), in which event the fees and disbursements of such counsel shall be
subject to indemnification hereunder. If such Indemnifying Party elects to
compromise or defend such Asserted Liability, it shall within 30 days (or
sooner, if the nature of the Asserted Liability so requires) notify the
Indemnitee of its intent to do so, and the Indemnitee shall have no further
liability for such Asserted Liability but shall cooperate, at the expense of
the Indemnifying Party, in the compromise of, or defense against, such Asserted
Liability. If the Indemnifying Party elects not to compromise or defend the
Asserted Liability, fails to notify the Indemnitee of its election as herein
provided, or contests its obligation to indemnify under this Agreement, the
Indemnitee may pay, compromise or defend such Asserted Liability.
Notwithstanding the foregoing, neither the Indemnifying Party nor the
Indemnitee may settle or compromise any claim over the objection of the other;
provided, however, that consent to settlement or compromise shall not be
unreasonably withheld. In any event, the Indemnitee and the Indemnifying Party
may participate, at their own expense, in the defense of such Asserted
Liability. If the Indemnifying Party chooses to defend any claim, the
Indemnitee shall make available to the Indemnifying Party any books, records or
other documents within its control that are necessary or appropriate for such
defense.
11. RIGHT TO CURE; DEFAULT. In the event either party shall be
alleged to be in breach of this Agreement, written notice shall be given by the
other party and a Ten (10) day opportunity to cure shall be provided. After
such Ten (10) day cure period, if the breach is not cured and remains as
alleged, the breaching party shall be deemed in default and this Agreement may
be terminated in the manner provided in Paragraph 6, above.
12. ENTIRE AGREEMENT. This Agreement represents the entire
agreement of the parties relating to the services of KELLY. All prior
negotiations between the parties are merged into this Agreement and there are
no understandings or agreements other than those incorporated herein.
13. MISCELLANEOUS.
(a) Severability; Court Enforcement. The parties hereto
covenant and agree that to the extent any provisions or portion of this
Agreement shall be held, found or deemed to be unreasonable, unlawful or
unenforceable, by any Court of law, then the parties hereto expressly covenant
and agree that any such provision or portion thereof shall be modified to the
extent necessary in order that any such provision or portion thereof shall be
legally enforceable to the fullest extent permitted by applicable law and that
any court of competent jurisdiction shall, and the parties hereto do hereby
expressly authorize any court of competent jurisdiction to, enforce any such
provision or portion thereof or to modify any such provision thereof shall be
enforced by such court to the fullest extent permitted by applicable law.
(b) Waiver. The COMPANY and KELLY each reserve the right
to waive any of the terms of this Agreement which benefits the party waiving
same. Any such waiver must be in a writing signed by the party waiving the
same.
(c) Choice of Law. It is the intention of the parties
hereto that this Agreement shall be governed by the laws of the State of
Maryland.
(d) Successors. The terms of this Agreement shall inure
to the benefit of and be binding upon the COMPANY, its successors and assigns,
and upon KELLY, his heirs, guardians and personal and legal representatives.
(e) Gender. The use of the masculine gender herein shall
be deemed to be or include the feminine gender, wherever appropriate.
(f) Notices. All notices, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally or if sent registered or certified mail,
return receipt requested, properly addressed and postage prepaid to the
addresses set forth hereinabove.
(g) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
(h) Headings. The Section and paragraph headings used
herein are for convenience and reference only and shall not enter into the
interpretation hereof.
(i) Representation by Counsel.
<PAGE> 9
(1) Counsel for the COMPANY. The parties hereto
acknowledge that Raymond G. LaPlaca , of the law firm of Reichelt,
Nussbaum, LaPlaca and Miller has acted as counsel to the COMPANY in this
matter.
(2) Counsel for KELLY. The parties hereto
acknowledge that Stephen C. Hosea, Esquire, of the law firm of McNamee, Hosea,
Jernigan & Kim, P.A., has acted as counsel to KELLY in this matter.
IN WITNESS WHEREOF this Agreement has been executed by the Venture as
of the day and year first above written.
ATTEST/WITNESS: SUBURBAN BANCSHARES, INC.
/s/ /s/
Susan J. Hansen By: Stephen A. Horvath
- ---------------------------- -----------------------------------------
Its President
SUBURBAN BANK OF MARYLAND
/s/ /s/
Susan J. Hansen By: Stephen A. Horvath
--------------------------- -----------------------------------------
Its President
/s/ /s/
Susan J. Hansen Winfield M. Kelly, Jr.
- ---------------------------- -----------------------------------------
<PAGE> 1
EXHIBIT 10.7
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (hereinafter this "Agreement") is entered
into on this 9th day of December, 1996, by and between Stephen A. Horvath, now
residing at 5 Oskaloosa Court, Rockville, Maryland, 20855, (the "Employee"),
Suburban Bank of Maryland, 7505 Greenway Center Drive, Greenbelt, Maryland,
20768, (the "Employer")and Suburban Bancshares,Inc., a Delaware Corporation
("Bancshares").
RECITAL
The Employee is hereby employed as President and Chief Executive
Officer of Suburban Bank of Maryland (hereinabove defined as the "Employer" and
hereinafter sometimes referred to as "Suburban Bank") under, and subject to,
the terms of this Employment Agreement.
NOW THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Definitions. As used in this Agreement, the following terms
have the meanings set forth below:
(a) Commencement Date. January 1, 1997.
(b) Bank Regulatory Agency. As used in this Agreement,
"Bank Regulatory Agency" shall mean any governmental authority, regulatory
agency, ministry, department, statutory corporation, central bank or other body
of the United States or of any other country or of any state or other political
subdivision of any of them having jurisdiction over the Employer or any
transaction contemplated, undertaken or proposed to be undertaken by the
Employer. Bank Regulatory Agency shall include, but not necessarily be limited
to:
(1) The Federal Deposit Insurance Corporation or
any other federal or state depository insurance organization or fund; and
(2) The Federal Reserve System, the Comptroller
of the Currency, the Maryland Division of Financial Regulation, or any other
federal or state bank regulatory or commissioner's office; and
(3) Any corporation, bridge bank, fund
association, or other entity established, organized, owned (in whole or in
part) or controlled by any of the foregoing; and
(4) Any predecessor, successor or assignee of the
foregoing.
2. Acceptance of Offer; Term.
(a) Construction of Agreement. For all purposes
contained herein, this Agreement shall, unless and until accepted as provided
for herein by the Employee, be considered to be a contingent offer of
employment by the Employer, but until properly accepted by the Employee, this
Agreement shall not become operative and shall not constitute an agreement for
the employment of the Employee. Accordingly, unless and until properly accepted
by the Employee, this Agreement shall impose no duties or obligations on either
party hereto.
(b) Manner of Acceptance. Execution of this Agreement by
both the Employee and the Employer.
(c) Commencement of Time to Accept Offer. This Agreement
shall be accepted within Fifteen (15) days after its presentation to the
Employee.
(d) End of Time to Accept; Lapse of Offer. If the
Employee does not accept the offer contained herein in the manner set forth
above, the offer contained in this Agreement shall lapse and will thereafter be
of no further force and effect.
(e) Initial Term of Accepted Agreement. Except as
provided for below under "Rights to Terminate Agreement", the Initial Term of
this Agreement shall expire on December 31, 1998.
(1) Renewals and Extensions; Subsequent Annual
Terms. After the Initial Term of this
<PAGE> 3
Agreement, this Agreement shall automatically renew for successive One (1) year
terms each of which shall expire on December 31 of each successive year unless:
(A) the Employee provides notice to the
Employer at least Thirty (30) days before the end of any term that he does not
wish to renew the contract for an additional annual term, in which event this
Agreement will expire at the end of the contract term in which the Employee
gives such notice to the Employer; or
(B) The Employer provides notice to the
Employee at least Thirty (30) days before the end of any term that the Employer
does not wish to renew this Agreement for an additional annual term, in which
event, this Agreement will expire at the end of the contract term in which the
Employer gives such notice to the Employee.
3. Duties of the Employee.
(a) Nature and Substance. Upon acceptance hereof by the
Employee, the Employer will employ the Employee as an executive officer of the
Employer. The Employee shall report directly to the Chairman of the Board of
Directors (the "Chairman") and shall be under the direction of the Chairman.
The specific powers and duties of the Employee shall be established, determined
and modified by and within the discretion of the Board of Directors of the
Employer (the "Board of Directors"), and at a minimum will include (but not
necessarily be limited to):
(1) The coordination and leadership of the
efforts of the Employer to achieve and maintain any and all necessary and/or
appropriate Bank Regulatory Agency approvals and permissions prerequisite to
its successful continued operation including coordination of the professional
services of counsel, accountants and bank consultants.
(2) The provision of any and all services
necessary, appropriate and/or helpful to operations of the Employer at a
minimum of additional cost or overhead to it.
(3) The provision of updates, status reports and
such other data and information as may be reasonably required by the Employer
and Bank Regulatory Agencies.
(4) Subject to guidelines and/or criteria
established by the Employer, the hiring, promotion, supervision, retention and
discharge of all employees except for its executive officers.
(5) The formulation and implementation of
employee personnel policies and benefits, subject to approval by the Board of
Directors.
(6) The promotion of the reputation and business
of the Employer within the community.
(7) The advancement of the business purposes of
the Employer, including, but not limited to business development, customer,
depositor and public relations.
(8) Participation in and service upon such
committees and subcommittees as may be directed by the Board of Directors
without additional compensation to that set forth hereinbelow.
(9) Supervision of the maintenance of the books
and accounts and the supervision and maintenance of accounts payable and
expenses of the Employer and the reporting of the status thereof at each
scheduled or called meeting of the Board of Directors or any committee thereof.
Provided, however, that all expenditures on behalf of the Employer shall be
approved in accordance with the terms and conditions of procedures established
by the Board of Directors.
(10) Serve as a member of the Employer's Board of
Directors.
(11) The Employee further agrees to be present or
available at the Offices of the Employer during normal business hours, or he
shall be performing services on behalf of the Employer during normal business
hours (which shall mean an average of not less that forty (40) hours per week)
and such additional hours as may be necessary and appropriate to work for the
Employer and to assist, direct or supervise the operations and other employees
of the Employer upon such terms, conditions, rules, policies and regulations as
may be set by the Board of Directors of the Employer from time to time. The
Employee agrees to devote his full time and attention and best efforts toward
the successful operation of the Employer.
<PAGE> 4
(b) Performance of Services. The Employee shall
discharge his duties to the best of his ability for and on behalf of the
Employer. The Employee shall comply with all laws, statutes, ordinances, rules
and regulations relating to his employment and duties. During the term of this
Agreement, the Employee shall not at any time or place directly or indirectly
engage or agree to engage in any business or practice related to the banking
business with or for any other person or entity to any extent whatsoever, other
than to the extent required by the terms and conditions of this Agreement.
(c) Additional Services to Suburban Bancshares, Inc. The
Employee shall also, as part of this Employment Agreement, perform services as
President and Chief Operating Officer of Suburban Bancshares, Inc., the parent
corporation of the Employer, without additional compensation to that set forth
hereinbelow, such services to include such items as described in paragraph 3(a)
above. If elected, the Employee agrees to serve on the Suburban Bancshares,
Inc, Board of Directors.
4. Payment Amount; Terms. As full compensation for all services
rendered pursuant to this Agreement and the covenants contained herein, the
Employer shall pay to the Employee the following:
(a) Base Compensation. Base compensation of One Hundred
Thirty-Five Thousand and 00/100 Dollars ($135,000.00) per annum, payable as set
forth below. The Board of Directors shall review this amount annually and may
grant such raises as in its discretion are deemed warranted.
(1) Base Salary Rate. Salary to begin on the
Commencement Date at the above annual rate.
(2) Bonuses. Such discretionary bonuses as may
be determined and approved by the Board of Directors from time to time.
(3) Method of Payment. The Employer shall pay
the Employee's salary in accordance with its regular payroll periods as may be
set by it from time to time, but at least twice monthly. Payment of all
salaries shall be subject to the customary withholding tax and other employment
taxes as required with respect to compensation paid by an employer to an
employee.
(b) Vacation and Leave. The Employee shall be entitled
to such vacation and leave as may be provided for under the current and future
leave and vacation policies of the Employer for executive officers.
(c) Office Space. The Employer will provide customary
office space and office support to the Employee beginning on the Commencement
Date.
(d) Car or Car Allowance. The Employer will provide to
the Employee the full time use of a Buick, Pontiac or Mercury car, either owned
or leased by the employer, plus provide all insurance, maintenance, gas and oil
and all related expenses for the operation of the vehicle which is customary in
the banking industry in the primary service area of the Employer.
(e) Insurance. The Employer will provide the Employee
with health, life, disability and such other insurance benefits as the Employer
may determine appropriate and proportionately similar to that which it arranges
for all executive personnel.
(f) Expense Account. The Employee is authorized to incur
reasonable expenses for promoting the business of the Bank including membership
fees, dues and the cost of attending meetings and conventions which the
Employee incurs in his capacity as President or Chief Executive Officer of the
Bank and which are reasonably necessary for the performance of his duties and
responsibilities. Such business expenses shall be incurred in accordance with
the general policies of the Bank as established from time to time.
(g) Retirement Plan and Deferred Compensation. The Employee
shall be entitled to participate in any and all retirement programs of the
Employer which are applicable to executive personnel of the Employer,
including, but not limited to, the cash or deferred Section 401 (k) plan of the
Employer. In addition to such participation, the Employee shall be entitled to
deferred compensation equal to Ten (10%) Percent of the Employee's annual base
compensation, accruing monthly on the first day of each month throughout the
term of the Employer's employment, reduced by the annual Employer contribution
to the Employee's said 401(K)plan account.
(h) Merger or Buy-out Termination or Non-renewal
Compensation. In the event this Agreement
<PAGE> 5
is terminated or not renewed by the Employer at the next opportunity for
termination or non-renewal as a result of any merger or buy-out or "Change in
Control" (as hereinafter defined) of the Employer at any time during the term of
this Agreement, the Employer shall continue to pay to the Employee a sum equal
to that provided in Paragraph 6 (b), below, plus the sum of One Hundred
Thousand ($100,000.00) Dollars. The compensation hereinabove provided in this
Paragraph 4 (h), shall also be payable to the Employee in the event that the
Employee, coincident with any such merger or buy-out or coincident with any
"Change in Control" of the Employer (as hereinafter defined) elects to
terminate his Employment. For purposes of the foregoing, "Change in Control"
shall be defined as any circumstance under which neither Winfield M. Kelly, Jr.
nor Marlin Husted (nor the Employee himself, if thus appointed subsequent
hereto)remains as Chairman or Vice Chairman of the Board of Directors or Chief
Executive Officer of Suburban Bancshares, Inc.
(i) Officers and Directors Liability Insurance. The Employer
shall provide such insurance coverage as is provided for other directors and
officers of Employer and its parent corporation, Suburban Bancshares, Inc., for
the benefit and protection of the Employee from all claims, lawsuits and causes
of action arising out of, or related to, the performance of Employee's duties,
except for matters described in Paragraph 6 (c), below.
5. Conditions Subsequent to Continued Operation and Effect of
Agreement. This Agreement shall be subject to the following conditions
subsequent to its continued operation and effect:
(a) Approval by Bank Regulatory Agencies. This Agreement
and all of its terms and conditions and the selection of the Employee named
herein, and the continued operation and effect of this Agreement and the
Employer's continuing obligations hereunder shall at all times be subject to
the continuing approval of any and all Bank Regulatory Agencies whose approval
is a necessary prerequisite to the continued operation of the Employer.
(b) Compliance With Bank Regulatory Agency Requirements.
Should any terms or conditions of this Agreement, upon subsequent detailed
review by any Bank Regulatory Agency, be found to be not in compliance with
federal or state bank regulations, or should any terms or conditions required
to be included herein by any such Bank Regulatory Agency be absent, this
Agreement may be rescinded by the Employer if the parties hereto cannot agree
upon such additions, deletions, or modifications as may be deemed necessary or
appropriate under such federal or state regulations and the interpretations
thereof. Any term or condition of this Agreement which violates or is deemed
to violate any then-applicable rule, regulation, order or understanding
promulgated by any Bank Regulatory Agency, or any payment, compensation, or
other consideration provided for hereunder shall be modified or deleted to
conform to any such Bank Regulatory Agency rule, regulation, order or
understanding.
6. Rights to Terminate Agreement.
(a) Breach or Default Under Agreement. Either party may
terminate this Agreement for breach or default as provided hereinbelow.
(b) Termination Without Cause/Severance. The Employee
may terminate this Agreement in accordance with Paragraph 2(e)(1)(A), above.
The Employer may terminate this Agreement in accordance with Paragraph
2(e)(1)(B), above. If the Employer thus terminates the Employee's employment
under the terms of Paragraph 2(e)(i)(B) or for any reason other than those
specified in paragraph (c) below, at any time during the initial two (2) year
term of this agreement, then the Employer shall pay to the Employee a sum equal
to Employee's base compensation for the duration of said initial term, which
shall not be less than twelve months compensation. If the Employer thus
terminates the Employee's employment under the terms of Paragraph 2(e)(i)(B)
or for any reason other than those specified in paragraph (c), below, at any
time after such initial two (2) year term, then the Employer shall pay to the
Employee a sum equal to the compensation provided for the duration of the then
applicable term of the Employee's employment, plus an additional twelve (12)
months of compensation at Employee's then current base compensation. The
Employee shall also be entitled, in the event of such termination without
cause, to a lump sum payment of Twelve Thousand and 00/100 ($12,000) Dollars in
lieu of continuation of health insurance, life insurance, disability insurance,
retirement funding and other Employee benefits; which benefits under Paragraph
4 shall cease upon such termination.
(c) Termination With Cause; Procedure.
(1) Termination of Compensation. If the Employer
terminates the Employee for cause as set forth in this paragraph, then the
compensation payments provided for herein shall cease.
(2) Definition of Cause: Under this Agreement,
"cause" shall be defined to be:
<PAGE> 6
(A) Any willful act or action on the part of the
Employee done in connection with or associated with the services rendered by
the Employee under this Agreement for which a criminal prosecution (other than
traffic and misdemeanor actions) is commenced by the prosecuting authorities in
the jurisdiction in which such act or action occurred. For the purposes of
this Agreement, the commencement of a criminal prosecution shall be deemed to
have occurred upon the filing of a criminal information against the Employee or
the indictment of the Employee by any local, state or federal authority.
(B) Any act of theft, fraud, deceit,
misrepresentation, assault or battery done by the Employee in connection with
or associated with the services rendered by the Employee to the Employer under
this Agreement.
(C) Any act, action, failure to act or omission
which constitutes gross misconduct or gross negligence in connection with or
associated with the services rendered by the Employee under this Agreement,
provided that the procedures of paragraph 6(c)(3) are followed.
(3) Procedure for Termination With Cause: The
procedure for termination with cause shall be as follows:
(A) For any reason specified in paragraph
6(c)(2)(A), the Employee shall be terminated upon the commencement of
prosecution, as of the date of the act to which that paragraph applies.
(B) For any reason specified in Paragraphs
6(c)(2)(B)or 6(c)(2)(C), unless ordered by or agreed to differently between the
Employer and a Bank Regulatory Agency, the Employer shall give the Employee
written notice of the cause alleged to be the basis for the Employee's
termination. The Employee shall thereafter have a period of Thirty (30) days
from the date of the receipt of the Employer's written notice in which to
dispute and/or explain the situation(s) referred to in the Employer's written
notice, including, if appropriate, a response to Bank Regulatory Agencies. If
the Employee does not respond to the Employer's notice, the Employee shall be
deemed to have agreed to the Employer's and/or the Bank Regulatory Agency's
allegations and the termination shall be effective as of the date of the
Employer's written notice. If the Employee disputes the allegations contained
in the Employer's and/or the Bank Regulatory Agency's notice, the Employee
shall notify the Employer in writing within the time period set forth above and
the Employer and the Employee shall set a meeting to discuss a resolution of
the dispute. If the parties and/or any Bank Regulatory Agency do not reach
agreement as to the Employee's termination, within Forty-five (45) days of the
Employer's notice, the Employer, by a majority of its Board of Directors, shall
have the right to terminate the Employee and to discontinue the compensation
payments to the Employee. If the Employee nevertheless still disagrees that
his termination was proper under the terms of this Agreement, both parties
hereto by their execution hereof agree, unless otherwise ordered by or agreed
to differently between any Bank Regulatory Agency and the Employer, to submit
to binding arbitration under the rules, regulations and procedures of the
American Arbitration Association with the costs of such arbitration to be borne
by the losing party.
(d) Death or Disability: If the Employee should be
unable to perform his professional duties due to death or disability (as
defined in the Employer's then in effect disability insurance policy covering
officers of the Employer), then the compensation provided for hereinabove shall
cease upon the Employee's death or at the end of the Employer's disability
insurance policy elimination period, and if the disability is temporary, shall
resume upon the Employee's return to full time employment and the end of
payments to the Employee under the Employer's disability insurance policy.
7. Representations and Warranties of the Employee. The Employee
represents and warrants to the Employer the following:
(a) Information Supplied to the Employer. All
information and data, including but not limited to, personal data, work
histories, salaries and responsibilities, represented and provided to the
Employer by the Employee in his application for the position provided for
herein are true and correct in all material respects and the Employee has not
stated any facts or circumstances, nor has he failed to disclose any facts or
circumstances to the Employer the statement or omission of which would cause
the Employee's application to be false or misleading in any material respect.
(b) Prior Employment Agreements. The Employee is not now
a party to or bound by any employment, consulting or other type of agreement,
nor has he been a party to or bound by any such agreement, which would be
breached by, or of which the Employee would be in default, by virtue of any
provision contained in this Agreement with the Employer, nor is the Employee a
party to any such agreement which would compete with or constitute a conflict
of
<PAGE> 7
interest with this Agreement and the Employee's duties and obligations to the
Employer.
(c) Bank Regulatory Agency Approval. To the best of the
Employee's knowledge, information and belief, there are no facts or
circumstances contained in the Employee's personal or professional history
which are likely to, or which in fact will, cause any Bank Regulatory Agency
having jurisdiction over the Employer to fail to approve Employee's employment
(where such approval may be required) or, after approval, to withdraw, suspend
or substantially modify its approval of the Employee as President and Chief
Executive Officer of the Employer or President and Chief Operating Officer
Suburban Bancshares, Inc.
8. Covenants of the Employee.
(a) Agreement Not to Compete. In the event the Employee
terminates or declines to renew this Agreement for any reason whatsoever, for a
period of time defined as the "non-competition period", from and after the last
day the Employee performs services for compensation on behalf of the Employer,
the Employee covenants and agrees that the Employee:
(1) Shall not accept employment by or on behalf
of any bank headquartered in Prince George's County, or Montgomery County,
Maryland, nor in such capacity shall he directly or indirectly request or
advise any present or future investors, depositors or customers of the Employer
to curtail or discontinue their business with the Employer, nor in this
capacity shall the Employee directly or indirectly induce, or attempt to induce
any employee of the business to terminate his employment with the Employer.
(2) Shall not directly or indirectly disparage
the business of the Employer, nor disclose any information relating to the
Employer's business, processes, trade secrets, procedures, computer software or
any other information learned as an employee of the Employer, to any person,
firm or corporation, whether such person, firm or corporation shall be a
present or former customer or employee of the Employer;
(3) Shall not directly or indirectly discuss or
disclose to any other person, firm or corporation the names of past, present or
future customers or employees of the Employer.
(b) "Non-competition Period" Defined. The
non-competition period shall be One (1) year.
9. Confidential Information.
(a) Proprietary Information. The Employee acknowledges
that upon acceptance of employment hereunder, the Employee will be making use
of, acquiring and adding to the Employer's confidential and proprietary
information of a special and unique nature and value relating to such matters
as, but not limited to the Employer's business operations, internal structure,
financial affairs, programs, software, systems, procedures, manuals,
confidential reports, and sales and marketing methods, as well as the amount,
nature and type of services, equipment and methods used and preferred by the
Employer's suppliers, and customers, all of which shall be deemed to be
confidential information. The Employee acknowledges that such confidential
information has been and will continue to be of central importance to the
business of the Employer and that disclosure of it or its use by others could
cause substantial loss to the Employer. In consideration of his anticipated
and thereafter continued employment by the Employer, upon acceptance hereof,
the Employee agrees that during the entire period of his employment with the
Employer, and upon and after leaving the employ of the Employer for any reason
whatsoever, the Employee shall not, for any purpose whatsoever, directly or
indirectly, divulge, reveal, report, publish, transfer, or disclose to any
person or entity any of such confidential information which was obtained by the
Employee as a result of the Employee's employment with the Employer, nor shall
the Employee reveal to any person or entity any trade secrets of the Employer,
but the Employee shall hold all of the same confidential and inviolate.
(b) Property of the Employer. All contracts, agreements,
forms, financial books, records, instruments and documents, supplier lists,
memoranda, data, reports, programs, software, tapes, rolodexes, telephone and
address books, letters, research, listings, programming, and any other
instruments, records or documents relating or pertaining to the Employer
(hereinafter referred to as "Records") shall at all times be and remain the
property of the Employer. Upon termination of the Employee's employment with
the Employer for any reason whatsoever, the Employee shall return to the
Employer all Records (whether furnished by the Employer, by a third party or
prepared by the Employee), and the Employee shall neither make nor retain any
copies of any such Records after such termination.
(c) Inventions and Creations. All inventions and other
creations, whether or not patentable or
<PAGE> 8
copyrightable, and all ideas, reports and other creative works, including,
without limitation, innovations, manuals or other materials, made or conceived
in whole or in part by the Employee while employed by the Employer, which
relate in any manner whatsoever to the business, existing or proposed of the
Employer or any other business or research development effort in which the
Employer or any of its subsidiaries or affiliates engages during the Employee's
employment by the Employer, will be disclosed promptly by the Employee to the
Employer and shall be the sole and exclusive property of the Employer.
10. Breach; Remedies.
(a) Right to Cure; Default. In the event either party
shall be alleged to be in breach of this Agreement, written notice shall be
given by the other party and a Thirty (30) day opportunity to cure shall be
provided. After such Thirty (30) day cure period, if the breach is not cured
and remains as alleged, the breaching party shall be deemed in default and this
Agreement may be terminated by written notice to the breaching or defaulting
party.
(b) Injunctive Relief. In the event of a breach of this
Agreement, the Employer shall be entitled to injunctive relief restraining the
Employee from taking or continuing any action which would constitute a breach
of the covenants contained herein. Such injunctive remedies shall not be
exclusive and shall be in addition to any and all other remedies which may be
available to the Employer at law or equity, including, without limitation, the
recovery of direct, indirect, incidental, consequential and/or punitive
damages.
11. Entire Agreement: This Agreement represents the entire
agreement of the parties relating to the services of the Employee. All prior
negotiations between the parties are merged into this Agreement and there are
no understandings or agreements other than those incorporated herein.
12. Miscellaneous.
(a) Severability; Court Enforcement. The parties hereto
covenant and agree that to the extent any provisions or portion of this
Agreement shall be held, found or deemed to be unreasonable, unlawful or
unenforceable, by any Court of law, then the parties hereto expressly covenant
and agree that any such provision or portion thereof shall be modified to the
extent necessary in order that any such provision or portion thereof shall be
legally enforceable to the fullest extent permitted by applicable law and that
any court of competent jurisdiction shall, and the parties hereto do hereby
expressly authorize any court of competent jurisdiction to, enforce any such
provision or portion thereof or to modify any such provision thereof shall be
enforced by such court to the fullest extent permitted by applicable law.
(b) Waiver. The Employer and the Employee each reserve
the right to waive any of the terms of this Agreement which benefits the party
waiving same. Any such waiver must be in a writing signed by the party waiving
the same.
(c) Choice of Law. It is the intention of the parties
hereto that this Agreement shall be governed by the laws of the State of
Maryland.
(d) Successors. The terms of this Agreement shall inure
to the benefit of and be binding upon the Employer, its successors and assigns,
and upon the Employee, his heirs, guardians and personal and legal
representatives.
(e) Gender. The use of the masculine gender herein shall
be deemed to be or include the feminine gender, wherever appropriate.
(f) Notices. All notices, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered personally or if sent registered or certified mail,
return receipt requested, properly addressed and postage prepaid to the
addresses set forth hereinabove.
(g) Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.
(h) Headings. The Section and paragraph headings used
herein are for convenience and reference only and shall not enter into the
interpretation hereof.
(i) Representation by Counsel.
<PAGE> 9
(1) Counsel for the Employer. The parties hereto
acknowledge that Stephen C. Hosea, of the law firm of McNamee, Hosea, Jernigan
& Kim, P.A., Suite 200, 6411 Ivy Lane, Greenbelt, Maryland 20770 has acted as
counsel to the Employer in this matter.
(2) Counsel for the Employee. The parties hereto
acknowledge that the Employee, for the purposes of this Agreement, has sought
and obtained, or acknowledges his right and opportunity to seek and obtain the
advice of his independent legal counsel with regard to the contents and
interpretation of this Agreement and each party hereto is fully and
independently apprised of the meaning and legal effect of this Agreement.
(j) Modifications. There shall be no modification or
amendment of this Agreement except by written amendment hereto signed by both
parties.
IN WITNESS WHEREOF this Agreement has been executed by the parties of
the day and year first above written.
WITNESS/ATTEST: SUBURBAN BANK OF MARYLAND
/s/ /s/
Stephen C. Hosea Winfield M. Kelly, Jr.
- --------------------------- --------------------------------------------
Winfield M. Kelly, Jr., Chairman
SUBURBAN BANCSHARES, INC.
/s/ /s/
Stephen C. Hosea Winfield M. Kelly, Jr.
- --------------------------- --------------------------------------------
Winfield M. Kelly, Jr., Chairman
/s/ /s/
M. Kathleen Kinter Stephen A. Horvath
- --------------------------- --------------------------------------------
Stephen A. Horvath
<PAGE> 1
EXHIBIT 11
<PAGE> 2
SUBURBAN BANCSHARES, INC. EXHIBIT 11
EARNINGS PER SHARE CALCULATION
DECEMBER 31, 1996
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
1996
COMMON AND EQUIVALENT SHARES (PRIMARY) 4QTR96 YEAR-TO-DATE
--------------------------------------
<S> <C> <C>
EARNINGS $ 3,994,207 $ 5,001,912
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 $0.353432 $0.442599
FULLY DILUTED
-------------
EARNINGS $ 3,994,207 $ 5,001,912
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 $0.353432 $0.442599
</TABLE>
<PAGE> 1
EXHIBIT 13
<PAGE> 2
Suburban Bancshares, Inc.
Annual Report 1996
<PAGE> 3
Suburban Bank
Leading the way
in
business
banking ...
<PAGE> 4
This page of the 1996 Annual Report to Shareholders contains six pictures
connected by a curving line, reflecting services offered by the Company. The
captions and a description of each picture follows:
(1) "Local Branches": Pictured is the exterior of our Rockville branch
(2) "Officers Calling at Your Business": The picture shows a calling
officer's business card.
(3) "TeleBank Services": A telephone receiver is pictured which represents
our telephone banking system for customers to access account
information and transfer funds between accounts.
(4) "Check Imaging": The picture shows a notebook that is provided to
customers for convenient storage of their monthly statements which
include images of their checks.
(5) "PC Banking": The picture shows a laptop computer that can be used by
businesses to access account information and perform certain
transactions via modem
(6) "Employee Services": The ATM at our Bethesda location is pictured.
"Suburban Bank is purposefully moving into new markets with the best in
technology and solid personal service."
page 1
<PAGE> 5
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
in thousands, except per share data 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Results of Operations
---------------------
Interest income $9,176 $8,358 $7,156 $6,575 $8,096
Interest expense 3,362 3,119 2,377 2,385 3,649
Net interest income 5,814 5,239 4,779 4,190 4,447
Provision (recovery) for loan losses (227) (260) 39 1,133 1,867
Noninterest income 517 1,599 787 1,313 1,890
Noninterest expense 5,614 5,551 5,308 5,762 7,334
Income tax (benefit) expense (4,058) 6 -- -- --
Net income (loss) 5,002 1,541 219 (1,392) (2,864)
Per Share Data
--------------
Net income (loss):
Primary $0.44 $0.15 $0.02 $(0.29) $(0.88)
Fully diluted 0.44 0.15 0.02 (0.29) (0.88)
Book value per share 1.63 1.20 0.95 0.96 1.54
Financial Condition (December 31)
---------------------------------
Total assets $126,085 $115,431 $114,229 $101,922 $109,414
Net loans 71,940 61,555 61,775 54,662 65,502
Total deposits 107,573 101,889 104,402 92,021 101,848
Total equity 17,831 13,096 8,587 8,649 4,995
Ratios
------
Return on average assets 4.42% 1.49% 0.21% (1.40)% (2.48)%
Return on average equity 36.35 15.29 2.51 (23.63) (39.44)
Net yield on earning assets 5.57 5.50 5.05 4.74 4.32
Average equity to average assets 12.15 9.75 8.31 5.92 6.28
Average loans to average deposits 74.75 69.87 63.74 68.03 73.45
Average Balances
----------------
Assets $113,272 $103,377 $105,137 $99,611 $115,564
Loans 74,014 64,616 60,577 62,244 77,330
Earning assets 104,356 95,228 94,664 88,426 102,890
Deposits 99,017 92,483 95,035 91,491 105,280
Equity 13,760 10,080 8,734 5,892 7,262
</TABLE>
Portions of this Annual Report contain forward-looking statements, including
statements of goals, intentions, and expectations, regarding or based upon
general economic conditions, interest rates, developments in national and local
markets, and other matters, and which, by their nature, are subject to
significant uncertainties. Because of these uncertainties and the assumptions
on which statements in this report are based, the actual future results may
differ materially from those indicated in this report.
4
<PAGE> 6
Dear Shareholders, Customers, and Employees:
Suburban Bancshares, Inc., and its subsidiary, Suburban Bank of Maryland, have
a mission of enhancing shareholder value through consistent earnings, quality
loan and investment portfolios, and our leadership position in the small- to
middle-market business communities. We believe we have substantially achieved
this mission in 1996.
Consistent Earnings
The Company reported record 1996 earnings, after non-recurring items,
of $5,002,000 or $.44 per share. This is a 225% increase from 1995's
$1,541,000 or $.15 per share. Book value at December 31, 1996 was
$1.63, a 36% increase from $1.20 reported at year-end 1995.
More importantly, the Company's "core earnings" trends are positive.
Management calculates "core earnings" by eliminating non-recurring
income and expense. Core earnings were $1,496,000 or $0.12 per share
in 1996, a 47% increase from $1,016,000 or $0.10 per share in 1995.
In 1996, the Company's earnings were positively impacted by the
recognition of deferred income tax benefits as required by Statement of
Financial Accounting Standards No. 109, described in detail later in
this report. In 1995, non-recurring items included the sale of the
Virginia subsidiary bank.
Quality Loan and Investment Portfolios
At December 31, 1996, nonperforming assets were $983,000 or .77% of
total assets; at December 31, 1995, the Company had nonperforming
assets of $2,744,000 or 2.38% of total assets.
Leadership to the Small- to Middle-Market Business Communities
We believe our leadership in the small- to middle-market business
communities is enhanced by our delivery systems and products. The
theme of this 1996 annual report is accessible account officers (our
principal delivery system) and quality products using current
technology.
In addition to our commercial account officers, we meet the banking
needs of businesses and their employees through our branch network.
Each branch has an experienced manager, as well as an excellent
customer service team and a supporting loan officer. In 1996 we
expanded our branch network by opening in Bethesda, Maryland.
We are pleased with the expanded technology we are able to offer our
customers. In addition to introducing Suburban OnLine (PC banking)
and TeleBank (telephone banking and transactions), we doubled our ATM
network. We also offer state of the art check imaging. In 1997, we
are pleased to announce Suburban's Escrow Manager, a product which
provides a convenient accounting and banking package for those
customers that manage escrowed, trust or other segregated funds.
Once more, a special thanks to William R. Johnson for his many years of fine
stewardship as President of Suburban Bancshares, Inc. and Suburban Bank.
Bill's leadership was well respected in the banking community. The Company
welcomes Stephen A. Horvath as our new president. Steve's focus will be on
continued growth, as we believe we will best enhance shareholder value by
striving to be a $250 million institution.
Thank you for your ongoing support of Suburban Bancshares.
/s/ /s/
Winfield M. Kelly, Jr. Stephen A. Horvath
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
5
<PAGE> 7
The following text is superimposed on a picture of the lobby of our Bethesda
branch. The picture shows customers as well as branch employees.
With the successes of 1996 under our belts,
We set our goal for 1997 and beyond ...
Identifying and reaching our
target markets throughout
Prince George's and Montgomery Counties
with Accessible Officers and Key Products,
expanding and building on our
Leadership role in
Business Banking
Suburban Bank
Logo
6
<PAGE> 8
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,848 $ 9,931
Interest-bearing deposits with banks -- 2,220
Federal funds sold 12,215 16,490
Investment securities available for sale 21,290 18,067
Loans held for sale 5,933 3,292
Loans 73,448 63,022
Less: Allowance for loan losses (1,508) (1,467)
Loans, net 71,940 61,555
Premises and equipment, net 1,314 1,191
Foreclosed real estate, net 212 1,152
Accrued interest receivable 771 607
Deferred income taxes 4,058 --
Other assets 504 926
TOTAL ASSETS $126,085 $115,431
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 21,145 $ 17,800
Interest-bearing deposits 86,428 84,089
Total deposits 107,573 101,889
Accrued expenses and other liabilities 681 446
Total liabilities 108,254 102,335
Commitments and contingent liabilities -- --
Shareholders' equity
Preferred stock, $.01 par value, 1,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value, 20,000,000 shares
authorized; shares issued and outstanding:
10,951,218 at December 31, 1996 and December 31, 1995 109 109
Paid-in capital -- stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (8,041) (13,043)
Net unrealized (loss) gain on securities available for sale (30) 237
Total shareholders' equity 17,831 13,096
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $126,085 $115,431
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 9
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands, except per share data 1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $7,409 $6,525 $5,511
Taxable interest on securities 1,080 1,229 1,043
Interest on Federal funds sold 629 589 590
Interest on deposits with banks 58 15 12
Total interest income 9,176 8,358 7,156
INTEREST EXPENSE
Interest on deposits 3,362 3,106 2,356
Interest on short-term borrowings -- 13 21
Total interest expense 3,362 3,119 2,377
NET INTEREST INCOME 5,814 5,239 4,779
Provision (recovery) for loan losses (227) (260) 39
Net interest income after provision for loan losses 6,041 5,499 4,740
NONINTEREST INCOME
Service charges on deposit accounts 394 440 487
Gains on sale of securities -- -- 114
Gain on sale of assets and transfer of liabilities -- 1,000 --
Other income 123 159 186
Total noninterest income 517 1,599 787
NONINTEREST EXPENSE
Salaries and employee benefits 2,743 2,735 2,371
Occupancy expense 518 549 669
Furniture and equipment expense 153 133 187
Loss (gain) on sale of loans and foreclosed assets 611 (85) (195)
Other expense 1,589 2,219 2,276
Total noninterest expense 5,614 5,551 5,308
Income before income taxes 944 1,547 219
Income tax (benefit) expense (4,058) 6 --
NET INCOME $5,002 $1,541 $219
Income per common share
Primary $0.44 $0.15 $0.02
Fully diluted 0.44 0.15 0.02
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 10
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,002 $1,541 $ 219
Adjustments to reconcile net income to net cash (used) provided by operating
activities:
Depreciation 129 139 226
(Recovery) provision for loan losses (227) (260) 39
Provision for foreclosed real estate losses -- 231 264
Stock option compensation expense -- 362 138
Originations of loans held for sale (2,641) (2,214) (4,938)
Proceeds from loan sales 382 -- 4,722
Loss (gain) on sale of loans 434 -- (340)
Net realized gain on available for sale securities -- -- (114)
Net accretion on securities (55) (100) (105)
Increase (decrease) in deferred loan fees 24 (25) 132
Decrease (increase) in accrued income and other assets 259 (448) 135
Increase (decrease) in accrued expenses and other liabilities 235 (78) (191)
Increase in deferred income taxes (4,058) -- --
Income tax refunds received -- 185 141
Loss (gain) on sale of foreclosed real estate 177 (85) 13
Gain on sale of assets and transfer of liabilities -- (1,000) --
Loss on write-off of fixed assets -- 104 --
Net cash (used) provided by operating activities (339) (1,648) 341
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in deposits with other banks 2,220 (1,975) 353
Decrease (increase) in Federal funds sold 4,275 (5,220) 6,250
Purchases of available for sale securities (11,819) (7,076) (21,483)
Proceeds from sale of available for sale securities -- 709 5,922
Proceeds from maturities of available for sale securities 8,235 11,450 8,500
Proceeds from payments of principal on securities 150 75 620
Purchases of held to maturity securities -- -- (4,821)
Net increase in loans (11,014) (11,493) (9,047)
Net purchases of premises and equipment (252) (322) (129)
Proceeds from sale of foreclosed real estate 777 1,720 587
Cash transferred on sale of assets and transfer of liabilities -- (1,346) --
Consideration paid on sale of assets and transfer of liabilities -- (754) --
Net cash used in investing activities (7,428) (14,232) (13,248)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 5,684 16,486 12,381
Net increase in securities sold under agreements to repurchase -- 423 179
Net proceeds from sale or issuance of common stock -- 1,897 53
Net cash provided by financing activities 5,684 18,806 12,613
Net (decrease) increase in cash and due from banks (2,083) 2,926 (294)
Cash and due from banks at beginning of period 9,931 7,005 7,299
Cash and due from banks at end of period $7,848 $9,931 $7,005
Interest paid $3,378 $3,090 $2,370
Income taxes paid -- 6 --
Loans transferred to foreclosed real estate 15 -- 274
Loans transferred to loans held for sale -- -- 1,488
Investments transferred from held to maturity to available for sale -- 4,872 --
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 11
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
in thousands Common Additional Accumulated Unrealized Gain Total
Stock Paid-In Deficit (Loss) on Available
Capital for Sale Securities
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 90 $23,362 $(14,803) $ -- $ 8,649
Net income for 1994 -- -- 219 -- 219
Cumulative effect of initial adoption of SFAS No. 115 -- -- -- 256 256
Issuance of common stock upon exercise of warrants 1 52 -- -- 53
Paid-in capital - stock options -- 138 -- -- 138
Unrealized loss on securities available for sale -- -- -- (728) (728)
Balance, January 1, 1995 91 23,552 (14,584) (472) 8,587
Net income for 1995 -- -- 1,541 -- 1,541
Issuance of common stock upon exercise of warrants 18 1,879 -- -- 1,897
Paid-in capital - stock options -- 362 -- -- 362
Unrealized gain on securities available for sale -- -- -- 709 709
Balance, January 1, 1996 109 25,793 (13,043) 237 13,096
Net income for 1996 -- -- 5,002 -- 5,002
Unrealized loss on securities available for sale -- -- -- (267) (267)
Balance, December 31, 1996 $109 $25,793 $(8,041) $ (30) $17,831
</TABLE>
See accompanying notes to consolidated financial statements.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Suburban Bancshares, Inc. and Subsidiary
This commentary provides an overview of the financial condition and significant
changes in the results of the operations of Suburban Bancshares, Inc. and its
subsidiary ("Bancshares" or "the Company") for the years 1994 through 1996.
Throughout this review the subsidiary of Suburban Bancshares, Inc., Suburban
Bank of Maryland, is referred to as "Suburban Maryland" or "the Bank". This
discussion should assist readers in their analysis of the accompanying
consolidated financial statements.
ORGANIZATIONAL BACKGROUND
Suburban Bancshares, Inc. is a bank holding company formed under the general
corporation laws of the State of Delaware in 1985 and is headquartered in
Greenbelt, Maryland. The Company formed and acquired a national banking
association located in McLean, Virginia (Bank 2000, N.A.), in October 1985, and
formed and acquired a national banking association located in Reston, Virginia
(BankStar, N.A.), in February 1988. These banks merged and began operating as
Suburban Bank of Virginia, N.A. ("Suburban Virginia") in March 1991. In April
1990, Bancshares acquired Suburban Maryland (formerly Jefferson Bank and Trust
Company), a four branch state-chartered bank located in Prince George's County,
Maryland.
On February 19, 1993, the Company entered into an Agreement and Plan of
Reorganization and Recapitalization (the "Plan") with Winfield M. Kelly, Jr.,
which provided for a restructure of the Company's Board of Directors and
management, a centralization of operational functions, and the commencement of
a public offering to raise between $4 and $7 million in new capital. In
connection with the implementation of the Plan, Mr. Kelly was elected Chairman
of the Board of Directors of the Company and each of the banks, and the
Company's Board of Directors was restructured. All operational and management
functions of the banks were centralized, enhancing efficiency throughout the
organization.
On July 14, 1993, the Company commenced a public offering of up to seven
million shares of common stock. The offering was successfully concluded on
September 27, 1993, with the sale of 5,756,294 shares with total proceeds to
the Company totaling $5,613,237. Transferable warrants to purchase an
additional 2,014,705 shares of common stock accompanied the new shares. These
warrants were exercisable at $1 per share during two windows in 1994 and two
windows in 1995, in which 1,949,849 shares, or 97% of the warrants outstanding,
were issued.
10
<PAGE> 12
On May 12, 1995, the Company completed the disposition of most of the assets
and all of the deposit liabilities of Suburban Virginia to Tysons Financial
Corporation and its subsidiary, Tysons National Bank in McLean, Virginia. On
August 18, 1995, the remaining assets and liabilities of Suburban Virginia were
merged into Suburban Maryland in a transaction accounted for as a pooling of
interests.
In October 1996, William R. Johnson, President and Chief Operating Officer of
the Company and President and Chief Executive Officer and Director of the Bank,
announced that he would step down from those positions at the beginning of
1997, after which he would serve as an advisor to the Chairman and the Board of
Directors. On January 2, 1997, Stephen A. Horvath was named President and
Chief Operating Officer of Suburban Bancshares, Inc. and President and Chief
Executive Officer of Suburban Bank of Maryland. Mr. Horvath will also serve as
a Director on Boards of Directors of the Company and the Bank.
RESULTS OF OPERATIONS
Overview
Suburban Bancshares, Inc. reported record earnings for 1996, after nonrecurring
items, of $5,002,000, a 225% increase from $1,541,000 in 1995. Net income per
share increased to $0.44 in 1996 from $0.15 in the prior year. Return on
average assets reached 4.42% and return on average equity was 36.35% in 1996,
both ratios representing record highs for the Company.
The earnings were positively impacted by the accounting requirements of
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. This standard requires the recognition of income tax benefits of loss
carryforwards and temporary differences when it is "more likely than not" that
they will be realized from the Company's future earnings capacity. These tax
benefits totaled $4,058,000 in 1996, and were recorded as a credit to income
taxes.
Other key factors affecting the Company's earnings included a steadily
improving net interest income, the result of strong loan demand and continued
improvement in asset quality, which permitted a reversal of previous years'
provisions for loan losses to reduce an excess in the allowance for loan
losses. Offsetting these positive impacts were nonrecurring expenses and
losses related to the disposition of nonperforming assets and to other one-time
items.
The reduction in nonperforming assets in 1996 was significant. On December 31,
1996, nonperforming assets were $983,000, or 0.78% of total assets, a 64%
decrease from $2,744,000 or 2.38% of assets at the end of 1995.
Assets at the end of 1996 were $126.1 million, rising 9.2% from $115.4 million
at the end of 1995. Total loans continued to climb, reaching $79.4 million at
December 31, 1996, a 19.7% increase from 1995's $66.3 million, and deposits
rose to $107.6 million at the end of 1996, a 5.6% increase from $101.9 million
in 1995.
This growth, improved asset quality, and expense control have contributed to a
strong improvement in core profitability for the second year. Core
profitability is defined here as earnings from continuing operations, excluding
non-recurring income and expenses. In 1995, core earnings were $1,016,000,
after excluding the income and expense associated with the disposition of
Suburban Virginia's assets and liabilities, the recognition of compensation
expense for the management stock options, the reversal of the provision for
loan losses, and acquisition-related expenses. In 1996, core earnings
increased 47.3% to $1,496,000 after the elimination of the tax benefit, the
losses and expenses of the disposition of nonperforming assets, the reversal of
the provision for loan losses, and reorganizational expenses. Each of these
items is explained in the appropriate sections of this discussion. The
adjusted return on average assets was 1.32% in 1996 and 0.98% in 1995.
Net Interest Income and Net Interest Margin
Net interest income, the largest contributor to the Company's earnings, is
defined as the difference between income on assets and the cost of funds
supporting those assets. Earning assets are composed primarily of loans and
investments while deposits and short-term borrowings, in the form of securities
sold under repurchase agreements, represent interest-bearing liabilities.
Noninterest-bearing checking deposits are another component of funding sources.
Variations in the volume and mix of these assets and liabilities, as well as
changes in the yields earned and rates paid, are determinants of changes in net
interest income.
Net interest income rose $575,000, or 11.0%, in 1996 to $5,814,000 from
$5,239,000 in 1995 primarily due to an increase in loans as a percentage of
earning assets. In 1995, net interest income rose 9.6%, or $460,000, due to
higher average interest rates for both loans and deposits and an increase in
loan volume.
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 1996, the net interest margin rose to 5.57%, a 7 basis point
increase from 5.50% for the prior year, even though interest rates remained
stable for both earning assets and interest-bearing funds. The basis for the
increase was the significant growth in the loan portfolio, since loans tend to
provide a higher return than other earning assets and a greater use of
noninterest-bearing funds. In 1995, the net interest margin improved 45 basis
points from 5.05%, as the increase in earning asset yields out-paced rising
funding costs.
11
<PAGE> 13
Changes in the volume of earning assets and interest-bearing funds impact both
interest income and interest expense. Average assets grew $9.9 million in
1996, $9.1 million of which was in earning assets. As a percentage of average
assets, earning assets remained stable at 92.1% in both 1996 and 1995 while
interest-bearing liabilities declined somewhat from 71.7% in 1995 to 70.3% in
1996. Average earning assets reached $104.4 million, an increase of 9.6% from
$95.2 million in 1995, and interest-bearing liabilities climbed from $74.1
million in 1995 to $79.7 million in 1996, a $5.6 million, or 7.5% increase.
Because only $5.6 million of the $9.1 million growth in earning assets in 1996
was funded by interest-bearing sources, interest income increased more than
interest expense.
In 1995, average earning assets grew only 0.6%; however, as a percentage of
average assets, earning assets rose from 90.0% to 92.1%, due to both declining
levels of nonperforming assets and loan growth. While average earning assets
were growing, average interest-bearing liabilities declined, which helped to
mitigate the negative impact on the margin of rising deposit costs.
Changes in the mix of earning assets have played a prominent role in producing
a rising trend in net interest income in both 1996 and 1995. Loan growth over
the last two years has provided a significant change in the ratio of loans to
average earning assets, which has climbed from 64.0% in 1994 to 67.9% in 1995
and to 70.9% in 1996. This steady rise in those earning assets that provide
the highest return has impacted the net interest margin positively, while
interest-bearing funds have increased at a slower pace over the last two years.
Shifts in the interest rate environment also impact the margin. In 1996,
interest rates fluctuated throughout the year but within a fairly narrow range.
Average loan yields fell slightly from 10.10% in 1995 to 10.01% in 1996, the
result of a lower average national prime rate, which affects pricing for most
loans. As loan rates slipped 9 basis points, investment yields fell 17 basis
points, but the increase in income due to the rise in loan volume more than
offset the decline in investment income. The result was a stable yield on
earning assets of 8.79% in 1996, 8.78% in 1995. Rates paid on deposits and
other borrowings remained stable also, rising only 3 basis points, from 3.36%
in 1995 to 3.39% in 1996, the increase occurring as maturing time deposits
renewed at higher rates.
In 1995, market rates peaked in June after increasing throughout 1994 and early
1995 and began a slow, but steady decline in the last half of the year.
Earning asset yields rose 122 basis points, with loan yields rising 100 basis
points and investment yields climbing 116 basis points over 1994 levels. As
the yields on these earning assets increased, the cost of funds was also under
pressure, though not to the same extent. The average cost of total funding
sources moved up 87 basis points during 1995.
12
<PAGE> 14
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31, 1996 1995 1994
Assets Average Interest Average Average Interest Average Average Interest Average
Balance Yield Balance Yield Balance Yield
or Rate or Rate or Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $74,014 $7,409 10.01% $64,616 $6,525 10.10% $60,577 $5,511 9.10%
Investment securities 17,325 1,080 6.23% 20,235 1,229 6.07% 19,155 1,043 5.45%
Fed funds sold & other
deposits 13,017 687 5.28% 10,377 604 5.82% 14,932 602 4.03%
Total interest-earning assets 104,356 9,176 8.79% 95,228 8,358 8.78% 94,664 7,156 7.56%
Noninterest-earning assets:
Cash and due from banks 7,073 6,322 6,716
Bank property and equipment 1,213 1,045 1,220
Other assets 2,155 3,124 5,102
Less: Allowance for loan
losses (1,525) (2,342) (2,565)
Total noninterest-earning
assets 8,916 8,149 10,473
TOTAL ASSETS $113,272 $103,377 $105,137
Liabilities and shareholders'
equity
Interest-bearing
liabilities:
Checking, money market &
savings $56,186 $2,030 3.61% $50,455 $1,816 3.60% $50,687 $1,300 2.56%
Time deposits
Other borrowings 23,499 1,332 5.67% 23,416 1,290 5.51% 23,713 1,056 4.45%
-- -- -- 261 13 4.83% 605 21 3.45%
Total interest-bearing 79,685 3,362 4.22% 74,132 3,119 4.21% 75,005 2,377 3.17%
liabilities
Noninterest-bearing
liabilities:
Noninterest-bearing deposits 19,332 18,612 20,635
Total funding sources 99,017 3,362 3.39% 92,744 3,119 3.36% 95,640 2,377 2.49%
Other liabilities 495 553 763
TOTAL LIABILITIES 99,512 93,297 96,403
Shareholders' equity 13,760 10,080 8,734
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $113,272 $103,377 $105,137
Net interest income $5,814 $5,239 $4,779
Net interest spread 5.40% 5.42% 5.07%
Net interest margin 5.57% 5.50% 5.05%
</TABLE>
13
<PAGE> 15
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 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 1996, the Company recognized a reverse provision of $227,000 to reduce an
excess in the allowance for loan losses created by recoveries on loans
previously charged off and the disposition of nonperforming loans totaling
$816,000. In 1995, the Company also recognized a reverse provision of
$260,000, the excess allowance created by the disposition of Suburban Virginia
loans and a sharp drop in nonperforming loans. These reversals increased
income and decreased the allowance available to absorb future losses.
The provision for loan losses in 1994 was $39,000. Recoveries on loans
previously charged-off increased significantly in 1994, as loan quality
improved and charge-offs declined.
Noninterest Income
Noninterest income was $517,000 in 1996, $1,082,000 less than the $1,599,000
recorded in 1995. In 1995, the Company recognized a $1 million premium on the
sale of assets and transfer of liabilities of Suburban Virginia and a $19,000
payment of interest on a refund of taxes from prior years. The change in
noninterest income from continuing operations was, therefore, a decrease of
$63,000, or 10.9% from $580,000 in 1995 to $517,000 in 1996, primarily the
result of declining service charges on deposit accounts.
In 1995, noninterest income from continuing operations declined $207,000 or
26.3% from $787,000 in 1994, the change attributable to a gain of $114,000 on
sales of securities in 1994 which did not recur in 1995 and to lower service
charges.
Noninterest Expenses
Noninterest expenses rose only $63,000, or 1.1% in 1996 to $5,614,000 from
$5,551,000 in 1995. While most expenses declined in 1996 and in 1995, several
nonrecurring events in both periods precipitated the recognition of additional
expenses. In 1996, the Company disposed of nonperforming assets and recognized
a loss on the transactions totaling $611,000, and expenses associated with a
corporate reorganization were $151,000. In 1995, the divestiture and
subsequent closing of Suburban Virginia, a charge to compensation expense as
the management stock options became exercisable, and merger and acquisition
costs resulted in additional expenditures of $735,000 for nonrecurring events.
Also in 1995, the Company recognized a total gain on sales of foreclosed
properties of $85,000. Noninterest expenses from continuing operations were
$4,852,000 in 1996, a slight decline of $49,000 or 1.0% from $4,901,000 in
1995. Increases in the cost of data services, marketing and equipment costs,
as we added our sixth branch to the network and added services such as
TeleBank, OnLine computer banking and imaged statements, were more than offset
by declining costs associated with maintaining properties obtained through
foreclosure, a reduction in the premium banks pay for FDIC insurance, and
overall expense control.
The Bank opened a new full-service banking office in Clinton, Maryland in
December 1995 and another full-service office in Bethesda, Maryland in November
1996. The increased operating expenses of these new offices will not be
immediately offset by income until the offices become stabilized, which usually
occurs after approximately three to four years.
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<PAGE> 16
In 1995, expenses of continuing operations dropped $407,000, or 7.7% from
$5,308,000 in 1994. Decreases in most expense categories are attributable to
the closing of the two Virginia offices, lower costs for maintaining and
collecting on nonperforming assets, and reduced FDIC premiums.
Please reference Note K to the Consolidated Financial Statement for a breakdown
of Other Expenses.
Deferred Income Taxes
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires the recognition of income tax benefits of loss carryforwards
and temporary differences when it is "more likely than not" that they will be
realized from the Company's future earnings capacity. At December 31, 1996,
the Company recognized net deferred tax assets of $4,058,000 including
approximately $3,930,000 relating to tax loss carryforwards, which expire in
varying amounts between 2003 and 2008. Realization of these benefits depends
on generating sufficient taxable income before the expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized. The
amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the
carryforward period are reduced. The amount of loss carryforward available for
any one year may be limited if the Company is subject to the alternative
minimum tax. For 1997, and subsequent years, the Company expects to record
income tax expense at the statutory rates which will impact earnings.
ASSET QUALITY
In 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan
("SFAS No. 114"), as amended by SFAS No. 118. SFAS No. 114 and No. 118 apply
to loans for which 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 the full collection of principal or interest is in doubt, or
when the payment of principal or interest has become contractually 90 days past
due, unless the obligation is both well secured and in the process of
collection. Loans may be placed on nonaccrual status when past due less than
90 days if collection becomes uncertain based upon an evaluation of the fair
value of the collateral and the financial strength of the borrower. When a loan
is placed on nonaccrual status, interest income in the current period is
reduced by the amount of any accrued and uncollected interest. Subsequent
payments of interest are applied as a reduction of principal when concern
exists as to the ultimate collection of principal; otherwise such payments are
recognized as interest income. Loans are removed from nonaccrual status when
they have demonstrated a period of performance and when concern no longer
exists as to the collectibility of principal or interest.
The recorded investment in loans that were considered impaired under SFAS No.
114 was $771,000 and $1,592,000 at December 31, 1996 and 1995, respectively.
This decrease of $821,000, or 51.6%, is attributable to the disposition of
nonperforming loans and aggressive loan collection efforts.
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
$1,088,000 at December 31, 1996 and $1,173,000 at the end of 1995. This
$85,000, or 7.2%, decrease was the result of normal principal payments and loan
payoffs.
Real estate acquired through foreclosure or deed in lieu of foreclosure is
carried at fair value less estimated selling costs, based upon current market
conditions and expected cash flows. Foreclosed real estate declined $940,000,
or 81.6% to $212,000 at December 31, 1996 from $1,152,000 at December 31, 1995.
This substantial decline was the result of sales of six properties, on which
net losses of $177,000 were realized.
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<PAGE> 17
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 SFAS No. 114, the allowance for loan losses related to
loans that are identified as impaired is based on discounted cash flows using
the loan's initial effective interest rate or the fair value of the collateral
for certain collateral dependent loans. Prior to 1995, the allowance for loan
losses related to these loans was based on undiscounted cash flows or the fair
value of the collateral for collateral dependent loans.
At December 31, 1996, the allowance for loan losses was $1,508,000, an increase
of $41,000 or 2.8% from $1,467,000 at the end of 1995. The disposition of
impaired loans reduced the required reserve significantly, allowing the Company
to recognize a reverse provision of $227,000 while maintaining sufficient
reserve to cover the loan growth in 1996.
The activity in the allowance for loan losses is shown in the following
schedule:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $1,467 $2,750 $2,486
Provision (recovery) for loan losses (227) (260) 39
Loans charged off (444) (1,340) (412)
Recoveries 712 317 637
------- ------- -------
Balance at end of year $1,508 $1,467 $2,750
</TABLE>
The allowance for loan losses declined to $1,467,000 at the end of 1995 from
$2,750,000 at December 31, 1994, a decrease of $1,283,000, or 46.7%. As asset
quality improved and Suburban Virginia loans were sold, the required reserve
was reduced and the Company recognized a reverse provision of $260,000 in 1995.
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, available for sale securities,
and foreclosed real estate. On the liability side of the balance sheet,
liquidity is affected by the timing of maturing liabilities and the ability to
generate new deposits or borrowings as needed.
In 1995, the Company's liquidity position increased as the mix of earning
assets shifted to a higher concentration of marketable loans held for sale and
overnight investments while loans and other investments declined slightly. In
1996, this trend changed somewhat, reducing liquid assets as loans increased
significantly while overnight investments fell. The deferred tax asset
recognized at the end of 1996 represented 3.2% of assets in the non-liquid
category. Liquid assets, defined as cash, available for sale securities and
other short-term investments, and loans held for sale, were $47,286,000, or
37.5% of total assets at year-end 1996.At the end of 1995, liquid assets
totaled $50,000,000, or 43.3% of assets.
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<PAGE> 18
The Company's liquidity position is enhanced by a relatively stable deposit
base. These core deposits are composed of noninterest checking accounts,
interest checking and money market accounts, and savings accounts and
individual retirement accounts. At December 31, 1996, this core deposit base
was $90.3 million, or 84.0% of total funding sources; in 1995, core deposits
were 81.7% of total funds, or $83.2 million.
Other sources of liquidity and cash flow in 1996 were from the sales of loans
and foreclosed real estate generating proceeds of $382,000 and $777,000,
respectively. In 1995, sales of available for sale securities produced
proceeds of $709,000, sales of foreclosed properties generated cash inflow of
$1,720,000, and the exercise of the remaining warrants outstanding provided
$1,897,000 in additional capital.
As a supplementary source of short-term liquidity, the Bank maintains $16
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.
INTEREST RATE RISK MANAGEMENT
Like most financial institutions, the Bank's profitability is dependent to a
large extent upon its net interest income, the difference between interest
earned on loans and investments and interest paid on deposits and borrowings.
Interest rate risk arises from fluctuations in the general level of interest
rates. The Bank's Asset Liability Management Committee manages its interest
rate risk by establishing and monitoring an appropriate balance between the
maturity and repricing characteristics of assets and funding sources to produce
results that are consistent with liquidity, capital adequacy, growth, risk and
profitability goals.
The table below represents the earlier of the maturity or repricing dates for
various interest-earning assets and interest-bearing liabilities at December
31, 1996.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
3 months Over 3 Over 6 Over 1 Total
or less months to 6 months to year
in thousands months 1 year
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 12,215 $ -- $ -- $ -- $ 12,215
Investments 1,411 2,008 2,006 15,865 21,290
Loans (1) 48,063 6,375 7,475 16,828 78,741
Total interest-earning assets 61,689 8,383 9,481 32,693 112,246
Interest-bearing liabilities:
Interest checking deposits $ 8,944 $ -- $ -- $ -- $ 8,944
Money market & savings deposits 55,419 -- -- -- 55,419
Time deposits 8,195 4,218 4,263 5,389 22,065
Total interest-bearing liabilities 72,558 4,218 4,263 5,389 86,428
CUMULATIVE GAP $(10,869) $(6,704) $(1,486) $25,818 $ 25,818
CUMULATIVE GAP TO TOTAL ASSETS -8.62% -5.32% -1.18% 20.48% 20.48%
</TABLE>
(1) Includes loans held for sale of $5,933 and excludes nonaccrual loans of
$771.
The amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability. The Bank has
assumed that its savings, interest checking and money market accounts reprice
daily. At December 31, 1996, the Bank's one-
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<PAGE> 19
year interest sensitivity gap (the difference between the amount of
interest-earning assets anticipated by the Bank, based on certain assumptions,
to mature or reprice within one year and the amount of interest-bearing
liabilities anticipated by the Bank, based on certain assumptions, to mature or
reprice within one year) as a percentage to total assets was negative 1.18%.
This negative gap position means that the Bank had $1,486,000 more liabilities
than assets repricing within one year. This generally indicates that in a
period of rising interest rates, the Bank's net interest income may be
adversely affected. Conversely, in a declining interest rate environment, the
Bank's net interest income may improve.
CAPITAL RESOURCES AND ADEQUACY
Shareholders' equity increased $4,735,000, or 36.2%, in 1996 to $17,831,000 at
the end of the year from $13,096,000 at December 31, 1995. Earnings of
$5,002,000, offset by a decrease in the market value of the Company's available
for sale securities of $267,000, were the components of this rise in equity.
In 1995, shareholders' equity grew $4,509,000 or 52.5% from $8,587,000 at
December 31, 1994. Earnings of $1,541,000, coupled with additional capital
generated from the exercise of 1,897,000 warrants at $1.00 each, were the
primary contributors to this increase. Other sources of shareholder equity in
1995 were the paid-in capital from the management stock options of $362,000 and
an increase in the market value of the Company's available for sale securities
of $709,000.
A combination of a leverage capital ratio and risk-based capital ratios is used
to categorize banks as well capitalized, adequately capitalized, or under
capitalized financial institutions under the guidelines established by the
Federal Deposit Insurance Corporation Improvement Act of 1991. 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, 1996 and 1995, 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 a disallowed portion of the deferred tax asset, and
Tier 2, of a qualifying portion of the allowance for loan losses. Assets, both
on- and off-balance-sheet items, are weighted according to the underlying risk
associated with the item and are assigned a risk weighting ranging from 0 to
100%. Banks are expected to meet a minimum ratio of total qualifying capital
to risk-weighted assets of 8%, with at least half of that percentage (4%) in
the form of core capital. This minimum capital requirement applies to the Bank
and will apply to the Company at such time as its total assets reach $150
million. At December 31, 1996, Suburban Maryland reported at Tier 1 risk-based
capital ratio of 14.10% and a ratio of 15.36% based on total capital. Both
ratios were well above the general regulatory minimums of 4% and 8%,
respectively.
Another capital adequacy measure is the leverage capital ratio, which is
calculated by dividing average total assets for the most recent quarter into
core (Tier 1) capital. The regulatory minimum for this ratio is 3%, with most
banks required to maintain a ratio of a least 4% to 5%, depending upon risk
profiles and other factors. At December 31, 1996, the leverage capital ratio
for Suburban Maryland was 9.47%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Suburban Bancshares, Inc. and its subsidiary, Suburban Bank of Maryland,
provide a variety of banking services to businesses, professionals and
individuals through six branches located in Prince George's and Montgomery
Counties in Maryland. In addition to commercial and personal depository
services, Suburban Bank of Maryland offers lending products such as commercial
loans, commercial real estate loans, Small Business Administration loans, asset
based lending, government contract loans and consumer loan products, including
vehicle, home equity and personal loans.
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NOTE A ACCOUNTING POLICIES
The accounting and reporting policies of Suburban Bancshares, Inc. and its
subsidiary ("the Company") are in conformity with generally accepted accounting
principles and conform to general practices within the banking industry.
Certain reclassifications have been made to conform the prior year's financial
statements to the 1996 presentation. The following is a summary of the
significant policies:
(1) PRINCIPLES OF CONSOLIDATION
In 1996, the consolidated financial statements of Suburban Bancshares, Inc.
include the accounts of Suburban Bancshares, Inc. and its wholly-owned banking
subsidiary, Suburban Bank of Maryland ("Suburban Maryland" or "the Bank"). A
former subsidiary, Suburban Bank of Virginia, N.A. ("Suburban Virginia") was
merged into Suburban Maryland on August 18, 1995 in a pooling of interests
transaction (see Note C). Financial statements for prior years include both
subsidiaries, collectively referred to as the "Banks". All significant
intercompany balances and transactions have been eliminated in consolidation.
In the condensed financial statements of Suburban Bancshares, Inc. ("Parent")
(Note S), the investment in the subsidiary is stated as equity in the net
assets of such subsidiary.
(2) BASIS OF PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and of revenues and expenses for the period. Material estimates
that are particularly susceptible to significant change in the near-term relate
to the determination of the allowance for loan losses and the evaluation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. Actual results could differ from those estimates.
(3) CASH AND DUE FROM BANKS
The Bank is required to maintain reserves against its deposits with the Federal
Reserve Bank. The balances of such reserves at December 31, 1996 and 1995 were
$1,030,000 and $967,000, respectively. At December 31, 1996, Suburban Maryland
had secured reverse repurchase lines of credit aggregating $16,000,000 for
short-term financing, all of which was available at that date. None of these
financing arrangements required compensating balances. For purposes of the
Consolidated Statements of Cash Flows, the Company considers cash and due from
banks to be cash and cash equivalents.
(4) INVESTMENT SECURITIES
The Company classifies its securities in one of three categories: trading,
held to maturity or available for sale. Management determines the appropriate
classification of securities at the time of purchase. Held to maturity
securities are those securities in which the Company has the ability and the
intent to hold until maturity and are reported at cost, adjusted for
amortization of premium and accretion of discounts using a method which
approximates the interest method over the term of the securities. All other
securities not included in trading or held to maturity are classified as
available for sale and are reported at fair value, with unrealized gains and
losses, net of taxes, reported as a separate component of shareholders' equity.
Securities available for sale will be used as part of the Company's interest
rate risk management strategy and may be sold in response to changes in
interest rates, changes in prepayment risk and other factors.
Realized gains or losses on securities are recognized at the time of sale using
the specific identification method and are classified as securities gains or
losses in the accompanying Consolidated Statements of Operations.
(5) LOANS HELD FOR SALE
The Company originates loans to customers under the Small Business
Administration ("SBA") program that generally provides for SBA guarantees of
75% to 90% of each loan. The Company may sell the guaranteed portion of each
loan to
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<PAGE> 21
a third party and retain the unguaranteed portion in its own portfolio. Those
loans to be sold are classified as loans held for sale and are carried at the
lower of aggregate cost or market. A gain is recognized on the sale of these
loans through collection of a premium over the adjusted carrying value, and
through retention of an ongoing rate differential as a normal servicing fee
between the rate paid by the borrower to the Company and the rate paid by the
Company to the purchaser (excess servicing fee). The Company's investment in
an SBA loan is based upon a relative fair market value allocation between the
portion of the loan sold, the portion of the loan retained and any excess
servicing retained. The gain on the sold portion of the loan is recognized,
the carrying value of the retained portion of the loan is reduced, thereby
increasing the future yield, and any excess servicing is recorded as an asset
and subsequently amortized to servicing income. The Company utilizes a 1%
normal servicing fee and has not recorded any excess servicing assets.
(6) LOANS
Loans generally are stated at their outstanding, unpaid principal balances net
of any deferred fees or costs, or unamortized premiums or discounts on
purchased loans. Interest income is accrued on the unpaid principal balance.
Discounts and premiums are amortized to income using the interest method. Loan
origination fees net of certain direct origination costs are deferred and
recognized as an adjustment of the yield (interest income) of the related
loans.
Nonaccrual loans -- Generally, a loan is classified as nonaccrual and the
accrual of interest on such loan is discontinued when the contractual payment
of principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a
loan is placed on nonaccrual status, unpaid interest credited to income is
reversed and the recognition of deferred fees or costs is discontinued.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's judgment as
to the collectibility of principal. Generally, loans are restored to accrual
status when the obligation is brought current, has performed in accordance with
the contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
Impaired Loans -- In 1995, the Company adopted Statements of Financial
Accounting Standards No. 114 and No. 118, Accounting by Creditors for
Impairment of a Loan ("SFAS No. 114 and No. 118"). Loans are considered
impaired when, based on current information, it is probable that the Company
will not collect all principal and interest payments according to contractual
terms. Generally, loans are considered impaired once principal or interest
payments become 90 days or more past due and they are placed on nonaccrual.
Management also considers the financial condition of the borrower, cash flows
of the loan and the value of the related collateral. Loans specifically
reviewed for impairment are not considered impaired during periods of "minimal
delay" in payment (90 days or less) provided eventual collection of all amounts
due is expected. The impairment of a loan is measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate, or the fair value of the collateral if repayment is expected to be
provided by the collateral. Generally, the Company's impairment on such loans
is measured by reference to the fair value of the collateral. Interest income
on impaired loans is recognized on the cash basis.
Allowance for Loan Losses -- The allowance for loan losses is increased through
provisions for credit losses charged against income and reduced by reversals of
previous years' provisions. Loans deemed to be uncollectible are charged
against the allowance for loan losses, and subsequent recoveries, if any, are
credited to the allowance.
Under SFAS No. 114 and No. 118, the allowance for loan losses related to loans
that are identified for evaluation in accordance with these statements is based
on discounted cash flows using the loan's initial effective interest rate or
the fair value of the collateral for certain collateral dependent loans. Prior
to 1995, the allowance for loan losses related to these loans was based on
undiscounted cash flows or the fair value of the collateral for collateral
dependent loans.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated probable credit losses. Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan
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portfolio, current economic conditions and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on loans
that may be susceptible to significant change.
(7) FORECLOSED REAL ESTATE
Foreclosed real estate is comprised of property acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure and loans
classified as insubstance foreclosure. In accordance with SFAS No. 114, a loan
is classified as insubstance foreclosure when the Company has taken possession
of the collateral regardless of whether formal foreclosure proceedings take
place.
Foreclosed assets initially are recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management, and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell. Costs relating to
property improvements are capitalized to the extent that they are recoverable
and costs relating to holding property are expensed when incurred. Gains or
losses on the sale of foreclosed real estate are recognized upon disposition of
the property.
(8) LONG-LIVED ASSETS
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the
straight-line method and are included in noninterest expense in the
accompanying Consolidated Statements of Operations. Premises and equipment are
depreciated over the estimated useful lives of the assets (generally five to
ten years), except for leasehold improvements which are amortized over the
terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
Long-lived assets are evaluated regularly for other-than-temporary impairment.
If circumstances suggest that their value may be impaired and the write-down
would be material, an assessment of recoverability is performed prior to any
write-down of the assets. Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, was adopted on January 1, 1996. Implementation of this standard
did not have a significant impact on the Company's financial condition or
results of operations.
(9) INCOME TAXES
Under the asset and liability method of accounting for income taxes, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are recognized for future
deductible temporary differences and tax loss carryforwards if their
realization is "more than likely".
(10) NET INCOME PER COMMON SHARE
Primary net income per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year, including
any dilutive average common stock equivalent shares. Fully diluted net income
per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the year including any dilutive
average common stock equivalent shares and contingent shares outstanding.
(11) FAIR VALUES OF FINANCIAL INSTRUMENTS
In 1995, the Company adopted the Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial Instruments ("SFAS No.
107"). The Statement was effective for companies with assets of at least
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<PAGE> 23
$150 million for years ending after December 15, 1992; for those companies with
less than $150 million, the Statement became effective in 1995. SFAS No. 107
requires disclosure of the fair value of on- and off-balance-sheet financial
instruments, including both financial assets and liabilities. The fair value
disclosures presented in Note R represent estimates at a point in time and may
not necessarily be relevant in predicting future earnings and cash flows.
(12) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"), establishes a fair value based method of
accounting for employee stock options and expands disclosure requirements,
including a description of the plan. SFAS No. 123 permits a company to
continue to measure compensation cost for its stock option plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issues to Employees. The Company
adopted SFAS No. 123 on January 1, 1996 as presented in Note O.
(13) FINANCIAL ASSETS AND LIABILITIES
Effective January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The adoption of this
pronouncement did not have a material impact on the Company's financial
position.
NOTE B RECAPITALIZATION
In 1993, a stock offering resulted in the sale of 5,756,294 shares totaling
$5,613,237. Total transferable warrants to purchase an additional 2,014,705
shares at the offering price of $1.00 per share were issued along with the new
shares.
The warrants were exercisable during two windows in 1994, when 53,090 shares
were issued and two windows in 1995, when 1,896,759 shares were issued.
Warrants exercised prior to the December 15, 1995 expiration date represent 97%
of the total warrants issued.
NOTE C SALE OF ASSETS AND MERGER OF SUBSIDIARIES
On May 12, 1995, the Company completed the disposition of most of the assets
and all of the liabilities of its subsidiary, Suburban Virginia, to Tysons
Financial Corporation and its subsidiary, Tysons National Bank ("Tysons") in
McLean, Virginia.
Assets transferred to Tysons included all cash and cash equivalents,
investments, loans (excluding nonperforming and other loans totaling $3.1
million) and interest receivable associated with those loans, and fixed assets
in one of Suburban Virginia's two branches. Liabilities assumed by Tysons
included all deposit accounts, securities sold under agreements to repurchase
and interest payable associated with those liabilities.
At closing, the Company paid Tysons $754,000 in cash, representing (1) the
amount by which the liabilities transferred exceeded the assets transferred,
less (2) the $1 million premium Tysons had agreed to pay the Company for the
assets acquired.
On August 18, 1995, the remaining assets and liabilities of Suburban Virginia
were merged into Suburban Maryland in a pooling of interests transaction.
Assets of Suburban Virginia on that date were $2,823,000 and capital was
$2,756,000.
NOTE D INVESTMENTS
The following table shows the amortized cost and estimated fair value of
investment securities classified as available for sale at December 31, 1996:
22
<PAGE> 24
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Amortized ---------- Fair
in thousands Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 7,345 $ 40 $ (6) $ 7,379
Federal agencies 12,986 31 (96) 12,921
Mortgage-backed obligations of
Federal agencies 167 -- (1) 166
Collateralized mortgage obligations 33 1 -- 34
Other 788 6 (4) 790
------- ----- --- ---
Total $21,319 $ 78 $(107) $21,290
</TABLE>
The schedule below shows the amortized cost and estimated fair value of
investment securities classified as available for sale at December 31, 1995:
<TABLE>
<CAPTION>
Gross
Unrealized Estimated
Amortized ---------- Fair
in thousands Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 9,495 $144 $ (1) $ 9,638
Federal agencies 6,984 97 (2) 7,079
Mortgage-backed obligations of
Federal agencies 308 5 (2) 311
Collateralized mortgage obligations 43 1 -- 44
Other 1,000 -- (5) 995
------- ---- ----- -------
Total $17,830 $247 $(10) $18,067
</TABLE>
In November 1995, the Financial Accounting Standards Board issued a Special
Report, A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities. The Report announced a one-time
window of opportunity for the reassessment and reclassification of securities
categorized as held to maturity. On December 31, 1995, the Company transferred
all securities previously classified as held to maturity to the available for
sale classification. The amortized cost of those securities transferred was
$4,872,000 and the estimated fair value was $5,007,000 on that date, resulting
in the addition of $135,000 to shareholders' equity.
The amortized cost and estimated fair value for securities available for sale
at December 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 $ 5,271 $ 5,292
Due after 1 year through 5 years 14,848 14,811
Due after 5 years through 10 years 1,000 987
Due after 10 years 33 34
Mortgage-backed securities 167 166
------- -------
Total $21,319 $21,290
</TABLE>
The amortized cost and estimated fair value of securities pledged as collateral
to secure certain deposits and short-term borrowings were $1,465,000 and
$1,483,000, respectively at December 31, 1996, as compared to $1,442,000 and
$1,493,000, respectively, at December 31, 1995.
23
<PAGE> 25
There were no sales of securities in 1996. Proceeds from the sale of available
for sale securities in 1995 were $709,000, which included gross gains of $3,000
and gross losses of $2,600; in 1994, proceeds from sales were $5,922,000, which
included gross gains of $120,000 and gross losses of $6,000.
NOTE E LOANS
Loans, net of amortized deferred fees, are summarized by type as follows:
<TABLE>
<CAPTION>
in thousands December 31,
1996 1995
<S> <C> <C>
Commercial $21,941 $20,030
Real Estate 35,157 32,098
Construction 9,944 4,461
Individual 5,046 4,622
Other 1,360 1,811
------- -------
Total loans 73,448 63,022
Less: Allowance for loan losses (1,508) (1,467)
------- -------
Loans, net $71,940 $61,555
</TABLE>
NOTE F IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company adopted the provisions of Statements of Financial Accounting
Standards No. 114 and No. 118, Accounting by Creditors for Impairment of a Loan
("SFAS No. 114 and No. 118") on January 1, 1995. SFAS No. 114 and No. 118
apply to loans for which it is probable that the creditor will not collect all
principal and interest payments according to the loan's contractual terms. The
impairment of a loan is measured at the present value of expected future cash
flows using the loan's effective interest rate, or as a practical expedient, at
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Interest income on impaired loans is recognized
on a cash basis. Restructured loans are loans on which the borrower has been
granted a concession as to rate or term as a result of financial difficulty.
Information with respect to impaired loans at December 31 is as follows:
<TABLE>
<CAPTION>
in thousands 1996 1995
---- ----
<S> <C> <C>
Impaired loans with a valuation allowance 771 1,592
Impaired loans without a valuation allowance -- --
Total impaired loans 771 1,592
--- -----
Allowance for credit losses related to impaired loans 78 313
Allowance for credit losses related to other than impaired loans 1,430 1,154
----- -----
Total allowance for credit losses 1,508 1,467
Average impaired loans for the year 1,752 2,561
Interest income on impaired loans recognized on the cash basis -- --
</TABLE>
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
$1,088,000 at December 31, 1996 and $1,173,000 at December 31, 1995.
24
<PAGE> 26
Interest income that would have been recognized on these loans if they were
performing according to their original terms was $119,000 in 1996 and $136,000
in 1995; income recorded was $136,000 and $100,700 in 1996 and 1995,
respectively. The Company has no obligation to make further extensions of
credit under loans classified as troubled debt restructurings.
The provision for loan losses is determined by analyzing the status of
individual loans, reviewing historical loss experience and reviewing the
delinquency of principal and interest payments where pertinent. Management
believes that uncollectible amounts have been charged off and that the
allowance is adequate to cover losses inherent in the portfolio at December 31,
1996. Increases and decreases in the allowance include changes in the
measurement of impaired loans.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $1,467 $2,750 $2,486
Provision (recovery) for loan losses (227) (260) 39
Loans charged off (444) (1,340) (412)
Recoveries 712 317 637
------ ------ ------
Balance at end of year $1,508 $1,467 $2,750
</TABLE>
NOTE G FORECLOSED REAL ESTATE
Foreclosed real estate is carried at the lower of cost or fair value less
estimated selling costs, based upon current market conditions and expected cash
flows.
The following schedule presents a breakdown by type of property of foreclosed
real estate:
<TABLE>
<CAPTION>
December 31,
in thousands 1996 1995 1994
<S> <C> <C> <C>
Commercial land $ -- $ 546 $ 671
Residential land -- 254 1,416
Commercial property 265 567 1,098
1-4 family residential -- 147 581
---- ------ ------
Total 265 1,514 3,766
Less: Allowance for losses (53) (362) (748)
---- ------ ------
Total estimated fair value $212 $1,152 $3,018
</TABLE>
Activity in the allowance for losses on foreclosed real estate is as follows:
<TABLE>
<CAPTION>
in thousands 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $362 $748 $847
Provision for losses -- 231 264
Dispositions, net (309) (597) (41)
Charge-offs, net of recoveries -- (20) (322)
---- ---- ----
Balance at end of year $ 53 $362 $748
</TABLE>
25
<PAGE> 27
NOTE H PREMISES AND EQUIPMENT
Premises and equipment include the following:
<TABLE>
<CAPTION>
December 31,
in thousands 1996 1995 1994
<S> <C> <C> <C>
Land $ 310 $ 237 $ 237
Buildings and improvements 551 470 464
Leasehold improvements 689 839 1,339
Furniture and equipment 1,051 977 1,672
Less: Accumulated depreciation and amortization (1,287) (1,332) (2,556)
------ ------- -------
Total premises and equipment $1,314 $ 1,191 $ 1,156
</TABLE>
The Company occupies banking and office space in five locations under
noncancellable lease arrangements accounted for as operating leases. The
initial lease periods range from five to ten years and provide for one or more
five-year renewal options. The leases provide for percentage annual rent
escalations and require that the lessee pay certain operating expenses
applicable to the leased space. Rent expense applicable to operating leases
amounted to $329,000, $346,000 and $413,000 in 1996, 1995 and 1994,
respectively. At December 31, 1996, future minimum lease payments under
noncancellable operating leases having an initial term in excess of one year
are as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1997 $ 434
1998 443
1999 452
2000 462
2001 472
Thereafter 2,801
-----
Total minimum lease payments $5,064
</TABLE>
NOTE I DEPOSITS
Total deposits are summarized by type as follows:
<TABLE>
<CAPTION>
December 31,
in thousands 1996 1995
<S> <C> <C>
Noninterest-bearing deposits $21,145 $17,800
Interest-bearing:
Interest checking deposits 8,944 11,791
Money market and savings deposits 55,419 48,926
Certificates of deposit of $100,000 or more 2,624 3,816
Other time deposits 19,441 19,556
------ ------
Total interest-bearing deposits 86,428 84,089
------ ------
Total deposits $107,573 $101,889
</TABLE>
26
<PAGE> 28
NOTE J SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under repurchase agreements,
which are securities sold to the Bank's customers, at the customer's request,
under a continuing "roll-over" contract that matures in one business day. The
underlying securities sold are U.S. Treasury notes or Federal agencies which
are segregated in the Bank's Federal Reserve Bank account from the Company's
other investment securities. At December 31, 1996 and 1995, there were no
short-term borrowings. The following table presents certain information for
short-term borrowings:
<TABLE>
<CAPTION>
1996 1995
in thousands Amount Rate Amount Rate
<S> <C> <C> <C> <C>
Securities sold under repurchase agreements:
At year end -- -- -- --
Average for the year -- -- $ 261 4.83%
Maximum month-end balance -- $1,321
</TABLE>
NOTE K OTHER EXPENSE
Other expense in the Consolidated Statements of Operations include the
following:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1996 1995 1994
<S> <C> <C> <C>
Professional fees and services $ 309 $ 505 $ 326
Printing and office expenses 202 197 208
Franchise taxes, filing fees and assessments 23 161 275
Outside data service fees 321 242 261
Marketing and advertising 147 86 107
Insurance 87 124 163
Loan and foreclosed real estate expenses 206 494 631
Bank operations 163 137 164
Other 131 273 141
------ ------ ------
Total other expenses $1,589 $2,219 $2,276
</TABLE>
NOTE L INCOME TAXES
Federal and state income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1996 1995 1994
<S> <C> <C> <C>
Current Federal income tax expense $ -- $ 6 $ --
Current state income tax (benefit) -- -- --
Deferred Federal income tax (benefit) (3,322) -- --
Deferred state income tax (benefit) (736) -- --
-------- ---- -----
Total income tax (benefit) expense $(4,058) $ 6 $ --
</TABLE>
27
<PAGE> 29
The following chart is a summary of the tax effects of temporary differences
that give rise to significant portions of deferred tax assets:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1996 1995 1994
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $ -- $ 66 $ 427
Deferred loan fees and costs 51 42 47
Allowance for losses on foreclosed real estate 21 140 289
Deferred rent 9 5 59
Deferred compensation 72 -- --
Deferred gain on sale of loans 28 -- --
Premises and equipment -- -- 112
Loan interest 8 -- --
Net operating loss carryforwards 3,930 4,151 4,233
------ ------- -------
Gross deferred tax assets 4,119 4,404 5,167
Less valuation allowance -- (4,360) (5,167)
------ ------- -------
Total deferred tax assets 4,119 44 --
Deferred tax liabilities:
Allowance for loan losses (22) -- --
Premises and equipment (39) (44) --
------ ------- -------
Net deferred income taxes $4,058 $ -- $ --
</TABLE>
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal income tax benefit 4.6 -- --
Elimination of valuation allowance on deferred tax assets (468.4) -- --
Benefit not recorded due to net operating loss
carryforward position -- (33.6) (34.0)
-------- ------- -------
Effective tax rates (429.8)% 0.4% --
</TABLE>
The Company has recorded a deferred tax asset of $3.9 million reflecting the
benefit of $10.2 million in tax loss carryforwards, which expire in varying
amounts between 2003 and 2008. Realization depends on generating sufficient
taxable income before the expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not that
all of the deferred tax asset will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The amount of loss carryforward available for any one year may be limited if
the Company is subject to the alternative minimum tax.
NOTE M INCOME PER COMMON SHARE
The weighted average number of shares outstanding used in the determination of
primary and fully diluted income per share are shown in the following table:
28
<PAGE> 30
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Primary 11,301,218 10,153,203 9,538,535
Fully diluted 11,301,218 10,201,620 9,584,840
</TABLE>
The warrants outstanding in 1995 and 1994 were considered common stock
equivalents for the purpose of computing net income per share and were included
in the computation for both primary and fully diluted earnings per share only
when they had a dilutive effect. The management stock options outstanding
(Note O) were included in the calculation of fully diluted earnings per share
when they were dilutive. Common stock equivalents are included in the weighted
shares outstanding.
NOTE N RELATED PARTY TRANSACTIONS
Certain directors, officers and principal shareholders of the Company and its
subsidiary, including their immediate families and companies in which they have
significant ownership, were loan customers during 1996 and 1995. Such loans
were made in the ordinary course of business and on substantially the same
credit terms, including interest rates, maturities and collateralization, as
those prevailing at the time for comparable transactions with other persons,
and did not involve more than normal risk of collectibility or present other
unfavorable features. At December 31, 1996, all of the loans were current and
performing according to agreement.
Total loans outstanding for each year indicated and activity in those loans are
shown below:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands
1996 1995
<S> <C> <C>
Outstanding at beginning of year $ 779 $ 846
New loans and principal advances 223 980
Repayments (165) (1,024)
Resignations -- (23)
----- -------
Outstanding at end of year $ 837 $ 779
</TABLE>
An individual who was a director of the Company's subsidiary during 1996 is a
general partner in a partnership which leases a branch facility to the Bank.
The initial five year lease term expired June 30, 1992, and was renewed under
the first of three five year renewal options at a minimum annual rate of
approximately $75,600. A director of the Company and its subsidiary is the
Chairman of the Board of a company that provided services associated with the
management and disposition of certain properties obtained through foreclosure.
Fees and commissions for these services were approximately $62,000 in 1996 and
$84,000 in 1995. Management believes that the services provided and the terms
of the foregoing lease are no more and no less favorable to the Company than
those which could have been received from unaffiliated parties.
NOTE O EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering all full-time employees who have reached
the age of 21 and have completed at least one year of service as defined by the
plan. The Company made contributions to the plan of approximately $55,000,
$41,000 and $32,000 in 1996, 1995 and 1994, respectively. These amounts are
included in salaries and employee benefits in the accompanying Consolidated
Statements of Operations.
The Company has adopted an Incentive Stock Option Plan for certain officers and
key employees and has reserved 404,235 shares of common stock for options to be
granted under the plan. The purchase price of the shares covered by an option
must be equal to the fair market value on the grant date. The plan authorizes
both qualified and non-qualified
29
<PAGE> 31
options; the characteristics are the same except that qualified options will
have a term of no more than ten years while non-qualified options will have a
term of eleven years. No options were granted under this plan in 1996, 1995 or
1994.
In 1993, upon the successful completion of the stock offering, 350,000
Management Stock Options were granted to the Chairman of the Board, the Vice
Chairman and a major stockholder under the terms of the Plan of Reorganization
and Recapitalization. These options are exercisable at a purchase price of
$0.10 per share and have a term of five years, expiring in March of 1998.
Deferred compensation expense has been recognized and the offset, recorded to
paid-in capital - stock options.
Changes in options outstanding under the Incentive Stock Option Plan and the
Management Stock Option Plan are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 430,000 $1.13 430,000 $1.13 430,000 $1.13
Granted -- -- -- -- -- --
Exercised -- -- -- -- -- --
Expired/cancele d -- -- -- -- -- --
End of year 430,000 $1.13 430,000 $1.13 430,000 $1.13
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All options outstanding at December 31, 1996 were exercisable.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, but applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its plans.
NOTE P REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1996, that the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions
or events since that notification that management believes have changed the
Bank's category.
30
<PAGE> 32
The Bank's actual capital amounts and ratios are presented in the table below:
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES CAPITALIZED
$ in thousands AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk-weighted assets): $12,292 15.36% $6,397 8.00% $7,996 10.00%
Tier 1 capital (to risk-weighted assets): 11,286 14.10 3,198 4.00 4,798 6.00
Tier 1 capital (to average assets): 11,286 9.47 4,766 4.00 5,958 5.00
As of December 31, 1995:
Total capital (to risk-weighted assets): $9,862 14.33% $5,506 8.00% $6,883 10.00%
Tier 1 capital (to risk-weighted assets): 8,994 13.07 2,753 4.00 4,130 6.00
Tier 1 capital (to average assets): 8,994 8.72 4,125 4.00 5,156 5.00
</TABLE>
NOTE Q COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company incurs certain commitments and
contingent liabilities, that are not reflected in the accompanying Consolidated
Financial Statements. These off-balance-sheet items include various
commitments to extend credit and standby letters of credit. No material losses
are expected to result from these transactions. At December 31, 1996 and 1995,
commitments under standby letters of credit totaled approximately $446,000 and
$630,000, respectively. Unfunded loan commitments totaled approximately
$8,761,000 and $8,203,000 at December 31, 1996 and 1995, respectively.
The Company's subsidiary is, at times, and in the ordinary course of banking
business, subject to legal actions. Management is of the opinion that losses,
if any, resulting from current legal actions will not have a material adverse
effect on the financial condition of the Company.
Because most of the Company's business activity is with customers located in
the Washington, D.C. metropolitan area, a geographic concentration of credit
risk exists within the loan portfolio, and, as such, its performance will be
influenced by the economy of the region. In addition, foreclosed real estate
is located in the same market or its surrounding areas; accordingly, the
recovery of a substantial portion of the carrying amount of foreclosed real
estate is susceptible to changes in market conditions in the Washington
metropolitan area. The loan portfolio is diversified with no single industry
or customer comprising more than 6.9% of the total portfolio. The largest
concentration of borrowers within general types of industries, as classified by
Standard Industrial Codes ("SIC"), is in the Finance/Insurance/Real Estate
group, which is 21.1% of the total portfolio.
The Company sells excess funds overnight (Federal funds sold) to correspondent
banks. At December 31, 1996, a total of $12.2 million was invested with three
banks, the largest exposure being $4.8 million. All of these correspondent
banks are considered well capitalized under regulatory guidelines, and,
therefore, little, if any, credit risk is present.
NOTE R FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS No. 107"), requires disclosure of fair
value information about financial instruments for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
31
<PAGE> 33
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
the fair value for its financial instruments as defined by SFAS No. 107.
CASH AND DUE FROM BANKS: The carrying amount approximates fair value.
INTEREST-BEARING DEPOSITS WITH BANKS AND FEDERAL FUNDS SOLD: The carrying
amount approximates fair value.
INVESTMENT SECURITIES AVAILABLE FOR SALE: Fair values are based on published
market prices or dealer quotes.
LOANS: For loans with short-term or variable characteristics, such as home
equity or personal lines of credit and variable-rate commercial and real estate
loans, the carrying value approximates fair value. This amount excludes any
value related to account relationships. The fair value of other types of loans
is estimated by discounting the future cash flows using the comparable
risk-free rate, adjusted for credit risk and operating expenses.
INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates fair
value.
NONINTEREST-BEARING DEPOSITS: The fair value of these instruments, by the SFAS
No. 107 definition, is the amount payable at the reporting date.
INTEREST-BEARING DEPOSITS: The fair value of demand deposits, savings accounts
and money market deposits with no defined maturity, by SFAS No. 107 definition,
is the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash flows using
the current rates at which similar deposits would be made.
At December 31, 1996, the Company had outstanding letters of credit and
commitments to extend credit of $446,000 and $8,761,000, respectively; at
December 31, 1995, outstanding letters of credit totaled $630,000 and
commitments to extend credit were $8,203,000. 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>
in thousands 1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $7,848 $7,848 $9,931 $9,931
Interest-bearing deposits with banks -- -- 2,220 2,220
Federal funds sold 12,215 12,215 16,490 16,490
Investment securities available for sale 21,290 21,290 18,067 18,067
Net loans (including loans held for sale) 77,873 79,499 64,847 66,388
Interest receivable 771 771 607 607
Liabilities:
Noninterest-bearing deposits 21,145 21,145 17,800 17,800
Interest-bearing deposits 86,428 87,289 84,089 85,065
Interest payable 53 53 70 70
</TABLE>
32
<PAGE> 34
NOTE S PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
In 1996 and 1995, all costs of operating the Bank were allocated directly to
the Bank. Condensed financial statements of Suburban Bancshares, Inc. only
(the "Parent") follows:
CONDENSED BALANCE SHEETS
Parent Company
<TABLE>
<CAPTION>
December 31,
in thousands 1996 1995
<S> <C> <C>
ASSETS
Cash $ 59 $ 48
Interest-bearing deposits with banks 576 2,220
Investment securities available for sale 3,265 1,578
Investment in subsidiary 13,743 8,994
Other assets 203 17
------- -------
Total Assets $17,846 $12,857
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 2 $ 5
Shareholders' equity:
Common stock 109 109
Paid-in capital -- stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (8,041) (13,043)
Net unrealized loss on securities available for sale (17) (7)
------- -------
Total shareholders' equity 17,844 12,852
------- -------
Total Liabilities and Shareholders' Equity $17,846 $12,857
CONDENSED STATEMENTS OF OPERATIONS
- ----------------------------------
Parent Company
</TABLE>
<TABLE>
<CAPTION>
December 31,
in thousands 1996 1995 1994
<S> <C> <C> <C>
Interest on deposits $ 64 $ 18 $ 13
Interest on investments 148 95 106
Other income -- 6 2
------ ------ ----
Total income 212 119 121
Total expense 111 552 208
Income (loss) before income taxes and equity in
undistributed income of subsidiaries 101 (433) (87)
Income tax benefit (152) -- --
------ ------ ----
Income (loss) before equity in undistributed income
of subsidiaries 253 (433) (87)
Equity in undistributed income of subsidiaries 4,749 1,974 306
------ ------ ----
Net income $5,002 $1,541 $219
</TABLE>
33
<PAGE> 35
CONDENSED STATEMENTS OF CASH FLOWS
Parent Company
<TABLE>
<CAPTION>
December 31,
in thousands 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $5,002 $1,541 $ 219
Adjustments to reconcile net income to net cash provded
(used) by operating activities:
Equity in income of subsidiaries (4,749) (1,974) (306)
Stock option compensation expense -- 362 138
Accretion on securities (3) (4) (10)
(Increase) decrease in other assets (186) 6 (12)
Decrease in other liabilities (3) (2) (43)
------ ------ -----
Net cash provided (used) by operating activities 61 (71) (14)
Net cash used by investing activities (50) (1,814) (83)
Net cash provided by financing activities -- 1,897 53
Net increase (decrease) in cash and cash equivalents 11 12 (44)
Cash and cash equivalents at beginning of year 48 36 80
------ ------ -----
Cash and cash equivalents at end of year
- -
$ 59 $ 48 $ 36
</TABLE>
MARKET FOR COMMON STOCK
Suburban Bancshares, Inc.'s common stock is traded in the over-the-counter
market and is quoted on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") under the NASDAQ Symbol "SBNK". The following
table sets forth the range of actual high and low bid prices for Suburban
Bancshares, Inc.'s common stock reported by NASDAQ. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
No dividends were paid during such periods. The approximate number of Suburban
Bancshares, Inc. shareholders of record as of March 3, 1997 was 998.
COMMON STOCK -- SBNK
<TABLE>
<CAPTION>
1996 1995
High Low High Low
<S> <C> <C> <C> <C>
1st quarter 2 1 1/4 1 1/2 1-3/16
2nd quarter 2-9/16 1-7/8 1 3/4 1 1/4
3rd quarter 2 1/2 1-15/16 2-1/8 1-5/8
4th quarter 2-9/16 2-1/16 2 1-1/8
</TABLE>
34
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Suburban Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of
Suburban Bancshares, Inc. and Subsidiary as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Suburban Bancshares, Inc. and Subsidiary as of December 31, 1996
and 1995, and the results of their operations and cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/
Stegman & Company
Towson, Maryland
January 13, 1997
35
<PAGE> 37
BOARD OF DIRECTORS
Suburban Bancshares, Inc. (1)
Suburban Bank of Maryland (2)
SAMUEL Y. BOTTS (1,2)
Partner, Jessamy, Fort & Botts
(law firm)
ELIZABETH J. BUCK-BEHNEY (1,2)
President, Buck Distributing Co., Inc.
(beverage distribution)
ALBERT G. DECESARIS (2)
Vice President, Vendemia & DeCesaris Builders, Inc.
ROBERT G. DEPEW (2)
President, Robert G. Depew & Associates, Inc.
(real estate leasing and management)
BARBARA M. DINENNA (1,2)
Chairman, DiNenna & Associates, C.P.A.
FRANK K. HALLEY, JR. (2)
President, Carrollton Realty, Inc.
(real estate sales and management)
STEPHEN A. HORVATH (1,2)
PRESIDENT
MARLIN K. HUSTED (1,2)
VICE CHAIRMAN (1)
WINFIELD M. KELLY, JR. (1,2)
CHAIRMAN
President & CEO, Dimensions Health Corporation
(health care management)
RAYMOND G. LAPLACA (1,2)
VICE CHAIRMAN (2)
Partner, Reichelt, Nussbaum, LaPlaca and Miller
(law firm)
ROBERT L. LONG (2)
Chairman, Long Fence Company
(commercial and residential fencing)
FRANK LUCENTE, JR. (2)
President, Lucente Enterprises
(real estate development)
36
<PAGE> 38
KENNETH H. MICHAEL (1,2)
Chairman, The Michael Companies, Inc.
(real estate sales and management)
ATA O. MOSHYEDI, M.D. (2)
Physician, Gastroenterology
VINCENT D. PALUMBO, D.D.S. (1,2)
President, V.D. Palumbo, P.A.
(oral and maxillofacial surgery)
NATHANAEL POLLARD, JR. (2)
President, Bowie State University
LAWRENCE A. SHULMAN (1,2)
Partner, Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
(law firm)
ALBERT W. TURNER (1,2)
Senior Partner, Carrollton Enterprises
(real estate development and management)
LEO VONDAS (2)
General Partner, Park Road Associates
(real estate development)
OFFICERS
Suburban Bancshares, Inc.
WINFIELD M. KELLY, JR.
Chairman and Chief Executive Officer
MARLIN K. HUSTED
Vice Chairman
STEPHEN A. HORVATH
President and Chief Operating Officer
SIBYL S. MALATRAS
Senior Vice President and Chief Financial Officer
SUSAN J. HANSEN
Corporate Secretary
Suburban Bank of Maryland
WINFIELD M. KELLY, JR.
Chairman
37
<PAGE> 39
RAYMOND G. LAPLACA
Vice Chairman
STEPHEN A. HORVATH
President and Chief Executive Officer
JOSEPH E. BURNETT
Senior Vice President and Chief Lending Officer
CESAR O. CABREJAS
Senior Vice President, Branch Administration
HAROLD J. KOCH
Senior Vice President, Credit Administration
SIBYL S. MALATRAS
Senior Vice President and Treasurer
STEVEN M. BRUNN
Vice President
CHARLES E. CARNS
Vice President and Controller
GEOFFREY J. GROSVENOR
Vice President
JOSEPH A. RUTH
Vice President
EDSEL G. SHAFFER
Vice President
JEROME D. SMALLWOOD
Vice President
PATRICK VAN DER HAM
Vice President
JEFFREY S. WAGNER
Vice President
N. LEE WALTZ, JR.
Vice President
38
<PAGE> 40
BRANCH LOCATIONS AND GENERAL INFORMATION
<TABLE>
<CAPTION>
Suburban Bank of Maryland
<S> <C> <C> <C>
Bethesda 7900 Wisconsin Avenue Lobby: M-F 9 am - 4 pm
Bethesda, MD 20814-3620 Drive-in: M-F 8 am - 6:30 pm
with ATM (301) 654-2200
fax: (301) 654-1040
Capitol Heights 8703 Central Avenue Lobby: M-F 9 am - 2 pm
Capitol Heights, MD 20743-3689 Drive-in: M-F 8 am - 6 pm
(301) 350-8100 Drive-in: Sat 9 am - 12 noon
fax: (301) 499-2597
Clinton 7600 Old Branch Avenue Lobby: M-F 9 am - 2 pm
Clinton, MD 20735-1603 Drive-in: M-F 8 am - 6 pm
with ATM (301) 858-1215 Drive-in: Sat 9 am - 12 noon
fax: (301) 868-0363
Greenbelt 7505 Greenway Center Drive Lobby: M-F 9 am - 4 pm
P. O. Box 298
Greenbelt, MD 20768-0298
(301) 220-0733
fax: (301) 220-2410
Oxon Hill 6196 Oxon Hill Road Lobby: M-F 9 am - 2 pm
Oxon Hill, MD 20745-3130 Drive-in: M-F 8 am - 6 pm
(301) 567-2650
fax: (301) 567-2479
Rockville 30 West Gude Drive Lobby: M-F 9 am - 4 pm
Rockville, MD 20850-1170 Walk-up: M-Th 8 am - 4 pm
(301) 309-1771 Walk-up: Fri 8 am - 6 pm
fax: (301) 309-6785
</TABLE>
General Information
Corporate Office
7505 Greenway Center Drive
P. O. Box 298
Greenbelt, MD 20768-0298
(301) 474-6694
(301) 474-9103 fax
Corporate Publications
Suburban Bancshares, Inc.'s Form 10-K and quarterly reports are available upon
request at no charge by writing or calling the Corporate Office.
Registrar
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
39
<PAGE> 1
EXHIBIT 21
<PAGE> 2
EXHIBIT 21
List of subsidiaries of Suburban Bancshares, Inc.
Suburban Bank of Maryland
7505 Greenway Center Drive
Greenbelt, Maryland 20770
<PAGE> 1
EXHIBIT 23
<PAGE> 2
Stegman & Company
Suite 200
405 East Joppa Road
Baltimore, Maryland 21286
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this
Form 10-K of Suburban Bancshares, Inc. for the year ended December 31, 1996 of
our report dated January 13, 1997 which appears on page 26 of the 1996 Annual
Report to Shareholders.
/s/
Stegman & Company
Towson, Maryland
March 19, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,848
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,215
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 21,290
<LOANS> 79,381
<ALLOWANCE> 1,508
<TOTAL-ASSETS> 126,085
<DEPOSITS> 107,573
<SHORT-TERM> 0
<LIABILITIES-OTHER> 681
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 17,722
<TOTAL-LIABILITIES-AND-EQUITY> 126,085
<INTEREST-LOAN> 7,409
<INTEREST-INVEST> 1,080
<INTEREST-OTHER> 687
<INTEREST-TOTAL> 9,176
<INTEREST-DEPOSIT> 3,362
<INTEREST-EXPENSE> 3,362
<INTEREST-INCOME-NET> 5,814
<LOAN-LOSSES> (227)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,614
<INCOME-PRETAX> 944
<INCOME-PRE-EXTRAORDINARY> 5,002
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,002
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 5.57
<LOANS-NON> 771
<LOANS-PAST> 35
<LOANS-TROUBLED> 1,088
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,467
<CHARGE-OFFS> 444
<RECOVERIES> 712
<ALLOWANCE-CLOSE> 1,508
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
