<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997
--------------------------------------------------------------
Commission File Number 0-16595
--------------------------------------------------------
SUBURBAN BANCSHARES, INC .
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in charter)
Delaware 54-1319441
- -------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
7505 Greenway Center Drive, Greenbelt, Maryland 20770
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(301) 474-6694
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
<TABLE>
<S> <C>
Common Stock $.01 Par Value Outstanding at August 7, 1997
- --------------------------- --------------------------------------------
(Class)
10,951,218 Shares
---------------------------
</TABLE>
1
<PAGE> 2
SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
June 30, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
<S> <C>
Item 1. Condensed Financial Statements
Consolidated Balance Sheets (unaudited)
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations (unaudited)
Six months ended June 30, 1997 and June 30, 1996 4
Consolidated Statements of Operations (unaudited)
Three months ended June 30, 1997 and June 30, 1996 5
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1997 and June 30, 1996 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE> 3
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
In thousands 1997 1996
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 11,331 $ 7,848
Federal funds sold 18,947 12,215
Investment securities 27,554 21,290
Loans held for sale 6,253 5,933
Loans 87,239 73,448
Less: Allowance for loan losses (1,522) (1,508)
Loans, net 85,717 71,940
Premises and equipment, net 1,666 1,314
Foreclosed real estate 212 212
Accrued interest receivable 932 771
Deferred income taxes 3,818 4,058
Other assets 285 504
TOTAL ASSETS $156,715 $126,085
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 24,922 $ 21,145
Interest-bearing deposits 111,638 86,428
Total deposits 136,560 107,573
Securities sold under repurchase agreements 1,247 --
Accrued expenses and other liabilities 618 681
Total liabilities 138,425 108,254
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.01 par value; 20,000,000 shares authorized; 10,951,218 shares issued
and outstanding at June 30, 1997 & December 31, 1996 109 109
Paid-in capital - stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (7,618) (8,041)
Net unrealized gain (loss) on securities available for sale 6 (30)
Total shareholders' equity 18,290 17,831
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $156,715 $126,085
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
In thousands, except per share data 1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $4,056 $3,443
Taxable interest on securities 771 564
Interest on Federal funds sold & deposits with other banks 426 292
Total interest income 5,253 4,299
INTEREST EXPENSE
Interest on deposits 2,012 1,598
Interest on short-term borrowings 4 --
Total interest expense 2,016 1,598
NET INTEREST INCOME 3,237 2,701
Provision for loan losses 115 --
Net interest income after provision for loan losses 3,122 2,701
NONINTEREST INCOME
Service charges on deposit accounts 281 208
Other income 83 70
Total noninterest income 364 278
NONINTEREST EXPENSE
Salaries and employee benefits 1,464 1,274
Occupancy expense 327 235
Furniture and equipment expense 102 67
Other expense 934 790
Total noninterest expense 2,827 2,366
Income before income taxes 659 613
Income taxes 236 --
NET INCOME $423 $613
Income Per Common Share
Primary $0.04 $0.05
Fully Diluted 0.04 0.05
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
In thousands, except per share data 1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $2,097 $1,784
Taxable interest on securities 434 278
Interest on Federal funds sold & deposits with other banks 231 146
Total interest income 2,762 2,208
INTEREST EXPENSE
Interest on deposits 1,077 797
Interest on short-term borrowings 4 --
Total interest expense 1,081 797
NET INTEREST INCOME 1,681 1,411
Provision for loan losses 80 --
Net interest income after provision for loan losses 1,601 1,411
NONINTEREST INCOME
Service charges on deposit accounts 159 108
Other income 34 34
Total noninterest income 193 142
NONINTEREST EXPENSE
Salaries and employee benefits 734 637
Occupancy expense 163 118
Furniture and equipment expense 50 37
Other expense 490 435
Total noninterest expense 1,437 1,227
Income before income taxes 357 326
Income tax 130 --
NET INCOME $227 $326
Income Per Common Share
Primary $0.02 $0.03
Fully Diluted 0.02 0.03
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) Six Months Ended June 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 423 $ 613
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation 80 61
Provision for loan losses 115 --
Originations of loans held for sale (320) (1,636)
Net accretion on securities (36) (28)
(Decrease) increase in deferred loan fees (726) 32
Decrease (increase) in accrued income and other assets 58 (602)
Decrease in accrued expenses and other liabilities (63) (45)
Deferred income taxes 236 --
Net cash used by operating activities (233) (1,605)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in deposits with other banks -- 1,021
(Increase) decrease in Federal funds sold (6,732) 4,875
Purchases of available for sale securities (10,026) (1,594)
Proceeds from maturities of available for sale securities 3,775 3,100
Proceeds from prepayments of principal on securities 62 111
Net increase in loans (13,165) (5,708)
Net purchases of premises and equipment (428) (61)
Gain on sale of fixed assets (4) --
Net cash (used) provided in investing activities (26,518) 1,744
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 28,987 1,076
Net increase in securities sold under agreements to repurchase 1,247 --
Net cash provided by financing activities 30,234 1,076
Net increase in cash and due from banks 3,483 1,215
Cash and due from banks at beginning of period 7,848 9,931
Cash and due from banks at end of period $ 11,331 $ 11,146
Interest paid $ 2,031 $ 1,605
Income taxes paid 0 0
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
SUBURBAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited consolidated financial statements, which
include the accounts of Suburban Bancshares, Inc. ("Bancshares" or "the
Company") and its wholly-owned subsidiary, Suburban Bank of Maryland ("Suburban
Maryland"), have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the disclosures required by generally accepted
accounting principles. All adjustments which, in the opinion of management,
are necessary to a fair presentation of the results for the interim periods
presented have been made; all of these adjustments are of a normal and
recurring nature. The results of operations for the six months ended June 30,
1997 are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1997.
NOTE A - ACCOUNTING POLICIES AND OTHER DATA
Reference should be made to the Notes to Consolidated Financial
Statements included in the Company's Annual Report to Shareholders for the year
ended December 31, 1996, which contain the Company's accounting policies and
other data.
NOTE B - INVESTMENT SECURITIES
The Company is required to classify its debt and marketable equity
securities in one of three categories: trading, available for sale, or held to
maturity. At the time of purchase, management determines the appropriate
designation for securities.
The following table shows the amortized cost and estimated fair value
of investment securities classified as available for sale at June 30, 1997 (in
thousands):
<TABLE>
<CAPTION>
Amortized Gross Gross Estimated Fair
Cost Unrealized Unrealized Value
Gains Losses
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 5,364 $ 20 $ (9) $ 5,375
Federal agencies 21,254 86 (87) 21,253
Mortgage-backed obligations of federal agencies 108 2 (4) 106
Collateralized mortgage obligations 29 1 -- 30
Other 790 3 (3) 790
Total investment securities $27,545 $112 $(103) $27,554
</TABLE>
The schedule below shows the amortized cost and estimated fair value
of investment securities classified as available for sale at December 31, 1996
(in thousands):
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $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 securities available for sale $21,319 $78 $(107) $21,290
</TABLE>
7
<PAGE> 8
The amortized cost and estimated fair value for securities at June 30,
1997, 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 $ 4,829 $ 4,840
Due after one year through 5 years 17,714 17,680
Due after 5 years through 10 years 4,865 4,898
Due after 10 years 29 30
Mortgage-backed securities 108 106
Total $27,545 $27,554
</TABLE>
There were no sales of securities in the six months ended June 30,
1997 or June 30, 1996. The net unrealized holding gain on available for sale
securities, which is shown as a separate component of shareholders' equity, net
of tax effect, in the accompanying Consolidated Balance Sheets, was $6,000 at
June 30, 1997. At December 31, 1996, the Company recorded a net unrealized
loss of $30,000.
NOTE C - IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES
Impaired loans are 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 is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
in thousands 1997 1996
<S> <C> <C>
Impaired loans with a valuation allowance $2,239 $ 771
Impaired loans without a valuation allowance --- ---
-------- --------
Total impaired loans 2,239 771
Allowance for credit losses related to impaired loans 437 78
Allowance for credit losses related to other than impaired loans 1,085 1,430
----- -----
Total allowance for credit losses 1,522 1,508
Average impaired loans for the period $1,287 $1,752
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 $1,122,000 at June 30, 1997 and $1,088,000 at December 31, 1996. The
Company has no obligation to make further extensions of credit under loans
classified as troubled debt restructurings.
The provision for loan losses is determined by analyzing the status of
individual loans, reviewing historical loss experience and reviewing the
delinquency of principal and interest payments where pertinent. Management
believes that uncollectible amounts have been charged off and that the
allowance is adequate to cover losses inherent in the portfolio at June 30,
1997. Increases and
8
<PAGE> 9
decreases in the allowance include changes in the measurement of impaired
loans.
Activity in the allowance for losses is summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended
in thousands June 30, 1997
------------------------------
<S> <C>
Balance at beginning of period $1,508
Provision for loan losses 115
Loans charged off (131)
Recoveries 30
------------------------------
Balance at end of period $1,522
==============================
</TABLE>
NOTE D - FORECLOSED REAL ESTATE
Foreclosed real estate is carried at the lower of cost or fair value,
less estimated selling costs, based upon current market conditions and expected
cash flows.
The following schedule presents a breakdown, by type of property, of
foreclosed real estate (in thousands) at both June 30, 1997 and December 31,
1996:
<TABLE>
<S> <C>
Commercial land $--
Residential land --
Commercial property 265
Residential property, 1-4 family --
------------------------------
Total $265
Allowance for losses (53)
------------------------------
TOTAL FAIR VALUE $212
==============================
</TABLE>
NOTE E - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the Federal banking agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company'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 Company 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 June 30, 1997, that
the Company meets all capital adequacy requirements to which it is subject.
As of June 30, 1997, 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.
The Company's actual capital amounts and ratios are presented in the
table that follows:
9
<PAGE> 10
<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 June 30, 1997:
Total capital (to risk-weighted assets): $17,502 19.33% $7,244 8.00% $9,055 10.00%
Tier 1 capital (to risk-weighted assets): 16,365 18.07 3,622 4.00 5,433 6.00
Tier 1 capital (to average assets): 16,365 11.58 5,652 4.00 7,065 5.00
As of December 31, 1996:
Total capital (to risk-weighted assets): $16,677 20.69% $6,449 8.00% $8,061 10.00%
Tier 1 capital (to risk-weighted assets): 15,663 19.43 3,224 4.00 4,837 6.00
Tier 1 capital (to average assets): 15,663 12.75 4,913 4.00 6,141 5.00
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary provides an overview of the financial
condition and significant changes in the results of the operations of Suburban
Bancshares, Inc. and its subsidiary ("Bancshares" or "the Company") for the six
months ended June 30, 1997 and 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.
OVERVIEW
Suburban Bancshares, Inc. reported pretax earnings of $659,000 for the
six months ending June 30, 1997, an increase of $46,000, or 7.5%, from the
$613,000 reported for the same period of 1996. Improvement in earnings is
attributed to strong loan growth and a strong net interest margin. In 1997,
the Company has begun to record tax expense, after the recognition of the
income tax benefits of loss carryforwards and temporary differences at the end
of 1996. Net income in 1997, after taxes of $236,000 was $423,000, or $0.04
per share.
Total assets climbed to $156.7 million at June 30, 1997, a $39.9
million, or 34.1%, increase from $116.8 million at June 30, 1996. Asset growth
since December 31, 1996 is $30.6 million, or 24.3%. Loans have increased $19.8
million, or 26.9%, since June 30, 1996 and $14.1 million, or 17.8%, since
year-end 1996, reaching $93.5 million at the end of the second quarter of 1997.
Deposits, at $136.6 million, rose 32.6% since June 30, 1996 and 26.9% since
December 31, 1996.
Average assets were $136.3 million for the first six months of 1997,
$28.4 million, or 26.3%, above average assets of $107.8 million for the same
period of 1996. Average earning assets rose 24.8% and average deposits rose
24.6%.
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 $536,000, or 19.8%, from $2,701,000 for the
first half of 1996 to $3,237,000 in 1997, the net result of higher loan
volume, changes in the composition of funding sources, and higher cost of
funds.
10
<PAGE> 11
The net interest margin represents the Company's net yield on its
earning assets and is calculated as net interest income divided by average
earning assets. In the first six months of 1997, the net interest margin was
5.28%, falling 20 basis points from 5.48% in the same period of 1996, the
result of lower loan yields and an increase in funding costs.
Changes in the volume of earning assets and interest bearing funds
impact both interest income and interest expense, and volume changes were key
determinants of the increase in net interest income in the first two quarters
of 1997. Both total average earning assets and total average interest bearing
funds rose in the first half of 1997 as compared to 1996. Average earning
assets rose $24.5 million, or 24.8%, from $99.1 million in 1996 to $123.6
million in 1997, and average interest bearing funds increased $18.0 million, or
23.5%, from $76.4 million to $94.4 million for the same periods. As a
percentage of average assets, earning assets declined from 91.9% in the first
six months of 1996 to 90.7% in 1997, the result of the addition of the deferred
tax asset of $ 3.9 million, or 2.9% of average assets. Average interest
bearing funding sources fell from 81.2% of total funding sources in the first
half of 1996 to 80.4% in the same period in 1997, which helped to ease the
rising cost of funds.
Changes in the mix of both earning assets and funding sources also
impacted net interest income in the first six months of both 1997 and 1996.
Average loans as a percentage of average earning assets declined from 70.4% in
1996 to 67.6% in 1997. Average investment securities rose from 18.5% to 19.6%
and short-term investments, Federal funds sold, rose from 11.1% of earning
assets to 12.8%. The impact of the shift in earning assets was a decrease in
the yield as funds were placed in lower yielding investments. Changes in the
mix of interest-bearing funds were more pronounced. Savings accounts,
averaging $22.0 million in 1997, were 18.7% of total funding sources, a
substantial increase from $5.7 million or 6.1% of total funds in 1996.
Partially offsetting the increased cost resulting from this change in the mix
of funding sources were (a) growth in noninterest-bearing deposits which rose
to 19.6% of total funds in 1997 from 18.8% in 1996 and (b) a decline in the
percentage of higher-cost time deposits from 25.3% in the first six months of
1996 to 19.4% in 1997.
Shifts in the interest rate environment and competitive factors
affected the rates paid for funds as well as the yields earned on assets. Loan
yields fell 13 basis points, from 9.92% in the first six months of 1996 to
9.79% in 1997, the result of competitive factors in our market. Federal funds
yields rose as the market rates were higher on average in 1997 than in 1996,
and the yield on investments increased as we extended the overall maturity of
the portfolio. In early 1996, as market rates began to decline, the decrease
in the cost of funds moved more slowly, and when other market rates leveled
off, deposit costs continued a slow decline. Competition for funds, however,
increased in late 1996 and early 1997, and the Company offered a special rate
on savings accounts, which are typically a stable source of funds. This
special rate brought in new funds and also resulted in some disintermediation
within the deposit base. Savings accounts rose from an average of $5.7 million
in the first six months of 1996 to $22.0 million in the same period of 1997.
As other deposit rates declined, the cost of savings rose 83 basis points. The
total cost of funds, even with this significant increase in savings rates, rose
only 5 basis points, from 3.41% in 1996 to 3.46% in 1997.
11
<PAGE> 12
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(In thousands)
<TABLE>
<CAPTION>
Six Months ended June 30, 1997 1996
AVERAGE AVERAGE
AVERAGE YIELD AVERAGE YIELD
ASSETS BALANCE INTEREST OR RATE BALANCE INTEREST OR RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $83,514 $4,056 9.79% $69,777 $3,443 9.92%
Investment securities 24,255 771 6.41% 18,283 564 6.21%
Fed funds sold & other deposits 15,846 426 5.42% 11,012 292 5.34%
Total interest-earning assets 123,615 5,253 8.57% 99,072 4,299 8.73%
Noninterest-earning assets:
Cash and due from banks 7,332 6,878
Bank property and equipment 1,535 1,189
Other assets 5,304 2,200
Less: Allowance for loan losses (1,533) (1,490)
Total noninterest-earning assets 12,638 8,777
TOTAL ASSETS $136,253 $107,849
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking, money market & savings
Time deposits $71,413 $1,390 3.93% $52,641 $918 3.51%
Other borrowings 22,825 622 5.50% 23,790 680 5.75%
188 4 4.14% --- --- ---
Total interest-bearing liabilities 94,426 2,016 4.31% 76,431 1,598 4.21%
Noninterest-bearing liabilities:
Noninterest-bearing deposits 23,036 17,704
Total funding sources 117,462 2,016 3.46% 94,135 1,598 3.41%
Other liabilities 757 440
TOTAL LIABILITIES 118,219 94,575
Shareholders' equity 18,034 13,274
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $136,253 $107,849
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $3,237 $2,701
Net interest spread 5.11% 5.31%
Net interest margin 5.28% 5.48%
</TABLE>
12
<PAGE> 13
PROVISION FOR LOAN LOSSES
The provision for loan losses is the effect of maintaining an
allowance, or reserve, for anticipated future losses on loans. The allowance
for loan losses reflects management's judgment as to the level considered
appropriate to absorb such losses based upon a review of many factors,
including historical loss experience, adverse situations that may affect the
borrower's ability to repay (including the timing of future payments), economic
conditions and trends, loan portfolio volume and mix, loan performance trends,
the value and adequacy of collateral, and the Company's internal credit review
process. Based on this ongoing evaluation, management determines the provision
or reversal necessary to maintain an appropriate allowance.
In the first six months of 1997, the provision for loan losses was
$115,000. Loans charged-off totaled $131,000 and recoveries were $30,000. In
the same period of 1996, there was no provision set aside, as recoveries of
$103,000 offset loans charged off of $72,000.
NONINTEREST INCOME
Noninterest income rose $86,000, or 30.9%, in the first half of 1997
to $364,000 from $278,000 in the same period of 1996. In the second quarter of
1997, noninterest income was $193,000, $51,000 or 35.9% higher than in the same
period of 1996. Deposit account service charges increased as deposits rose,
and fees for other services provided to customers rose as the customer base
increased.
NONINTEREST EXPENSES
Noninterest expenses increased $461,000, or 19.5%, in the first six
months of 1997 as compared to the same period of 1996, to $2,827,000 from
$2,366,000. Salaries and benefits increased 14.9% over last year's first half,
the result of merit increases and staffing for a new branch. The new branch in
Bethesda, the renovation of our Greenbelt headquarters, and new services
offered have pushed other expenses higher, as well. In the quarter ending June
30, noninterest expenses rose from $1,227,000 in 1996 to $1,437,000 in 1997, a
17.1% increase, for the same reasons.
ASSET QUALITY
Loan impairment applies to loans for which it is probable that the
creditor will not collect all principal and interest payments according to the
loan's contractual terms. The impairment of a loan is measured at the present
value of expected future cash flows using the loan's effective interest rate,
or as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. Interest income
on impaired loans is recognized on a cash basis. Restructured loans are loans
on which the borrower has been granted a concession as to rate or term as a
result of financial difficulty. Nonaccrual loans are those loans on which the
accrual of interest is discontinued when full collection of principal or
interest is in doubt, or when the payment of principal or interest has become
contractually 90 days past due, unless the obligation is both well secured and
is in the process of collection. Loans may be placed on nonaccrual status when
past due less than 90 days if collection becomes uncertain based upon an
evaluation of the fair value of the collateral and the financial strength of
the borrower. When a loan is placed on nonaccrual status, interest income in
the current period is reduced by the amount of any accrued and uncollected
interest. Subsequent payments of interest are applied as a reduction of
principal when concern exists as to the ultimate collection of principal;
otherwise such payments are recognized as interest income. Loans are removed
from nonaccrual status when they have demonstrated a period of performance and
when concern no longer exists as to the collectibility of principal or
interest.
The recorded investment in loans that were considered impaired was
$2,239,000 and $771,000 at June 30,1997 and December 31, 1996, respectively.
The increase in impaired loans in the first half of 1997 is primarily the
impact of three large loans shifting to impaired status. The recorded
investment in loans that were restructured prior to the adoption of SFAS No.
114, Accounting by Credits for Impairment of a Loan, and which were performing
according to the new terms was $1,122,000 at June 30, 1997 and $1,088,000 at
December 31, 1996.
Real estate acquired through foreclosure or deed in lieu of
foreclosure is carried at fair value less estimated selling costs, based upon
current market conditions and expected cash flows. Foreclosed real estate was
$212,000 at June 30, 1997, unchanged from December 31, 1996.
13
<PAGE> 14
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. The allowance for loan losses related to
loans that are identified as impaired is based on discounted cash flows using
the loans' initial effective interest rates or the fair value of the collateral
for certain collateral dependent loans.
The allowance for loan losses was $1,522,000 at June 30,1997, a slight
increase from $1,508,000 at December 31, 1996. Activity in the allowance for
loan losses during the first quarter of 1997 included recoveries of $30,000,
charge-offs of $131,000, and a provision for future losses of $115,000.
LIQUIDITY MANAGEMENT
Liquidity is the ability to generate and maintain sufficient cash
flows to fund operations and to meet financial obligations to depositors and
borrowers promptly and in a cost-effective manner. Asset liquidity is provided
primarily by maturing loans and investments and by cash received from
operations. Other sources of asset liquidity include readily marketable assets
that can serve as collateral for borrowings, and sales of loans and other real
estate. On the liability side of the balance sheet, liquidity is affected by
the timing of maturing liabilities and the ability to generate new deposits or
borrowings as needed.
In the first six months of 1997, the Company's liquidity position has
increased as loans, as a percent of earning assets, declined and marketable
securities increased. As a percentage of total earning assets, loans,
excluding loans held for sale, fell to 62.3% at June 30, 1997 from 65.1% at
December 31, 1996, while marketable securities, overnight investments and loans
held for sale rose to 37.7% from 34.9%, respectively. This shift in the mix of
earning assets to a higher percentage of readily marketable assets has
increased the Company's overall liquidity.
A typically stable source of liquidity is the core deposit base. Core
deposits are normally noninterest checking accounts, interest checking and
money market accounts, and savings accounts. The stability of these core
deposits is reflected in the ratio of these deposits to total funding sources,
which averaged 80.4% in the first six months of 1997 and 74.7% in 1996. Time
deposits under $100,000, which are also considered to be stable funding
sources, declined from 21.2% of funding sources in the first six months of 1996
to 17.0% in 1997; the volume in these accounts, however, remained stable at
$20.0 million in 1996 and $19.9 million in 1997. Additional funding is
generated from short-term borrowings (securities sold under repurchase
agreements) and large CDS. These funds, which are considered to be volatile or
rate sensitive, even though they are provided by local customers, have declined
as a percentage of average total funding sources from 4.0% in the first quarter
of 1996 to 2.6% in 1997.
Other sources of liquidity and cash flow in the first six months of
1997 and 1996, were from maturing securities which generated cash inflow of
$3.8 million and $3.1 million, respectively.
As an additional 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.
CAPITAL RESOURCES AND ADEQUACY
Shareholders' equity increased $459,000, or 2.6%, in the first six
months of 1997 to $18,290,000 at June 30, 1997 from $17,831,000 at December 31,
1996, the result of earnings of $423,000 plus an increase of $36,000 in the net
unrealized gain on securities available for sale.
14
<PAGE> 15
A combination of a leverage capital ratio and risk-based capital
ratios is used to categorize banks as well capitalized, adequately capitalized,
or under capitalized financial institutions under the guidelines established by
FDICIA. A financial institution is considered "well capitalized" if it has a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6%, and a leverage ratio of 5% or greater and it is not
subject to a written agreement, order or directive. At December 31, 1996 and
June 30, 1997, 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 from
0 to 100%. Financial institutions 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 to the Company. At June 30, 1997, Suburban
Bancshares reported at Tier 1 risk-based capital ratio of 18.07% and a ratio of
19.33% based on total capital. Both ratios were well above the general
regulatory minimums of 4% and 8%, respectively.
Another capital adequacy measure is the leverage capital ratio, which
is calculated by dividing average total assets for the most recent quarter into
core (Tier 1) capital. The regulatory minimum of this ratio is 3%, with most
financial institutions required to maintain a ratio of at least 4% to 5%,
depending upon risk profiles and other factors. At June 30, 1997, the leverage
capital ratio for the Company was 11.58%.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of the shareholders (the "Meeting") was held
on May 22, 1997. The following matters were submitted to a
vote of shareholders either by proxy or in person:
1. Two directors were elected to the class of directors
whose terms expired at the Meeting to serve for terms expiring
at the 2000 annual meeting of shareholders or until their
successors are elected and qualify (the "2000 Class").
Vincent D. Palumbo and Albert W. Turner were elected
to the 2000 Class. Dr. Palumbo was elected with 8,884,851
votes for and 19,730 votes withheld and Mr. Turner, with
8,888,251 votes for and 16,330 votes withheld.
Other directors whose terms continued after the
Meeting were Samuel Y. Botts, Stephen A. Horvath, Winfield M.
Kelly, Jr. and Kenneth H. Michael, members of the class whose
term expires at the end of the 1998 annual meeting of
shareholders and Barbara M. DiNenna, Marlin K. Husted, Raymond
G. LaPlaca and Lawrence A. Shulman, members of the class whose
term expires at the 1999 annual meeting of shareholders or
until their successors are elected and qualify.
2. The shareholders approved the 1997 Stock Option Plan
for Employees and Directors with 8,473,317 votes for, 255,162
votes against and 176,102 abstentions.
3. The shareholders ratified the selection of Stegman &
Company as the Company's independent public accountants for
1997 with 8,828,244 votes for, 24,505 votes against and 51,832
abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of
this report.
<TABLE>
<CAPTION>
Exhibit # Description
--------- -----------
<S> <C>
11.0 Computation of per share earnings
27.0 Financial Data Schedule
</TABLE>
(b) No reports on Form 8K were filed in the
quarter ended June 30, 1997.
16
<PAGE> 17
PART II. OTHER INFORMATION (continued)
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUBURBAN BANCSHARES, INC.
(Registrant)
Date: August 8, 1997 Stephen A. Horvath
---------------------- ----------------------------------------
Stephen A. Horvath
President and Chief Operating Officer
Date: August 8, 1997 Sibyl S. Malatras
---------------------- ----------------------------------------
Sibyl S. Malatras
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
17
<PAGE> 1
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
JUNE 30, 1997
<TABLE>
<CAPTION>
Market Price per Share: Daily Average End-of-Period
----------------------- ------------- -------------
<S> <C> <C>
First Quarter 1997 $2.4260 $2.1875
Second Quarter 1997 $2.2573 $2.3125
Third Quarter 1997
Fourth Quarter 1997
</TABLE>
COMMON STOCK EQUIVALENT COMPUTATION
================================================================================
<TABLE>
<S> <C> <C> <C>
(a) 350,000 Management Stock Options exercisable at $0.10
First Quarter 1997 Primary Fully Diluted
350,000 - ((350,000*.10)/avg price) = 335,573
350,000 - ((350,000*.10)/end price) = 334,000
Second Quarter 1997 Primary Fully Diluted
350,000 - ((350,000*.10)/avg price) = 334,495
350,000 - ((350,000*.10)/end price) = 334,865
(b) 12,600 Options granted 1/22/97 exercisable at $2.625
First Quarter 1997 Primary Fully Diluted
12,600 - ((12,600*2.625)/avg price) = (1,034) Antidilutive
12,600 - ((12,600*2.625)/end price) = (2,520) Antidilutive
Second Quarter 1997 Primary Fully Diluted
12,600 - ((12,600*2.625)/avg price) = (2,052) Antidilutive
12,600 - ((12,600*2.625)/end price) = (1,703) Antidilutive
</TABLE>
EARNINGS PER SHARE CALCULATION
================================================================================
<TABLE>
<CAPTION>
COMMON AND EQUIVALENT SHARES (PRIMARY) 2nd Quarter 1997 1997 Year-to-Date
<S> <C> <C>
EARNINGS $227,329 $423,432
SHARES & EQUIVALENT SHARES
Common Shares 10,951,218 10,951,218
Common Stock Equivalents 334,495 335,031
------------ ------------
TOTAL 11,285,713 11,286,249
EPS $0.020143 $0.037518
FULLY DILUTED
EARNINGS $227,329 $423,432
SHARES & EQUIVALENT SHARES
Common Shares 10,951,218 10,951,218
Exercisable Options 334,865 334,435
------------ ------------
TOTAL 11,286,083 11,285,653
EPS $0.020142 $0.037520
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 11,331
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18,947
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 27,554
<LOANS> 93,492
<ALLOWANCE> 1,522
<TOTAL-ASSETS> 156,715
<DEPOSITS> 136,560
<SHORT-TERM> 1,247
<LIABILITIES-OTHER> 618
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 18,181
<TOTAL-LIABILITIES-AND-EQUITY> 156,715
<INTEREST-LOAN> 4,056
<INTEREST-INVEST> 771
<INTEREST-OTHER> 426
<INTEREST-TOTAL> 5,253
<INTEREST-DEPOSIT> 2,012
<INTEREST-EXPENSE> 2,016
<INTEREST-INCOME-NET> 3,237
<LOAN-LOSSES> 115
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,827
<INCOME-PRETAX> 659
<INCOME-PRE-EXTRAORDINARY> 659
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 423
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<YIELD-ACTUAL> 5.28
<LOANS-NON> 2,239
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,216
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,508
<CHARGE-OFFS> 131
<RECOVERIES> 30
<ALLOWANCE-CLOSE> 1,522
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
