<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1997
-------------------------------------------------------------
Commission File Number 0-16595
---------------------------------------------------------
SUBURBAN BANCSHARES, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in charter)
<TABLE>
<S> <C>
Delaware 54-1319441
- -------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
7505 Greenway Center Drive, Greenbelt, Maryland 20770
- -------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(301) 474-6694
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
<TABLE>
<S> <C>
Common Stock $.01 Par Value Outstanding at May 5, 1997
- --------------------------- ---------------------------
(Class)
10,951,218 Shares
---------------------------
</TABLE>
1
<PAGE> 2
SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
March 31, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
<S> <C> <C>
Item 1. Condensed Financial Statements
Consolidated Balance Sheets March 31, 1997 (unaudited)
and December 31, 1996 (audited) 3
Consolidated Statements of Operations (unaudited)
Three months ended March 31, 1997 and March 31, 1996 4
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1997 and March 31, 1996 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
</TABLE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
2
<PAGE> 3
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
In thousands 1997 1996
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,259 $ 7,848
Federal funds sold 25,355 12,215
Investment securities 22,952 21,290
Loans held for sale 6,025 5,933
Loans (net of deferred loan fees) 77,003 73,448
Less: Allowance for loan losses (1,524) (1,508)
Loans, net 75,479 71,940
Premises and equipment, net 1,553 1,314
Foreclosed real estate 212 212
Accrued interest receivable 682 771
Deferred income taxes 4,046 4,058
Other assets 320 504
TOTAL ASSETS $146,883 $126,085
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 24,378 $ 21,145
Interest-bearing deposits 103,992 86,428
Total Deposits 128,370 107,573
Accrued expenses and other liabilities 605 681
Total liabilities 128,975 108,254
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 March 31, 1997 & December 31, 1996 109 109
Paid-in capital - stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (7,845) (8,041)
Net unrealized loss on securities available for sale (149) (30)
Total shareholders' equity 17,908 17,831
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $146,883 $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>
Three months ended March 31,
In thousands, except per share data 1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,960 $1,659
Taxable interest on securities 336 286
Interest on Federal funds sold 195 126
Interest on deposits with banks -- 20
Total interest income 2,491 2,091
INTEREST EXPENSE
Interest on deposits 935 801
Interest on short-term borrowings -- --
Total interest expense 935 801
NET INTEREST INCOME 1,556 1,290
Provision for loan losses 35 --
Net interest income after provision for loan losses 1,521 1,290
NONINTEREST INCOME
Service charges on deposit accounts 122 100
Other income 49 36
Total noninterest income 171 136
NONINTEREST EXPENSE
Salaries and employee benefits 730 637
Occupancy expense 164 117
Furniture and equipment expense 52 29
Other expense 444 355
Total noninterest expense 1,390 1,138
Income before income taxes 302 288
Income tax 106 --
NET INCOME $196 $288
Income Per Common Share
Primary $0.02 $0.03
Fully Diluted 0.02 0.03
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited) QUARTER ENDED MARCH 31,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $196 $ 288
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation 40 29
Provision for loan losses 35 --
Originations of loans held for sale (92) (1,211)
Net accretion on securities (14) (14)
(Decrease) increase in deferred loan fees (7) 24
Decrease (increase) in accrued income and other assets 273 (134)
Decrease in accrued expenses and other liabilities (76) (47)
Deferred income taxes 106 --
Net cash provided (used) by operating activities 461 (1,065)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in deposits with other banks -- 1,071
(Increase) decrease in Federal funds sold (13,140) 4,170
Purchases of available for sale securities (3,666) (1,594)
Proceeds from maturities of available for sale securities 1,775 1,000
Proceeds from prepayments of principal on securities 30 16
Net increase in loans (3,567) (1,937)
Net purchases of premises and equipment (276) (12)
Gain on sale of fixed assets (3) --
Net cash (provided) used by investing activities (18,847) 2,714
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 20,797 79
Net cash provided by financing activities 20,797 79
Net increase in cash and due from banks 2,411 1,728
Cash and due from banks at beginning of period 7,848 9,931
Cash and due from banks at end of period $10,259 $11,659
Interest paid $940 $806
Income taxes paid -- --
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
SUBURBAN BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited consolidated financial statements, which
include the accounts of Suburban Bancshares, Inc. ("Bancshares" or "the
Company") and its wholly-owned subsidiary, Suburban Bank of Maryland ("Suburban
Maryland"), have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the disclosures required by generally accepted
accounting principles. All adjustments which, in the opinion of management, are
necessary to a fair presentation of the results for the interim periods
presented have been made; all of these adjustments are of a normal and
recurring nature. The results of operations for the three months ended March
31, 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, manage-ment determines the appropriate
designation for securities.
The following table shows the amortized cost and estimated fair value
of investment securities classified as available for sale at March 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Estimated Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 6,355 $ 16 $ (28) $ 6,343
Federal agencies 15,882 11 (236) 15,657
Mortgage-backed obligations of federal agencies 138 2 (2) 138
Collateralized mortgage obligations 31 1 --- 32
Other 789 --- (7) 782
Total investment securities $23,195 $ 30 $(273) $22,952
</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 Gross Unrealized Gross Unrealized Estimated Fair
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 securities available for sale $21,319 $78 $(107) $21,290
</TABLE>
6
<PAGE> 7
The amortized cost and estimated fair value for securities at March
31, 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 $ 5,930 $ 5,939
Due after one year through 5 years 15,116 14,906
Due after 5 years through 10 years 1,980 1,937
Due after 10 years 31 32
Mortgage-backed securities 138 138
Total $23,195 $22,952
</TABLE>
There were no sales of securities in the three months ended March 31,
1997 or 1996. The net unrealized holding loss on available for sale
securities, which is shown as a separate component of shareholders' equity in
the accompanying Consolidated Balance Sheets, was $149,000 at March 31, 1997
and $30,000 at December 31, 1996.
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>
March 31, December 31,
in thousands 1997 1996
<S> <C> <C>
Impaired loans with a valuation allowance $1,146 $ 771
Impaired loans without a valuation allowance --- ---
------ -------
Total impaired loans 1,146 771
Allowance for credit losses related to impaired loans 209 78
Allowance for credit losses related to other than impaired loans 1,315 1,430
------ -------
Total allowance for credit losses 1,524 1,508
Average impaired loans for the period $990 $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 March 31, 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 March 31,
1997. Increases and decreases in the allowance include changes in the
measurement of impaired loans.
7
<PAGE> 8
Activity in the allowance for losses is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
in thousands March 31, 1997
------------------
<S> <C>
Balance at beginning of period $ 1,508
Provision for loan losses 35
Loans charged off ( 31)
Recoveries 12
---------------
Balance at end of period $ 1,524
===============
</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 March 31, 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 Bank 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 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 March 31, 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
As of March 31, 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 Bank's actual capital amounts and ratios are presented in the table that
follows:
8
<PAGE> 9
<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 March 31, 1997:
Total capital (to risk-weighted assets): $12,592 14.45% $6,970 8.00% 8,713 10.00%
Tier 1 capital (to risk-weighted assets): 11,497 13.20 3,485 4.00 5,228 6.00
Tier 1 capital (to average assets): 11,497 9.33 4,928 4.00 6,160 5.00
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
</TABLE>
NOTE F - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments ("SFAS No. 107"), requires disclosure of
fair value information about financial instruments for which it is practicable
to estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfiancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value for its financial instruments as defined by SFAS No.
107.
CASH AND DUE FROM BANKS: The carrying amount approximates fair value.
INTEREST-BEARING DEPOSITS WITH BANKS AND FEDERAL FUNDS SOLD: The carrying
amount approximates fair value.
INVESTMENT SECURITIES AVAILABLE FOR SALE: Fair values are based on published
market prices or dealer quotes.
LOANS: For loans with short-term or variable characteristics, such as home
equity or personal lines of credit and variable-rate commercial and real estate
loans, the carrying value approximates fair value. This amount excludes any
value related to account relationships. The fair value of other types of loans
is estimated by discounting the future cash flows using the comparable
risk-free rate, adjusted for credit risk and operating expenses.
INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates
fair value.
NONINTEREST-BEARING DEPOSITS: The fair value of these instruments, by the SFAS
No. 107 definition, is the amount payable at the reporting date.
INTEREST-BEARING DEPOSITS: The fair value of demand deposits, savings accounts
and money market deposits with no defined maturity, by SFAS No. 107 definition,
is the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash flows using
the current rates at which similar deposits would be made.
At March 31, 1997, the Company had outstanding letters of credit and
commitments to extend credit of $742,000 and $10,697,000, respectively. The
fair value of these off-balance-sheet financial instruments, based on fees that
would be charged to enter similar arrangements, is immaterial.
9
<PAGE> 10
The estimated fair values of the Company's financial instruments
required to be disclosed under SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
In thousands Carrying Amount Fair Value Carrying Amount Fair Value
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $10,259 $ 10,259 $ 7,848 $ 7,848
Federal funds sold 25,355 25,355 12,215 12,215
Investment securities available for sale 22,952 22,952 21,290 21,290
Net loans (including loans held for sale) 81,504 82,797 77,873 79,499
Interest receivable 682 682 771 771
Liabilities:
Noninterest-bearing deposits 24,378 24,378 21,145 21,145
Interest-bearing deposits 103,992 104,035 86,428 87,289
Interest payable 48 48 53 53
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following commentary provides an overview of the financial
condition and significant changes in the results of the operations of Suburban
Bancshares, Inc. and its subsidiary ("Bancshares" or "the Company") for the
three months ended March 31, 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 earnings before taxes of $302,000
for the three months ending March 31, 1997, an increase of $14,000, or 5.2%,
over $288,000 reported for the first quarter of 1996. Improvement in earnings
is attributed to strong loan growth and a rising 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 $106,000, was $196,000, or $0.02 per
share.
Total assets climbed to $146.9 million at March 31, 1997, a $31.3
million, or 27.1%, increase from $115.6 million at March 31, 1996. Asset
growth since December 31, 1996 is $20.8 million, or 16.5%. Loans have
increased $13.6 million, or 19.6%, since March 31, 1996 and $3.6 million, or
4.6%, since year-end 1996, reaching $83.0 million at the end of the first
quarter of 1997. Deposits, at $128.4 million, rose 25.9% since March 31, 1996
and 19.3% since December 31, 1996.
Average assets were $129.1 million for the first three months of 1997,
$22.9 million, or 21.6%, above average assets of $106.2 million for the same
period of 1996. Average earning assets rose 19.5% and average deposits rose
19.2%.
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.
10
<PAGE> 11
Net interest income rose $266,000, or 20.6%, from $1,290,000 for the
first quarter of 1996 to $1,556,000 in 1997, the net result of higher loan
volume and changes in the composition of funding sources.
The net interest margin represents the Company's net yield on its
earning assets and is calculated as net interest income divided by average
earning assets. In the first three months of 1997, the net interest margin was
5.42%, rising 9 basis points from 5.33% in the same period of 1996, the result
of a slight increase in the yield on earning assets and a small decrease 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 quarter of
1997. Both total average earning assets and total average interest bearing
funds rose in the first quarter of 1997 as compared to 1996. Average earning
assets rose $19.0 million, or 19.5%, from $97.4 million in 1996 to $116.4
million in 1997, and average interest bearing funds increased $13 million, or
17.1%, from $75.6 million to $88.6 million for the same periods. As a
percentage of average assets, earning assets declined from 91.8% in the first
quarter of 1996 to 90.2% in 1997, the result of the addition of the deferred
tax asset of $ 4.0 million, or 3.1% of average assets. Average interest
bearing funding sources fell from 81.7% of total funding sources in the first
quarter of 1996 to 80.3% in the same period in 1997, resulting in a slightly
lower cost of funds. As the growth in earnings assets exceeded the growth of
interest-bearing funds, the margin improved.
Changes in the mix of both earning assets and funding sources also
impacted net interest income in the first quarter of both 1997 and 1996;
however, the changes in the mix of earning assets were less significant than
the change in composition of funding sources. Average loans as a percentage of
average earning assets declined slightly from 69.6% in 1996 to 68.8% in 1997;
average investments also fell slightly from 19.2% to 18.5%. Short-term
investments, Federal funds sold, rose from 11.2% of earning assets to 12.8%.
The impact of the shift, though small, was a decrease in the yield on earning
assets as funds were placed in lower yielding investments. Changes in the mix
of interest-bearing funds were more pronounced as funds shifted from higher
cost deposits into noninterest-bearing funding sources and lower cost savings
accounts. Time deposits fell $1.9 million, from 25.9% of funding sources to
19.7% in 1997, and noninterest-bearing deposits rose from 18.3% to 19.7%; both
of these changes in deposit composition resulted in a decrease in the cost of
funds, which was partially offset by an increase in the cost of savings
accounts. Savings accounts were 18.1% of total funding sources in 1997, a
significant increase from 5.7% in 1996.
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 rose 8 basis points, from 9.84% in the first three months of 1996 to
9.92% in 1997, primarily the result of a decrease in problem loans on
nonaccrual status. Investments and Federal funds yields remained fairly stable
as the market rates were approximately the same on average in both 1996 and
1997. 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 $5.3 million
in the first quarter of 1996 to $19.9 million in the same period of 1997. As
other deposit rates declined, the cost of savings rose 98 basis points. The
total cost of funds, even with this increase in savings accounts, declined 4
basis points, from 3.48% in 1996 to 3.44% in 1997.
11
<PAGE> 12
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(In thousands)
<TABLE>
<CAPTION>
Three Months ended March 31, 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 $80,084 $1,960 9.92% $67,818 $1,659 9.84%
Investment securities 21,484 336 6.34% 18,694 286 6.15%
Fed funds sold & other deposits 14,900 195 5.31% 10,912 146 5.38%
Total interest-earning assets 116,468 2,491 8.67% 97,424 2,091 8.63%
Noninterest-earning assets:
Cash and due from banks 7,368 6,884
Bank property and equipment 1,429 1,187
Other assets 5,308 2,152
Less: Allowance for loan losses (1,521) (1,493)
Total noninterest-earning assets 12,584 8,730
TOTAL ASSETS $129,052 $106,154
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking, money market & savings
Time deposits $66,865 $636 3.86% $51,957 $459 3.55%
Other borrowings 21,732 299 5.57% 23,679 342 5.81%
--- --- --- --- --- ---
Total interest-bearing liabilities 88,597 935 4.28% 75,636 801 4.26%
Noninterest-bearing deposits 21,726 16,917
Total funding sources 110,323 935 3.44% 92,553 801 3.48%
Other liabilities 770 383
TOTAL LIABILITIES 111,093 92,936
Shareholders' equity 17,959 13,218
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $129,052 $106,154
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $1,556 $1,290
Net interest spread 5.24% 5.15%
Net interest margin 5.42% 5.33%
</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 three months of 1997, the provision for loan losses was
$35,000. Loans charged-off totaled $31,000 and recoveries were $12,000. In
the same period of 1996, there was no provision set aside, as recoveries of
$41,000 offset loans charged off of $32,000.
NONINTEREST INCOME
Noninterest income rose $35,000, or 25.7%, in the first quarter of
1997 to $171,000 from $136,000 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 $252,000, or 22.1%, in the first three
months of 1997 as compared to the same period of 1996, to $1,390,000 from
$1,138,000. Salaries and benefits increased over last year's first quarter,
the result of merit increases and staffing for a new branch. The new branch in
Bethesda and new services offered have pushed other expenses higher, as well.
ASSET QUALITY
In 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan
("SFAS No. 114"), as amended by SFAS No. 118. SFAS No. 114 and No. 118 apply
to loans for which it is probable that the creditor will not collect all
principal and interest payments according to the loan's contractual terms. The
impairment of a loan is measured at the present value of expected future cash
flows using the loan's effective interest rate, or as a practical expedient, at
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Interest income on impaired loans is recognized
on a cash basis. Restructured loans are loans on which the borrower has been
granted a concession as to rate or term as a result of financial difficulty.
Nonaccrual loans are those loans on which the accrual of interest is
discontinued when full collection of principal or interest is in doubt, or when
the payment of principal or interest has become contractually 90 days past due,
unless the obligation is both well secured and is in the process of collection.
Loans may be placed on nonaccrual status when past due less than 90 days if
collection becomes uncertain based upon an evaluation of the fair value of the
collateral and the financial strength of the borrower. When a loan is placed
on nonaccrual status, interest income in the current period is reduced by the
amount of any accrued and uncollected interest. Subsequent payments of
interest are applied as a reduction of principal when concern exists as to the
ultimate collection of principal; otherwise such payments are recognized as
interest income. Loans are removed from nonaccrual status when they have
demonstrated a period of performance and when concern no longer exists as to
the collectibility of principal or interest.
The recorded investment in loans that were considered impaired under
SFAS No. 114 was $1,146,000 and $771,000 at March 31,1997 and December 31,
1996, respectively. The increase in impaired loans in the first quarter of
1997 is primarily the impact of two large loans shifting to impaired status.
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 March 31, 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 March 31, 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. Under the new SFAS No. 114, the allowance
for loan losses related to loans that are identified as impaired was based on
discounted cash flows using the loans' initial effective interest rate or the
fair value of the collateral for certain collateral dependent loans.
The allowance for loan losses was $1,524,000 at March 31,1997, 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 $12,000, charge-offs of $31,000, and a provision for future losses of
$35,000.
LIQUIDITY MANAGEMENT
Liquidity is the ability to generate and maintain sufficient cash
flows to fund operations and to meet financial obligations to depositors and
borrowers promptly and in a cost-effective manner. Asset liquidity is provided
primarily by maturing loans and investments and by cash received from
operations. Other sources of asset liquidity include readily marketable assets
that can serve as collateral for borrowings, and sales of loans and other real
estate. On the liability side of the balance sheet, liquidity is affected by
the timing of maturing liabilities and the ability to generate new deposits or
borrowings as needed.
In the first quarter of 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 58.6% at March 31, 1997 from 65.1% at
December 31, 1996, while marketable securities, overnight investments and loans
held for sale rose to 41.4% 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 80.3% in the first quarter of 1997 and 74.4% in 1996. Time
deposits under $100,000, which are also considered to be stable funding
sources, declined from 21.3% of funding sources in the first three months of
1996 to 17.7% in 1997; the volume in these accounts, however, remained stable
at $19.7 million in 1996 and $19.5 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 4.3% in the first quarter
of 1996 to 2.0% in 1997.
Other sources of liquidity and cash flow in the first three months of
1997 and 1996, were from maturing securities which generated cash inflow of
$1.8 million and $1.0 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 $77,000, or 0.4%, in the first three
months of 1997 to $17,908,000 at March 31, 1997 from $17,831,000 at December
31, 1996. Earnings of $196,000 were partially offset by a decrease of $119,000
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
March 31, 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%. Banks are expected to meet a minimum ratio of total qualifying
capital to risk-weighted assets of 8%, with at least half of that percentage
(4%) in the form of core capital. This minimum capital requirement applies to
the Bank and will apply to the Company at such time as its total assets reach
$150 million. At March 31, 1997, Suburban Maryland reported at Tier 1
risk-based capital ratio of 13.20% and a ratio of 14.45% 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
banks required to maintain a ratio of at least 4% to 5%, depending upon risk
profiles and other factors. At March 31, 1997, the leverage capital ratio for
Suburban Maryland was 9.33%.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this report.
Exhibit # Description
11.0 Computation of per share earnings
27.0 Financial Data Schedule
(b) No reports on Form 8K were filed in the quarter ended
March 31, 1997.
PART II. OTHER INFORMATION (continued)
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUBURBAN BANCSHARES, INC.
(Registrant)
Date: May 12, 1997 Stephen A. Horvath
------------------- ----------------------------------------
Stephen A. Horvath
President and Chief Operating Officer
Date: May 12, 1997 Sibyl S. Malatras
------------------- ----------------------------------------
Sibyl S. Malatras
Senior Vice President and Treasurer
(Principal Financial Officer)
15
<PAGE> 1
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
MARCH 31, 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
Third Quarter 1997
Fourth Quarter 1997
</TABLE>
COMMON STOCK EQUIVALENT COMPUTATION
a) 350,000 Management Stock Options exercisable at $.010
<TABLE>
<CAPTION>
First Quarter 1997 Primary Fully Diluted
------- -------------
<S> <C> <C>
350000 - ((350000*.10)/avg price) = 335,573
350000 - ((350000*.10)/end price) = 334,000
</TABLE>
b) 12,600 options granted 1/22/97 exercisable at $2,625
<TABLE>
<CAPTION>
First Quarter 1997 Primary Fully Diluted
------- -------------
<S> <C> <C> <C>
12600 - ((12600*2.625)/avg price) = (1,034) Antidilutive
12600 - ((12600*2.625)/end price) = (2,520) Antidilutive
</TABLE>
EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
1st Quarter 1997
COMMON AND EQUIVALENT SHARES (PRIMARY) 1997 Year-to-Date
<S> <C> <C>
EARNINGS $ 196,104 $ 196,104
SHARES & EQUIVALENT SHARES
Common Shares 10,951,218 10,951,218
Common Stock Equivalents 335,573 335,573
------- -------
TOTAL 11,286,791 11,286,791
EPS $0.017375 $0.017375
FULLY DILUTED
EARNINGS $ 196,104 $ 196,104
SHARES & EQUIVALENT SHARES
Common Shares 10,951,218 10,951,218
Common Stock Equivalents 334,000 334,000
------- -------
TOTAL 11,285,218 11,285,218
EPS $0.017377 $0.017377
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 10,259
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 25,355
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 22,952
<LOANS> 83,028
<ALLOWANCE> 1,524
<TOTAL-ASSETS> 146,883
<DEPOSITS> 128,370
<SHORT-TERM> 0
<LIABILITIES-OTHER> 605
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 17,799
<TOTAL-LIABILITIES-AND-EQUITY> 146,883
<INTEREST-LOAN> 1,960
<INTEREST-INVEST> 336
<INTEREST-OTHER> 195
<INTEREST-TOTAL> 2,491
<INTEREST-DEPOSIT> 935
<INTEREST-EXPENSE> 935
<INTEREST-INCOME-NET> 1,556
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,390
<INCOME-PRETAX> 302
<INCOME-PRE-EXTRAORDINARY> 302
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<YIELD-ACTUAL> 5.42
<LOANS-NON> 1,146
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,122
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,508
<CHARGE-OFFS> 31
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 1,524
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
