<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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 November 3, 1997
- --------------------------- ----------------------------------------------
(Class)
10,951,218 Shares
---------------------------
</TABLE>
1
<PAGE> 2
SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
September 30, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------- --------
<S> <C> <C>
Item 1. Condensed Financial Statements
Consolidated Balance Sheets
September 30, 1997 (unaudited) and December 31, 1996 (audited) 3
Consolidated Statements of Operations (unaudited)
Nine months ended September 30, 1997 and September 30, 1996 4
Consolidated Statements of Operations (unaudited)
Three months ended September 30, 1997 and September 30, 1996 5
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1997 and September 30, 1996 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
2
<PAGE> 3
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
In thousands 1997 1996
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,283 $ 7,848
Federal funds sold 17,131 12,215
Investment securities 32,187 21,290
Loans held for sale 6,497 5,933
Loans 92,896 73,448
Less: Allowance for loan losses (1,615) (1,508)
Loans, net 91,281 71,940
Premises and equipment, net 1,628 1,314
Foreclosed real estate 212 212
Accrued interest receivable 961 771
Deferred income taxes 3,628 4,058
Other assets 369 504
TOTAL ASSETS $164,177 $126,085
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 27,432 $ 21,145
Interest-bearing deposits 114,188 86,428
Total deposits 141,620 107,573
Securities sold under repurchase agreements 3,123 0
Accrued expenses and other liabilities 674 681
Total liabilities 145,417 108,254
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 September 30, 1997 & December 31, 1996 109 109
Paid-in capital - stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (7,265) (8,041)
Net unrealized gain (loss) on securities available for sale 123 (30)
Total shareholders' equity 18,760 17,831
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $164,177 $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>
Nine months ended September 30,
In thousands, except per share data 1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $6,280 $5,375
Taxable interest on securities 1,254 806
Interest on Federal funds sold & deposits with other banks 675 459
Total interest income 8,209 6,640
INTEREST EXPENSE
Interest on deposits 3,227 2,448
Interest on short-term borrowings 17 0
Total interest expense 3,244 2,448
NET INTEREST INCOME 4,965 4,192
Provision for loan losses 195 0
Net interest income after provision for loan losses 4,770 4,192
NONINTEREST INCOME
Service charges on deposit accounts 465 301
Other income 123 102
Total noninterest income 588 403
NONINTEREST EXPENSE
Salaries and employee benefits 2,163 1,930
Occupancy expense 504 358
Furniture and equipment expense 161 110
Other expense 1,324 1,189
Total noninterest expense 4,152 3,587
Income before income taxes 1,206 1,008
Income taxes 430 0
NET INCOME $776 $1,008
Income Per Common Share
Primary $0.07 $0.09
Fully Diluted 0.07 0.09
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
In thousands, except per share data 1997 1996
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $2,224 $1,932
Taxable interest on securities 483 242
Interest on Federal funds sold & deposits with other banks 249 167
Total interest income 2,956 2,341
INTEREST EXPENSE
Interest on deposits 1,215 850
Interest on short-term borrowings 13 0
Total interest expense 1,228 850
NET INTEREST INCOME 1,728 1,491
Provision for loan losses 80 0
Net interest income after provision for loan losses 1,648 1,491
NONINTEREST INCOME
Service charges on deposit accounts 184 93
Other income 40 33
Total noninterest income 224 126
NONINTEREST EXPENSE
Salaries and employee benefits 699 656
Occupancy expense 177 123
Furniture and equipment expense 59 43
Other expense 390 400
Total noninterest expense 1,325 1,222
Income before income taxes 547 395
Income tax 194 0
NET INCOME $353 $395
Income Per Common Share
Primary $0.03 $0.03
Fully Diluted 0.03 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) Nine months ended September 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 776 $ 1,008
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation 141 93
Provision for loan losses 195 0
Originations of loans held for sale (564) (2,224)
Net accretion on securities (63) (41)
(Decrease) increase in deferred loan fees (1,197) 28
(Increase) decrease in accrued income and other assets (55) 410
(Decrease) increase in accrued expenses and other liabilities (84) 99
Loss on sale of foreclosed real estate 0 12
Gain on sale of fixed assets (4) 0
Deferred income taxes 430 0
Net cash used by operating activities (425) (615)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in deposits with other banks 0 1,158
Increase in Federal funds sold (4,916) (5,854)
Purchases of available for sale securities (16,450) (3,179)
Proceeds from maturities of available for sale securities 5,775 5,000
Proceeds from prepayments of principal on securities 71 146
Net increase in loans (18,339) (10,300)
Net purchases of premises and equipment (451) (88)
Proceeds from the sale of foreclosed assets 0 126
Net cash used in investing activities (34,310) (12,991)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 34,047 12,760
Net increase in securities sold under agreements to repurchase 3,123 0
Net cash provided by financing activities 37,170 12,760
Net increase in cash and due from banks 2,435 (846)
Cash and due from banks at beginning of period 7,848 9,931
Cash and due from banks at end of period $10,283 $9,085
Interest paid $3,232 $2,465
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 nine months ended
September 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 Company does not engage in derivative
activities.
The following table shows the amortized cost and estimated fair value
of investment securities classified as available for sale at September 30, 1997
(in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 5,375 $ 24 $ (2) $ 5,397
Federal agencies 25,681 194 (21) 25,854
Mortgage-backed obligations of federal agencies 100 1 -- 101
Collateralized mortgage obligations 28 -- -- 28
Other 802 6 (1) 807
Total investment securities $31,986 $225 $(24) $32,187
</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>
Gross Gross
Amortized Unrealized 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>
7
<PAGE> 8
The amortized cost and estimated fair value for securities at
September 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 $ 3,927 $ 3,944
Due after one year through 5 years 22,562 22,653
Due after 5 years through 10 years 5,358 5,449
Due after 10 years 28 28
Mortgage-backed securities 100 101
Not set maturity 11 12
Total $31,986 $32,187
</TABLE>
There were no sales of securities in the nine months ended September
30, 1997 or September 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
$123,000 at September 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>
September 30, December 31,
in thousands 1997 1996
<S> <C> <C>
Impaired loans with a valuation allowance $2,075 $ 771
Impaired loans without a valuation allowance --- ---
-------- --------
Total impaired loans 2,075 771
Allowance for credit losses related to impaired loans 373 78
Allowance for credit losses related to other than impaired loans 1,242 1,430
----- -----
Total allowance for credit losses 1,615 1,508
Average impaired loans for the period $1,568 $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 $84,000 at September 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
8
<PAGE> 9
have been charged off and that the allowance is adequate to cover losses
inherent in the portfolio at September 30, 1997. Increases and decreases in
the allowance include changes in the measurement of impaired loans.
Activity in the allowance for losses is summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended
in thousands September 30, 1997
-----------------------------
<S> <C>
Balance at beginning of period $1,508
Provision for loan losses 195
Loans charged off (189)
Recoveries 101
-----------------------------
Balance at end of period $1,615
=============================
</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.
Foreclosed real estate (in thousands) at both September 30, 1997 and
December 31, 1996 consists of the following:
<TABLE>
<S> <C>
Commercial property $ 265
Less: 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 September 30, 1997,
that the Company meets all capital adequacy requirements to which it is
subject.
As of September 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 September 30, 1997:
Total capital (to risk-weighted assets): $18,101 19.70% $7,350 8.00% $9,187 10.00%
Tier 1 capital (to risk-weighted assets): 16,947 18.45 3,675 4.00 5,512 6.00
Tier 1 capital (to average assets): 16,947 11.04 6,138 4.00 7,673 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
nine months ended September 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 $1,206,000 for
the nine months ending September 30, 1997, an increase of $198,000, or 19.6%,
from the $1,008,000 reported for the same period of 1996. Improvement in
earnings is attributed to strong 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 $430,000 was $776,000, or $0.07
per share.
Total assets climbed to $164.2 million at September 30, 1997, a $35.1
million, or 27.2%, increase from $129.1 million at September 30, 1996. Asset
growth since December 31, 1996 is $38.1 million, or 30.2%. Loans have
increased $20.5 million, or 25.9%, since September 30, 1996 and $20.0 million,
or 25.2%, since year-end 1996, reaching $99.4 million at the end of the third
quarter of 1997. Deposits, at $141.6 million, rose 23.5% since September 30,
1996 and 31.7% since December 31, 1996.
Average assets were $142.1 million for the first nine months of 1997,
$32.3 million, or 29.4%, above average assets of $109.9 million for the same
period of 1996. Average earning assets rose 28.2% and average deposits rose
27.8%.
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 $773,000, or 18.4%, from $4,192,000 for the
first nine months of 1996 to $4,965,000 in 1997, the net result of higher
volume, changes in the composition of funding sources, and higher cost of
funds.
The net interest margin represents the Company's net yield on its
earning assets and is calculated as net interest income divided by average
earning assets. In the first nine months of 1997, the net interest margin was
5.13%, falling 42 basis points from 5.55% 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 three quarters
of 1997. Both total average earning assets and total average interest bearing
funds rose in 1997 as compared to 1996. Average earning assets rose $28.4
million, or 28.2%, from $101.0 million in 1996 to $129.4 million in 1997, and
average interest bearing funds increased $21.8 million, or 28.2%, from $77.5
million to $99.4 million for the same periods. As a percentage of average
assets, earning assets declined from 91.9% in the first nine months of 1996 to
91.0% in 1997, the result of the addition of the deferred tax asset of $ 3.9
million, or 2.75% of average assets. Average interest bearing funding sources
fell slightly from 80.8% of total funding sources in the first nine months of
1996 to 80.7% in the same period in 1997, which helped somewhat 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 nine months of both 1997 and 1996.
Average loans as a percentage of average earning assets declined from 71.5% in
1996 to 67.1% in 1997. Average investment securities rose from 17.1% to 20.2%
and short-term investments, Federal funds sold, rose from 11.4% of earning
assets to 12.7%. During the third quarter of 1997, the Company purchased a
portfolio of the guaranteed portion of SBA loans. Because of the reduced risk
factor associated with these government guaranteed loans, the yields are lower
and, therefore, the yield on the total loan portfolio declined. The impact of
these shifts in earning assets was a decrease in the yield as funds were placed
in lower yielding loans and investments. Changes in the mix of
interest-bearing funds were more pronounced. Savings accounts, averaging
$23.1 million in 1997, were 18.8% of total funding sources, a substantial
increase from $7.0 million or 7.3% of total funds in 1996. Partially
offsetting the increased cost resulting from this change in the mix of funding
sources were (a) stability in noninterest-bearing deposits which rose slightly
to 19.3% of total funds in 1997 from 19.2% in 1996 and (b) a decline in the
percentage of higher-cost time deposits from 24.8% in the first nine months of
1996 to 19.9% 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 28 basis points, from 9.95% in the first nine months of 1996 to
9.67% in 1997, the result of competitive factors in our market and the purchase
of the guaranteed loans mentioned above. 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 $7.0 million in the
first nine months of 1996 to $23.1 million in the same period of 1997. As
other deposit rates declined, the cost of savings rose 45 basis points. The
total cost of funds, even with this significant increase in savings rates, rose
only 11 basis points, from 3.41% in 1996 to 3.52% in 1997.
11
<PAGE> 12
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(In thousands)
<TABLE>
<CAPTION>
Nine Months ended September 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 $86,846 $6,280 9.67% $72,157 $5,375 9.95%
Investment securities 26,141 1,254 6.41% 17,319 806 6.22%
Fed funds sold & other deposits 16,428 675 5.49% 11,487 459 5.34%
Total interest-earning assets 129,415 8,209 8.48% 100,963 6,640 8.78%
Noninterest-earning assets:
Cash and due from banks 7,437 7,052
Bank property and equipment 1,571 1,188
Other assets 5,260 2,178
Less: Allowance for loan losses (1,537) (1,503)
Total noninterest-earning assets 12,731 8,915
TOTAL ASSETS $142,146 $109,878
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking, money market & savings $74,291 $2,213 3.98% $53,789 $1,434 3.56%
Time deposits 24,550 1,014 5.52% 23,760 1,014 5.70%
Other borrowings 544 17 4.12% --- --- ---
Total interest-bearing liabilities 99,385 3,244 4.36% 77,549 2,448 4.22%
Noninterest-bearing liabilities:
Noninterest-bearing deposits 23,828 18,452
Total funding sources 123,213 3,244 3.52% 96,001 2,448 3.41%
Other liabilities 792 460
TOTAL LIABILITIES 124,005 96,461
Shareholders' equity 18,141 13,417
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $142,146 $109,878
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $4,965 $4,192
Net interest spread 4.96% 5.38%
Net interest margin 5.13% 5.55%
</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 nine months of 1997, the provision for loan losses was
$195,000. Loans charged-off totaled $189,000 and recoveries were $101,000. In
the same period of 1996, there was no provision set aside, as recoveries of
$190,000 offset loans charged off of $72,000.
NONINTEREST INCOME
Noninterest income rose $185,000, or 45.9%, in the first three
quarters of 1997 to $588,000 from $403,000 in the same period of 1996. In the
third quarter of 1997, noninterest income was $224,000, $98,000 or 77.8% 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 $565,000, or 15.8%, in the first nine
months of 1997 as compared to the same period of 1996, to $4,152,000 from
$3,587,000. Salaries and benefits increased 12.1% over last year's first three
quarters, 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 September 30, noninterest expenses rose from $1,222,000 in 1996 to
$1,325,000 in 1997, an 8.4% 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
$2,075,000 and $771,000 at September 30, 1997 and December 31, 1996,
respectively. The increase in impaired loans in the first nine months 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 $84,000 at September 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 September 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 $1,615,000 at September 30,1997, an
increase of $107,000 or 7.1% from $1,508,000 at December 31, 1996. Activity in
the allowance for loan losses during the three quarters of 1997 included
recoveries of $101,000, charge-offs of $189,000, and a provision for future
losses of $195,000.
LIQUIDITY MANAGEMENT
Liquidity is the ability to generate and maintain sufficient cash
flows to fund operations and to meet financial obligations to depositors and
borrowers promptly and in a cost-effective manner. Asset liquidity is provided
primarily by maturing loans and investments and by cash received from
operations. Other sources of asset liquidity include readily marketable assets
that can serve as collateral for borrowings, and sales of loans and other real
estate. On the liability side of the balance sheet, liquidity is affected by
the timing of maturing liabilities and the ability to generate new deposits or
borrowings as needed.
In the first nine months of 1997, the Company's liquidity position has
increased even though loans, as a percent of earning assets, increased and
marketable securities declined. As a percentage of total earning assets,
loans, excluding loans held for sale, rose to 66.8% at September 30, 1997 from
65.1% at December 31, 1996, while marketable securities, overnight investments
and loans held for sale fell to 33.2% from 34.9%, respectively. A portion of
the loans, however, are the government guaranteed portion of readily marketable
SBA loans and are, therefore, considered liquid assets. These loans were
purchased in the third quarter and were 9.5% of earning assets at September 30,
1997. 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 79.6% in the first nine months of 1997 and 75.2% in 1996. Time
deposits under $100,000, which are also considered to be stable funding
sources, declined from 20.8% of funding sources in the first nine months of
1996 to 16.9% in 1997; the volume in these accounts, however, remained stable
at $20.0 million in 1996 and $20.8 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 3.9% in the first three
quarters of 1996 to 3.5% in 1997.
Other sources of liquidity and cash flow in the first nine months of
1997 and 1996, were from maturing securities which generated cash inflow of
$5.8 million and $5.0 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 $929,000, or 5.2%, in the first nine
months of 1997 to $18,760,000 at September 30, 1997 from $17,831,000 at
December 31, 1996, the result of earnings of $776,000 plus an increase of
$153,000 in the net unrealized gain
14
<PAGE> 15
on securities available for sale.
A combination of a leverage capital ratio and risk-based capital
ratios is used to categorize banks as well capitalized, adequately capitalized,
or under capitalized financial institutions under the guidelines established by
FDICIA. A financial institution is considered "well capitalized" if it has a
total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital
ratio of at least 6%, and a leverage ratio of 5% or greater and it is not
subject to a written agreement, order or directive. At December 31, 1996 and
September 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 September 30, 1997,
Suburban Bancshares reported at Tier 1 risk-based capital ratio of 18.45% and a
ratio of 19.70% based on total capital. Both ratios were well above the
general regulatory minimums of 4% and 8%, respectively.
Another capital adequacy measure is the leverage capital ratio, which
is calculated by dividing average total assets for the most recent quarter into
core (Tier 1) capital. The regulatory minimum of this ratio is 3%, with most
financial institutions required to maintain a ratio of at least 4% to 5%,
depending upon risk profiles and other factors. At September 30, 1997, the
leverage capital ratio for the Company was 11.04%.
15
<PAGE> 16
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 8-K were filed in the quarter ended September
30, 1997.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUBURBAN BANCSHARES, INC.
(Registrant)
Date: November 6, 1997 Stephen A. Horvath
------------------------- -------------------------------------
Stephen A. Horvath
President and Chief Operating Officer
Date: November 6, 1997 Sibyl S. Malatras
------------------------- -------------------------------------
Sibyl S. Malatras
Senior Vice President and Chief Financial
Officer
(Principal Financial Officer)
16
<PAGE> 1
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
SEPTEMBER 30, 1997
COMMON STOCK EQUIVALENT COMPUTATION
================================================================================
<TABLE>
<CAPTION>
Market Price per Share: Daily Average End-of-Period
----------------------- ------------- -------------
<S> <C> <C> <C>
First Quarter 1997 $2.4260 $2.1875
Second Quarter 1997 $2.2573 $2.3125
Third Quarter 1997 $2.3979 $3.3125
(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
Third Quarter 1997 Primary Fully Diluted
350,000 - ((350,000*.10)/avg price) = 335,404
350,000 - ((350,000*.10)/end price) = 339,434
(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
Third Quarter 1997 Primary Fully Diluted
12,600 - ((12,600*2.625)/avg price) = (1,193) Antidilutive
12,600 - ((12,600*2.625)/end price) = 2,615
</TABLE>
<PAGE> 2
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
SEPTEMBER 30, 1997
EARNINGS PER SHARE CALCULATION
================================================================================
<TABLE>
<CAPTION>
COMMON AND EQUIVALENT SHARES (PRIMARY) 3rd Quarter 1997 1997 Year-to-Date
<S> <C> <C>
EARNINGS $352,494 $775,926
SHARES & EQUIVALENT SHARES
Common Shares 10,951,218 10,951,218
Common Stock Equivalents 335,404 335,157
------------ ------------
TOTAL 11,286,622 11,286,375
EPS $0.031231 $0.068749
FULLY DILUTED
EARNINGS $352,494 $775,926
SHARES & EQUIVALENT SHARES
Common Shares 10,951,218 10,951,218
Exercisable Options 342,049 336,120
------------ ------------
TOTAL 11,293,267 11,287,338
EPS $0.031213 $0.068743
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,283
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,131
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 32,187
<LOANS> 99,393
<ALLOWANCE> 1,615
<TOTAL-ASSETS> 164,177
<DEPOSITS> 141,620
<SHORT-TERM> 3,123
<LIABILITIES-OTHER> 674
<LONG-TERM> 0
109
0
<COMMON> 0
<OTHER-SE> 18,651
<TOTAL-LIABILITIES-AND-EQUITY> 164,177
<INTEREST-LOAN> 6,280
<INTEREST-INVEST> 1,254
<INTEREST-OTHER> 675
<INTEREST-TOTAL> 8,209
<INTEREST-DEPOSIT> 3,227
<INTEREST-EXPENSE> 3,244
<INTEREST-INCOME-NET> 4,965
<LOAN-LOSSES> 195
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,152
<INCOME-PRETAX> 1,206
<INCOME-PRE-EXTRAORDINARY> 1,206
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 776
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
<YIELD-ACTUAL> 5.13
<LOANS-NON> 2,075
<LOANS-PAST> 0
<LOANS-TROUBLED> 84
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,508
<CHARGE-OFFS> 189
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 1,615
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
