<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, 1998
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Commission File Number 0-16595
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SUBURBAN BANCSHARES, INC.
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(Exact name of Registrant as specified in charter)
<TABLE>
<S> <C>
Delaware 54-1319441
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
7505 Greenway Center Drive, Greenbelt, Maryland 20770
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(Address of principal executive offices) (Zip Code)
</TABLE>
(301) 474-6694
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(Registrant's telephone number, including area code)
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(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
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Common Stock $.01 Par Value Outstanding at May 4, 1998
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(Class)
10,951,218 Shares
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SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
March 31, 1998
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
Item 1. Condensed Financial Statements
Consolidated Balance Sheets March 31, 1998 (unaudited)
and December 31, 1997 (audited) 3
Consolidated Statements of Operations (unaudited)
Three months ended March 31, 1998 and March 31, 1997 4
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1998 and March 31, 1997 5
Consolidated Statements of Changes in Shareholders' Equity
Three months ended March 31, 1998 and March 31, 1997 6
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands) 1998 1997
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 15,516 $ 10,759
Federal funds sold 47,455 15,569
Investment securities 30,530 30,360
Loans 114,611 113,543
Less: Allowance for loan losses (1,434) (1,473)
Loans, net 113,177 112,070
Premises and equipment, net 1,720 1,658
Foreclosed real estate 1,089 349
Accrued interest receivable 1,005 1,172
Deferred income taxes 3,141 3,299
Other assets 486 430
TOTAL ASSETS $ 214,119 $ 175,666
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 34,992 $ 28,856
Interest-bearing deposits 153,999 123,946
Total deposits 188,991 152,802
Securities sold under repurchase agreements 4,961 3,049
Accrued expenses and other liabilities 699 633
Total liabilities 194,651 156,484
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, 1998 and December 31, 1997 109 109
Paid-in capital - stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (6,615) (6,910)
Accumulated other comprehensive income 181 190
Total shareholders' equity 19,468 19,182
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 214,119 $ 175,666
</TABLE>
See accompanying notes to consolidated financial statements
3
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
(in thousands, except per share data) 1998 1997
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,501 $1,960
Taxable interest on securities 482 336
Interest on Federal funds sold 237 195
Total interest income 3,220 2,491
INTEREST EXPENSE
Interest on deposits 1,334 935
Interest on short-term borrowings 36 --
Total interest expense 1,370 935
NET INTEREST INCOME 1,850 1,556
Provision for loan losses 100 35
Net interest income after provision for loan losses 1,750 1,521
NONINTEREST INCOME
Service charges on deposit accounts 151 122
Other income 57 49
Total noninterest income 208 171
NONINTEREST EXPENSE
Salaries and employee benefits 816 730
Occupancy expense 182 164
Furniture and equipment expense 63 52
Other expense 439 444
Total noninterest expense 1,500 1,390
Income before income taxes 458 302
Income tax 163 106
NET INCOME $295 $196
Basic earnings per common share $0.03 $0.02
Diluted earnings per common share $0.03 $0.02
</TABLE>
See accompanying notes to consolidated financial statements
4
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
(in thousands) 1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $295 $196
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 57 40
Provision for loan losses 100 35
Deferred income tax expense 163 106
Originations of loans held for sale -- (92)
Net accretion on securities (22) (14)
Decrease in deferred loan fees (30) (7)
Amortization of premium on loans purchased 51 --
Decrease in accrued income and other assets 111 273
Increase (decrease) in accrued expenses and other liabilities 65 (76)
Net cash provided by operating activities 790 461
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Federal funds sold (31,886) (13,140)
Purchases of available for sale securities (2,117) (3,666)
Proceeds from maturities of available for sale securities 1,950 1,775
Proceeds from prepayments of principal on securities 5 30
Net increase in loans (1,947) (3,567)
Purchases of loans (20) --
Net purchases of premises and equipment (119) (276)
Gain on sale of fixed assets -- (3)
Net cash used by investing activities (34,134) (18,847)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 36,189 20,797
Net increase in securities sold under agreements to repurchase 1,912 --
Net cash provided by financing activities 38,101 20,797
Net increase in cash and due from banks 4,757 2,411
Cash and due from banks at beginning of period 10,759 7,848
Cash and due from banks at end of period $15,516 $10,259
Interest paid $1,360 $940
Income taxes paid -- --
Loans transferred to foreclosed real estate 740 --
</TABLE>
See accompanying notes to consolidated financial statements
5
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unaudited
<TABLE>
<CAPTION>
(in thousands) Accumulated Other
Comprehensive
Three Months Ended Accumulate Income Common Stock Paid-in
March 31, 1998 Deficit Capital Total
<S> <C> <C> <C> <C> <C>
Beginning balance $(6,910) $190 $109 $25,793 $19,182
----------- -------------- ---------- -------- --------
Comprehensive income:
Net income 295 295
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale (9) (9)
---------
Comprehensive income 286
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Ending balance $(6,615) $181 $109 $25,793 $19,468
Three Months Ended
March 31, 1997
Beginning balance $(8,041) $(30) $109 $25,793 $17,831
---------- -------------- ---------- ------- -------
Comprehensive income:
Net income 196 196
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale (119) (119)
---------
Comprehensive income 77
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Ending balance $(7,845) $(149) $109 $25,793 $17,908
</TABLE>
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, 1998 are not necessarily indicative of results that may be expected for the
entire year ending December 31, 1998.
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, 1997, 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.
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The following table shows the amortized cost and estimated fair value
of investment securities classified as available for sale at March 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 2,441 $ 16 $ (1) $ 2,456
Federal agencies 26,825 294 (19) 27,100
Mortgage-backed obligations of federal agencies 84 1 (1) 84
Other 884 6 -- 890
Total investment securities $30,234 $317 $(21) $30,530
</TABLE>
The schedule below shows the amortized cost and estimated fair value
of investment securities classified as available for sale at December 31, 1997
(in thousands):
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gross Unrealized Estimated Fair
Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 4,384 $ 21 $ (1) $ 4,404
Federal agencies 24,695 285 (4) 24,976
Mortgage-backed obligations of federal agencies 89 2 -- 91
Other 883 7 (1) 889
Total securities available for sale $30,051 $315 $ (6) $30,360
</TABLE>
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 $ 4,622 $ 4,637
Due after one year through 5 years 23,435 23,686
Due after 5 years through 10 years 2,093 2,123
Due after 10 years -- --
Mortgage-backed securities 84 84
Total $30,234 $30,530
</TABLE>
There were no sales of securities in the three months ended March 31,
1998 or 1997. The net unrealized holding gain on available for sale
securities, which is shown as a separate component of shareholders' equity in
the accompanying Consolidated Balance Sheets, was $181,000 at March 31, 1998
and $190,000 at December 31, 1997.
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.
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Information with respect to impaired loans is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
in thousands 1998 1997
<S> <C> <C>
Impaired loans with a valuation allowance $1,154 $ 1,763
Impaired loans without a valuation allowance -- --
-------- --------
Total impaired loans 1,154 1,763
Allowance for credit losses related to impaired loans 254 274
Allowance for credit losses related to other than impaired loans 1,180 1,199
----- -----
Total allowance for credit losses 1,434 1,473
Average impaired loans for the period $1,594 $1,633
Interest income on impaired loans recognized on the cash basis -- --
</TABLE>
There were no loans that were restructured prior to the adoption of
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, and which were
performing according to the new terms at March 31, 1998 or December 31, 1997.
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,
1998. 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>
Three Months Ended
in thousands March 31, 1998
--------------------------
<S> <C>
Balance at beginning of period $ 1,473
Provision for loan losses 100
Loans charged off (183)
Recoveries 44
--------------------------
Balance at end of period $ 1,434
==========================
</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 March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------------------------------------
<S> <C> <C>
Commercial property $1,142 $402
-------------------------------------------
Total $1,142 402
Allowance for losses (53) (53)
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TOTAL FAIR VALUE $1,089 $349
===========================================
</TABLE>
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NOTE E - REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. 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 classifications are also subject to qualitative judgements
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 March 31, 1998, that
the Company meets all capital adequacy requirements to which it is subject.
As of March 31, 1998, 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 actual capital amounts and ratios for the Company and the Bank are
presented in the table below:
<TABLE>
<CAPTION>
FOR CAPITAL TO BE WELL
ACTUAL ADEQUACY PURPOSES CAPITALIZED
$ in thousands AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Total capital (to risk-weighted assets):
Company $19,604 17.20% $9,119 8.00% $11,399 10.00%
Suburban Bank of Maryland 15,015 13.36 8,991 8.00 11,238 10.00
Tier 1 capital (to risk-weighted assets):
Company 18,179 15.95 4,559 4.00 6,839 6.00
Suburban Bank of Maryland 13,610 12.11 4,495 4.00 6,743 6.00
Tier 1 capital (to average assets):
Company 18,179 10.43 6,996 4.00 8,745 5.00
Suburban Bank of Maryland 13,610 8.03 6,780 4.00 8,475 5.00
As of December 31, 1997:
Total capital (to risk-weighted assets):
Company $18,981 18.44% $8,233 8.00% $10,292 10.00%
Suburban Bank of Maryland 14,437 14.25 8,105 8.00 10,132 10.00
Tier 1 capital (to risk-weighted assets):
Company 17,692 17.19 4,117 4.00 6,175 6.00
Suburban Bank of Maryland 13,168 13.00 4,053 4.00 6,079 6.00
Tier 1 capital (to average assets):
Company 17,692 10.82 6,542 4.00 8,178 5.00
Suburban Bank of Maryland 13,168 8.25 6,383 4.00 7,979 5.00
</TABLE>
9
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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, 1998 and 1997. Throughout this review the
subsidiary of Suburban Bancshares, Inc., Suburban Bank of Maryland, is referred
to as "Suburban Maryland" or "the Bank". This discussion should assist readers
in their analysis of the accompanying consolidated financial statements.
OVERVIEW
Suburban Bancshares, Inc. reported earnings of $295,000 for the three
months ending March 31, 1998, an increase of $99,000, or 50.5%, over $196,000
reported for the first quarter of 1997. Improvement in earnings is attributed
to strong asset growth, offset by a declining net interest margin.
Total assets climbed to $214.1 million at March 31, 1998, a $67.2
million, or 45.8%, increase from $146.9 million at March 31, 1997. Asset
growth since December 31, 1997 is $38.4 million, or 21.9%. Loans have
increased $31.6 million, or 38.0%, since March 31, 1997 and $1.1 million, or
0.9%, since year-end 1997, reaching $114.6 million at the end of the first
quarter of 1998. Deposits, at $189.0 million, rose 47.2% since March 31, 1997
and 23.7% since December 31, 1997.
Average assets were $174.3 million for the first three months of 1998,
$45.3 million, or 35.1%, above average assets of $129.0 million for the same
period of 1997. Average earning assets rose $43.4 million, or 37.2%, and
average deposits rose $40.2 million, or 36.4%.
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 $294,000, or 18.9%, from $1,556,000 for the
first quarter of 1997 to $1,850,000 in 1998, the net result of higher loan and
deposit volume which offset a falling net interest margin.
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 1998, the net interest margin was
4.69%, falling 73 basis points from 5.42% in the same period of 1997, the
result of a drop of 84 basis points in the yield on loans and an increase of 17
basis points 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
1998. Both total average earning assets and total average interest bearing
funds rose in the first quarter of 1998 as compared to 1997. Average earning
assets rose $43.4 million, or 37.2%, from $116.4 million in 1997 to $159.8
million in 1998, and average interest bearing funds increased $38.6 million, or
43.6%, from $88.6 million to $127.2 million for the same periods. As a
percentage of average assets, earning assets rose from 90.2% in the first
quarter of 1997 to 91.7% in 1998, which resulted in higher interest income.
Average interest-bearing funding sources rose as well, from 80.3% of total
funding sources in the first quarter of 1997 to 82.6% in the same period in
1998, resulting in a higher cost of funds. Because the growth in earning
assets exceeded the growth of interest-bearing funds, the level of net interest
income improved, even though the net interest margin declined.
Combined changes in interest rates received on earning assets and paid
on funding sources negatively affected the net interest margin in the first
quarter of 1998. The yield on earning assets fell in 1998 to 8.17% from 8.67%
in 1997, as loan yields dropped to 9.08% from 9.92%. The lower yield on loans
was the combined effect of competitive factors in our market, a lower interest
rate environment overall, and a lower rate earned on a portfolio of the
guaranteed portion of SBA loans, which were
10
<PAGE> 11
purchased during the last half of 1997. This pool, averaging $16,991,000 in
the first quarter of 1998, represents 15.1% of the average loan portfolio, and
because of the reduced risk associated with the pool, the yield, at 7.16%, is
less than loans without the backing of a government guarantee. The yield on
the investment portfolio remained stable as maturing dollars were reinvested
and extended the overall portfolio maturity, and the return on Federal funds
remained higher on average than in the first three months of 1997. An increase
in the cost of funds also reduced the margin, as rates paid for funds rose to
3.61% for 1998 from 3.44% in 1997, a 17 basis point increase primarily the
result of changes in the composition of funding sources.
Changes in the mix of both earning assets and funding sources also
impacted net interest income in the first quarter of both 1998 and 1997;
however, the changes in the mix of earning assets were less significant than
the changes in composition of funding sources. Average loans as a percentage
of average earning assets increased slightly from 68.8% in 1997 to 69.9% in
1998; average investments also rose slightly from 18.5% to 19.3%. Short-term
investments, Federal funds sold, fell from 12.8% of earning assets to 10.8%.
The impact of these shifts, though small, helped to moderate the decrease in
the yield on earning assets resulting from rate changes. Changes in the mix of
interest-bearing funds were more pronounced as funds shifted to higher-cost
deposits from noninterest-bearing funding sources and lower-cost transaction
accounts. Time deposits rose $15.7 million, from 19.7% of funding sources to
24.3% in 1998, and noninterest-bearing deposits fell from 19.7% to 17.4%; both
of these changes in deposit composition resulted in an increase in the cost of
funds. A new product introduced in the second quarter of 1997 offers a sweep
of noninterest-bearing deposits, into a repurchase agreement; this shift of
funds from noninterest-bearing to interest-bearing funds was also a negative
impact on the margin.
11
<PAGE> 12
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(In thousands)
<TABLE>
<CAPTION>
Three Months ended March 31, 1998 1997
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 $111,758 $2,501 9.08% $80,084 $1,960 9.92%
Investment securities 30,861 482 6.34% 21,484 336 6.34%
Fed funds sold & other deposits 17,216 237 5.58% 14,900 195 5.31%
Total interest-earning assets 159,835 3,220 8.17% 116,468 2,491 8.67%
Noninterest-earning assets:
Cash and due from banks 8,704 7,368
Bank property and equipment 1,714 1,429
Other assets 5,599 5,308
Less: Allowance for loan losses (1,505) (1,521)
Total noninterest-earning assets 14,512 12,584
TOTAL ASSETS $174,347 $129,052
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking, money market & savings $86,369 $830 3.90% $66,865 $636 3.86%
Time deposits 37,385 504 5.47% 21,732 299 5.57%
Other borrowings 3,473 36 4.22% --- --- ---
Total interest-bearing liabilities 127,227 1,370 4.37% 88,597 935 4.28%
Noninterest-bearing deposits 26,766 21,726
Total funding sources 153,993 1,370 3.61% 110,323 935 3.44%
Other liabilities 945 770
TOTAL LIABILITIES 154,938 111,093
Shareholders' equity 19,409 17,959
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $174,347 $129,052
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $1,850 $1,556
Net interest spread 4.56% 5.24%
Net interest margin 4.69% 5.42%
</TABLE>
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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 1998, the provision for loan losses was
$100,000. Loans charged off totaled $183,000 and recoveries were $44,000. In
the same period of 1997, the provision was $35,000, loans charged off were
$31,000 and recoveries totaled $12,000.
NONINTEREST INCOME
Noninterest income rose $37,000, or 21.6%, in the first quarter of
1998 to $208,000 from $171,000 in the same period of 1997. 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 $110,000, or 7.9%, in the first three
months of 1998 as compared to the same period of 1997, from $1,390,000 to
$1,500,000. 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
White Flint and new services offered have pushed other expenses higher, as
well.
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
$1,154,000 and $1,763,000 at March 31,1998 and December 31, 1997, respectively.
The decrease in impaired loans in the first quarter of 1998 is the result of a
large loan being transferred to foreclosed real estate. There were no loans
that were restructured prior to the adoption of SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, and which were performing according to the
new terms at March 31, 1998 or at December 31, 1997.
Real estate acquired through foreclosure or deed in lieu of
foreclosure is carried at fair value less estimated selling costs, based upon
current market conditions and expected cash flows. Foreclosed real estate was
$1,089,000 at March 31, 1998, an increase of $740,000 from $349,000 at December
31,1997.
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 rate or the fair value of the collateral
for certain collateral dependent loans.
The allowance for loan losses was $1,434,000 at March 31,1998, a
slight decrease from $1,473,000 at December 31, 1997. Activity in the
allowance for loan losses during the first quarter of 1998 included recoveries
of $44,000, charge-offs of $183,000, and a provision for future losses of
$100,000.
LIQUIDITY AND INTEREST SENSITIVITY
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. Liquidity is provided
through readily marketable assets, maturing loans and investments, and the
ability to generate new deposits or borrowings as needed. The Company's
liquidity position is monitored and managed by the Asset/Liability Management
Committee, which has the overall objective of optimizing income while
minimizing and controlling liquidity and interest rate risk, and maintaining
capital adequacy.
Core deposits normally provide a stable source of liquidity for the
Company. These core deposits are composed of noninterest checking accounts,
checking and money market accounts, and savings and individual retirement
accounts. This core deposit base represented 79.8% of total funding sources at
March 31, 1998, compared to 77.6% at the end of 1997. Another indicator of
adequate liquidity is the level of readily marketable assets. These liquid
assets, securities available for sale, overnight federal funds and the
guaranteed portion of SBA loan in the loan portfolio increased to 48.4% of
total assets at March 31, 1998 from 40.5% at December 31, 1997.
As a supplementary source of short-term liquidity, the Bank maintains
$16,000,000 of reverse repurchase lines of credit and unsecured lines of credit
totaling $2,000,000 with correspondent banks. These correspondents meet
regulatory capital requirements for well capitalized financial institutions,
thereby minimizing the risk that might be associated with this level of
interbank exposure. The Bank has not needed to utilize these backup lines as
internally generated liquidity has provided ample resources.
Interest sensitivity pertains to the volatility of earnings resulting
from interest rate fluctuations. The management of interest rate risk has two
goals: to minimize fluctuations in net interest income and net income, and to
identify the potential change in the Company's market value of portfolio
equity. Interest rate risk can be defined or measured as either the change in
earnings that results from changes in interest rates (earnings at risk) or a
change in the theoretical market value of the Company (economic value at risk).
Economic value at risk is essentially the value of equity at risk. The Company
recognizes that with return, there must be risk; however, the levels of risk
must be contained within tolerable limits as established by the Asset/Liability
Management Committee and the Investment Sub-committee.
One method of measuring the Company's interest rate sensitivity is the
"gap" report, which measures the mismatch in repricing between
interest-sensitive assets and liabilities and provides a general indication of
the interest sensitivity of the balance sheet at a point in time. By limiting
the size of the gap position, the Company can limit the net interest income at
risk arising from pricing imbalances. The gap schedule that follows reflects
the earlier of the maturity or repricing dates for various interest-earning
assets and interest-bearing liabilities at March 31, 1998.
14
<PAGE> 15
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
3 months or Over 3 months Over 6 Over 1 year Total
less to months to 1
in thousands 6 months year
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $47,455 $ -- $ -- $ -- $ 47,455
Investments 500 498 3,548 25,984 30,530
Loans (1) 69,071 2,684 12,149 30,729 114,633
Total interest-earning assets 117,026 3,182 15,697 56,713 192,618
Cumulative rate sensitive assets 117,026 120,208 135,905 192,618
Interest-bearing liabilities:
Interest checking deposits $ 14,701 $ -- $ -- $ -- $ 14,701
Money market deposits and savings deposits 100,965 -- -- -- 100,965
Time deposits 25,859 2,026 3,481 6,968 38,334
Securities sold under repurchase agreements 4,961 -- -- -- 4,961
Total interest-bearing liabilities 146,486 2,026 3,481 6,968 158,961
Cumulative rate sensitive liabilities 146,486 148,512 151,993 158,961
GAP $ $(29,460) $ 1,156 $12,216 $49,745
CUMULATIVE GAP (29,460) (28,304) (16,088) 33,657 $33,657
CUMULATIVE GAP TO TOTAL ASSETS -13.76% -13.22% -7.51% 15.72% 15.72%
</TABLE>
(1) Excludes net deferred fees of ($22).
The amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual terms of the asset or liability. The
Company has assumed that its savings, interest checking and money market
accounts reprice daily. At March 31, 1998, the Company's one-year interest
sensitivity gap (the difference between the amount of interest-earning assets
anticipated by the Company, based on certain assumptions, to mature or reprice
within one year and the amount of interest-bearing liabilities anticipated by
the Company, based on certain assumptions, to mature or reprice within one
year) as a percentage to total assets was negative 7.51%. This negative gap
position means that the Company had $16,088,000 more liabilities than assets
repricing within one year. At December 31, 1997 the gap as a percentage of
assets was negative 8.17%. A negative gap generally indicates that in a period
of rising interest rates, the Company's net interest income may be adversely
affected. Conversely, in a declining interest rate environment, the Company's
net interest income may improve.
Another tool used to assess interest rate risk reflects the adverse
changes that would occur assuming an instantaneous, parallel shift of 200
basis points in the Treasury Yield Curve is introduced over a one-year forecast
horizon. This interest shock simulation measures the potential changes in
simulated earnings and the potential changes in market value of portfolio
equity as rates are shifted at each point on the yield curve upward and
downward. The methodology is based upon an initial forecast assumption of a
constant balance sheet and constant market interest rates and utilizes present
value computations on cash flows as well as duration analysis to produce
measurements of earnings and economic value at risk. The analyses are prepared
using current call report data from the Bank and incorporate both management
assumptions and trend analyses based upon the Company's historical data as well
as market trends in pricing spreads, prepayment patterns and other rate-driven
parameters which affect the level and timing of cash flows. Finally, the
impact of planned growth is factored into the simulation model.
The Asset/Liability Committee has established limits or guidelines on
earnings and economic value at risk and monitors the Company's performance
against these guidelines, as well as peer results, on a quarterly basis. The
Company's policy is to limit the percentage change in annual net interest
income to -15% and in economic value to -20% from an immediate and sustained
parallel shift in interest rates of 200 basis points. As of December 31, 1997,
the estimated sensitivity profile for the
15
<PAGE> 16
Company showed a change in annual net interest income of -12.5% and a change in
economic value of -14.1% for a downward shift of 200 basis points in interest
rates. Based on the mix of assets and liabilities and the current interest
rate environment, management does not believe there has been a significant
change in the first quarter of 1998.
Both of the above tools used to assess interest rate risk have
strengths and weaknesses. Because the gap reflects a static position at a
single point in time, it is limited in quantifying the total impact of market
rate changes which do not affect all earning assets and interest-bearing
liabilities equally or simultaneously. In addition, gap reports depict the
existing structure, excluding exposure arising from new business. While the
simulation process is a powerful tool in analyzing interest rate sensitivity,
many of the assumptions used in the process are both highly qualitative and
subjective and subject to the risk that past historical activity may not
generate accurate predictions of the future. Both measurement tools, however,
provide a comprehensive evaluation of the Company's exposure to changes in
interest rates, enabling management to control the volatility of earnings.
CAPITAL RESOURCES AND ADEQUACY
Shareholders' equity increased $286,000, or 1.5%, in the first three
months of 1998 to $19,468,000 at March 31, 1998 from $19,182,000 at December
31, 1997. Earnings of $295,000 were partially offset by a decrease of $9,000
in the accumulated other comprehensive income.
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, 1997 and
March 31, 1998, the Company 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. At March 31, 1998, the
Company reported at Tier 1 risk-based capital ratio of 15.95% and a ratio of
17.20% 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 March 31, 1998, the
leverage capital ratio for the Company was 10.39%.
16
<PAGE> 17
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, 1998.
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.
<TABLE>
<CAPTION>
SUBURBAN BANCSHARES, INC.
(Registrant)
<S> <C>
Date: May 11, 1998 Stephen A. Horvath
-------------------------- --------------------------------------
Stephen A. Horvath
President and Chief Operating Officer
Date: May 11, 1998 Sibyl S. Malatras
------------------------ --------------------------------------
Sibyl S. Malatras
Senior Vice President and Treasurer
(Principal Financial Officer)
</TABLE>
17
<PAGE> 1
SUBURBAN BANCSHARES, INC. EXHIBIT 11
EARNINGS PER SHARE CALCULATION
March 31, 1998
INFORMATION FOR COMPUTATION OF DILUTION
<TABLE>
<CAPTION>
Market Price per Share: Daily Average
<S> <C> <C>
First Quarter 1998 $3.6508 61 trading days
Second Quarter 1998
Third Quarter 1998
Fourth Quarter 1998
Average Price for the Period Ended March 31, 1998 $3.6508 61 trading days
(a) 350,000 Management Stock Options exercisable at $0.10
and outstanding for the period ended March 31, 1998
(b) 12,600 options granted 1/22/97 exercisable at $2.625
First Quarter 1998 Diluted
12,600 - ((12,600*2.625)/avg price) = 3,540
(c) 178,000 options granted 1/21/98 exercisable at $3.50
First Quarter 1998 Diluted
178,000 - ((178,000*3.50)/avg price) = 7,352
</TABLE>
<PAGE> 2
SUBURBAN BANCSHARES, INC. EXHIBIT 11
EARNINGS PER SHARE CALCULATION
March 31, 1998
EARNINGS PER SHARE CALCULATION - 1998
<TABLE>
<CAPTION>
Income Shares
Basic Earnings per Share: (Numerator) (Denominator) EPS
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $294,603.88
Common Shares Outstanding 10,951,218
Basic EPS $294,603.88 10,951,218 $0.0269
<CAPTION>
Income Shares
Diluted Earnings per Share: (Numerator) (Denominator) EPS
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $294,603.88 10,951,218
Additional shares to be issued upon assumed exercise of 350,000
management stock options
Shares hypothetically repurchased at the average market price (9,587)
with the proceeds
Additional shares to be issued upon assumed exercise of 12,600
incentive options (b)
Shares hypothetically repurchased at the average market price (9,060)
with the proceeds
Additional shares to be issued upon assumed exercise of 178,000
incentive stock options (c)
Shares hypothetically repurchased at the average market price (127,991)
with the proceeds
Diluted EPS $294,604 11,345,181 $0.0260
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 15,516
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 47,455
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,530
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 114,611
<ALLOWANCE> 1,434
<TOTAL-ASSETS> 214,119
<DEPOSITS> 188,991
<SHORT-TERM> 4,961
<LIABILITIES-OTHER> 699
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 19,359
<TOTAL-LIABILITIES-AND-EQUITY> 214,119
<INTEREST-LOAN> 2,501
<INTEREST-INVEST> 482
<INTEREST-OTHER> 237
<INTEREST-TOTAL> 3,220
<INTEREST-DEPOSIT> 1,334
<INTEREST-EXPENSE> 1,370
<INTEREST-INCOME-NET> 1,850
<LOAN-LOSSES> 100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,500
<INCOME-PRETAX> 458
<INCOME-PRE-EXTRAORDINARY> 295
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 295
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<YIELD-ACTUAL> 4.69
<LOANS-NON> 1,154
<LOANS-PAST> 0
<LOANS-TROUBLED> 44
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,473
<CHARGE-OFFS> 183
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 1,434
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
