<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, 1999
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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 (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
</TABLE>
7505 GREENWAY CENTER DRIVE, GREENBELT, MARYLAND 20770
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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
--- ---
COMMON STOCK $.01 PAR VALUE OUTSTANDING AT NOVEMBER 3, 1999
- --------------------------- -------------------------------
(CLASS)
11,301,218 SHARES
-------------------------------
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SUBURBAN BANCSHARES, INC.
S.E.C. FORM 10-Q
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C> <C>
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 (UNAUDITED)
AND DECEMBER 31, 1998 (AUDITED) 3
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 6
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
</TABLE>
FORWARD-LOOKING INFORMATION
PORTIONS OF THIS QUARTERLY REPORT ON FORM 10Q CONTAIN FORWARD-LOOKING
STATEMENTS, INCLUDING STATEMENTS OF GOALS, INTENTIONS, AND EXPECTATIONS,
REGARDING OR BASED UPON GENERAL ECONOMIC CONDITIONS, INTEREST RATES,
DEVELOPMENTS IN NATIONAL AND LOCAL MARKETS, THE COMPANY'S ABILITY TO ADDRESS THE
YEAR 2000 ISSUE AND THE ABILITY OF THIRD PARTIES TO EFFECTIVELY ADDRESS THEIR
YEAR 2000 ISSUES, AND OTHER MATTERS, WHICH, BY THEIR NATURE, ARE SUBJECT TO
SIGNIFICANT UNCERTAINTIES. BECAUSE OF THESE UNCERTAINTIES AND THE ASSUMPTIONS ON
WHICH STATEMENTS IN THIS REPORT ARE BASED, THE ACTUAL FUTURE RESULTS MAY DIFFER
MATERIALLY FROM THOSE INDICATED IN THIS REPORT.
2
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(in thousands) (unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 9,183 $ 12,280
Federal funds sold 23,850 43,093
Investment securities available for sale 46,444 45,843
Loans held for sale 259 1,814
Loans 136,776 129,885
Less: Allowance for loan losses (1,646) (1,524)
Loans, net 135,130 128,361
Premises and equipment, net 2,211 1,683
Foreclosed real estate 458 535
Accrued interest receivable 1,248 1,387
Deferred income taxes 2,826 2,474
Other assets 1,193 1,096
TOTAL ASSETS $222,802 $238,566
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 40,277 $ 37,507
Interest-bearing deposits 147,415 169,873
Total deposits 187,692 207,380
Securities sold under repurchase agreements 12,952 9,523
Accrued expenses and other liabilities 1,729 951
Total liabilities 202,373 217,854
Commitments and contingent liabilities -- --
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.01 par value; 20,000,000 shares authorized; shares issued and
outstanding: 11,301,218 at September 30, 1999 and 10,951,218 at December 31, 1998 113 109
Paid-in capital - stock options 0 534
Additional paid-in capital 25,824 25,259
Accumulated deficit (4,774) (5,484)
Accumulated other comprehensive income (loss) (734) 294
Total shareholders' equity 20,429 20,712
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $222,802 $238,566
</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) 1999 1998
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 7,971 $ 7,765
Taxable interest on securities 2,181 1,598
Interest on Federal funds sold and deposits with other banks 658 1,028
Total interest income 10,810 10,391
INTEREST EXPENSE
Interest on deposits 4,573 4,427
Interest on short-term borrowings 266 172
Total interest expense 4,839 4,599
NET INTEREST INCOME 5,971 5,792
Provision for loan losses 369 315
Net interest income after provision for loan losses 5,602 5,477
NONINTEREST INCOME
Service charges on deposit accounts 429 467
Gain on sale of investment securities 23 12
Other income 343 243
Total noninterest income 795 722
NONINTEREST EXPENSE
Salaries and employee benefits 2,841 2,520
Occupancy expense 618 555
Furniture and equipment expense 262 197
Other expense 1,609 1,380
Total noninterest expense 5,330 4,652
Income before income taxes 1,067 1,547
Income tax 357 554
NET INCOME $ 710 $ 993
Basic earnings per common share $0.06 $0.09
Diluted earnings per common share 0.06 0.09
</TABLE>
See accompanying notes to consolidated financial statements
4
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30,
(in thousands, except per share data) 1999 1998
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,828 $ 2,696
Taxable interest on securities 724 576
Interest on Federal funds sold and deposits with other banks 210 424
Total interest income 3,762 3,696
INTEREST EXPENSE
Interest on deposits 1,528 1,578
Interest on short-term borrowings 109 87
Total interest expense 1,637 1,665
NET INTEREST INCOME 2,125 2,031
Provision for loan losses 105 120
Net interest income after provision for loan losses 2,020 1,911
NONINTEREST INCOME
Service charges on deposit accounts 138 157
Gain on sale of securities -- 12
Other income 91 101
Total noninterest income 229 270
NONINTEREST EXPENSE
Salaries and employee benefits 1,007 871
Occupancy expense 223 189
Furniture and equipment expense 119 68
Other expense 510 488
Total noninterest expense 1,859 1,616
Income before income taxes 390 565
Income tax 133 203
NET INCOME $ 257 $ 362
Basic earnings per common share $0.02 $0.03
Diluted earnings per common share 0.02 0.03
</TABLE>
See accompanying notes to consolidated financial statements
5
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
(in thousands) 1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 710 $ 993
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 241 181
Provision for loan losses 369 315
Provision for losses on foreclosed real estate -- 6
Deferred income tax expense 295 554
Originations of loans held for sale (6,474) (1,972)
Proceeds from loan sales 8,028 1,791
Gain on sales of loans -- (48)
Net realized gains on available for sale securities (23) (12)
Net accretion on securities (39) (102)
Increase (decrease) in deferred loan fees 45 (89)
Net decrease (increase) in premium on loans purchased 531 (317)
Decrease (increase) in accrued income and other assets 42 (636)
Increase in accrued expenses and other liabilities 778 1,005
Gain on sale of foreclosed real estate (1) (15)
Net cash provided by operating activities 4,502 1,654
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in Federal funds sold 19,243 (37,516)
Purchases of available for sale securities (15,255) (11,308)
Proceeds from maturities of available for sale securities 11,670 6,350
Proceeds from prepayments of principal on securities 874 97
Proceeds from sales of available for sale securities 505 1,031
Net increase on other securities (7) (5)
Net increase in loans (8,018) (4,902)
Purchases of loans -- (5,607)
Net purchases of premises and equipment (768) (246)
Proceeds from sale of foreclosed real estate 381 755
Net cash provided (used) by investing activities 8,625 (51,351)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in total deposits (19,688) 43,330
Net increase in securities sold under agreements to repurchase 3,429 8,577
Net proceeds from sale or issuance of common stock 35 --
Net cash (used) provided by financing activities (16,224) 51,907
Net (decrease) increase in cash and due from banks (3,097) 2,210
Cash and due from banks at beginning of period 12,280 10,759
Cash and due from banks at end of period $ 9,183 $12,969
Interest paid $ 4,874 $ 4,562
Income taxes paid 62 26
Loans transferred to foreclosed real estate 304 800
</TABLE>
See accompanying notes to consolidated financial statements
6
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SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
(in thousands)
Nine Months Ended Comprehensive Accumulated
September 30, 1999 Total Income Deficit
<S> <C> <C> <C>
Beginning balance $ 20,712 $ (5,484)
Exercise of management stock options 35
Comprehensive income:
Net income 710 710 710
Other comprehensive income, net of tax
Unrealized gains (losses)on securities
available for sale (1,028) (1,028)
-------
Comprehensive income (318)
--------- ======= --------
Ending balance $ 20,429 $(4,774)
========= ========
Nine Months Ended
September 30, 1998
Beginning balance $ 19,182 $(6,910)
Comprehensive income:
Net income 993 993 993
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale 239 239
-----
Comprehensive income 1,232
-------- ===== --------
Ending balance $ 20,414 $(5,917)
======== ========
</TABLE>
<TABLE>
<CAPTION>
(in thousands) Accumulated Other
Nine Months Ended Comprehensive Common Paid-in
September 30, 1999 Income Stock Capital
<S> <C> <C> <C>
Beginning balance $ 294 $ 109 $25,793
Exercise of management stock options 4 31
Comprehensive income:
Net income
Other comprehensive income, net of tax
Unrealized gains (losses)on securities
available for sale (1,028)
Comprehensive income
--------- ------- -------
Ending balance $ (734) $ 113 $25,824
========= ======= =======
Nine Months Ended
September 30, 1998
Beginning balance $ 190 $ 109 $25,793
Comprehensive income:
Net income
Other comprehensive income, net of tax
Unrealized gains (losses) on securities
available for sale 239
Comprehensive income
-------- ------- -------
Ending balance $ 429 $ 109 $25,793
======== ======= =======
</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 nine months ended September 30, 1999
are not necessarily indicative of results that may be expected for the entire
year ending December 31, 1999.
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, 1998, which contain the Company's accounting policies and
other data.
NOTE B - INVESTMENT SECURITIES
The following table shows the amortized cost and estimated fair
value of investment securities classified as available for sale at September 30,
1999 (in thousands):
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gains
<S> <C> <C>
U.S. Treasury notes $ 1,199 $ 7
Federal agencies 34,209 63
Mortgage-backed obligations of federal agencies 10,006 --
Federal Home Loan Bank stock 657 --
Other 1,569 6
Total investment securities $47,640 $76
</TABLE>
<TABLE>
<CAPTION>
Gross Unrealized Losses Estimated Fair Value
<S> <C> <C>
U.S. Treasury notes $ -- $ 1,206
Federal agencies (860) 33,412
Mortgage-backed obligations of federal agencies (379) 9,627
Federal Home Loan Bank stock -- 657
Other (33) 1,542
Total investment securities $ (1,272) $46,444
</TABLE>
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<PAGE> 8
The schedule below shows the amortized cost and estimated fair value
of investment securities classified as available for sale at December 31, 1998
(in thousands):
<TABLE>
<CAPTION>
Amortized Cost Gross Unrealized Gains
<S> <C> <C>
U.S. Treasury notes $ 1,448 $ 30
Federal agencies 38,381 512
Mortgage-backed obligations of federal agencies 4,267 8
Other 1,268 21
Total securities available for sale $45,364 $571
</TABLE>
<TABLE>
<CAPTION>
Gross Unrealized Losses Estimated Fair Value
<S> <C> <C>
U.S. Treasury notes $ 0 $ 1,478
Federal agencies (77) 38,816
Mortgage-backed obligations of federal agencies (14) 4,261
Other (1) 1,288
Total securities available for sale $ (92) $45,843
</TABLE>
The amortized cost and estimated fair value for securities at
September 30, 1999, 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 $ 6,383 $ 6,406
Due after one year through 5 years 25,009 24,483
Due after 5 years through 10 years 6,242 5,928
Due after 10 years -- --
Mortgage-backed securities 10,006 9,627
Total $47,640 $46,444
</TABLE>
Sales of securities in the nine months ended September 30, 1999
resulted in profits of $23,000; in the nine months ended September 30, 1998
sales of securities resulted in profits of $12,000. The net unrealized holding
loss on available for sale securities, which is included in accumulated other
comprehensive income and shown as a separate component of shareholders' equity
in the accompanying Consolidated Balance Sheets, was $734,000 at September 30,
1999; an unrealized gain of $294,000 was reported at December 31, 1998.
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 1999 1998
<S> <C> <C>
Impaired loans with a valuation allowance $848 $ 1,160
Impaired loans without a valuation allowance -- --
------ ---------
Total impaired loans 848 1,160
Allowance for credit losses related to impaired loans 157 135
Allowance for credit losses related to other than impaired loans 1,489 1,389
----- -----
Total allowance for credit losses $1,646 $1,524
Average impaired loans for the period $880 $1,569
Interest income on impaired loans recognized on the cash basis -- --
</TABLE>
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
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charged off and that the allowance is adequate to cover losses inherent in the
portfolio at September 30, 1999. 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,
----------------------------------------
1999 1998
----------------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,524 $1,473
Provision for loan losses 369 315
Loans charged off (288) (424)
Recoveries 41 88
----------------------------------------
Balance at end of period $ 1,646 $1,452
========================================
</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:
<TABLE>
<CAPTION>
September 30, December 31,
in thousands 1999 1998
-------------------------------------
<S> <C> <C>
Commercial property $ 401 $562
Commercial land 60 60
-------------------------------------
Total $461 622
Allowance for losses (3) (87)
-------------------------------------
ESTIMATED FAIR VALUE $458 $535
=====================================
</TABLE>
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 September 30, 1999, that the
Company meets all capital adequacy requirements to which it is subject.
As of September 30, 1999, 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:
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<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
$ in thousands AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total capital (to risk-weighted assets):
Company $22,809 17.01% $10,727 8.00% $13,409 10.00%
Suburban Bank of Maryland 18,310 13.88 10,553 8.00 13,191 10.00
Tier 1 capital (to risk-weighted assets):
Company 21,163 15.78 5,354 4.00 8,045 6.00
Suburban Bank of Maryland 16,664 12.63 5,276 4.00 7,915 6.00
Tier 1 capital (to average assets):
Company 21,163 9.73 8,704 4.00 10,880 5.00
Suburban Bank of Maryland 16,664 7.79 8,561 4.00 10,701 5.00
As of December 31, 1998:
Total capital (to risk-weighted assets):
Company $21,583 16.65% $10,371 8.00% $12,964 10.00%
Suburban Bank of Maryland 16,914 13.23 10,226 8.00 12,783 10.00
Tier 1 capital (to risk-weighted assets):
Company 20,058 15.47 5,186 4.00 7,779 6.00
Suburban Bank of Maryland 15,390 12.04 5,113 4.00 7,670 6.00
Tier 1 capital (to average assets):
Company 20,058 9.13 8,791 4.00 10,988 5.00
Suburban Bank of Maryland 15,390 7.05 8,738 4.00 10,922 5.00
</TABLE>
NOTE F - CONTINGENT LIABILITIES
In addition to contingent liabilities the Company incurs in the
normal course of business, the Bank is involved in litigation for the recovery
of premium paid for a loan that the Bank later discovered was in default at the
time of purchase. The maximum amount of the contingent liability is $165,000;
the minimum, full recovery. As of November 3, 1999, a court date has not yet
been established.
NOTE G - OTHER EVENTS
On September 28, 1999, Suburban Bancshares, Inc. ("Suburban"), the
bank holding company for Suburban Bank of Maryland, Greenbelt, Maryland, entered
into a Plan and Agreement to Merge (the "Merger Agreement"), pursuant to which
Suburban will be merged into Columbia Bancorp, Inc., the bank holding company
for Columbia Bank, Columbia, Maryland (the "Merger"). The Merger is intended to
be a tax-free reorganization for federal income tax purposes and to be accounted
for as a pooling-of-interests.
Under the Merger Agreement, each share of Suburban common stock
outstanding immediately prior to the effective time of the Merger will be
converted into 0.2196 shares of Columbia common stock (rounded to the nearest
hundredth of a share, with cash being paid in lieu of fractional shares
interests). The conversion ratio is subject to increase, but not decrease, to
the extent necessary to cause the value of the Columbia shares into which each
share of Suburban common stock shall have been converted to be $3.00 per share
(based on the mean of the daily high and low trade prices of Columbia common
stock for the 10 trading days ending on the trading date that is three days
before the Effective Date, or, if there are no trades, the daily high bid and
low asked prices, reported on NASDAQ), provided that the adjusted conversion
ratio may not exceed 0.2338 shares of Columbia common stock per share of
Suburban common stock. Options to purchase Suburban common stock outstanding at
the effective time of the Merger will be converted as to each whole share
subject to such option into a proportionally adjusted option to purchase, for
the same aggregate exercise price, the number of whole shares of Suburban common
stock subject to the option multiplied by the conversion ratio.
Consummation of the Merger is subject to various conditions,
including (i) the approval of the shareholders of Suburban and Columbia, (ii)
the approval of the appropriate state and federal bank regulators and other
governmental agencies, (iii) the receipt of a letter from Columbia's independent
auditors that the Merger will qualify for pooling-of-interests accounting
treatment, (iv) the receipt of an opinion of counsel that the Merger will be
treated for federal tax purposes as a tax free reorganization for federal income
tax purposes, and (v) other customary conditions to closing.
In connection with the Merger Agreement, Suburban and Columbia
entered into an option agreement which provides Columbia with the right to
purchase up to 19.9% of Suburban's common stock at an exercise price of $2.313
(subject to adjustment in certain circumstances), upon the occurrence of
certain events described in the option agreement. Suburban and Columbia also
entered into a substantially identical option agreement which provides Suburban
the right to purchase up to 9.9% of the Columbia common stock at an exercise
price per share of $13.063 (subject to certain circumstances), upon the
occurrence of certain events described in the option
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agreement. The options were grated by each of Suburban and Columbia as a
condition to the other party's entering into the Merger Agreement.
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, 1999 and 1998. 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 $710,000 for the nine
months ending September 30, 1999, a decrease of $283,000, or 28.5%, from
$993,000 reported for the same period of 1998. This earnings decline is
attributed to a declining net interest margin and the implementation of planned
infrastructure enhancements in the second quarter of 1999.
Total assets were $222.8 million at September 30, 1999, a $7.0
million, or 3.1%, decrease from $229.8 million at September 30, 1998. Assets
have declined since December 31, 1998, $15.8 million, or 6.6%. Loans have
increased $13.5 million, or 10.9%, since September 30, 1998 and $5.3 million, or
4.1%, since year-end 1998, reaching $137.0 million at the end of the third
quarter of 1999. Deposits, at $187.7 million, rose 4.3% since September 30, 1998
and have fallen 9.5% since December 31, 1998.
Average assets were $214.6 million for the first nine months of 1999,
$24.0 million, or 12.6%, above average assets of $190.6 million for the same
period of 1998. Average earning assets rose $23.2 million, or 13.3%, and average
deposits rose $18.7 million, or 11.4%.
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 $179,000, or 3.1%, from $5,792,000 for the
first nine months of 1998 to $5,971,000 in 1999, 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 nine months of 1999, the net interest margin was
4.02%, falling 40 basis points from 4.42% in the same period of 1998, the result
of a drop of 79 basis points in the yield on loans and a 34 basis point drop in
the yield for invested funds, while funding costs declined only 26 basis points.
Changes in the volume of earning assets and interest-bearing funds
impact both interest income and interest expense. Both total average earning
assets and total average interest-bearing funds rose in the nine months of 1999
as compared to 1998. Average earning assets rose $23.2 million, or 13.3%, from
$175.2 million in 1998 to $198.4 million in 1999, and average interest-bearing
funds increased $16.2 million, or 11.6%, from $140.1 million to $156.3 million
for the same periods. Because the amount of growth in earning assets exceeded
the growth in interest-bearing funds, the level of net interest income
increased.
Combined changes in interest rates received on earning assets and
paid on funding sources negatively affected the net interest margin in the first
nine months of 1999. The yield on earning assets fell in 1999 to 7.28% from
7.93% in 1998, as loan yields dropped to 8.06% from 8.85%. The lower yield on
loans was the combined effect of competitive factors in our market, a lower
interest rate environment overall after market rates declined in the last
quarter of 1998, and a lower rate earned on a portfolio of the guaranteed
portion of SBA loans. This pool, averaging $17,169,000 in 1999, represents 13.0%
of the average loan portfolio, and because of the reduced risk associated with
the pool, the yield is less than loans without the backing of a government
guarantee. That yield was further reduced in the first nine months of 1999, as
payoffs in the portfolio resulted in elimination of purchase premiums, which
directly impacts the margin. The yield on the investment portfolio fell only 40
basis points as maturing dollars were reinvested at lower yields, while
extending the overall portfolio maturity, and the return on Federal funds
dropped 66 basis points on average compared to the first nine months of 1998. A
slight decrease in the cost of funds helped to mitigate the falling margin, as
rates paid for funds declined to 3.36% for 1999 from 3.62% in 1998, a 26 basis
point drop, primarily the result of falling market rates and increasing
noninterest-bearing deposits.
11
<PAGE> 12
Changes in the mix of both earning assets and funding sources also
impacted net interest income in the first nine months of both 1999 and 1998.
Average loans as a percentage of average earning assets decreased from 67.0% in
1998 to 66.6% in 1999; average investments rose from 18.9% to 24.3%. Short-term
investments, Federal funds sold, fell from 14.1% of earning assets to 9.0%. The
impact of the shift to a lower percentage of loans in earning assets was
significant, though slight, because loans are typically the highest yielding
earning asset and a drop in the percentage will result in a lower yield on
earning assets. Changes in the mix of interest-bearing funds were also
significant as funds shifted to higher-cost deposits from lower-cost
interest-bearing transaction accounts. Time deposits rose $8.6 million, from
25.5% of funding sources to 27.0% in 1999, and checking and money market
deposits fell from 38.7% to 35.1%; both of these changes in deposit composition
resulted in an increase in the cost of funds, offsetting falling rates. Growth
of $6.5 million, or 22%, in noninterest-bearing deposits also helped to mitigate
the impact of the shift to higher cost deposits.
In the three months ended September 30, 1999, net interest income was
$2,125,000, $94,000 or 4.6% above the $2,031,000 recorded for the third quarter
of 1998. This improvement was also the result of volume increases, mitigated by
lower yields.
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
AVERAGE
AVERAGE YIELD
ASSETS BALANCE INTEREST OR RATE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans $132,193 $7,971 8.06%
Investment securities 48,300 2,181 6.04%
Fed funds sold and other deposits 17,934 658 4.91%
Total interest-earning assets 198,427 10,810 7.28%
Noninterest-earning assets:
Cash and due from banks 10,303
Bank property and equipment 1,856
Other assets 5,638
Less: Allowance for loan losses (1,672)
Total noninterest-earning assets 16,125
TOTAL ASSETS $214,552
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking and money market $67,533 $ 1,722 3.41%
Savings 27,165 802 3.95%
Time deposits 51,930 2,049 5.28%
Securities sold under repurchase agreements 9,651 266 3.69%
Total interest-bearing liabilities 156,279 4,839 4.14%
Noninterest-bearing deposits 36,262
Total funding sources 192,541 4,839 3.36%
Other liabilities 1,358
TOTAL LIABILITIES 193,899
Shareholders' equity 20,653
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $214,552
- -----------------------------------------------------------------------------------------------------------------
Net interest income
Net interest spread $5,971 3.92%
Net interest margin 4.02%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
AVERAGE
AVERAGE YIELD
ASSETS BALANCE INTEREST OR RATE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans $117,358 $7,765 8.85%
Investment securities 33,154 1,598 6.44%
Fed funds sold and other deposits 24,687 1,028 5.57%
Total interest-earning assets 175,199 10,391 7.93%
Noninterest-earning assets:
Cash and due from banks 9,738
Bank property and equipment 1,716
Other assets 5,436
Less: Allowance for loan losses (1,489)
Total noninterest-earning assets 15,401
TOTAL ASSETS $190,600
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking and money market $65,633 $ 1,763 3.59%
Savings 25,468 873 4.58%
Time deposits 43,368 1,791 5.52%
Securities sold under repurchase agreements 5,609 172 4.11%
Total interest-bearing liabilities 140,078 4,599 4.39%
Noninterest-bearing deposits 29,726
Total funding sources 169,804 4,599 3.62%
Other liabilities 1,070
TOTAL LIABILITIES 170,874
Shareholders' equity 19,726
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $190,600
- ----------------------------------------------------------------------------------------------------------
Net interest income $5,792
Net interest spread 4.31%
Net interest margin 4.42%
</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 1999, the provision for loan losses was
$369,000. Loans charged off totaled $288,000 and recoveries were $41,000. In the
same period of 1998, the provision was $315,000, loans charged off were $424,000
and recoveries totaled $88,000. The provision in the third quarter of 1999 was
$105,000, a decrease of $15,000 over the $120,000 recorded in the same period of
1998, primarily the result of decreasing problem loans.
NONINTEREST INCOME
Noninterest income rose $73,000, or 10.1%, in the first nine months
of 1999 to $795,000 from $722,000 in the same period of 1998. Fees for the
origination of mortgage loans, a new service offered in 1998, account for
$68,000 of the increase, a gain on the sale of investment securities added
$23,000, and NSF fees have declined. In the three months ended September 30,
1999, noninterest income was $229,000, $41,000 or 15.2% lower than the same
period of 1998.
NONINTEREST EXPENSES
Noninterest expenses increased $678,000, or 14.6%, in the first nine
months of 1999 as compared to the same period of 1998, from $4,652,000 to
$5,330,000. Salaries and benefits increased, the result of merit increases and
staffing for the new branch in Beltsville. Expenses associated with the
conversion to a new computer services vendor and the installation of a wide-area
network in the second quarter pushed other expenses higher, adding $140,000 in
one-time charges. In the third quarter of 1999, noninterest expenses were
$1,859,000, $243,000 or 15.0% above the $1,616,000 recorded for the same
three-month period in 1998.
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
$848,000 and $1,160,000 at September 30, 1999 and December 31, 1998,
respectively, a decrease of $312,000, primarily the result of charge-offs.
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
$458,000 at September 30, 1999 and $535,000 at December 31, 1998.
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 $1,646,000 at September 30, 1999,
an increase of $122,000 from $1,524,000 at December 31, 1998. Activity in the
allowance for loan losses during the first nine months of 1999 included
recoveries of $41,000, charge-offs of $288,000, and a provision for future
losses of $369,000.
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,
interest checking and money market accounts, and savings and individual
retirement accounts. This core deposit base represented 75.5% of total funding
sources at September 30, 1999, compared to 73.4% at the end of 1998. Another
indicator of adequate liquidity is the level of readily marketable assets. As
the core deposit base was rising, these liquid assets, securities available for
sale, overnight federal funds and the guaranteed portion of SBA loans in the
loan portfolio, declined to 41.6% of total assets at September 30, 1999 from
48.6% at December 31, 1998, as overnight investments dropped while loan volume
increased. The relatively small changes in core deposits and marketable assets
are indicative of the stability of the liquidity they provide.
As a supplementary source of short-term liquidity, the Bank maintains
$6,000,000 of reverse repurchase lines of credit and unsecured lines of credit
totaling $4,500,000 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 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 September 30, 1999:
14
<PAGE> 15
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
3 months or Over 3 months Over 1 year
in thousands less to 1 year to 5 years
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold and other deposits $23,850 $ -- $ --
Investment securities available for sale 8,108 9,564 18,614
Loans (1) 61,033 18,724 35,745
Total interest-earning assets 92,991 28,288 54,359
Cumulative rate sensitive assets 92,991 121,279 175,638
Interest-bearing liabilities:
Interest checking deposits $ 12,581 $ -- $ --
Money market deposits 57,821 -- --
Savings deposits 26,669 -- --
Time deposits 37,516 6,233 6,595
Securities sold under repurchase agreements 12,952 -- --
Total interest-bearing liabilities 147,539 6,233 6,595
Cumulative rate sensitive liabilities 147,539 153,772 160,367
GAP $ $(54,548) $ 22,055 $47,764
CUMULATIVE GAP (54,548) (32,493) 15,271
CUMULATIVE GAP TO TOTAL ASSETS -24.48% -14.58% 6.85%
</TABLE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
Over 5
in thousands years Total
<S> <C> <C>
Interest-earning assets:
Federal funds sold and other deposits $ -- $ 23,850
Investment securities available for sale 10,158 46,444
Loans (1) 21,341 136,843
Total interest-earning assets 31,498 207,137
Cumulative rate sensitive assets 207,137
Interest-bearing liabilities:
Interest checking deposits $ -- $ 12,581
Money market deposits -- 57,821
Savings deposits -- 26,669
Time deposits -- 50,344
Securities sold under repurchase agreements -- 12,952
Total interest-bearing liabilities -- 160,367
Cumulative rate sensitive liabilities 160,367
GAP $ $31,498
CUMULATIVE GAP 46,769 $46,769
CUMULATIVE GAP TO TOTAL ASSETS 20.99% 20.99%
</TABLE>
(1) Excludes net deferred fees $67.
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 and that investment securities with call options will be
called. At September 30, 1999, 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 14.58%. This negative gap position means that the
Company had $32,493,000 more liabilities than assets repricing within one year.
At December 31, 1998 the gap as a percentage of assets was positive 1.83%. 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
15
<PAGE> 16
in interest rates of 200 basis points. As of June 30, 1999, the most recent date
the information is available, the estimated sensitivity profile for the Company
was as follows:
<TABLE>
<CAPTION>
Immediate Change in Rates Policy Limitation
+200BP -200BP
------ ------
<S> <C> <C> <C>
Net interest income at risk 5.9% -5.9% -15%
Economic value at risk 0.4% -5.2% -20%
</TABLE>
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 third quarter of 1999.
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 decreased $283,000, or 1.4%, in the first nine
months of 1999 to $20,429,000 at September 30, 1999 from $20,712,000 at December
31, 1998. Earnings of $710,000 and a decrease of $1,028,000 in the accumulated
other comprehensive income accounted for most of the change in equity; the
exercise of management stock options contributed $35,000.
A combination of a leverage capital ratio and risk-based capital
ratios is used to categorize banks as well capitalized, adequately capitalized,
or under capitalized financial institutions under the guidelines established by
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, 1998 and
September 30, 1999, 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 September 30, 1999, the Company
reported at Tier 1 risk-based capital ratio of 15.78% and a ratio of 17.01%
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, 1999, the
leverage capital ratio for the Company was 9.73%.
YEAR 2000 PROJECT
Many computer programs now in use have not been designed to properly recognize
years after 1999. If not corrected, these programs could fail or create
erroneous results. This Year 2000 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and
16
<PAGE> 17
other equipment that use computer chips. This problem is not limited to computer
systems. Y2K issues may affect every system that has an embedded microchip, such
as automated teller machines, elevators, vaults, heating, air conditioning, and
security systems. Y2K issues may also affect the operation of third parties with
whom the Company does business such as vendors, suppliers, utility companies,
and customers.
Risks Related to Year 2000
The Y2K issue poses certain risks to the Company and its operations. Some of
these risks are present because the Company purchases technology and information
system applications from other parties who also face Y2K challenges. Other risks
are specific to the banking industry.
Commercial banks may experience a deposit base reduction if customers withdraw
significant amounts of cash in anticipation of Y2K. Such a deposit contraction
could cause an increase in interest rates, require the Company to locate
alternative sources of funding or sell investment securities or other liquid
assets to meet liquidity needs, and may reduce future earnings. To reduce
customer concerns regarding Y2K noncompliance, a customer awareness plan has
been implemented which is directed towards making deposit customers
knowledgeable about the Company's Y2K compliance efforts.
The Company lends significant amounts to businesses and individuals in its
marketing areas. If these borrowers are adversely affected by Y2K problems, they
may not be able to repay their loans in a timely manner. This increased credit
risk could adversely affect the Company's financial performance. In an effort to
identify any potential loan loss risk because of borrower Y2K noncompliance, all
loan customers with loans or commitments exceeding $250,000 have been visited by
calling officers for the purpose of discussing their Y2K plans and for the
completion of a Y2K questionnaire. Additional visits have been made to reassess
the progress of those borrowers that were assumed to be computer-dependent.
The Company's operations, like those of many other companies, can be adversely
affected by Y2K triggered failures which may be experienced by third parties
upon whom the Company relies for processing transactions. The Company has
identified all critical third-party service providers and vendors and is
monitoring their Y2K compliance programs. The Company's primary supplier of data
processing services has adopted a Y2K compliance plan which includes a timetable
for making changes necessary to be able to provide services in the Y2K. That
supplier has provided written assurances to the Company regarding its progress
toward Y2K compliance and has been examined for Y2K readiness by federal bank
examiners.
The Company's operations may also be adversely affected by Y2K related failures
of third party providers of electricity, telecommunications services and other
utility services. The Y2K compliance of these providers is largely beyond the
control of the Company.
The Company's State of Readiness
The Company has created a task force to establish a Y2K plan to prevent or
mitigate the adverse effects of the Y2K issue on the Company and its customers.
Goals of the Y2K plan include identifying Y2K risks, information systems and
equipment used by the Company, informing customers of Y2K issues and risks,
establishing a contingency plan for operating if Y2K issues cause important
systems or equipment to fail, implementing changes necessary to achieve Y2K
compliance, and verifying that these changes are effective. The Federal Deposit
Insurance Corporation has examined the Company's Y2K compliance plan and the
Company's progress in its implementation. In addition, the Board of Directors is
carefully monitoring progress under the plan on a monthly basis.
The assessment phase included an inventory and physical date rollover testing of
all computer hardware, and an identification of other systems or functions that
may be impacted by the date change. The Company has moved aggressively to verify
with third-party vendors and service providers that software and non-IT systems
are, or will be, Year 2000 compliant, and has completed 100% of the process of
internal testing of critical systems. Critical systems include communication
with the Federal Reserve via Fedline, the computer system and item processing
system, both of which are provided by the third party servicers, and the
wide-area network supporting communications between offices. Non-critical
systems that have been tested for date transition include ATMs, payroll,
accounts payable, internal telephone systems and general operational hardware
such as fax machines, postage meters, and copiers, some of which required
software enhancements and some, replacements.
17
<PAGE> 18
As a result of the Company's completed migration to new data processing and item
processing providers in May 1999, and the enhancement of our inter-branch
communication network through a wide-area network, the hardware replacement
costs resulting from date recognition failure have been replaced by equipment
costs for support of the new network environment. Costs related to the migration
were approximately $260,000, to be amortized over the life of each of the
contracts, and costs associated with the installation of the wide-area network
totaled approximately $380,000, which will be depreciated over its useful life.
A one-time de-conversion charge plus annual costs of the new systems resulted in
a charge to income of approximately $150,000 in 1999 (most of which was recorded
in the second quarter of 1999), and will not materially impact the results of
operations in this year or future years. The Company has been assured that the
new systems are Year 2000 compliant; we have tested the wide-area network, and
we have used proxy-testing for the systems provided by third party servicers to
verify their readiness. A third-party review of the proxy testing for Y2K
compliance was issued for the data processing system; the report was very
favorable, showing a 99% success rate. Proxy testing on the item processing
system is complete, with the system performing as expected.
In addition, an ongoing awareness campaign has been implemented to inform
customers and shareholders of the potential problem and its implications, and
our employees are kept informed of the issue and of our progress toward
minimizing its impact. Our customers and shareholders have been and will
continue to be informed of our preparedness, and will be kept aware of
developments in the industry during the remaining months of 1999.
While management currently believes that its Year 2000 plans for monitoring
third-party progress and subsequent systems testing will mitigate the Year 2000
problem, if the service providers and customers, upon whom we rely, are not in
compliance, the Year 2000 issue may have a material adverse impact on the
operation of the Bank. The Company has established contingency plans in case of
failure resulting from the date change issue, and will be prepared to function
on a limited basis until such failure is corrected. Because the Bank is a
relatively small financial institution, daily transactions, deposits,
withdrawals and payments, can be processed normally, and accounts can be updated
manually until computer connectivity is re-established. Delays in processing
transactions may result in the event that the Company is forced to process
transactions manually and may disrupt normal business activities of the Company
and its customers. In addition to a detailed business resumption plan, the
Company has created an event plan for the remainder of the year, and a
comprehensive liquidity plan that will take us through the century date change.
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) Our report on Form 8K was filed on September 28,
1999 relating to the announcement that Suburban
Bancshares, Inc. and Columbia Bancorp, Inc. had
entered into a Plan and Agreement to Merge
pursuant to which Suburban will be merged into
Columbia Bancorp, Inc.
18
<PAGE> 19
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: November 5, 1999 Stephen A. Horvath
---------------- -------------------------------
Stephen A. Horvath
President and Chief Operating
Officer
Date: November 5, 1999 Sibyl S. Malatras
---------------- -------------------------------
Sibyl S. Malatras
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
19
<PAGE> 1
SUBURBAN BANCSHARES, INC. EXHIBIT 11
EARNINGS PER SHARE CALCULATION
September 30, 1999
<TABLE>
<CAPTION>
INFORMATION FOR COMPUTATION OF DILUTION
=======================================
Market Price per Share: Daily Average
<S> <C> <C>
First Quarter 1999 $2.7169 62 trading days
Second Quarter 1999 $2.4178 63 trading days
Third Quarter 1999 $2.2890 64 trading days
Fourth Quarter 1999
Average Price for the Period Ended September 30, 1999 $2.4723 189 trading days
</TABLE>
<TABLE>
<S> <C> <C> <C>
12,600 options granted 1/22/97 exercisable at $2.625
(a) and outstanding for the entire year
First Quarter 1999 Diluted
12,600 - ((12,600*2.625)/avg price) = 426
Second Quarter 1999
12,600 - ((12,600*2.625)/avg price) = (1,080) Antidilutive
Third Quarter 1999
12,600 - ((12,600*2.625)/avg price) = (1,849) Antidilutive
(b) 178,000 options granted 1/21/98 exercisable at $3.625 and
outstanding for the entire year
First Quarter 1999 Diluted
178,000 - ((178,000*3.625)/avg price) = (59,496) Antidilutive
Second Quarter 1999
178,000 - ((178,000*3.625)/avg price) = (88,875) Antidilutive
Third Quarter 1999
178,000 - ((178,000*3.625)/avg price) = (103,887) Antidilutive
(c) 41,590 options granted 1/21/98 and vested 1/21/99, exercisable
at $3.625
First Quarter 1999 Diluted
41,590 - ((41,590*3.625)/avg price) = (13,901) Antidilutive
Second Quarter 1999
41,590 - ((41,590*3.625)/avg price) = (20,766) Antidilutive
Third Quarter 1999
41,590 - ((41,590*3.625)/avg price) = (24,273) Antidilutive
</TABLE>
<PAGE> 2
SUBURBAN BANCSHARES, INC. EXHIBIT 11
EARNINGS PER SHARE CALCULATION
September 30, 1999
EARNINGS PER SHARE CALCULATION - 3rd QUARTER 1999
==================================================
<TABLE>
<CAPTION>
Income
Basic Earnings per Share: (Numerator) Shares (Denominator) EPS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $256,750
Common Shares Outstanding 11,301,218
Basic EPS $256,750 11,301,218 $0.02
</TABLE>
<TABLE>
<CAPTION>
Income
Diluted Earnings per Share: (Numerator) Shares (Denominator) EPS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $256,750 11,301,218
Diluted EPS $256,750 11,301,218 $0.02
</TABLE>
EARNINGS PER SHARE CALCULATION - Nine Months ended September 30, 1999
======================================================================
<TABLE>
<CAPTION>
Income
Basic Earnings per Share: (Numerator) Shares (Denominator) EPS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $710,255
Common Shares Outstanding 11,301,218
Basic EPS $710,255 11,301,218 $0.06
</TABLE>
<TABLE>
<CAPTION>
Income
Diluted Earnings per Share: (Numerator) Shares (Denominator) EPS
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $710,255 11,301,218
Diluted EPS $710,255 11,301,218 $0.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,183
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,444
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 137,035
<ALLOWANCE> 1,646
<TOTAL-ASSETS> 222,802
<DEPOSITS> 187,692
<SHORT-TERM> 12,952
<LIABILITIES-OTHER> 1,729
<LONG-TERM> 0
0
0
<COMMON> 113
<OTHER-SE> 20,316
<TOTAL-LIABILITIES-AND-EQUITY> 222,802
<INTEREST-LOAN> 7,971
<INTEREST-INVEST> 2,181
<INTEREST-OTHER> 658
<INTEREST-TOTAL> 10,810
<INTEREST-DEPOSIT> 4,573
<INTEREST-EXPENSE> 4,839
<INTEREST-INCOME-NET> 5,971
<LOAN-LOSSES> 369
<SECURITIES-GAINS> 23
<EXPENSE-OTHER> 5,330
<INCOME-PRETAX> 1,067
<INCOME-PRE-EXTRAORDINARY> 710
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 710
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
<YIELD-ACTUAL> 4.02
<LOANS-NON> 1,467
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,524
<CHARGE-OFFS> 288
<RECOVERIES> 41
<ALLOWANCE-CLOSE> 1,646
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
