<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 -- Commission File Number 0-16595
------------
SUBURBAN BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 54-1319411
- ----------------------------------------------------- -------------------------------------
(State of incorporation) (IRS Employer Identification No.)
7505 Greenway Center Drive
Greenbelt, Maryland 20770
- ----------------------------------------------------- -------------------------------------
(Address of principal executive officers) (Zip Code)
(301) 474-6694
- -----------------------------------------------------
(Registrant's telephone number, including area code)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act: N/A
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 at least the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates is approximately $27,671,801 (based on March 1, 1999 average of
the closing bid and asked prices of such common stock of $3.0625 per share). As
of March 1, 1999, there were 11,301,218 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's 1998 Annual
Report to Shareholders are incorporated by reference in Part II to the extent
provided in Items 5, 6, 7 and 8 hereof. Portions of the registrant's definitive
Information Statement (to be dated approximately April 22, 1999) are
incorporated herein by reference in response to Part III of this report.
<PAGE> 2
PART I
ITEM 1. Business
GENERAL
SUBURBAN BANCSHARES, INC. (the "Company" or "Bancshares"), which is
headquartered in Greenbelt, Maryland, was formed under the general corporation
laws of the State of Delaware in 1985 and is registered as a bank holding
company. The Company's subsidiary, Suburban Bank of Maryland, is also
headquartered in Greenbelt, Maryland and is a state-chartered commercial bank.
Currently the Company has a total of seven branch locations and a
mortgage lending office located in the Maryland suburbs of Washington, D.C. in
the communities of Greenbelt, Capitol Heights, Clinton, Oxon Hill, Rockville,
Bethesda and White Flint. An eighth office, located in Beltsville, is scheduled
to open in the second quarter of 1999. The counties of Prince George's and
Montgomery are the Company's primary markets, but also served are the
surrounding counties in Maryland and the District of Columbia.
The Bank provides a variety of general commercial and retail banking
services, which include lending, depository, cash management and related
financial services to business and professional customers, as well as retail
customers, on a personalized basis. The primary focus of the Bank is toward the
small businesses and professionals and their employees in their market service
areas, providing such services as SBA (Small Business Administration) loans,
commercial loans, asset-based and government contract loans, commercial and
residential real estate loans, and consumer-type loans such as home equity,
vehicle, home improvement, mortgage and personal loans. The Bank also offers ATM
access, credit cards and other financial services.
The Company is not dependent upon a single customer, or a few
customers, the loss of one or more of which would have a material adverse effect
on its operations. The operations and earnings of the Company are not materially
affected by seasonal changes or by Federal, state or local environmental laws or
regulations.
COMPETITION
The Bank operates in a highly competitive environment in which it must
share its market with large regional banks as well as institutions not subject
to the regulatory restrictions of banks and bank holding companies, such as
money market and other mutual funds. The Bank encounters competition from
diversified financial institutions, ranging in size from small banks to the
mega-banks operating in the Mid-Atlantic region, and include commercial banks,
savings and loan associations, credit unions and other lending institutions.
The principal competitive factors among the Company's competitors can
be classified into two categories: pricing and services. Interest rates on
deposits, especially time deposits, and interest rates and fees charged to
customers on loans are very competitive. From a service perspective, financial
institutions compete against each other in convenience of location, types of
services, service costs and banking hours. The Company is generally competitive
with institutions in its primary service areas with respect to interest rates
paid on deposit accounts, charges for services provided, and interest rates and
fees charged on loans.
EMPLOYEES
As of March 1, 1999, the Company employed 82 full-time equivalent
employees. The employees of the Company are not represented by any collective
bargaining group. Management of the Company considers relations with its
employees to be satisfactory.
SUPERVISION AND REGULATION
OVERVIEW
The Company and the Bank are subject to governmental supervision,
regulation and control and, as such, may be susceptible to future adjustments
and legislative or policy changes.
The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, and, as such, is subject to regulation
and supervision by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board" or "FRB"). The Company is required to file quarterly
reports of its operations with the FRB.
Suburban Bank of Maryland is a state-chartered non-member bank and is
subject primarily to regulation and examination by the Commissioner of Financial
Regulation for the State of Maryland and by the Federal Deposit Insurance
Corporation (the "FDIC"), which insures Bank's deposits to the maximum extent
permitted by law.
2
<PAGE> 3
ITEM 1. Business (continued)
BANK HOLDING COMPANY REGULATIONS
As a bank holding company, the Company can engage in banking-related
activities as permitted by the Federal Reserve Board, directly or through
newly-formed subsidiaries or by acquiring companies already established in such
activities subject to the FRB regulations relating to those activities. However,
except for activities related to its operation as the holding company of the
Bank, the Company does not anticipate engaging in any other banking-related
activity in the foreseeable future.
CAPITAL ADEQUACY
The Bank and the Company are 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 Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank and 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 December 31,
1998, that the Bank and the Company meet all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios 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 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
As of December 31, 1997:
Total capital (to risk-weighted assets):
Company $18,959 18.74% $8,094 8.00% $10,118 10.00%
Suburban Bank of Maryland 14,415 14.48 7,966 8.00 9,958 10.00
Tier 1 capital (to risk-weighted assets):
Company 17,692 17.49 4,047 4.00 6,071 6.00
Suburban Bank of Maryland 13,168 13.22 3,983 4.00 5,975 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>
3
<PAGE> 4
STATISTICAL INFORMATION
The following tables present statistical information relating to
Suburban Bancshares, Inc. and its subsidiaries on a consolidated basis.
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The table presented below shows average balances, net interest income
and net interest margin:
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
in thousands
<TABLE>
<CAPTION>
Years ended December 31, 1998 1997
Assets Average % of Interest Average Average % of Interest Average
Balance Earning Yield Balance Earning Yield
Assets & or Rate Assets & or Rate
Funding Funding
Sources Sources
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $119,623 65.5% $10,529 8.80% $92,200 68.1% $8,752 9.49%
Investment securities 34,712 19.0% 2,193 6.32% 27,471 20.3% 1,746 6.35%
Federal funds sold and
other deposits 28,372 15.5% 1,524 5.37% 15,730 11.6% 865 5.50%
------- ----- ------ ---
Total interest-earning assets 182,707 100.0% 14,246 7.80% 135,401 100.0% 11,363 8.39%
Noninterest-earning assets:
Cash and due from banks 10,200 7,517
Premises and equipment 1,716 1,591
Other assets 5,441 5,302
Less: Allowance for loan losses (1,483) (1,530)
------- -------
Total noninterest-earning assets 15,874 12,880
TOTAL ASSETS $198,581 $148,281
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking and money market
deposits $68,645 38.7% $2,432 3.54% $52,389 40.6% $1,886 3.60%
Savings deposits 25,779 14.5% 1,139 4.42% 23,887 18.5% 1,144 4.79%
Time deposits 45,513 25.7% 2,512 5.52% 27,111 21.0% 1,490 5.50%
Securities sold under repurchase
agreements 6,549 3.7% 254 3.87% 1,220 1.0% 50 4.08%
----- --- ----- --
Total interest-bearing liabilities 146,486 82.6% 6,337 4.33% 104,607 81.1% 4,570 4.37%
Noninterest-bearing deposits 30,964 17.4% 24,442 18.9%
------ ------
Total funding sources 177,450 100.0% 6,337 3.57% 129,049 100.0% 4,570 3.54%
Other liabilities 1,160 820
----- ---
TOTAL LIABILITIES 178,610 129,869
Shareholders' equity 19,971 18,412
------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $198,581 $148,281
Net interest income $7,909 $6,793
Net interest spread 4.23% 4.85%
Net interest margin 4.33% 5.02%
<CAPTION>
Years ended December 31, 1996
Assets Average % of Interest Average
Balance Earning Yield or
Assets & Rate
Funding
Sources
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $74,014 70.9% $7,409 10.01%
Investment securities 17,325 16.6% 1,080 6.23%
Federal funds sold and
other deposits 13,017 12.5% 687 5.28%
------ ---
Total interest-earning assets 104,356 100.0% 9,176 8.79%
Noninterest-earning assets:
Cash and due from banks 7,073
Premises and equipment 1,213
Other assets 2,155
Less: Allowance for loan losses (1,525)
-------
Total noninterest-earning assets 8,916
TOTAL ASSETS $113,272
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Checking and money market
deposits $47,337 47.8% $1,625 3.43%
Savings deposits 8,849 9.0% 405 4.58%
Time deposits 23,499 23.7% 1,332 5.67%
Securities sold under repurchase
agreements -- -- -- --
--- ---
Total interest-bearing liabilities 79,685 80.5% 3,362 4.22%
Noninterest-bearing deposits 19,332 19.5%
------
Total funding sources 99,017 100.0% 3,362 3.39%
Other liabilities 495
---
TOTAL LIABILITIES 99,512
Shareholders' equity 13,760
------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $113,272
Net interest income $5,814
Net interest spread 5.40%
Net interest margin 5.57%
</TABLE>
Basis of preparation: Amounts are in thousands; balances are presented as
annualized daily averages; nonaccrual loans are included in the loan category as
earning assets.
4
<PAGE> 5
ITEM 1. Business (continued)
The following table presents the dollar amount of change in interest
income and expense and the corresponding amounts attributable to changes in rate
and to changes in volume:
<TABLE>
<CAPTION>
NET INTEREST INCOME ANALYSIS
1998 OVER 1997 1997 OVER 1996
--------------------------------------------------------------------------------------
(in thousands) INCREASE CHANGE DUE TO INCREASE CHANGE DUE TO
--------------------------- ------------------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
--------------------------------------------------------------------------------------
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Loans $1,777 (674) $2,451 $1,343 $(400) $1,743
Taxable investment securities 447 (10) 457 666 104 562
Money market investments 659 (20) 679 178 (38) 216
--------------------------------------------------------------------------------------
Total Interest-Earning Assets 2,883 (704) 3,587 2,187 (334) 2,521
Interest-Bearing Liabilities:
Checking and money markets 546 (30) 576 44 (144) 188
Savings deposits (5) (92) 87 956 406 550
Time deposits 1,022 6 1,016 158 (42) 200
Fed funds purchased/repurchase agreements 204 (3) 207 50 -- 50
--------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 1,767 (119) 1,886 1,208 220 988
======================================================================================
NET INTEREST INCOME $1,116 $(585) $1,701 $979 $(554) $1,533
======================================================================================
</TABLE>
NOTE: The rate/volume change is allocated between volume change and rate
change using the ratio each of the components bears to the absolute
value of their total.
II. INVESTMENT PORTFOLIO
The following table shows the estimated fair value of the investment
portfolio of the Company by category at December 31:
<TABLE>
<CAPTION>
(in thousands) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury $ 1,478 $ 4,404 $ 7,379
Federal Agencies 38,816 24,976 12,921
Mortgage-back obligations ("MBO") 4,261 91 166
Collateralized mortgage obligations -- -- 34
Other 1,288 889 790
-------- -------- --------
TOTAL $45,843 $30,360 $21,290
======== ======== ========
</TABLE>
All securities are classified as available for sale.
The table presented below sets forth by type and contractual maturity
the Company's investment securities as of December 31, 1998 (dollars in
thousands). Expected maturities may differ from contracted maturities because
borrowers may have the right to call or prepay certain obligations with or
without call premiums or prepayment penalties.
5
<PAGE> 6
ITEM 1. Business (continued)
<TABLE>
<CAPTION>
Maturity - estimated fair U.S. Federal
value Treasuries Agencies MBO's Other Total Yield
- ----------------------------- ---------- ----------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 Year or less $ 251 $ 5,730 $ -- $ 382 $ 6,363 5.96%
greater than 1 to 5 Years 1,227 25,610 887 654 28,378 6.06%
greater than 5 to 10 years -- 7,476 -- 252 7,728 5.99%
Over 10 Years -- -- 3,374 -- 3,374 6.02%
------- -------- ------- ------- -------- ------
Total estimated
fair value $1,478 $38,816 $4,261 $1,288 $45,843 6.03%
======= ======== ======= ======= ======== ======
Yield 6.02% 5.58% 5.99% 5.15% 6.03%
Weighted Average
Maturity in Years 1.48 3.84 12.24 2.54 4.51
</TABLE>
None of the Company's securities holdings by individual issuers (excluding the
United States government or its agencies) exceeded 10% of total shareholders'
equity at December 31, 1998.
III. LOAN PORTFOLIO
The following table presents the major categories of the Company's loan
portfolio at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Construction $ 12,024 $ 12,071 $ 9,944
Real Estate 48,871 44,181 35,157
Commercial 57,970 49,644 21,941
Individual 4,560 5,069 5,046
Other 6,460 2,578 1,360
--------- --------- ----------
$129,885 $113,543 $73,448
Less: Allowance for loan losses (1,524) (1,473) (1,508)
--------- --------- ----------
Total loans, net $128,361 $112,070 $71,940
========= ========= ==========
</TABLE>
The following table presents the contractual maturity distribution and
interest-rate sensitivity of the Company's commercial and real estate loans at
December 31, 1998 (in thousands). The Company's experience indicates that
certain loans, on an individual basis, will be renewed, rescheduled or repaid
prior to scheduled maturity. Accordingly, the table should not be regarded as a
forecast of future cash collections.
<TABLE>
<CAPTION>
REMAINING MATURITIES
-----------------------------------------------------------------------------------------
1 YEAR OR LESS 1 TO 5 YEARS DUE AFTER 5 YEARS TOTALS
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSTRUCTION $ 4,046 $ 3,223 $ 4,755 $ 12,024
REAL ESTATE 6,733 20,752 21,386 48,871
COMMERCIAL 17,166 15,546 25,258 57,970
-----------------------------------------------------------------------------------------
TOTAL $27,945 $39,521 $51,399 $118,865
=========================================================================================
INTEREST RATE SENSITIVITY
VARIABLE RATE $23,693 $23,860 $39,774 $ 87,327
FIXED RATE 4,252 15,661 11,625 31,538
-----------------------------------------------------------------------------------------
TOTAL $27,945 $39,521 $51,399 $118,865
=========================================================================================
</TABLE>
6
<PAGE> 7
ITEM 1. Business (continued)
Nonperforming Assets
Nonperforming assets consist of loans on which interest is no longer
accrued, real estate acquired through foreclosure or insubstance foreclosure,
and real estate on which deeds in lieu of foreclosure have been accepted.
Restructured loans are loans on which the borrower has been granted a concession
as to rate or term as a result of financial difficulty.
Generally, the accrual of interest on a loan is discontinued when the
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 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 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.
Foreclosed real estate is recorded at the lower of cost or fair value
at acquisition date. Subsequent to acquisition, foreclosed real estate is
carried at lower of cost or fair value less estimated selling costs, based upon
periodic evaluation by management. Costs relating to property improvements are
capitalized to the extent that they are recoverable, and costs relating to
holding property are expensed when incurred. Gains or losses on the sale of
foreclosed real estate are recognized upon disposition of the property.
The Company had no obligation to make further extensions of credit
under loans classified as troubled debt restructurings or nonaccrual at December
31, 1997 or 1996. Nonaccrual and restructured loans are classified as loans in
the accompanying schedules and the Consolidated Balance Sheets.
The table below shows nonperforming assets and troubled debt
restructurings (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $1,339 $1,763 $ 771
Foreclosed real estate 535 349 212
Total nonperforming assets $1,874 $2,112 $ 983
- ---------------------------------------------------------------------------------------------------------------------------
Loans classified as nonaccrual but contractually current $110 $126 $ 1
- ---------------------------------------------------------------------------------------------------------------------------
Restructured loans classified as nonaccrual above -- 824 --
Restructured loans accruing -- 44 1,088
Total restructured loans $ -- $868 $1,088
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, there were no loans past due 90 days and still accruing.
There was one loan of $160,000 past due 90 days and still accruing at December
31, 1997, and there were two loans past due 90 days or more and still accruing
at December 31, 1996 totaling $35,000.
The gross interest income that would have been received during the year
ended December 31, 1998 on nonaccrual loans had such loans been current in
accordance with their original terms throughout the year was approximately
$183,000. No interest income was recorded on loans classified as nonaccrual in
1998.
7
<PAGE> 8
ITEM 1. Business (continued)
The following schedule presents a breakdown by type of property of
foreclosed real estate (in thousands):
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial land $ 60 $ -- $ --
Commercial property 562 402 265
------------------------------------------------------------------------------------------------
Total 622 402 265
Allowance for losses (87) (53) (53)
------------------------------------------------------------------------------------------------
Total estimated fair value $535 $349 $ 212
================================================================================================
</TABLE>
Activity in the allowance for losses on foreclosed real estate is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 53 $ 53 $ 362
Provision for losses 34 -- --
Dispositions, net -- -- (309)
Charge-offs, net of recoveries -- -- --
------------------------------------------------------------------------------------------------
Balance at end of year $87 $ 53 $ 53
------------------------------------------------------------------------------------------------
</TABLE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The allowance for loan losses is an estimate of uncollectible loans and
reduces the gross amount of loans outstanding. Each loan deemed to involve
significant risk of loss is considered individually to determine the possible
amount of such loss and the remaining loans are evaluated in the aggregate.
The allowance for loan losses is increased through charges to
operations in the form of a provision for loan losses and is reduced by
reversals of previous years' provisions. Charge-offs are made against the
allowance and subsequent recoveries, if any, are credited to the allowance. The
allowance is maintained at a level that management believes will be adequate to
absorb losses on existing loans that may become uncollectible. 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.
Management believes that the allowances for losses on loans and
foreclosed real estate are adequate given current circumstances and conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in economic conditions, the situations of specific borrowers,
or other factors.
8
<PAGE> 9
ITEM 1. Business (continued)
The following table shows activity affecting the allowance for possible
loan losses for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of period $1,473 $1,508 $1,467
Provision for loan losses 415 254 (227)
Loans charged off:
Construction 0 0 0
Real Estate 186 377 228
Commercial 231 0 168
Individual 53 41 48
Other 0 0 0
Total loans charged off $470 $418 $444
Recoveries:
Construction 0 0 0
Real Estate 18 58 182
Commercial 70 60 517
Individual 18 11 13
Other 0 0 0
Total recoveries $106 $129 $712
Total allowance at end of period $1,524 $1,473 $1,508
=========== ========== ==========
Net loans charged off as a % of
average loans outstanding 0.30% 0.31% -0.36%
=========== ========== ==========
</TABLE>
The following is a breakdown of the allowance for loan losses by loan
category (in thousands). This breakdown represents management's best judgment as
to the allocation of the allowance based on the risk characteristics associated
with each category of loans. The allowance is allocated to specific categories
of loans for analysis purposes only.
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96
---------------------------------------------------------------------------------------------------------
Allowance Distribution Allowance Distribution Allowance Distribution
Allocation of Loans Allocation of Loans Allocation of Loans
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Construction $ 138 9.26% $ 134 10.63% $ 150 13.54%
Real Estate 700 37.63% 764 38.91% 828 47.87%
Commercial 554 44.63% 489 43.72% 427 29.87%
Individual 58 3.51% 57 4.47% 81 6.87%
Other 74 4.97% 29 2.27% 22 1.85%
---------------------------------------------------------------------------------------------------------
$1,524 100.00% $1,473 100.00% $1,508 100.00%
=========================================================================================================
</TABLE>
9
<PAGE> 10
ITEM 1. Business (continued)
V. DEPOSITS
The following table provides a breakdown by category of deposits of the
Company on a daily average basis at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
Year ending December 31, 1998 1997 1996
----------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $30,964 0.00% $24,442 0.00% $19,332 0.00%
Money market, savings, and interest
checking 94,424 3.78% 76,276 3.97% 56,186 3.61%
Time deposits 45,513 5.52% 27,111 5.50% 23,499 5.67%
------------------ ------------- -----------
TOTAL DEPOSITS $170,901 $127,829 $99,017
================== ============= ===========
</TABLE>
Maturities of certificates of deposit and other time deposits greater
than $100,000 outstanding at December 31, 1998 are presented below (dollars in
thousands):
<TABLE>
<CAPTION>
Certificates of Deposit Other Time Deposits
------------------------------ ------------------------------
<C> <C>
Three months or less $ 988 $ 0
Over 3 through 6 months 4,555 106
Over 6 through 12 months 2,974 234
Over 12 months 7,196 918
------------------------------ ------------------------------
TOTAL $15,713 $1,258
============================== ==============================
</TABLE>
VI. RETURN ON EQUITY AND ASSETS
The ratio of net income to average total assets and average
shareholders' equity, and certain other ratios for the periods indicated follow:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C>
Return on Average Assets 0.72% 0.76% 4.42%
Return on Average Equity 7.14% 6.14% 36.35%
Average Equity to Average Assets 10.06% 12.42% 12.15%
Dividend Payout Ratio - - -
</TABLE>
10
<PAGE> 11
ITEM 1. Business (continued)
VII. SHORT-TERM BORROWINGS
The table below shows balances and rates paid on short-term borrowings:
<TABLE>
<CAPTION>
1998 1997 1996
(in thousands) Amount Rate Amount Rate Amount Rate
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
At year end:
Securities sold under repurchase agreements $9,523 3.58% $3,049 4.15% $ - -
- ----------------------------------------------------------------------------------------------------------------------------------
Average for the year:
Securities sold under repurchase agreements $6,549 3.87% $1,220 4.08% $ - -
- ----------------------------------------------------------------------------------------------------------------------------------
Maximum month-end balance:
Securities sold under repurchase agreements $12,403 $4,259
==================================================================================================================================
</TABLE>
ITEM 2. Properties
Suburban Maryland owns and occupies a one-story building located in
Capitol Heights, Maryland and occupies leased office and banking space in seven
other Maryland locations (Greenbelt (2), Oxon Hill, Clinton, Bethesda, Rockville
and White Flint). The Greenbelt lease had a five-year initial term which expired
May 31, 1991, and is currently in the second of three five-year renewal option
terms. The mortgage division currently occupies office space in Greenbelt with
an initial lease term of three years, expiring June 30, 2001. The Oxon Hill
lease also had a five-year initial term which expired June 30, 1992, and the
first five-year renewal term expired June 30, 1997, at which time the second of
three five-year renewal options was exercised (see "Item 13. Certain
Relationships and Related Transactions"). The Rockville lease is currently in
its ten-year initial term which expires April 12, 2000, and contains two
five-year renewal options, and the Clinton lease is currently in its initial
term of seven years, expiring January 1, 2003, and has one five-year renewal
option. The Bethesda lease is currently in its initial term of six years which
expires September 30, 2002, and includes one five-year renewal option, and the
White Flint lease, which commenced January 1, 1998, expires December 31, 2003,
and includes an option to extend the lease for one period of five years.
ITEM 3. Legal Proceedings
As of March 1, 1999, there were no material legal proceedings against
Suburban Bancshares, Inc. or its subsidiary.
ITEM 4. Submission of Matters to Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.
11
<PAGE> 12
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
The information contained under the heading "Market for Common Stock"
in the Company's 1998 Annual Report to Shareholders is incorporated herein by
reference thereto.
ITEM 6. Selected Financial Data
The information contained under the heading "Summary Financial
Information" in the Company's 1998 Annual Report to Shareholders is incorporated
herein by reference thereto.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information contained under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1998 Annual Report to Shareholders is incorporated herein by reference thereto.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements together with the
report of Stegman and Company thereon appearing in the Company's 1998 Annual
Report to Shareholders are incorporated herein by reference thereto. See ITEM 14
for a list of financial statements and notes thereto so incorporated.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on matters
of accounting principles or practices or financial statement disclosures in
1998.
PART III
ITEM 10. Directors and Executive Officers
The information contained under the heading "Directors and Executive
Officers" in the Company's definitive proxy statement relating to the Company's
1999 meeting of shareholders is incorporated herein by reference thereto.
ITEM 11. Compensation of Executive Officers and Directors
The information contained under the heading "Executive Compensation" in
the Company's definitive proxy statement relating to the Company's 1999 meeting
of shareholders is incorporated herein by reference thereto.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the heading "Beneficial Ownership of
Common Stock" in the Company's definitive proxy statement relating to the
Company's 1999 meeting of shareholders is incorporated herein by reference
thereto.
ITEM 13. Certain Relationships and Related Transactions
The information contained under the heading "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement relating to
the Company's 1999 meeting of shareholders is incorporated herein by reference
thereto.
12
<PAGE> 13
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
As listed in the index to financial statements on
page 15 hereof.
2. Financial Statement Schedules
Schedule I Indebtedness of and to Related
Parties - included in Note L to the
Consolidated Financial Statements.
Schedule II Guaranties of Securities and
Other Issuers has been omitted
because the required information is
not applicable.
3. Exhibits
As listed in the Index to Exhibits on pages 15 and 16
hereof.
(b) No reports on Form 8-K were filed during the fourth quarter of
1998.
(c) See Item 14.(a)3. above
(d) See Item 14.(a)2. above
13
<PAGE> 14
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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.
By: Winfield M. Kelly, Jr.
----------------------
Winfield M. Kelly, Jr.
Chairman of the Board/CEO
Date: March 17, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: Winfield M. Kelly, Jr.
----------------------
Winfield M. Kelly, Jr.
Chairman of the Board/CEO
(Principal Executive Officer and Director)
Date: March 17, 1999
By: Marlin K. Husted
----------------
Marlin K. Husted
Vice Chairman of the Board
Date: March 17, 1999
By: Stephen A. Horvath
------------------
Stephen A. Horvath
President, Chief Operating Officer, and Director
Date: March 17, 1999
By: Sibyl S. Malatras
-----------------
Sibyl S. Malatras
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 17, 1999
By: Raymond G. LaPlaca
------------------
Raymond G. LaPlaca, Director
Date: March 17, 1999
By: Barbara M. DiNenna-Corboy
-------------------------
Barbara M. DiNenna-Corboy, Director
Date: March 17, 1999
By: Vincent D. Palumbo
------------------
Vincent D. Palumbo, Director
Date: March 17, 1999
14
<PAGE> 15
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report on 1998 Consolidated Financial Statements *
Consolidated Balance Sheets at December 31, 1998 and 1997 *
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 *
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 *
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 *
Notes to Consolidated Financial Statements *
</TABLE>
* Incorporated by reference to the Company's 1998 Annual Report to
Shareholders. See ITEM 8 of this report on Form 10-K.
INDEX TO EXHIBITS
Exhibit Number Description
- -------------------------------------------------------------------------------
2.1 Agreement and Plan of Reorganization between Bancshares 2000, Inc. and
Jefferson Bank and Trust Company dated February 21, 1989 (Incorporated
by reference to Exhibit 2.1 of the 1988 Annual Report on Form 10-K)
2.2 Agreement and Plan of Reorganization and Recapitalization between
Suburban Bancshares, Inc. and Winfield M. Kelly, Jr. dated February 19,
1993 (Incorporated by reference to Exhibit 2.2 to Registration
Statement No. 33-63286)
2.3 Amendment to Agreement and Plan of Reorganization and Recapitalization
between Suburban Bancshares, Inc. and Winfield M. Kelly, Jr. dated
March 31, 1993 (Incorporated by reference to Exhibit 2.3 to
Registration Statement No. 33-63286)
2.4 Amendment to Agreement and Plan of Reorganization and Recapitalization
between Suburban Bancshares, Inc. and Winfield M. Kelly, Jr., dated
November 17, 1993 (Incorporated by reference to Exhibit 2.4 of the 1993
Annual Report on Form 10-K)
3.0 Restated Certificate of Incorporation of Bancshares 2000, Inc., as
amended, dated August 10, 1988 (Incorporated by reference to Exhibit
3.4 of the 1988 Annual Report on Form 10-K)
3.1 Amendment to Certificate of Incorporation of Bancshares 2000, Inc. as
adopted at the Stockholders' Meeting held on October 3, 1989
(Incorporated by reference to Exhibit 3.11 of the 1989 Annual Report on
Form 10-K)
3.2 Amendment to Certificate of Incorporation of Bancshares 2000, Inc. as
adopted at the Stockholders' Meeting held on June 26, 1991
(Incorporated by reference to Exhibit 3.2 of the 1992 Annual Report on
Form 10-K)
3.3 Amendment to Certificate of Incorporation of Suburban Bancshares, Inc.
as adopted at the Stockholders' Meeting held on June 2, 1993
(Incorporated by reference to Exhibit 3.3a to Registration Statement
No. 33-63286)
3.4 Amended and Restated By-Laws of Suburban Bancshares, Inc. (Incorporated
by reference to Exhibit 3.4 to Registration Statement No. 33-63286)
4.0 Form of Common Stock Certificate of Bancshares 2000, Inc. (Incorporated
by reference to Exhibit 4. to Registration Statement No. 33-11380)
4.1 Form of Common Stock Certificate of Suburban Bancshares, Inc.
(Incorporated by reference to Exhibit 4.1 of the 1992 Annual Report on
Form 10-K)
10.3 Incentive Stock Option Plan, as adopted by the Board of Directors of
Bancshares 2000, Inc., on December 18, 1986 (Incorporated by reference
to Exhibit 10.5 to Registration Statement No. 33-11380)
15
<PAGE> 16
10.4 Incentive Stock Option Plan, as amended, as adopted at the
stockholders' meeting held on October 3, 1989 (Incorporated by
reference to Exhibit 10.3 to Registration Statement No. 33-30727)
10.4a Amendment to Incentive Stock Option Plan, as adopted by the Board of
Directors of Suburban Bancshares, Inc., on February 14, 1992
(Incorporated by reference to Exhibit 3.13 of the 1991 Annual Report on
Form 10-K)
10.5a Employment Agreement with William R. Johnson dated December 27, 1996
and effective January 1, 1997 (Incorporated by reference to Exhibit
10.5a of the 1996 Annual Report on Form 10-K)
10.5b Deferred Compensation Agreement with William R. Johnson dated December
27, 1996 (Incorporated by reference to Exhibit 10.5a of the 1996 Annual
Report on Form 10-K)
10.5c Trust Under Deferred Compensation Agreement with William R. Johnson
dated December 27, 1996 (Incorporated by reference to Exhibit 10.5a of
the 1996 Annual Report on Form 10-K)
10.6 Services Agreement with Winfield M. Kelly, Jr. dated January 29, 1997
and effective January 1, 1997 (Incorporated by reference to Exhibit
10.5a of the 1996 Annual Report on Form 10-K)
10.7 Employment Agreement with Stephen A. Horvath dated December 9, 1996 and
effective January 1, 1997 (Incorporated by reference to Exhibit 10.5a
of the 1996 Annual Report on Form 10-K)
10.8 1997 Stock Option Plan, as adopted at the stockholders' meeting held on
May 22, 1997 (Incorporated by reference to Exhibit 10.8 of the 1997
Annual Report on Form 10-K)
10.9a Severance Agreement with Joseph E. Burnett dated March 2, 1998
(Incorporated by reference to Exhibit 10.9a of the 1997 Annual Report
on Form 10-K)
10.9b Severance Agreement with Harold J. Koch dated March 2, 1998
(Incorporated by reference to Exhibit 10.9b of the 1997 Annual Report
on Form 10-K)
10.9c Severance Agreement with Sibyl S. Malatras dated March 2, 1998
(Incorporated by reference to Exhibit 10.9c of the 1997 Annual Report
on Form 10-K)
10.10 Deferred Compensation Plan for Directors and Executive Officers dated
May 21, 1997
11. Computation of per share earnings
13. Suburban Bancshares, Inc. 1998 Annual Report to Stockholders (furnished
for the information of the Securities and Exchange Commission only and
not to be deemed filed as part of this Annual Report on Form 10-K
except for the portions thereof which are specifically incorporated
herein by reference)
21. List of Subsidiaries of Suburban Bancshares, Inc.
23 Consent of Stegman and Company
27. Financial Data Schedule
16
<PAGE> 1
EXHIBIT 10.10
DEFERRED COMPENSATION PLAN
FOR DIRECTORS AND EXECUTIVE OFFICERS
1. Purpose
The purpose of the Deferred Compensation Plan for Directors and Executive
Officers (the "Plan") is to provide directors and selected senior executive
employees of Suburban Bancshares, Inc. and its Subsidiary (the "Company") an
opportunity to defer compensation received by them from the Company in
accordance with the terms and conditions set forth herein.
2. Administration
The Plan shall be administered by a Committee of the Board of Directors of the
Company (the "Committee") who shall consist of at least three members who are
not participants in the Plan. The Committee shall have sole and complete
authority to interpret the terms and provisions of the Plan and to adopt, alter
and repeal such administrative rules, regulations and practices governing the
operation of the Plan as it shall from time-to-time deem advisable.
3. Eligibility
The Committee shall select those senior executive employees and directors who
shall be eligible to participate in the Plan.
Such persons shall be collectively referred to as the "Participant" or
"Participants" as the case may be.
4. Election to Defer
(a) Participant may elect in writing to defer receipt of all or a specified
portion of his/her compensation (including the annual base salary and
annual incentive compensation). Amounts deferred under this Paragraph
4(a) shall be referred to as the "Deferred Amounts". Once received by
the Committee, an election cannot be revoked.
(b) The election must be made prior to the beginning of the fiscal year (or
period) to which the compensation applies. A Participant must make a
separate election with respect to each year of participation in the
Plan. A new Participant in the Plan shall have 15 days following
his/her selection by the Committee to make an election with respect to
compensation to be earned for the balance of the year.
5. Establishment of Deferred Compensation Account
The Deferred Amount shall be withheld by-weekly from the payroll and shall be
credited to the Participant's Deferred Compensation Account monthly on the last
day of each month. Interest and/or fund growth will be credited to the account
monthly.
6. Payment of Deferred Amounts
(a) Except as otherwise provided in subparagraph (c) or (d) below, a
Participant's Deferred Compensation Amount shall be paid, or commence
to be paid, to the Participant, or the Participant's beneficiary, as
soon as practicable after the earliest to occur of the following:
(i) the Participant's death, or
(ii) the Participant's retirement as defined in paragraph 11(b).
In the event of the Participant's death, payment of the balance in the
Participant's Deferred Compensation Account at the end of the fiscal
year subsequent to the death of the Participant shall be made to the
Participant's designated beneficiary, or if none, to the Participant's
estate.
(b) The Participant may elect to receive payment of the balance in his/her
Deferred Compensation Account at retirement either (i) in a lump sum or
(ii) in such number of annual installments, not to exceed fifteen, as
the Participant shall elect. The election must be made at least one
year before the Deferred Compensation Amount is payable. If no election
is made, a lump sum payment will be made.
(c) A Participant may elect to receive the balance in the Deferred
Compensation Account upon the occurrence of a Change in Control of the
Company. The term "Change in Control" shall mean: "the purchase or
other acquisition by any person, entity or group of persons, within the
meaning of Section 13(d) or 14(d) of the Securities Exchange Act of
1934 ("Act"), or any comparable successor provisions, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Act)
of 30 percent or more of either
<PAGE> 2
the outstanding shares of common stock or the combined voting power of
the Company's then outstanding voting securities entitled to vote
generally, or the approval by the stockholders of the Company of a
reorganization, merger, or consolidation, in each case, with respect to
which persons who were stockholders of the Company immediately prior to
such reorganization, merger or consolidation do not, immediately
thereafter, own more than 50 percent of the combined voting power
entitled to vote generally in the election of directors of the
reorganized, merged or consolidated Company's then outstanding
securities, or a liquidation or dissolution of the Company or of the
sale of all or substantially all of the Company's assets."
(d) Anything contained in this Paragraph to the contrary notwithstanding,
in the event at participant incurs a severe financial hardship as
defined in paragraph 11(c) or a Participant becomes disabled, the
Committee, in its sole discretion and upon written application of such
Participant, may direct immediate payment of all or a portion of the
then current value of such Participant's Deferred Compensation Account;
provided that, in the case of a hardship, such payment shall in no
event exceed the amount necessary to alleviate such financial hardship.
8. Participant Reports
The Committee shall provide a statement to the Participant at least annually
concerning the status of his/her Deferred Compensation Account.
9. Transferability of Interests
During the Deferral Period, all Deferred Amounts shall be considered as general
assets of the Company for use as it deems necessary and shall be subject to the
claims of the Company's creditors.
The rights and interests of a Participant during the Deferral Period shall be
those of a general creditor except that such Participant's rights and interest
may not be anticipated, assigned, pledged, transferred or otherwise encumbered
except in the event of the death of the Participant, and then only by will or
the laws of descent and distribution.
10. Amendment, Suspension and Termination
The Company may amend, suspend or terminate the Plan or any portion thereof in
such manner and to such extent as it may deem advisable and in the best
interests of the Company. No amendment, suspension and termination shall alter
or impair any then Deferred Amounts without the consent of the Participant
affected thereby.
11. Definitions
(a) The term "Subsidiary" shall mean any corporation 50 percent or more of
the voting stock of which shall at the time be owned directly or
indirectly by the Company.
(b) The term "retirement" shall mean the date a Participant ceases to be
employed by the Company or ceases to serve as a director of the
Company.
(c) The term "hardship" shall mean an immediate and heavy financial need
limited to: (i) expenses incurred or necessary for medical care,
described in Code Section 213(d), of the Participant, the Participant's
spouse, or any dependents of the Participant (as defined in Code
Section 152); (ii) purchase (excluding mortgage payments) of a
principal residence for the Participant, (iii) payment of tuition and
related educational fees for the next 12 months of post-secondary
education for the Participant, his spouse, children or dependents; (iv)
the need to prevent the eviction of the Participant from his principal
residence or foreclosure on the mortgage of the Participant's principal
residence; or (v) any other distribution which is deemed by the
Commissioner of Internal Revenue to be made on account of immediate and
heavy financial need as provided in Treasury regulations. The
Participant's request for a withdrawal shall include his written
statement that an immediate and heavy financial need exists and explain
its nature.
12. Unfunded Obligation
The Plan shall not be funded, and no trust, escrow or other provisions shall be
established to secure payments due under the Plan. A Participant shall be
treated as a general, unsecured creditor at all times under the Plan. The
Company may, at its option, establish a Rabbi Trust purely for its convenience.
The Employee or Director Participant is not a beneficiary of, and has no rights
as such, under the Trust.
13. No Right to Employment or Other Benefits
Nothing contained herein shall be construed as conferring upon any Participant
the right to continue in the employ of the Company. Any compensation deferred
and any benefits paid under this Plan shall not be included in creditable
compensation in computing benefits under
<PAGE> 3
any employee benefit plan of the Company except to the extent expressly provided
for therein.
14. Effective Date
The Plan shall be effective on May 15,1997 after approval by the Board of
Directors of the Company. Thereupon, eligible Participants shall be permitted to
make an election under Paragraph 4, above, within 15 days with respect to
compensation to be earned during the balance of the fiscal year.
<PAGE> 4
Deferred Compensation Plan
for Directors and Executive Officers
DEFERRAL AGREEMENT
Name: ("Participant")
------------------------------------------------------------
Last First Middle Initial
Social Security Number: - -
--------------------------------
A. This Deferral Agreement ("Agreement") has been made this __________ of
_________________ , 19____ between the Participant and Suburban Bank
("Company").
I elect to participate in the Deferred Compensation Plan for Directors
and Executive Officers ("Plan"). I acknowledge receipt of copies of
Summary Fund Descriptions, Plan Description and a Trust Agreement. I
understand the general provisions of the Plan.
I irrevocably elect to defer the following from my 19___ compensation:
(Indicate dollar or % amount.)
of my salary $ of my fees
--------------- ---------------------
My preference for the allocation of the above deferral would be to the
following funds as indicated in even percentages: (Minimum per fund -
5%) (Please be sure your percentages total = 100%.) I understand that
this preference is not binding on the Company or the Trustee.
____ % Constellation ____ % Value _____ % Charter
____ % High Yield ____ % Money Market
I elect to receive my benefit:
lump sum at retirement in 10 annual payments
-------- --------
I further recognize that nothing contained herein or in the Plan shall
be construed as a contract of employment between me and the Company, as
a right of continued employment or as a limitation of the Company's
right of discharge.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
on the day and year written above.
Suburban Bank Participant
By:
------------------------------- -------------------------
Signature
Title:
-----------------------------
B. I do not wish to participate in the Suburban Bank Deferred Compensation
Plan for Directors and Executive Officers at this time.
------------------------ ------------------------
Date Signature
<PAGE> 5
Deferred Compensation Plan
for Directors and Executive Officers
BENEFICIARY DESIGNATION
I HEREBY designate that the following person(s) or Trust shall be my
beneficiary(ies) under the Suburban Bank Deferred Compensation Plan for
Directors and Executive Officers (the "Plan") in the event of my death.
I reserve the full right to revoke or modify this designation, or any
modification hereof, at any time by a further written designation, subject to
the restrictions set forth in the Plan.
<TABLE>
<S> <C> <C>
PRIMARY
NAME & ADDRESS RELATIONSHIP PERCENTAGE
- ---------------------- --------------------- ----------
- ----------------------
- ----------------------
CONTINGENT
NAME & ADDRESS RELATIONSHIP PERCENTAGE
- ---------------------- --------------------- ----------
- ----------------------
- ----------------------
TERTIARY
NAME & ADDRESS RELATIONSHIP PERCENTAGE
- ---------------------- --------------------- ----------
- ----------------------
- ----------------------
- ---------------------- ------------------------------
Date Signature of Participant
------------------------------
Printed Name of Participant
</TABLE>
<PAGE> 6
RABBI TRUST AGREEMENT
UNDER
DEFERRED COMPENSATION PLAN FOR
DIRECTORS AND EXECUTIVE OFFICERS
THIS AGREEMENT made this 21 day of May, 1997, between Suburban
Bancshares, Inc. and its subsidiary, Suburban Bank of Maryland of Greenbelt,
Maryland (hereinafter sometimes called "Company"), and Marlin K. Husted of
Naples , Florida, (hereinafter sometimes called "Trustee");
WHEREAS, the Company has adopted a Non-Qualified Deferred Compensation
Plan for Directors and Executive Officers; and
WHEREAS, the Company wishes to establish a trust (hereinafter called
"Trust") and to contribute and/or to accept voluntary contributions to the Trust
assets that shall be held therein, subject to the claims of the Company's
creditors in the event of the Company's insolvency, as herein defined, until
paid to Plan participants and their beneficiaries in such manner and at such
times as specified in the Plan; and
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employees Retirement Income Security Act of 1974;
and
WHEREAS, it is the intention of the Company to make contributions to
the Trust to provide itself with a source of funds to assist it in the meeting
of its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
Section 1 Establishment of the Trust
1.1 The Company will begin to make monthly deposits with the Trustee in
trust effective May 1997, which shall become the principal of the Trust
to be held, administered and disposed of by the Trustee as provided in
this Trust Agreement.
1.2 The Trust hereby established shall be irrevocable.
1.3 The Trust is intended to be a grantor trust, of which the Company is
the grantor, within the meaning of Subpart E, Part I, Subchapter J,
Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended,
and shall be construed accordingly.
1.4 The principal of the Trust, and any earnings thereon, shall be held
separate and apart from other funds of the Company and shall be used
exclusively for the uses and purposes of the Plan participants and
general creditors as herein set forth. Plan participants and their
beneficiaries shall have no preferred claim on, or any beneficial
ownership interest in, any assets of the Trust. Any rights created
under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against
the Company. Any assets held by the Trust will be subject to the claims
of the Company's general creditors under federal and state law in the
event of insolvency, as defined in Section 3.1 herein.
1.5 The Company, in its sole discretion, may at any time, or from
time-to-time, make additional deposits of cash or other property in
trust with the Trustee to augment the principal to be held,
administered and disposed of by the Trustee as provided in this Trust
Agreement. Neither the Trustee nor any Plan participant or beneficiary
shall have any right to compel such additional deposits.
1.6 Upon a Change of Control, the Company shall, as soon as possible, but
in no event longer than thirty (30) days following the Change of
Control, as defined herein, make an irrevocable contribution to the
Trust in an amount that is sufficient to pay each Plan participant or
beneficiary the benefits to which the Plan participants or their
beneficiaries would be entitled pursuant to the terms of the Plan as of
the date on which the Change of Control occurred.
Section 2 Payments to Plan Participants and Their Beneficiaries
2.1 The Company shall deliver to the Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of each Plan
participant (and his or her beneficiaries), that provides a formula or
other instructions acceptable to the Trustee for determining the
amounts so payable, the form in which such amount is to be paid (as
provided for or available under the Plan), and the time of commencement
for payment of such amounts. Except as otherwise provided herein, the
Trustee shall make payments to the Plan participants and their
beneficiaries in accordance with such Payment Schedule. The Trustee
shall make provision for the reporting
<PAGE> 7
and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits
pursuant to the terms of the Plan and shall pay amounts withheld to the
appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by the Company.
2.2 The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by the Company or such
party as it shall designate under the Plan, and any claim for such
benefits shall be considered and reviewed under the procedures set out
in the Plan.
2.3 The Company may make payment of benefits directly to Plan participants
or their beneficiaries as they become due under the terms of the Plan.
The Company shall notify the Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to participants
or their beneficiaries. In addition, if the principal of the Trust, and
any earnings thereon, are not sufficient to make payments of benefits
in accordance with the terms of the Plan, the Company shall make the
balance of each such payment as it falls due. The Trustee shall notify
the Company where principal and earnings are not sufficient.
Section 3 Trustee Responsibility Regarding Payments to Trust Beneficiary
when the Company is Insolvent
3.1 The Trustee shall cease payment of benefits to Plan participants and
their beneficiaries if the Company is insolvent. The Company shall be
considered "insolvent" for purposes of this Trust Agreement if (i) the
Company is unable to pay its debts as they become due, or (ii) the
Company is subject to a pending proceeding as a debtor under the United
Stated Bankruptcy Code.
3.2 At all times during the continuance of this Trust, as provided in
Section 1.4 hereof, the principal and income of the Trust shall be
subject to claims of general creditors of the Company under federal and
state law as set forth below:
(a) The Board of Directors and the Chief Executive Officer of the
Company shall have the duty to inform the Trustee in writing
of the Company's insolvency. If a person claiming to be a
creditor of the Company alleges in writing to the Trustee that
the Company has become insolvent, the Trustee shall determine
whether the Company is insolvent and, pending such
determination, the Trustee shall discontinue payment of
benefits to Plan participants or their beneficiaries.
(b) Unless the Trustee has actual knowledge of the Company's
insolvency, or has received notice from the Company or a
person claiming to be a creditor alleging that the Company is
insolvent, the Trustee shall have no duty to inquire whether
the Company is insolvent. The Trustee may in all events rely
on such evidence concerning the Company's solvency as may be
furnished to the Trustee and that provides the Trustee with a
reasonable basis for making a determination concerning the
Company's solvency.
(c) If at any time, the Trustee has determined that the Company is
insolvent, the Trustee shall discontinue payments to Plan
participants or their beneficiaries and shall hold the assets
of the Trust for the benefit of the Company's general
creditors. Nothing in this Trust Agreement shall in any way
diminish any rights or Plan participants or their
beneficiaries to pursue their rights as general creditors of
the Company with respect to benefits under the Plan or
otherwise.
(d) The Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section
2 of this Trust Agreement only after the Trustee has
determined that the Company is not insolvent (or is no longer
insolvent).
(e) Provided that there are sufficient assets, if the Trustee
discontinues the payment of benefits from the Trust pursuant
to this Section 3.2 and subsequently resumes such payments,
the first payment following such discontinuance shall include
the aggregate amount of all payments due to Plan participants
or their beneficiaries under the terms of the Plan for the
period of such discontinuance, less the aggregate amount of
any payments made to Plan participants or their beneficiaries
by the Company in lieu of the payments provided for hereunder
during any such period of discontinuance.
Section 4 Investment Authority
4.1 In no event may the Trustee invest in securities (including stock or
rights to acquire stock) or obligations issued by the Company, other
than a de minimis amount held in common investment vehicles in which
the Trustee invests. All rights associated with assets of the Trust
shall be exercised by the Trustee or the person designated by the
Trustee, and shall in no event be exercisable by or rest with Plan
participants.
4.2 The Company shall have the right at any time, and from time-to-time in
its sole discretion, to substitute assets of equal fair market value
for any asset held by the Trust. This right is exercisable by the
Company in a nonfiduciary capacity without the approval or consent of
any person in a fiduciary capacity.
<PAGE> 8
Section 5 Disposition of Income
5.1 During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 6 Accounting by Trustee
6.1 The Trustee shall keep accurate and detailed records of all
investments, receipts, disbursements, and all other transactions
required to be made, including such specific records as shall be agreed
upon in writing between the Company and the Trustee. Within sixty (60)
days following the close of each calendar year and within thirty (30)
days following the removal or resignation of the Trustee, the Trustee
shall deliver to the Company a written account of its administration of
the Trust during such year or during the period from the close of the
last preceding year to the date of such removal or resignation, setting
forth all investments, receipts, disbursements and other transactions
effected by it, including a description of all securities and
investments purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being shown
separately), and showing all cash, securities and other property held
in the Trust at the end of such year or as of the date of such removal
or resignation, as the case may be.
Section 7 Responsibility of the Trustee
7.1 The Trustee shall act with the care, skill, prudence and diligence
under the circumstances then prevailing that a prudent person acting in
like capacity and familiar with such matters would use in the conduct
of an enterprise of a like character and like aims, provided, however,
that the Trustee shall incur no liability to any person for any action
taken pursuant to a direction, request or approval given by the Company
which is contemplated by, and in conformity with, the terms of the Plan
or this Trust and is given in writing by the Company. In the event of a
dispute between the Company and a party, the Trustee may apply to a
court of competent jurisdiction to resolve the dispute.
7.2 If the Trustee undertakes or defends any litigation arising in
connection with this Trust, the Company agrees to indemnify the Trustee
against the Trustee's costs, expense and liabilities (including,
without limitation, attorneys' fees and expenses) relating thereto and
to be primarily liable for such payments. If the Company does not pay
such costs, expenses and liabilities in a reasonably timely manner, the
Trustee may obtain payment from the Trust.
7.3 The Trustee may consult with legal counsel (who may also be counsel for
the Company generally) with respect to any of its duties or obligations
hereunder.
7.4 The Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
7.5 The Trustee shall have without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of
the Trust, the Trustee shall have no power to name a beneficiary of the
policy other than the Trust, to assign the policy (as distinct from
conversion of the policy to a different form) other than to a successor
Trustee, or to loan to any person the proceeds of any borrowing against
such policy.
7.6 However, notwithstanding the provisions of Section 7.5 above, the
Trustee may loan to the Company the proceeds of any borrowing against
an insurance policy held as an asset of the Trust.
7.7 Notwithstanding any powers granted to the Trustee pursuant to this
Trust Agreement or to applicable law, the Trustee shall not have any
power that could give this Trust the objective of carrying on a
business and dividing the gains there-from, within the meaning of
Section 201.7701-2 of the Procedure and Administrative Regulations
promulgated pursuant to the Internal Revenue Code.
Section 8 Compensation and Expenses of the Trustee
8.1 The Company shall pay all administrative and the Trustee's fees and
expenses. If not so paid, the fees and expenses shall be paid from the
Trust.
Section 9 Resignation and Removal of the Trustee
9.1 The Trustee may resign at any time by written notice to the Company,
which shall be effective thirty (30) days after receipt of such notice
unless the Company and the Trustee agree otherwise.
9.2 The Trustee may be removed by the Company on thirty (30) days notice or
upon shorter notice accepted by the Trustee.
<PAGE> 9
9.3 Upon a Change of Control, as defined herein, the Trustee may not be
removed by the Company for one year.
9.4 If the Trustee resigned within one year after a Change of Control, as
defined herein, the Company shall apply to a court of competent
jurisdiction for the appointment of a successor Trustee or for
instructions.
9.5 Upon resignation or removal of the Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within thirty (30)
days after receipt of notice of resignation, removal or transfer,
unless the Company extends the time limit.
9.6 If the Trustee resigns or is removed, a successor shall be appointed,
in accordance with Section 10 hereof, by the effective date of
resignation or removal under Section 9.1 or 9.2. If no such appointment
has been made, the Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All
expenses of the Trustee in connection with the proceeding shall be
allowed as administrative expenses of the Trust.
Section 10 Appointment of a Successor
10.1 If the Trustee resigns or is removed in accordance with Section 9.1 or
9.2 hereof, the Company may appoint any third party, such as a bank
trust department or other party that may be granted corporate trustee
powers under state law, as a successor to replace the Trustee upon
resignation or removal. Absent a Change of Control, the Company may
appoint any qualified individual who is not a participant, including a
member of the Board of Directors or an Executive Officer, to serve as
Trustee. The appointment shall be effective when accepted in writing by
the new Trustee, who shall have all of the rights and powers of the
former Trustee, including ownership rights in the Trust assets. The
former Trustee shall execute any instrument necessary or reasonably
requested by the Company or the successor Trustee to evidence the
transfer.
10.2 The successor Trustee need not examine the record and acts of any prior
Trustee and may retain or dispose of existing Trust assets, subject to
Sections 6 and 7 hereof. The successor Trustee shall not be responsible
for and the Company shall indemnify and defend the successor Trustee
from any claim or liability resulting from any action or inaction of
any prior Trustee or from any other past event, or any condition
existing at the time it becomes successor Trustee.
Section 11 Amendment or Termination
11.1 This Trust may be amended by a written instrument executed by Trustees
and provided the Company, however, no such amendment shall conflict
with the terms of the Plan or shall make the Trust revocable.
11.2 The Trust shall not terminate until the date on which Plan participants
and their beneficiaries are no longer entitled to benefits pursuant the
terms of the Plan. Upon termination of the Trust, any assets remaining
in the Trust shall be returned to the Company.
11.3 Upon written approval of participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan, the Company may
terminate this Trust prior to the time all benefit payments under the
Plan have been made. All assets in the Trust at termination shall be
returned to the Company.
Section 12 Miscellaneous
12.1 Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating
the remaining provisions hereof.
12.2 Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or
in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
12.3 This Trust Agreement shall be governed by and construed in accordance
with the laws of Maryland.
12.4 For purposes of this Trust, Change of Control shall mean: "the purchase
or other acquisition by any person, entity or group of persons, within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of
1934 ("Act"), or any comparable successor provisions, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Act)
of 30 percent or more of either the outstanding shares of common stock
or the combined voting power of the Company's then outstanding voting
securities entitled to vote generally, or the approval by the
stockholders of the Company of a reorganization, merger, or
consolidation, in each case, with respect to which persons who were
stockholders of the Company immediately prior to such reorganization,
merger or consolidation do not, immediately thereafter, own more than
50 percent of the combined voting power entitled to vote generally in
the election of directors of the reorganized, merged or consolidated
Company's then outstanding securities, or a liquidation or
<PAGE> 10
dissolution of the Company or of the sale of all or substantially all
of the Company's assets."
Section 13 Effective Date
13.1 The effective date of this Trust Agreement shall be
May 21, 1997.
Suburban Bancshares, Inc.
Company
/s/ Marlin K. Husted, Trustee
------------------------------
Trustee
<PAGE> 1
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
DECEMBER 31, 1998
EARNINGS PER SHARE CALCULATION -- 1998
<TABLE>
<CAPTION>
Income Shares
Basic Earnings per Share: (Numerator) (Denominator) EPS
<S> <C> <C> <C>
Net Income $1,426,054
Common Shares Outstanding 10,951,218
Basic EPS $1,426,054 10,951,218 $0.13
</TABLE>
<TABLE>
<CAPTION>
Income Shares
Diluted Earnings per Share: (Numerator) (Denominator) EPS
<S> <C> <C> <C>
Net Income $1,426,054 10,951,218
Additional shares to be issued upon assumed exercise of management stock
options 350,000
Shares hypothetically repurchased at the average market price with the
proceeds (9,874)
Additional shares to be issued upon assumed exercise of incentive stock
options (b) 12,600
Shares hypothetically repurchased at the average market price with the
proceeds (9,331)
Additional shares to be issued upon assumed exercise of incentive stock
options (c - dilutive in 1st & 2nd quarters only) 178,000
Shares hypothetically repurchased at the average market price with the
proceeds (81,523)
Diluted EPS $1,426,054 11,391,089 $0.13
</TABLE>
<PAGE> 2
SUBURBAN BANCSHARES, INC.
EARNINGS PER SHARE CALCULATION EXHIBIT 11
DECEMBER 31, 1998
INFORMATION FOR COMPUTATION OF DILUTION
<TABLE>
<CAPTION>
Market Price per Share: Daily Average
<S> <C>
First Quarter 1998 $3.6508
Second Quarter 1998 $4.2398
Third Quarter 1998 $3.4910
Fourth Quarter 1998 $2.7917
Average Price for the Year $3.5446
</TABLE>
(a) 350,000 Management Stock Options exercisable at $0.10 and outstanding
for the entire year.
(b) 12,600 options granted 1/22/97 exercisable at $2.625
(c) 178,000 options granted 1/21/98 exercisable at $3.625
<TABLE>
<CAPTION>
First Quarter 1998 Diluted
<S> <C> <C>
178,000 - ((178,000*3.50)/avg price) = 1,258
Second Quarter 1998 Diluted
178,000 - ((178,000*3.50)/avg price) = 25,811
Third Quarter 1998 Diluted
178,000 - ((178,000*3.50)/avg price) = (6,832) Antidilutive
Fourth Quarter 1998 Diluted
178,000 - ((178,000*3.50)/avg price) = (53,133) Antidilutive
</TABLE>
<PAGE> 1
EXHIBIT 13
Dear Shareholders, Customers, and Employees:
1998 was the second year of our "200 IN 2000" strategic plan, that is, reaching
$200 million in assets by the end of the year 2000. We are pleased that our
strategy of creative service to local business allowed us to meet our goal two
years early. Suburban Bancshares had a 36% increase in assets for 1998, reaching
$238.6 million at year's end. Our plan to maximize the efficiency of the
Company's assets through this targeted growth strategy is working. Our net
income increased 26% to $1,426,000 from $1,131,000 in 1997, and diluted earnings
per common share rose to $0.13 in 1998 from $0.10 in 1997.
We continued to expand our distribution system in 1998 by opening our seventh
branch, Rockville/White Flint, our third Montgomery County branch. Our strategy
is to place branches in key business centers in the two counties in which we
operate. We have identified an eighth branch site in Beltsville, Maryland, which
we plan to open by summer 1999, bringing our Prince George's branch total to
five. Our current expansion plans will be complete when we locate a final site
in northern Montgomery County, most likely in late 2000.
1999 will be a year of systems improvements at Suburban Bank of Maryland. During
the year, we will be making a significant investment of both time and money to
bring enhanced capabilities to our customers through new avenues: a wide-area
network linking all of our locations and a new computer services provider. These
new capacities will enable the Company to continue to grow, while offering more
sophisticated products and services to our customers. Throughout the year, we
will also continue our progress toward Year 2000 compliance.
We believe the investments we are making will enable us to be the finest
independent bank for small- to mid-size businesses in the Greater Washington
marketplace. Increased asset size and efficiency will lead to increased earnings
per share for our shareholders.
Thank you for your continuing support.
/s/ /s/
Winfield M. Kelly, Jr. Stephen A. Horvath
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
A picture of the Chairman and the President, with the Company's headquarters
building in the background, appears in the upper right-hand corner of this page,
above the letter. Facing this page are three (3) bar charts showing the
following data:
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total Assets (in millions) $ 114 $ 115 $ 126 $ 176 $ 239
Total Loans (in millions) $ 67 $ 66 $ 79 $ 114 $ 132
Book Value (in dollars) $0.95 $1.20 $1.63 $1.75 $1.89
</TABLE>
1
<PAGE> 2
SUBURBAN BANCSHARES, INC.
Annual Report Photo Text
IT TAKES A TEAM
Successful business banking is a team sport. From bank directors to lending
officers, from branch staff to operations personnel, providing desirable
business banking is a mutual endeavor. At Suburban, we team up to do it right!
We begin with a simple mission: To enhance shareholder value through consistent
earnings, quality loan and investment portfolios, and our leadership position in
the small- to middle-market business communities.
We study the Prince George's and Montgomery Counties' business markets. Our
market knowledge is enhanced through our board of directors. Being local
business people, their industry expertise guides us in identifying local
business requirements. As our 1998 director advertisements confirm: "It takes
one to know one. Suburban Bank does it right. As directors, we make sure of it!"
The average age of a Suburban Banker is 42. The average manager has 19 years of
experience with senior management exceeding 25. It is this quality banking
personnel, coupled with our local board of directors, that has allowed us to
grow 35% in assets and 26% in earnings in 1998! It takes a team!
The above text appears on the left side of a two-page spread. Accompanying the
text is a collage of pictures of directors and officers with filler in the
background. The following captions are associated with team members shown:
"Financing commercial and government receivables requires expertise. Suburban
bankers do it right."
Bob Depew
President, Robert G. Depew and Associates, Inc.
"Accountants know the value a community-based banker offers to small
business owners."
Barbara DiNenna-Corboy
Retired Chairman, DiNenna & Associates, CPA
"Competition is vital. So is cooperation. Our lenders and branch managers work
in concert to meet the requirements of every customer."
Harry Koch, Senior Credit Officer
Joe Burnett, Senior Lending Officer
Cesar Cabrejas, Senior Branch Administrator
"Having started a small business, I know that bank financing can be formidable.
Suburban's experience as a Preferred Lender for the SBA makes the process run
smoothly."
Sam Botts
Partner, Jordan, Keys, Jessamy & Botts, LLP
CREATING A NICHE
We team with our enterprising business customers to provide new products and
services to help them become more successful Our credit products are designed
for small- to mid-sized businesses. In addition to traditional lines of credit
and term loans, we are one of Maryland's leading Preferred Lenders for the U.S.
Small Business Administration. We also specialize in lending to smaller
government contractors. Our real estate team has both commercial and residential
experience.
We offer our corporate customers cash management and electronic banking services
specially designed for businesses. Their receivables can be collected faster
through our wholesale mail lockbox. Any idle cash can be reduced through our
end-of-the-day sweep accounts. Our PC banking service, Suburban OnLine, enables
our business customers to monitor their commercial account activity and transfer
balances directly from their computer.
2
<PAGE> 3
As with the previous page, the text above appears on the left with another
collage featuring directors and employees with the following captions:
"Finding a bank that understands medical practice financing can be a challenge.
Suburban's small business focus enables them to excel."
Vince Palumbo, DDS
"Real estate sales and property management need a banker who knows the business
and the community. Suburban's bankers know both."
Ken Michael
Chairman, The Michael Companies, Inc.
"Small businesses rely on us for government guaranteed lending and financing of
government receivables. Our lenders work together to deliver the product that
fits the customers best."
Bobbie Hart, Lee Reed, Chad Smith, Derek Whitwer and Joe Ruth
"Financing single family home builders and buyers requires expertise and
functional coordination. Suburban does it well."
Bob Long
Chairman, Long Fence
WORKING AS A TEAM
Our personal banking services are offered to business owners and their
employees, as well as to all individuals who bank with Suburban. Checking and
investment products are available. Home equity lines and installment loans, as
well as ATM machines, provide more options for personal banking relationships.
Suburban's branch team provides these convenient personal banking services from
seven offices in our two county market.
Suburban's growth is possible because of our quality operations and financial
personnel. The technical expertise of the back room has enabled Suburban to grow
assets $100 million in two years. Customers know their questions will be
answered. People actually answer telephones at Suburban Bank of Maryland!
The collage opposite the above text features officers of Suburban Bank
accompanied by the following captions:
"Our business customers use lending, deposit and cash management services.
We work together to make banking at Suburban enjoyable."
Jeff Franklin, Branch Manager
Jerome Smallwood, Lender
Annette Pointer, Cash Management Officer
"Managing multiple escrow deposits requires time and attention. Our team of
specialists has a product that does the accounting and banking for our customers
so that they can concentrate on other tasks."
Lee Waltz, Branch Manager
Charlie Carns, Controller
Mary Smith, Operations Officer
"Individual retirement accounts and 401(k) plans help our small business
customers meet the need of their employees. Our team of bankers are ready to
offer any assistance."
Ed Shaffer, Branch Manager
Yolanda Stahura, Human Resources
"Home builders and home buyers alike expect the lending and mortgage process to
go smoothly. Suburban's lenders meet those expectations."
Jeff Wagner, Commercial Lender
Rich Lichty, Mortgage Lender
3
<PAGE> 4
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
in thousands, except per share data 1998 1997 1996 1995 1994
Results of Operations
- ---------------------
<S> <C> <C> <C> <C> <C>
Interest income $14,246 $11,363 $9,176 $8,358 $7,156
Interest expense 6,337 4,570 3,362 3,119 2,377
Net interest income 7,909 6,793 5,814 5,239 4,779
Provision (recovery) for loan losses 415 254 (227) (260) 39
Noninterest income 1,088 774 517 1,599 787
Noninterest expense 6,359 5,511 5,614 5,551 5,308
Income tax expense (benefit) 797 671 (4,058) 6 --
Net income 1,426 1,131 5,002 1,541 219
Per Share Data
- --------------
Net income:
Basic $0.13 $0.10 $0.46 $0.17 $0.02
Diluted 0.13 0.10 0.44 0.15 0.02
Book value per share 1.89 1.75 1.63 1.20 0.95
Financial Condition (December 31)
- ---------------------------------
Total assets $238,566 $175,666 $126,085 $115,431 $114,229
Net loans 128,361 112,070 71,940 61,555 61,775
Total deposits 207,380 152,802 107,573 101,889 104,402
Total equity 20,712 19,182 17,831 13,096 8,587
Ratios
- ------
Return on average assets 0.72% 0.76% 4.42% 1.49% 0.21%
Return on average equity 7.14 6.14 36.35 15.29 2.51
Net yield on earning assets 4.33 5.02 5.57 5.50 5.05
Average equity to average assets 10.06 12.42 12.15 9.75 8.31
Average loans to average deposits 70.00 72.13 74.75 69.87 63.74
Average Balances
- ----------------
Assets $198,581 $148,281 $113,272 $103,377 $105,137
Loans 119,623 92,200 74,014 64,616 60,577
Earning assets 182,707 135,401 104,356 95,228 94,664
Deposits 170,901 127,829 99,017 92,483 95,035
Equity 19,971 18,412 13,760 10,080 8,734
</TABLE>
PORTIONS OF THIS ANNUAL REPORT 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.
4
<PAGE> 5
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Suburban Bancshares, Inc. and Subsidiary
Suburban Bancshares, Inc. and its subsidiary, Suburban Bank of Maryland (the
"Company" or "Suburban"), provide a variety of banking services to businesses,
professionals and individuals through seven branches located in Prince George's
and Montgomery Counties in Maryland. In addition to commercial and personal
depository services and cash management services, Suburban Bank of Maryland (the
"Bank") offers lending products such as commercial loans, commercial real estate
loans, Small Business Administration loans, asset-based loans, government
contract loans and consumer loan products, including vehicle, home equity,
mortgage and personal loans.
FORWARD LOOKING STATEMENTS
This management's discussion and analysis of financial condition and results of
operations includes forward looking statements, such as: statements of the
Company's goals, intentions and expectations; estimates of risks and of future
costs and benefits; and statements of the Company's ability to achieve financial
and other goals. These forward looking statements are subject to significant
uncertainties because they are based upon: future interest rates and other
economic conditions; statements by suppliers of data processing equipment and
services, government agencies, and other third parties as to year 2000
compliance and costs; future laws and regulations; and a variety of other
matters. Because of these uncertainties, the actual future results may be
materially different from the results indicated by these forward looking
statements. In addition, the Company's past growth and performance do not
necessarily indicate its future results.
RESULTS OF OPERATIONS
Overview
Net income increased from $1,131,000 in 1997 to $1,426,000 in 1998, representing
a 26.1% increase. Both basic and diluted earnings per common share for 1998 were
$0.13 as compared to $0.10 per share for 1997. Book value per share was $1.89 at
December 31, 1998, marking the fifth consecutive year for which an improvement
in shareholders' equity was recorded. Return on average assets and return on
average equity for 1998 were 0.72% and 7.14%, respectively.
The year 1998 reflected a continuation of the Company's aggressive growth
strategy. Asset growth was 35.8%, a $62.9 million increase from $175.7 million
in 1997 to $238.6 million in 1998. This asset growth in 1998 enabled the Company
to exceed its goal of $200 million by 2000, two years early. Average assets rose
$50.3 million, or 33.9%, reaching $198.6 million in 1998 from $148.3 million in
1997.
Key factors which influenced Suburban's performance in 1998 and factors which
may influence future performance include:
- - Loan growth of 16.0% to $131.7 million in 1998 from $113.5 million in
1997.
- - Growth in deposits of 35.7%, reaching $207.4 million in 1998 from $152.8
million at the end of 1997.
- - The opening of our seventh branch in Rockville/White Flint in January
1998, continuing our expansion program.
- - Establishment of a mortgage loan division, offering a new product line to
our consumer customer base.
- - Improving asset quality as nonperforming assets (impaired loans plus
foreclosed real estate) declined from $2.1 million or 1.2% of assets in
1997 to $1.7 million or 0.7% of assets in 1998.
- - A declining net interest margin, as market rates declined in late 1998,
and deposit growth outpaced loan growth.
The discussion which follows provides further detailed analysis regarding the
financial condition and results of operations of Suburban Bancshares, Inc. and
its subsidiary, Suburban Bank of Maryland, for the years 1996 through 1998. It
is intended to assist readers in their analysis of the accompanying consolidated
financial statements and notes.
Distribution of Assets, Liabilities and Shareholders' Equity
The following table provides certain information regarding the Company's average
balances of assets and liability categories, interest income and expense,
percentage distribution of earning assets and funding sources, and average rates
and yields for the years ended December 31, 1998, 1997 and 1996. These yields
and costs are derived by dividing income or expense by the average daily balance
of the related asset or liability for the relevant period. Nonaccrual loans are
included in average loans as earning assets.
5
<PAGE> 6
AVERAGE BALANCES, INTEREST YIELDS AND RATES, AND NET INTEREST MARGIN
(in thousands)
<TABLE>
<CAPTION>
Years ended
December 31, 1998 1997
Average % of Interest Average Average % of Interest Average
Balance Earning Yield Balance Earning Yield
Assets or Rate Assets or Rate
& &
Funding Funding
ASSETS Sources Sources
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $119,623 65.5% $10,529 8.80% $92,200 68.1% $8,752 9.49%
Investment securities 34,712 19.0% 2,193 6.32% 27,471 20.3% 1,746 6.35%
Federal funds sold
and other deposits 28,372 15.5% 1,524 5.37% 15,730 11.6% 865 5.50%
------ ----- ------ ---
Total interest-earning
assets 182,707 100.0% 14,246 7.80% 135,401 100.0% 11,363 8.39%
Noninterest-earning
assets:
Cash and due from 10,200 7,517
banks
Premises and
equipment 1,716 1,591
5,302
Other assets 5,441
Less: Allowance for
loan losses (1,483) (1,530)
------ ------
Total noninterest-
earning assets 15,874 12,880
TOTAL ASSETS $198,581 $148,281
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Checking and money
market deposits $68,645 38.7% $2,432 3.54% $52,389 40.6% $1,886 3.60%
Savings deposits 25,779 14.5% 1,139 4.42% 23,887 18.5% 1,144 4.79%
Time deposits 45,513 25.7% 2,512 5.52% 27,111 21.0% 1,490 5.50%
Securities sold under
repurchase agreements 6,549 3.7% 254 3.87% 1,220 1.0% 50 4.08%
----- --- ----- --
Total interest-bearing
liabilities 146,486 82.6% 6,337 4.33% 104,607 81.1% 4,570 4.37%
Noninterest-bearing
deposits 30,964 17.4% 24,442 18.9%
------ ------
Total funding sources 177,450 100.0% 6,337 3.57% 129,049 100.0% 4,570 3.54%
Other liabilities 1,160 820
----- ---
TOTAL
LIABILITIES 178,610 129,869
Shareholders' equity 19,971 18,412
------ ------
TOTAL
LIABILITIES AND
SHAREHOLDERS'
EQUITY $198,581 $148,281
Net interest income $7,909 $6,793
4.85%
Net interest spread 4.23%
Net interest margin 4.33% 5.02%
</TABLE>
<TABLE>
<CAPTION>
Years ended
December 31, 1996
Average % of Interest Average
Balance Earning Yield or
Assets Rate
&
Funding
ASSETS Sources
<S> <C> <C> <C> <C>
Interest-earning assets:
Loans $74,014 70.9% $7,409 10.01%
Investment securities 17,325 16.6% 1,080 6.23%
Federal funds sold
and other deposits 13,017 12.5% 687 5.28%
------ ---- ---
Total interest-earning
assets 104,356 100.0% 9,176 8.79%
Noninterest-earning
assets:
Cash and due from 7,073
banks
Premises and
equipment 1,213
2,155
Other assets
Less: Allowance for
loan losses (1,525)
------
Total noninterest-
earning assets 8,916
TOTAL ASSETS $113,272
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Checking and money
market deposits $47,337 47.8% $1,625 3.43%
Savings deposits 8,849 9.0% 405 4.58%
Time deposits 23,499 23.7% 1,332 5.67%
Securities sold under
repurchase agreements -- -- -- --
------ -------
Total interest-bearing
liabilities 79,685 80.5% 3,362 4.22%
Noninterest-bearing
deposits 19,332 19.5%
------
Total funding sources 99,017 100.0% 3,362 3.39%
Other liabilities 495
---
TOTAL
LIABILITIES 99,512
Shareholders' equity 13,760
------
TOTAL
LIABILITIES AND
SHAREHOLDERS'
EQUITY $113,272
Net interest income $5,814
5.40%
Net interest spread
Net interest margin 5.57%
</TABLE>
6
<PAGE> 7
Net Interest Income and Net Interest Margin
The principal source of the Company's earnings, net interest income, 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 investment
securities while deposits and short-term borrowings, in the form of securities
sold under repurchase agreements, comprise 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, impact the level of net interest
income.
Net interest income rose $1,116,000, or 16.4%, in 1998 to $7,909,000 from
$6,793,000 in 1997, the result of the significant growth in both loan and
deposit volume. In 1997, net interest income rose 16.8%, or $979,000, for the
same reason.
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
1998, the net interest margin fell to 4.33%, a 69 basis point decrease from
5.02% for the prior year. Negative influences on the margin include a lower loan
yield, a higher cost of funds and a lower ratio of loans to earning assets.
These negative factors were mitigated by the increase in volume on both sides of
the balance sheet. In 1997, the net interest margin fell 55 basis points from
5.57%, the result of a change in the mix of earning assets toward a lower
percentage of loans, which traditionally provide a higher return than other
earning assets, and a higher cost of funds; these negative factors were somewhat
mitigated by a higher yield on the investment portfolio.
Changes in the volume of earning assets and interest-bearing liabilities impact
both interest income and interest expense. Average earning assets rose
$47,306,000, or 34.9%, to $182,707,000 in 1998 from $135,401,000 in 1997. Total
average funding sources rose $48,401,000, or 37.5%, during the same period, with
$41,879,000, of those funds, or 86.5% of the growth, in interest-bearing
accounts. Because this growth resulted in an increase in the percentage of
interest-bearing funds to total funds, the cost of funds rose, producing a
negative impact on net interest income. In 1997, earning assets grew
$31,045,000, or 29.7%, from $104,356,000 in 1996, with $24,922,000, or 83.0% of
the growth in funding sources, provided by interest-bearing sources of funds.
Changes in the composition of earning assets and of funding sources also impact
the level of net interest income. In 1998 as in 1997, the growth in loans did
not keep pace with deposit or funding growth and resulted in a decrease in the
ratio of loans to earning assets, while interest-bearing funds increased as a
percentage of funding sources, both factors providing a negative influence on
the margin. In 1997, average loans were 68.1% of total earning assets and in
1998, the ratio decreased to 65.5%. As the loan mix declined, the mix of
investment securities and overnight investments increased from 31.9% in 1997 to
34.5% in 1998. On the liability side of the balance sheet, the composition of
interest-bearing funding sources shifted toward a higher percentage of funds in
higher cost sources. This shift added to the negative effect of a higher ratio
of interest-bearing sources as a percentage of total sources of funds. As total
interest-bearing funds increased to 82.6% of total funding sources in 1998 from
81.1% in 1997, the percentage of funds deposited in higher cost time deposit and
repurchase agreements increased to 29.4% in 1998 from 22.0% in 1997 and the
percentage of lower-cost checking, money market, and savings deposits decreased
to 53.2% from 59.1%.
Both changes in interest rates received on earning assets and changes in rates
paid on funding sources negatively affected the net interest margin in 1998. The
yield on earning assets fell in 1998 to 7.80% from 8.39% in 1997, as loan yields
dropped to 8.80% from 9.49%. The lower yield on loans was the combined effect of
competitive factors in our market, a declining interest rate environment with
three (3) prime lending rate changes in the fourth quarter of 1998, and a lower
rate earned on a portfolio of the guaranteed portion of SBA loans, which were
purchased during the last half of 1997 and early 1998. This pool, totaling
$19,198,000, represents 16.0% of the average loan portfolio, and because of the
reduced risk associated with the pool, the yield at 7.15% is less than loans
without the backing of a government guarantee. The yield on the investment
portfolio remained relatively stable as we extended the overall maturity of the
portfolio, and the return on federal funds fell only 13 basis points on average
for the year.
A relatively small increase in the cost of funds also reduced the margin, as
rates paid for funds rose to 3.57% for 1998 from 3.54% in 1997, a 3 basis point
increase. As competition for funds increased in late 1996 and early 1997, the
Company offered a special rate on savings accounts, a typically stable source of
funds, which brought in new funds and also resulted in some shifts within the
deposit base. Savings accounts rose to an average of $23,887,000, an increase of
$15,038,000, with an average cost of 4.79% in 1997. In 1998, that growth
subsided with savings rising only $1,892,000, to $25,779,000, and the savings
rate fell 37 basis points to 4.42%. Growth in time deposits, however, was
$18,402,000, or 67.9%, from an average of $27,111,000 in 1997 to $45,513,000 in
1998, at a slightly higher rate. Rates paid on other interest-bearing funds fell
but the decline did not offset the effect of the drop in the loan yield.
Provision for Loan Losses
The Company makes provisions for loan losses in order to maintain an allowance,
or reserve, for losses on loans at a level deemed appropriate. 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
7
<PAGE> 8
(including the timing of future payments), economic conditions and trends, loan
portfolio volume 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 1998, the Company recorded a provision for loan losses of $415,000, as loan
volume increased; loan charge-offs totaled $470,000, an increase of $52,000 from
$418,000 in 1997, and recoveries declined to $106,000 from $129,000 in 1997.
In 1997, the Company recognized a provision for loan losses of $254,000, also
the result of increasing loan volume. In 1996, a reverse provision of $227,000
was recorded to reduce an excess in the allowance for loan losses created by
recoveries on loans previously charged off and the disposition of nonperforming
loans.
Noninterest Income
In 1998, noninterest income rose 40.6% to $1,088,000 from $774,000 in 1997, the
result of $205,000 of income generated by a newly created mortgage loan
division, the recognition of a premium on the sale of SBA loans of $39,000 and a
gain of $12,000 on the sale of securities.
Noninterest income increased 49.7% in 1997 from $517,000 in 1996. The increase
was primarily in deposit account service charges, the result of both deposit
account growth and new deposit-related services being offered. Fees for other
services rose, as well, as the growing customer base utilized multiple services
within the expanded product line.
Noninterest Expenses
Noninterest expenses rose 15.4%, or $848,000, in 1998 to $6,359,000 from
$5,511,000 in 1997. This increase was primarily the result of the start-up costs
for the mortgage division, the costs associated with the opening of our seventh
branch early in 1998, and higher data processing costs.
Noninterest expenses declined 1.8% in 1997 from $5,614,000 in 1996. The
comparability of results for 1997 and 1996 are impacted by nonrecurring events
in 1996 which precipitated the recognition of additional expenses as the Company
disposed of nonperforming assets and recognized a loss on the transactions
totaling $611,000, and expenses associated with a corporate reorganization were
$151,000. The reduction of expenses in 1997 resulting from these nonrecurring
expenses in 1996 was partially offset by rising costs associated with a new
branch opening in late 1996 and the renovation of our Greenbelt headquarters in
1997.
The Bank opened a new full-service banking office in Bethesda, Maryland in
November 1996, and a full-service branch in Rockville/White Flint, Maryland in
January 1998. The increased operating expenses of new offices are not
immediately offset by income until the offices become established, which, though
not assured, often occurs after approximately three to four years.
Please reference Note I to the Consolidated Financial Statement for a breakdown
of Other Expenses.
Deferred Income Taxes
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires the recognition of income tax benefits of loss carryforwards and
temporary differences when it is "more likely than not" that they will be
realized from the Company's future earnings capacity. At December 31, 1996, the
Company recognized net deferred tax assets of $4,058,000 including approximately
$3,930,000 relating to tax loss carryforwards, which expire in varying amounts
between 2003 and 2008. Realization of these benefits depends on generating
sufficient taxable income before the expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that the net deferred tax asset will be realized. The amount of the net
deferred tax asset considered realizable, however, could be reduced if estimates
of future taxable income during the carryforward period are reduced. The amount
of loss carryforward available for any one year may be limited if the Company is
subject to the alternative minimum tax. In 1998, the net deferred tax asset was
reduced by the income tax expense of $797,000 and the change in the tax on the
unrealized gain on securities available for sale of $66,000, net of the
estimated tax payments of $38,000. In 1997, the net deferred tax asset was
reduced by the income tax expense of $671,000 and the tax on the unrealized gain
on securities available for sale of $119,000, net of the estimated alternative
minimum tax of $32,000. At December 31, 1998, the net deferred tax asset was
$2,474,000, including approximately $2,154,000 relating to tax loss
carryforwards.
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
8
<PAGE> 9
collateral dependent. Interest income on impaired loans is recognized on a cash
basis. Nonaccrual loans are those loans on which the accrual of interest is
discontinued when the 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 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 $1,160,000
and $1,763,000 at December 31, 1998 and 1997, respectively, a decrease of
$603,000, as one large loan moved to foreclosed real estate and was subsequently
sold.
Real estate acquired through foreclosure is carried at fair value less estimated
selling costs, based upon current market conditions and expected cash flows.
Foreclosed real estate rose $186,000, or 53.3% to $535,000 at December 31, 1998
from $349,000 at December 31, 1997. This increase was the result of the addition
of two properties to foreclosed real estate in 1998.
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 loan's
initial effective interest rate or the fair value of the collateral for certain
collateral dependent loans.
At December 31, 1998, the allowance for loan losses was $1,524,000, and at the
end of 1997 it was $1,473,000. The combined effect of substantial loan growth
and higher net charge-offs, offset by the low risk factor of a portfolio of
government guaranteed loans which comprise 15.8% of the total loan portfolio at
year end and a decrease in loans that were considered impaired, was an increase
of $51,000 in the allowance for loan losses in 1998. The activity in the
allowance for loan losses is shown in the following schedule:
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 1,473 $ 1,508 $ 1,467
Provision (recovery) for loan losses 415 254 (227)
Loans charged off (470) (418) (444)
Recoveries 106 129 712
------- ------- -------
Balance at end of year $ 1,524 $ 1,473 $ 1,508
</TABLE>
The allowance for loan losses fell to $1,473,000 at the end of 1997 from
$1,508,000 at December 31, 1996. During 1997, 51.8% of the loan growth of
$34,162,000 was in loans with a low risk factor because of the government
guarantee on SBA loans purchased. The effect of this lower risk factor plus the
effect of the disposition of nonperforming loans in 1996 was a reduction of
$35,000 in the reserve.
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
9
<PAGE> 10
73.4% of total funding sources at December 31, 1998, compared to 77.6% at the
end of 1997. Offsetting this decrease is an increase in the level of readily
marketable assets, which is another indicator of adequate liquidity. These
liquid assets, securities available for sale, overnight federal funds and the
guaranteed portion of SBA loans in the loan portfolio, were 49.4% of total
assets at December 31, 1998 and 40.5% at December 31, 1997.
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 shown below reflects the earlier of the
maturity or repricing dates for various interest-earning assets and
interest-bearing liabilities at December 31, 1998.
Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
Over 3
3 months or months to Over 1 year Over 5
in thousands less 1 year to 5 years years Total
Interest-earning assets:
<S> <C> <C> <C> <C>
Federal funds sold $ 43,093 $ -- $ -- $ -- $ 43,093
Investments 5,647 15,516 13,578 11,102 45,843
Loans (1) 78,376 16,160 28,624 6,747 129,907
Total interest-earning assets 127,116 31,676 42,202 17,849 218,843
Cumulative rate sensitive assets 127,116 158,792 200,994 218,843
Interest-bearing liabilities:
Interest checking deposits $ 14,650 $ -- $ -- $ -- $ 14,650
Money market deposits $ 76,844 -- -- -- 76,844
Savings deposits 25,999 -- -- -- 25,999
Time deposits 4,890 22,526 24,964 -- 52,380
Securities sold under repurchase
agreements 9,523 -- -- -- 9,523
Total interest-bearing liabilities 131,906 22,526 24,964 -- 179,396
Cumulative rate sensitive liabilities 131,906 154,432 179,396 179,396
GAP $ $(4,790) $ 9,150 $ 17,238 $17,849
CUMULATIVE GAP (4,790) 4,360 21,598 39,447 $ 39,447
CUMULATIVE GAP TO TOTAL ASSETS -2.01% 1.83% 9.05% 16.54%
</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 and that investments with call options will be called. At December 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 positive 1.83%. This slightly positive gap position means that the
10
<PAGE> 11
Company had $4,360,000 more assets than liabilities repricing within one year.
This generally indicates that in a period of rising interest rates, the
Company's net interest income may improve. Conversely, in a declining interest
rate environment, the Company's net interest income may be adversely affected.
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, 1998, the estimated
sensitivity profile for the Company was as follows:
<TABLE>
<CAPTION>
Immediate Change in Rates Policy Limitation
+200 BP -200 BP
------- -------
<S> <C> <C> <C>
Net interest income at risk 10.00% -9.9% -15%
Economic value at risk 9.56% -13.8% -20%
</TABLE>
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 exposure to changes in interest rates, assisting the Company in its
efforts to manage the volatility of earnings.
CAPITAL RESOURCES AND ADEQUACY
Shareholders' equity was $20,712,000 at December 31, 1998 representing an 8.0%
increase from $19,182,000 at the end of 1997. Equity growth in 1998 was
primarily attributable to the earnings of the Company of $1,426,000. Also
contributing to the increase was the impact of the change in unrealized gains on
securities available for sale of $104,000, net of taxes.
In 1997, shareholders' equity increased $1,351,000, or 7.6%, from $17,831,000 at
December 31, 1996. Earnings of $1,131,000, and an increase in the market value
of the Company's available for sale securities of $220,000, were the components
of this rise in equity.
A combination of the leverage capital ratio and the risk-based capital ratios is
used to categorize banks as well capitalized, adequately capitalized, or under
capitalized financial institutions under the guidelines established by the
Federal Deposit Insurance Corporation Improvement Act of 1991. 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 1997, the Company was
considered to be a well capitalized financial institution for regulatory
purposes.
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). 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. Tier 2 capital
consists 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 ranging 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 December 31, 1998, the Company
reported a Tier 1 risk-based capital ratio of 15.47% and a ratio of 16.65% based
on total capital. Both ratios were well above the general regulatory minimums of
4% and 8%, respectively.
11
<PAGE> 12
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 for this ratio is 3%, with most
financial institutions required to maintain a ratio of a least 4% to 5%,
depending upon risk profiles and other factors. At December 31, 1998, the
leverage capital ratio for the Company was 9.13%.
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 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.
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 will complete the process of internal
testing of critical systems by March 31, 1999. 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.
12
<PAGE> 13
As a result of the Company's planned migration to new data processing and item
processing providers in May 1999, and the planned 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 will approximate $260,000, to be amortized over the life of each of
the contracts, and costs associated with the installation of the wide-area
network will total approximately $380,000, which will be depreciated over its
useful life. A one-time de-conversion charge plus annual costs of the new
systems will result in a charge to income of approximately $120,000 in 1999, and
will not materially impact the results of operations in those or future years.
The Company has been assured that the new systems are Year 2000 compliant and
will test the wide-area network and use proxy-testing for the systems provided
by third party servicers to verify their readiness prior to March 31, 1999.
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.
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.
13
<PAGE> 14
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks $ 12,280 $ 10,759
Federal funds sold 43,093 15,569
Investment securities available for sale 45,843 30,360
Loans held for sale 1,814 --
Loans 129,885 113,543
Less: Allowance for loan losses (1,524) (1,473)
Loans, net 128,361 112,070
Premises and equipment, net 1,683 1,658
Foreclosed real estate 535 349
Accrued interest receivable 1,387 1,172
Deferred income taxes 2,474 3,299
Other assets 1,096 430
TOTAL ASSETS $238,566 $175,666
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 37,507 $ 28,856
Interest-bearing deposits 169,873 123,946
Total deposits 207,380 152,802
Securities sold under repurchase agreements 9,523 3,049
Accrued expenses and other liabilities 951 633
Total liabilities 217,854 156,484
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;
10,951,218 shares issued and outstanding at December 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 (5,484) (6,910)
Accumulated other comprehensive income 294 190
Total shareholders' equity 20,712 19,182
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $238,566 $175,666
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands, except per share data 1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $10,529 $ 8,752 $7,409
Taxable interest on securities 2,193 1,746 1,080
Interest on federal funds sold and deposits with other banks 1,524 865 687
Total interest income 14,246 11,363 9,176
INTEREST EXPENSE
Interest on deposits 6,083 4,520 3,362
Interest on short-term borrowings 254 50 --
Total interest expense 6,337 4,570 3,362
NET INTEREST INCOME 7,909 6,793 5,814
Provision for loan losses 415 254 (227)
Net interest income after provision for loan losses 7,494 6,539 6,041
NONINTEREST INCOME
Service charges on deposit accounts 645 612 394
Gain on sale of investment securities 12 -- --
Other income 431 162 123
Total noninterest income 1,088 774 517
NONINTEREST EXPENSE
Salaries and employee benefits 3,411 2,873 2,743
Occupancy expense 741 673 518
Furniture and equipment expense 264 222 153
(Gain) loss on sale of loans and foreclosed assets (20) -- 611
Other expense 1,963 1,743 1,589
Total noninterest expense 6,359 5,511 5,614
Income before income taxes 2,223 1,802 944
Income tax expense (benefit) 797 671 (4,058)
NET INCOME $1,426 $1,131 $5,002
Basic earnings per common share $0.13 $0.10 $0.46
Diluted earnings per common share 0.13 0.10 0.44
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided (used) by operating $1,426 $1,131 $5,002
activities:
Depreciation 247 194 129
Provision (recovery) for loan losses 415 254 (227)
Provision for losses on foreclosed real estate 34 -- --
Deferred income tax expense (benefit) 760 639 (4,058)
Originations of loans held for sale (5,834) -- (2,641)
Proceeds from loan sales 4,614 -- 382
(Gain) loss on sale of loans -- 434
Net realized gains on investment securities -- --
Net accretion on securities (117) (87) (55)
(Decrease) increase in net deferred loan fees (69) (41) 24
Net increase in premium on loans purchased (308) (1,513) --
(Increase) decrease in accrued income and other assets (882) (327) 259
Increase (decrease) in accrued expenses and other liabilities 318 (48) 235
(Gain) loss on sale of foreclosed real estate (15) -- 177
Net cash provided (used) by operating activities 529 202 (339)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in deposits with other banks -- -- 2,220
(Increase) decrease in federal funds sold (27,524) (3,354) 4,275
Purchases of available for sale securities (25,511) (17,438) (11,819)
Proceeds from maturities of available for sale securities 9,250 8,775 8,235
Proceeds from prepayments of principal on securities 125 110 150
Proceeds from sales of available for sale securities 1,031 -- --
Net increase in other securities (80) (91) --
Net increase in loans (12,227) (14,713) (11,014)
Purchases of loans (5,607) (18,320) --
Net purchases of premises and equipment (272) (538) (252)
Proceeds from sale of foreclosed real estate 755 -- 777
Net cash used in investing activities (60,060) (45,569) (7,428)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in total deposits 54,578 45,229 5,684
Net increase in securities sold under agreements to repurchase 6,474 3,049 --
Net cash provided by financing activities 61,052 48,278 5,684
Net increase (decrease) in cash and due from banks 1,521 2,911 (2,083)
Cash and due from banks at beginning of period 10,759 7,848 9,931
Cash and due from banks at end of period $12,280 $10,759 $7,848
Interest paid $6,283 $4,523 $3,378
Income taxes paid 38 -- --
Loans transferred to foreclosed real estate 961 136 15
Loans transferred to loans held for sale 545 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 17
SUBURBAN BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Accumulated Comprehensive Common Paid-in
in thousands Total Income Deficit Income Stock Capital
Year ended December 31, 1996
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $13,096 $(13,043) $ 237 $109 $25,793
Comprehensive income:
Net income 5,002 $5,002 5,002
Other comprehensive income, net of tax:
Unrealized losses on securities (267) (267) (267)
------
Comprehensive income $4,735
------- ====== --------- ------ ---- -------
Ending balance $17,831 $ (8,041) $ (30) $109 $25,793
======= ========= ====== ==== =======
Year ended December 31, 1997
Beginning balance $17,831 $ (8,041) $ (30) $109 $25,793
Comprehensive income:
Net income 1,131 $1,131 1,131
Other comprehensive income, net of tax:
Unrealized gains on securities 220 220 220
------
Comprehensive income $1,351
======
------- --------- ----- ---- -------
Ending balance $19,182 $ (6,910) $ 190 $109 $25,793
======= ========= ===== ==== =======
Year ended December 31, 1998
Beginning balance $19,182 $ (6,910) $ 190 $109 $25,793
Comprehensive income:
Net income 1,426 $1,426 1,426
Other comprehensive income, net of tax:
Unrealized gains on securities of $104
net of reclassification adjustment for
gains included in net income of $0 104 104 104
------
Comprehensive income $1,530
------- ====== --------- ----- ---- -------
Ending balance $20,712 $ (5,484) $ 294 $109 $25,793
======= ========= ===== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Suburban Bancshares, Inc. and its subsidiary, Suburban Bank of Maryland, provide
a variety of banking services to businesses, professionals and individuals
through seven branches located in Prince George's and Montgomery Counties in
Maryland. In addition to commercial and personal depository services and cash
management services, Suburban Bank of Maryland offers lending products such as
commercial loans, commercial real estate loans, Small Business Administration
loans, asset based lending, government contract loans and consumer loan
products, including vehicle, home equity, mortgage and personal loans.
NOTE A ACCOUNTING POLICIES
The accounting and reporting policies of Suburban Bancshares, Inc. and its
subsidiary (the "Company") are in conformity with generally accepted accounting
principles and conform to general practices within the banking industry. Certain
reclassifications have been made to conform the prior year's financial
statements to the 1998 presentation. The following is a summary of the
significant policies:
(1) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of Suburban Bancshares, Inc. include the
accounts of Suburban Bancshares, Inc. and its wholly-owned banking subsidiary,
Suburban Bank of Maryland ("Suburban Maryland" or the "Bank"). All significant
intercompany balances and transactions have been eliminated in consolidation. In
the condensed financial statements of Suburban Bancshares, Inc. ("Parent") (Note
Q), the investment in the subsidiary is stated as equity in the net assets of
such subsidiary.
(2) BASIS OF PRESENTATION
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and of revenues and expenses for the period. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses and the evaluation of real
estate acquired in connection with foreclosures or in satisfaction of loans.
Actual results could differ from those estimates.
(3) CASH AND DUE FROM BANKS
The Bank is required to maintain reserves against its deposits with the Federal
Reserve Bank. The balances of such reserves at December 31, 1998 and 1997 were
$1,039,000 and $1,212,000, respectively. At December 31, 1998, Suburban Maryland
had secured reverse repurchase lines of credit aggregating $6,000,000 and
unsecured lines of credit totaling $4,500,000 for short-term financing, all of
which was available at that date. None of these financing arrangements required
compensating balances. For purposes of the Consolidated Statements of Cash
Flows, the Company considers cash and due from banks to be cash and cash
equivalents.
(4) INVESTMENT SECURITIES
The Company classifies its securities in one of three categories: trading, held
to maturity or available for sale. Management determines the appropriate
classification of securities at the time of purchase. Held to maturity
securities are those securities in which the Company has the ability and the
intent to hold until maturity and are reported at cost, adjusted for
amortization of premium and accretion of discounts using a method which
approximates the interest method over the term of the securities. All other
securities not included in trading or held to maturity are classified as
available for sale and are reported at fair value, with unrealized gains and
losses, net of taxes, reported as a separate component of shareholders' equity.
Securities available for sale will be used as part of the Company's interest
rate risk management strategy and may be sold in response to changes in interest
rates, changes in prepayment risk and other factors.
Realized gains or losses on securities are recognized at the time of sale using
the specific identification method and are classified as securities gains or
losses in the accompanying Consolidated Statements of Operations.
(5) LOANS HELD FOR SALE
The Company originates loans to customers under the Small Business
Administration ("SBA") program that generally provides for SBA guarantees of 75%
to 90% of each loan. The Company may sell the guaranteed portion of each loan to
a third party and retain the unguaranteed portion in its own portfolio. Those
loans to be sold are classified as loans held for sale and are carried at the
lower of aggregate cost or market. A gain is recognized on the sale of these
loans through collection of a premium over the adjusted carrying value, and
through retention of an ongoing rate differential as a normal servicing fee
between the rate paid
18
<PAGE> 19
by the borrower to the Company and the rate paid by the Company to the purchaser
(excess servicing fee). The Company's investment in an SBA loan is based upon a
relative fair market value allocation between the portion of the loan sold, the
portion of the loan retained and any excess servicing retained. The gain on the
sold portion of the loan is recognized, the carrying value of the retained
portion of the loan is reduced, thereby increasing the future yield, and any
excess servicing is recorded as an asset and subsequently amortized to servicing
income. The Company utilizes a 1% normal servicing fee and has not recorded any
excess servicing assets.
(6) LOANS
Loans generally are stated at their outstanding, unpaid principal balances net
of any deferred fees or costs, or unamortized premiums or discounts on purchased
loans. Interest income is accrued on the unpaid principal balance. Discounts and
premiums are amortized to income using the interest method. Loan origination
fees net of certain direct origination costs are deferred and recognized as an
adjustment of the yield (interest income) of the related loans.
Nonaccrual loans -- Generally, a loan is classified as nonaccrual and the
accrual of interest on such loan is discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan currently is performing. A loan may remain on accrual status if it is in
the process of collection and is either guaranteed or well secured. When a loan
is placed on nonaccrual status, unpaid interest credited to income is reversed
and the recognition of deferred fees or costs is discontinued. Interest received
on nonaccrual loans generally is either applied against principal or reported as
interest income, according to management's judgment as to the collectibility of
principal. Generally, loans are restored to accrual status when the obligation
is brought current, has performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
Impaired Loans -- Loans are considered impaired when, based on current
information, it is probable that the Company will not collect all principal and
interest payments according to contractual terms. Generally, loans are
considered impaired once principal or interest payments become 90 days or more
past due and they are placed on nonaccrual. Management also considers the
financial condition of the borrower, cash flows of the loan and the value of the
related collateral. Loans specifically reviewed for impairment are not
considered impaired during periods of "minimal delay" in payment (90 days or
less) provided eventual collection of all amounts due is expected. The
impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if repayment is expected to be provided by the collateral.
Generally, the Company's impairment on such loans is measured by reference to
the fair value of the collateral. Interest income on impaired loans is
recognized on the cash basis.
Allowance for Loan Losses -- The allowance for loan losses is increased through
provisions for credit losses charged against income and reduced by reversals of
previous years' provisions. 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 loan's initial effective interest
rate or the fair value of the collateral for certain collateral dependent loans.
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 loans
that may be susceptible to significant change.
(7) FORECLOSED REAL ESTATE
Foreclosed real estate is comprised of property acquired through foreclosure
proceedings or acceptance of a deed-in-lieu of foreclosure.
Foreclosed assets initially are recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management, and the real estate is carried at the
lower of cost or fair value minus estimated costs to sell. Costs relating to
property improvements are capitalized to the extent that they are recoverable
and costs relating to holding property are expensed when incurred. Gains or
losses on the sale of foreclosed real estate are recognized upon disposition of
the property.
(8) LONG-LIVED ASSETS
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method and are included in noninterest expense in the accompanying Consolidated
Statements of Operations.
19
<PAGE> 20
Premises and equipment are depreciated over the estimated useful lives of the
assets (generally five to ten years), except for leasehold improvements which
are amortized over the terms of the respective leases or the estimated useful
lives of the improvements, whichever is shorter.
Long-lived assets are evaluated regularly for other-than-temporary impairment.
If circumstances suggest that their value may be impaired and the write-down
would be material, an assessment of recoverability is performed prior to any
write-down of the assets.
(9) INCOME TAXES
Under the asset and liability method of accounting for income taxes, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred tax assets are recognized for future deductible
temporary differences and tax loss carryforwards if their realization is "more
than likely".
(10) NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income available
to common shareholders by the weighted average number of common shares
outstanding during the year. Diluted net income per common share is computed by
dividing net income available to common shareholders by the weighted average
number of common shares outstanding during the year including any dilutive
potential common shares outstanding, such as options and warrants.
(11) STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method. For
disclosure purposes, pro forma net income and earnings per share impacts are
provided as if the fair value method had been applied.
(12) COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"), was issued and establishes standards for
reporting and displaying comprehensive income and its components. SFAS 130
requires comprehensive income and its components, as recognized under the
accounting standard, to be displayed in a financial statement with the same
prominence as other financial statements. The Company adopted the standard, as
required, beginning in 1998; adoption of this disclosure requirement had no
impact on the financial position or results of operations of the Company.
(13) NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131, Disclosures About Segments
of an Enterprise and Related Information ("SFAS 131"), which was issued in June
1997 established new standards for reporting information about operating
segments in annual and interim financial statements. The standard requires
descriptive information about the way that operating segments are determined,
the products and services provided by the segments and the nature of differences
between reportable years beginning after December 15, 1997. Operating segments
are defined under the Standard based on the availability and utilization of
discrete financial information as well as the necessity for this discrete
financial information to meet certain quantitative thresholds. Management
believes that it has no components that qualify as an operating segment under
SFAS 131 for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133"). The provisions of this statement require that
derivative instruments be carried at fair value on the balance sheet. The
statement allows derivative instruments to be used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be used. The statement also provides for offsetting changes in fair value or
cash flows of both the derivative and the hedged asset or liability to be
recognized in earnings in the same period; however, any changes in fair value or
cash flow that represent the ineffective portion of a hedge are required to be
recognized in earnings and cannot be deferred. For derivative instruments not
accounted for as hedges, changes in fair value are required to be recognized in
earnings. The provisions of this statement become effective for quarterly and
annual reporting beginning January 1, 2000, and allow for early adoption in any
quarterly period after June 1998. The Company will adopt SFAS 133 as required in
2000. It is expected that adoption of this standard will have no material
impact.
20
<PAGE> 21
NOTE B INVESTMENTS
The following table shows the amortized cost and estimated fair value of
investment securities classified as available for sale at December 31, 1998:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
in thousands Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 1,448 $ 30 $ 0 $ 1,478
Federal agencies 38,381 512 (77) 38,816
Mortgage-backed obligations of
federal agencies 4,267 8 (14) 4,261
Other 1,268 21 (1) 1,288
------- ---- ---- -------
Total $45,364 $571 $(92) $45,843
</TABLE>
The schedule below shows the amortized cost and estimated fair value of
investment securities classified as available for sale at December 31, 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
in thousands Cost 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 $30,051 $315 $(6) $30,360
</TABLE>
The amortized cost and estimated fair value for securities available for sale at
December 31, 1998, 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 $ 6,319 $ 6,363
Due after 1 year through 5 years 27,040 27,491
Due after 5 years through 10 years 7,738 7,728
Mortgage-backed securities 4,267 4,261
-------- --------
Total $ 45,364 $ 45,843
</TABLE>
The amortized cost and estimated fair value of securities pledged as collateral
to secure certain deposits and short-term borrowings were $16,020,000 and
$16,364,000, respectively at December 31, 1998, as compared to $9,344,000 and
$9,549,000, respectively, at December 31, 1997.
Proceeds from the sale of available for sale securities in 1998 were $1,031,000,
which included gross gains of $12,000. There were no sales of securities in
1997 or 1996.
21
<PAGE> 22
NOTE C LOANS
Loans, net of amortized deferred fees, are summarized by type as follows:
<TABLE>
<CAPTION>
in thousands December 31,
1998 1997
<S> <C> <C>
Commercial $57,970 $49,644
Real estate 48,871 44,181
Construction 12,024 12,071
Individual 4,560 5,069
Other 6,460 2,578
-------- --------
Total loans 129,885 113,543
Less: Allowance for loan losses (1,524) (1,473)
-------- --------
Loans, net $128,361 $112,070
</TABLE>
NOTE D IMPAIRED LOANS AND ALLOWANCE FOR LOAN LOSSES
Impaired loans are those 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.
Information with respect to impaired loans at December 31 is as follows:
<TABLE>
<CAPTION>
in thousands 1998 1997
---- ----
<S> <C> <C>
Impaired loans with a valuation allowance $1,160 $1,763
Impaired loans without a valuation allowance -- --
------ ------
Total impaired loans $1,160 $1,763
Allowance for credit losses related to impaired loans $ 135 $ 274
Allowance for credit losses related to other than impaired loans 1,389 1,199
------ ------
Total allowance for credit losses $1,524 $1,473
Average impaired loans for the year $1,569 $1,633
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 charged off and that the allowance
is adequate to cover losses inherent in the portfolio at December 31, 1998.
Increases and decreases in the allowance include changes in the measurement of
impaired loans.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
in thousands Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $1,473 $ 1,508 $1,467
Provision (recovery) for loan losses 415 254 (227)
Loans charged off (470) (418) (444)
Recoveries 106 129 712
------ ------- ------
Balance at end of year $1,524 $ 1,473 $1,508
</TABLE>
22
<PAGE> 23
NOTE E 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>
December 31,
in thousands 1998 1997
<S> <C> <C>
$ 60 $ --
Commercial land 562 402
---- ----
Commercial property 622 402
Less: Valuation allowance (87) (53)
---- ----
Total estimated fair value $535 $349
</TABLE>
Activity in the valuation allowance on foreclosed real estate is as follows:
<TABLE>
<CAPTION>
in thousands 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $53 $ 53 $ 362
Provision for losses 34 -- --
Dispositions, net -- -- (309)
Charge-offs, net of recoveries -- -- --
--- ---- -----
Balance at end of year $87 $ 53 $ 53
</TABLE>
NOTE F PREMISES AND EQUIPMENT
Premises and equipment include the following:
<TABLE>
<CAPTION>
December 31,
in thousands 1998 1997
<S> <C> <C>
Land $ 231 $ 231
Buildings and improvements 630 630
Leasehold improvements 953 904
Furniture and equipment 1,540 1,254
Branch in construction 1 66
Less: Accumulated depreciation and amortization (1,672) (1,427)
------- -------
Total premises and equipment $ 1,683 $ 1,658
</TABLE>
23
<PAGE> 24
The Company occupies banking and office space in seven locations under
noncancellable lease arrangements accounted for as operating leases. The initial
lease periods range from three to ten years and provide for one or more
five-year renewal options. The leases provide for percentage annual rent
escalations and require that the lessee pay certain operating expenses
applicable to the leased space. Rent expense applicable to operating leases
amounted to $505,000, $441,000 and $329,000 in 1998, 1997 and 1996,
respectively. At December 31, 1998, future minimum lease payments under
noncancellable operating leases having an initial term in excess of one year are
as follows (in thousands):
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1999 $ 519
2000 530
2001 533
2002 536
2003 547
Thereafter 2,067
-----
Total minimum lease payments $4,732
</TABLE>
NOTE G DEPOSITS
Total deposits are summarized by type as follows:
<TABLE>
<CAPTION>
December 31,
in thousands 1998 1997
<S> <C> <C>
Noninterest-bearing deposits $37,507 $28,856
Interest-bearing:
Interest checking deposits 14,650 12,461
Money market deposits 76,844 50,987
Savings deposits 25,999 24,607
Certificates of deposit of $100,000 or more 17,713 11,259
Other time deposits 34,667 24,632
------ ------
Total interest-bearing deposits 169,873 123,946
------- -------
Total deposits $207,380 $152,802
</TABLE>
NOTE H SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under repurchase agreements,
which are securities sold to the Bank's customers, at the customer's request,
under a continuing "roll-over" contract that matures in one business day. The
underlying securities sold are U.S. Treasury notes or Federal agencies which are
segregated in the Bank's Federal Reserve Bank account from the Company's other
investment securities. The following table presents certain information for
short-term borrowings:
<TABLE>
<CAPTION>
1998 1997
in thousands Amount Rate Amount Rate
Securities sold under repurchase agreements:
<S> <C> <C> <C> <C>
At year end $ 9,523 3.58% $3,049 4.15%
Average for the year 6,549 3.87% 1,220 4.08%
Maximum month-end balance 12,403 4,259
</TABLE>
24
<PAGE> 25
NOTE I OTHER EXPENSE
Other expense in the Consolidated Statements of Operations include the
following:
<TABLE>
<CAPTION>
in thousands Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Outside data service fees $ 529 $ 434 $ 321
Printing and office expenses 339 267 202
Director fees 201 210 146
Bank operations 225 179 163
Loan and foreclosed real estate expenses 201 139 206
Professional fees and services 94 127 163
Marketing and advertising 144 118 147
Insurance 58 60 87
Franchise taxes, filing fees and assessments 49 55 23
Other 123 154 131
------ ------ ------
Total other expenses $1,963 $1,743 $1,589
</TABLE>
NOTE J INCOME TAXES
Federal and state income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
in thousands Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Current federal income tax $ -- $ -- $ --
Current state income tax -- -- --
Deferred federal income tax expense (benefit) 742 614 (3,322)
Deferred state income tax expense (benefit) 55 57 (736)
------ ------ -------
Total income tax expense (benefit) $ 797 $ 671 $(4,058)
</TABLE>
25
<PAGE> 26
The following chart is a summary of the tax effects of temporary differences
that give rise to significant portions of deferred tax assets:
<TABLE>
<CAPTION>
in thousands Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses $236 $ 76 $ --
Deferred loan fees and costs 54 60 51
Allowance for losses on foreclosed real estate 34 20 21
Deferred rent 16 14 9
Deferred compensation 51 22 72
Deferred gain on sale of loans 22 22 28
Loan interest 5 11 8
Alternative minimum tax 97 32 --
Net operating loss carryforwards 2,154 3,199 3,930
----- ----- -----
Gross deferred tax assets 2,669 3,456 4,119
Less valuation allowance -- -- --
----- ----- -----
Total deferred tax assets 2,669 3,456 4,119
Deferred tax liabilities:
Allowance for loan losses -- -- (22)
Tax on unrealized gain on securities available for sale (185) (119) --
Premises and equipment (10) (38) (39)
------ ------ ------
Net deferred income taxes $2,474 $3,299 $4,058
</TABLE>
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit 1.6 2.1 4.6
Elimination of valuation allowance on deferred tax assets -- -- (468.4)
Other, net 0.2 1.1 --
----- ----- -------
Effective tax rates 35.8% 37.2% (429.8)%
</TABLE>
At December 31, 1998 the Company reported a net deferred tax asset of $2,154,000
reflecting the benefit of $5,576,000 in tax loss carryforwards, which expire in
varying amounts between 2003 and 2008. Realization depends on generating
sufficient taxable income before the expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced. The amount of loss carryforward available for any one year may be
limited if the Company is subject to the alternative minimum tax.
26
<PAGE> 27
NOTE K EARNINGS PER COMMON SHARE
The weighted average number of shares outstanding used in the determination of
basic and diluted income per share are shown in the following table:
<TABLE>
<CAPTION>
For the Year Ended 1998
----------------------------------------------
Income Shares Per Share
dollars in thousands (numerator) (denominator) Amount
<S> <C> <C> <C>
Basic earnings per share:
Income available to common shareholders $1,426 10,951,218 $0.13
Effect of dilutive securities (assuming conversion) 439,871
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions of options outstanding $1,426 11,391,089 $0.13
- ---------------------------------------------------------------------------------------------------------------
For the Year Ended 1997
----------------------------------------------
Income Shares Per Share
dollars in thousands (numerator) (denominator) Amount
Basic earnings per share:
Income available to common shareholders $1,131 10,951,218 $0.10
Effect of dilutive securities (assuming conversion) 338,004
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions of options outstanding $1,131 11,289,222 $0.10
- ---------------------------------------------------------------------------------------------------------------
For the Year Ended 1996
----------------------------------------------
Income Shares Per Share
dollars in thousands (numerator) (denominator) Amount
Basic earnings per share:
Income available to common shareholders $5,002 10,951,218 $0.46
Effect of dilutive securities (assuming conversion) 333,344
Diluted earnings per share:
Income available to common shareholders plus
assumed conversions of options outstanding $5,002 11,284,562 $0.44
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Options to purchase 178,000 shares of common stock at $3.625 were outstanding
during 1998 but were not included in the computation of diluted EPS in the last
two quarters because the options' exercise price was greater than the average
market price of the common shares. Likewise, 80,000 options outstanding during
the entire year were exercisable at $5.625 and were not included in the
computation because they do not have a dilutive effect.
In January 1998, under the 1997 Stock Option Plan, the Company awarded 385,950
options to employees and directors, 207,950 of which vest at 20% per year over a
period of five years. The exercise price of the options granted was equal to the
market price on the date of grant at $3.625. In January 1999, 16,868 options
were granted under the 1997 Stock Option Plan to employees. These options also
vest at 20% per year over five years and were awarded at an exercise price of
$2.59, the market price on the date of grant.
NOTE L RELATED PARTY TRANSACTIONS
Certain directors, officers and principal shareholders of the Company and its
subsidiary, including their immediate families and companies in which they have
significant ownership, were loan customers during 1998 and 1997. Such loans were
made in the ordinary course of
27
<PAGE> 28
business and on substantially the same credit terms, including interest rates,
maturities and collateralization, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than normal risk of
collectibility or present other unfavorable features. At December 31, 1998, all
of the loans were current and performing according to agreement.
Total loans outstanding for each year indicated and activity in those loans are
shown below:
<TABLE>
<CAPTION>
in thousands Years ended December 31,
1998 1997
<S> <C> <C>
Outstanding at beginning of year $ 962 $ 870
New loans and principal advances 1,968 524
Repayments (899) (432)
----- -----
Outstanding at end of year $ 2,031 $ 962
</TABLE>
An individual who was a director of the Company's subsidiary during 1998 is a
general partner in a partnership which leases a branch facility to the Bank. The
lease term expired June 30, 1997, and was renewed under the second of three
five-year renewal options at a minimum annual rate of approximately $75,600. A
director of the Company and its subsidiary is the Chairman of the Board of a
company that provided services associated with the disposition of certain
properties obtained through foreclosure. Fees and commissions for these services
were approximately $85,000 in 1998; no fees were paid in 1997. Management
believes that the services provided and the terms of the foregoing lease are no
more and no less favorable to the Company than those which could have been
received from unaffiliated parties.
NOTE M EMPLOYEE BENEFIT PLANS
The Company has a 401(k) plan covering all employees who have reached the age of
21 and have completed at least one year of service as defined by the plan. The
Company made contributions to the plan of approximately $77,000, $67,000 and
$55,000 in 1998, 1997 and 1996, respectively. These amounts are included in
salaries and employee benefits in the accompanying Consolidated Statements of
Operations.
In 1993, upon the successful completion of a stock offering, 350,000 Management
Stock Options were granted to the Chairman of the Board, the Vice Chairman and a
major stockholder under the terms of the Plan of Reorganization and
Recapitalization. These options are exercisable at a purchase price of $0.10 per
share and have a term of five years, expiring in March of 2001. Deferred
compensation expense has been recognized and the offset, recorded to paid-in
capital - stock options.
An Incentive Stock Option ("ISO") Plan in place since 1987 allowed the Company
to grant options to officers and key employees for up to 404,235 shares of
common stock. There were 80,000 options outstanding under the ISO Plan at the
beginning of 1995. No options were granted under this plan during 1996. In
January 1997, seven officers and key employees were granted 12,600 options. The
exercise price of the options, which have a term of ten years from the date of
the grant, equals the market price of the Company's stock on the date of grant.
At the 1997 Annual Shareholders Meeting, a combined stock option plan for both
employees and directors was approved to replace the original ISO Plan, with a
total of 500,000 shares of common stock available for grant. Awards under the
1997 Stock Option Plan (the "1997 Plan") may be granted in the form of incentive
stock options for employees or non-incentive stock options for either employees
or directors, and have a maximum duration of ten years from the date of grant.
The exercise price of any option granted under the plan may not be less than the
market price of the optioned shares on the date of grant. In January 1998,
178,000 options were granted under the 1997 Plan to directors, and 207,950
incentive stock options, which vest at 20% per year over a five year period,
were granted to employees; in January 1999, 16,868 options, which also vest at
20% per year over a five-year period, were granted to employees.
28
<PAGE> 29
Under the provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), the Company had the option
of accruing a compensation expense for stock options granted to employees or
applying the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"). The Company has elected to continue to account for the
above fixed stock option plans under APB 25, which does not require compensation
expense to be recognized in the Consolidated Statements of Operations. Had
compensation cost for the plan been determined based on the fair value of the
options at the grant date consistent with the method of SFAS 123, the Company's
net income and earnings per share in 1997 would have been:
<TABLE>
<CAPTION>
Basic Diluted
Net income Earnings Per Earnings Per
(in thousands) Share Share
<S> <C> <C> <C>
As reported $1,131 $0.10 $0.10
Pro forma 1,112 0.10 0.10
</TABLE>
No pro forma information is provided for 1998, because options granted during
the year and vested at December 31, 1998, were to non-employee directors. No
options were granted in 1996.
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1997: dividend yield of 0%, expected volatility
of 30%, risk-free interest rate of 6.41%, and expected life of 10 years.
A summary of the status of the Company's fixed stock option plans at December
31, 1998, 1997 and 1996 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 442,600 $1.17 430,000 $1.13 430,000 $1.13
Granted 385,950 $3.625 12,600 2.63 -- --
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
End of year 828,550 $2.31 442,600 $1.17 430,000 $1.13
Weighted average fair value of
options granted during the year $1.97 $1.50 --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, 620,600 options were exercisable; at December 31, 1997 and
1996, all options outstanding were exercisable.
The following information applies to options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Number outstanding 828,550
Range of exercise prices $0.10 to $5.625
Weighted average exercise price $2.31
Weighted average remaining contractual life 5.7 years
</TABLE>
NOTE N 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
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
29
<PAGE> 30
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 December 31, 1998, that the
Company meets all capital adequacy requirements to which it is subject.
As of December 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 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
As of December 31, 1997:
Total capital (to risk-weighted assets):
Company $18,959 18.74% $8,094 8.00% $10,118 10.00%
Suburban Bank of Maryland 14,415 14.48 7,966 8.00 9,958 10.00
Tier 1 capital (to risk-weighted assets):
Company 17,692 17.49 4,047 4.00 6,071 6.00
Suburban Bank of Maryland 13,168 13.22 3,983 4.00 5,975 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>
NOTE O COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company incurs certain commitments and
contingent liabilities, that are not reflected in the accompanying Consolidated
Financial Statements. These off-balance-sheet items include various commitments
to extend credit and standby letters of credit. No material losses are expected
to result from these transactions. At December 31, 1998 and 1997, commitments
under standby letters of credit totaled approximately $744,000 and $954,000,
respectively. Unfunded loan commitments totaled approximately $18,817,000 and
$15,000,000 at December 31, 1998 and 1997, respectively.
The Company's subsidiary is, at times, and in the ordinary course of banking
business, subject to legal actions. Management is of the opinion that losses, if
any, resulting from current legal actions will not have a material adverse
effect on the financial condition of the Company.
Because most of the Company's business activity is with customers located in the
Washington, D.C. metropolitan area, a geographic concentration of credit risk
exists within the loan portfolio, and, as such, its performance will be
influenced by the economy of the region. In addition, foreclosed real estate is
located in the same market or its surrounding areas; accordingly, the recovery
of a substantial portion of the carrying amount of foreclosed real estate is
susceptible to changes in market conditions in the Washington metropolitan area.
The loan portfolio is diversified with no single industry or customer comprising
more than 7.3% of the total portfolio. The largest concentration of borrowers
within general types of industries, as classified by Standard Industrial Codes
("SIC"), is in the Finance/Insurance/Real Estate group, which is 17.4% of the
total portfolio.
The Company sells excess funds overnight (Federal funds sold) to correspondent
banks. At December 31, 1998, a total of $43.1 million was invested with three
banks, the largest exposure being $22.8 million. All of these correspondent
banks are considered well capitalized under regulatory guidelines, and,
therefore, little, if any, credit risk is present.
30
<PAGE> 31
NOTE P FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments ("SFAS 107"), requires disclosure of fair value
information about financial instruments for which it is practicable to estimate
that value. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value for its financial instruments as defined by SFAS 107.
CASH AND DUE FROM BANKS: The carrying amount approximates fair value.
INTEREST-BEARING DEPOSITS WITH BANKS AND FEDERAL FUNDS SOLD: The carrying amount
approximates fair value.
INVESTMENT SECURITIES AVAILABLE FOR SALE: Fair values are based on published
market prices or dealer quotes.
LOANS: For loans with short-term or variable characteristics, such as home
equity or personal lines of credit and variable-rate commercial and real estate
loans, the carrying value approximates fair value. This amount excludes any
value related to account relationships. The fair value of other types of loans
is estimated by discounting the future cash flows using the comparable risk-free
rate, adjusted for credit risk and operating expenses.
INTEREST RECEIVABLE AND INTEREST PAYABLE: The carrying amount approximates fair
value.
NONINTEREST-BEARING DEPOSITS: The fair value of these instruments, by the SFAS
107 definition, is the amount payable at the reporting date.
INTEREST-BEARING DEPOSITS: The fair value of demand deposits, savings accounts
and money market deposits with no defined maturity, by SFAS 107 definition, is
the amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash flows using
the current rates at which similar deposits would be made.
At December 31, 1997, the Company had outstanding letters of credit and
commitments to extend credit of $954,000 and $15,000,000, respectively; at
December 31, 1998, outstanding letters of credit totaled $744,000 and
commitments to extend credit were $18,817,000. The fair value of these
off-balance-sheet financial instruments, based on fees that would be charged to
enter similar arrangements, is immaterial.
The estimated fair values of the Company's financial instruments required to be
disclosed under SFAS 107 are as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
in thousands Amount Value Amount Value
Assets:
<S> <C> <C> <C> <C>
Cash and due from banks $12,280 $12,280 $10,759 $10,759
Federal funds sold 43,093 43,093 15,569 15,569
Investment securities available for sale 45,843 45,843 30,360 30,360
Net loans (including loans held for sale) 130,175 133,706 112,070 113,671
Interest receivable 1,387 1,387 1,172 1,172
Liabilities:
Noninterest-bearing deposits $37,507 $37,507 $28,856 $28,856
Interest-bearing deposits 169,873 170,177 123,946 123,981
Securities sold under repurchase agreements 9,523 9,523 3,049 3,049
Interest payable 154 154 100 100
</TABLE>
31
<PAGE> 32
NOTE Q PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
In 1998 and 1997, all costs of operating the Bank were allocated directly to the
Bank. Condensed financial statements of Suburban Bancshares, Inc. only (the
"Parent") follow:
CONDENSED BALANCE SHEETS
Parent Company
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks $ 1,449 $ 773
Investment securities available for sale 2,784 3,300
Investment in subsidiary 16,127 14,789
Deferred income taxes 40 96
Other assets 48 46
------- -------
Total Assets $20,448 $19,004
LIABILITIES AND SHAREHOLDERS' EQUITY $ 6 $ 5
Liabilities
Shareholders' equity:
Common stock 109 109
Paid-in capital -- stock options 534 534
Additional paid-in capital 25,259 25,259
Accumulated deficit (5,484) (6,910)
Accumulated other comprehensive income 24 7
------ ------
Total shareholders' equity 20,442 18,999
------ ------
Total Liabilities and Shareholders' Equity $20,448 $19,004
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
Parent Company
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1998 1997 1996
<S> <C> <C> <C>
Interest on deposits $ 55 $ 33 $ 64
Interest on investments 172 197 148
--- --- ---
Total income 227 230 212
Total expenses 92 91 111
Income before income taxes and equity in
undistributed income of subsidiaries 135 139 101
Income tax expense (benefit) 47 54 (152)
----- ----- -------
Income before equity in undistributed
income of subsidiaries 88 85 253
Equity in undistributed income of subsidiaries 1,338 1,046 4,749
Net income ----- ----- ------
$1,426 $1,131 $5,002
</TABLE>
32
<PAGE> 33
CONDENSED STATEMENTS OF CASH FLOWS
Parent Company
<TABLE>
<CAPTION>
Years ended December 31,
in thousands 1998 1997 1996
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 1,426 $ 1,131 $ 5,002
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Equity in income of subsidiaries (1,338) (1,046) (4,749)
Accretion on securities (4) (6) (3)
Deferred income tax expense (benefit) 44 51 (152)
(Increase) decrease in other assets (2) 5 (34)
Increase (decrease) in other liabilities 1 3 (3)
------- ------- -------
Net cash provided by operating activities 127 138 61
Net cash provided by investing activities 549 -- 526
Net cash provided by financing activities -- -- --
Net increase in cash and cash equivalents 676 138 587
Cash and cash equivalents at beginning of year 773 635 48
------- ------- -------
Cash and cash equivalents at end of year $ 1,449 $ 773 $ 635
</TABLE>
33
<PAGE> 34
NOTE R SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
1998
Dollars in thousands First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Income from earning assets $3,220 $3,475 $3,696 $3,855
Interest expense 1,370 1,564 1,665 1,738
Net interest income 1,850 1,911 2,031 2,117
Provision for loan losses 100 95 120 100
Noninterest income 208 244 270 366
Noninterest expense 1,500 1,536 1,616 1,707
Income before income taxes 458 524 565 676
Income tax expense 163 188 203 243
Net income $295 $336 $362 $433
- ------------------------------------------------------------------------------------------------------------------
Basic:
Earnings per share $0.03 $0.03 $0.03 $0.04
Average shares outstanding 10,951,218 10,951,218 10,951,218 10,951,218
Diluted:
Earnings per share $0.03 $0.03 $0.04 $0.03
Average shares outstanding 11,295,171 11,297,762 11,294,318 11,289,433
Dividends declared per common share -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Market price per common share
High for the period $ 4 $ 4 9/16 $ 4 1/8 $ 3
Low for the period 3 3/8 3 7/8 2 7/8 2 11/32
==================================================================================================================
<CAPTION>
1997
Dollars in thousands First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
Income from earning assets $ 2,491 $2,762 $2,956 $3,154
Interest expense 935 1,081 1,228 1,326
Net interest income 1,556 1,681 1,728 1,828
Provision for loan losses 35 80 80 59
Noninterest income 171 193 224 186
Noninterest expense 1,390 1,437 1,325 1,359
Income before income taxes 302 357 547 596
Income tax benefit 106 130 194 241
Net income $ 196 $227 $353 $355
- ------------------------------------------------------------------------------------------------------------------
Basic:
Earnings per share $ 0.02 $0.02 $0.03 $0.03
Average shares outstanding 10,951,218 10,951,218 10,951,218 10,951,218
Diluted:
Earnings per share $ 0.02 $0.02 $0.03 $0.03
Average shares outstanding 11,286,791 11,285,713 11,286,622 11,295,202
Dividends declared per common share -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Market price per common share
High for the period $ 2 5/8 $ 2 1/2 $ 3 9/16 $ 4
Low for the period 2 3/16 2 2 1/8 $ 3
==================================================================================================================
</TABLE>
34
<PAGE> 35
MARKET FOR COMMON STOCK
Suburban Bancshares, Inc.'s common stock is traded on the NASDAQ Stock Market
under the symbol "SBNK". The approximate number of Suburban Bancshares, Inc.
shareholders of record as of March 1, 1999 was 883.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Suburban Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of
Suburban Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Suburban Bancshares, Inc. and Subsidiary as of December 31, 1998 and 1997, and
the results of their operations and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/
Stegman & Company
Baltimore, Maryland
January 8, 1999
35
<PAGE> 36
BOARD OF DIRECTORS
Suburban Bancshares, Inc. (1)
Suburban Bank of Maryland (2)
SAMUEL Y. BOTTS (1,2)
Partner, Jordan, Keys, Jessamy & Botts, L.L.P.
(law firm)
ALBERT G. DeCESARIS (2)
Vice President, Vendemia & DeCesaris Builders, Inc.
ROBERT G. DEPEW (2)
President, Robert G. Depew & Associates, Inc.
(real estate leasing and management)
BARBARA M. DiNENNA-CORBOY (1,2)
Retired Chairman, DiNenna & Associates, C.P.A.
FRANK K. HALLEY, JR. (2)
President, Carrollton Realty, Inc.
(real estate sales and management)
STEPHEN A. HORVATH (1,2)
PRESIDENT
MARLIN K. HUSTED (1,2)
VICE CHAIRMAN (1)
WINFIELD M. KELLY, JR. (1,2)
CHAIRMAN
President & CEO, Dimensions Health Corporation
(health care management)
RAYMOND G. LaPLACA (1,2)
VICE CHAIRMAN (2)
Partner, Knight, Manzi, Nussbaum & LaPlaca, P. A.
(law firm)
ROBERT L. LONG (2)
Chairman, Long Fence Company
(commercial and residential fencing)
FRANK LUCENTE, JR. (2)
President, Lucente Enterprises
(real estate development)
KENNETH H. MICHAEL (1,2)
Chairman, The Michael Companies, Inc.
(real estate sales and management)
ATA O. MOSHYEDI, M.D. (2)
Physician, Gastroenterology
VINCENT D. PALUMBO, D.D.S. (1,2)
President, V.D. Palumbo, P.A.
(oral and maxillofacial surgery)
36
<PAGE> 37
LAWRENCE A. SHULMAN (1,2)
Partner, Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
(law firm)
CAROL A. TRAWICK (2)
CEO, Trawick & Associates
(computer consulting firm)
ALBERT W. TURNER (1,2)
Senior Partner, Carrollton Enterprises
(real estate development and management)
OFFICERS
Suburban Bancshares, Inc.
WINFIELD M. KELLY, JR.
Chairman and Chief Executive Officer
MARLIN K. HUSTED
Vice Chairman
STEPHEN A. HORVATH
President and Chief Operating Officer
SIBYL S. MALATRAS
Senior Vice President and Chief Financial Officer
SUSAN J. HANSEN
Corporate Secretary
Suburban Bank of Maryland
WINFIELD M. KELLY, JR.
Chairman
RAYMOND G. LaPLACA
Vice Chairman
STEPHEN A. HORVATH
President and Chief Executive Officer
JOSEPH E. BURNETT
Senior Vice President and Senior Lending Officer
CESAR O. CABREJAS
Senior Vice President and Senior Branch Administrator
HAROLD J. KOCH
Senior Vice President and Senior Credit Officer
SIBYL S. MALATRAS
Senior Vice President and Chief Operating Officer
MICHAEL A. AHEARN
Vice President
37
<PAGE> 38
ENNIA C. ANDERSEN
Vice President
STEVEN M. BRUNN
Vice President
CHARLES E. CARNS
Vice President and Controller
VERNA P. CIARAVELLA
Vice President
JEFFREY D. FRANKLIN
Vice President
BARBARA M. HART
Vice President
DOROTHY H. HOLLAND
Vice President
RICHARD A. LICHTY
Vice President
JAMES M. LYON
Vice President
JOSEPH A. RUTH
Vice President
EDSEL G. SHAFFER
Vice President
JEROME D. SMALLWOOD
Vice President
PATRICK van der HAM
Vice President
JEFFREY S. WAGNER
Vice President
N. LEE WALTZ, JR.
Vice President
38
<PAGE> 39
BRANCH LOCATIONS AND GENERAL INFORMATION
<TABLE>
<CAPTION>
Suburban Bank of Maryland
<S> <C> <C> <C>
Bethesda 7900 Wisconsin Avenue Lobby: M-F 9 am - 4 pm
Bethesda, MD 20814-3601 Drive-in: M-F 8 am - 6:30 pm
with ATM (301) 654-2200
fax: (301) 654-1040
Capitol Heights 8703 Central Avenue Lobby: M-F 9 am - 2 pm
Capitol Heights, MD 20743-3689 Drive-in: M-F 8 am - 6 pm
with ATM (301) 350-8100 Drive-in: Sat 9 am - 12 noon
fax: (301) 499-2597
Clinton 7600 Old Branch Avenue Lobby: M-F 9 am - 2 pm
Clinton, MD 20735-1603 Drive-in: M-F 8 am - 6 pm
with ATM (301) 868-1215 Drive-in: Sat 9 am - 12 noon
fax: (301) 868-0363
Greenbelt 7505 Greenway Center Drive Lobby: M-F 9 am - 4 pm
P. O. Box 298
Greenbelt, MD 20768-0298
(301) 220-0733
fax: (301) 220-2410
Oxon Hill 6196 Oxon Hill Road Lobby: M-F 9 am - 2 pm
Oxon Hill, MD 20745-3130 Drive-in: M-F 8 am - 6 pm
(301) 567-2650
fax: (301) 567-2479
Rockville 30 West Gude Drive Lobby: M-F 9 am - 4 pm
Rockville, MD 20850-1170 Walk-up: M-Th 8 am - 4 pm
(301) 309-1771 Walk-up: Fri 8 am - 6 pm
fax: (301) 309-6785
White Flint 11414 Rockville Pike Lobby: M-F 9 am - 4 pm
Rockville, MD 20852-3001 Drive-in: M-F 8 am - 6:30 pm
with ATM (301) 770-6625 Drive-in: Sat 9 am - 12 noon
fax: (301) 770-6658
Opening in mid 1999
Beltsville 10421 Baltimore Boulevard Lobby: M-F 9 am - 4 pm
Beltsville, MD 20705 Drive-in: M-F 8 am - 6 pm
with ATM (301) 931-2330 Drive-in: Sat 9 am - 12 noon
fax: (301) 931-2333
</TABLE>
General Information
Corporate Office
7505 Greenway Center Drive
P. O. Box 298
Greenbelt, MD 20768-0298
(301) 474-6694
(301) 474-9103 fax
39
<PAGE> 40
Corporate Publications
Suburban Bancshares, Inc.'s Form 10-K and quarterly reports are available upon
request at no charge by writing or calling the Corporate Office.
Registrar
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
40
<PAGE> 1
EXHIBIT 21
List of subsidiaries of Suburban Bancshares, Inc.
Suburban Bank of Maryland
7505 Greenway Center Drive
Greenbelt, Maryland 20770
<PAGE> 1
STEGMAN
& Company
Certified Public Accountants and
Management Consultants since 1915
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this Form 10-K
of Suburban Bancshares, Inc. for the year ended December 31, 1998 of our report
dated January 8, 1999 which appears on page 35 of the 1998 Annual Report to
Shareholders of Suburban Bancshares, Inc.
/s/
Stegman & Company
Baltimore, Maryland
March 16, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,280
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 43,093
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,843
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 131,699
<ALLOWANCE> 1,524
<TOTAL-ASSETS> 238,566
<DEPOSITS> 207,380
<SHORT-TERM> 9,523
<LIABILITIES-OTHER> 951
<LONG-TERM> 0
0
0
<COMMON> 109
<OTHER-SE> 20,603
<TOTAL-LIABILITIES-AND-EQUITY> 238,566
<INTEREST-LOAN> 10,529
<INTEREST-INVEST> 2,193
<INTEREST-OTHER> 1,524
<INTEREST-TOTAL> 14,246
<INTEREST-DEPOSIT> 6,083
<INTEREST-EXPENSE> 6,337
<INTEREST-INCOME-NET> 7,909
<LOAN-LOSSES> 415
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 6,359
<INCOME-PRETAX> 2,223
<INCOME-PRE-EXTRAORDINARY> 1,426
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,426
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 4.33
<LOANS-NON> 1,339
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,473
<CHARGE-OFFS> 470
<RECOVERIES> 106
<ALLOWANCE-CLOSE> 1,524
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
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</TABLE>
