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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
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Commission file number 0-22414
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Suburban Bancorporation Inc.
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(Name of small business issuer in its charter)
Delaware 31-1385530
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10869 Montgomery Road, Cincinnati, Ohio 45242
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(Address of principal executive offices)
Issuer's telephone number (513) 489-4888
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [x]
State issuer's revenues for its most recent fiscal year $15,638,000
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days: $16,672,824 (1,058,592 shares at $15.75, per share, the last
sale price on the NASDAQ National Market System on September 12, 1996).
(Excludes shares beneficially owned by directors and executive officers and
shares held by the registrant's employee stock ownership plan and management
recognition plan and not allocated or granted to participants in such plans).
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date Common Stock, 1,474,932
shares as of September 26, 1996
Transitional Small Business Disclosure Format (check one): Yes _____
No__X__
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1996 Annual Meeting of
Shareholders to be held October 16, 1996 are incorporated by reference into Part
III (the "Proxy Statement").
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PART I
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Page
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Item 1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01
Item 2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . 29
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 61
PART III
Item 9. Directors and Executive Officers; Compliance
with Section 16(a) of the Exchange Act . . . . . . . . . . . . . . . . . . . . . 61
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 12. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Item 13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 62
</TABLE>
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
The Company is primarily engaged in planning and coordinating the
business activities of the Bank. In the future, the Company may become an
operating company or acquire or organize other operating subsidiaries,
including other financial institutions.
The Bank serves the greater Cincinnati metropolitan area with its main
office located in Montgomery, Ohio and six branch offices located in Hamilton
County. While the Bank's market area consists of all of Hamilton County, the
southern areas of Butler and Warren Counties and the western area of Clermont
County, Ohio, the Bank accepts loan applications from all of Butler, Warren and
Clermont Counties in Ohio, as well as the northern areas of Kentucky proximate
to the greater Cincinnati area. The Bank is principally engaged in the
business of accepting deposits from the general public and originating and
purchasing permanent loans which are secured by first mortgages on one-to-four
family residential properties located in its market area. The Bank also makes
residential construction loans, multi-family residential loans, and consumer
loans. In the past, however, the Bank more actively invested in multi-family
and commercial real estate loans, and a substantial amount of such loans remain
in the Bank's portfolio.
RECENT DEVELOPMENTS
On August 8, 1995, the FDIC approved a significant reduction in the
deposit insurance premiums charged to those financial institutions that are
members of the Bank Insurance Fund ("BIF"). As a result of such action, most
BIF-insured financial institutions pay an annual deposit insurance assessment
of 0.04% of insured deposits or less. No similar reduction was approved for
institutions, such as the Bank, that are members of the SAIF. This amendment
creates a significant disparity between the deposit insurance premiums paid by
BIF and SAIF members. The United States Congress and the federal banking
agencies are actively considering several options to address this disparity,
including a one-time assessment based on a percentage of insured deposits to
be imposed on all SAIF members. While it is uncertain whether this or any
proposal for addressing the insurance premium disparity will be adopted based
on the Bank's deposits at June 30, 1996, a one-time assessment based on .80% of
deposits would be approximately $632,000 after taxes. The effect of which at
June 30, 1996 would have reduced tangible and core capital ratios to 10.6% from
10.9%, and reduced risk based capital ratios to 20.3% from 20.7%. However, if
such a special assessment is imposed and the SAIF is recapitalized, it could
have the effect of reducing the Bank's deposit insurance premiums in future
periods, thereby establishing competitive equality between BIF and SAIF insured
financial institutions (see "Regulation"). Also under consideration are
proposals relating to the reduction or elimination of differences between banks
the thrifts, including the possible merger of the BIF and SAIF and elimination
of the thrift charter. While there currently are substantial impediments to
converting from SAIF to BIF deposit insurance, recent legislation substantially
reduced the adverse federal tax consequences of thrifts converting to banks
(see "Taxation"). The Bank cannot predict at this time whether any pending
legislation ultimately will be enacted in its current form or, if enacted,
whether such legislation would remedy some or all of the related adverse
financial and tax effects.
LENDING ACTIVITIES
GENERAL In recent years, Suburban Federal's principal lending activity
has been the origination and purchase of loans secured by first mortgages on
one- to four-family residences in the Bank's market area. The Bank also makes
residential construction loans, multi-family loans, commercial real estate
loans, and consumer loans. In the future the Bank will begin offering
non-mortgage business loan products.
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Suburban Federal offers a variety of adjustable rate loans for its
loan portfolio, fixed rate loans are also available but are generally sold on
the secondary market if the initial term is greater than 15 years. Fixed rate
loans are sold to enhance income and help to manage interest rate risk of the
Bank.
LOAN PORTFOLIO COMPOSITION For information regarding to the
composition of the Bank's loan portfolio, see Note 4 of the Notes to
Consolidated Financial Statements in Item 7 of this report which Note is
incorporated herein by reference.
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The following table sets forth information at June 30, 1996 regarding
the dollar amount of loans maturing in Suburban Federal's portfolio, including
scheduled repayments of principal, based on contractual terms to maturity.
Demand loans, loans having no schedule of repayments and no stated maturity and
overdrafts are reported as due in one year or less.
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Due after Due after Due after
Due during the year ending 3 through 5 through 10 through Due after
June 30, 5 yrs after 10 yrs after 15 yrs after 15 yrs after
---------------------------- June 30, June 30, June 30, June 30,
1997 1998 1999 1996 1996 1996 1996 Total
---- ---- ---- ----------- ------------ ------------ ------------ -----
(In thousands)
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Real estate mortgage loans:
Residential . . . . . . . . $ 154 $ 132 $ 155 $ 1,031 $ 7,289 $31,382 $79,472 $119,615
Multi-family . . . . . . . 1,701 5,287 2,047 855 8,769 2,707 3,133 24,499
Non-residential . . . . . . 3,260 2,408 3,255 1,675 4,705 741 270 16,314
Construction (1) . . . . . 348 -- -- -- -- 850 2,875 4,073
Consumer loans:
Savings accounts . . . . . 143 51 3 -- -- -- -- 197
Other . . . . . . . . . . . 66 3 7 5 30 -- -- 111
------- ------- ------- ------- ------- ------- ------ --------
Total loans . . . . . . . $ 5,672 $ 7,881 $ 5,467 $ 3,566 $20,793 $35,680 $85,750 $164,809
======= ======= ======= ======= ======= ======= ======= ========
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(1) Consists of residential construction loans that will
convert to conventional loans after a construction period.
The following table sets forth the dollar amount of loans at June 30,
1996 due one year or more after June 30, 1996 which have predetermined interest
rates and floating or adjustable interest rates.
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Predetermined Floating or
Rates Adjustable-rates
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(In thousands)
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Real estate mortgage loans:
Residential. . . . . . . . . . . . . $39,869 $79,592
Multi-family . . . . . . . . . . . . -- 22,799
Non-residential . . . . . . . . . . . 11 13,042
Construction . . . . . . . . . . . . 1,036 2,689
Consumer loans:
Savings accounts . . . . . . . . . . 55 --
Home improvements . . . . . . . . . 45 --
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Total . . . . . . . . . . . . . . . $41,016 $118,122
======= ========
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Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, due-on-sale clauses in mortgage loans generally give Suburban Federal
the right to declare a conventional loan due and payable in the event, among
other things, that a borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to
increase when current mortgage loan market rates are substantially higher than
rates on existing mortgage loans and tends to decrease when current mortgage
loan market rates are substantially lower than rates on existing mortgage
loans.
ORIGINATIONS, PURCHASES AND SALES OF LOANS The following table sets
forth certain information with respect to Suburban Federal's loan originations,
purchases and sales during the periods indicated.
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Year Ended June 30,
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1996 1995 1994
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Loans originated: Amount Amount Amount
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Real estate
One-to four-family. . . . . . . . $24,912 $18,258 $39,486
Multi-family. . . . . . . . . . . 4,453 6,036 --
Commercial. . . . . . . . . . . . -- 1,978 905
Construction. . . . . . . . . . . 3,195 1,683 460
Consumer. . . . . . . . . . . . . . 272 332 157
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$32,832 $28,287 $41,008
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Loans purchased. . . . . . . . . . . . $26,376 $25,283 --
======= ======= =======
Loans sold . . . . . . . . . . . . . . $ 7,085 $ 1,030 $ 8,112
======= ======= =======
</TABLE>
During the fiscal year ended June 30, 1995, Suburban Federal began
purchasing loans from third party originators to complement loan originations.
The loans purchased are all originated in the Bank's local market area and are
approved, prior to closing, by the underwriting staff of the Bank in accordance
with the Bank's underwriting standards.
ONE-TO FOUR-FAMILY RESIDENTIAL LENDING Since mid-1991, Suburban
Federal's principal lending activity has been the origination of loans secured
by first mortgages on existing one- to four-family residences in the Bank's
market area. At June 30, 1996, $119.6 million, or 72.6%, of the Bank's total
loans were secured by one- to four-family residences, a substantial majority of
which were existing, owner-occupied, single-family residences in the Bank's
market area. The Bank's current policy is to sell its long-term fixed-rate
loan originations to investors in the secondary market, and to retain its
adjustable-rate and short-term (15 years or less), fixed-rate loan originations
in its portfolio. The Bank does originate a small amount of long term fixed
rate loans in a program to aid first time home buyers. At June 30, 1996, $79.7
million, or 66.6%, of the Bank's one- to four-family residential loans had
adjustable interest rates, and $39.9 million, or 33.4%, had fixed-rates.
Suburban Federal's one- to four-family residential mortgage loans
generally are for terms of 10 to 30 years, amortized on a monthly basis, with
principal and interest due each month.
Suburban Federal's fixed-rate, one- to four-family residential
mortgage loans are underwritten in accordance with applicable guidelines and
requirements for sale to investors in the secondary market. The maximum
loan-to-value ratio on one- to four-family residential first mortgage loans
secured by owner-occupied properties is 97% of the lesser of the appraised
value or purchase price, with private mortgage insurance required on loans with
loan-to-value ratios in excess of 80%. The maximum loan-to-value ratio on
mortgage loans secured by non-owner-occupied properties is limited to 80%.
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Suburban Federal offers a variety of adjustable-rate, one- to
four-family residential mortgage loans. These loans are indexed to the weekly
average rate on U.S. Treasury securities adjusted to a constant maturity. The
rates at which interest accrues on these loans are adjustable periodically,
generally with limitations on adjustments of 2% per adjustment period and 6%
over the life of the loan.
The retention of adjustable-rate loans in the Bank's portfolio helps
reduce the Bank's exposure to increases in prevailing market interest rates.
However, there are unquantifiable credit risks resulting from potential
increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, one- to four-family
adjustable-rate loans which provide for initial rates of interest below the
fully indexed rates may be subject to increased risk of delinquency or default
as the higher, fully indexed rate of interest, subsequently replaces the lower
initial rate due to the fact that the loans generally are underwritten based on
the initial rate of interest when the initial term to repricing is three years
or more. Further, although adjustable-rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates,
the extent of this interest sensitivity is limited by the periodic and lifetime
interest rate adjustment limitations and the ability of borrowers to convert
the loans to fixed-rates. Accordingly, there can be no assurance that yields
on the Bank's adjustable-rate loans will fully adjust to compensate for
increases in the Bank's cost of funds. Finally, adjustable-rate loans increase
the Bank's exposure to decreases in prevailing market interest rates, although
decreases in the Bank's cost of funds tend to offset this effect.
Suburban Federal also offers construction loans to qualified borrowers
for construction of one- to four-family residences in the Bank's market area.
Typically, the Bank limits its construction lending to selected local
developers to build single-family dwellings where a permanent purchase
commitment has been obtained or individuals building their primary or secondary
residences. Construction loans have a maximum loan-to-value ratio of 90%.
Borrowers must satisfy all credit requirements which would apply to the Bank's
permanent mortgage loan financing for the subject property. While the Bank's
construction loans generally require repayment in full upon the completion of
construction, the Bank also makes construction loans that convert to permanent
loans following construction. Construction loans with a Loan- To-Value over
80% require the borrower to obtain private mortgage insurance.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING Following Suburban
Federal's acquisition of approximately $43 million in cash in connection with
its acquisition of the deposits of Valleywood Savings Association in
Cincinnati, Ohio in 1986, the Bank became active in the origination of
multi-family and commercial real estate loans in order to benefit from the
higher origination fees and interest rates, as well as shorter terms to
maturity and repricing, than could be obtained from single-family mortgage
loans. Multi-family and commercial real estate lending, however, entails
significant additional risks compared with one- to four-family residential
lending. For example, multi-family and commercial real estate loans typically
involve large loan balances to single borrowers or groups of related borrowers,
the payment experience on such loans typically is dependent on the successful
operation of the real estate project, and these risks can be significantly
impacted by supply and demand conditions in the market for multi-family
residential units and commercial office, retail and warehouse space.
Consistent with these increased risks, during the economic slowdown in the late
1980s and early 1990s the Bank experienced increases in its non-performing
multi-family and commercial real estate loans and real estate acquired in
settlement of such loans and decreases in the quality of such loans that have
remained performing. As a result, by mid-1991 the Bank had ceased offering
multi-family or commercial real estate loans in accordance with a cease and
desist order issued by the Office of Thrift Supervision at that time.
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As of September 30, 1993 and as a result of the successful closing of
the initial stock offering of the Company, the OTS Order was released. For a
time after the release of the Order management limited lending on multi-family
and non-residential collateral. During Fiscal 1995 the Bank re-entered the
market for multi-family loans, and during Fiscal 1996 the Bank adopted a new
policy and underwriting standards for non-residential real estate loans.
In the coming fiscal year the management intends to introduce small
business lending products to the offering mix. Such lending is intended to be
limited initially to moderate the exposure of the Bank to the inherently higher
level of risk associated with this type of lending.
The following paragraphs set forth information regarding the Bank's
multi-family and commercial real estate loans with outstanding balances
exceeding $1.0 million which were not classified by management as substandard,
doubtful or loss or designated by management as special mention at June 30,
1996. For information regarding the Bank's asset classification policies and
largest adversely classified assets, see "Asset Classification, Allowance for
Losses and Non-Performing Assets."
APARTMENT IN NORTH COLLEGE HILL, OHIO In December 1994, the
Bank made a $2.9 million loan secured by a 108 unit apartment complex.
At that time, an appraisal indicated a market value of $3.85 million,
for a loan to value ratio of 76%. The loan is being amortized over 25
years for the purpose of monthly payments of principal and interest,
but the full balance of the loan will be due in January 2005. The
outstanding balance was $2.9 million at June 30, 1996.
SHOPPING CENTERS IN CINCINNATI, OHIO AND OXFORD, OHIO In
February 1995, the Bank made a $1.9 million loan secured by a shopping
center with 82,366 net rentable square feet in Cincinnati, Ohio and a
shopping center with 48,234 net rentable square feet in Oxford, Ohio.
This loan was the result of a refinance and combination of two
existing loans already held by the Bank which matured during the year.
At the time of the transaction, an appraisal indicated a total market
value of $2.4 million for a loan-to-value of 80.0%. In December 1995
the Oxford property was sold with the sale proceeds of $658,500 being
applied to the loan. An appraisal indicated a market value of
$1,650,000 on the remaining secured property for loan-to-value of
72.7%. The loan is being amortized over 20 years for the purpose of
monthly payments of principal and interest but the full balance of
the loan will be due in March 1998. The outstanding balance was
$1.2 million at June 30, 1996.
APARTMENT COMPLEX IN CINCINNATI, OHIO In September 1995, the
Bank made a $1.4 million loan secured by a 79-unit apartment complex.
This loan was a result of a refinance of a loan that was maturing in
August 1996. At the time of the transaction, an appraisal indicated a
total market value of $1.98 million, for a loan-to-value of 70.7%.
The loan is being amortized over 25 years, but the full balance of the
loan will be due in October 2005. The outstanding loan balance was
$1.4 million at June 30, 1996.
APARTMENT COMPLEX IN CINCINNATI, OHIO In September 1994, the
Bank made a $1.3 million loan secured by four apartment complexes
totalling 81 units in Cincinnati, Ohio. This loan was the result of a
refinance and combination of four existing loans already held by the
Bank. At the time of the transaction, an appraisal indicated a total
market value of $1.7 million for a loan-to-value of 78.9%. The loan
is being amortized over 20 years for the purpose of monthly payments
of principal and interest but the full balance of the loan will be
due in October 2009. The outstanding balance was $1.3 million at
June 30, 1996.
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SELF-STORAGE FACILITY IN CINCINNATI, OHIO In January 1989,
the Bank made a $1.2 million loan secured by a 374-unit self-storage
facility in Cincinnati, Ohio. At that time, an appraisal indicated
a market value of $1.5 million, for a loan-to-value ratio of 78.4%.
The loan is being amortized over 30 years, but the full balance of
the loan will be due in February 1999. The outstanding balance was
$1.1 million at June 30, 1996.
APARTMENT COMPLEX IN CINCINNATI, OHIO In September 1985, the
Bank made a $1.2 million loan secured by a 72-unit apartment complex
in Cincinnati, Ohio. At that time, an appraisal indicated a market
value of $1.6 million, for a loan-to-value ratio of 75%. The loan is
being amortized over 30 years, but the full balance of the loan will
be due in October 2015. The outstanding balance was $1.0 million at
June 30, 1996.
Suburban Federal's multi-family and commercial real estate loans
generally are limited to properties in the Bank's market area, with
amortization periods of up to 30 years and maturities up to 15 years. In the
past these loans generally had annually adjustable interest rates, with
limitations on adjustments of 1% per year and 2% per five year period, and
maximum loan-to-value ratios of 80%. New loans are currently offered with
adjustable rates and indexed to the U.S. Treasury curve adjusted to a constant
maturity with limits of 2% at any adjustment and 6% over the life.
Suburban Federal is subject to regulatory limitations on the amounts
it can lend to any one borrower or group of affiliated borrowers. Due to
changes in the law which reduced the Bank's limit on loans to one borrower, one
of the Bank's prior loan relationships exceeds the current limit. The loan is
grandfathered, however, and current regulations preclude management from
extending any additional credit to those borrowers.
CONSUMER LENDING During the fiscal year ended June 30, 1995, the Bank
began offering home equity loans and lines of credit with a maximum combined
loan to value ratio of 80% under certain circumstances. During 1996 the Bank
expanded the program to include loans to 100% loan to value under certain
circumstances. In the coming year management expects to introduce consumer
loans having collateral other than real estate such as automobiles, etc.
Management expects to continue aggressively marketing these products. Prior to
this recent introduction, the Bank's consumer lending was limited to primarily
loans secured by savings accounts.
Consumer loans generally are smaller but involve more risk than first
mortgage loans. Loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Further, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered.
LOAN SOLICITATION AND PROCESSING Suburban Federal's loan originations
are derived from a number of sources, including referrals by realtors,
builders, depositors, borrowers and mortgage brokers, as well as walk in
customers.
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing. It is
the Bank's policy to obtain an appraisal of the real estate intended to secure
a proposed mortgage loan from a fee appraiser approved by the Bank. Except
when the Bank becomes aware of a particular risk of environmental
contamination, the Bank generally does not obtain a formal environmental report
on the real estate at the time a loan is made.
The Board of Directors has the overall responsibility and authority
for general supervision of Suburban Federal's loan policies. The Board has
established written lending policies for the Bank and has delegated to its Loan
Committee, which consists of the President, the Vice President of Residential
Lending, the Chief Financial Officer, and a Junior Underwriter, the authority
to approve mortgage loans, under various levels of authority, up
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to $500,000 for all residential property loans. Any loan in excess of that
amount or that will be secured by nonresidential real estate must be approved
by the Board or its Executive Committee.
INTEREST RATES AND LOAN FEES Interest rates charged by Suburban
Federal on mortgage loans are primarily determined by competitive loan rates
offered in its market area and minimum yield requirements for loans purchased
by investors in the secondary market. Mortgage loan rates reflect factors such
as prevailing market interest rate levels, the supply of money available to the
financial institution industry and the demand for such loans. These factors
are in turn affected by general economic conditions, the monetary policies of
the federal government, including the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"), the general supply of money in the
economy, tax policies and governmental budget matters, among others.
Suburban Federal receives fees in connection with loan commitments and
originations, loan modifications, late payments and changes of property
ownership and for miscellaneous services related to its loans. Loan
origination fees are calculated as a percentage of the loan principal. The
Bank typically receives fees of between zero and two points (one point being
equivalent to 1% of the principal amount of the loan) in connection with the
origination of fixed-rate and adjustable-rate residential mortgage loans. The
excess, if any, of loan origination fees over direct loan origination expenses
is deferred and accreted into income over the contractual life of the loan
using the interest method. If a loan is prepaid, refinanced or sold, all
remaining deferred fees with respect to such loan are taken into income at such
time.
One- to four-family loans purchased by the Bank are generally
purchased at a premium over the principal balance of the loan. The premium is
amortized over the life of the loan using the level yield method. If a loan is
prepaid, refinanced or sold, all remaining deferred premiums with respect to
such loan are deducted from income at such time.
In addition to the foregoing fees, Suburban Federal receives fees for
servicing loans for others. Servicing activities include the collection and
processing of mortgage payments, accounting for loan funds and paying real
estate taxes, hazard insurance and other loan-related expenses out of escrowed
funds.
COLLECTION POLICIES When a borrower fails to make a payment on a
loan, Suburban Federal generally takes immediate steps to have the delinquency
cured and the loan restored to current status. Once the payment grace period
has expired (in most instances 15 days after the due date), a late notice is
mailed to the borrower within two business days, and a late charge of five to
eight percent of the payment is imposed, if applicable. If payment is not
promptly received, the borrower is contacted, and efforts are made to formulate
an affirmative plan to cure the delinquency and contact with borrower is
continued. If payment is not made, management may pursue foreclosure or other
appropriate action. Before foreclosure, it is the Bank's policy to conduct an
informal inspection of the subject property for evidence of environmental
contamination and, when warranted, to obtain a formal (e.g., "Phase I")
environmental report.
ASSET CLASSIFICATION, ALLOWANCES FOR LOSSES AND NON-PERFORMING ASSETS
An asset is classified as substandard if it is determined to be inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. An asset is classified as doubtful if full
collection is highly questionable or improbable. An asset is classified as
loss if it is considered uncollectible, even if a partial recovery could be
expected in the future. The regulations also provide for a special mention
designation, described as assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification but do
possess credit deficiencies or potential weaknesses deserving management's
close attention. At June 30, 1996, Suburban Federal had $2.4 million of assets
classified as substandard (including $200,000 of real estate acquired in
settlement of loans), no assets classified as doubtful, $552,000 of assets
classified as loss and $4.8 million of assets designated as special mention.
8
<PAGE> 11
Suburban Federal regularly reviews its assets to determine whether any
assets require classification or re-classification. Each adversely classified
or designated asset over $200,000 is the subject of a written asset plan. Each
asset plan contains specific information regarding the condition of the asset,
including reasons for criticism, management's strategy to protect the Bank from
loss and current resolution and disposition efforts. The Bank's Classified
Asset Committee, consisting of a number of outside directors and members of
management, reviews all asset plans on a quarterly basis and makes resulting
classification recommendations to the Board of Directors. The Board approves
all classifications after its review of the asset plans and committee
recommendations.
In originating loans, Suburban Federal recognizes that credit losses
will occur and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain a
general allowance for loan losses based on, among other things, regular reviews
of delinquencies and loan portfolio quality, character and size, the Bank's and
the industry's historical and projected loss experience and current and
forecasted economic conditions. The Bank increases its allowance for loan
losses by charging provisions for possible losses against the Bank's income.
Management actively monitors Suburban Federal's asset quality and
periodically charges off loans and properties acquired in settlement of loans
against the allowances for losses on loans and such properties and/or provides
specific loss reserves. Although management believes it uses the best
information available to make determinations with respect to the allowances for
losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making
the initial determinations.
Suburban Federal's methodology for establishing the allowance for loan
losses takes into consideration probable losses that have been identified in
connection with specific loans as well as losses that have not been identified
but can be expected to occur. Management conducts regular reviews of the
Bank's loans and evaluates the need to establish general and specific
allowances on the basis of this review. General allowances are established by
the Board of Directors on at least a quarterly basis based on an assessment of
risk in the Bank's loans taking into consideration the composition and quality
of the portfolio, delinquency trends, current charge-off and loss experience,
the state of the real estate market and economic conditions generally.
Specific allowances are provided for individual loans, or portions of loans,
when ultimate collection is considered improbable by management based on the
current payment status of the loan, the fair value or net realizable value of
the security for the loan as well as other factors. Fair value is generally
defined as the amount in cash or cash-equivalent value of other consideration
that a real estate parcel would yield in a current sale between a willing buyer
and a willing seller. Fair value is measured by market transactions. If a
market does not exist, fair value of the item is estimated based on selling
prices of similar items in active markets or, if there are no active markets
for similar items, by discounting a forecast of expected cash flows at a rate
commensurate with the risk involved. Fair value is generally determined through
independent appraisal at the time of foreclosure. At June 30, 1996, the Bank
held no assets acquired in settlement of loans for which market prices were
unavailable. Any amount of cost in excess of fair value is charged-off against
the allowance for loan losses. Subsequent to acquisition, the property is
periodically evaluated by management and an allowance is established if the
estimated fair value of the property, less holding costs and estimated costs to
sell, declines.
9
<PAGE> 12
The following table sets forth an analysis of Suburban Federal's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1996 1995 1994
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period . . . . . . $ 3,132 $ 3,113 $ 3,060
------- ------- -------
Charge offs (1):
Real Estate Mortgages . . . . . . . . . - - 1
Construction . . . . . . . . . . . . . - - 43
------- ------- -------
Recoveries:
Real Estate Mortgages . . . . . . . . . 6 9 34
------- ------- -------
Net charge offs (Recoveries): (6) (9) 9
Provisions charged to income . . . . . - 10 63
------- ------- -------
Balance at end of period . . . . . . . . . 3,138 3,132 3,113
======= ======= =======
Ratio of net charge-offs to average
loans outstanding. . . . . . . . . . . . 0.00% 0.00% 0.01%
======= ======= =======
Ratio of allowance to total loans
net (2) . . . . . . . . . . . . . . . . . 1.94% 2.14% 2.71%
======= ======= =======
</TABLE>
______________
(1) Loans are charged off when management concludes they are
uncollectible.
(2) Total loans less deferred fees and loans in process.
The following table allocates the allowance for loan losses by asset
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------
1996 1995
------------------------ ------------------------
Percent of Percent of
Reserves in Each Reserves in Each
Category to Category to
Amount Total Reserves Amount Total Reserves
------ -------------- ------ --------------
Loans: (Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate --
One- to four-family . $ 330 10.5% $ 285 9.1%
Multi-family . . . . 404 12.9 429 13.7
Commercial . . . . . 967 30.8 765 24.4
Unallocated . . . . . . 1,437 45.8 1,653 52.8
------ ----- ------ -----
Total allowance for loan
losses . . . . . . . $3,138 100.0% $3,132 100.0%
====== ===== ====== =====
</TABLE>
10
<PAGE> 13
The following table sets forth information with respect to Suburban
Federal's non-performing assets at the dates indicated. Loans generally are
placed on non-accrual status when they become 90 days past due, unless
management believes collection of interest in full is reasonably assured, such
as situations in which the delinquency is considered to be a temporary
condition. At these dates, the Bank did not have any restructured loans within
the meaning of Statement of Financial Accounting Standards No. 15.
<TABLE>
<CAPTION>
At June 30,
---------------------------------
1996 1995 1994
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a
non-accrual basis (1):
Real Estate --
One- to four-family . . . . . . . . . $ 70 $ 120 $ 83
Multi-family . . . . . . . . . . . . -- 126 152
Commercial . . . . . . . . . . . . . -- 132 126
------ ------ ------
Total . . . . . . . . . . . . . . 70 378 361
------ ------ ------
Accruing loans contractually
past due 90 days or more:
Real Estate . . . . . . . . . . . . . -- -- 16
Consumer . . . . . . . . . . . . . . -- -- --
------ ------ ------
Total . . . . . . . . . . . . . . -- -- 16
------ ------ ------
Total of non-accrual and 90 day
past due loans . . . . . . . . . . . . 70 378 377
------ ------ ------
Other Non-Performing
Assets (2):
Real Estate --
One- to four-family . . . . . . . . . $ -- $ -- $ 88
Multi-family . . . . . . . . . . . . -- -- 250
Commercial . . . . . . . . . . . . . 200 200 709
------ ------ ------
Total . . . . . . . . . . . . . . 200 200 1,047
------ ------ ------
Total . . . . . . . . . . . . . . . . . $ 270 $ 578 $1,424
====== ====== ======
Non-accrual and 90 days past
due loans to total loans, net (3) . . . 0.04% 0.26% 0.34%
====== ====== ======
Nonperforming assets to total assets . . 0.13% 0.29% 0.79%
====== ====== ======
</TABLE>
_________________
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is doubtful.
Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income,
depending on assessment of the collectibility of the loan. During the
fiscal years ended June 30, 1996, 1995, and 1994, gross interest
income of $8,000, $13,000, and $24,000, respectively, would have been
recorded on loans accounted for on a non-accrual basis at the end of
the period if the loans had been current throughout such periods.
(2) Other non-performing assets represents property acquired by the Bank
in settlement of loans (i.e., through foreclosure or repossession).
These assets are recorded at the lower of their fair value or the
unpaid principal balance plus unpaid accrued interest of the related
loans.
(3) Total loans less deferred fees and loans in process.
At June 30, 1996, Suburban Federal's management had identified
approximately $7.9 million of loans, or 4.8% of the Bank's total loans, which
were not reflected in the preceding table but were identified as having
possible credit weaknesses. All of such loans were classified as substandard,
doubtful or loss or designated as special mention.
11
<PAGE> 14
The following paragraphs set forth information regarding Suburban
Federal's assets classified as substandard, doubtful or loss or designated as
special mention, none of which are considered nonperforming, in the amount of
more than $500,000 at June 30, 1996:
OFFICE BUILDING IN CINCINNATI, OHIO In July 1986, the Bank
made a $3.5 million loan secured by a 58,000-square foot office
building in Cincinnati, Ohio. The cash flow generated from the
collateral is slightly below the underwriting standards of the Bank
for a loan on investment properties, therefore, this loan is
designated as special mention. At June 30, 1996, the outstanding loan
balance was $3.4 million.
APARTMENT COMPLEX IN CINCINNATI, OHIO In September 1987, the
Bank made a $1.4 million loan secured by a 72-unit apartment complex
in Cincinnati, Ohio. Due to marginal cash flow in the past from the
property and a history of late payments, the loan is classified as
substandard. At June 30, 1996, the outstanding loan balance was $1.3
million.
OFFICE AND RETAIL BUILDING IN CINCINNATI, OHIO In February
1987, the Bank made a $1.2 million loan secured by a 14,700-square
foot office and retail building in Cincinnati, Ohio. Since cash flow
is substantially below required debt coverage, $547,312 of the loan is
considered impaired and classified as special mention (management's
estimate of the approximate fair value of the property), the remainder
is classified as loss, which was established as a $552,000 specific
allowance. At June 30, 1996, the outstanding loan balance was $1.1
million.
MOTEL IN WESTCHESTER, OHIO In June 1990, the Bank made a $1.1
million loan to finance the sale of a 95-unit motel in Westchester,
Ohio acquired in settlement of a loan. The loan is secured by the
motel, two acres of adjacent land and a $124,000 certificate of
deposit at the Bank. The cash flow generated by the collateral is
below the underwriting standards of the Bank for a loan on investment
property, therefore, the balance of the loan net of the certificate of
deposit is classified as special mention. At June 30, 1996, the
outstanding loan balance was $847,000.
MORTGAGE-BACKED SECURITIES
Suburban Federal maintains a significant portfolio of mortgage-backed
securities in the form of FNMA, FHLMC, and GNMA participation certificates.
FNMA, FHLMC, and GNMA certificates are each guaranteed by their respective
agencies as to principal and interest. Mortgage-backed securities generally
entitle the Bank to receive a pro rata portion of the cash flows from an
identified pool of mortgages. The Bank also has very small investments in Real
Estate Mortgage Investment Conduits ("REMICs") which are securities issued by
special purpose entities generally collateralized by pools of mortgage-backed
securities. The cash flows from such pools are segmented and paid in
accordance with a predetermined priority to various classes of securities
issued by the entity. The Bank's REMICs are short term maturity tranches
collateralized by federal agency securities. Although mortgage-backed
securities yield from 30 to 100 basis points less than the loans which are
exchanged for such securities, they present lower credit risk and are more
liquid than individual mortgage loans and may be used to collateralize
obligations of the Bank. Management has purchased mortgage-backed securities
to increase the volume of interest earning assets relative to the volume of
equity ("leverage") to improve income. The Bank may employ this strategy from
time to time to further leverage the equity of the Company. Management holds
such securities as available for sale and from time to time the securities may
be liquidated to provide funding for cash needs of the Bank.
Further information pertaining to the volume of mortgage-backed
securities of each type is included in "Note 2" of the notes to the
Consolidated Financial Statements in the Company's Annual Report to
Stockholders for the period ended June 30, 1996.
12
<PAGE> 15
The following table sets forth information regarding the scheduled
maturities, amortized costs, market value and weighted average yields for
Suburban Federal's mortgage-backed securities at June 30, 1996. Expected
maturities will differ from contractual maturities due to scheduled repayments
and because borrowers may have the right to call or prepay obligations with or
without prepayment penalties. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
<TABLE>
<CAPTION>
At June 30, 1996
---------------------------------------------------------------------------------------------------------------
Total Investment
One Year or Less One to Five Years Five to Ten Years More than Ten Years & MBS Portfolio
----------------- ----------------- ----------------- ------------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed
securities
available
for sale:
FNMA certificates -- -- -- -- -- -- $10,495 6.96% $10,494 $10,307 6.96%
FHLMC certificate -- -- -- -- $11 8.50% 17,290 7.23% 17,301 17,250 7.23%
GNMA certificates -- -- -- -- -- -- 795 6.09% 795 757 6.09%
REMIC's $156 5.22% -- -- -- -- 156 156 5.22%
---- ----- ----- ----- --- ---- ------- ----- ------- ------- ------
Total $156 5.22% -- -- $11 8.50% $28,580 7.10% $28,746 $28,470 7.09%
==== ===== ===== ===== === ===== ======= ===== ======= ======= ======
</TABLE>
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 2 of the Notes to
Consolidated Financial Statements.
13
<PAGE> 16
INVESTMENT ACTIVITIES
Suburban Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of
Cincinnati, certificates of deposits in federally insured institutions, certain
bankers' acceptances and federal funds. The Bank may also invest, subject to
certain limitations, in commercial paper having one of the two highest
investment ratings of a nationally recognized credit rating agency, and certain
other types of corporate debt securities and mutual funds. Federal regulations
require the Bank to maintain an investment in FHLB of Cincinnati stock and a
minimum amount of liquid assets which may be invested in cash and specified
securities. From time to time, the OTS adjusts the percentage of liquid assets
which savings are required to maintain. For additional information, see
"Regulation -- Regulation of Suburban Federal -- Liquidity Requirements."
Suburban Federal invests in investment securities in order to
diversify its assets, manage cash flow, obtain yield and maintain the minimum
levels of liquid assets required by regulatory authorities. Such investments
generally include purchases of federal funds, federal government and agency
securities and qualified deposits in other financial institutions. Investment
decisions generally are made by the Chief Executive Officer and ratified by the
Board of Directors.
For further information regarding the volume and type of investment
securities and the contractual maturities of those securities, see Note 2 and 3
of the Notes to Consolidated Financial Statements in Item 7 of this report
which notes are incorporated herein by reference.
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL Deposits are the primary source of Suburban Federal's funds
for lending and other investment purposes. In addition to deposits, the Bank
derives funds from loan principal repayments, interest payments and maturing
investments. Loan repayments and interest payments are a relatively stable
source of funds, while deposit inflows and outflows are significantly
influenced by prevailing market interest rates and money market conditions.
Borrowings may be used to supplement the Bank's available funds, and from time
to time the Bank has borrowed funds from the FHLB of Cincinnati.
DEPOSITS The Bank attracts deposits principally from within its
market area by offering a variety of deposit instruments, including personal
and business checking accounts, passbook and statement accounts and
certificates of deposit which range in term from 91 days to five years.
Deposit terms vary, principally on the basis of the minimum balance required,
the length of time the funds must remain on deposit and the interest rate. The
Bank also offers Individual Retirement Accounts ("IRAs").
Suburban Federal's policies are designed primarily to attract deposits
from local residents through the Bank's branch network rather than from outside
the Bank's market area. The Bank will accept deposits from institutional
depositors but does not accept deposits from brokers due to their rate
sensitivity and lack of cross sale opportunities.
14
<PAGE> 17
Savings Deposit in the Bank were represented by the various types of
savings programs described below at June 30, 1996.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE % OF
INTEREST MINIMUM MINIMUM AGGREGATE TOTAL
RATE * TERM CATEGORY BALANCE BALANCE SAVINGS
- -------- ------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C>
2.00% None Now Accounts Varies $ 6,383,608 5.33%
2.70 None Regular Savings Accounts $200 10,446,120 8.74
3.40 None Money Market Savings Accounts 100 10,918,079 9.12
2.28 None Premier Checking Accounts 1,500 2,639,287 2.21
0.00 None Other Demand Accounts Varies 2,284,663 1.91
CERTIFICATE OF DEPOSIT
----------------------
4.30% 91 days Fixed term, fixed rate 500 $ 864,646 0.72%
4.77 6-9 months Fixed term, fixed rate 500 2,548,328 2.13
5.26 9-11 months Fixed term, fixed rate 500 18,581,848 15.52
5.47 1-2 years Fixed term, fixed rate 500 27,816,234 23.24
5.86 2-3 years Fixed term, fixed rate 500 16,634,535 13.90
6.28 3-4 years Fixed term, fixed rate 500 6,293,786 5.26
5.77 4-5 years Fixed term, fixed rate 500 3,470,526 2.90
7.01 5-10 years Fixed term, fixed rate 500 10,809,716 9.03
------------ ------
$119,691,376 100.00%
============ ======
</TABLE>
- ----------------
* Represents weighted average interest rate.
The following table indicates the amount of the Bank's savings deposits
of $100,000 or more at June 30, 1996.
<TABLE>
<CAPTION>
BALANCE AT % OF BALANCE AT % OF
JUNE 30, 1996 DEPOSITS JUNE 30, 1995 DEPOSITS
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Jumbo Accounts, Mixed Types $ 9,057,928 7.6% $ 8,963,486 7.1%
</TABLE>
The following table indicates the amount of Suburban Federal's
certificates of deposit of $100,000 or more by time remaining until maturity at
June 30, 1996.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- --------------
(IN THOUSANDS)
<S> <C>
Three months or less . . . . . . . . . . . . . . . . . . . . . $ 561
Three through six months . . . . . . . . . . . . . . . . . . . 362
Six through twelve months . . . . . . . . . . . . . . . . . . . 2,853
Over twelve months . . . . . . . . . . . . . . . . . . . . . . 2,430
------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,206
======
</TABLE>
15
<PAGE> 18
BORROWINGS Savings deposits historically have been the primary source
of funds for Suburban Federal's lending, investment and general operating
activities. The Bank is authorized, however, to use advances from the FHLB of
Cincinnati to supplement its supply of lendable funds, to purchase other
investments and to meet deposit withdrawal requirements. The FHLB of
Cincinnati functions as a central reserve bank providing credit for savings
institutions and certain other member financial institutions. As a member of
the FHLB system, the Bank is required to own stock in the FHLB of Cincinnati
and is authorized to apply for advances. Advances are made pursuant to several
different programs, each of which has its own interest rate and range of
maturities. Advances from the FHLB of Cincinnati are secured by the Bank's
stock in the FHLB and a portion of the Bank's mortgage loan portfolio. At June
30, 1996, the Bank had advances outstanding from the FHLB of Cincinnati with an
aggregate balance of $54.0 million, a weighted average rate of 6.42% and a
weighted average remaining contractual term of 3.75 years. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Note 8" of the notes to Consolidated Financial Statements.
SUBSIDIARY ACTIVITIES
As a federally chartered savings institution, Suburban Federal is
permitted to invest up to 2% of its assets in subsidiary service corporations
plus an additional 1% in subsidiaries engaged in specified community purposes.
At June 30, 1996, the net book value of the Bank's investment in its service
corporation, Suburban Financial Services, Inc. ("Suburban Financial Services")
was $328,000, or 0.2% of the Bank's total assets. Suburban Federal is also
authorized to make investments of any amount in operating subsidiaries that
engage solely in activities that federal savings institutions may conduct
directly. Suburban Federal currently has no such operating subsidiaries.
Suburban Financial Services' principal holdings consist of land in
Columbus, Ohio on which a national chain discount store has been operating for
a number of years. The subsidiary's only other significant asset is a
three-quarters interest in two, two-family residences which have been
rehabilitated and are leased to low income disabled persons. The subsidiary's
principal income is from rent payments and its principal expense is for
property management fees.
Suburban Federal is required to deduct its investment in Suburban
Financial Services from its regulatory capital. See "Regulation -- Regulation
of the Bank -- Regulatory Capital Requirements."
COMPETITION
Suburban Federal faces strong competition for deposits and loans. The
Bank's principal competitors for deposits are other banking institutions, such
as commercial banks, credit unions and other savings institutions, as well as
mutual funds and other investments. The Bank principally competes for deposits
by offering a variety of deposit accounts, convenient business hours and branch
locations, customer service and a well trained staff. The Bank competes for
loans with other depository institutions, as well as specialty mortgage lenders
and brokers and consumer finance companies. The Bank principally competes for
loans on the basis of interest rates and the loan fees it charges, the types of
loans it originates and the convenience and service it provides to borrowers.
In addition, the Bank believes it has developed strong relationships with the
businesses, realtors and general public in its market area. Due to the Bank's
small size relative to the many and various other depository and lending
institutions in its market area, management believes that the Bank has an
insubstantial overall share of the deposit and loan market.
EMPLOYEES
As of June 30, 1996, Suburban Federal had 69 full-time, equivalent
employees, none of whom was represented by a collective bargaining agreement.
16
<PAGE> 19
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The following table sets forth information regarding the executive
officers of Suburban Federal who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
AGE AT
NAME 6/30/96 TITLE
- ---- ------- -----
<S> <C> <C>
Mark A. Brandon 45 Vice President
John A. Buchheid 39 Vice President
Christopher L. Henn 33 Vice President/Chief Financial Officer
Paul J. Neiser 39 Vice President/Chief Lending Officer
Lisa A. Whitman 31 Vice President
Robert J. Zihlman 45 Treasurer and Controller
</TABLE>
MARK A. BRANDON joined Suburban Federal in 1980 and currently serves
as Vice President, Financial Services. Mr. Brandon also acts as the Bank's
designated Compliance Officer, Community Reinvestment Act Officer, Security
Officer, and Internal Auditor. Mr. Brandon is a volunteer for the Loveland
Free Store.
JOHN A. BUCHHEID joined Suburban Federal in 1991 and currently serves
as Vice President, Commercial Lending. Mr. Buchheid is primarily responsible
for monitoring and reviewing the Bank's multi-family and commercial real estate
portfolio. From April 1988 to September 1991, Mr. Buchheid was employed as a
supervisory analyst in the Cincinnati district office of the OTS. Mr. Buchheid
is a group leader for the Family Nurturing Center of Northern Kentucky and a
volunteer at St. Theresa Nursing Home.
CHRISTOPHER L. HENN joined Suburban Federal in 1992 and currently
serves as Vice President and Chief Financial Officer. From April 1992 to March
1993, Mr. Henn served as Assistant Vice President for Special Projects. Prior
to joining the Bank, Mr. Henn was employed at Sunrise Bank for Savings, FSB,
Fort Mitchell, Kentucky, where he was the Director of Internal Audit. From
July 1985 to March 1991, Mr. Henn was employed as an examiner/analyst in the
Cincinnati district office of the OTS.
PAUL J. NEISER joined Suburban Federal in June 1993 as Vice President
and Chief Lending Officer. Previously, Mr. Neiser was with PNC Bank,
Cincinnati, Ohio, or its predecessors, for 18 years, most recently as Division
Administrator and Vice President of Consumer Finance.
LISA A. WHITMAN joined Suburban Federal in August 1992 and currently
serves as Vice President and Branch Coordinator. From August 1992 to January
1994 Ms. Whitman served as a branch manager. Previously Ms. Whitman was
employed by Household Bank as a branch manager in Chicago, Illinois. Ms.
Whitman also serves as an Instructor for the Institute of Financial Education.
ROBERT J. ZIHLMAN joined Suburban Federal in 1988 and currently serves
as Treasurer and Controller. Previously, Mr. Zihlman served as Chief
Accountant with Black Clawson Co., a manufacturing concern in Middletown, Ohio.
17
<PAGE> 20
REGULATION
REGULATION OF SUBURBAN FEDERAL
General. As a federally chartered savings institution, Suburban
Federal is subject to extensive regulation by the OTS. The lending, investment
and deposit-taking activities of the Bank must comply with various federal and
state regulatory requirements. The OTS periodically examines the Bank for
compliance with various regulatory requirements and for safe and sound
operations. The FDIC also has the authority to conduct special examinations of
the Bank because its deposits are insured by the SAIF. The Bank must file
reports with the OTS describing its activities and financial condition. The
Bank is also subject to certain reserve requirements promulgated by the Federal
Reserve Board, which are intended primarily for the protection of depositors.
Regulatory Capital Requirements. Under OTS regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and "total" capital
(a combination of core and "supplementary" capital) equal to 8% of
risk-weighted assets. At June 30, 1996, Suburban Federal exceeded all
regulatory minimum capital requirements.
The OTS capital rule requires that core and tangible capital be reduced
by an amount equal to a savings institution's debt and equity investments in
any subsidiary engaged in activities not permissible for national banks, other
than a subsidiary engaged in activities undertaken as agent for customers or in
mortgage banking activities and certain subsidiary depository institutions or
their holding companies. At June 30, 1996, the net book value of Suburban
Federal's investment in Suburban Financial Services, which is engaged in
activities not permissible for national banks, was $328,000.
Risk-based capital requirements of the OTS require savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. An institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value generally is defined as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. An institution will
be considered to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis point increase
or decrease in market interest rates (whichever results in the greater decline)
is less than two percent of the current estimated economic value of its assets.
An institution with a greater than normal interest rate risk will be required
to deduct from total capital, for purposes of calculating its risk-based
capital requirement, an amount (the "interest rate risk component") equal to
one-half the difference between the institution's measured interest rate risk
and the normal level of interest rate risk, multiplied by the economic value of
its total assets. The Bank does not have more than normal level of interest
rate risk as measured under the rule and has not been required to increase its
total capital as a result of the rule.
The OTS has proposed to amend its core capital requirement to establish
a 3% core capital ratio for savings institutions in the strongest financial and
managerial condition. For all other savings institutions, the minimum core
capital ratio would be 3%, plus at least an additional 1 to 2%, determined on a
case-by-case basis by the OTS, after assessing both the quality of risk
management systems and the level of overall risk in each individual savings
institution. Though this may result in an increase in its capital requirement,
Suburban Federal does not anticipate that it would be materially affected by
this regulation if adopted in its current form. In addition to the proposed
rule, the OTS has adopted a prompt corrective action rule under which a savings
institution that has a core capital ratio of less than 4% would be deemed to be
"undercapitalized" and may be subject to certain sanctions. See - "Prompt
Corrective Regulatory Action."
For further information regarding the regulatory capital level of the
Bank, see Note 9 of the Notes to Consolidated Financial Statement in Item 7 of
this report, which Note is incorporated herein by reference.
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In addition to generally applicable capital standards for savings
institutions, the Director of the OTS is authorized to establish the minimum
level of capital for a savings institution at such amount or at such ratio as
the Director determines to be necessary or appropriate for such institution.
The Director of the OTS may treat the failure of any savings institution to
maintain capital at or above such level as an unsafe or unsound practice and
may issue a directive requiring any savings institution that fails to maintain
capital at or above the minimum level required by the Director to submit and
adhere to a plan for increasing capital. Such an order may be enforced in the
same manner as a cease-and-desist order.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an institution
fails to satisfy certain minimum capital requirements, including a leverage
limit, a risk-based capital requirement, and any other measure deemed
appropriate by the federal banking regulators for measuring the capital
adequacy of an insured depository institution. All institutions, regardless of
their capital levels, are restricted from making any capital distributions or
paying any management fees that would cause the institution to become
undercapitalized. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") generally is : (i)
subject to increased monitoring by the appropriate federal banking regulator;
(ii) required to submit an acceptable capital restoration plan within 45 days;
(iii) subject to asset growth limits; and (iv) required to obtain prior
regulatory approval for acquisitions, branching and new lines of businesses.
The capital restoration plan must include a guarantee by the institution's
holding company that the institution will comply with the plan until it has
been adequately capitalized on average for four consecutive quarters, under
which the holding company would be liable up to the lesser of 5% of the
institution's total assets or the amount necessary to bring the institution
into capital compliance as of the date it failed to comply with its capital
restoration plan. A significantly undercapitalized institution, as well as any
undercapitalized institution that does not submit an acceptable capital
restoration plan, may be subject to regulatory demands for recapitalization,
broader application of restrictions on transactions with affiliates,
limitations on interest rates paid on deposits, asset growth and other
activities, possible replacement of directors and officers, and restrictions on
capital distributions by any bank holding company controlling the institution.
Any company controlling the institution may also be required to divest the
institution or the institution could be required to divest subsidiaries. The
senior executive officers of a significantly undercapitalized institution may
not receive bonuses or increase in compensation without prior approval and the
institution is prohibited from making payments of principal or interest on its
subordinated debt, with certain exceptions. If an institution's ratio of
tangible capital to total assets falls below the "critical capital level"
established by the appropriate federal banking regulator, the institution is
subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calendar quarter beginning
270 days after the date it became critically undercapitalized.
Under the OTS regulation implementing the prompt corrective action
provisions of FDICIA, the OTS measures an institution's capital adequacy on the
basis of its total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk-weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). An institution that is not subject to an
order or written directive to meet or maintain a specific capital level is
deemed "well capitalized" if it also has: (i) a total risk-based capital ratio
of 10% or greater; (ii) a Tier 1 risk-based capital ratio of 6.0% or greater,
and (iii) a leverage ratio of 5.0% or greater. An "adequately capitalized"
savings institution is an institution that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8.0% or greater;
(ii) a Tier 1 capital risk-based ratio of 4.0% or greater; and (iii) a leverage
risk-based capital ratio of 4.0% or greater (or 3.0% or greater if the savings
institution has a composite 1 CAMEL rating). An "undercapitalized institution"
is an institution that has (i) a total risk-based capital ratio less than 8.0%;
or (ii) a Tier 1 risk-based capital ratio of less than 4.0%, or (iii) a
leverage ratio of less than 4.0% (or 3.0% if the institution has a composite 1
CAMEL rating). A "significantly undercapitalized" institution is defined as an
institution that has: (i) a total risk-based capital ratio of less than 6.0%;
or (ii) a Tier 1 risk-based capital ratio of less than 3.0%; or (iii) a
leverage ratio of less than
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3.0%. A "critically undercapitalized" savings institution is defined as an
institution that has a ratio of core capital to total assets of less than 2.0%.
The OTS may reclassify a well capitalized savings institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions
in the next lower capital category if the OTS determines, after notice and an
opportunity for a hearing, that the savings institution is in an unsafe or
unsound condition or that the institution has received and not corrected a
less-than-satisfactory rating for any CAMEL rating category. At June 30, 1996,
Suburban Federal qualified as "well capitalized."
Liquidity Requirements. Suburban Federal is required to maintain
average daily balances of liquid assets (cash, deposits maintained pursuant to
Federal Reserve Board requirements, time and savings deposits in certain
institutions, obligations of the United States and states and political
subdivisions thereof, shares in mutual funds with certain restricted investment
policies, highly rated corporate debt and mortgage loans and mortgage-related
securities with less than one year to maturity or subject to pre-arranged sale
within one year) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus
short-term borrowings. Savings institutions also are required to maintain
average daily balances of short-term liquid assets at a specified percentage
(currently 1%) of the total of their net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements. The average daily liquidity and
short-term liquidity ratios of Suburban Federal for June 30, 1996 were 8.7% and
5.9%, respectively. A substantial and sustained decline in savings deposits
could adversely affect the Bank's liquidity, which could result in restricted
operations and additional borrowings from the FHLB of Cincinnati.
Qualified Thrift Lender Test. Suburban Federal is subject to OTS
regulations which use the concept of a qualified thrift lender ("QTL") to
determine eligibility for FHLB advances and for certain other purposes. To
meet the QTL test, an institution's "Qualified Thrift Investments" must total
at least 65% of "portfolio assets." Portfolio assets are defined as total
assets less intangibles, property used by a savings institution in its business
and liquidity investments in an amount not exceeding 20% of assets. Qualified
Thrift Investments consist of (i) loans, equity positions or securities related
to domestic, residential real estate or manufactured housing, (ii) 50% of the
dollar amount of residential mortgage loans subject to sale under certain
conditions, and (iii) stock in an FHLB or the FHLMC. In addition, subject to a
20% of portfolio assets limit, savings institutions are able to treat as
Qualified Thrift Investments 200% of their investments in loans to finance
"starter homes" and loans for construction, development or improvement of
housing and community service facilities or for financing small businesses in
"credit-needy" areas. In order to maintain QTL status, the savings institution
must maintain a weekly average percentage of Qualified Thrift Investments to
portfolio assets equal to 65% on a monthly average basis in nine out of 12
months. A savings institution that fails to maintain QTL status is permitted
to requalify once, and if it fails the QTL test a second time, it will become
immediately subject to all penalties as if all time limits on such penalties
had expired. Failure to qualify as a QTL results in a number of sanctions,
including the imposition of certain operating restrictions imposed on national
banks and a restriction on obtaining additional advances from the Federal Home
Loan Bank System. Upon failure to qualify as a QTL for two years, a savings
association must convert to a commercial bank.
At June 30, 1996, approximately 88.6% of Suburban Federal's assets were
invested in Qualified Thrift Investments, which was in excess of the percentage
required to qualify the Bank under the QTL test.
Dividend Restrictions. The Bank may not pay dividends on its capital
stock if its regulatory capital would thereby be reduced below the remaining
balance of the liquidation account that was established for the benefit of
certain depositors of the Bank at the time of its conversion to stock form. In
addition, the Bank is required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the Company.
Additional limitations are imposed on the payment of dividends and
other capital distributions (including stock repurchases and cash mergers) by
Suburban Federal. As a savings institution that, immediately prior to, and on
a pro forma basis after giving effect to, a proposed capital distribution, has
total capital (as defined by OTS regulation) that is equal to or greater than
the amount of its fully phased-in capital requirements (a "Tier 1
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Association"), the Bank generally is permitted, after notice, to make capital
distributions during a calendar year in the amount equal to the greater of: (a)
75% of its net income for the previous four quarters; or (b) 100% of its net
income to date during the calendar year plus an amount that would reduce by
one-half the amount by which its ratio of total capital to assets exceeded its
fully phased-in risk-based capital ratio requirement at the beginning of the
calendar year. Despite the above authority, the OTS may prohibit any savings
institution from making a capital distribution that would otherwise be
permitted by the regulation, if the OTS were to determine that the distribution
constituted an unsafe or unsound practice. Furthermore, under the OTS prompt
corrective action regulations, the Bank would be prohibited from making any
capital distributions if, after making the distribution, the Bank would have:
(i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1
risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0%. See "Prompt Corrective Regulatory Action."
Limits on Loans to One Borrower. Savings institutions generally are
subject to the lending limits applicable to national banks. With certain
limited exceptions, a savings institution's loans and extensions of credit
outstanding to a person at one time shall not exceed 15% of the unimpaired
capital and surplus of the institution. A savings institution may lend an
additional amount, equal to 10% of unimpaired capital and surplus, if such loan
is fully secured by readily marketable collateral. Savings institutions are
additionally authorized to make loans to one borrower, for any purpose, in an
amount not to exceed $500,000 or, by order of the Director of OTS, in an amount
not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and
surplus to develop residential housing, provided: (i) the purchase price of
each single-family dwelling in the development does not exceed $500,000; (ii)
the savings institution is in compliance with its fully phased-in capital
requirements; (iii) the loans comply with applicable loan-to-value
requirements, and; (iv) the aggregate amount of loans made under this authority
does not exceed 150% of unimpaired capital and surplus. The lending limits
generally do not apply to purchase money mortgage notes taken from the
purchaser of real property acquired by the savings institution in satisfaction
of debts previously contracted if no new funds are advanced to the borrower and
the institution is not placed in a more detrimental position as a result of the
sale. Certain types of loans are excepted from the lending limits, including
loans secured by savings deposits. Due to changes in the law during 1989,
which reduced Suburban Federal's limits on loans to one borrower, the Bank had
a total of $4.5 million of loans at June 30, 1996 to one borrower and groups of
affiliated borrowers, which had complied with the applicable limits when made
but which exceed the Bank's current limits. Those loans are grandfathered, and
no additional credit will be extended to those borrowers until total
indebtedness is below the lending limit of the Bank.
Enforcement. The OTS has primary enforcement responsibility over
savings institutions and has the authority to bring enforcement action against
all "institution-related parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on a savings institution. Civil
penalties cover a wide range of violations and actions and range up to $25,000
per day unless a finding of reckless disregard is made, in which case penalties
may be as high as $1 million per day. Criminal penalties for most financial
institution crimes include fines of up to $1 million and imprisonment for up to
30 years. In addition, regulators have substantial discretion to take
enforcement action against an institution that fails to comply with its
regulatory requirements, particularly with respect to the capital requirements.
Possible enforcement actions range from the imposition of a capital plan and
capital directive to receivership, conservatorship or the termination of
deposit insurance. The FDIC has the authority to recommend to the Director of
the OTS that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances.
Deposit Insurance. Savings institutions are charged a premium by the
FDIC for SAIF insurance of their insurable deposit accounts. The FDIC may
establish an assessment rate for deposit insurance premiums that protects the
insurance fund and considers the fund's operating expenses, case resolution
expenditures, income and the effect of the assessment rate on the earnings and
capital of SAIF members.
The FDIC has adopted a risk-based deposit insurance assessment system
under which the assessment rate for an insured depository institution depends
on the assessment risk classification assigned to the institution based on the
institution's capital level and a supervisory evaluation by the FDIC. The
assessment rate ranges from 0.23%
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of deposits for well capitalized institutions in Subgroup A to 0.31% of
deposits for undercapitalized institutions in Subgroup C. Suburban Federal's
deposit insurance premium was 0.23% (annualized) of deposits during the second
semi-annual period of 1995.
The FDIC is authorized to raise insurance premiums for SAIF-member
institutions in certain circumstances. If the FDIC determines to increase the
assessment rate for all SAIF-member institutions, institutions in all risk
categories could be affected. While an increase in premiums for Suburban
Federal could have an adverse effect on the Bank's earnings, a decrease in
premiums could have a positive impact on the earnings of the Bank.
On August 8, 1995, the FDIC approved a significant reduction in the
deposit insurance premiums charged to those financial institutions that are
members of the Bank Insurance Fund ("BIF"). As a result of such action, most
BIF-insured financial institutions will pay an annual deposit insurance
assessment of 0.04% or less of insured deposits. No similar reduction was
approved for institutions, such as the Bank, that are members of the SAIF.
This amendment creates a significant disparity between the deposit insurance
premiums paid by BIF and SAIF members. The United States Congress and the
federal banking agencies are actively considering several options to address
this disparity, including a one-time assessment of up to 0.80% of insured
deposits to be imposed on all SAIF members. While it is uncertain whether this
or any proposal for addressing the insurance premium disparity will be adopted,
based on the Bank's deposits at June 30, 1996, the proposed one time assessment
would be approximately $632,000 after taxes, the effect of which at June 30,
1996 would have reduced tangible and core capital ratios to 10.6% from 10.9%,
and reduced risk based capital ratios to 20.3% from 20.7%. However, if such a
special assessment is imposed and the SAIF is recapitalized, it could have the
effect of reducing the Bank's deposit insurance premiums in future periods,
thereby establishing competitive equality between BIF and SAIF insured
financial institutions. See also "Taxation."
Also under consideration are proposals relating to the reduction or
elimination of differences between banks and thrifts, including the possible
merger of the BIF and SAIF and elimination of the thrift charter. While there
currently are substantial impediments to converting from SAIF to BIF deposit
insurance, recent legislation substantially reduced the adverse federal tax
consequences of thrifts converting to banks (see "Taxation"). The Bank cannot
predict at this time whether any pending legislation ultimately will be enacted
in its correct form or, if enacted, whether such legislation would remedy some
or all of the related adverse financial and tax effects.
Federal Home Loan Bank System. The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance
Board ("FHFB"). The FHLBs provide a central credit facility primarily for
member institutions. As a member of the FHLB of Cincinnati, Suburban Federal
is required to acquire and hold shares of capital stock in the FHLB of
Cincinnati in an amount at least equal to 1% of the aggregate unpaid principal
of its home mortgage loans, home purchase contracts, and similar obligations at
the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB
of Cincinnati, whichever is greater. The Bank was in compliance with this
requirement with investment in FHLB of Cincinnati stock at June 30, 1996, of
$2.7 million. The FHLB of Cincinnati serves as a reserve or central bank for
its member institutions within its assigned district. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It offers advances to members in accordance with policies and
procedures established by the FHLB and the Board of Directors of the FHLB of
Cincinnati. Long-term advances may only be made for the purpose of providing
funds for residential housing finance. At June 30, 1996, the Bank had $54.0
million of advances outstanding from the FHLB of Cincinnati.
For further information, see Item 1. Description of Business - Deposit
Activity and Other Source of Funds-Borrowings.
Federal Reserve System. Pursuant to regulations of the Federal Reserve
Board, a savings institution must maintain average daily reserves equal to a
percentage of transaction accounts. This percentage is subject to adjustment
by the Federal Reserve Board. Because required reserves must be maintained in
the form of vault cash or in a noninterest bearing account at a Federal Reserve
Savings Bank, the effect of the reserve requirement is to
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reduce the amount of the institution's interest-earning assets. At June 30,
1996, Suburban Federal met its reserve requirements.
Safety and Soundness Guidelines. Under FDICIA, as amended by the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "CDRI
Act"), each banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines took effect on August 9,
1995. The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's business. The
guidelines also establish certain basic standards for loan documentation,
credit underwriting, interest rate risk exposure, and asset growth. The
guidelines further provide that savings institutions should maintain safeguards
to prevent the payment of compensation, fees and benefits that are excessive or
that could lead to material financial loss, and should take into account
factors such as comparable compensation practices at comparable institutions.
If the OTS determines that a savings institution is not in compliance with the
safety and soundness guidelines, it may require the institution to submit an
acceptable plan to achieve compliance with the guidelines. A savings
institution must submit an acceptable compliance plan to the OTS within 30 days
of receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions.
Management believes that the Bank already meets substantially all the standards
adopted in the interagency guidelines, and therefore does not believe that
implementation of these regulatory standards will materially affect the Bank's
operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal
banking agencies are required to establish standards relating to the asset
quality and earnings that the agencies determine to be appropriate. On July
10, 1995, the federal banking agencies, including the OTS, issued proposed
guidelines relating to asset quality and earnings. Under the proposed
guidelines, a savings institution should maintain systems, commensurate with
its size and the nature and scope of its operations, to identify problem assets
and prevent deterioration in those assets as well as to evaluate and monitor
earnings and ensure that earnings are sufficient to maintain adequate capital
and reserves. Management does not believe that the asset quality and earnings
standards, in the form proposed by the banking agencies, would have a material
effect on the Bank's operations.
REGULATION OF THE COMPANY
General. As a savings institution holding company, the Company is
registered with the OTS and is subject to OTS regulation, examination,
supervision and reporting requirements. As a subsidiary of a savings
institution holding company, Suburban Federal is subject to certain
restrictions in its dealings with the Company and affiliates thereof. The
Company also is required to file certain reports with, and otherwise comply
with the rules and regulations of, the SEC under the federal securities laws.
Activities Restrictions. The Company is a unitary savings institution
holding company. There are generally no restrictions on the activities of a
unitary savings institution holding company. However, if the Director of the
OTS determines that there is reasonable cause to believe that the continuation
by a savings institution holding company of an activity constitutes a serious
risk to the financial safety, soundness or stability of its subsidiary savings
institution, the Director of the OTS may impose such restrictions as deemed
necessary to address such risk, including limiting: (i) payment of dividends by
the savings institution; (ii) transactions between the savings institution and
its affiliates; and (iii) any activities of the savings institution that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings
institution holding companies, if the savings institution subsidiary of such a
holding company fails to meet the QTL test, then such unitary holding company
shall also presently become subject to the activities restrictions applicable
to multiple holding companies and, unless the savings institution requalifies
as a QTL within one year thereafter, register as, and become subject to, the
restrictions applicable to a bank holding company.
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If the Company were to acquire control of another savings institution,
other than through merger into or other business combination with Suburban
Federal, the Company would become a multiple savings institution holding
company. Except where such acquisition is an emergency thrift acquisitions and
where each subsidiary savings institution meets the QTL test, the activities of
the Company and any of its subsidiaries (other than the Bank or other
subsidiary savings institutions) would thereafter be subject to further
restrictions. Among other things, no multiple savings institution holding
company or subsidiary thereof, that is not a savings institution, shall
commence or continue for a limited period of time after becoming a multiple
savings institution holding company or subsidiary thereof, any business
activity, upon prior notice to, and no objection by, the OTS, other than: (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple holding companies; or (vii) unless the Director of the
OTS by regulation prohibits or limits such activities for savings institution
holding companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in (vii)
above must also be approved by the Director of the OTS prior to being engaged
in by a multiple holding company.
Transactions with Affiliates. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution of its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus, and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution by (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities, which are
permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate,
except for affiliates which are subsidiaries of the savings institution.
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to an
executive officer and to a greater than 10% stockholder of a savings
institution, and certain affiliated entitles of either, may not exceed,
together with all other outstanding loans to such person and affiliated
entities the institution's loan to one borrower limit (generally equal to 15%
of the institution's unimpaired capital and surplus and an additional 10% of
such capital and surplus for loans fully secured by certain readily marketable
collateral). Section 22(h) also prohibits loans, above amounts prescribed by
the appropriate federal banking agency, to directors, executive officers and
greater than 10% stockholders of a savings institution, and their respective
affiliates, unless such loan is approved in advance by a majority of the board
of directors of the institution with any "interested" director not
participating in the voting. The Federal Reserve Board has prescribed the loan
amount (which includes all other outstanding loans to such person), as to which
such prior board of director approval is required, as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, the Federal
Reserve Board pursuant to Section 22(h) requires that loans to directors,
executive officers and principal stockholders be made on terms substantially
the same as offered in comparable transactions to other person. Section 22(h)
also generally prohibits a depository institution from paying the overdrafts of
any of its executive officers or directors.
Savings institutions are also subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act and Regulation O on
loans to executive officers and the restrictions of 12 U.S.C. Section 1972 on
certain tying arrangements and extensions of credit by correspondent banks.
Section 22(g) of the Federal Reserve Act
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requires that loans to executive officers of depository institutions not be
made on terms more favorable than those afforded to other borrowers, requires
approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972
prohibits (i) a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain
services of a competitor of the institution, subject to certain exceptions, and
(ii) extensions of credit to executive officers, directors, and greater than
10% stockholders of a depository institution by any other institution which has
a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
Restrictions on Acquisitions. Savings institution holding companies
are prohibited from acquiring, without prior approval of the Director of OTS,
(i) control of any other savings institution or savings institution holding
company or substantially all the assets thereof or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not
a subsidiary. Under certain circumstances, a savings institution holding
company is permitted to acquire, with the approval of the Director of the OTS,
up to 15% of the voting shares of an under-capitalized savings institution
pursuant to a "qualified stock issuance" without that savings institution being
deemed controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiary must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings institution holding company and the
issuing savings institution, and transactions between the savings institution
and the savings institution holding company and any of its affiliates must
conform to Sections 23A and 23B of the Federal Reserve Act. Except with the
prior approval of the Director of the OTS, no director or officer of a savings
institution holding company or person owning or controlling by proxy or
otherwise more than 25% of such company's stock, may also acquire control of
any savings institution, other than a subsidiary savings institution, or of any
other savings institution holding company.
The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings institution holding company that controls
savings institutions in more than one state only if: (i) the multiple savings
institution holding company involved controls a savings institution that
operated a home or branch office in the state of the institution to be acquired
as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings institution holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
OTS regulations authorize federal savings institutions to branch in any
state or states of the United States and its territories. Except in
supervisory cases or when interstate branching is otherwise permitted by state
law or other statutory provision, a federal institution may not establish an
out-of-state branch unless (i) the federal institution qualifies as a "domestic
building and loan association" under Section 7701(a)(19) of the Internal
Revenue Code and the total assets attributable to all branches of the
institution in the state would qualify such branches taken as a whole for
treatment as a domestic building and loan association and (ii) such branch
would not result in (a) formation of a prohibited multi-state multiple savings
holding company or (b) a violation of certain statutory restrictions on
branching by savings institution subsidiaries of banking holding companies.
Federal associations generally may not establish new branches unless the
institution meets or exceeds minimum regulatory capital requirements. The OTS
will also certify the institution's record of compliance with the Community
Reinvestment Act of 1977 in connection with any branch application.
Bank holding companies are authorized to acquire control of any savings
institution. Owning, controlling or operating a savings institution is a
permissible activity for bank holding companies, if the savings institution
25
<PAGE> 28
engages only in deposit-taking activities and lending and other activities that
are permissible for bank holding companies. A bank holding company that
controls a savings institution may merge or consolidate the assets and
liabilities of the savings institution with, or transfer assets and liabilities
to, any subsidiary bank which is a member of the BIF with the approval of the
appropriate federal banking agency and the Federal Reserve Board. The
resulting bank will be required to continue to pay assessments to the SAIF at
the rates prescribed for SAIF members on the deposits attributable to the
merged savings institution plus an annual growth increment. In addition, the
transaction must comply with the restrictions on interstate acquisitions of
commercial banks under the Bank Holding Company Act.
Federal Securities Law. The Common Stock is registered with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and,
under OTS regulations, generally may not be deregistered for at least three
years after September 30, 1993, the effective date of the Bank's conversion to
stock form. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Exchange Act.
TAXATION
GENERAL
The Company and its subsidiary file a consolidated federal income tax
return on a June 30 fiscal year basis. Consolidated returns have the effect of
eliminating intercompany distributions, including dividends, from the
computation of consolidated taxable income for the taxable year in which the
distributions occur.
FEDERAL INCOME TAXATION
Savings institutions are subject to the provisions of the Internal
Revenue Code of 1986, as amended (the "Internal Revenue Code") in the same
general manner as other corporations. For tax years beginning before December
31, 1995, institutions such as Suburban Federal which met certain definitional
tests and other conditions prescribed by the Internal Revenue Code could
benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and nonqualifying loans, which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans was based on actual loss
experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans could be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without
regard to such deduction (the "percentage of taxable income method").
Suburban Federal generally elected to use the method which resulted in
the greatest deductions for federal income tax purposes. Under the experience
method, the bad debt deduction for an addition to the reserve for qualifying
real property loans is an amount determined under a formula based generally on
the bad debts actually sustained by a savings institution over a period of
years. Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans was computed as a percentage,
which Congress had reduced from as much as 60% in prior years to 8% of taxable
income, with certain adjustments, effective for taxable years beginning after
1986. The allowable deduction under the percentage of taxable income method
(the "percentage bad debt deduction") for taxable years beginning before 1987
was scaled downward in the event that less than 82% of the total dollar amount
of the assets of an institution were within certain designated categories.
When the percentage method bad debt deduction was lowered to 8%, the 82%
qualifying assets requirement was lowered to 60%. For all taxable years, there
was no deduction in the event that less than 60% of the total dollar amount of
the assets of an institution fell within such categories. The Bank's bad debt
reserves amounted to approximately $4.2 million at June 30, 1996.
26
<PAGE> 29
Earnings appropriated to Suburban Federal's bad debt reserve and
claimed as a tax deduction are not available for the payment of cash dividends
or for distribution to stockholders (including distributions made on
dissolution or liquidation), unless the Bank includes the amount in taxable
income, along with the amount deemed necessary to pay the resulting federal
income tax.
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Bank, which have previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves calculated under
the experience method over a six-year period beginning with the first taxable
year beginning after December 31, 1995. The start of such recapture may be
delayed until the third taxable year beginning after December 31, 1995 if the
dollar amount of the institution's residential loan originations in each year
is not less than the average dollar amount of residential loan originated in
each of the six most recent years disregarding the years with the highest and
lowest originations during such period. For purposes of this test, residential
loan originations would not include refinancings and home equity loans.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will be
able to take a tax deduction only when a loan is actually charged off.
Institutions with less than $500 million in assets will still be permitted to
make deductible bad debt additions to reserves, but only using the experience
method.
For taxable years beginning after June 30, 1986, the Internal Revenue
Code imposes an alternative minimum tax at a rate of 20%. The alternative
minimum tax generally applies to a base of regular taxable income plus certain
tax preferences ("alternative minimum taxable income" or "AMTI") and is payable
to the extent such AMTI exceeds an exemption amount. The Internal Revenue Code
provides that an item of tax preference is the excess of the bad debt deduction
allowable for a taxable year pursuant to the percentage of taxable income
method over the amount allowable under the experience method. The other items
of tax preference that constitute AMTI include (a) tax-exempt interest on
newly-issued (generally, issued on or after August 8, 1986) private activity
bonds other than certain qualified bonds and (b) for taxable years including
1987 through 1989, 50% of the excess of (i) the taxpayer's pre-tax adjusted net
book income over (ii) AMTI (determined without regard to this latter preference
and prior to reduction by net operating losses). For taxable years beginning
after 1989, this latter preference has been replaced by 75% of the excess (if
any) of (i) adjusted current earnings as defined in the Internal Revenue Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). For any taxable year beginning after 1986,
net operating losses can offset no more than 90% of AMTI. Certain payments of
alternative minimum taxes may be used as credits against regular tax
liabilities in future years. In addition, for taxable years after 1986 and
before 1992, corporations, including savings institutions, are also subject to
an environmental tax equal to 0.12% of the excess of AMTI for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2.0 million. Suburban Federal is not currently paying
any amount of alternative minimum tax but may, depending on future results of
operations, be subject to this tax.
The Bank adopted SFAS No. 109 "Accounting for Income Taxes" effective
July 1, 1993. The effect of adopting the standard was the recognition of a
deferred tax asset of $1,173,000. See Note 12 of Notes to Consolidated
Financial Statements in Item 7 of this report.
Suburban Federal's federal income tax returns have not been audited in
the past six years.
STATE INCOME TAXATION
Suburban Federal is subject to an Ohio franchise tax based on its
equity capital plus certain reserve amounts. Total equity capital for this
purpose is reduced by certain exempted assets. The resultant net taxable value
of capital is taxed at a rate of 1.5% for 1996, 1995 and 1994. Suburban
Financial Services also is subject to an Ohio franchise tax. The Company will
be subject to the Ohio franchise tax on holding companies of financial
27
<PAGE> 30
institutions. The tax imposed is the greater of the tax on equity capital
after adjustments to exclude the portion attributable to the financial
institution, or the tax on net earnings. The tax on net earnings is computed
on federal taxable income adjusted to exclude distributions from the financial
institution, and subject to certain other adjustments. The rate of tax differs
for equity capital and net earnings computations, and can include a surtax if
based on net earnings and an add-on litter tax under either method.
For additional information regarding taxation, see Note 12 of the Notes
to Consolidated Financial Statements.
ITEM 2 DESCRIPTION OF PROPERTY OFFICES AND OTHER MATERIAL PROPERTIES
The following table sets forth information regarding Suburban Federal's
offices at June 30, 1996. The Bank owns all of its offices except as
indicated. All offices are in Hamilton County, Ohio.
<TABLE>
<CAPTION>
NET BOOK DEPOSITS
YEAR OWNED OR TOTAL VALUE AT MARCH APPROXIMATE AT MARCH
OPENED LEASED INVESTMENT JUNE 30, 1996 SQUARE FOOTAGE JUNE 30, 1996
------ -------- ---------- -------------- -------------- -------------
MAIN OFFICE: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
10869 Montgomery Road 1980 Owned $1,826 $1,081 5,600 $20,680
BRANCH OFFICES:
Beechmont
7944 Beechmont Avenue 1986 Leased (1) 178 98 1,826 12,379
Hartwell
8358 Vine Street 1959 Owned 285 64 1,728 22,177
Hillcrest
1856 Seymour Avenue 1980 Leased (2) 159 8 2,166 15,825
Hyde Park
2717 Erie Avenue 1976 Owned 299 26 2,312 16,943
Northgate
9440 Colerain Avenue 1975 Leased (3) 149 4 1,875 17,430
White Oak
3554 Blue Rock Road 1986 Owned 395 230 2,604 14,257
- ---------------
</TABLE>
(1) The current term expires in 1998; there are two five-year extension
options.
(2) The current term expires in 1996; there is one five-year extension option.
(3) The current term expires in 2000; there are two five-year extension
options.
The net book value of Suburban Federal's investment in premises and
equipment totaled approximately $1.7 million at June 30, 1996.
ITEM 3 LEGAL PROCEEDINGS
From time to time, Suburban Federal is a party to various legal
proceedings incident to its business. At June 30, 1996, there were no legal
proceedings to which the Company, the Bank or its subsidiary was a party, or to
which any of their property was subject, which were expected by management to
result in a material loss.
28
<PAGE> 31
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of security holders during the
quarter ended June 30, 1996.
PART II
ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading under the symbol "SBCN" on the NASDAQ
National Market System on September 30, 1993. There are currently 1,474,932
shares of the common stock outstanding and approximately 1300 holders of
record of the common stock.
Quarterly stock prices and dividends paid are shown in the table below.
<TABLE>
<CAPTION>
1996 First Second Third Fourth Year
---- ----- ------ ----- ------ ----
<S> <C> <C> <C> <C> <C>
High $18.25 $18.50 $18.50 $17.00 $18.50
Low 15.75 16.50 15.50 14.25 14.25
Dividend Declared
& Paid $0.075 $0.10 $0.15 $0.15 $0.475
1995 First Second Third Fourth Year
---- ----- ------ ----- ------ ----
High $18.00 $16.50 $18.00 $18.25 $18.25
Low 13.25 15.00 15.75 16.50 13.25
Dividend Declared
& Paid $0.075 $0.075 $0.175 $0.075 $0.40
</TABLE>
Stock prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
The information set forth under "Item 1. Description of Business -
Regulation - Regulation of Suburban Federal - Dividend Restrictions" and Note
11 of the Notes to Consolidated Financial Statements in Item 7 of this report
is incorporated herein by reference.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The principal business of Suburban Federal consists of accepting
deposits from the general public and investing these funds in loans secured by
one-to-four family and multi-family residential properties located in the
Bank's market area, as well as consumer loan products primarily secured by real
estate. The Bank also holds a substantial portfolio of multi-family and
commercial real estate loans principally originated by the Bank in prior years.
Suburban Federal's operations are primarily dependent on its net
interest income, which is the difference between the interest earned on
interest earning assets and the interest expense on interest bearing
liabilities. Interest income is a function of the balance of outstanding
interest earning assets during the period and the yield earned on such assets.
Interest expense is a function of the outstanding balance of interest bearing
liabilities and the rates paid
29
<PAGE> 32
on such liabilities. The Bank also generates non-interest income, such as loan
fees, service charges on transaction accounts, fees on servicing mortgage loans
for others and gains generated from the sale of loans to the secondary mortgage
markets.
Net income is further affected by the level of operating expenses,
such as personnel expenses, occupancy and equipment expense, federal deposit
insurance premiums and the provision for losses on assets. Prior to fiscal
1994, the provision for losses adversely affected the operating results of the
Bank as the economic slowdown that began in the late 1980's increased the level
of losses on non-performing multi-family and commercial real estate loans and
properties acquired in settlement of such loans as well as significant
deterioration in the asset quality of performing loans.
The operations of Suburban Federal are significantly influenced by
general economic conditions and the monetary and fiscal policies of government
regulatory agencies. Deposit flows and costs of funds are influenced by
interest rates on competing investments and prevailing market rates of
interest. Lending activities are affected by the demand for financing real
estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered and other factors affecting loan
demand and the availability of funds. Just as the Bank's operations are
influenced by regulatory authorities, so are its liquidity levels and capital
resources.
On August 8, 1995, the FDIC approved a significant reduction in the
deposit insurance premiums charged to those financial institutions that are
members of the Bank Insurance Fund ("BIF"). As a result of such action, most
BIF-insured financial institutions pay an annual deposit insurance assessment
of 0.04% or less of insured deposits. No similar reduction was approved for
institutions, such as the Bank, that are members of the SAIF. This amendment
creates a significant disparity between the deposit insurance premiums paid by
BIF and SAIF members. The United State Congress and the federal banking
agencies are actively considering several options to address this disparity,
including a one-time assessment based on a percentage of insured deposits to be
imposed on all SAIF members. While it is uncertain whether this or any
proposal for addressing the insurance premium disparity will be adopted based
on the Bank's deposits at June 30, 1996, a one-time assessment based on .80% of
deposits would be approximately $632,000 after taxes. The effect of which at
June 30, 1996 would have reduced tangible and core capital ratios to 10.6% from
10.9%, and reduced risk based capital ratios to 20.3% from 20.7%. However, if
such a special assessment is imposed and the SAIF is recapitalized, it could
have the effect of reducing the Bank's deposit insurance premiums in future
periods, thereby establishing competitive equality between BIF and SAIF
insured financial institutions (see "Regulation"). Also under consideration
are proposals relating to the reduction or elimination of differences between
banks and thrifts, including the possible merger of the BIF and SAIF and
elimination of the thrift charter. While there currently are substantial
impediments to converting from SAIF to BIF deposit insurance, recent
legislation substantially reduced the adverse federal tax consequences of
thrifts converting to banks (see "Taxation"). The Bank cannot predict at this
time whether any pending legislation ultimately will be enacted in its current
form or, if enacted, whether such legislation would remedy some or all of the
related adverse financial and tax effects.
ASSET/LIABILITY MANAGEMENT
The Company monitors its interest rate risk, or sensitivity of its net
interest income to changes in interest rates, since the level of such risk
significantly affects certain of its operating strategies. Net interest income
is subject to volatility due to (i) a mismatch in the timing of maturity or
repricing of interest-earning assets and interest-bearing liabilities and (ii)
changes in the relative levels of interest rates for different maturities along
the yield curve (i.e., the shape of the yield curve). An Asset/Liability
Committee, established by the Bank's Board of Directors, is responsible for
reviewing asset/liability policies and the Company's interest rate risk
position. This committee meets at least monthly and reports to the Board of
Directors on interest rate risk levels and trends on a quarterly basis.
One means of evaluating the sensitivity of an institution's net
interest income to changes in interest rates is to examine the extent to which
its assets and liabilities are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap". An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature
or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive
30
<PAGE> 33
when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of falling interest rates therefore,
the net interest income of an institution with a positive gap may be adversely
affected due to its interest-earning assets repricing to a greater extent than
its interest-bearing liabilities, while an institution with a negative gap
would likely have an opposite result. Conversely, during a period of rising
interest rates, the net interest income of an institution with a positive gap
position may increase since it is able to increase the yield on its
interest-earning assets more rapidly than the cost of its interest-bearing
liabilities, while an institution with a negative gap would likely have an
opposite result.
The following table sets forth the Company's interest-earning assets
and interest-bearing liabilities at June 30, 1996, which may based upon certain
assumptions, reprice or mature in each of the future time periods shown.
Except as stated below, the amount of assets and liabilities shown which
reprice or mature during a particular period were determined in accordance with
the earlier of the term to repricing or the contractual terms of the asset or
liability. The Company's loan prepayment and deposit decay rate assumptions
are management's estimates derived from sources which the Asset/Liability
Committee uses in monitoring the Company's interest rate risk position.
Specifically, the table assumes a 15% annual prepayment rate for
adjustable-rate mortgage loans. Fixed rate single-family mortgage loans are
assumed to prepay at a 20% annual prepayment rate.
Decay rates estimate the annual rate at which balances in certain
deposits will reprice or be transferred by the depositor to an account with a
more favorable interest rate. The following table assumes the passbook savings
reprice at an annual rate of 40% in the first year and 100% of the remaining
balance during years two and three. Now accounts and other checking balances
are assumed to reprice at an annual rate of 30% in the first year and 100% of
the remaining balance during years two and three. Money Market accounts are
assumed to reprice within three months or less since rates on such accounts are
adjusted to market conditions.
<TABLE>
<CAPTION>
Three Months Over One Over Five
Three Months Through Through Through Over Ten
or Less One Year Five Years Ten Years Years Total
------------ ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $19,936 $44,018 $90,492 $6,306 $1,045 $161,797
Investment securities 100 1,009 0 0 0 1,109
Mortgage-backed securities 1,917 3,441 13,869 5,549 3,697 28,473
FHLB stock 2,745 2,745
Short-term investments 6,481 0 0 0 0 6,481
------- ------- ------- ------- ------- --------
Total 31,179 48,468 104,361 11,855 4,742 200,605
Investment-bearing liabilities:
Deposits 26,385 42,754 50,108 443 0 119,690
FHLB advances 5,475 13,662 28,035 5,933 922 54,027
------- ------- ------- ------- ------- --------
Total 31,860 56,416 78,143 6,376 922 173,717
Interest sensitivity gap ($681) ($7,948) $26,218 $5,479 $3,820 $26,888
======= ======= ======= ======= ======= ========
Cumulative interest
sensitivity gap ($681) ($8,629) $17,589 $23,068 $26,888 $26,888
======= ======= ======= ======= ======= ========
Cumulative ratio of
interest-earning assets to
interest-bearing liabilities 97.86% 90.23% 110.57% 113.35% 115.48% 115.48%
======= ======= ======= ======= ======= ========
Ratio of cumulative gap to
total assets -0.34% -4.27% 8.70% 11.42% 13.31% 13.31%
======= ======= ======= ======= ======= ========
</TABLE>
As the preceding table indicates, the Company has a small negative
cumulative gap for assets and liabilities, maturing or repricing within one
year equal to 4.27% of total assets. Thus, decreases in interest rates during
this time period would generally increase the Company's net interest income,
while increases in interest rates would generally decrease the Company's net
interest income. However, certain limitations are inherent in the method of
analysis presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities or periods to repricing,
they may react in different degrees to changes in market interest rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in the market interest rates, while interest rates on other
types may lag behind changes in market rates. Additionally, certain assets
such as adjustable rate mortgage (ARM) loans have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of changes in interest rates, prepayment and decay rates
would likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to afford the payments on their ARM
loans may decrease in the event of an interest rate increase.
31
<PAGE> 34
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to the
Bank's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and the average cost of liabilities for
the periods and at the date indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods indicated. During the periods
indicated, non-accrual loans are included in the net loan category. The table
also presents information for the periods indicated with respect to the
difference between the weighted average yield earned on interest-earning assets
and the weighted average rate paid on interest-bearing liabilities, or
"interest rate spread," which the Bank uses as an indicator of profitability.
Another indicator of an institution's net interest income is its "net yield on
interest-earning assets," which is its net interest income divided by the
average balance of interest-earning assets. Net interest income is affected by
the interest rate spread and by the relative amounts of interest-earning assets
and interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities any positive interest rate spread will
generate net interest income.
32
<PAGE> 35
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table sets forth certain information relating to the Bank's
average interest-earning assets and interest-bearing liabilities and reflects
the average yield on assets and the average
<TABLE>
<CAPTION>
For Year Ended June 30,
1996 1995 1994
------------------------------ ---------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans . . . . . . . . . . . . . . $148,689 $12,088 8.13% $123,976 $10,344 8.34% $111,804 $9,688 8.67%
Investment Securities . . . . . . 1,108 74 6.68 1,099 75 6.82 1,932 117 6.06
Mortgage-backed Securities . . . 35,575 2,460 6.91 45,096 3,073 6.81 25,742 1,552 6.03
FHLB stock . . . . . . . . . . . 2,284 165 7.22 2,006 127 6.33 1,250 59 4.72
Short-term Investments . . . . . 6,731 311 4.62 12,389 648 5.23 16,810 605 3.60
-------- ------- -------- ------- -------- -------
Total Interest-Earning Assets . 194,387 15,098 7.77 184,566 14,267 7.73 157,538 12,021 7.63
------- ------- -------
Noninterest-Earning Assets . . . . 4,822 5,273 7,056
-------- -------- --------
Total Assets . . . . . . . . . $199,209 $189,839 $164,594
======== ======== ========
Interest-Bearing Liabilities:
Deposits . . . . . . . . . . . . $126,037 $ 6,341 5.03% $122,484 $ 5,459 4.46% $120,710 $ 5,155 4.27%
Borrowings . . . . . . . . . . . 44,246 2,899 6.55 39,232 2,546 6.49 19,584 1,111 5.67
-------- -------- -------- ------- -------- -------
Total Interest-Bearing
Liabilities . . . . . . . . . 170,283 9,240 5.43 161,716 8,005 4.95 140,294 6,266 4.47
-------- ------- -------
Noninterest-Bearing Liabilities . . 2,617 1,751 1,419
-------- -------- --------
Total Liabilities . . . . . . . 172,900 163,467 141,713
Stockholders' Equity . . . . . . . 26,309 26,372 22,881
-------- -------- ------
Total Liabilities and Retained
Earnings . . . . . . . . . . $199,209 $189,839 $164,594
======== ======== ========
Net Interest Income . . . . . . . . $ 5,858 $ 6,262 $ 5,755
======= ======= =======
Interest Rate Spread . . . . . . . 2.34% 2.78% 3.16%
===== ===== =====
Net Yield on Interest-Earning
Assets . . . . . . . . . . . . . 3.01% 3.39% 3.65%
===== ===== =====
Ratio of average Interest-Earning
Assets to average Interest-
Bearing Liabilities . . . . . . . 114.16% 114.13% 112.29%
======= ======= =======
</TABLE>
33
<PAGE> 36
RATE/VOLUME ANALYSIS
The following table sets forth information regarding the extent to
which changes in interest rates and changes in volume of interest related
assets and liabilities have affected Suburban Federal's interest income and
expense during the periods indicated. For each category of interest-earning
asset and interest-bearing liability, information is provided for changes
attributable to (i) changes in volume (changes in volume multiplied by old
rate), (ii) changes in rates (change in rate multiplied by old volume).
Changes due to changes in rate-volume (changes in rate multiplied by the
changes in volume) have been allocated proportionately between the changes of
volume and the changes in rate.
<TABLE>
<CAPTION>
Year ended June 30, Year Ended June 30,
-------------------------------------- -------------------------------------
1996 vs. 1995 1995 vs. 1994
-------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans . . . . . . . . . . . . . $2,001 $ (257) $1,744 $ 995 $(339) $ 656
Investment Securities . . . . . 1 (2) (1) (60) 18 (42)
Mortgage-backed Securities . . (659) 46 (613) 1,296 225 1,521
FHLB stock . . . . . . . . . . 19 19 38 43 25 68
Short-term Investments . . . . (268) (69) (337) (59) 102 43
------ ------- ------ ------ ----- ------
Total Interest-Earning
Assets . . . . . . . . . . 1,094 (263) 831 2,215 31 2,246
Interest-Bearing Liabilities:
Deposits . . . . . . . . . . . 162 720 882 77 227 304
FHLB advances . . . . . . . . . 328 25 353 1,255 180 1,435
------ ------- ------ ------ ----- ------
Total Interest-Bearing
Liabilities . . . . . . . 490 745 1,235 1,332 407 1,739
------ ------- ------ ------ ----- ------
Change in Net Interest Income . . $ 604 $(1,008) $ (404) $ 883 $(376) $ 507
====== ======= ====== ====== ===== ======
</TABLE>
34
<PAGE> 37
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1996 AND 1995
Total assets increased by $5.6 million or 2.8% from $196.5 million at
June 30, 1995 to $202.1 million at June 30, 1996. The increase in assets is the
result of a 10.9% increase in loans over the prior year. Loan growth was
funded by an increase in FHLB advances, and the sale of mortgage-backed
securities identified as available for sale.
Loan originations and purchases were $53.6 million during fiscal 1995
and increased 10.5% to $59.2 million during the fiscal year ended June 30,
1996. Loans sold to investors were $1.6 and $7.2 million for fiscal 1995 and
1996, respectively. During the 1996 fiscal year, adjustable rate loans were
being favored by customers over fixed rate loans. As a result, loans
receivable net increased $15.6 million or 10.9% from $143.1 million at June 30,
1995, to $158.7 million at June 30, 1996.
During the 1996 fiscal year, the Bank continued its emphasis on
resolving delinquent and troubled credit. As a result loans accounted for on a
non accrual basis were reduced by $308,000 with no increase in the balance of
real estate owned from the prior year.
Deposits decreased $5.8 million during the fiscal year. The decrease
was primarily the result of the transfer of $5.3 million in deposits which were
serviced at the Bank's downtown branch office which was closed for deposit
operations on May 31, 1996. The deposits were sold to a local financial
institution which maintains a downtown location.
The volume of deposits during the fiscal year were also affected by a
general decline in the volume at the downtown branch location from $7.1 million
to $5.3 million at June 30, 1995 and May 31, 1996, respectively. The remaining
branch locations experienced slight growth to offset in part the decline in
deposits at the downtown location.
Late in the fourth fiscal quarter the Company introduced an innovative
program for marketing demand deposit accounts. This program is expected to
eventually lower deposit costs and increase the volume of deposits, as well as
create a new source of cross-selling opportunities for the bank services.
During fiscal 1996, the Company sold $9.8 million in mortgage-backed
securities which were identified as available for sale. The securities were
liquidated to provide funding for loan production and to facilitate the
transfer of the downtown deposits, and resulted in a loss of $124,000 during
the year.
Advances from the FHLB increased by $10.9 million or 25.3% from $43.1
million at June 30, 1995 to $54.0 million at June 30, 1996. Advances were
acquired during the fiscal year to fund loan production. FHLB advances are
generally amortizing and have maturities or repricing periods similar to the
mortgage-backed securities purchased or loans funded. In the future,
management may acquire additional FHLB advances to fund loan production, to
acquire other investments, or as a tool to manage interest rate risk of the
Bank.
Stockholders' equity decreased from $26.2 million at June 30, 1995 to
$25.7 million at June 30, 1996 or 12.7% as a percentage of total assets. The
decrease in equity was the result of $726,000 in acquisitions of treasury stock
related to a stock repurchase plan approved by the board of directors in
October 1994 and February 1996, and dividends declared in the amount of
$888,000 which was partially offset by $952,000 in earnings and $353,000 in
equity adjustments related to director and employee stock benefit plans. The
repurchase plans authorized the acquisition of approximately ten percent or
154,000 shares of which approximately 107,000 have been purchased.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1996 AND 1995.
Net Income. Net income was lower by $621,000 from $1.6 million for
the fiscal year ended June 30, 1995 to $952,000 for the fiscal year ended June
30, 1996. The lower net earnings was attributable primarily to two factors;
net expenses of $526,000 related to the closing of the downtown branch
including the sale of savings deposits, and $394,000 difference in net interest
income for the year. The branch closing expense recorded in fiscal 1996
includes a charge to recognize the remaining lease obligation, other related
expenses and is net of a premium paid by the financial institution which
acquired the deposits. By closing the branch office management expects to
35
<PAGE> 38
benefit from reduced overhead and by more efficient allocation of its
resources. The deposits of the branch which totaled $5.3 million at the
closing date were sold to a local financial institution for the convenience of
depositors. Any subsequent sublease of the closed facility will be recognized
as a recovery at that time. Net income was also affected by a $124,000 loss on
sale of mortgage-backed securities and a $150,000 recovery on the settlement of
a legal dispute.
Net Interest Income. Net interest income after provision for loan
losses was $394,000 lower in fiscal 1996 as compared to fiscal 1995. The lower
result was primarily caused by a 57 basis point increase in average cost of
deposits from 4.46% during 1995 to 5.03% during 1996.
The higher average cost of deposits is the lagging result of higher
interest rates paid on fixed term deposits acquired in fiscal 1995 and also a
decline in the volume of lower cost deposit types as a result of depositors
seeking higher interest rates. Such funding sources were replaced with higher
cost deposit types and FHLB advances during the fiscal year. As a partial
offset to the rise in the cost of funds the average yield on earning assets
improved slightly from the prior year and as a result average net interest
margin decreased 38 basis points from 3.39% to 3.01% for the fiscal years ended
June 30, 1995 and 1996, respectively. Net interest margin has improved
slightly during the fourth quarter from 2.97% at March 31, 1996 to 3.01%
reported at June 30, 1996, and is expected to stabilize in the near future,
subject to changes in market influences, as balances of core deposit accounts
improve and adjustable rate loans originated in prior years, when rates were
predominantly lower, begin to adjust to the changes in market interest rates.
Interest Income. Total interest income increased from $14.3 million
to $15.1 million for the fiscal years ended June 30, 1995 and 1996,
respectively. Interest income on loans increased $1.8 million or 16.9%. A
$24.7 million change in average balance of loans in the portfolio resulted in a
$2.0 million increase in interest income. This was partially offset by a
$257,000 decrease in interest income due to the decline in average yield on the
portfolio from 8.34% during fiscal 1995 to 8.13% during fiscal 1996. The
decline in average yield was the result of many factors including the effect of
lower market interest rates from the preceding year on adjustable rate,
commercial real estate loans, lower prevailing market rates for new loan
production as compared to the preceding year, and a decline in the volume of
commercial real estate loans, which generally carry a higher interest rate than
one to four family residential mortgages. The average yield on loans is
affected by loan acquisition activity, adjustable rate features of loans in
portfolio, the interest rate environment and other economic factors out of the
control of the Bank.
Interest income on mortgage-backed securities and short-term
investments decreased by $950,000 primarily as a result of a $15.2 million
decrease in the average volume of such assets. Some mortgage-backed securities
and short-term investments were liquidated during 1996 to provide funding for
loan production and to fund the sale of deposits from the downtown branch.
Interest Expense. Total interest expense increased from $8.0 million
for the fiscal year ended June 30, 1995 to $9.2 million for the fiscal year
ended June 30, 1996. The increase is primarily attributable to $882,000
increase in deposit expenses which was primarily the result of a 12.8% increase
in average cost of deposits from 4.46% during fiscal 1995 to 5.03% during
fiscal 1996. Another major component of the increase in interest expense was a
$353,000 increase in the cost of FHLB advances. The increase in the cost of
advances was almost entirely due to an increase in volume used to fund loan
production. The future level of cost of deposits and advances is dependent on
funding needs of the Bank, the interest rate environment and other economic
factors beyond the control of management.
Late in the fourth fiscal quarter the Company introduced an innovative
program for marketing demand deposit accounts. This program is expected to
eventually lower deposit costs and increase the volume of deposits, as well as
create a new source of cross-selling opportunities. In the coming fiscal year
advertising expenses for the program are expected to increase non-interest
operating expenses over fiscal 1996 levels. The higher expenses are expected
to be offset by a related increase on non-interest fee income, and higher net
interest income as volume of deposits increases in future years.
Provision for Loan Losses. No provision for losses on loans was made
for the 1996 fiscal year, as compared to a $10,000 provision in 1995. Among
the factors considered in determining the amount of the provision
36
<PAGE> 39
were the overall level of delinquent loans, the underlying value of collateral,
the historical performance, the loan portfolio and the economic environment
both locally and nationally. The level of provisions for losses in the future
will be determined by management based on analysis and factors discussed above.
Noninterest Income. Primarily as a result of higher gains on loan
sales, noninterest income was higher by $46,000 in fiscal 1996 as compared to
the fiscal year ended June 30, 1995. Gains on the sale of loans to the
secondary market were higher by $67,000 compared to the prior year. While
adjustable rate loan products have remained the preference for the majority of
loan customers, there has been a small demand for fixed rate loans which are
generally sold in the secondary market on a servicing released basis.
Noninterest Expense. Noninterest expense was higher by $697,000
during the fiscal year ended June 30, 1996 as compared to the 1995 fiscal year.
The increase in expense is primarily attributable to the $526,000 net charge
for closing the downtown branch operation and the $124,000 loss on sale of
available for sale mortgage-backed securities and an increase in legal,
consulting and advertising expenses. Compensation expense was slightly higher
by 1.7% during fiscal 1996 as compared to the prior year as a result of general
increases in salaries and changes in staff levels and composition. The higher
expenses were partially offset by a $150,000 recovery recognized in the fourth
quarter on a legal dispute related to real estate obtained through foreclosure.
Legal and professional services expenses were higher by $156,000
compared to the prior year due to a lawsuit filed by the Company against the
Bank's former legal counsel, the consideration of strategic alternatives and
the development of a new program for marketing demand deposit accounts, which
also increased advertising expense $97,000 compared to the prior year. The
lawsuit was resolved in the fourth quarter. Legal and consulting expenses are
not expected to continue at these levels in future periods.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1995 AND 1994.
Net Income. Net income was lower by approximately $1.0 million from
$2.6 million for the fiscal year ended June 30, 1994 to $1.6 million for the
fiscal year ended June 30, 1995. The decline in income is attributable to the
$1.2 million cumulative effect of a change in accounting principle related to
income taxes recorded in 1994. Income before the cumulative effect of the
change in accounting principle was $1.5 million in fiscal 1994.
Net Interest Income. Net interest income increased by $507,000 or
8.8% to $6.3 million for the fiscal year ended June 30, 1995. The increase in
net interest income primarily reflects a $25.2 million increase in average
interest earning assets during fiscal 1995. The improvement was partially
offset by a decline in the average net yield on earning assets from 3.65% to
3.39% for the fiscal years ended June 30, 1994 and 1995, respectively, due to
the average yield on earning assets increasing slower than the cost of funds.
Interest Income. Total interest income increased from $12.0 million
to $14.3 million for the fiscal years ended June 30, 1994 and 1995,
respectively. Interest income on loans increased $657,000 or 6.8%. A $12.2
million change in the average balance of loans in the portfolio resulted in a
$995,000 increase on interest income. This was offset by a $339,000 decrease
in interest income due to the decline in average yield on the portfolio from
8.67% during fiscal 1994 to 8.34% during fiscal 1995. The decline in average
yield was primarily the result of adding $31.3 million in loans to the
portfolio during fiscal 1995 at an average rate of approximately 7.875%, which
was the average prevailing market rate for loans in the Bank's market area.
Depending on the interest rate environment and other factors out of the control
of the Bank, the average yield on loans may continue to be affected by future
loan acquisition activity.
Interest income on mortgage-backed securities increased by $1.5
million as a result of a $19.4 million increase in average balance and an
improvement on the average rate from 6.03% in fiscal 1994 to 6.81% in fiscal
1995. The increase in average balance was attributable to a strategy to
increase the overall volume of interest earning assets in an effort to improve
earnings.
Interest or short term investments, such as interest earning deposits
and federal funds sold, increased slightly by $43,000 as a result of an
increase in average rate from 3.60% to 5.23% for the fiscal years 1994 and
1995, respectively. The increase in rate was partially offset by a $4.4
million decrease in the average volume of such assets.
37
<PAGE> 40
Income on investment securities decreased slightly during the 1995
fiscal year. The decline was offset by a slight increase in the income from
FHLB stock, which the Bank is required to own. Both asset categories were
primarily effected by a change in average volume.
Interest Expense. Total interest expense increased from $6.3 million
for the fiscal year ended June 30, 1994 to $8.0 million for the fiscal year
ended June 30, 1995. The increased expense was primarily attributable to $1.4
million increase in expense on borrowings from the FHLB, which was primarily
the result of a $19.6 million increase in average volume. The borrowings were
used to fund purchases of mortgage-backed securities and loan originations.
Contributing to the overall increase in interest expense was a $304,000
increase in deposit expense primarily related to change in average rate from
4.27% to 4.46% for the fiscal years ended June 30, 1994 and 1995, respectively.
Provision for Loan Losses. The provision for losses on loans was
$63,000 and $10,000 for the fiscal years ended June 30, 1994 and 1995,
respectively. Among the factors considered in determining the amount of the
provision were the overall level of delinquent loans, the underlying value of
collateral, the historical performance of the loan portfolio and the economic
environment both locally and nationally. The level of provisions for losses in
the future will be determined by management based on analysis and factors
discussed above.
Noninterest Income. Total noninterest income decreased $210,000 from
$704,000 for the fiscal year ended June 30, 1994 to $494,000 for the fiscal
year ended June 30, 1995. The decrease is primarily attributable to lower
gains on the sale of loans to investors. Gains were $96,000 lower on 87% lower
volume of sales. Sales to investors were lower during fiscal 1995 due to the
interest rate environment which kept demand for fixed rate mortgage loans low,
but raised demand for adjustable rate loans which are retained in the
portfolio.
Noninterest Expense. Noninterest Expense increased by $97,000 or 2.3%
from the fiscal year ended June 30, 1994 to the fiscal year ended June 30,
1995. The increase in expense is attributable to a $225,000 increase in
compensation expense due to the addition of employees; an increase in expense
related to stock related benefit plans for employees and directors and a
general increase in salaries. A $124,000 increase in franchise tax expense
related to operation of the holding company and the overall increase in the
level of capital also contributed to the increase in noninterest expense.
These increases were partially offset by lower expenses for occupancy and
equipment, loss on real estate owned, and other expenses.
Income Taxes. The effective income tax expense for fiscal 1995 was
35.3% of income before taxes. The effective tax expense for the fiscal year
ended June 30, 1994 was 32.3% of income before taxes and before the cumulative
effect adjustment for a change in the method of accounting for income taxes.
The effective tax rate varies from the statutory rate primarily as a result of
differences in bad debt deductions.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no business other than that of the Bank.
Management expects that the net proceeds retained by the Company in the stock
conversion, together with dividends that may be paid from the Bank to the
Company will provide sufficient funds for its operations. The Bank is subject
to certain regulatory limitations with respect to the payment of dividends to
the Company. The Bank meets all existing regulatory capital requirements on
both a current and fully phased-in basis. At June 30, 1996, the Bank's
tangible and core capital ratios as reported to the OTS were 10.9% and its
risked-based capital ratio was 20.7%. At that date, the minimum regulatory
capital requirements to which the Bank was subject were a tangible capital
ratio of 1.5%, a core capital ratio of 3.0% and a risk based capital ratio of
8.0%. On September 30, 1993, the Company closed the initial stock offering,
which resulted in a net increase in capital of $13.1 million.
The Bank's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and mortgage-backed securities and
borrowings from the FHLB. While maturities and scheduled amortization of loans
and mortgage-backed securities usually are a predictable source of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, and competition.
38
<PAGE> 41
During the fiscal year ended June 30, 1995, deposits increased by $5.9
million, as a result of competitive pricing. As a result of the branch closing
and sale of $5.3 million of deposits, total deposits declined by $5.8 million
during fiscal 1996.
Late in the fourth quarter of fiscal 1996 the Company introduced a
program to market demand deposit accounts. This program is expected to
eventually increase the volume of deposits and lower cost of funds.
The primary investing activity of the Bank is the origination and
purchase of mortgage loans. During the fiscal years ended June 30, 1995 and
1996, the Bank originated loans in the amounts of $28.3 million and $32.8
million, respectively. Loans totalling $25.3 million and $26.4 million were
purchased during 1995 and 1996, respectively. The Bank purchases loans and
mortgage-backed securities to reduce liquidity during periods of reduced loan
demand or reduced retention of loan production in the portfolio. Purchases of
mortgage-backed securities totaled $3.4 million during the fiscal year ended
June 30, 1996. No securities were purchased in 1995. Other investing
activities include investing in federal funds, FHLB stock and U.S. government
and agency securities.
The Bank has other sources of liquidity if there is need of additional
funds. These sources include substantial borrowing authority with the FHLB,
and the ability to borrow against the investment portfolio. At June 30, 1996,
the Bank had $54.0 million of borrowings from the FHLB. Other sources of
liquidity include investment securities maturing within one year.
The Bank is required to maintain minimum levels of liquid assets as
defined by the OTS regulations. This requirement, which may be varied at the
direction of the OTS depending on economic conditions and deposit outflows, is
based upon a percentage of deposits and short term borrowings. The required
minimum ratio is currently 5.0%. The Bank's liquidity ratios were 8.7% and
5.7% at June 30, 1995 and 1996, respectively, which levels exceeded required
levels at such dates.
The Bank's most liquid assets are cash equivalents, which are
short-term highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash,
interest-bearing deposits and federal funds sold. The levels of these assets
are dependent on the Bank's operating, financing and investing activities
during any given period. At June 30, 1995 and 1996 cash and cash equivalents
totaled $5.5 million and $7.0 million, respectively.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. At June 30, 1996, the Bank had commitments to
originate or purchase loans of $6.2 million. Certificates of deposit which
were scheduled to mature in one year or less at June 30, 1996, totaled $50.1
million. Management believes that a significant portion of such deposits will
remain with the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and accompanying notes appearing
elsewhere herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of the Bank's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates
have a greater impact on the Bank's performance than do the effects of the
general level of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
For discussion of several accounting pronouncements which impact the
Bank and Company see "Notes to the Consolidated Financial Statements" in Item 7
of this report, which is incorporated herein by reference.
39
<PAGE> 42
ITEM 7 FINANCIAL STATEMENTS
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
Suburban Bancorporation, Inc.
We have audited the accompanying consolidated balance sheets of Suburban
Bancorporation, Inc. and Subsidiaries ("the Company") as of June 30, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for the three years then ended. 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 financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Suburban
Bancorporation, Inc. and Subsidiaries as of June 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the three
years ended June 30, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for income taxes to conform with Statement of Financial
Accounting Standards No. 109 effective July 1, 1993.
Deloitte & Touch LLP
August 9 , 1996
40
<PAGE> 43
SUBURBAN BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and 1995
(In Thousands)
__________
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Non-interest earning deposits $ 482 $ 604
Interest-earning deposits 2,481 1,859
Federal funds sold 4,000 3,000
-------- -------
Total cash and cash equivalents 6,963 5,463
Available for sale securities 29,479
Held to maturity securities 100 41,563
Loans (less allowance for loan losses of $3,138 and
$3,132 at June 30, 1996 and 1995, respectively) 158,728 143,121
Investment in FHLB stock, at cost 2,745 2,271
Property and equipment, net 1,511 1,706
Accrued interest receivable 987 1,011
Other assets 1,544 1,372
-------- --------
$202,057 $196,507
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $119,691 $125,495
Advances from FHLB 54,027 43,135
Advances by borrowers for taxes and insurance 719 564
Accrued expenses and other liabilities 1,899 1,106
-------- --------
Total liabilities 176,336 170,300
Stockholders' Equity:
Serial preferred stock ($.01 par value), authorized:
3,000,000 shares; none outstanding
Common stock ($.01 par value) authorized: 12,000,000
shares; issued: 1,581,710 shares 16 16
Additional paid-in capital 15,092 14,983
Retained earnings, substantially restricted 13,728 13,664
Other equity adjustments (1,302) (1,369)
Treasury stock at cost: 106,778 and 63,100 shares at
June 30, 1996 and 1995, respectively (1,813) (1,087)
-------- --------
Total Stockholders' Equity 25,721 26,207
-------- --------
$202,057 $196,507
======== ========
</TABLE>
See notes.to consolidated financial statements
41
<PAGE> 44
SUBURBAN BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1996, 1995 and 1994
(In Thousands Except Per Share Data)
__________
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $12,088 $10,344 $ 9,687
Investment securities 74 75 118
Mortgage-backed securities 2,460 3,073 1,552
Other interest-earning assets 476 775 664
------- ------- -------
Total interest income 15,098 14,267 12,021
------- ------- -------
Interest expense:
Deposits 6,341 5,459 5,155
Borrowed funds 2,899 2,546 1,111
------- ------- -------
Total interest expense 9,240 8,005 6,266
------- ------- -------
Net interest income 5,858 6,262 5,755
Provision for loan losses 10 63
------- ------- -------
Net interest income after provision for loan losses 5,858 6,252 5,692
------- ------- -------
Noninterest income:
Gain on sales of loans 78 11 107
Loan servicing and other fees 366 383 446
Other 96 100 151
------- ------- -------
Total noninterest income 540 494 704
------- ------- -------
Noninterest expense:
Compensation and benefits 2,369 2,330 2,105
Occupancy and equipment 446 465 524
FDIC deposit insurance premium 292 276 333
Data processing and automated teller services 273 248 253
Franchise tax 369 315 191
Advertising 214 117 117
Branch closing expense 526
Other 522 563 694
------- ------- -------
Total noninterest expense 5,011 4,314 4,217
------- ------- -------
Income before income taxes and cumulative
effect of change in accounting principle 1,387 2,432 2,179
Income tax expense 435 859 703
------- ------- -------
Income before cumulative effect of change
in accounting principle 952 1,573 1,476
Cumulative effect of change in accounting principle 1,173
------- ------- -------
Net income $ 952 $ 1,573 $ 2,649
======= ======= =======
Earnings per share $0.65 $1.05 $0.76
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 45
SUBURBAN BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 1996, 1995 and 1994
(In Thousands)
__________
<TABLE>
<CAPTION>
Additional Other Total
Common Paid-in Retained Equity Treasury Stockholders'
Stock Capital Earnings Adjustments Stock Equity
-------- ---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 $10,184 $10,184
Issuance of common stock
(1,399,205 shares) $14 $13,050 13,064
Management Recognition Plan:
Shares issued (60,835 shares) 1 607 $ (608)
Shares earned 91 91
ESOP shares:
Issued (121,670 shares) 1 1,216 (1,217)
Earned 17 122 139
Net change in unrealized gain (loss)
on available for sale securities (19) (19)
Dividends declared ($0.10 per share) (158) (158)
Net income 2,649 2,649
------ ------- ------- ------- -------
Balance, June 30, 1994 16 14,890 12,675 (1,631) 25,950
Management Recognition Plan:
Shares earned 122 122
Income tax benefit of vested
shares earned 24 24
ESOP shares earned 69 122 191
Net change in unrealized gain (loss)
on available for sale securities 18 18
Dividends declared ($0.40 per share) (584) (584)
Treasury shares purchased (1,087) (1,087)
Net income 1,573 1,573
------ ------- ------- ------- ------- -------
Balance June 30, 1995 16 14,983 13,664 (1,369) (1,087) 26,207
Management Recognition Plan:
Shares earned 122 122
Income tax benefit of vested
shares earned 31 31
ESOP shares earned 78 122 200
Net change in unrealized gain (loss) on
available for sale securities (177) (177)
Dividends declared ($0.625 per share)
(888) (888)
Treasury shares purchased (726) (726)
Net income 952 952
------ ------- ------- ------- ------- -------
Balance, June 30, 1996 $16 $15,092 $13,728 ($1,302) ($1,813) $25,721
====== ======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 46
SUBURBAN BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1996, 1995 and 1994
(In Thousands)
__________
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 952 $ 1,573 $ 2,649
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 113 121 141
Deferred federal income taxes (73) 156 (978)
ESOP and MRP compensation 353 336 229
Gain on sale of real estate
acquired in settlement of loans (16) (68) (56)
Gain on sale of mortgage loans (78) (11) (107)
Branch closing expense 526
Provision for loan losses and losses on
foreclosed real estate 158 63
FHLB stock dividends (165) (127) (59)
Decrease (increase) in accrued interest receivable 24 (119) (85)
(Increase) decrease in other assets (8) (69) 634
Increase (decrease) in accrued expenses
and other liabilities (58) 349 104
Loss on sale of securities 124
Proceeds from the sale of loans 7,163 1,041 8,219
Disbursements on loans originated for sale (6,463) (1,652) (8,186)
------- ------- -------
Net cash provided by operating activities 2,394 1,685 2,568
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans:
Principal repayments 36,383 21,017 30,539
Disbursements - mortgage and other (26,369) (26,635) (32,822)
Purchased (26,376) (25,283)
Proceeds from maturing investment securities 999
Mortgage-backed securities:
Principal repayment-held to maturity 1,212 3,493 7,870
Sale proceeds - available for sale 9,816 3,690
Principal repayment-available for sale 3,998 308 11
Purchased-held to maturity (31,674)
Purchased-available for sale (3,432) (4,010)
Purchase of FHLB Stock (309) (392) (516)
Proceeds from sale of real estate acquired
in settlement of loans and recoveries 148 853 2,221
Property and equipment additions (15) (26) (232)
------- ------- -------
Net cash used in investing activities (4,944) (22,975) (27,614)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits
(excluding $5,300 of deposits sold
in connection with branch closing) (504) 5,922 (2,674)
Cash used in sale of deposits (5,100)
Advances from FHLB 21,900 11,439 19,500
Repayment of advances from FHLB (11,009) (2,971) (2,020)
Increase (decrease) in advances by borrowers
for taxes and insurance 156 350 (90)
Proceeds from the sale of common stock 13,064
Treasury stock acquired (726) (1,087)
Dividends paid to stockholders (667) (584) (158)
------- ------ -------
Net cash provided by financing activities 4,050 13,069 27,622
------- ------ -------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 1,500 (8,221) 2,576
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,463 13,684 11,108
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,963 $ 5,463 $13,684
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, including interest credited to deposit accounts $ 9,202 $ 7,903 $ 6,212
Income taxes 495 650 635
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Real estate acquired in settlement of loans $ 132 $ 200 $ 144
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following describes the significant accounting policies followed in the
preparation of these consolidated financial statements. These policies
conform with generally accepted accounting principles and with general
practices within the thrift industry.
Principles of Consolidation
The consolidated financial statements include the accounts of Suburban
Bancorporation, Inc. (the "Company"), its wholly-owned subsidiary, Suburban
Federal Savings Bank (the "Bank") and Suburban Financial Services, Inc.,
the wholly-owned subsidiary of the Bank. All significant intercompany
balances and transactions have been eliminated in consolidation.
Nature of Operations
The Company accepts deposits from the general public and originates or
purchases loans, primarily residential and commercial real estate loans, in
Ohio and Kentucky. The Company also services loans which it has sold to
other investors. Consolidated results of operations are dependent primarily
on net interest income, which is the difference between the interest income
earned on interest-earnings assets, such as loans and securities, and the
interest expense incurred on interest-bearing liabilities, such as deposits
and other borrowings.
Operating expenses consist primarily of employee compensation, occupancy
expenses, federal deposit insurance premiums and other general and
administrative expenses. Results of operations are significantly affected
by the provision for loan losses and by general economic and competitive
conditions, particularly changes in market interest rates, government
policies and actions of regulatory agencies.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of reporting cash flows, all investments with a maturity of
ninety days or less when purchased are considered cash equivalents.
Investment and Mortgage-Backed Securities
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", was adopted effective
June 30, 1994. With the adoption of SFAS No. 115, stockholders' equity was
decreased by $18,586, net of deferred income taxes of $9,574, to reflect
the unrealized holding losses on available for sale securities. The
adoption of SFAS No. 115 did not have a material affect on the results of
operations for the year ended June 30, 1994.
At the time of purchase, management classifies investment and
mortgage-backed securities in the following categories and re-evaluates
such designation at each balance sheet date.
Trading account securities are held for resale in anticipation of
short-term market movements and are valued at fair value. Gains and
losses, both realized and unrealized, are included in income. At June
30, 1996 and 1995, no securities were held for resale.
46
<PAGE> 48
Debt and mortgage-backed securities are classified as held-to-maturity
when the positive intent and ability to hold the securities to maturity
exists. Securities held to maturity are carried at cost, adjusted for
amortization of premiums and accretion of discounts over the remaining
lives of the underlying securities using methods which approximate
the interest method.
Debt and mortgage-backed securities not classified as held to maturity
or trading account are classified as available-for-sale. Securities
available-for-sale are carried at fair value with unrealized gains and
losses reported separately as a component of stockholder's equity.
Amortization of premiums and accretion of discounts are recorded as interest
income. Realized gains and losses are computed using the specific
identification method.
In November 1995, the Financial Accounting Standards Board (FASB) issued "A
Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." This guide deals with various
implementation issues regarding SFAS No. 115. A provision of the guide
permitted a one-time reassessment of the Company's classification of all
securities. Under this provision, a reclassification from the held to
maturity category to another category does not call into question the
Company's intent to hold other debt securities to maturity. The Company
reclassified held to maturity securities with a carrying value of $39.0
million to available for sale. For such securities, an unrecognized gain of
$314,000, net of $162,000 in deferred taxes, was recorded in shareholders'
equity.
Loans Receivable
It is the general policy of the Bank to sell in the secondary market
certain eligible fixed rate, one-to-four family loans originated. Such
loans are designated as held for sale during the period of underwriting and
are carried at the lower of cost or market determined in the aggregate.
The amount of loans held for sale at June 30, 1996 and 1995 is not material
to the loan portfolio and is not reported separately in the Bank's balance
sheets. The Bank has the ability and intent to hold all other loans to
maturity or earlier repayment, and these loans are stated at unpaid
principal balances, less the allowance for loan losses and net deferred
loan origination fees and discounts.
Premiums and discounts on mortgage loans acquired are amortized to income
using the interest method over the remaining period to contractual
maturity.
Interest income is accrued when earned and is discontinued when a reasonable
doubt exists as to the collection thereof.
Loan Origination Fees
The Bank defers loan origination fees, net of certain direct loan
origination costs, and amortizes them over the life of the loan using the
interest method.
Loss Allowances
An allowance has been established for possible loan losses. The allowance
is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions.
Management believes the allowance for loan losses is adequate; however,
future additions to the allowance may be necessary based on changes in
economic conditions, thereby causing the allowance estimates to be
particularly susceptible to changes that could result in material
adjustments to results of operations. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the allowance and may require the Bank to recognize additions based
on information available to them at the time of their examination.
46
<PAGE> 49
On July 1, 1995, the Company adopted SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures", which requires
that a loan be identified as impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The
impairment is measured based on the present value of expected future cash
flows discounted at the loans effective interest rate, the fair value of
collateral dependent loans, or observable market price of the loan.
Adoption of SFAS No. 114 and 118 did not have a material impact on financial
position or results of operations.
Real Estate
Real estate held for investment is carried at the lower of cost or net
realizable value. Real estate acquired in settlement of loans is held for
sale and stated at the lower of cost or fair value, less estimated costs to
sell. At foreclosure, if the fair market value of the real estate is less
than the carrying value of the loan, the real estate is recorded at fair
value and the difference is charged to the allowance for loan losses.
Subsequently, valuations are performed periodically by management, and any
reduction in the carrying value of a property is charged to operations.
Costs relating to the holding of such properties are expensed as incurred;
costs to develop or improve the property are capitalized. The specific
identification method is used to determine gain or loss on the sale of real
estate. Real estate transactions and balances were not material for the
years presented and are classified with other accounts.
Property and Equipment
Land is stated at cost. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets. Expenditures
for betterments and major renovations are capitalized; ordinary repairs and
maintenance are charged to operations as incurred.
Federal Income Taxes
The Company files a consolidated Federal income tax return. Income taxes
are provided for all taxable items included in the income statement,
regardless of when such items are reported for tax purposes, adjusted for
permanent differences. 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. When new tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
The bank adopted SFAS No. 109 "Accounting for Income Taxes", effective July
1, 1993. This standard requires an asset and liability approach to
financial accounting and reporting for income taxes. The cumulative effect
of adopting the standard was the recognition of a deferred tax asset of
$1,117,353 in fiscal 1994.
Reclassification
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Earnings Per Share
The Company's conversion to stock ownership was completed September 30,
1993; therefore, earnings per share for 1994 is computed by dividing net
income for the period October 1, 1993 through June 30, 1994 by 1,472,633,
the weighted average number of common share and common share equivalents
outstanding. For 1996 and 1995, the weighted average number of common
share and common share equivalents outstanding is 1,464,736 and 1,502,824,
respectively. Stock options are considered common share equivalents and
are included in the computation using the treasury stock method. Only ESOP
shares released for allocation are considered outstanding in determining
the weighted average number of shares.
47
<PAGE> 50
2. AVAILABLE FOR SALE SECURITIES:
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Treasury notes, due within 1 year $ 1,000 $ 9 $ 1,009
======= ======= =======
Mortgage-backed securities:
FHLMC certificates $17,301 $ 48 $ 99 $17,250
FNMA certificates 10,494 38 225 10,307
GNMA certificates 795 38 757
REMIC's 156 156
------- ------- ------- -------
Totals $28,746 $ 86 $ 362 $28,470
======= ======= ======= =======
</TABLE>
There were no available for sale securities at June 30, 1995. Amortized
cost of mortgage-backed securities with adjustable rates was $1.3 million
at June 30, 1996.
In 1996, gross realized gains and gross realized losses on sales of
available for sale securities were $15,000 and $139,000, respectively. In
1995, available for sale mortgage-backed securities with a carrying value of
$3.7 million were sold for $3.7 million; thus, no gain or loss. There were
no sales of securities in 1994.
3. HELD TO MATURITY SECURITIES:
<TABLE>
<CAPTION>
June 30, 1996
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C>
Investment securities-FHLB time deposits,
due within 1 year $ 100 $ 100
======= =======
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Investment securities:
FHLB time deposits $ 100 $ 100
U.S. Treasury notes 999 $ 19 1,018
------- ---- -----
Totals $ 1,099 $ 19 $ 1,118
======= ==== =======
Mortgage-backed securities:
FHLMC certificates $27,147 $ 8 $27,155
FNMA certificates 12,173 $97 12,076
GNMA certificates 911 32 879
REMIC's 233 1 232
------- ---- ------- -------
Totals $40,464 $ 8 $ 130 $40,342
======= ==== ======= =======
</TABLE>
Amortized cost mortgage-backed securities with adjustable rates were $1.6
million at June 30, 1995.
48
<PAGE> 51
4. LOANS RECEIVABLE:
Substantially all of the Bank's residential and commercial real estate and
other loans are to borrowers located in the southwestern Ohio and northern
Kentucky areas. Loans are originated or purchased on the basis of credit
policies established by the Bank's management and are generally
collateralized by first mortgages on the property. Management believes
that the Bank has a diversified loan portfolio and that there are no credit
concentrations other than residential and commercial real estate loans.
Loans receivable at June 30, 1996 and 1995 consists of the following
(rounded to thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------
1996 1995
---- ----
<S> <C> <C>
First mortgage loans (principally conventional):
Collateralized by one-to-four family residences $119,615 $ 96,709
Collateralized by multi-family properties 24,499 26,121
Collateralized by other properties 16,314 21,756
Construction loans 4,073 2,108
-------- --------
Totals 164,501 146,694
Consumer and other loans:
Loans on savings accounts 197 268
Other 111 46
-------- -------
Totals 164,809 147,008
Less:
Undisbursed portion of construction loans (2,942) (695)
Unearned discounts (321) (146)
Unamortized premiums 389 227
Net deferred loan origination fees (69) (141)
Allowance for loan losses (3,138) (3,132)
-------- --------
$158,728 $143,121
======== ========
</TABLE>
At June 30, 1996, the composition of the portfolio of loans held for
investment classified as "term to maturity" for fixed rate loans and "term to
rate adjustment" for variable rate loans is as follows (rounded to thousands):
<TABLE>
<CAPTION>
Term Fixed Rate Variable Rate
----------------- ----------- -------------
<S> <C> <C>
1 month to 1 year $ 2,296 $43,344
1 year to 3 years 512 35,890
3 years to 5 years 1,735 38,048
5 years to 10 years 6,719 3,138
10 years to 20 years 31,204
Over 20 years 1,923
------- --------
Total $44,389 $120,420
------- --------
</TABLE>
Activity in the allowance for loan losses is summarized as follows (rounded
to thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $3,132 $3,113 $3,060
Provision charged to income 10 63
Charge-offs (44)
Recoveries 6 9 34
------ ------ -----
Balance at end of year $3,138 $3,132 $3,113
====== ====== ======
</TABLE>
It is the opinion of management that adequate provisions have been made for
anticipated losses in the loan portfolio.
49
<PAGE> 52
Loans transferred to real estate acquired in settlement of loans amounted
to approximately $132,000, $202,000 and $144,000 for the years ended June
30, 1996, 1995 and 1994, respectively.
Loans serviced for others amounted to approximately $14,814,000,
$21,346,000 and $24,022,000 at June 30, 1996, 1995, and 1994, respectively.
These loans are not assets of the Bank and are not included in the
consolidated financial statements. Loan servicing income is recorded on a
cash basis and includes servicing fees from investors and certain charges
collected from borrowers, such as late payment fees.
The Bank had discontinued accrual of interest on loans receivable with
principal balances of approximately $70,000, $378,000 and $361,000 at June
30, 1996, 1995 and 1994, respectively. If non-accruing loans had been
current in accordance with their original contractual terms and had been
outstanding throughout the periods, interest income would have been
approximately $8,000, $13,000 and $24,000 higher for the years ended June
30, 1996, 1995, and 1994, respectively.
The following information pertains to impaired loans (dollars in thousands):
As of June 30, 1996:
Gross impaired loans which have allowances $1,099
Less: related allowances for loan losses 552
------
Net impaired loans with related allowances 547
Impaired loans with no related allowances 269
------
Total $ 816
For the year ended June 30, 1996:
Average impaired loans outstanding, net $1,034
Interest income recognized 114
Interest income received 108
The Company recognizes interest income on an impaired loan when earned,
unless the loan is on nonaccrual status, in which case interest income is
recognized when received or when the loan is repaid.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Rights
an amendment of FASB Statement No. 65." This statement eliminates the
accounting distinction between rights to service loans for others that are
not acquired through loan origination activities and those acquired through
purchase transactions. For all mortgage loans that are sold, or
securitized, with mortgage servicing rights retained, the total cost of the
loan is allocated between the loan and the rights to service the loan. The
mortgage servicing rights will be amortized in proportion to and over the
period of the estimated servicing income and evaluated for impairment based
on their fair value. SFAS No. 122 is effective for fiscal years beginning
after December 15, 1995. Management has determined that adopting SFAS No.
122 will not have a material effect on the Bank's financial condition or
results or operations.
On June 28, 1996 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". Application of SFAS No. 125 is based on
consistent application of a financial-componenets approach that focuses on
control. After a transfer of financial assets an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, recognizes the transfer of financial assets when control has been
surrendered, and recognizes the elimination of liabilities when
extinguished. SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishment of liabilities occurring after
December 15, 1996. Management has not determined the effect that adopting
SFAS No. 125 will have on the Bank's financial condition or results of
operations.
50
<PAGE> 53
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (rounded to thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Building and leasehold improvements $1,466 $1,631
Furniture and fixtures 1,290 1,325
Less accumulated depreciation (1,780) (1,785)
------ ------
976 1,171
Land 535 535
------ ------
$1,511 $1,706
====== ======
</TABLE>
6. ACCRUED INTEREST RECEIVABLE:
Accrued interest receivable consists of the following (rounded to
thousands):
<TABLE>
<CAPTION>
June 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
Investment securities $ 21 $ 23
Mortgage-backed securities 177 240
Loans receivable 789 748
---- -----
$987 $1,011
==== ======
</TABLE>
7. DEPOSITS:
Deposits consist of the following (rounded to thousands):
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------
1996 1995
---------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Passbook and Lifestyle Savings $10,446 2.7% $11,578 2.7%
Super Saver and Money Market Savings 10,918 3.4 11,992 3.5
NOW and Checking Accounts 9,023 2.1 9,717 2.1
Non-Interest bearing demand 2,284 0.0 2,973 0.0
------ ---- ------ ----
32,671 2.6 36,260 2.6
Certificates:
91 days through 365 days 21,995 5.2 16,263 5.7
1 year through 5 years 54,215 5.7 60,346 5.8
5 years through 10 years 10,810 7.0 12,626 7.2
------ --- ------ ---
87,020 5.8 89,235 6.0
------ --- ------ ---
$119,691 4.9% $125,495 5.0%
======== ==== ======== ====
</TABLE>
Scheduled maturities of certificate accounts at June 30, 1996 are as
follows (rounded to thousands):
<TABLE>
<S> <C>
One year or less $50,146
Over 1 year to 2 years 24,255
Over 2 years to 3 years 7,876
Over 3 years 4,743
-------
$87,020
=======
</TABLE>
51
<PAGE> 54
Interest expense on deposits consists of the following (rounded to
thousands):
<TABLE>
<CAPTION>
June 30,
----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Passbooks $290 $340 $400
Money Market 380 417 464
NOW Accounts 187 199 212
Certificates 5,484 4,503 4,079
----- ----- -----
$6,341 $5,459 $5,155
====== ====== ======
</TABLE>
8. ADVANCES FROM FEDERAL HOME LOAN BANK:
Advances from the FHLB consist of promissory notes which bear interest
from 5.30% to 7.75% and mature as follows (rounded to thousands):
<TABLE>
<CAPTION>
Maturities in years ending June 30:
<S> <C>
1997 $19,137
1998 13,067
1999 7,907
2000 5,624
2001 1,437
2002 and thereafter 6,855
-------
$54,027
=======
</TABLE>
As collateral for the advances, the Bank has pledged its FHLB stock and
a portion of its mortgage loan portfolio under a Blanket Agreement for
Advances. Under the agreement, the Bank is required to maintain an
aggregate unencumbered balance of first mortgage, residential loans
equal to no less than 150% of outstanding FHLB advances.
9. REGULATORY CAPITAL REQUIREMENT:
As required under FIRREA, the Office of Thrift Supervision ("OTS")
promulgated regulations implementing uniform capital standards for
federally insured savings associations. At June 30, 1996, the capital
standards included a 1.5% tangible capital requirement, a 3% leverage
ratio (core capital requirement) and an 8.0% risk-based capital ratio
requirement.
The following is a reconciliation of stockholders' equity as reflected
in these financial statements (determined under generally accepted
accounting principles) to the Bank's computed regulatory capital, and
compliance with each of the capital requirements, at June 30, 1996
(rounded to thousands).
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------------ ------------ ------------
<S> <C> <C> <C>
Stockholders' Equity $25,721 $25,721 $25,721
Equity of Holding Company not
available for regulatory capital (3,501) (3,501) (3,501)
Investments in non-qualifying subsidiary (332) (332) (332)
Unrealized loss on available for sale
securities 176 176 176
General valuation allowance - limited 1,430
------- ------- -------
Bank's regulatory capital 22,064 22,064 23,494
Required regulatory capital 3,039 6,079 9,056
------- ------- -------
Excess regulatory capital $19,025 $15,985 $14,438
======= ======= =======
</TABLE>
52
<PAGE> 55
<TABLE>
<S> <C> <C> <C>
Capital ratios computed as a percentage of
total or risk-adjusted assets:
Suburban Federal Savings Bank 10.9% 10.9% 20.7%
Regulatory requirement 1.5 3.0 8.0
----- ----- -----
Excess 9.4% 7.9% 12.7%
===== ===== =====
</TABLE>
In April 1991, the OTS issued a proposal to increase the core capital
requirement for most savings institutions. Under the proposal, only
institutions rated composite 1 under the MACRO rating system of the OTS
would be permitted to operate at or near the current 3% core capital
requirement. For all other savings institutions, the minimum required
ratio would be 3% plus at least an additional 100 to 200 basis points as
determined by the OTS on a case-by-case basis. In the opinion of
management, the Bank would continue to exceed its core capital
requirement if the proposed rule were adopted in its present form.
The OTS has adopted an amendment to the risk-based capital requirement
that includes an interest rate risk component for institutions that carry
"above normal" interest rate risk. "Above normal" interest rate risk
would be determined based on the change in the net market value of the
institution's assets, liabilities and off-balance sheet items under
specific interest rate scenarios. Interest rate risk determined to be
"above normal" would likely require additional risk-based capital. The
interest rate risk component does not apply to institutions with less
than $300 million of assets and risk-based capital ratios above 12%. As
of June 30, 1996, the Bank did not have an interest rate risk component
added to its capital requirement.
Under the provisions of the Federal Deposit Insurance Corporation
Improvement Act, the OTS has issued minimum capital standards which place
savings institutions into one of five categories, from "critically
undercapitalized" to "well capitalized", depending on levels of three
measures of capital. A well capitalized institution, as defined by the
regulations, has a total risk-based capital ratio of at least 10 percent,
a Tier 1 (core) risk-based capital ratio of at least six percent and a
leverage (core) risk-based capital ratio of at least five percent. At
June 30, 1996, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized. There are no
conditions or events since that notification that management believes
have changed the Bank's category.
Management believes that, under the current regulations, the Bank will
continue to meet its minimum capital requirements in the coming year.
However, events beyond the control of the Bank, such as fluctuations in
interest rates or a down-turn in the economy in areas where the Bank has
most of its loans, could adversely affect future earnings and
consequently, the ability of the Bank to meet its future minimum capital
requirements.
Various Committees of Congress and various federal regulatory banking
agencies, including the FDIC, are currently discussing changes to the
federal deposit insurance system to narrow or eliminate the difference in
financial characteristics between the Bank Insurance Fund ("BIF") and the
Savings Association Insurance Fund ("SAIF"). One of the proposals being
discussed would, among other things, assess thrifts, such as the Bank, a
one-time fee to bring the SAIF fund into parity with the BIF fund. In the
event that such a proposal was to become law, the Bank would be $957,000
based on June 30, 1996 deposit balances and a fee of 80 basis points.
Thereafter, the Bank's annual deposit insurance expense may be reduced
for the foreseeable future. If such a proposal is enacted and the Bank
recognizes this one-time charge to its earnings during the quarter that
the proposal is enacted, the Bank would remain well-capitalized for prompt
corrective action purposes.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of the Bank's financial instruments at June 30, 1996. The use of
different market assumptions or estimation methodologies could have a
material effect on the estimated fair value amounts.
53
<PAGE> 56
Cash and Cash Equivalents and Investment in FHLB Stock
The carrying value of cash and cash equivalents and the investment in
FHLB stock approximates fair value.
Investments and Mortgage-Backed Securities
For investment securities and mortgage-backed securities, fair values are
based on quoted market prices, where available. If a quoted market price
is not available, fair value is estimated using quoted market prices of
comparable instruments.
Loans Receivable
The fair value of mortgage loans is calculated by discounting contractual
cash flows using estimated market discount rates which reflect the credit
and interest rate risk inherent in the loan. For residential mortgage
loans, fair value is estimated by discounting contractual cash flows
adjusted for prepayment estimates using discount rates based on secondary
market sources. Assumptions regarding credit risk, cash flow, and
discount rates are judgmentally determined by using available market
information. For loans having short term to maturity such as consumer
loans, second mortgages, and construction loans, fair value is considered
to equal carrying value.
Deposits
The fair values of passbook accounts, NOW accounts, and money market
accounts equal their carrying values. The fair value of fixed maturity
certificates of deposit is estimated using a discounted cash flow
calculation that applies interest rates currently offered for deposits of
similar remaining maturities.
Advances from FHLB
Rates currently available to the Bank for advances from FHLB with similar
terms and remaining maturities are used to estimate the fair value of
existing advances from FHLB.
Commitments to Extend Credit and Letters of Credit
The fair value of commitments to extend credit and letters of credit
would approximate fees charged for similar agreements taking into
consideration the remaining terms and the counterparties' credit
standings. Such amounts are not material.
The estimated fair values of financial instruments at June 30, 1996 and
1995 are as follows (rounded to thousands):
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
------------------------ -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,963 $ 6,963 $ 5,464 $ 5,463
Available for sale securities 29,479 29,479 0 0
Held to maturity securities 100 100 41,563 41,460
Loans receivable 161,866 162,208 146,313 150,209
Investment in FHLB stock 2,745 2,745 2,271 2,271
Financial liabilities:
Deposits 119,691 120,223 125,495 129,039
Advances from FHLB 54,027 54,101 43,135 43,408
</TABLE>
54
<PAGE> 57
When available, the fair value estimates consider relevant market
information. Because no market exists for several financial instruments,
fair value estimates are determined judgmentally and consider factors,
including current economic conditions and risk characteristics of certain
financial instruments. Changes in factors, or the weight assumed for the
various factors, could significantly affect the estimated values.
The fair value estimates are presented for on- and off-balance sheet
financial instruments without attempting to estimate the value of
long-term relationships with depositors and the benefit that results from
the low cost funding provided by deposit liabilities. In addition,
significant assets which are not considered financial instruments and are
therefore not a part of the fair value estimates include real estate
owned and premises and equipment.
The above fair value estimates are based on information available to
management as of June 30, 1996 and 1995, respectively. Although
management is not aware of any factors that would significantly affect
the estimated fair values, such amounts have not been comprehensively
revalued since that date and, therefore, current estimates may differ
significantly from the amounts presented herein.
11. STOCKHOLDERS' EQUITY
On September 30, 1993, the Bank completed a conversion from a federal
mutual savings bank to a federal stock savings bank pursuant to its Plan
of Conversion adopted June 2, 1993. All stock of the Bank was issued to
Suburban Bancorporation, Inc., a holding company formed in connection with
the conversion. Net proceeds from the sale of 1,581,710 shares of stock of
Suburban Bancorporation, Inc. were $13.1 million after deducting costs
relating to the issuance of common stock and amounts retained to fund
benefit plans in the amount of $1.8 million.
In accordance with federal regulations, at the time the Bank converted
from a federal mutual savings bank to a federal stock savings bank, the
Bank restricted a portion of retained earnings by establishing a
liquidation account. The liquidation account is maintained for the
benefit of eligible account holders who continue to maintain their
accounts at the Bank. The liquidation account is reduced annually to the
extent that eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder is entitled to receive a
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held.
Under current regulations, the Bank would not be permitted to pay
dividends on its stock if its regulatory capital would thereby be reduced
below (i) the amount then required for the aforementioned liquidation
account or (ii) the Bank's regulatory capital requirements. As a "Tier 1"
institution (an institution with capital in excess of its capital
requirements, both immediately before the proposed capital distribution
and on a proforma basis giving effect to such distribution), the Bank may
make capital distributions without the prior consent of the OTS in any
calendar year up to the greater of 100% of its net earnings to date during
such calendar year plus the amount that would reduce by one-half its
capital surplus ratio at the beginning of such calendar year; or 75% of
its net income over the most recent four quarter period.
12. FEDERAL INCOME TAXES:
The Bank is permitted under the Internal Revenue Code to deduct an annual
addition to a reserve for bad debts in determining taxable income, subject
to certain limitations. This addition differs from the bad debt expense
for financial reporting purposes. The income tax bad debt deductions for
years prior to 1988 are included in taxable income of later years only if
the bad debt reserve is used subsequently for purposes other than to
absorb bad debt losses. Because the Bank does not intend to use the
reserve for purposes other than to absorb such losses, no deferred income
taxes have been provided. Retained earnings at June 30, 1996, include
approximately $4,173,000 of earnings for which no deferred income tax
liability has been provided.
55
<PAGE> 58
For years beginning after June 30, 1987 (the "base year"), a deferred tax
liability is recorded if the addition to the tax bad debt reserve causes
the reserve to exceed the base year amount. In August 1996, legislation
was passed by congress that (1) repeals the percentage of taxable income
bad debt deduction currently available to thrift institutions and (2)
requires thrift institutions to recapture the excess of their bad debt
reserves over the base year reserves. These changes are effective for years
beginning after December 31, 1995. Because the Bank's tax bad debt reserves
do not exceed the base year amounts, the recapture provisions will not
require additional tax payments. However, effective with its year
beginning July 1, 1996, the Bank will no longer be entitled to a tax bad
debt deduction under the percentage of taxable income method and instead
will generally be limited to a deduction equal to its actual experience
losses.
Significant components of the deferred tax assets and liabilities are as
follows: (rounded to thousands).
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Bad debt reserves $ 879 $ 944
Deferred loan fees 23 48
Branch closing expense 198 0
Unrealized loss on available for sale securities 91 0
Other 68 55
------ ------
Total assets 1,259 1,047
------ ------
FHLB stock dividend (282) (226)
Other (81) (89)
------ ------
Total liabilities (363) (315)
------ ------
Net deferred asset $ 896 $ 732
====== ======
</TABLE>
The provision for federal income taxes included in the consolidated
statements of operations consists of the following components (rounded to
thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Current $361 $706 $518
Deferred 74 153 185
---- ---- ----
Total $435 $859 $703
==== ==== ====
</TABLE>
The provision for federal income taxes differs from the statutory rate
of 34% for the following reasons (rounded to thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------
1996 1995 1994
---- ----- ----
<S> <C> <C> <C>
Tax at statutory rate $472 $827 $741
Bad debt deduction (43) 44 (19)
Other, net 6 (12) (19)
---- ---- ----
Total $435 $859 $703
==== ==== ====
</TABLE>
56
<PAGE> 59
13. EMPLOYEE BENEFIT PLANS:
401(k) Profit Sharing Plan
The Bank has a combined 401(k) and profit-sharing plan. All employees
are eligible on January 1 or July 1 of each year after six months of
service. The Bank contributes at least 3% of employees' wages plus 50%
of the employees' contribution up to 6% of their wages. Total expense
for this plan was $73,500, $71,721 and $57,994 for the years ended June
30, 1996, 1995, and 1994, respectively.
ESOP
The Suburban Bancorporation Employee Stock Ownership Plan (ESOP)
provides benefits to substantially all employees of the Bank. The ESOP
acquired 121,670 shares of the Company's common stock on September 30,
1993. The purchase price of $1,216,700 ($10 a share) was financed by a
loan from the Company (internally leveraged). The ESOP is repaying the
loan in 10 annual installments of $121,670 on June 30 of each year and,
simultaneously, a pro rata number of the ESOP shares are allocated to
participants. The shares pledged as collateral are reported as unearned
ESOP shares in the consolidated statements of stockholders' equity. The
Company reports compensation expense equal to the fair value price of
shares released, determined by the quoted market price of outstanding
shares. Shares become outstanding for earnings-per-share (EPS)
computations when they are committed to be released. Dividends on
allocated ESOP shares are charged to retained earnings; dividends on
unallocated ESOP shares are reported as compensation costs. Dividends
on allocated shares were $11,170 and $4,867 in 1996 and 1995,
respectively. Dividends on unallocated shares were $46,235, $43,801 and
$12,167 in 1996, 1995 and 1994, respectively.
ESOP compensation was $188,490, $186,033 and $138,338 in 1996, 1995 and
1994, respectively. A summary of ESOP shares is as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1996 1995 1994
Shares: ---- ---- ----
<S> <C> <C> <C>
Allocated in prior years 24,334 12,167
Released for allocation 12,167 12,167 12,167
Unearned 85,169 97,336 109,503
Sold for distribution to retirees (1,388)
------- ------- -------
Total 120,282 121,670 121,670
======= ======= =======
Fair value of unallocated ESOP shares $1,214 $1,655 $1,451
(rounded to thousands) ====== ====== ======
</TABLE>
Retirement Plan for Non-Employee Directors
Non-employee directors of the Company participate in the "Suburban
Bancorporation, Inc. Retirement Plan for Non-Employee Directors." The
plan was adopted in January 1994 and provides for annual retirement
benefits equal to two thirds of the director's total compensation in the
year preceding his retirement. The actuarially determined plan expense
was $38,000 in 1996 and 1995 and $32,000 in 1994, respectively.
Stock Option and Management Recognition Plans
In conjunction with the Bank's conversion, the Board of Directors of the
Company adopted a Stock Option and Incentive Plan ("Option Plan") and a
Management Recognition Plan ("MRP"). Under the Option Plan, options can
be granted to directors and key employees to purchase common stock of
the Company. The exercise price in each case is equal to the fair
market value of the Company's stock at the date of grant. The date on
which the options are first exercisable is determined by the Stock
Option Committee of the Board of Directors; the term of any option may
not exceed ten years from the date of grant. Outstanding stock options
can be exercised over a ten year period.
57
<PAGE> 60
On September 30, 1993, upon the conversion of the Bank to a stock
savings bank, options to purchase 118,615 shares were awarded at $10.00
per share. The options vest at a rate of 33 1/3% each year commencing
September 30, 1994. There were no options granted, exercised, forfeited
or expired in 1996 or 1995. Presented below is stock option activity
under the plan:
<TABLE>
<S> <C> <C>
Balance, June 30, 1996, 1995 115,953 115,953
======= =======
Exercisable at end of year 77,301 38,650
======= =======
Options available for future
grants 36,134 36,134
======= =======
</TABLE>
Pursuant to the MRP, restricted stock awards for up to 60,835 common
shares may be granted to key employees and directors of the Company. On
September 30, 1993, restricted stock awards were granted totaling 59,560
shares. Forty percent of the shares were vested as of September 30,
1995; an additional 20% will vest on September 30, 1996, and each year
for the following two years. Plan expense was $121,670 in 1996 and 1995
and $91,000 in 1994. The fair value of the shares vested in fiscal 1996
and 1995 was $212,923 and $187,692, respectively which is deductible for
federal income tax purposes. The federal income tax benefit of $31,000
in 1996 and $24,000 in 1995 resulting from the tax deduction exceeding
the plan expense was added to additional paid-in capital in the
respective years.
New Accounting Standard
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which requires adoption no later than fiscal
years beginning after December 31, 1995. The new standard defines a fair
value method of accounting for stock options and similar equity
instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized
over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for
such transactions under Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees," but would be required to
disclose, in a note to the financial statements, proforma net income and
earnings per share as if the Company had applied the new method of
accounting.
The accounting requirements of the new method are effective for all
employee awards granted after the beginning of the fiscal year of
adoption. The Company intends to account for stock based compensation
using APB 25.
14. LEASE COMMITMENTS:
Rent expense for operating leases, primarily office facilities, was
$89,000, $126,000, and $118,000 for the years ended June 30, 1996, 1995
and 1994, respectively. Projected minimum rental payments under terms
of the leases at June 30, 1996 are as follows (rounded to thousands):
<TABLE>
<CAPTION>
Year ending June 30:
<S> <C>
1997 $ 49
1998 50
1999 29
2000 23
---
$151
====
</TABLE>
58
<PAGE> 61
15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
In the normal course of business, the Bank issues commitments to extend
credit to customers or to purchase newly originated loans from others
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some
portion of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. At June 30, 1996, real estate loan commitments
consisted of fixed rate commitments of $613,000 at an average rate of
8.76% and variable rate commitments of $5,559,000 at initial rates of
6.25% to 9.75%.
16. QUARTERLY DATA (unaudited):
(In Thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended June 30, 1996
-------------------------------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Total interest income 3,809 3,743 3,721 3,825
Net interest income 1,474 1,415 1,425 1,544
Net income (b) 349 325 (203) 481
EPS (a) $0.24 $0.22 ($0.14) $0.33
Year Ended June 30, 1995
-------------------------------------------
First Second Third Fourth
----- ------ ----- ------
Total interest income 3,366 3,462 3,641 3,798
Net interest income 1,591 1,573 1,556 1,542
Net income 429 440 395 309
EPS (a) $0.29 $0.29 $0.26 $0.21
</TABLE>
(a) Only ESOP shares allocated or released for allocation are
considered outstanding for purposes of computing earnings per share.
(b) Third quarter net income includes a pre-tax charge of $526 for
closing the Company's downtown branch and a pre-tax loss of $124
from the sale of available for sale securities.
17. BRANCH CLOSING EXPENSE
In February 1996, management approved the closing of the Company's
downtown branch and the sale of substantially all of the branch's
deposits. The expense of $526,00 represents recognition of the remaining
lease obligation, the value of unamortized leasehold improvements and
other costs net of a premium on the deposits. On May 31, 1996 the
office was closed and $5.3 million in deposits were sold.
59
<PAGE> 62
18. SUBURBAN BANCORPORATION, INC. (Parent Company Only)
The following condensed statements of financial condition as of June 30,
1996 and 1995 and condensed statements of earnings and cash flows for
the years ended June 30, 1996 and 1995 and the period from September 30,
1993 (inception) to June 30, 1994 of Suburban Bancorporation, Inc.
should be read in conjunction with the consolidated financial statements
and notes thereto.
<TABLE>
<CAPTION>
June 30,
-----------------------------
Statements of Financial Condition (In Thousands) 1996 1995
--------------------------------- ---- ----
<S> <C> <C>
ASSETS:
Cash $0 $1
Investment in Suburban Federal Savings Bank 22,879 21,890
Receivable from Suburban Federal Savings Bank 3,225 4,416
Other assets 3 3
------- -------
TOTAL $26,107 $26,310
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities - Accounts payable and accrued expenses $ 386 $ 103
------- -------
Stockholders' Equity:
Common stock ($.01 par value), authorized
15,000,000 shares; outstanding 1,581,710 shares 16 16
Additional paid-in capital 15,092 14,983
Retained earnings 13,728 13,664
Other equity adjustments (1,302) (1,369)
Treasury shares (1,813) (1,087)
------- -------
Total stockholders' equity 25,721 26,207
------- -------
TOTAL $26,107 $26,310
======= =======
</TABLE>
<TABLE>
<CAPTION>
Years (Period) Ended June 30,
----------------------------------------
Statements of Earnings (In Thousands) 1996 1995 1994
----------------------- ---- ---- ----
<S> <C> <C> <C>
Equity in undistributed earnings of
Suburban Federal Savings Bank $1,165 $1,735 $1,286
Directors and employees compensation (160) (159) (123)
Other operating expenses (163) (86) (133)
Income tax benefit 110 83 87
------ ------ ------
NET INCOME $ 952 $1,573 $1,117
====== ====== ======
Statements of Cash Flows (In Thousands)
------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 952 $1,573 $1,117
Equity in undistributed earnings of
Suburban Federal Savings Bank (1,165) (1,735) (1,286)
Directors and employees compensation 160 159 123
Increase (decrease) in other assets 0 0 (3)
Increase (decrease) in accrued expenses
and other liabilities 23 (26) 60
------ ------ ------
Net cash provided by (used in) operating
activities (30) (29) 11
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of treasury stock (726) (1,087)
Purchase of common stock of Suburban Federal
Savings Bank (7,153)
Decrease (increase) in receivable from Suburban
Federal Savings Bank 1,422 1,699 (5,763)
------ ------ -------
Net cash provided by (used in) investing activities 696 612 (12,916)
------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 13,064
Payment of dividends on common stock (667) (583) (158)
------ ------ ------
Net cash provided by (used in)
investing activities (667) (583) 12,906
------ ------ ------
CASH AT BEGINNING OF PERIOD $1 $1 $0
------ ------ ------
CASH AT END OF PERIOD $0 $1 $1
====== ====== ======
</TABLE>
60
<PAGE> 63
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required to be disclosed under this item has been
previously reported and therefore is not required to be reported herein. See
the Company's Current Report on Form 8-K dated January 27, 1994, as amended
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS: COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
For information concerning the directors of the Company, the information
contained under the section captioned "Proposal 1 - Election of Directors -
General" in the Proxy Statement is incorporated herein by reference. For
information concerning the executive officers who are not directors of the
Company, see "Item 1. Description of Business - Executive Officer's Who Are
Not Directors" which is incorporated herein by reference.
ITEM 10 EXECUTIVE COMPENSATION
The information contained under the sections captioned "Proposal I -
Election of Directors - Executive Compensation," - "Director Compensation" and
- - "Employment Agreement" in the Proxy Statement is incorporated herein by
reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners - Information
required by this item is incorporated herein by reference to the section
captioned "Voting Securities and Principal Holders Thereof" in the Proxy
Statement.
(b) Security Ownership of Management - Information required by this
item is incorporated herein by reference to the sections captioned "Voting
Securities and Principal Holders Thereof" and "Proposal I - Election of
Directors -General" in the Proxy Statement.
(c) Changes in Control - The Company is not aware of any arrangements,
including any pledge by a person of securities of the Company, the operation of
which may at a subsequent date result in a change in control of the Company.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I - Election of Directors -
Transactions with Management" in the Proxy Statement.
61
<PAGE> 64
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits either are filed as part of this report or
are incorporated herein by reference:
<TABLE>
<CAPTION>
No. Description Numbered Page
--- ----------- -------------
<S> <C> <C> <C>
3.1 Certificate of Incorporation of
Suburban Bancorporation, Inc. *
3.2 Bylaws of Suburban Bancorporation, Inc. *
4 Form of Common Stock Certificate of
Suburban Bancorporation, Inc. *
10.1 Suburban Bancorporation, Inc.
1993 Stock Option and Incentive Plan *
10.2 Suburban Bancorporation, Inc.
Management Recognition Plan "A" & "B" *
10.3 Employment Agreements between
Suburban Bancorporation, Inc.
and Suburban Federal Savings Bank
and Joseph F. Hutchison *
10.4 Severance Agreements between
Suburban Bancorporation, Inc.
and John A. Buchheid and
Christopher L. Henn *
21 Subsidiaries *
23.1 Consent of Deloitte & Touche LLP --
</TABLE>
_____________
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-64406).
(b) No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
62
<PAGE> 65
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, as of the date indicated:
SUBURBAN BANCORPORATION, INC.
Date: September 27, 1996
By: /s/ JOSEPH F. HUTCHISON
---------------------------------
Joseph F. Hutchison, President
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
as of the dates indicated.
By: /s/ JOSEPH F. HUTCHISON Date: September 27, 1996
---------------------------------
Joseph F. Hutchison
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ CHRISTOPHER L. HENN Date: September 27, 1996
---------------------------------
Christopher L. Henn
Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ ROBERT J. ZIHLMAN Date: September 27, 1996
---------------------------------
Robert J. Zihlman
Treasurer and Controller
(Principal Accounting Officer)
By: /s/ KENNETH L. KERR, JR. Date: September 27, 1996
---------------------------------
Kenneth L. Kerr, Jr.
Chairman of the Board
By: /s/ ROBERT V. BARNES Date: September 27, 1996
---------------------------------
Robert V. Barnes, Director
By: /s/ ROBERT A. BARON Date: September 27, 1996
---------------------------------
Robert A. Baron, Director
By: /s/ WILLIAM K. FRARY Date: September 27, 1996
---------------------------------
William K. Frary, Director
By: /s/ R. GLEN MAYFIELD Date: September 27, 1996
---------------------------------
R. Glen Mayfield, Director
By: /s/ WILLIAM V. STRAUSS Date: September 27, 1996
---------------------------------
William V. Strauss, Director
63
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-64406 of Suburban Bancorporation, Inc. on Form S-8 of our report dated
August 9, 1996 (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to the changes in methods of accounting for
income taxes), incorporated by reference in the Annual Report on Form 10-KSB of
Suburban Bancorporation, Inc. for the year ended June 30, 1996.
Deloitte & Touche LLP
Cincinnati, Ohio
September 23, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 482
<INT-BEARING-DEPOSITS> 2,481
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 100
<INVESTMENTS-MARKET> 100
<LOANS> 158,728
<ALLOWANCE> 3,138
<TOTAL-ASSETS> 202,057
<DEPOSITS> 119,691
<SHORT-TERM> 19,137
<LIABILITIES-OTHER> 2,618
<LONG-TERM> 34,890
<COMMON> 16
0
0
<OTHER-SE> 25,705
<TOTAL-LIABILITIES-AND-EQUITY> 202,057
<INTEREST-LOAN> 12,088
<INTEREST-INVEST> 2,534
<INTEREST-OTHER> 476
<INTEREST-TOTAL> 15,098
<INTEREST-DEPOSIT> 6,341
<INTEREST-EXPENSE> 9,240
<INTEREST-INCOME-NET> 5,858
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,011
<INCOME-PRETAX> 1,387
<INCOME-PRE-EXTRAORDINARY> 1,387
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 952
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
<YIELD-ACTUAL> 3.01
<LOANS-NON> 70
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 816
<ALLOWANCE-OPEN> 3,132
<CHARGE-OFFS> 0
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 3,138
<ALLOWANCE-DOMESTIC> 1,701
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,437
</TABLE>
