SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) August 14, 1997
TALBOT BANCSHARES, INC.
(Exact name of Registrant as specified in charter)
<TABLE>
<CAPTION>
Maryland 0-22929 52-2033630
<S> <C> <C> <C> <C> <C> <C>
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification
incorporation or organization) Number)
</TABLE>
18 East Dover Street
Easton, MD 21601
(410) 822-1400
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)
Not Applicable
(Former name or former address of Registrant, if changed since last report)
<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events.
Attached hereto are the following Exhibits:
2.1 Agreement and Plan of Reorganization
2.2 Definitive Proxy Statement, dated April 1, 1997, for Annual
Stockholders' Meeting April 23, 1997 (as filed with the
FDIC)
21 Subsidiaries of Talbot Bancshares, Inc.
99.1 Form F-2 Annual Report for Year Ended December 31, 1996 of
The Talbot Bank of Easton, Maryland (as filed with the FDIC)
99.2 Annual Report to Stockholders for Year Ended December 31,
1996, of The Talbot Bank of Easton, Maryland (as filed with
the FDIC)
99.3 Form F-4 Quarterly Report for Period Ended March 31, 1997,
of The Talbot Bank of Easton, Maryland (as filed with the
FDIC)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
TALBOT BANCSHARES, INC.
Date: August 25, 1997 By: /s/ Susan E. Leaverton, C.P.A.
-------------------------------
Susan E. Leaverton, C.P.A.
Secretary/Treasurer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibits Page
- ------ ----------------------- ----
2.1 Agreement and Plan of Reorganization 5
2.2 Definitive Proxy Statement, dated April 1, 1997, for 13
Annual Stockholders' Meeting April 23, 1997
(as filed with the FDIC)
21 Subsidiaries of Talbot Bancshares, Inc. 41
99.1 Form F-2 Annual Report for Year Ended 42
December 31, 1996 of The Talbot Bank of Easton,
Maryland (as filed with the FDIC)
99.2 Annual Report to Stockholders for the Year Ended 64
December 31, 1996, of The Talbot Bank of Easton,
Maryland (as filed with the FDIC)
99.3 Form F-4 Quarterly Report for Period Ended 98
March 31, 1997, of The Talbot Bank of Easton,
Maryland (as filed with the FDIC)
<PAGE>
Exhibit 2.1
Agreement and Plan of Reorganization
<PAGE>
PLAN OF REORGANIZATION
AND SHARE EXCHANGE
THIS PLAN OF REORGANIZATION AND SHARE EXCHANGE (the "Plan") is
made as of April 9, 1997, between Talbot Bancshares, Inc., a Maryland
corporation (the "Company") and The Talbot Bank of Easton, Maryland, a banking
corporation organized under the laws of the State of Maryland (the "Bank").
EXPLANATORY NOTE
The Company is a corporation duly incorporated and existing
under the laws of the State of Maryland with its principal office at 18 East
Dover Street, Easton, Maryland 21601. The Company has an authorized capital
stock consisting of 25,000,000 shares of common stock, $.01 par value per share,
of which one share is issued and outstanding.
The Bank is a commercial bank organized and existing under the
laws of the State of Maryland with its principal office at 18 East Dover Street,
Easton, Maryland 21601. The Bank has an authorized capital stock consisting of
650,000 shares of common stock, par value $10.00 per share, of which
approximately 593,321 shares are issued and outstanding.
The Company intends to file a Notice of Formation of a Bank
Holding Company with the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") or other notice or application as required by the Bank
Holding Company Act of 1956, as amended, to become a registered bank holding
company. The Company desires to acquire all of the common stock of the Bank by
share exchange.
AGREEMENT
In consideration of the mutual covenants and agreements
contained in this Plan and the mutual benefits to be derived from this Plan, the
parties agree as follows:
1. The Share Exchange. Subject to the terms and conditions
herein contained, on the Effective Date (as hereinafter defined), all of the
common stock of the Bank shall be automatically exchanged and converted into
shares of the Company (the "Share Exchange") as provided in the attached
Articles of Share Exchange. The "Effective Date" of the Share Exchange provided
for in this Plan shall be the date designated by the Articles of Share Exchange.
2. Events Preceding Effectiveness. On or before the Effective
Date, the following shall have occurred:
(a) a majority of each of the Board of Directors of
the Company and the Bank shall have advised and approved this
Plan;
(b) this Plan shall have been submitted to the
stockholders of the Bank for their consideration and the Share
Exchange contemplated hereby shall have
<PAGE>
been approved by the holders of not less than two-thirds of
the issued and outstanding voting stock of the Bank at a
meeting duly called for that purpose;
(c) the Federal Reserve Board shall have received and
accepted the Company's Notice to Become a Registered Bank
Holding Company or accepted any other required notice, or
approved any other required application, with respect to the
formation of a holding company;
(d) the Maryland Commissioner of Financial Regulation
shall have accepted and approved the Application for a Banking
Institution to have an Affiliate and any and all other
applications or notices required by the Financial Institutions
Article of the Annotated Code of Maryland;
(e) the Maryland State Department of Assessments and
Taxation shall have accepted for record Articles of Share
Exchange substantially in the form attached hereto; and
(f) any and all other approvals necessary and proper
to effectuate the Share Exchange shall have been obtained.
3. Conditions Precedent to Consummation of the Plan. This Plan
shall not be consummated and the Share Exchange shall not become effective
except upon compliance with each of the following conditions (unless waived by
the Board of Directors of each of the parties hereto):
(a) each of the events set forth in Paragraph 2 shall
have occurred;
(b) not more than 5% of the holders of common stock
of the Bank shall have exercised dissenters' rights with
respect to the Share Exchange provided for in the Plan; and
(c) all consents or approvals, governmental or
otherwise which, in the opinion of counsel for the Bank, are
necessary to permit the Share Exchange and to permit the Bank
to conduct all of the business and activities conducted by the
Bank prior to the Effective Date, in the manner in which such
business and activities were then conducted, shall have been
granted or issued.
4. Terms of the Share Exchange.
4.1. Stock and Exchange. Upon the Share Exchange becoming
effective:
(a) each share of common stock of the Bank, issued
and outstanding as of the Effective Date, as defined in the
Plan, shall, without any action on the part of the holder
thereof, be converted into the right to receive two shares of
common stock of the Company;
(b) the one issued and outstanding share of common
stock of the Company held by W. Moorhead Vermilye shall be
cancelled; and
<PAGE>
(c) the Company's one share of common stock of the
Bank shall automatically and without further act be converted
into the number of shares of the Bank that were issued and
outstanding as of the effective date of the Share Exchange.
4.2. Stock Certificates. Certificates representing shares
of common stock of the Bank shall represent the right to receive shares of
common stock of the Company in the amount specified in Section 4.1(a) and may
any time thereafter be exchanged by the holder thereof for the appropriate
number of shares of common stock of the Company. The payment of dividends or
other distributions may be withheld on said stock until new certificates have
been so issued. When the new certificates are issued, the holders thereof shall
be entitled to be paid the amount (without any interest thereon) of all
dividends of other distributions which have become payable with respect to such
shares of common stock of the Company. After the Share Exchange is effective,
stockholders will receive instructions as to the time and method of surrendering
their certificates representing shares of common stock of the Bank in exchange
for certificates representing shares of common stock of the Company.
4.3. Rights of Dissenting Stockholders. Each holder of
shares of common stock of the Bank which are voted against the approval of the
Share Exchange who perfects his appraisal rights pursuant to the provisions of
the Corporations and Associations Article of the Annotated Code of Maryland
shall be entitled to receive from the Bank in cash the value of such shares of
the common stock of the Bank determined in accordance with the provisions of
said section; and the Bank shall act as agent for all of the dissenting
stockholders of the Bank and shall hold all amounts distributable on account of
their stock solely for their benefit.
4.4. Benefit Plans. The Company shall adopt a stock option
plan upon substantially the same terms and conditions as the Bank's 1995 Stock
Option Plan (the "1995 Plan"). At the Effective Date, the Bank's 1995 Plan shall
be cancelled and the Company shall exchange all unexercised stock options
granted under the Bank's 1995 Plan for options granted under the Company's stock
option plan, on a two share for one share basis, upon the same terms and
conditions as provided in any agreement granting such options under the Bank's
1995 Plan. The Bank shall further adopt amendments to the Bank's 401(k) Plan and
401(k) Trust to permit investment of funds in shares of common stock of the
Company. The Company shall issue shares of common stock of the Company as
necessary from time to time to fulfill any investment requirements under the
401(k) Plan and 401(k) Trust.
5. Amendment of Plan. This Plan may be amended at any time
prior to the Effective Date, provided that any such amendment is in writing and
is approved by the Board of Directors of each of the parties hereto, and
provided further that subsequent to the date on which the Share Exchange
provided for herein is approved by the stockholders of the Bank, no amendment
shall be made in the terms of the exchange of shares of stock of the parties set
forth in Paragraph 4.1 hereof.
6. Abandonment of Plan. At any time prior to the Effective
Date, this Plan may be terminated and the Share Exchange provided for herein
abandoned by any party hereto upon the adoption of an appropriate resolution to
that effect by the Board of Directors of such party, and there shall be no
liability by reason of this Plan and the Share Exchange provided for
<PAGE>
herein, or the abandonment thereof, on the part of any of the parties hereto, or
their directors, officers, employees, agents, or stockholders.
7. Miscellaneous. This Plan shall be governed by and
construed in accordance with the laws of the State of Maryland. This Plan shall
be binding upon and inure to the benefit of each of the parties hereto and their
respective successors and assigns.
IN WITNESS WHEREOF, each of the parties has caused this Plan
to be executed on its behalf by its duly authorized officers and its corporate
seal to be hereunto affixed, duly attested by its Cashier or Assistant Cashier,
or its Secretary or Assistant Secretary, and a majority of the Board of
Directors of each of the parties have subscribed their names as of the date
first written above.
ATTEST: TALBOT BANCSHARES, INC.
/s/ Susan E. Leaverton By: /s/ W. Moorhead Vermilye
Susan E. Leaverton W. Moorhead Vermilye
Secretary President
ATTEST: THE TALBOT BANK OF EASTON,
MARYLAND
/s/ Jerome M. McConnell By: /s/ W. Moorhead Vermilye
Jerome M. McConnell W. Moorhead Vermilye
Secretary President
<PAGE>
ARTICLES OF SHARE EXCHANGE
between
THE TALBOT BANK OF EASTON, MARYLAND
and
TALBOT BANCSHARES, INC.
ARTICLES OF SHARE EXCHANGE made and entered into this 23rd day
of April, 1997, by and between The Talbot Bank of Easton, Maryland, a Maryland
banking corporation ("Bank"), and Talbot Bancshares, Inc., a Maryland
corporation (the "Successor Corporation").
THIS IS TO CERTIFY THAT:
FIRST: The parties hereto have agreed that, at the Effective
Time (as hereinafter defined), all of the issued and outstanding common stock,
par value $10.00, of the Bank ("Bank Shares") shall be acquired by, and
exchanged for the shares of Common Stock, par value $ .01 per share, of the
Successor Corporation ("Company Shares") in a share exchange ("Share Exchange")
under the Maryland General Corporation Law. The Share Exchange shall be
effective at 12:01 a.m. on May 1, 1997 or the time these Articles of Share
Exchange are accepted for record by the Maryland State Department of Assessments
and Taxation, whichever is later.
SECOND: The state of incorporation of each party to these
Articles of Share Exchange are as follows: The Bank is a banking corporation
organized under the laws of the State of Maryland; the Successor Corporation is
a corporation organized under the laws of the State of Maryland.
<PAGE>
THIRD: The principal office of the Bank in Maryland is located
in Talbot County. The principal office of the Successor Corporation in Maryland
is located in Talbot County. The Bank owns interest in land in Talbot County,
Maryland.
FOURTH: The total number of shares of capital stock which the
Bank has authority to issue is 650,000 shares, all of which are shares of common
stock with a par value of $10.00 per share, resulting in an aggregate par value
of $6,500,000.
FIFTH: The manner and basis of exchanging the stock to be
acquired for stock or other consideration to be issued or delivered by or on
behalf of the Successor Corporation shall be as follows:
Upon consummation of the Share Exchange provided by these
Articles of Share Exchange, each Bank Share issued and outstanding shall,
without any action on the part of the holder thereof, be converted into the
right to receive two Company Shares; the one issued and outstanding Company
Share held by W. Moorhead Vermilye will be cancelled; and the Successor
Corporation's one Bank Share shall automatically and without further act be
converted into the number of shares of the Bank that were issued and outstanding
as of the Effective Time of the Share Exchange.
SIXTH: The terms and conditions of the transaction set forth
in these Articles of Share Exchange were advised, authorized and approved by the
Bank and the Successor Corporation in the manner and by the vote required by
their respective charters and the laws of Maryland. The manner of approval by
the Bank and the Successor Corporation of the transaction set forth in these
Articles is as follows:
(a) The Board of Directors of the Bank adopted a
resolution at a meeting held on January 8, 1997 which declared that the
transaction set forth in these Articles of Share Exchange is advisable and
directed that the transaction be submitted for consideration at its
<PAGE>
annual meeting of the stockholders. The Share Exchange was approved by the
stockholders at its Annual Meeting of Stockholders held on April 23, 1997, by
the affirmative vote of two-thirds of all the votes entitled to be cast on the
matter.
(b) The Board of Directors of the Successor
Corporation adopted a resolution at a meeting held on April 9, 1997 which
declared that the transaction set forth in these Articles of Share Exchange is
advisable and approved.
IN WITNESS WHEREOF, the Bank and the Successor Corporation
have caused these Articles of Share Exchange to be signed in their respective
corporate names and on behalf of each such corporation by its President, and its
corporate seal to be affixed and attested by its Secretary or Assistant
Secretary on the day and year first above written, and each such signatory does
hereby acknowledge the same to be the act of such Corporation, and that to the
best of his knowledge, information and belief, all matters and facts stated
herein are true in all material respects, this statement being made under the
penalties of perjury.
ATTEST: THE TALBOT BANK OF EASTON, MD
/s/ Jerome M. McConnell By:/s/ W. Moorhead Vermilye
Jerome M. McConnell W. Moorhead Vermilye
Secretary President
ATTEST: TALBOT BANCSHARES, INC.
/s/ Susan E. Leaverton By:/s/ W. Moorhead Vermilye
Susan E. Leaverton W. Moorhead Vermilye
Secretary President
<PAGE>
Exhibit 2.2
Definitive Proxy Statement
for
Annual Stockholders Meeting April 23, 1997
<PAGE>
THE TALBOT BANK
-----------------------------------
Established 1885
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of THE TALBOT BANK OF EASTON, MARYLAND
Notice is hereby given that the Annual Meeting of Stockholders of The
Talbot Bank of Easton, Maryland will be held at the Historical Society
Auditorium, 17 South Washington Street, Easton, Maryland, 21601 at 11:00 a.m.,
local time, on Wednesday, April 23, 1997, for the following purposes:
1. To elect a Board of Directors to hold office for the ensuing
year and until their successors are elected and qualify.
2. To consider and vote upon a share exchange (the "Share
Exchange") between The Talbot Bank of Easton, Maryland and
Talbot Bancshares, Inc. under a Plan of Reorganization and
Share Exchange (including the Articles of Share Exchange
annexed thereto) pursuant to which each share of common stock
of The Talbot Bank of Easton, Maryland will be exchanged for
two shares of common stock of Talbot Bancshares, Inc., and as
a result of which The Talbot Bank of Easton, Maryland will
reorganize into a holding company structure.
3. To transact such other business as may properly come before
the meeting or any adjournment thereof.
Stockholders of record at the close of business on March 24, 1997, will
be entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
Those who cannot attend are urged to sign, date and mail promptly the enclosed
proxy in the envelope provided for that purpose. Approval of the Share Exchange
requires the affirmative vote of two-thirds of the votes entitled to be cast,
either in person or by proxy, by holders of shares of common stock entitled to
vote at the meeting. Whether you own a few or many shares, your proxy is
important in fulfilling this requirement. Returning your proxy does not deprive
you of your right to attend the meeting and to vote your shares in person.
By Order of the Board of Directors,
W. Moorhead Vermilye
President and Chief Executive Officer
April 1, 1997
18 East Dover Street, Easton, Maryland 21601
---------------------------------------------------------
410-822-1400 / Fax 410-820-7180
<PAGE>
THE TALBOT BANK
-----------------------------------
Established 1885
PROXY STATEMENT
FOR
1997 ANNUAL MEETING OF STOCKHOLDERS
This Proxy Statement is furnished to the stockholders of The Talbot
Bank of Easton, Maryland (the "Bank") in connection with the solicitation of
proxies by the Board of Directors of the Bank to be voted at the Annual Meeting
of Stockholders to be held on Wednesday, April 23, 1997 at 11:00 a.m., local
time, at the Historical Society Auditorium, 17 South Washington Street, Easton,
Maryland, 21601, and at any adjournments thereof. The expense of preparing,
printing, and mailing the proxies and solicitation materials will be borne by
the Bank. In addition to solicitations by mail, the Bank may solicit proxies in
person or by telephone, and arrange for brokerage houses and other custodians,
nominees, and fiduciaries to send proxies and proxy material to their principals
at the expense of the Bank. The approximate date on which this proxy statement
and attached form of proxy is mailed to stockholders is April 1, 1997.
Holders of record at the close of business on March 24, 1997 (the
"Record Date") of outstanding shares of the Bank's common stock, par value
$10.00 per share ("Bank Common Stock"), are entitled to notice of and to vote at
the meeting. As of the Record Date, the number of shares of outstanding Bank
Common Stock entitled to vote is 593,321 shares. Each share of stock is entitled
to one vote. Shares represented by any proxy properly executed and received
pursuant to this solicitation will be voted in accordance with the directions of
the stockholder; if no direction is given, the proxy will be voted for approval
of Proposals 1 and 2 and in the discretion of the holders of the proxies as to
any other matters that may properly come before the meeting. The proxy may be
revoked by a stockholder at any time prior to its use by execution of another
proxy bearing a later date, or by written notice delivered to W. Moorhead
Vermilye, President and CEO of the Bank, at the Bank's address or at the
meeting. The Bank's address is 18 East Dover Street, Easton, Maryland 21601
(410-822-1400).
Holders of Bank Common Stock will be asked (1) to elect a Board of
Directors to hold office for the ensuing year and until their successors are
elected and qualify, and (2) to approve the proposed reorganization of the Bank
into a holding company structure. The proposed reorganization will be
accomplished through the exchange of all outstanding shares (the "Share
Exchange") of the Bank for shares of Talbot Bancshares, Inc. ("Holding Company")
pursuant to a Plan of Reorganization and Share Exchange ("Share Exchange
Agreement"), a copy of which accompanies this Proxy Statement as Appendix A. As
a result of the Share Exchange each share of Bank Common Stock will be converted
into the right to receive two shares of Holding Company's common stock, par
value $.01 per share ("Holding Company Stock").
The Bank files periodic reports with the Federal Deposit Insurance
Corporation ("FDIC"), including the Bank's annual report on Form F-2 and
quarterly reports on Form F-4, pursuant to the Securities Exchange Act of 1934.
Any stockholder may obtain, upon written request to the Bank's corporate
secretary and without charge, a copy of the Bank's annual report on Form F-2 (as
a permissible alternative to an "annual disclosure statement"), including the
Financial Statements and the Schedules thereto. Reports are also available from
the FDIC by writing to the Registration and Disclosure Section, FDIC, 1776 F
Street, N.W., Room F-643, Washington, D.C. 20006 or by calling the FDIC public
files at 202-898-8913. The Bank's Financial Statements and the Schedules thereto
are hereby incorporated by reference.
THE SHARES OF HOLDING COMPANY STOCK ISSUABLE IN THE SHARE EXCHANGE ARE
SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
INVESTMENT. SHARES OF HOLDING COMPANY STOCK ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OTHER OBLIGATIONS OF A BANK OR SAVINGS INSTITUTION AND ARE NOT INSURED BY THE
FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
Page 1
<PAGE>
ITEM I. ELECTION OF DIRECTORS
It is proposed that the persons listed below be elected Directors of
the Bank, to serve until the next Annual Meeting of Stockholders, and until
their successors are elected and have qualified. The Bank's President and Chief
Executive Officer and the Bank's Executive Vice President are among the
Directors proposed to be elected as Directors of the Bank.
The names of the nominees, their ages as of March 15, 1997, their
principal occupations and business experience for the past five years, and
certain other information are set forth below.
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<CAPTION>
Name Age Information Regarding Nominees
<S> <C> <C> <C> <C> <C> <C>
Herbert L. Andrew, III 60 Mr. Andrew has served as a Director of the Bank since 1977.
He is a farmer and was elected to the Talbot County Council in
1994.
Blenda W. Armistead 45 Mrs. Armistead has served as a Director of the Bank since
1992. She is the County Manager of Talbot County.
Lloyd L. Beatty, Jr. 44 Mr. Beatty has served as a Director of the Bank since 1992.
He is a Certified Public Accountant and Principal of Beatty,
Satchell & Company, L.L.C.
Donald D. Casson 67 Mr. Casson has served as a Director of the Bank since 1983.
He is a Certified Public Accountant, real estate broker, and a
stock broker presently with Washington Investing Corp.
Gary L. Fairbank 60 Mr. Fairbank has served as a Director of the Bank since 1985.
He is the owner of Fairbank Tackle.
Ronald N. Fox 59 Mr. Fox has served as a Director of the Bank since 1981. He
is a co-owner and employee of the Washington Street Pub.
Richard C. Granville 54 Mr. Granville has served as a Director of the Bank since 1994.
He is the President of Celeste Industries Corporation of Easton,
Maryland.
Jerome M. McConnell 50 Mr. McConnell has served as a Director of the Bank since
1990. He is the Executive Vice-President of the Bank.
Shari L. McCord 40 Mrs. McCord has served as a Director of the Bank since 1995.
She is the President of Chesapeake Travel Services, Inc. of
Easton, Maryland.
William H. Myers 84 Mr. Myers has served as a Director of the Bank since 1948 and
as Chairman of the Board since 1995. He is a farmer.
David L. Pyles 52 Mr. Pyles has served as a Director of the Bank since 1989. He
is an investor. Prior to 1996, Mr. Pyles was the President of
Pyles Lincoln Mercury, Inc.
Christopher F. Spurry 49 Mr. Spurry has served as a Director of the Bank since 1995.
He is the President of Spurry & Associates, Inc.
W. Moorhead Vermilye 56 Mr. Vermilye has served as a Director of the Bank since 1977.
He is the President of the Bank and was elected Chief
Executive Officer in 1993.
</TABLE>
Page 2
<PAGE>
A quorum for the Annual Meeting consists of a majority of the issued
and outstanding shares of Bank Common Stock present in person or by proxy and
entitled to vote, and directors are elected by a plurality of the votes of the
shares present in person or by proxy and entitled to vote. Consequently,
withholding of votes, abstentions and broker non-votes with respect to shares
otherwise present at the Annual Meeting in person or by proxy will have no
effect on the outcome of this vote.
During the past year the Bank has had banking transactions in the
ordinary course of its business with its directors, officers and owners of 5% or
more of the outstanding Bank Common Stock and with their associates on
substantially the same terms, including interest rates, collateral, and
repayment terms on loans, as those prevailing at the same time for comparable
transactions with others. The extensions of credit by the Bank to these persons
have not and do not currently involve more than the normal risk of
collectability or present other unfavorable features. To the knowledge of Bank
management, at December 31, 1996, loans to directors, executive officers and
owners of 5% or more of the outstanding Bank Common Stock and their associates,
including loans guaranteed by such person, aggregated $8,655,433.
The Bank has five standing committees of the Board of Directors as of
December 31, 1996. The Executive Committee consists of Messrs. Vermilye, Andrew,
Fox, McConnell, Pyles and Mrs. Armistead. The Committee has the authority to
exercise the powers of the Board in the management of the business and affairs
of the Bank, subject to subsequent revision or alteration of any such action by
the Board of Directors of the Bank.
The Loan Committee consists of Messrs. Vermilye, McConnell, Casson,
Fox, Granville and Pyles. The Committee meets to evaluate loan requests which
require Board approval prior to the next regularly scheduled meeting of the
Board of Directors.
The Executive and Loan Committees meet jointly every Wednesday of the
year, other than regularly scheduled Board meeting dates. Although not required,
it is common practice that all Board members attend these meetings. The
Executive and Loan Committees met 40 times during 1996.
The Audit Committee consists of 3 non-management Directors (Messrs.
Casson, Fox and Pyles). The Committee meets with the Bank's independent
accountants to review whether satisfactory accounting procedures are being
followed and with the Bank's internal auditor to ensure internal accounting
controls are adequate. During 1996 the Committee held 4 meetings.
The Nominating Committee consists of Mr. Vermilye and 4 non-management
Directors (Messrs. Andrew, Fairbank, Myers and Mrs. Armistead). The basic
function of this Committee is the recommendation to the Board of those persons
to be designated as Board nominees for election to the Board by the stockholders
at their Annual Meeting.
The Personnel Committee consists of Messrs. Andrew, Beatty, Fairbank,
Fox and Pyles. The Committee provides recommendations concerning officer
compensation and promotions. The Committee met 3 times in 1996.
The total number of meetings of the Board of Directors, including
regularly scheduled and special meetings, which were held in 1996 was 12. No
Director during the last full fiscal year attended fewer than 75% of the
aggregate of (1) the total number of meetings of the Board of Directors (held
during the period for which that person has been Director) and (2) the total
number of meetings held by all committees of the Board on which that person
served (during the period served). Outside Directors receive an annual retainer
of $5,000 per year for serving on the Board.
Total Director's fees paid to Directors during 1996 were $75,000. In
addition, $55,000 was accrued for the Director's retainers for 1996. Mr. Andrew
also received fees of $4,900 for appraisals of real estate in connection with
the granting of loans throughout the year.
Page 3
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table reflects the beneficial ownership of Bank Common
Stock by executive officers, directors and by stockholders known to management
to own beneficially 5% or more of Bank Common Stock as of March 14, 1997, and
include all shares of Bank Common Stock that may be acquired by such persons
within 60 days of the Record Date. Unless otherwise indicated below, each person
specified below has sole investment and voting power (or shares such power with
his or her spouse) with regard to the shares set forth in the following table.
The address of each of the persons named below is the address of the Bank.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Number of Percent
Shares of Class
Beneficially Beneficially
Name Owned Owned
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Herbert L. Andrew, III 9,336 (1) 1.52
Blenda W. Armistead 122 (2) .02
Lloyd L. Beatty, Jr. 451 (3) .07
Donald D. Casson 3,233 (4) .53
Gary L. Fairbank 1,582 (5) .26
Ronald N. Fox 4,386 (6) .72
Richard C. Granville 15,104 (7) 2.47
Jerome M. McConnell 6,418 (8) 1.05
Shari L. McCord 50 (9) .01
William H. Myers 22,500 3.67
David L. Pyles 9,252 1.51
Christopher F. Spurry 266 (10) .04
W. Moorhead Vermilye 18,225 (11) 2.97
All Directors and Executive 96,832 15.80
Officers as a Group (16
Persons)
Other Persons
Nicholas F. Brady 35,405 5.78
Total 132,237 21.58
- --------------------------------------------------------------------------------------------------
* As of March 10, 1997, one share of the Common Stock
of Holding Company was outstanding and held by W.
Moorhead Vermilye, President and Chief Executive
Officer of the Bank. This share will be repurchased
by Holding Company upon the effectiveness of the
Share Exchange.
<FN>
(1) Includes 2,832 shares registered to Herbert L. Andrew, III and
Della M. Andrew as joint tenants with rights of survivorship,
5,940 shares registered to Herbert L. Andrew, III and Della M.
Andrew as tenants by the entirety, and 64 shares registered to
the Bank as Custodian for IRA of Herbert L. Andrew, III.
(2) Includes 122 shares registered to the Bank as Custodian for
IRA of Blenda W. Armistead.
Page 4
<PAGE>
(3) Includes 121 shares registered to the Bank as Custodian for
IRA of Lloyd L. Beatty, Jr., 100 shares held in a brokerage
account for IRA of Lloyd L. Beatty, Jr., and 180 shares
jointly owned by Lloyd L. Beatty, Jr. and Nancy W. Beatty held
in street name.
(4) Includes 1,120 shares registered to the Bank as Custodian for
IRA of Donald D. Casson.
(5) Includes 500 shares registered to Gary L. Fairbank and Joyce
A. Fairbank and 854 shares held in a brokerage account for IRA
of Gary L. Fairbank.
(6) Includes 66 shares registered to the Bank as Custodian for IRA
of Ronald N. Fox.
(7) Includes 2,834 shares registered to the Bank as Custodian for
IRA of Richard C. Granville.
(8) Includes 1,368 shares registered to The Talbot Bank 401(k)
Plan and 5,000 stock options.
(9) Includes 50 shares registered to the Bank as Custodian for IRA
of Shari L. McCord.
(10) Includes 200 shares registered to the Bank as Custodian for
IRA of Christopher F. Spurry.
(11) Includes 703 shares registered to the Bank as Custodian for
IRA of W. Moorhead Vermilye, 2,932 shares registered to The
Talbot Bank 401(k) Plan, and 10,000 stock options.
</FN>
</TABLE>
EXECUTIVE COMPENSATION
The following table summarizes the remuneration earned in 1996 and the
prior two years by the President and CEO of the Bank, and any other executive
officer of the Bank who received cash compensation during the preceding three
fiscal years that exceeds $100,000.
<TABLE>
<CAPTION>
==========================================================================================================================
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term
Compensaton All
Other
Compensation
($)(3)
------------------------------------------------------------------
Name and principal Year Salary ($) Bonus ($) Other Annual Options
position Ended Compensation SARs
($)(1) (#)(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
W. Moorhead Vermilye 1996 157,500 72,600 4,316 5,000 5,513
President & CEO 1995 151,758 67,600 4,230 5,000 5,309
1994 140,000 62,625 7,994 - 5,600
- --------------------------------------------------------------------------------------------------------------------------
Jerome M. McConnell 1996 106,800 35,000 2,246 2,500 3,916
Executive Vice 1995 102,767 30,000 2,688 2,500 3,767
President 1994 94,000 24,600 7,960 - 3,760
==========================================================================================================================
<FN>
(1) Includes Director's fees, value of benefits from the Bank's
life insurance program, and tax "gross up" for use of a motor
vehicle.
(2) Amount reflects the number of options and SARs issued under
the 1995 Employee Stock Option Plan.
(3) Represents Bank matching contributions under the 401(k) and
deferred compensation plans.
</FN>
</TABLE>
Page 5
<PAGE>
BENEFIT PLANS
Defined Benefit Pension Plan
Effective January 1, 1995 the bank froze its non-contributory Defined
Benefit Pension Plan so that no future benefits will accrue after that date. The
plan covered substantially all full time employees with more than six months of
service. The Plan is administered by a committee appointed by the Board of
Directors. The funded status of the plan is presented in Note 9 of the Notes to
Consolidated Financial Statements contained in the 1996 Annual Report. The
Bank's policy has been to fund the actuarially determined minimum annual
required amount.
The following is based on the January 1, 1997 Actuarial Valuation of
the Plan:
Name and Principal Years Annual Benefit Percentage
Position of Service at Retirement Vested
-------- ---------- ------------- ------
Mr. Vermilye 10 $21,180 100
President and CEO
Mr. McConnell 7 $10,805 100
Executive Vice President
401(k) Plan
The Bank's 401(k) Plan is administered by a committee appointed by the
Board of Directors and is available to eligible employees of the Bank who have
completed six months of service. Participants are required to contribute at
least 1% and not more than 15% of base salary.
The Bank provides employer matching contributions to each active
member's account for each year in an amount equal to 100% of the member's pay
reduction contributions up to 3% of base salary, plus 50% of contributions which
exceed 3% of base salary, up to 5% of base salary, with a maximum matching
contribution equal to the Maximum Annual Additions limit for that year. In 1996,
the Bank made matching contributions to the plan on behalf of the Messrs.
Vermilye and McConnell of $5,513 and $3,916, respectively.
All employee contributions are immediately vested. Matching
contributions vest incrementally over a six year period. Pre-tax and matching
contributions may be withdrawn while a member is employed by the Bank if the
member has reached age 59-1/2, in circumstances of financial hardship or in
certain other circumstances pursuant to Plan restrictions.
Profit Sharing and Retirement Plan
Effective January 1, 1995 the Bank adopted the Profit Sharing and
Retirement Plan to replace the frozen Defined Benefit Plan. The Plan covers
substantially all full-time employees with more than six months of service. The
Bank makes discretionary contributions to the Plan based on profits.
Contributions to the Plan are allocated using an age-weighted formula. In 1996,
the Bank made contributions to the Plan totalling $80,000. Contributions
allocated to W. Moorhead Vermilye and Jerome M. McConnell were $10,143 and
$6,002, respectively.
Employee Incentive Stock Option Plan
The Bank has a Stock Option Plan and has reserved 20,000 shares of
common stock for issuance thereunder. The Stock Option Plan provides for the
granting of incentive stock option and nonqualified stock options to certain key
employees of the Bank. No options may be granted after January 11, 2005.
Nonqualified options totalling 9,100 shares were issued in 1996 at $50.00 per
share. Two hundred options were exercised during 1996, none of which were
exercised by an executive officer of the Bank. The following table sets forth
certain information relating to options granted under the Bank's Employee Stock
Option Plan.
Page 6
<PAGE>
<TABLE>
<CAPTION>
Name and Principal Number of Securities % of Total Exercise Expiration
Position Underlying Options/SARs or Base Date
Options/SARs Granted to Price
Granted (#) Employees ($/Sh)
----------- --------- ------
in Fiscal Year
<S> <C> <C> <C> <C> <C>
W. Moorhead Vermilye 5,000 54.9% $50 12/11/06
President and CEO
Jerome M. McConnell 2,500 27.5% $50 12/11/06
Executive Vice President
</TABLE>
Upon exercise of all or a portion of these options, the Bank shall pay
the Optionee a Tax Benefit Payment in an amount of U.S. dollars equal to the
number of shares as to which the option is being exercised, times the "Tax
Rate", times the difference between the per share fair market value at the time
of exercise and the per share option price. The Tax Rate shall be a percentage
designated by the Committee to result in compensating the Optionee for the
federal, state and local income tax liability incurred by the Optionee by virtue
of his exercise of the option and the payment to him of the Tax Benefit Payment.
Deferred Compensation
During 1996, the Bank adopted a supplemental deferred compensation plan
to provide retirement benefits to its President and Chief Executive Officer. The
plan calls for fixed annual payments of $20,000 vesting immediately to be
credited to the participant's account. Contributions to the plan totaled $20,000
for the year ended December 31, 1996.
Bonus Plans
The Bank has a discretionary bonus plan whereby officers and employees
are awarded annual bonuses based upon individual merit and the Bank's financial
performance. Amounts accrued under the plan totalled $297,854 for 1996.
EXECUTIVE OFFICERS
The following table sets forth the executive officers of the Bank:
Position
Name In This Capacity Age Years Served
---- ---------------- --- ------------
W. Moorhead Vermilye President and Chief
Executive Officer 56 9
Jerome M. McConnell Executive Vice President 50 7
G. Rodney Taylor Senior Vice President--
Operations 55 14
Susan E. Leaverton Vice President--Finance 33 4
Robert J. Meade Vice President--Human
Resources 53 2
All officers have served in their present capacity for the previous
five years except as follows: Ms. Leaverton was appointed Vice President in
1994. Prior to 1994, Ms. Leaverton served as the Internal Auditor of the Bank.
Prior to joining the Bank, Ms. Leaverton was employed in public accounting. Mr.
Meade joined the Bank
Page 7
<PAGE>
in 1994 in his present capacity. Prior to joining the Bank, Mr. Meade was
employed by Cadmus Journal Services, Inc. as Director of Human Resources. Each
officer is reappointed on an annual basis by the Board of Directors.
RECENT STOCK PRICES AND DIVIDENDS
The Bank Common Stock is traded infrequently. The following table
indicates cash dividends paid per share for each quarter of 1996, 1995 and 1994,
and the ranges of representative sales prices of the Bank Common Stock for the
stated periods, based on actual transfers recorded by the Bank's transfer agent.
The number of record holders of the Bank Common Stock was 499, as of March 14,
1997.
<TABLE>
<CAPTION>
1996 1995 1994
Price Range Dividends Price Range Dividends Price Range Dividends
High Low Paid High Low Paid High Low Paid
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 45 - 44 $ .25 $ 40 - 38 $ .20 $ 40 - 38 $ .20
Second Quarter 46 - 44 .25 40 - 38 .25 40 - 37 .20
Third Quarter 50 - 47 .25 42 - 39 .25 40 - 36 .20
Fourth Quarter 50 - 49 .65 45 - 40 .55 38 - 37 .40
----- ----- -----
$1.40 $1.25 $1.00
===== ===== =====
</TABLE>
ITEM II. DESCRIPTION OF THE SHARE EXCHANGE AND REORGANIZATION
The terms and conditions of the Share Exchange are contained in the
Share Exchange Agreement, a copy of which accompanies this Proxy Statement. The
following description does not purport to be complete and is qualified in its
entirety by reference to the Share Exchange Agreement.
The Bank is a Maryland state-chartered commercial bank that has been
doing business since 1885. The Bank has a main office located at 18 East Dover
Street, Easton, Talbot County, Maryland. Its commercial banking services include
accepting demand, savings and time deposits and making various types of loans to
individual and corporate borrowers.
Holding Company is a Maryland corporation organized on March 10, 1997
and is in the process of becoming a registered bank holding company under the
Bank Holding Company Act of 1956, as amended. Its principal office is at the
Bank's main office at 18 East Dover Street, Easton, Talbot County, Maryland.
Terms of the Share Exchange
Under the terms of the Share Exchange Agreement, upon effectiveness of
the Share Exchange each share of Bank Common Stock will be exchanged for and
converted automatically into two shares of Holding Company Stock, and the one
share of Bank Common Stock held by Holding Company will be converted
automatically and without further act into the number of shares of Bank Common
Stock that were issued and outstanding immediately prior to the effectiveness of
the Share Exchange. Consequently, each stockholder's proportionate interest in
Holding Company will be identical to his or her proportionate interest in the
Bank, except to the extent that cash is received by stockholders upon exercise
of their appraisal rights.
After the Share Exchange, the Board of Directors of Holding Company
will be comprised of all the persons who are currently Directors of the Bank.
After the Share Exchange is effective, stockholders will receive
instructions as to the time and method of surrendering their certificates
representing shares of Bank Common Stock in exchange for certificates
representing shares of Holding Company Stock. As a result of the Share Exchange,
shares of Bank Common Stock will be converted automatically into shares of
Holding Company Stock without any further act. However, until the certificates
representing Bank Common Stock are surrendered in accordance with the
instructions, no dividends or
Page 8
<PAGE>
other distributions on the shares of Holding Company Stock will be paid to
persons holding certificates that formerly represented shares of Bank Common
Stock.
Reasons for the Reorganization
The reorganization to create a holding company structure has been
proposed by the Board of Directors of the Bank in order to provide greater
flexibility and broader business opportunities. While the Bank will be preserved
as an operating entity and will continue to engage in the banking business, the
holding company structure will permit Holding Company a wider range of
alternatives with respect to acquisitions of and affiliation with other banks,
and will enhance its options in raising capital. Further, the holding company
structure is expected to provide an opportunity for developing and expanding
financial and other bank-related services through the creation of non-bank
subsidiaries that may engage in "non-banking" activities. Management has no
present plans for any significant changes in the business of the Bank; however,
Holding Company may engage directly or through subsidiaries in other types of
related businesses in the future.
Recommendation of Board of Directors; Vote Required
The Board of Directors of the Bank has unanimously approved the Share
Exchange and recommends that stockholders of the Bank vote in favor of the Share
Exchange. The affirmative vote of two-thirds of the shares of Bank Common Stock
outstanding is required for approval of the Share Exchange Agreement.
Conditions of the Reorganization
Reorganization of the Bank pursuant to the Share Exchange Agreement is
conditioned upon providing regulatory notice to the Board of Governors of the
Federal Reserve System and receiving regulatory approvals from the Maryland
Office of the Commissioner of Financial Regulation (the "Maryland Commissioner")
as required by federal and state banking laws. All notices and requests for
these regulatory approvals have been submitted. One of the conditions to the
Share Exchange is that the Share Exchange Agreement may be terminated, and the
Share Exchange may be cancelled, if stockholders who hold 5% or more shares of
Bank Common Stock exercise their dissenters' rights. This condition may be
waived by the Board of Directors of the Bank in its sole discretion.
Effective Date
Subject to satisfaction of all conditions of the Share Exchange
Agreement which have not been waived by any of the parties, the Share Exchange
will be effective on the date specified in the Articles of Share Exchange filed
with the Maryland State Department of Assessments and Taxation after acceptance
of the Articles of Share Exchange for record. The Share Exchange Agreement may
be terminated or abandoned at any time prior to the effective date by vote of
the Board of Directors of either Holding Company or the Bank.
Expenses
The Bank will pay all costs and expenses in connection with the Share
Exchange Agreement, including legal, accounting, and printing costs and the
costs incurred in connection with obtaining required regulatory approvals.
Accounting Treatment
The Share Exchange is intended to be accounted for using the pooling of
interests method.
Federal Income Tax Consequences
The consummation of the Share Exchange will, assuming the stockholders
have no present intention of disposing more than 20% of the stock that they
receive in the exchange, constitute a tax-free exchange under Section 351 of the
Internal Revenue Code of 1986, as amended (the "Code"). As a result, for federal
income tax purposes:
Page 9
<PAGE>
(a) no gain or loss will be recognized by stockholders of the
Bank to the extent of the receipt of shares of Holding Company Stock in exchange
for their shares of Bank Common Stock;
(b) the basis of the shares of Holding Company Stock received
by stockholders of the Bank pursuant to the Share Exchange will be the same as
the basis of their shares of Bank Common Stock exchanged therefor;
(c) the holding period of the shares of Holding Company Stock
received by stockholders of the Bank pursuant to the Share Exchange will include
the holding period of the shares of Bank Common Stock exchanged therefor,
provided that on the effective date of the Share Exchange the shares of Bank
Common Stock were capital assets in the hands of such holders; and
(d) cash received by dissenting stockholders of the Bank in
exchange for their shares of Bank Common Stock will be treated as a redemption
of such shares, subject to Section 302 of the Code.
Each stockholder should consult with his or her tax adviser to
determine the tax consequences to him or her arising from the Share Exchange,
including consequences that arise from the receipt of cash by a dissenting
stockholder and the tax consequences that arise under state and local tax laws.
Neither Holding Company nor the Bank has requested or will request a
ruling from the Internal Revenue Service with respect to the tax treatment of
the exchange.
COMPARISON OF BANK COMMON STOCK WITH
HOLDING COMPANY STOCK
General
The rights of the holders of Holding Company Stock will differ in
certain respects from the rights of the holders of Bank Common Stock. The
following discussion describes certain rights of the holders of common stock of
the Bank and Holding Company and notes any significant differences. These
differences generally arise from certain distinctions between the Articles of
Incorporation and Bylaws of Holding Company from the Articles of Incorporation
and Bylaws of the Bank and because the Maryland General Corporation Law, which
governs Holding Company, provides security holders with rights that are slightly
different than those provided under the Financial Institutions Article of the
Annotated Code of Maryland (the "Maryland Financial Institutions Article"). The
rights of stockholders also may be affected because Holding Company will be
subject to supervision and regulation by governmental agencies which are
different than those for the Bank. See "CERTAIN REGULATORY MATTERS." While the
following discussion summarizes certain provisions of Holding Company's Articles
of Incorporation, this summary does not purport to be a complete description of,
and is qualified in its entirety by reference to, and Bylaws of Holding Company.
A copy of the Articles of Incorporation of Holding Company accompanies this
Proxy Statement. A copy of the Bylaws of Holding Company is available upon
written request to the Bank.
Authorized Capital Stock
The Bank's Articles of Incorporation currently provide for an
authorized capitalization consisting of 650,000 shares of common stock, par
value $10.00 per share. As of March 15, 1997, 593,321 shares of Bank Common
Stock were outstanding.
Holding Company's Articles of Incorporation provide for an authorized
capitalization consisting of 25,000,000 shares, initially classified as common
stock, par value $.01 per share. Immediately prior to the Share Exchange, one
share of Holding Company Stock was outstanding, which is held by W. Moorhead
Vermilye, President of the Bank. This share will be repurchased by Holding
Company after the Share Exchange is effective. Upon consummation of the Share
Exchange, and assuming repurchase of the one share issued prior to the Share
Exchange, Holding Company will have at least 1,186,642 shares of Holding Company
Stock outstanding as adjusted
Page 10
<PAGE>
for stock issued after the Record Date (or fewer shares, to the extent any
stockholders exercise their dissenters' rights).
After consummation of the Share Exchange, Holding Company will have
approximately 23,813,358 shares of authorized common stock available for
issuance. Additional shares will be issued pursuant to Holding Company's
adoption of the Bank's 401(k) Plan and the Bank's Employee Incentive Stock
Option Plan. While there are no present plans to issue any additional shares of
Holding Company Stock, such stock could be issued for the purpose of acquiring
other banks or businesses, for raising additional capital, for payment of
compensation to management and employees or for other appropriate purposes.
Under Maryland law, and as authorized by the Articles of Incorporation, the
Board of Directors may issue authorized common stock without stockholder
approval.
Dividend Rights
The holders of Bank Common Stock are entitled to dividends, when, as,
and if declared by the Bank's Board of Directors, subject to the restrictions
imposed by the Maryland banking law. Under Maryland banking law, the Board of
Directors of a bank may declare a cash dividend only from its undivided profits,
or, with the prior approval of the Maryland Commissioner, from the bank's
surplus in excess of 100% of its required capital stock. To declare a stock
dividend, the bank's surplus, after the increase in capital stock, must be equal
to at least 20% of the outstanding capital stock as increased. It is the policy
of Bank management, however, to have at least an equal amount of surplus as in
capital stock.
The holders of Holding Company Stock will be entitled to dividends,
when, as, and if declared by Holding Company's Board of Directors, subject to
the restrictions imposed by the Maryland General Corporation Law. The only
statutory limitation applicable to Holding Company is that dividends may not be
paid if Holding Company is insolvent or if the dividend would cause Holding
Company to become insolvent. However, unless Holding Company expands its
activities, its only source of income will be through its Bank subsidiary.
Therefore, the dividend restrictions applicable to Maryland state-chartered
banks described in the preceding paragraph will continue to impact Holding
Company's ability to pay dividends.
Voting Rights
Under Maryland banking law and the Bank's Articles of Incorporation,
each share of the Bank Common Stock is entitled to one vote per share. Under the
Maryland General Corporation Law and Holding Company's Articles of
Incorporation, each share of Holding Company Stock also will be entitled to one
vote per share. While generally the voting rights of the stockholders are the
same in Holding Company as they are in the Bank, there are some differences.
Among other things, under the Bank's Bylaws, stockholders representing an
aggregate of 25% of the outstanding shares of Bank Common Stock may call a
special meeting of stockholders. Holding Company's bylaws require the request
for a special meeting to be made by holders of a majority of all shares
outstanding and entitled to vote.
Holders of Bank Common Stock have voting rights in all mergers
involving the Bank, even if the Bank is the successor corporation. Under the
Maryland General Corporation Law, holders of Holding Company Stock do not have
voting rights in mergers in which Holding Company is the successor corporation
except in three circumstances: first, if Holding Company issues shares of
Holding Company Stock in excess of 15% of the number of shares then outstanding;
second, if the merger reclassifies or changes the rights of the outstanding
Holding Company Stock; or third, if the Articles of Incorporation of Holding
Company are being amended.
Under Maryland law, the power to adopt, alter, and repeal the bylaws of
a corporation is vested in the stockholders except to the extent that the
charter or bylaws vest it in the board of directors. The Bank's Bylaws do not
provide for amendment of the Bylaws by the Bank's Board of Directors. Under
Holding Company's Bylaws, the power to adopt, alter, and repeal the bylaws is
vested in both Holding Company's stockholders and in the Board of Directors.
Page 11
<PAGE>
Board of Directors
Under the Bank's Articles of Incorporation, each director is elected
for a one year term. Pursuant to Holding Company's Articles of Incorporation,
the Directors are divided into three classes, each serving for a three year term
so that the term of office of one class of Directors shall expire in each year.
Initially, however, the Class A Directors will serve for a one year term, Class
B Directors will serve for a two year term, and the Class C directors will serve
for a three year term.
The Bank's Bylaws contain no procedure for nominations of directors by
stockholders. Under the procedure contained in Holding Company's Bylaws,
nominations may be made by any stockholder if the nomination is made by written
notice to the Secretary of Holding Company to be received not less than 90 days
nor more than 120 days before the date fixed for the meeting. The notice must
provide information regarding the nominating stockholder and the nominee, as
more fully set forth in Holding Company's Bylaws.
Preemptive Rights
Neither the Articles of Incorporation of the Bank nor the Articles of
Incorporation of Holding Company contain any provision relating to preemptive
rights for stockholders. The term "preemptive rights" means that if the Bank
proposes to issue additional shares of its common stock, the new shares must
first be offered to existing stockholders at the same price and terms as would
be offered to new stockholders. Under the Maryland Financial Institutions
Article, and subject to certain exceptions, holders of the common stock of a
Maryland financial institution, including the Bank, have preemptive rights.
Conversely, under the Maryland General Corporation Law, stockholders of Maryland
corporations do not have preemptive rights unless they are expressly granted in
the corporation's charter; as stated above, Holding Company's Articles of
Incorporation does not grant preemptive rights to stockholders. A requirement to
offer new shares first to existing stockholders is likely to create legal
complications and costly delays in, or preclude any financing through, the
issuance of Holding Company Stock. The requirement of offering the new shares to
existing stockholders also could frustrate Holding Company's ability to acquire
another financial institution, and will impede the ability of Holding Company to
use its stock for other valid corporate purposes. Directors have a fiduciary
duty to obtain, as consideration for new shares, a value at least equal to the
fair market value of the common stock. Thus, while a stockholder's percentage
ownership of common stock of Holding Company may be reduced if and when new
shares of that class are issued, the stockholder's equitable interest in Holding
Company Stock will be enhanced by the value received for the new shares.
Appraisal Rights
Under the Maryland Financial Institutions Article, appraisal rights are
available to stockholders of a successor bank that is a party to a
consolidation, merger or transfer of assets. Under the Maryland General
Corporation Law, stockholders of a successor to a consolidation, merger, share
exchange or transfer of assets have appraisal rights only if the stockholder had
the right to vote on the transaction, such as if the contract rights of the
stockholder are altered in the transaction.
Business Combinations
Under the Maryland General Corporation Law, certain "business
combinations" (including any merger or similar transaction subject to a
statutory stockholder vote and additional transactions involving transfers of
assets or securities in specific amounts) between a Maryland corporation and any
person who, after the date on which the corporation has 100 or more beneficial
owners of its stock, beneficially owns 10% or more of the voting power of the
corporation's shares or any affiliate of the corporation who, at any time within
the two year period prior to the date in question and after the date on which
the corporation has 100 or more beneficial owners of its stock, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder"), or an affiliate
thereof, are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder unless an exemption is
available. Thereafter, any such business combination must be recommended by the
board of directors of the corporation and approved by the affirmative vote of at
least: (i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of the
Page 12
<PAGE>
corporation; and (ii) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares held by the
Interested Stockholder with whom the business combination is to be effected,
unless the corporation's stockholders receive a minimum price (as described in
the Maryland General Corporation Law) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board of
directors prior to the time that the Interested Stockholder becomes an
Interested Stockholder. In order to amend Holding Company's charter to elect not
to be subject to the foregoing requirements with respect to Interested
Stockholders, an affirmative vote of at least 80% of the votes entitled to be
cast by all holders of outstanding shares of voting stock and two-thirds of the
votes entitled to be cast by holders of outstanding shares of voting stock who
are not Interested Stockholders is required under the Maryland General
Corporation Law.
Control Share Acquisitions
The Maryland General Corporation Law provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the shares
entitled to be voted on the matter, excluding shares of stock owned by the
acquiror or by officers or directors who are employees of the corporation.
"Control shares" are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror, or in respect of which
the acquiror is able to exercise or direct the exercise of voting power except
solely by virtue of a revocable proxy, would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third; (ii) one-third or more but
less than a majority; or (iii) a majority of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses and delivery of an "acquiring person statement"), may compel the
corporation's board of directors to call a special meeting of stockholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, the corporation may itself present the question
at any stockholders' meeting.
Unless the charter or bylaws provide otherwise, if voting rights are
not approved at the meeting or if the acquiring person does not deliver an
acquiring person statement within 10 days following a control share acquisition
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition or of any meeting of stockholders at which the voting
rights of such shares are considered and not approved. Moreover, unless the
charter or bylaws provides otherwise, if voting rights for control shares are
approved at a stockholders' meeting and the acquiror becomes entitled to
exercise or direct the exercise of a majority or more of all voting power, other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
RIGHTS OF DISSENTING STOCKHOLDERS
Under the applicable provisions of the Maryland General Corporation
Law, each holder of Bank Common Stock will be entitled to demand and receive
payment of the fair value of his shares, if the holder (i) prior to or at the
meeting, files with the Bank a written objection to the Share Exchange, (ii)
does not vote in favor of the Share Exchange, and (iii) within 20 days after
Articles of Share Exchange have been accepted for record by the State Department
of Assessments and Taxation of Maryland (the "Department"), makes written demand
on Holding Company for payment of his shares, stating the number of shares for
which payment is demanded. A direction in the stockholder's proxy to vote
against the Share Exchange will not in itself constitute a written objection or
demand
Page 13
<PAGE>
that satisfies the requirements described above. Any stockholder who fails to
comply with the requirements described above will be bound by the terms of the
Share Exchange.
Holding Company will promptly deliver or mail to each objecting
stockholder written notice of the date of acceptance of the Articles of Share
Exchange for record by the Department. Holding Company may also deliver or mail
to each objecting stockholder a written offer to pay for his stock at a price
deemed by Holding Company to be the fair value thereof. Within 50 days after
acceptance of the Articles of Share Exchange for record by the Department,
either Holding Company or any objecting stockholder who has not received payment
for his shares may petition a court of equity in Talbot County, Maryland, for an
appraisal to determine the fair value of such shares. If the court finds that an
objecting stockholder is entitled to appraisal of his stock, the court will
appoint three disinterested appraisers to determine the fair market value of
such shares on terms and conditions the court determines proper, and such
appraisers will, within 60 days after appointment (or such longer period as the
court may direct), file with the court and mail to each party to the proceeding
their report stating their conclusion as to the fair value of such shares.
Within 15 days after the filing of such report, any party may object to such
report and request a hearing thereon. The court will, upon motion of any party,
enter an order either confirming, modifying or rejecting such report and, if
confirmed or modified, enter judgment directing the time within which payment
will be made. If the appraisers' report is rejected, the court may determine the
fair value of the shares of the objecting stockholders or may remit the
proceeding to the same or other appraisers. Any judgment entered pursuant to a
court proceeding will include interest from the date of the stockholders' vote
on the action to which objection was made. Costs of the proceeding shall be
determined by the court and may be assessed against Holding Company or, under
certain circumstances, the objecting stockholder, or both.
At any time after the filing of a petition for appraisal, the court may
require objecting stockholders to submit their certificates representing shares
to the clerk of the court for notation of the pendency of the appraisal
proceedings. A stockholder demanding payment for shares will not have the right
to receive any dividends or distributions payable to holders of record after the
close of business on the date of the stockholders' vote and will cease to have
any rights as a stockholder with respect to such shares except the right to
receive payment of the fair value thereof.
The foregoing summary of the rights of objecting stockholders does not
purport to be a complete statement of the procedures to be followed by
stockholders desiring to exercise their appraisal rights. The preservation and
exercise of appraisal rights are conditioned on strict adherence to the
applicable provisions of the Maryland General Corporation Law. Each stockholder
desiring to exercise appraisal rights should refer to Title 3, Subtitle 2,
entitled "Rights of Objecting Stockholders," of the Corporations and
Associations Article of the Annotated Code of Maryland (1993 Replacement
Volume), a copy of which is attached as Appendix B to this Proxy Statement, for
a complete statement of their rights and the steps which must be followed in
connection with the exercise of those rights.
CERTAIN REGULATORY MATTERS
The Bank is subject to a variety of federal and state statutes and
regulations applicable to state-chartered commercial banks, all of which impact
the operations of the Bank. After effectiveness of the Share Exchange, the Bank
will be subject to the same regulation, supervision and examinations. Since
Holding Company's sole business initially will be ownership of the Bank, any
regulations which affect the operations of the Bank will affect Holding
Company's results.
SUPERVISION AND REGULATION
General
Holding Company and the Bank are extensively regulated under federal
and state law. Generally, these laws and regulations are intended to protect
depositors, not stockholders. The following is a summary description of certain
provisions of certain laws which affect the regulation of bank holding companies
and banks. The discussion
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is qualified in its entirety by reference to applicable laws and regulations.
Changes in such laws and regulations may have a material effect on the business
and prospects of Holding Company and the Bank.
Federal Bank Holding Company Regulation and Structure
Holding Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956, as amended, and as such, it is subject to
regulation, supervision, and examination by the Board of Governors of the
Federal Reserve ("FRB"). Holding Company is required to file annual and
quarterly reports with the FRB and to provide the FRB with such additional
information as the FRB may require. The FRB may conduct examinations of Holding
Company and its subsidiaries.
With certain limited exceptions, Holding Company is required to obtain
prior approval from the FRB before acquiring direct or indirect ownership or
control of more than 5% of any voting securities or substantially all of the
assets of a bank or bank holding company, or before merging or consolidating
with another bank holding company. Additionally, with certain exceptions, any
person proposing to acquire control through direct or indirect ownership of 25%
or more of any voting securities of Holding Company is required to give 60 days'
written notice of the acquisition to the FRB, which may prohibit the
transaction, and to publish notice to the public.
Generally, a bank holding company may not engage in any activities
other than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior approval
of the FRB, Holding Company may acquire more than 5% of the assets or
outstanding shares of a company engaging in non-bank activities determined by
the FRB to be closely related to the business of banking or of managing or
controlling banks In September, 1996, the FRB proposed expedited procedures for
expansion into approved categories of non-bank activities. It is impossible to
predict whether or when the proposal may become final.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit Holding Company's ability to obtain funds
from the Bank for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. For example, the Bank may not generally require a customer to
obtain other services from itself or Holding Company, and may not require that a
customer promise not to obtain other services from a competitor as a condition
to and extension of credit to the customer. In September, 1996, the FRB proposed
to end the anti-tying rules for bank holding companies and their non-banking
subsidiaries; they would be retained for banks. It is impossible to predict
whether or when the proposal may become final.
Under FRB policy, a bank holding company is expected to act as a source
of financial strength to its subsidiary banks and to make capital injections
into a troubled subsidiary bank, and the FRB may charge the bank holding company
with engaging in unsafe and unsound practices for failure to commit resources to
a subsidiary bank when required. A required capital injection may be called for
at a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the FDIC can be held liable for any
losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with the default of, or assistance provided to, a commonly controlled
FDIC-insured depository institution. Accordingly, in the event that any insured
subsidiary of Holding Company causes a loss to the FDIC, other insured
subsidiaries of Holding Company could be required to compensate the FDIC by
reimbursing it for the estimated amount of such loss. Such cross guaranty
liabilities generally are superior in priority to the obligations of the
depository institution to its shareholders due solely to their status as
shareholders and obligations to other affiliates.
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State Bank Holding Company Regulation
As a Maryland bank holding company, Holding Company is subject to
various restrictions on its activities as set forth in Maryland law, in addition
to those restrictions set forth in federal law. See "--Federal Bank Holding
Company Regulation and Structure." Under Maryland law, a bank holding company
that desires to acquire a bank or bank holding company that has its principal
place of business in Maryland must obtain approval from the Maryland
Commissioner. Also, a bank holding company and its Maryland state-chartered bank
or trust company cannot directly or indirectly acquire banking or non-banking
subsidiaries or affiliates until the bank or trust company receives the approval
of the Maryland Commissioner.
Federal and State Bank Regulation
The Bank is a Maryland state-chartered commercial bank, regulated and
examined by the Maryland Commissioner and the FDIC. The FDIC has extensive
enforcement authority over the institutions it regulates to prohibit or correct
activities which violate law, regulation or written agreement with the FDIC or
which are deemed to constitute unsafe or unsound practices. Enforcement actions
may include the appointment of a conservator or receiver, the issuance of a
cease and desist order, the termination of deposit insurance, the imposition of
civil money penalties on the institution, its directors, officers, employees and
institution-affiliated parties, the issuance of directives to increase capital,
the issuance of formal and informal agreements, the removal of or restrictions
on directors, officers, employees and institution-affiliated parties, and the
enforcement of any such mechanisms through restraining orders or other court
actions.
In its lending activities, the maximum legal rate of interest, fees and
charges which a financial institution may charge on a particular loan depends on
a variety of factors such as the type of borrower, the purpose of the loan, the
amount of the loan and the date the loan is made. Other laws tie the maximum
amount which may be loaned to any one customer and its related interests to
capital levels. The Bank is also subject to certain restrictions on extensions
of credit to executive officers, directors, principal shareholders or any
related interest of such persons which generally require that such credit
extensions be made on substantially the same terms as are available to third
persons dealing with the Bank and not involve more than the normal risk of
repayment.
The Community Reinvestment Act ("CRA") requires that, in connection
with the examination of financial institutions within their jurisdictions, the
FDIC evaluate the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered by all regulatory agencies in evaluating
mergers, acquisitions and applications to open a branch or facility. As of the
date of its most recent examination report, the Bank has a CRA rating of
"Satisfactory."
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the FDIC, have adopted standards
covering internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. Holding Company, on behalf of the Bank,
believes that it meets substantially all standards which have been adopted.
FDICIA also imposed new capital standards on insured depository institutions.
See "--Capital Requirements."
Before establishing new branch offices, the Bank must meet certain
minimum capital stock and surplus requirements. With each new branch located
outside the municipal area of the Bank's principal banking office, these minimal
levels increase by $120,000 to $900,000, based on the population size of the
municipal area in which the branch will be located. Prior to establishment of
the branch, the Bank must obtain Maryland Commissioner and FDIC approval. If
establishment of the branch involves the purchase of a bank building or
furnishings, the total
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investment in bank buildings and furnishings cannot exceed, with certain
exceptions, 50% of the Bank's unimpaired capital and surplus.
Deposit Insurance
The Bank's deposits are insured to a maximum of $100,000 per depositor
through the Bank Insurance Fund ("BIF"), administered by the FDIC, and each
institution is required to pay semi-annual deposit insurance premium assessments
to the FDIC. In 1997, all BIF-insured deposits, including deposits held by the
Bank, became subject to an additional premium assessment to help repay interest
due on Financing Corp. ("FICO") bonds, which were purchased by the federal
government as part of the federal savings association bailout during the past
decade. Shares of Bank Common Stock and of Holding Company Stock are not
deposits and are not insured by the FDIC.
Limits on Dividends and Other Payments
Holding Company's current ability to pay dividends is largely dependent
upon the receipt of dividends from its banking subsidiary, the Bank. Both
federal and state laws impose restrictions on the ability of the Bank to pay
dividends. The FRB has issued a policy statement which provides that, as a
general matter, insured banks and bank holding companies may pay dividends only
out of prior operating earnings. For a Maryland state-chartered bank or trust
company, dividends may be paid out of undivided profits or, with the prior
approval of the Maryland Commissioner, from surplus in excess of 100% of
required capital stock. If, however, the surplus of a Maryland bank is less than
100% of its required capital stock, cash dividends may not be paid in excess of
90% of net earnings. In addition to these specific restrictions, bank regulatory
agencies, in general, also have the ability to prohibit proposed dividends by a
financial institution which would otherwise be permitted under applicable
regulations if the regulatory body determines that such distribution would
constitute an unsafe or unsound practice.
Capital Requirements
The FRB and FDIC have adopted certain risk-based capital guidelines to
assist in the assessment of the capital adequacy of a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with relatively high credit risk, such as business loans. For
bank holding companies with less than $150,000,000 in consolidated assets, the
guidelines are applied on a bank- only basis.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital,
includes common equity, perpetual preferred stock (excluding auction rate
issues) and minority interest in equity accounts of consolidated subsidiaries,
less goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes, among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk- weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As
December 31, 1996, the Bank's ratio of Tier 1 to risk-weighted assets stood at
16.60% and its ratio of total capital to risk-weighted assets stood at 17.75%.
In addition to risk-based capital, banks and bank holding companies are required
to maintain a minimum amount of Tier 1 capital to total assets, referred to as
the leverage capital ratio, of at least 3%. At December 31, 1996, the Bank's
leverage capital ratio stood at 11.04%.
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In August, 1995 and May, 1996, the federal banking agencies adopted
final regulations specifying that the agencies will include, in their
evaluations of a bank's capital adequacy, an assessment of the Bank's interest
rate risk exposure. The standards for measuring the adequacy and effectiveness
of a banking organization's interest rate risk management includes a measurement
of board of director and senior management oversight, and a determination of
whether a banking organization's procedures for comprehensive risk management
are appropriate to the circumstances of the specific banking organization. The
Bank has internal IRR models that are used to measure and monitor IRR.
Additionally, the regulatory agencies have been assessing IRR on an informal
basis for several years. For these reasons, Holding Company does not expect the
addition of IRR evaluation to the agencies' capital guidelines to result in
significant changes in capital requirements for the Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "--Federal Deposit Insurance Corporation
Improvement Act of 1991" below, as applicable to undercapitalized institutions.
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends to Holding Company.
Federal Deposit Insurance Corporation Improvement Act of 1991
In December, 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to several other federal banking statutes. FDICIA
provides for, among other things, (i) publicly available annual financial
condition and management reports for financial institutions, including audits by
independent accountants, (ii) the establishment of uniform accounting standards
by federal banking agencies, (iii) the establishment of a "prompt corrective
action" system of regulatory supervision and intervention, based on
capitalization levels, with more scrutiny and restrictions placed on depository
institutions with lower levels of capital, (iv) additional grounds for the
appointment of a conservator or receiver, and (v) restrictions or prohibitions
on accepting brokered deposits, except for institutions which significantly
exceed minimum capital requirements. FDICIA also provides for increased funding
of the FDIC insurance funds and the implementation of risked-based premiums. See
"- Deposit Insurance."
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fees to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of other
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets and stop
accepting deposits from correspondent banks. Critically undercapitalized
institutions are subject to the appointment of a receiver or conservator,
generally within 90 days of the date such institution is determined to be
critically undercapitalized.
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FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution. FDICIA also limits the circumstances under which the FDIC
is permitted to provide financial assistance to an insured institution before
appointment of a conservator or receiver.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
was enacted into law on September 29, 1994. Among other things, the law
eliminated substantially all state law barriers to the acquisition of banks by
out-of-state bank holding companies as of September 29, 1995. The law will also
permit interstate branching by banks effective as of June 1, 1997, subject to
the ability of states to opt-out completely or to set an earlier effective date.
Maryland generally established an earlier effective date of September 29, 1995.
On December 13, 1995, Maryland, Delaware, Virginia and Pennsylvania signed a
supervisory pact establishing uniform rules for the supervision of
state-chartered banks and trust companies that operate branches across state
lines. Under the agreement, home-state regulators will have primary
responsibility for banks chartered in the home state, including those that
branch into other jurisdictions, although such branches may be subject to the
other jurisdiction's regulatory authorities in certain circumstances. Holding
Company anticipates that the effect of the new law and the supervisory compact
may be to increase competition within the markets in which Holding Company now
operates, although Holding Company cannot predict the extent to which
competition will increase in such markets or the timing of such increase.
Monetary Policy
The earnings of a bank holding company are affected by the policies of
regulatory authorities, including the FRB, in connection with the FRB's
regulation of the money supply. Various methods employed by the FRB are open
market operations in United States Government securities, changes in the
discount rate on member bank borrowings and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The money policies of the FRB have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future.
Federal Securities Regulation
Under the Securities Exchange Act of 1934, as amended, a corporation
that has more than $10 million in assets and 500 stockholders is required to
register with the Securities and Exchange Commission ("SEC") as a "public
company." After the Share Exchange, Holding Company will register as a public
company by filing a registration statement on Form 10 with the SEC, not later
than 120 days after the end of the fiscal year in which it becomes a public
company. Upon filing a Form 10, Holding Company will thereafter be required to
file certain periodic and current reports with the SEC. These reports include a
quarterly report on Form 10-Q (required to be filed within 45 days after the end
of the first three fiscal quarters of each fiscal year), an annual report on
Form 10-K (required to be filed within 90 days after the end of each fiscal
year), and a current report on Form 8-K reporting certain material events. In
addition, the solicitation of proxies by Holding Company will be subject to the
proxy rules promulgated under the Securities Exchange Act of 1934, and proxies
would be accompanied by an annual report to stockholders providing financial
statements, stock prices and market and dividend data, and other information
regarding Holding Company, its business and financial condition. Copies of SEC
filings may be obtained from the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
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INDEPENDENT AUDITORS
The Board of Directors has engaged Stegman & Company, P.A., Certified
Public Accountants, to audit the books and accounts of the Bank and Holding
Company for the fiscal year ending December 31, 1997. Stegman & Company, P.A.
served as the Bank's independent auditor for 1996.
Stegman & Company, P.A. has advised the Bank that neither the
accounting firm nor any of its members or associates has any direct financial
interest in or any connection with the Bank other than as independent public
auditors. A representative of Stegman & Company, P.A. will be present at this
year's annual meeting and will respond to appropriate questions.
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
Stockholders' proposals for the 1998 Annual Meeting must be received at
Holding Company's principal office not later than January 5, 1998.
OTHER BUSINESS
As of the date of this proxy statement, management does not know of any
other matters that will be brought before the meeting requiring action of the
stockholders. However, if any other matters requiring the vote of the
stockholders properly come before the meeting, it is the intention of the
persons named in the enclosed form of proxy to vote the proxies in accordance
with the discretion of management. The persons designated as proxies will also
have the right to approve any and all adjournments of the meeting for any
reason, including, if necessary, to permit further solicitation of proxies in
the event that there are not sufficient votes at the time of the meeting to
approve the Share Exchange.
By Order of the Board of Directors,
W. Moorhead Vermilye
President and Chief Executive Officer
April 1, 1997
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APPENDIX B
RIGHTS OF OBJECTING STOCKHOLDERS
UNDER MARYLAND LAW
ss. 3-201. "Successor" defined.
(a) Corporation amending charter.--In this subtitle, except as provided
in subsection (b) of this section, "successor" includes a corporation which
amends its charter in a way which alters the contract rights, as expressly set
forth in the charter, of any outstanding stock, unless the right to do so is
reserved by the charter of the corporation.
(b) Corporation whose stock is acquired.--When used with reference to a
share exchange, "successor" means the corporation the stock of which was
acquired in the share exchange. (An. Code 1957, art. 23, ss. 73; 1975, ch. 311,
ss. 2; 1985, ch. 657.)
ss. 3-202. Right to fair value of stock.
(a) General rule.--Except as provided in subsection (c) of this
section, a stockholder of a Maryland corporation has the right to demand and
receive payment of the fair value of the stockholder's stock from the successor
if:
(1) The corporation consolidates or merges with another
corporation;
(2) The stockholder's stock is to be acquired in a share
exchange;
(3) The corporation transfers its assets in a manner requiring
corporate action under ss. 3-105 of this title;
(4) The corporation amends its charter in a way which alters the
contract rights, as expressly set forth in the charter, of
any outstanding stock and substantially adversely affects
the stockholder's rights, unless the right to do so is
reserved by the charter of the corporation; or
(5) The transaction is governed byss.3-602 of this title or
exempted byss.3-603 (b) of this title.
(b) Basis of fair value.--(1) Fair value is determined as of the close
of business:
(i) With respect to a merger under ss. 3-106 of this title
of a 90 percent or more owned subsidiary into its
parent, on the day notice is given or waived under ss.
3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair
value may not include any appreciation or depreciation which
directly or indirectly results from the transaction objected
to or from its proposal.
<PAGE>
(3) In any transaction governed by ss. 3-602 of this title or
exempted by ss. 3-603 (b) of this title, fair value shall be
value determined in accordance with the requirements of ss.
3-603 (b) of this title.
(c) When right to fair value does not apply.--Unless the transaction is
governed by ss. 3-602 of this title or is exempted by ss. 3-603 (b) of this
title, a stockholder may not demand the fair value of his stock and is bound by
the terms of the transaction if:
(1) The stock is listed on a national securities exchange or is
designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc.:
(i) With respect to a merger under ss. 3-106 of this title
of a 90 percent or more owned subsidiary into its
parent, on the date notice is given or waived under
ss. 3-106; or
(ii) With respect to any other transaction, on the record
date for determining stockholders entitled to vote on
the transaction objected to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as
expressly set forth in the charter, and the charter
does not reserve the right to do so; or
(ii) The stock is to be changed or converted in whole or in
part in the merger into something other than either
stock in the successor or cash, scrip, or other rights
or interests arising out of provisions for the
treatment of fractional shares of stock in the
successor; or
(3) The stock is that of an open-end investment company
registered with the Securities and Exchange Commission under
the Investment Company Act of 1940 and the value placed on
the stock in the transaction is its net asset value. (An.
Code 1957, art. 23, ss. 73; 1975, ch. 311, ss. 2; 1976, ch.
567, ss. 2; 1983, Sp. Sess., ch. 1; 1985, chs. 363, 657;
1990, ch. 6, ss. 2.)
ss. 3-203. Procedure by stockholder.
(a) Specific duties.--A stockholder of a corporation who desires to
receive payment of the fair value of his stock under this subtitle:
(1) Shall file with the corporation a written objection to the
proposed transaction:
(i) With respect to a merger under ss. 3-106 of this title
of a 90 percent or more owned subsidiary into its
parent, within 30 days after notice is given or waived
under ss. 3-106; or
(ii) With respect to any other transaction, at or before
the stockholders' meeting at which the transaction
will be considered;
(2) May not vote in favor of the transaction; and
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(3) Within 20 days after the Department accepts the articles for
record, shall make a written demand on the successor for
payment for his stock, stating the number and class of
shares for which he demands payment.
(b) Failure to comply with section.--A stockholder who fails to comply
with this section is bound by the terms of the consolidation, merger, share
exchange, transfer of assets, or charter amendment. (An. Code 1957, art. 23, ss.
73; 1975, ch. 311, ss. 2; 1976, ch. 567, ss. 2.)
ss. 3-204. Effect of demand on dividend and other rights.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions
payable to holders of record of that stock on a record date
after the close of business on the day as at which fair
value is to be determined under ss. 3-202 of this subtitle;
and
(2) Ceases to have any rights of a stockholder with respect to
that stock, except the right to receive payment of its fair
value. (An. Code 1957, art. 23, ss. 73; 1975, ch. 311, ss.
2; 1976, ch. 567, ss. 2.)
ss. 3-205. Withdrawal of demand.
A demand for payment may be withdrawn only with the consent of the
successor. (An. Code 1957, art. 23, ss. 73; 1975, ch. 311, ss. 2.)
ss. 3-206. Restoration of dividend and other rights.
(a) When rights restored.--The rights of a stockholder who demands
payment are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time
required by this subtitle;
(3) A court determines that the stockholder is not entitled to
relief; or
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration.--The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceedings taken before the
restoration. (An. Code 1957, art. 23, ss. 73; 1975, ch. 311, ss. 2.)
ss. 3-207. Notice and offer to stockholders.
(a) Duty of successor.--(1) The successor promptly shall notify each
objecting stockholder in writing of the date the articles are accepted for
record by the Department.
<PAGE>
(2) The successor also may send a written offer to pay the
objecting stockholder what it considers to be the fair value
of his stock. Each offer shall be accompanied by the
following information relating to the corporation which
issued the stock:
(i) A balance sheet as of a date not more than six months
before the date of the offer;
(ii) A profit and loss statement for the 12 months ending
on the date of the balance sheet; and
(iii) Any other information the successor considers
pertinent.
(b) Manner of sending notice.--The successor shall deliver the notice
and offer to each objecting stockholder personally or mail them to him by
certified mail, return receipt requested, bearing a postmark from the United
States Postal Service, at the address he gives the successor in writing, or, if
none, at his address as it appears on the records of the corporation which
issued the stock. (An. Code 1957, art. 23, ss. 73; 1975, ch. 311, ss. 2; 1983,
ch. 563; 1985, ch. 10, ss. 3.)
ss. 3-208. Petition for appraisal; consolidation of proceedings; joinder of
objectors.
(a) Petition for appraisal.--Within 50 days after the Department
accepts the articles for record, the successor or an objecting stockholder who
has not received payment for his stock may petition a court of equity in the
county where the principal office of the successor is located or, if it does not
have a principal office in this State, where the resident agent of the successor
is located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors.--(1) If more than one
appraisal proceeding is instituted, the court shall direct the consolidation of
all the proceedings on terms and conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in
an appraisal proceeding. (An. Code 1957, art. 23, ss. 73; 1975, ch. 311, ss. 2.)
ss. 3-209. Notation on stock certificate.
(a) Submission of certificate.--At any time after a petition for
appraisal is filed, the court may require the objecting stockholders parties to
the proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) Transfer of stock bearing notation.--If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder. (An. Code 1957, art. 23, ss. 73; 1975,
ch. 311, ss. 2.)
ss. 3-210. Appraisal of fair value.
(a) Court to appoint appraisers.--If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
<PAGE>
(b) Report of Appraisers--Filing--Within 60 days after their
appointment, unless the court sets a longer time, the appraisers shall determine
the fair value of the stock as of the appropriate date and file a report stating
the conclusion of the majority as to the fair value of the stock.
(c) Same--Contents.--The report shall state the reasons for the
conclusion and shall include a transcript of all testimony and exhibits offered.
(d) Same--Service; objection.--(1) On the same day that the report is
filed, the appraisers shall mail a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may
object to it and request a hearing. (An. Code 1957, art. 23, ss. 73; 1975, ch.
311, ss. 2.)
ss. 3-211. Action by court on appraisers' report.
(a) Order of court.--The court shall consider the report and, on motion
of any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the
stockholder.
(b) Procedure after order.--(1) If the appraisers' report is confirmed
or modified by the order, judgment shall be entered against the successor and in
favor of each objecting stockholder party to the proceeding for the appraised
fair value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter
judgment for the stockholder; or
(ii) Remit the proceedings to the same or other appraisers
on terms and conditions it considers proper.
(c) Judgment includes interest.--(1) Except as provided in paragraph
(2) of this subsection, a judgment for the stockholder shall award the value of
the stock and interest from the date as at which fair value is to be determined
under ss. 3-202 of this subtitle.
(2) The court may not allow interest if it finds that the
failure of the stockholder to accept an offer for the stock made under ss. 3-207
of this subtitle was arbitrary and vexatious or not in good faith. In making
this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information
furnished to the stockholder; and
(iii) Any other circumstances it considers relevant.
(d) Costs of proceedings.--(1) The costs of the proceedings, including
reasonable compensation and expenses of the appraisers, shall be set by the
court and assessed against the successor. However, the court may direct the
costs to be apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer for the stock
made under ss. 3-207 of this subtitle was arbitrary and vexatious or not in good
faith. In making this finding, the court shall consider:
<PAGE>
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information
furnished to the stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The
reasonable fees and expenses of experts may be included only
if:
(i) The successor did not make an offer for the stock
under ss. 3-207 of this subtitle; or
(ii) The value of the stock determined in the proceeding
materially exceeds the amount offered by the
successor.
(e) Effect of judgment.--The judgment is final and conclusive on all
parties and has the same force and effect as other decrees in equity. The
judgment constitutes a lien on the assets of the successor with priority over
any mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment. (An. Code 1957, art. 23,
ss. 73; 1975, ch. 311, ss. 2; 1976, ch. 567, ss. 2.)
ss. 3-212. Surrender of stock.
The successor is not required to pay for the stock of an
objecting stockholder or to pay a judgment rendered against it in a proceeding
for an appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to
it, indorsed in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the
certificates and sufficient indemnity bond are furnished.
(An. Code 1957, art. 23, ss. 73; 1975, ch. 311, ss. 2.)
ss. 3-213. Rights of successor with respect to stock.
(a) General rule.--A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to holders of
record of that stock on a record date after the close of business on the day as
at which fair value is to be determined under ss. 3-202 of this subtitle.
(b) Successor in transfer of assets.--After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all the
rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange.--Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock. (An. Code 1957, art. 23, ss. 73; 1975, ch.311, ss. 2;
1976, ch. 567, ss. 2.)
<PAGE>
Exhibit 21
Subsidiaries of Talbot Bancshares, Inc.
Talbot Bancshares, Inc. is the sole stockholder of The Talbot Bank of
Easton, Maryland (the "Bank"), a Maryland-chartered commercial bank. The Bank
owns a one hundred percent interest in Dover Street Realty, Inc., a Maryland
corporation, and a one-third interest in Eastern Shore Mortgage Corporation, a
Maryland corporation.
<PAGE>
Exhibit 99.1
Form F-2 Annual Report for Year Ended December 31, 1996
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
-----------------------------------------------------
FORM F-2
ANNUAL REPORT UNDER SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------
FDIC Certificate No. 01893
THE TALBOT BANK OF EASTON, MARYLAND
(Exact name of bank as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
52-0504630 P. O. Box 949
(I.R.S. Employer Easton, Maryland 21601-0949
Identification Number) (Address of principal office)
(410) 822-1400
(Bank's telephone number, including area code)
-----------------------------------------------------------------------
Securities registered under Section 12(b) of the Act:
Title of each class...........none
Name of exchange on which class is being registered........none
Securities registered under Section 12(g) of the Act:
Common Stock, par value $10.00 per share
Indicate by checkmark if the Bank, as a "small business issuer" as
defined under 17 CFR 240:12b-2, is providing alternative
disclosures as permitted for small business
issuers in this Form F-2
[ X ]
Indicate by check mark if disclosure of delinquent filers pursuant
to item 10 is not contained herein, and will not be contained,
to the best of bank's knowledge, in definitive proxy
or other information statements,
incorporated by reference in Part III of
this Form F-2 or any amendment of this
Form F-2.
[ X ]
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of
1934 during the preceding 12 months (or for such
shorter period that the bank was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES.....X.....NO...........
Aggregate market value of voting stock held by
nonaffiliates as of March 14, 1997
$ 25,817,428
Number of shares outstanding March 14, 1997
593,321
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for the year ended December 31, 1996
Part II
Proxy Statement for Annual Stockholders' Meeting April 23, 1997
Parts I and III
<PAGE>
PART I
Item 1. Business
--------
The Talbot Bank of Easton, Maryland (the "Bank") is a commercial bank
chartered under the laws of the State of Maryland and commenced operations in
1885.
The Bank is engaged in general commercial and retail banking business
serving individuals, businesses, and governmental units in Talbot and Dorchester
Counties, Maryland. At December 31, 1996, the Bank had total deposits of $215
million, total loans of $169 million, total assets of $253 million and total
stockholders' equity of $28 million. The Bank currently operates four banking
offices all in Talbot County, Maryland, three of which are located in Easton and
one in St. Michaels. The Bank also operates an in-store branch in Dorchester
County, Maryland in the city of Cambridge.
The Bank also owns 33% of the outstanding common stock of Eastern Shore
Mortgage Corporation, a Maryland corporation. See Note #7, page 19, in the
"Notes to Consolidated Financial Statements", incorporated by reference from the
Annual Report to Stockholders for the year ended December 31, 1996.
Competitive Conditions
----------------------
The Bank's primary service areas are Talbot and Dorchester Counties,
Maryland. The Bank is subject to substantial competition in all aspects of its
business. The Bank competes principally with five other commercial banks which
operate offices in Talbot County, three of which have resources substantially
greater than the Bank's. In Dorchester County the Bank competes principally with
two other commercial banks. The Bank also encounters competition from thrift
institutions, consumer loan companies, brokerage firms, credit unions and other
financial institutions in both Talbot and Dorchester Counties. There have been
no material changes and developments since the beginning of the fiscal year
regarding competitive conditions in Talbot County.
Deposits and Loans
------------------
No material portion of the Bank's deposits have been obtained from a
single person or a few persons (including Federal, State and local governments
and agencies thereunder), the loss of any one or more of which would have a
materially adverse effect on the business of the Bank. Likewise, no material
portion of the Bank's loans is concentrated within a single industry or group of
industries.
Principal Services
------------------
Services provided to businesses include commercial checking, savings
and related services. The Bank offers all forms of commercial lending, including
lines of credit, term loans, accounts receivable financing, commercial and
construction real estate and other forms of secured financing.
Services provided to individuals include checking accounts, various
savings programs, mortgage loans, home improvement loans, installment and other
personal loans, credit cards, personal lines of credit, automobile and other
consumer financing, safe deposit services, debit cards and 24 hour automatic
teller machine services through the "Most" and "Cirrus" networks. During 1996,
the Bank opened an in-store branch in Cambridge, Maryland offering full service
banking 7 days a week. Alternative real estate financing is also available to
the Bank's customers through Eastern Shore Mortgage Corporation, an affiliate of
the Bank.
Environmental Matters
---------------------
Management is not aware of any material effects that compliance with
federal, state and local provisions relating to the protection of the
environment will have upon the capital expenditures, earnings or competitive
position of the Bank.
(1)
<PAGE>
PART I
(Continued)
Employees
---------
At March 14, 1997 the Bank employed 75 full-time employees and 5
part-time employee.
Seasonality
-----------
Seasonality does not have a material impact on the Bank's operations.
Item 2. PROPERTIES
----------
The Bank's main office is located at 18 East Dover Street, Easton,
Maryland. A second Easton area office is located on Marlboro Road at Tred Avon
Square and the third Easton area office is located on Elliott Road in the
Carlton Business Park. The St. Michaels office is located on Route 33 at St.
Michaels Village.
The Bank owns three of the four banking offices it currently operates
in Talbot County. The Bank leases the office located on Route 33 at St. Michaels
Village. The annual rental for this office which expires in 2001 is $32,400.
The Bank also owns the building at 21 Dover Street, Easton, Maryland,
which contains its bookkeeping and loan services departments.
The Bank operates a branch in the Metro Market Store in Cambridge,
Maryland under a Facility License Agreement with International Banking
Technologies, Inc. The agreement commenced on August 2, 1995 and terminates on
the fifteenth anniversary of the commencement date. The annual licensing fee
under this agreement is $40,000 per year for years 1 through 5, $45,000 per year
for years 6 through 10, and $50,000 per year for years 11 through 15. The Branch
unit located within the store is owned by the Bank.
Item 3. LEGAL PROCEEDINGS
-----------------
There are no material legal proceedings, other than the ordinary
routine litigation incidental to the Bank's business, to which the Bank is a
party or of which any property of the Bank is subject.
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Incorporated by reference from Proxy Statement for Annual Stockholders'
Meeting to be held April 23, 1997 under "Beneficial Ownership of Common Stock."
The Bank knows of only one person who beneficially owns more than 5% of
the Bank's outstanding common stock. Nicholas F. Brady owns 35,405 shares,
representing 5.78% of the Bank's outstanding common stock as of March 14, 1997.
(2)
<PAGE>
PART II
Item 5. MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER
--------------------------------------------------------------
MATTERS
-------
Market Price and Dividend Information
Incorporated by reference from Annual Report to Stockholders for the
year ended December 31, 1996 under "Managements Discussion and Analysis of
Financial Condition and Results of Operations - Recent Stock Prices and
Dividends", page 7, and "Notes to Consolidated Financial Statements", Note #13,
page 23 and 24.
In addition, the Bank anticipates future payment of dividends
consistent with earnings and dividend payment history.
Item 6. SELECTED FINANCIAL DATA (5 YEAR SUMMARY)
----------------------- ----------------
Incorporated by reference from Annual Report to Stockholders for the
year ended December 31, 1996 under "Selected Financial Data", page 8.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Incorporated by reference from Annual Report to Stockholders for the
year ended December 31, 1996 on pages 3 through 7. In addition, statistical
information related to the listed categories follows and should be read in
conjunction with the management's Discussion and Analysis in the Annual Report
to Stockholders for the year ended December 31, 1996.
I. Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials:
Refer to attached Schedules A through J, pages 5 through 14 of
this document.
II. Investment Portfolio:
Incorporated by reference from Annual Report to Stockholders
for the year ended December 31, 1996, Note #4, pages 16 and
17.
III. Loan Portfolio:
Incorporated by reference form Annual Report to Stockholders
for the year ended December 31, 1996, under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations", pages 4 and 5, and "Notes to Consolidated
Financial Statements", Note #1, page 14 and Note #5, pages 17
and 18. Also refer to attached Schedules E through J, pages 9
through 14 of this document for maturities and sensitivity of
Loans to changes in interest rates.
IV. Summary of Loan Loss Experience:
Incorporated by reference from Annual Report to Stockholders
for the year ended December 31, 1996, under "Managements
Discussion and Analysis of Financial Condition and Results of
Operations", pages 4 and 5, and "Notes to Consolidated
Financial Statements", Note #5, pages 17 and 18.
(3)
<PAGE>
PART II
(Continued)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
V. Deposits:
Incorporated by reference from Annual Report to Stockholders
for the year ended December 31, 1996, "Notes to Consolidated
Financial Statements", Note #8, page 20. Also refer to
attached Schedules A, B, C and D, pages 5 through 8 of this
document.
VI. Return on Equity and Assets:
Incorporated by reference from Annual Report to Stockholders
for the year ended December 31, 1996 under "Selected Financial
Data", page 8. The following table sets forth certain other
ratios of the Bank.
Year Ended December 31,
1996 1995 1994
---- ---- ----
Ratio of net income to
Average daily total deposits............... 1.56% 1.41% 1.14%
Ratio of dividends declared per
share to net income per share.......... 26% 27% 26%
Ratio of average daily loans to
average daily deposits.......................81.44% 79.37% 72.38%
VII. Short-Term Borrowings:
To the extent that deposits are not adequate to fund customer
loan demand, liquidity needs can be met in the short-term
funds markets. At December 31, 1996 ,1995 and 1994 securities
sold under agreement to repurchase were $9,267,693,
$12,946,247 and $15,198,872 respectively. Average year to date
yield analysis is included on Schedules B, C and D, pages 6, 7
and 8 of this document, for the years ended December 31, 1996,
1995 and 1994.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
(a) Consolidated Financial Statements of the Bank - Annual
Report to Stockholders, incorporated herein by reference,
includes audited consolidated balance sheets for the years
ended December 31, 1996 and 1995, and audited consolidated
statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996,
and is attached.
(4)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
1994 Compared to 1993 1995 Compared to 1994 1996 Compared to 1995
---------------------------------------------------------------------------------
Total Caused by Total Caused by Total Caused by
Variance Rate Volume Variance Rate Volume Variance Rate Volume
-------------------------- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest inocme form earning assets:
Federal funds sold $(10) $109 $(119) $4 $154 $(150) $122 $(29) $151
Investment securities:
Taxable 460 (106) 566 103 233 (130) (35) 235 (270)
Non-taxable (3) 130 (10) 140 (28) 1 (29) 84 13 71
Loans (2) 150 243 (93) 1,915 1,284 631 1,500 (70) 1,570
---------------------------------------------------------------------------------------
Total interst income 730 236 494 1,994 1,672 322 1,671 149 1,522
---------------------------------------------------------------------------------------
Interest expense on deposits and borrowed funds:
Interest bearing demand 75 12 63 189 143 46 (113) (178) 65
Savings deposits 157 51 106 (345) 51 (630) (349) (295) (54)
Time deposits (93) (144) 51 752 251 493 854 (24) 878
Securities sold under agreements
to repurchase 128 46 82 430 65 365 (147) (68) (79)
Short term borrowings - - - 4 - 4 (4) - (4)
---------------------------------------------------------------------------------------
Total interest expense 266 (35) 301 1,030 752 278 241 (565) 806
---------------------------------------------------------------------------------------
Net interest income $ 464 $ 271 $ 193 $ 964 $ 920 $ 44 $1,430 $ 714 $ 716
=======================================================================================
<FN>
(1) The volume/rate variance i sallocated entirely to changes in rates.
(2) The portion attributable to nontaxable loans is reflected on a fully
taxable equivalent basis based on 34% effective tax rate.
(3) Fully taxable equivalent basis based on 34% effective tax rate.
</FN>
</TABLE>
(5)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE B
FOR THE YEAR ENDED DECEMBER 31, 1996
AVERAGE INCOME/ YIELD
BALANCE EXPENSE RATE
------- ------- ----
<S> <C> <C> <C>
U.S. Securities 54,075,000 3,069,297 5.68%
Taxable Municipal Securities 250,000 16,249 6.50%
Municipal Securities 6,352,000 384,444 6.05%
-------------------------------------------------
Total Investment Securities 60,677,000 3,469,990 5.72%
Installment Consumer Loans 3,202,000 340,944 10.65%
Tax Exempt Municipal Loans 1,339,000 125,129 9.34%
T & D Accrual Loans 34,169,000 3,089,271 9.04%
Real Estate Mortgage Loans 129,724,000 11,705,392 9.02%
Check Loans 173,000 26,029 15.05%
-------------------------------------------------
Total Loans 168,607,000 15,286,765 9.07%
Federal Funds Sold 8,650,000 463,549 5.36%
-------------------------------------------------
Total interst earning assets 237,934,000 19,220,304 8.08%
Talbot County Sweeps 2,882,000 143,516 4.98%
Regular NOW Deposits 25,302,000 705,431 2.79%
Super NOW Deposits 10,210,000 293,776 2.88%
Tier Investment Deposits 2,609,000 106,810 4.09%
Regular Savings Deposits 12,874,000 387,157 3.01%
Club Deposits 562,000 18,388 3.27%
Money Management Deposits 51,696,000 1,611,428 3.12%
CD's 100,000 or More 26,212,000 1,388,908 5.30%
All Other Certificates 56,452,000 3,254,118 5.76%
-------------------------------------------------
Total interest bearing deposits 188,799,000 7,909,532 4.19%
Repurchase Agreements 12,675,000 538,199 4.25%
Funds Borrowed 0 0 0.00%
-------------------------------------------------
Total Borrowed Funds 12,675,000 538,199 4.25%
----------------------------------------------
Total interest bearing liabilities 201,474,000 8,447,731 4.19%
NET INTEREST SPREAD 10,772,573 3.89%
</TABLE>
(6)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE C
FOR THE YEAR ENDED DECEMBER 31, 1995
AVERAGE INCOME/ YIELD
BALANCE EXPENSE RATE
<S> <C> <C> <C> <C> <C> <C>
U.S. Securities 59,042,000 3,116,132 5.28%
Taxable Municipal Securities 68,000 4,314 6.34%
Municipal Securities 5,172,000 300,071 5.80%
-----------------------------------------------
Total Investment Securities 64,282,000 3,420,517 5.32%
Installment Consumer Loans 3,218,000 335,811 10.44%
Tax Exempt Municipal Loans 1,610,000 103,292 6.42%
T & D Accrual Loans 30,120,000 2,836,835 9.42%
Real Estate Mortgage Loans 116,181,000 10,486,894 9.03%
Check Loans 163,000 24,334 14.93%
------------------------------------------------
Total Loans 151,292,000 13,787,166 9.11%
Federal Funds Sold 5,838,000 341,967 5.86%
-----------------------------------------------
Total interst earning assets 221,412,000 17,549,651 7.93%
Talbot County Sweeps 946,000 51,609 5.46%
Regular NOW Deposits 26,405,000 853,467 3.23%
Super NOW Deposits 8,233,000 278,401 3.38%
Tier Investment Deposits 4,023,000 179,560 4.46%
Regular Savings Deposits 13,870,000 470,857 3.39%
Club Deposits 551,000 24,607 4.47%
Money Management Deposits 52,458,000 1,876,611 3.58%
CD's 100,000 or More 16,601,000 916,660 5.52%
All Other Certificates 50,054,000 2,865,860 5.73%
-----------------------------------------------
Total interest bearing deposits 173,141,000 7,517,632 4.34%
Repurchase Agreements 14,546,000 685,337 4.71%
Funds Borrowed 59,000 3,623 6.14%
------------------------------------------------
Total Borrowed Funds 14,605,000 688,960 4.72%
----------------------------------------------
Total interest bearing liabilities 187,746,000 8,206,592 4.37%
NET INTEREST SPREAD 9,343,059 3.56%
</TABLE>
(7)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE D
FOR THE YEAR ENDED DECEMBER 31, 1994
AVERAGE INCOME/ YIELD
BALANCE EXPENSE RATE
<S> <C> <C> <C>
U.S. Securities 61,493,000 3,013,087 4.90%
Taxable Municipal Securities 75,000 4,275 5.70%
Municipal Securities 5,665,000 328,027 5.79%
-----------------------------------------------
Total Investment Securities 67,233,000 3,345,389 4.98%
Installment Consumer Loans 3,493,000 360,455 10.32%
Tax Exempt Municipal Loans 1,179,000 81,005 6.87%
T & D Accrual Loans 32,326,000 2,384,783 7.38%
Real Estate Mortgage Loans 106,886,000 9,022,823 8.44%
Check Loans 155,000 22,975 14.82%
------------------------------------------------
Total Loans 144,039,000 11,872,041 8.24%
Federal Funds Sold 8,399,000 337,876 4.02%
-----------------------------------------------
Total interst earning assets 219,671,000 15,555,306 7.08%
Regular NOW Deposits 27,488,000 820,030 2.98%
Super NOW Deposits 6,649,000 203,732 3.06%
Tier Investment Deposits 4,572,000 150,271 3.29%
Regular Savings Deposits 17,184,000 533,228 3.10%
Club Deposits 549,000 16,886 3.08%
Money Management Deposits 66,931,000 2,159,665 3.23%
CD's 100,000 or More 13,008,000 649,538 4.99%
All Other Certificates 44,910,000 2,389,063 5.32%
-----------------------------------------------
Total interest bearing deposits 181,291,000 6,922,413 3.82%
Repurchase Agreements 6,809,000 255,765 3.76%
Funds Borrowed 0 0.00%
-----------------------------------------------
Total Borrowed Funds 6,809,000 255,765 3.76%
--------------------------------------------
Total interest bearing liabilities 188,100,000 7,178,178 3.82%
NET INTEREST SPREAD 8,377,128 3.26%
</TABLE>
(8)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE E
THE TALBOT BANK OF EASTON, MARYLAND
REPRICING OPPORTUNITIES FOR SELECTED CATAGORIES
31-Dec-96
(000's)
3 Months 3 Months Over 1 year Over 3 years Over
ASSETS: Immediate or Less to 1 year to 3 years to 5 years 5 years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loan and Leases 48,203 14,478 30,329 63,474 12,522 1,143 170,149
Investment Securities 0 5,783 12,250 33,812 7,536 442 59,823
Federal Funds Sold 7,573 0 0 0 0 0 7,573
-------------------------------------------------------------------------------------
TOTAL 55,776 20,261 42,579 97,286 20,058 1,585 237,545
LIABILITIES:
CD's 100,000 or More 0 18,465 9,578 209 100 0 28,352
Other Time Deposits 278 19,209 34,871 2,831 380 0 57,569
Other Liabilities 9,268 0 0 0 0 0 9,268
-----------------------------------------------------------------------------------
TOTAL 9,546 37,674 44,449 3,040 480 0 95,189
</TABLE>
CERTIFICATE OF DEPOSIT MATURITY RATE ANALYSIS
(000'S)
WEIGHTED WEIGHTED
MONTH BALANCE AVG. RATE MONTH BALANCE AVG RATE
-----------------------------------------------------------------------------
Jan-97 22,965 7.053% Dec-97 3,797 5.968%
Feb-97 8,392 5.437% Jan-98 611 5.135%
Mar-97 6,342 5.585% Feb-98 336 5.119%
Apr-97 7,052 5.840% Mar-98 258 5.445%
May-97 5,221 5.838% Apr-98 261 5.555%
Jun-97 5,494 5.693% May-98 153 5.210%
Jul-97 6,093 6.058% Jun-98 64 5.100%
Aug-97 3,862 6.382% Jul-98 203 5.576%
Sep-97 3,995 5.987% Aug-98 120 5.120%
Oct-97 4,497 6.015% Sep-98 146 5.350%
Nov-97 4,320 5.890% Oct-98 188 5.358%
(9)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE F
THE TALBOT BANK OF EASTON, MARYLAND
REPRICING OPPORTUNITIES FOR SELECTED CATAGORIES
Dec-95
(000's)
<S> <C> <C> <C> <C> <C> <C>
3 Months 3 Months 6 Months Over 1 year Over
ASSETS: Immediate or Less to 6 mons to 1 year to 5 years 5 years Total
- ----------------------------------------------------------------------------------------------------------------------------
Loan and Leases 52,782 12,851 10,573 23,527 59,593 420 159,746
Debt Securities 0 8,138 5,490 12,835 33,781 549 60,793
Federal Funds Sold 2,331 0 0 0 0 0 2,331
-------------------------------------------------------------------------------------
TOTAL 55,113 20,989 16,063 36,362 93,374 969 222,870
LIABILITIES:
CD's 100,000 or More 0 11,400 3,704 5,599 514 0 21,217
Other Time Deposits 360 16,965 13,981 20,599 3,055 0 54,961
Other Liabilities 12,946 0 0 0 0 0 12,946
------------------------------------------------------------------------------------
TOTAL 13,306 28,365 17,685 26,198 3,569 0 89,124
</TABLE>
CERTIFICATE OF DEPOSIT MATURITY RATE ANALYSIS
(000'S)
WEIGHTED WEIGHTED
MONTH BALANCE AVG. RATE MONTH BALANCE AVG RATE
-----------------------------------------------------------------------------
Jan-96 18,387 4.920% Dec-96 3,954 6.060%
Feb-96 3,914 5.775% Jan-97 675 5.422%
Mar-96 6,084 5.953% Feb-97 260 5.637%
Apr-96 6,687 6.207% Mar-97 128 5.547%
May-96 5,742 6.112% Apr-97 118 5.498%
Jun-96 5,290 5.848% May-97 183 5.452%
Jul-96 5,782 6.254% Jun-97 480 5.948%
Aug-96 4,069 6.116% Jul-97 267 5.538%
Sep-96 3,610 6.206% Aug-97 83 5.730%
Oct-96 4,416 6.138% Sep-97 176 5.666%
Nov-96 4,446 6.048% Oct-97 265 5.771%
(10)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE G
THE TALBOT BANK OF EASTON, MARYLAND
REPRICING OPPORTUNITIES FOR SELECTED CATAGORIES
Dec-94
(000's)
3 Months 3 Months 6 Months Over 1 year Over
ASSETS: Immediate or Less to 6 mons to 1 year to 5 years 5 years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loan and Leases 63,454 9,323 6,867 10,386 50,093 491 140,614
Debt Securities 0 6,115 8,850 10,483 47,898 898 74,244
Federal Funds Sold 4,000 0 0 0 0 0 4,000
-------- -------- --------- ---------- --------- -------- --------
TOTAL 67,454 15,438 15,717 20,869 97,991 1,389 218,858
LIABILITIES:
CD's 100,000 or More 0 6,243 2,085 4,530 390 0 13,248
Other Time Deposits 213 14,158 12,254 16,547 3,132 0 46,305
Other Liabilities 15,199 0 0 0 0 0 15,199
------- --------- --------- -------- ------ ------ -------
TOTAL 15,412 20,401 14,339 21,077 3,522 0 74,752
</TABLE>
CERTIFICATE OF DEPOSIT MATURITY RATE ANALYSIS
(000'S)
WEIGHTED WEIGHTED
MONTH BALANCE AVG. RATE MONTH BALANCE AVG RATE
------------------------------------------------------------------------------
Jan-95 10,892 4.534% Dec-95 3,101 5.997%
Feb-95 3,865 4.867% Jan-96 784 5.406%
Mar-95 5,672 5.344% Feb-96 149 4.444%
Apr-95 5,727 5.547% Mar-96 148 4.780%
May-95 5,094 5.220% Apr-96 192 6.130%
Jun-95 3,546 5.408% May-96 216 5.360%
Jul-95 4,938 5.830% Jun-96 98 5.060%
Aug-95 2,773 5.560% Jul-96 167 4.844%
Sep-95 2,990 5.588% Aug-96 223 4.746%
Oct-95 3,563 5.705% Sep-96 71 5.066%
Nov-95 3,661 5.739% Oct-96 165 4.940%
(11)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE H
THE TALBOT BANK OF EASTON, MARYLAND
GAP REPORT
31-Dec-96
(000's)
3 Months 3 Months 6 Months Over 1 year Over
ASSETS: Immediate or Less to 6 mons to 1 year to 5 years 5 years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loan and Leases 48,203 14,478 30,329 63,474 12,618 1,143 170,245
Investment Securities 0 5,783 12,250 33,812 7,536 442 59,823
Federal Funds Sold 7,573 0 0 0 0 0 7,573
-------- -------- --------- ---------- --------- -------- --------
Total Rate Sensitive Assets 55,776 20,261 42,579 97,286 20,154 1,585 237,641
LIABILITIES:
CD's 100,000 or More 0 18,465 9,578 209 100 0 28,352
Other Time Deposits 278 19,209 34,871 2,831 380 0 57,569
MMDA's, Reg Sav & All NOW's 0 0 10,358 43,074 42,558 11,050 107,040
Other Liabilities 9,268 0 0 0 0 0 9,268
------ --------- --------- -------- ------ ------ ------
Total Rate Sens. Liabilities 9,546 37,674 54,807 46,114 43,038 11,050 202,229
TOTAL GAP 46,230 (17,413) (12,228) 51,172 (22,884) (9,464)
CUMMULATIVE GAP 28,817 16,589 67,760 44,877 35,412
</TABLE>
(12)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
THE TALBOT BANK OF EASTON, MARYLAND
GAP REPORT
Dec-95
(000's)
3 Months 3 Months 6 Months Over 1 year Over
ASSETS: Immediate or Less to 6 mons to 1 year to 5 years 5 years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loan and Leases 52,782 12,851 10,573 23,527 59,593 420 159,746
Debt Securities 0 8,138 5,490 12,835 33,781 549 60,793
Federal Funds Sold 2,331 0 0 0 0 0 2,331
-------- -------- --------- ---------- --------- -------- --------
Total Rate Sensitive Assets 55,113 20,989 16,063 36,362 93,374 969 222,870
LIABILITIES:
CD's 100,000 or More 0 11,400 3,704 5,599 514 0 21,217
Other Time Deposits 360 16,965 13,981 20,599 3,055 0 54,960
MMDA's, Reg Sav & All NOW's 0 0 0 24,493 66,042 10,387 100,922
Other Liabilities 12,946 0 0 0 0 0 12,946
------ --------- --------- -------- ------ ------ -------
Total Rate Sens. Liabilities 13,306 28,365 17,685 50,691 69,611 10,387 190,046
TOTAL GAP 41,807 (7,376) (1,622) (14,329) 23,762 (9,418)
CUMMULATIVE GAP 34,431 32,809 18,481 42,243 32,825
</TABLE>
(13)
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE J
THE TALBOT BANK OF EASTON, MARYLAND
GAP REPORT
Dec-94
(000's)
3 Months 3 Months 6 Months Over 1 year Over
ASSETS: Immediate or Less to 6 mons to 1 year to 5 years 5 years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loan and Leases 63,454 9,323 6,867 10,386 50,093 491 140,614
Debt Securities 0 6,115 8,850 10,483 47,898 898 74,244
Federal Funds Sold 4,000 0 0 0 0 0 4,000
-------- -------- --------- ---------- --------- -------- --------
Total Rate Sensitive Assets 67,454 15,438 15,717 20,869 97,991 1,389 218,858
LIABILITIES:
CD's 100,000 or More 0 6,243 2,085 4,530 390 0 13,248
Other Time Deposits 213 14,158 12,254 16,547 3,132 0 46,304
MMDA's, Reg Sav & All NOW's 114,333 0 0 0 0 0 114,333
Other Liabilities 15,199 0 0 0 0 0 15,199
------ --------- --------- -------- ------ ------ -------
Total Rate Sens. Liabilities 129,744 20,401 14,339 21,077 3,522 0 189,083
TOTAL GAP (62,290) (4,963) 1,378 (208) 94,469 1,389
CUMMULATIVE GAP (67,253) (65,876) (66,084) 28,386 29,774
</TABLE>
(14)
<PAGE>
PART III
Item 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK
--------------------------------------------
(a) Directors of the Bank - Incorporated by reference from the Proxy
Statement for Annual Stockholders' Meeting to be held April 23, 1997,
under "Information Concerning Directors or the Bank." In addition, none
of the Directors has any family relationship or is involved with any
legal proceedings involving the Bank.
(b) Principal Officers of the Bank - The Bank's principal officers are
elected annually and are listed below. None of the principal officers
has any family relationship or is involved with any legal proceedings
involving the Bank.
W. Moorhead Vermilye - President and Chief Executive Officer
Jerome M. McConnell - Executive Vice President
G. Rodney Taylor - Senior Vice President
Susan E. Leaverton, CPA - Vice President Finance
Robert J. Meade - Vice President Human Resources
Information concerning the above named principal officers is
incorporated by reference from the attached Proxy Statement for Annual
Stockholders' Meeting to be held April 23, 1997.
Item 10. MANAGEMENT COMPENSATION AND TRANSACTIONS
----------------------------------------
Incorporated by reference from the Proxy Statement for Annual
Stockholders' Meeting to be held April 23, 1997, under "Compensation of
Officers and Directors" and "Benefit Plans".
(15)
<PAGE>
PART IV
Item 11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM F-3
----------------------------------------------------------------
(a) Contents:
(1) Financial Statements are listed under Item 8, page 4.
(2) Financial Statement Schedules are attached as Exhibits or
the required information is presented in the financial
statements or the notes thereto. Note references relate to
the number in the Annual Report to Stockholders.
Schedule I - Securities - Note #4, pages 16 and 17
Schedule II - Loans to Officers, Directors, Principal
Security Holders, and any Associates of the Foregoing
Persons - Exhibit 6.2
Schedule III - Loans and Lease Financing Receivables - Note
#5, page 17 and 18 Schedule IV - Bank Premises and Equipment
- Note #6, page 19
Schedule V - Investments in, Income from Dividends, and
Equity in Earnings or Losses of Subsidiaries and Associated
Companies - Note #7, page 19
Schedule VI - Allowance for Possible Credit Losses - Note
#5, pages 17 and 18
(b) Reports filed on Form F-3:
There were no reports on Form F-3 filed during the last
quarter of 1996.
(c) Exhibits:
(6) 6.1 The Annual Report to Stockholders for the year ended
December 31, 1996.
Except for those portions expressly incorporated herein by
reference, the report is furnished only for the information
of the FDIC and is not deemed to be "filed".
(8) 8.1 Proxy Statement for Annual Meeting of Stockholders held
on April 23, 1997.
(16)
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE TALBOT BANK OF EASTON, MARYLAND
Date: March 26, 1997 By: /s/ W. Moorhead Vermilye
------------------------
W. Moorhead Vermilye
President and Chief Executive Officer
(17)
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities and Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 26, 1997 By: /s/ W. Moorhead Vermilye
------------------------
W. Moorhead Vermilye
President and Chief Executive Officer
Date: March 26, 1997 By: /s/ Susan E. Leaverton
----------------------
Susan E. Leaverton
Vice President/Finance
(Principal Accounting and Financial Officer)
DIRECTORS
/s/ Herbert L. Andrew, III /s/ Jerome M. McConnell
Herbert L. Andrew, III Jerome M. McConnell
/s/ Shari L. McCord
Blenda W. Armistead Shari L. McCord
/s/ Lloyd L. Beatty, Jr.
Lloyd L. Beatty, Jr. William H. Myers
/s/ Donald D. Casson
Donald D. Casson David L. Pyles
/s/ Gary L. Fairbank /s/ Christopher F. Spurry
Gary L. Fairbank Christopher F. Spurry
/s/ Ronald N. Fox /s/ W. Moorhead Vermilye
Ronald N. Fox W. Moorhead Vermilye
/s/ Richard C. Granville
Richard C. Granville
(18)
<PAGE>
EXHIBIT 6.2
SCHEDULE II
<TABLE>
<CAPTION>
LOANS TO OFFICERS, DIRECTORS, PRINCIPAL SECURITY HOLDERS
AND ANY ASSOCIATES OF THE FOREGOING PERSONS
YEAR ENDED DECEMBER 31, 1996
Balance Balance at
beginning of Amounts Amounts end of
Name of borrower of period Additions collected charged off period
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans to Directors
( 3 persons ) $ 3,076,800 $ 2,868,266 $ 792,244 $ 0 $ 5,152,825
</TABLE>
Note: Loans to directors and their affiliated interests are made in the
normal course of business. They are consistent with sound banking
practices and within regulatory lending limits.
The significant terms of the loans aggregated above are summarized as
follows:
Maturity dates: 1 to 5 years
Interest rates: Prime tied
Terms of repayment: Fixed payments, fixed principal plus interest
monthly/quarterly, interest only monthly with principal due upon
maturity
Collateral: Commercial properties, business assets and intangibles,
vehicles, and unsecured
<PAGE>
Exhibit 99.2
Annual Report to Stockholders for Year ended December 31, 1996
<PAGE>
THE TALBOT BANK
Established 1885
1996
ANNUAL
REPORT
<PAGE>
Financial Highlights
(Dollars in Thousands, Except Per Share Data)
Percent
Increase
Years ended December 31, 1996 1995 (Decrease)
- -------------------------------------------------------------------------------
For the Year
Interest income $19,019 $17,435 9.1%
Interest expense 8,448 8,207 2.9%
Net interest income 10,571 9,228 14.6%
Net income 3,220 2,684 20.0%
Cash dividends 829 737 12.5%
- -------------------------------------------------------------------------------
Average
Total assets $247,384 $230,159 7.5%
Total deposits 207,026 190,628 8.6%
Total loans 168,607 151,292 11.4%
Stockholders' equity 26,527 23,864 11.2%
- -------------------------------------------------------------------------------
At Year End
Total assets $253,184 $234,406 8.0%
Total deposits 215,101 195,447 10.1%
Total loans, net of unearned income 171,701 162,284 5.8%
Stockholders' equity 27,920 25,193 10.8%
- -------------------------------------------------------------------------------
Per Share
Net income $5.44 $4.55 19.6%
Cash dividends 1.40 1.25 12.0%
Book value at year-end 47.07 42.64 10.4%
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
FINANCIAL HIGHLIGHTS PAGE 1
LETTER TO SHAREHOLDERS PAGE 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PAGE 3
SELECTED FINANCIAL DATA PAGE 8
CONSOLIDATED FINANCIAL STATEMENTS PAGE 9
INDEPENDENT AUDITORS REPORT PAGE 26
DIRECTORS AND OFFICERS PAGE 27
DESCRIPTION OF BUSINESS, BANK LOCATIONS AND EMPLOYEES PAGE 28
Page 1
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholder,
I am pleased to report that 1996 has been another successful year for The Talbot
Bank. Earnings reached a record level, totalling $3,220,317 or $5.44 per share,
representing approximately a 20% increase over 1995. Increased loan volume
remained the single largest factor contributing to the Bank's growth in earnings
in 1996. I am pleased to present to you the results of 1996 in the enclosed
audited financial statements and other informative reports.
As of December 31, 1996, total loans and total deposits reached record highs at
$171,700,560 and $215,101,440, respectively. As a percentage loans increased
5.8% and deposits increased 10.1%. Loan growth combined with a reduction in the
rate paid for interest bearing liabilities contributed to a 14.6% increase in
net interest income. Some other key ratios are the Bank's net interest margin
which increased to 4.53% at December 31, 1996 compared to 4.22% one year ago,
and the Bank's return on average assets which was 1.30% for 1996 compared to
1.17% in 1995.
Return on Stockholders equity at December 31, 1996 also increased to 12.14% from
11.25% one year ago. Capital ratios are an important measure of a Bank's
financial soundness and I am pleased to report that the Talbot Bank has
continued to maintain capital levels well in excess of the regulatory
requirements. In addition, the board increased the dividends paid to
shareholders in 1996 for the third consecutive year. On a per share basis the
Bank paid dividends of $1.40 for 1996, a 12% increase over the $1.25 per share
paid in 1995.
The Board is always mindful of the ability to sustain growth over long periods
of time. That is why in 1996 they voted to make an addition to the provision for
loan losses which resulted in an increase in the allowance for loan losses to a
level more consistent with it's peer group. The maintenance of an adequate
allowance for loan losses minimizes the potential for loan losses to adversely
impact earnings in future years. The allowance for loan losses at December 31,
1996 totalled $2,728,320 or 1.59% of total loans.
During 1996, the Bank introduced Supermarket banking to its customers, and to
the Eastern Shore, with the opening of the Metro Market Branch in Cambridge. The
branch offers extended hours and is opened seven days a week. Credit Cards and
Debit Cards are some of the most recent products being offered by the Bank.
Technological advancements in the area of telephone banking and PC banking are
on the horizon for 1997. The Bank also made a presence on the internet this year
with the establishment of a web site. You can now visit the Bank at
http://talbot-bank.com.
There are many challenges facing the banking industry as it approaches the
twenty first century. A bank's ability to meet these challenges will determine
its success, and it is likely that only the best prepared banks will prosper in
these changing times. One of the ways your Board of Director's feels it can best
prepare the Talbot Bank for these challenges and opportunities is by the
reorganization of the Bank into a bank holding company form of ownership.
Holding company structure provides increased operational flexibility, broader
business and growth opportunities and additional measures to protect against an
unfriendly takeover. While management has no plans for changes as a result of
the proposed reorganization it feels this will provide the best vehicle for
growth as we move forward into the next century. Detailed information relating
to the proposed plan of reorganization is included in the proxy material sent to
you with this annual report. I encourage you to read this information carefully
and to vote your proxy.
In closing, I would like to thank our staff, whose contribution was essential to
our success in 1996. On behalf of the Board of Directors, management and staff
we look forward to another successful year in 1997.
W. MOORHEAD VERMILYE
President and Chief Executive Officer
Page 2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------
OVERVIEW
The Bank's net income for 1996 was $3.22 million compared to $2.68 million in
1995 and $2.26 million in 1994. Earnings per share for 1996 were $5.44 compared
to $4.55 and $3.85 for 1995 and 1994, respectively.
The Bank experienced growth in total assets of 8.0% and total deposits of 10.1%
in 1996. Loan growth of 5.8% was the primary component of total asset growth for
the year. The return on average assets increased to 1.30% in 1996 from 1.17% in
1995. In addition, the return on average stockholders' equity increased to
12.14% in 1996 from 11.25% in 1995.
Management continues to closely monitor the quality of assets and control
non-interest expenses in order to sustain moderate growth and satisfactory
earnings and return to shareholders.
------------
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the excess of interest and fees earned on loans and the
investment portfolio, over interest paid to depositors. It is the most
significant component of the Bank's earnings. Net interest income for 1996 was
$10,571,000 compared to $9,228,000 for 1995 and $8,274,000 for 1994. This
represents an increase of 14.6% and 11.5% for 1996 and 1995, respectively.
The following table sets forth the major components of net interest income, on a
tax equivalent basis, as of December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Investment Securities $60,677 $ 3,470 5.72% $ 64,282 $ 3,421 5.32% $ 67,233 $ 3,345 4.98%
Loans 168,607 15,287 9.07 151,292 13,787 9.11 144,039 11,872 8.24
Federal Funds Sold 8,650 463 5.36 5,838 342 5.86 8,399 338 4.02
-------- ------- ------- -------- ------- ------- ----- ---- ----
Total earning assets $237,934 $19,220 8.08% $221,412 $17,550 7.93% $219,671 $15,555 7.08%
------- ------- -------
Non-interest earning
assets $ 9,450 $ 8,747 $ 9,086
-------- -------- --------
Total assets $247,384 $230,159 $228,757
======== ======== ========
Interest bearing liabilities
Interest bearing
deposits $188,799 $7,910 4.19% $173,141 $7,518 4.34% $181,291 $6,922 3.82%
Borrowings 12,675 538 4.25 14,605 689 4.72 6,809 256 3.76
-------- ------- ------- -------- ------- ------- ----- --- ----
Total interest bearing
liabilities $201,474 $ 8,448 4.19% $187,746 $ 8,207 4.37% $188,100 $ 7,178 3.82%
------- ------- -------
Non-interest bearing
liabilities $ 19,383 $ 18,549 $ 18,721
Stockholders' equity 26,527 23,864 21,936
-------- -------- --------
Total liabilities and
stockholders' equity $247,384 $230,159 $228,757
======== ======== ========
Net interest spread $10,772 3.89% $ 9,343 3.56% $ 8,377 3.26%
======= ======= =======
Net interest margin 4.53% 4.22% 3.81%
Page 3
</TABLE>
<PAGE>
The increases in the Bank's net interest income and net margin (tax equivalent
basis) are the result of increased loan volume and a reduction in the average
rate paid on interest bearing liabilities. The average balance of earning assets
increased $16.5 million or 7.5% in 1996. Average loans increased $17.3 million
or 11.4% and represented 71% of average earning assets compared to 68% and 66%
in 1995 and 1994, respectively. Average investment securities decreased $3.6
million or 5.6% as a result of loan demand. The average yield on earning assets
for 1996 was 15 basis points more than 1995 as a result of higher yields on
investment securities.
Overall interest expense increased due to growth in interest bearing deposits,
however the average rate paid on those deposits was 4.19% for 1996 compared to
4.34% for 1995 and 3.82% for 1994. The average balance of Certificates of
Deposit, $100,000 or more, increased $9.6 million for 1996 causing a significant
increase in the Bank's interest expense. These increased deposits are primarily
local municipal funds which are collateralized by investment securities owned by
the Bank. The Bank's net interest margin for 1996 was 4.53% compared to 4.22%
and 3.81% for 1995 and 1994, respectively.
The average yield on earning assets increased 85 basis points to 7.93 in 1995
compared to 1994. The rate paid on interest bearing liabilities increased 55
basis points to 4.37 in 1995 compared to 1994.
The following Rate/Volume Variance Analysis identifies the portion of the
changes in net interest income, on a tax equivalent basis, which are
attributable to changes in volume of average balances or to changes in yield on
earning assets and rates paid on interest bearing liabilities.
<TABLE>
<CAPTION>
1996 over(under) 1995 1995 over(under) 1994
--------------------- ---------------------
Total Caused by Total Caused by
(dollars in thousands) Variance Rate Volume Variance Rate Volume
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income from earning assets:
Federal funds sold $ 122 $ (29) $ 151 $ 4 $ 154 $(150)
Taxable investment securities (35) 235 (270) 103 233 (130)
Non-taxable investment securities 84 13 71 (28) 1 (29)
Loans 1,500 (70) 1,570 1,915 1,284 631
- --------------------------------------------------------------------------------------------------------------
Total interest income 1,671 149 1,522 1,994 1,672 322
- --------------------------------------------------------------------------------------------------------------
Interest expense on deposits
and borrowed funds:
Interest bearing demand (113) (178) 65 189 143 46
Savings deposits (349) (295) (54) (345) 285 (630)
Time deposits 854 (24) 878 752 259 493
Securities sold under
agreements to repurchase (147) (68) (79) 430 65 365
Short term borrowings (4) --- (4) 4 --- 4
- --------------------------------------------------------------------------------------------------------------
Total interest expense 241 (565) 806 1,030 752 278
- --------------------------------------------------------------------------------------------------------------
Net interest income $1,430 $ 714 $ 716 $ 964 $ 920 $ 44
- --------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR CREDIT LOSSES
In 1996, the Bank increased it's provision for credit losses to $955,000
compared to $540,000 in 1995 and $525,000 in 1994. Net charge-offs declined in
1996 to $303,995 from $330,350 in 1995 and $407,335 in 1994, however, management
feels that a higher overall reserve level is desirable to sustain growth and
avoid future loan losses from having an adverse affect on net income. Net
charge-offs as a percentage of average loans outstanding were .18% in 1996
compared to .21% in 1995 and .28% in 1994. The Bank's ratio of the allowance for
possible loan losses to total loans, net of unearned income, as of December 31,
1996 was 1.59% compared to 1.30% for 1995 and 1.32% for 1994. Monitored by
management, the allowance of $2,728,320 at December 31, 1996 is considered
adequate.
Page 4
<PAGE>
Asset quality continues to improve as indicated in the following table of past
due and non-performing assets:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994
---------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accrual loans $1,551 $2,539 $2,611
Other real estate and other assets owned 299 147 280
--- --- ---
Total non-performing assets 1,850 2,686 2,891
Past due loans 654 356 438
--- --- ---
Total non-performing assets and past due loans $2,504 $3,042 $3,329
------ ------ ------
Non-performing assets to total loans,
net of unearned income, at period end 1.08% 1.68% 2.05%
Non-performing assets and past due loans,
to total loans, net of unearned income, at period end 1.46% 1.90% 2.36%
</TABLE>
NONINTEREST INCOME
The components of noninterest income are service charges and fees, gain on sale
of securities, income or loss from unconsolidated subsidiary and other
miscellaneous items. Total noninterest income decreased approximately $43,000 or
6.9% in 1996 from the previous year. Losses on sales of securities and losses
from the bank's unconsolidated subsidiary, Eastern Shore Mortgage Corporation
were the causes of the decline. During 1996, the bank sold several low yielding
securities at losses and reinvested the proceeds in higher yielding securities
to improve the overall return on its investment portfolio. This is a common
investing technique employed during periods of rising rates. Losses on sales of
securities totaled $22,732 in 1996 compared to gains of $22,070 and $625 in 1995
and 1994, respectively. In addition, the bank recorded a loss on its investment
in Eastern Shore Mortgage Corporation on $32,699 compared to a loss of $7,050 in
1995 and earnings of $22,679 in 1994.
<TABLE>
<CAPTION>
Years Ended Change from Prior Year
----------- ----------------------
1996/95 1995/94
------- -------
1996 1995 1994 Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service charges on deposit accounts $504,746 $485,514 $ 491,224 $ 19,232 4.0% $ (5,710) (1.2)%
Other service charges and fees 77,072 79,767 78,504 (2,695) (3.4)% 1,263 1.6%
Gain on sale of securities (22,732) 22,070 625 (44,802) (203.0)% 21,445 --
Income(Loss) from unconsolidated
subsidiary (32,700) (7,050) 22,679 (25,650) (363.8)% (29,729) (131.1)%
Other noninterest income 47,827 36,700 39,704 11,127 30.3% (3,004) (7.6)%
- -------------------------------------------------------------------------------------------------------------------
Total $574,213 $617,001 $ 632,736 $ (42,788) (6.9)% $(15,735) (2.5)%
</TABLE>
NONINTEREST EXPENSES
Total noninterest expense increased approximately $135,000 or 2.7% in 1996.
Salaries and employee benefits, representing 60% of total noninterest expense
for 1996, increased 8% over 1995. The increase is attributable to increases in
existing salaries and the addition of approximately 10 full-time employees
during the year. The Bank opened its fifth branch in September 1996 creating 6
new jobs. The Bank paid the minimum FDIC Insurance premium for 1996 resulting in
a decrease of $224,947 or 99.3% for 1996 compared to 1995. Other noninterest
expenses, including Occupancy, Furniture and equipment and Date Processing,
increased due to the overall growth of the bank.
<TABLE>
<CAPTION>
Years Ended Change from Prior Year
----------- ----------------------
1996/95 1995/94
------- -------
1996 1995 1994 Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Employee benefits $3,111,577 $2,880,724 $2,669,145 $ 230,853 8.0% $ 211,579 7.9%
Occupancy expense 332,039 316,341 289,586 15,698 5.0 26,755 9.2
Furniture and equipment expense 280,133 251,700 232,316 28,433 11.3 19,384 8.3
Data processing 272,899 266,376 264,226 6,523 2.4 2,150 .8
FDIC Insurance 1,500 226,447 473,385 (224,947) (99.3) (246,938) (52.2)
Other operating expenses 1,220,629 1,141,910 957,994 78,719 6.9 183,916 19.2
- ---------------------------------------------------------------------------------------------------------------
Total $5,218,777 $5,083,498 $4,886,652 $ 135,279 2.7% $ 196,846 4.0%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Page 5
<PAGE>
INCOME TAXES
In 1996, 1995 and 1994 the Bank's effective tax rates on earnings were 35.2%,
36.4%, 35.3%, respectively. These effective rates differ from statutory rates
due to levels of tax-exempt income and non-deductibility of some interest
expense. During 1996, the Bank's state income tax and overall effective tax rate
declined due to the partial exemption of interest on various U.S. Government and
Maryland Municipal securities.
-----------------------------------------
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity describes the ability of the Bank to meet financial obligations that
arise during the normal course of business. Liquidity is primarily needed to
meet the borrowing and deposit withdrawal requirements of the customers of the
Bank and to fund current and planned expenditures. The Bank derives liquidity
through increased customer deposits, maturities in the investment portfolio,
loan repayments and income from earning assets. To the extent that deposits are
not adequate to fund customer loan demand, liquidity needs can be met in the
short-term funds markets. The Bank has an arrangement with a correspondent bank
whereby it has a $10,000,000 line of credit available to meet any short-term
needs (30 days) which may not be funded by its large portfolio of readily
marketable investments that can be converted to cash if needed.
Interest rate sensitivity is an important factor in the management of the
composition and maturity configurations of the Bank's earning assets and funding
sources. The Bank's interest rate sensitivity position is managed to maintain an
appropriate balance between the maturity and repricing characteristics of assets
and liabilities that is consistent with the Bank's liquidity analysis, growth
and capital adequacy goals. It is the objective of Bank management to maximize
net interest margins during periods of volatile as well as stable interest
rates, to attain earnings growth and to maintain sufficient liquidity to satisfy
depositors' requirements and meet credit needs of customers.
There are no known trends or demands, commitments, events or uncertainties that
management is aware of which will materially affect the Bank's ability to
maintain liquidity at satisfactory levels.
--------------------
CAPITAL RESOURCES
Total Stockholders' equity was $27.9 million at December 31, 1996, 10.8% higher
than the previous year. Average stockholders' equity was $26.5 million for 1996,
an increase of 11.2% compared to 1995.
Bank regulatory authorities have historically determined the adequacy of a
bank's capital resources by comparison of its capital to its assets. The FDIC
has enacted capital adequacy guidelines requiring the Bank to maintain specific
minimum amounts of capital and additional amounts based upon the amount and
nature of their assets and commitments currently at risk. The leverage capital
rule requires the most highly rated banks to have a minimum core capital ratio
of 3%, with an additional 100 to 200 basis point cushion required for all banks
as established by the FDIC on a case by case basis. At December 31, 1996, the
Bank's leverage capital ratio was 11.04%. Risk-based capital rules specify five
categories of asset or commitment risk, with each category being assigned a
weight of 0% through 100% depending on the risk involved. Each asset or
commitment of the Bank is categorized and weighted appropriately, and the
capital of the Bank is then compared to the aggregate value of such risk
weighted assets or commitments to determine if additional capital is required.
At December 31, 1996, the Bank's ratio of core and supplementary capital to risk
weighted assets was 17.75% as compared to the regulatory guideline of 8.00%.
According to FDIC capital guidelines, the Bank is considered to be "Well
Capitalized."
Statement of Financial Accounting Standards No. 115 requires the Bank to record
unrealized holding losses on investment securities available-for-sale as a
separate component of stockholder's equity. As of December 31, 1996, the portion
of the Bank's investment portfolio designated as "available-for-sale" had
unrealized holding losses, net of income taxes, of $143,413. Management has
established policies to monitor and control the investment portfolio in order to
prevent any material negative affect on capital.
Page 6
<PAGE>
The following table compares the bank's capital ratios to the regulatory
requirements:
Regulatory
December 31, 1996 1995 Requirements
- -------------------------------------------------------------------------------
($ in thousands)
Tier 1 capital $ 28,063 $ 25,568
Tier 2 capital 2,121 2,077
- -------------------------------------------------------------------------------
Total capital, less deductions $ 30,002 $ 27,445
Risk-adjusted assets $ 169,043 $ 173,639
Risk-based Capital ratios:
Tier 1 16.60% 14.73% 4.0%
Total capital 17.75% 15.81% 8.0%
- -------------------------------------------------------------------------------
Total capital $ 28,063 $ 25,568
Total adjusted assets $ 254,267 $ 224,758
Leverage capital ratio 11.04% 12.52% 3.0% to 5.0%
- --------------------------------------------------------------------------------
On January 8, 1997 the Board of Directors approved the formation of a Bank
Holding Company to be known as Talbot Bancshares, Inc. At the Annual Meeting of
Shareholders to be held Wednesday, April 23, 1997 the shareholders of the Bank
will vote on a proposed share exchange agreement between the Bank and Talbot
Bancshares, Inc. If the share exchange agreement is approved each share of
common stock of The Talbot Bank of Easton, Maryland will be exchanged for two
shares of common stock of Talbot Bancshares, Inc.
The shareholders approved an increase in the authorized stock of the bank by
50,000 shares from 600,000 to 650,000 shares at their 1995 annual meeting.
20,000 shares were designated for issuance under the 1995 Employee Stock Option
Plan which was approved by the shareholders.
Management knows of no other trends or demands, commitments, events or
uncertainties which may materially affect capital.
-------------------------------------
RECENT STOCK PRICES AND DIVIDENDS
The Bank's stock is traded infrequently. The following table indicates cash
dividends paid per share for each quarter of 1996, 1995, and 1994 and the ranges
of representative sales prices of the Bank's common stock for the stated
periods, based on actual transfers recorded by the Bank's transfer agent. The
number of record holders of the Bank's common stock was 499, as of March 14,
1997.
<TABLE>
<CAPTION>
1996 1995 1994
Price Range Dividends Price Range Dividends Price Range Dividends
High Low Paid High Low Paid High Low Paid
---- --- ---- ---- --- ---- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
First Quarter $45 - 44 $ .25 $40 - 38 $ .20 $40 - 38 $ .20
Second 46 - 44 .25 40 - 38 .25 40 - 37 .20
Third Quarter 50 - 47 .25 42 - 39 .25 40 - 36 .20
Fourth Quarter 50 - 49 .65 45 - 40 .55 38 - 37 .40
-------- ------- -------
$1.40 $1.25 $1.00
===== ===== =====
</TABLE>
Page 7
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data concerning the
Bank for the five years ended December 31, 1996, and is qualified in its
entirety by the detailed information and financial statements, including notes
thereto, included elsewhere or incorporated by reference in this annual report.
This data should be read in conjunction with the financial statements and
related notes thereto, included elsewhere in this annual report and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING RESULTS:
Total interest income $ 19,019 $ 17,435 $ 15,452 $ 14,781 $ 15,733
Total interest expense 8,448 8,207 7,178 6,911 8,100
---------- --------- ---------- ---------- ---------
Net interest income 10,571 9,228 8,274 7,870 7,633
Provision for credit losses 955 540 525 2,911 1,430
---------- --------- ---------- ---------- ---------
Net interest income after provision for credit losses 9,616 8,688 7,749 4,959 6,203
Noninterest income 574 617 633 982 1,020
Noninterest expense 5,219 5,083 4,887 4,540 4,357
---------- --------- ---------- ---------- ---------
Income before income taxes 4,971 4,222 3,495 1,401 2,866
Provision for income taxes 1,751 1,538 1,232 483 1,020
---------- --------- ---------- ---------- ---------
NET INCOME $ 3,220 $ 2,684 $ 2,263 $ 918 $ 1,846
========== ========= ========== ========== =========
PER SHARE DATA:
Net income $ 5.44 $ 4.55 $ 3.85 $ 1.57 $ 3.18
Dividends paid 1.40 1.25 1.00 .94 .95
Book value at end of period 47.07 42.64 37.72 37.19 36.52
Weighted average common shares(1) 591,626 589,683 587,979 584,001 580,708
OTHER DATA (AT YEAR END):
Total assets $ 253,184 $ 234,406 $ 231,700 $ 226,622 $ 209,103
Total deposits 215,101 195,447 193,364 199,143 184,851
Total loans, net of unearned income
and allowance for credit losses 168,972 160,207 141,358 146,265 141,505
Total stockholder's equity 27,920 25,193 22,204 21,798 21,075
RETURN ON EQUITY AND ASSETS:
Return on average total assets 1.30% 1.17% .99% .46% .91%
Return on average stockholders' equity 12.14% 11.25% 10.32% 4.18% 9.49%
Average stockholders' equity to average total assets 10.72% 10.37% 9.59% 9.99% 9.60%
<FN>
(1) The weighted average common shares includes the effect of dilution of stock
options outstanding at period end.
</FN>
</TABLE>
Page 8
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
----------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from banks (Note 3) $ 7,013,605 $ 4,768,797
Federal funds sold 7,572,840 2,331,335
Investments in debt securities: (Notes 1 and 4)
Available for sale - at fair value 32,201,161 30,805,390
Held to maturity - at amortized cost - fair value of
$30,743,571 (1996) and $30,518,766 (1995) 30,608,360 30,085,880
Loans, less allowance for credit losses (1996) $2,728,320
(1995) $2,077,315 (Note 5) 168,972,240 160,207,140
Bank premises and equipment (Notes 1 and 6) 3,187,665 2,968,084
Accrued interest receivable on loans and investment securities 1,828,130 1,753,978
Deferred income tax benefits (Notes 1 and 12) 736,619 788,758
Other real estate (Note 1) 298,513 147,013
Other assets (Notes 7 and 11) 764,873 549,151
-------- -------
Total assets $ 253,184,006 $ 234,405,526
============== =============
LIABILITIES:
Deposits: (Notes 4 and 8)
Noninterest-bearing demand $ 22,140,586 $ 18,347,285
NOW and Super NOW 43,038,382 38,770,033
Certificates of deposit, $100,000 or more 28,351,993 21,217,470
Other time and savings 121,570,479 117,112,203
-------------- -------------
215,101,440 195,446,991
Securities sold under agreements to repurchase (Note 4) 9,267,693 12,946,247
Accrued interest payable on deposits 393,089 358,890
Other liabilities (Note 9) 501,779 459,943
-------------- -------------
Total liabilities 225,264,001 209,212,071
-------------- -------------
COMMITMENTS (Notes 6 and 9)
STOCKHOLDERS' EQUITY: (Notes 9, 10 and 13)
Common stock, par value $10, authorized 650,000 shares;
issued and outstanding (1996) 593,121 shares;
(1995) 590,875 shares 5,931,210 5,908,750
Surplus 6,515,944 6,433,820
Retained earnings 15,616,264 13,224,629
Net unrealized holding losses on securities
available for sale (Notes 1 and 4) (143,413) (373,744)
--------------- ---------------
Total stockholders' equity 27,920,005 25,193,455
-------------- -------------
Total liabilities and stockholders' equity $ 253,184,006 $ 234,405,526
============== =============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
Page 9
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees (Notes 1 and 5) $15,215,968 $13,774,563 $11,880,372
U.S. Treasury securities and obligations of other
U.S. Government agencies and corporations 3,069,297 3,116,132 3,013,087
Obligations of states and political subdivisions 269,982 202,360 220,772
Federal funds sold 463,549 341,966 337,876
------------ ------------ ------------
Total interest income 19,018,796 17,435,021 15,452,107
------------ ------------ ------------
INTEREST EXPENSE:
NOW and Super NOW accounts 1,249,532 1,363,038 1,174,033
Certificates of deposit, $100,000 or more 1,388,908 916,659 649,538
Other time and savings 5,271,092 5,237,936 5,098,842
Securities sold under agreements to repurchase 538,199 688,960 255,765
------------ ------------ ------------
Total interest expense 8,447,731 8,206,593 7,178,178
------------ ------------ ------------
NET INTEREST INCOME 10,571,065 9,228,428 8,273,929
PROVISION FOR CREDIT LOSSES (Notes 1 and 5) 955,000 540,000 525,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 9,616,065 8,688,428 7,748,929
------------ ------------ ------------
NONINTEREST INCOME:
Service charges on deposit accounts 504,746 485,514 491,224
Other service charges, commissions and fees 77,072 79,767 78,504
Gain (loss) on sale of securities (Note 4) (22,732) 22,070 625
Other operating income, net (Note 7) 15,127 29,650 62,383
------------ ------------ ------------
574,213 617,001 632,736
------------ ------------ ------------
NONINTEREST EXPENSES:
Salaries and wages 2,313,247 2,126,071 1,920,969
Employee benefits (Notes 9, 10 and 11) 798,330 754,653 748,176
Occupancy expense (Note 6) 332,039 316,341 289,586
Furniture and equipment expense 280,133 251,700 232,316
Data processing 272,899 266,376 264,226
Other operating expenses 1,222,129 1,368,357 1,431,379
------------ ------------ ------------
5,218,777 5,083,498 4,886,652
------------ ------------ ------------
INCOME BEFORE TAXES ON INCOME 4,971,501 4,221,931 3,495,013
Federal and State income taxes (Note 12) 1,751,184 1,537,586 1,232,381
------------ ------------ ------------
NET INCOME $ 3,220,317 $ 2,684,345 $ 2,262,632
============ ============ ============
Earnings per common share (Note 1) $5.44 $4.55 $3.85
===== ===== =====
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
Page 10
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net Unrealized
Holding Gains
(Losses) on Debt
Common Retained Securities Avail-
Stock Surplus Earnings able for Sale
----- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $ 5,860,880 $ 6,292,586 $ 9,615,244 $ 28,910
2,503 shares issued under 401(k) plan 25,030 70,084 - -
Net income - - 2,262,632 -
Cash dividends paid, $1.00 per share - - (587,203) -
Change, net of income taxes, in unrealized
losses on securities available for sale - - - (1,363,928)
----------- ------------ ------------ ----------------
Balances, December 31, 1994 5,885,910 6,362,670 11,290,673 (1,335,018)
2,284 shares issued under 401(k) plan 22,840 71,150 - -
Net income - - 2,684,345 -
Cash dividends paid, $1.25 per share - - (737,036) -
Change, net of income taxes, in unrealized
gains on securities available for sale - - - 961,274
Adjustment related to Treasury stock purchase
of unconsolidated subsidiary - - (13,353) -
----------- ------------ ------------- ---------------
Balances, December 31, 1995 5,908,750 6,433,820 13,224,629 (373,744)
2,046 shares issued under 401(k) plan 20,460 76,324 - -
Exercise of stock option 2,000 5,800 - -
Net income - - 3,220,317 -
Cash dividends paid, $1.40 per share - - (828,682) -
Change, net of income taxes, in unrealized
losses on securities available for sale - - - 230,331
----------- ------------ ------------ --------------
Balances, December 31, 1996 $ 5,931,210 $ 6,515,944 $15,616,264 $ (143,413)
=========== ============ ============ ================
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
Page 11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,220,317 $ 2,684,345 $ 2,262,632
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 472,441 278,967 515,482
Discount accretion on debt securities (88,246) 9,678 (97,753)
Discount accretion on matured debt securities 30,815 218,133 42,395
(Gain) loss on sale of securities 22,732 (22,070) (625)
Provision for credit losses, net 651,005 209,650 117,665
Deferred income taxes (92,784) (107,065) (123,901)
Loss on disposal of bank premises and equipment 6,482 3,385 4,487
Loss on other real estate owned 13,500 - -
Net changes in:
Accrued interest receivable (74,152) 191,833 (486,235)
Other assets (132,464) (99,280) 230,428
Accrued interest payable on deposits 34,199 82,109 (5,510)
Other liabilities 41,836 (196,651) 400,889
------------- -------------- -------------
Net cash provided by operating activities 4,105,681 3,253,034 2,859,954
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 4,976,911 9,008,719 1,000,625
Proceeds from maturities and principal payments
of securities available for sale 10,682,736 11,707,931 4,250,656
Purchases of securities available for sale (17,056,224) (15,583,542) (21,867,041)
Proceeds from maturities and principal payments
of securities held to maturity 10,841,694 9,106,982 7,308,141
Purchases of securities held to maturity (11,153,089) (489,498) (8,218,788)
Net (increase) decrease in loans (11,843,709) (19,068,969) 6,550,561
Purchase of loans (198,000) (199,613) (1,722,465)
Proceeds from sale of loans 2,460,604 342,979 29,031
Purchase of bank premises and equipment (582,088) (247,480) (941,486)
Redemption of stockholder in unconsolidated subsidiary - (13,353) -
Proceeds from sale of bank premises and equipment - 26,600 12,000
------------- ------------- ------------
Net cash used in investing activities (11,871,165) (5,409,244) (13,598,766)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, NOW,
money market, and savings deposits $ 9,923,185 $ (14,529,451) $ (8,024,557)
Net increase in certificates of deposit 9,731,264 16,612,648 2,245,206
Net (decrease) increase in securities sold
under agreement to repurchase (3,678,554) (2,252,625) 10,056,034
Proceeds from issuance of common stock 104,584 93,990 95,114
Dividends paid (828,682) (737,036) (587,203)
--------- --------- ---------
Net cash provided (used) by financing activities 15,251,797 (812,474) 3,784,594
------------ -------------- -------------
</TABLE>
Page 12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED) For the Years Ended December
31, 1996, 1995 and 1994
1996 1995 1994
------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 7,486,313 (2,968,684) (6,954,218)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 7,100,132 10,068,816 17,023,034
------------ -------------- ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 14,586,445 $ 7,100,132 $ 10,068,816
============= ============== =============
Supplemental cash flows information:
Interest paid $ 8,413,532 $ 8,124,484 $7,183,689
============= ============== =============
Income taxes paid $ 1,830,877 $ 1,885,326 $ 1,634,000
============= ============== =============
Transfers of investments in debt securities
available for sale to held to maturity $ - $ - $ 29,511,700
============= =============== ==============
Transfers from loans to other real estate owned $ 165,000 $ - $ -
============ =============== ==============
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
Page 13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of The Talbot Bank of
Easton, Maryland (the Bank) and its subsidiary, Dover Street Realty, Inc. (Dover
Street) with all significant intercompany transactions eliminated. The
accounting and reporting policies of the Bank conform to generally accepted
accounting principles and to prevailing practices within the banking industry.
Certain reclassifications have been made to amounts previously reported to
conform with the classifications made in 1996.
Nature of Operations
The Bank provides commercial banking services from its locations in Talbot and
Dorcester Counties, Maryland. Its primary source of revenue is from providing
commercial and real estate loans to customers who are predominately small
businesses, professionals and middle income individuals located in the general
Talbot County area of Maryland's eastern shore.
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.
Investment Securities Available for Sale
Investment securities available for sale are stated at estimated fair value
based on quoted market prices. They represent those securities which management
may sell as part of its asset/liability strategy or which may be sold in
response to changing interest rates, changes in prepayment risk or other similar
factors. The cost of securities sold is determined by the specific
identification method. Net unrealized holding gains and losses on these
securities are reported as a separate component of stockholders' equity, net of
related income taxes.
Investment Securities Held to Maturity
Investment securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Bank intends and has
the ability to hold such securities until maturity. When securities are
transferred into the held to maturity category from available for sale, they are
accounted for at estimated fair value with any unrealized holding gain or loss
at the date of the transfer reported as a separate component of stockholders'
equity and amortized over the remaining life of the security as an adjustment of
yield.
Loans
Loans are stated at their principal amount outstanding net of any deferred fees
and costs. Interest income is accrued and credited to income at the contractual
rate based on the principal amount outstanding. Fees charged and costs
capitalized for originating loans are being amortized primarily on the interest
method over the term of the loan. A loan is placed on nonaccrual when it is
specifically determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously accrued on those
loans is reversed from income. Interest income generally is not recognized on
specific impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is recognized only
to the extent of interest payments received.
The Bank adopted the provisions of Statements of Financial Accounting Standards
(SFAS) Nos. 114 and 118, Accounting by Creditors for Impairment of a Loan on
January 1, 1995. SFAS Nos. 114 and 118 apply to loans for which it is probable
that the creditor will not collect all principal and interest payments according
to the loan's contractual terms. The impairment of a loan is measured at the
present value of expected future cash flows using the loan's effective interest
rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. Interest income on impaired
loans is recognized on a cash basis.
Impaired loans do not include groups of smaller balance homogeneous loans such
as residential mortgage and consumer installment loans that are evaluated
collectively for impairment. Reserves for probable future credit losses related
to these loans are based upon historical loss ratios and are included in the
allowance for credit losses.
Allowance for Credit Losses
The allowance for credit losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for credit
losses when management believes that the collectibility of the principal is
unlikely. The allowance, based on evaluations of the collectibility of loans and
prior loan loss experience, is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible. The evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic conditions and trends
that may affect the borrowers' ability to pay.
Page 14
<PAGE>
Long-Lived Assets
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed under the straight-line and accelerated methods over
the estimated useful lives of the assets.
Other Real Estate
Other real estate represents assets acquired in satisfaction of loans either by
foreclosure or deeds taken in lieu of foreclosure. Properties acquired are
recorded at the lower of cost or fair value less estimated selling costs at the
time of acquisition with any deficiency charged to the allowance for credit
losses. Thereafter, cost incurred to operate or carry the properties as well as
reductions in value as determined by periodic appraisals are charged to
operating expense. Gains and losses resulting from the final disposition of the
properties are included in noninterest expense.
Income Taxes
Deferred income taxes are provided under the liability method based on the
difference between the financial statement and tax bases of assets and
liabilities and are measured at the current statutory tax rates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Bank considers cash and due
from banks, and federal funds sold to be cash and cash equivalents.
Earnings Per Common Share
Earnings per common share have been calculated on the basis of the weighted
average number of shares outstanding for each year. Weighted average shares
outstanding were 591,626, 589,683 and 587,979 for the years ended December 31,
1996, 1995 and 1994, respectively. Although stock options granted are considered
common stock equivalents for the purpose of computing earnings per share, they
have been excluded since they have no dilutive effect.
NOTE 2. NEW ACCOUNTING STANDARDS
Long-Lived Assets
Long-lived assets are evaluated regularly for other-than-temporary impairment.
If circumstances suggest that their value may be impaired and the write-down
would be material, an assessment of recoverability is performed prior to any
write-down of the asset. Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, was adopted on January 1, 1996. Implementation of this standard
did not have a significant impact on the financial condition or results of
operations of the Bank.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS 123), establishes a fair value based method of accounting for
employee stock options and expands disclosure requirements, including a
description of the plan. SFAS 123 permits a company to continue to measure
compensation cost for its stock option plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. The Bank adopted SFAS 123 on January
1, 1996 as presented in Note 10.
Financial Assets and Liabilities
On January 1, 1997, the Bank adopted the provisions of Statement of Financial
Accounting Standards No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The adoption of this
pronouncement is not expected to have a material impact on the financial
position of the Bank.
NOTE 3. CASH AND DUE FROM BANKS
The Federal Reserve requires banks to maintain certain minimum cash balances
consisting of vault cash and deposits in the Federal Reserve Bank or in other
commercial banks. Such balances averaged approximately $1,854,000 and $1,566,000
during 1996 and 1995, respectively.
Page 15
<PAGE>
NOTE 4. INVESTMENT IN DEBT SECURITIES
The amortized cost and estimated fair values of investments in debt securities
are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Available for sale securities:
December 31, 1996
U.S. Treasury securities $ 24,920,534 $ 167,519 $ 15,993 $ 25,072,060
Obligations of U.S. Government agencies
and corporations 3,001,152 4,773 5,485 3,000,440
Obligations of states and political subdivisions 1,568,628 - 24,465 1,544,163
------------ ----------- ---------- ------------
29,490,314 172,292 45,943 29,616,663
Mortgage-backed securities 2,580,092 7,229 2,823 2,584,498
------------ ----------- ---------- ------------
$ 32,070,406 $ 179,521 $ 48,766 $ 32,201,161
============ =========== ========== ============
December 31, 1995:
U.S. Treasury securities $ 18,908,510 $ 165,050 $ 3,470 $ 19,070,090
Obligations of U.S. Government agencies
and corporations 7,007,819 - 57,009 6,950,810
Obligations of states and political subdivisions 893,321 - 14,562 878,759
------------ ----------- ---------- ------------
26,809,650 165,050 75,041 26,899,659
Mortgage-backed securities 3,897,585 11,305 3,159 3,905,731
------------ ----------- ---------- ------------
$ 30,707,235 $ 176,355 $ 78,200 $ 30,805,390
============ =========== ========== ============
Held to maturity securities:
December 31, 1996:
U.S. Treasury securities $ 10,868,672 $ 123,368 $ - $ 10,992,040
Obligations of U.S. Government
agencies and corporations 8,012,868 14,308 36,506 7,990,670
Obligations of states and political subdivisions 6,265,205 61,514 55,075 6,271,644
------------ ----------- ---------- ------------
25,146,745 199,190 91,581 25,254,354
Mortgage-backed securities 5,461,615 27,602 - 5,489,217
------------ ----------- ---------- ------------
$ 30,608,360 $ 226,792 $ 91,581 $ 30,743,571
============ =========== ========== ============
December 31, 1995:
U.S. Treasury securities $ 13,183,716 $ 281,274 $ - $ 13,464,990
Obligations of U.S. Government
agencies and corporations 5,910,613 44,844 14,887 5,940,570
Obligations of states and political subdivisions 4,752,731 80,851 35,381 4,798,201
------------ ----------- ---------- ------------
23,847,060 406,969 50,268 24,203,761
Mortgage-backed securities 6,238,820 76,185 - 6,315,005
------------ ----------- ---------- ------------
$ 30,085,880 $ 483,154 $ 50,268 $ 30,518,766
============ =========== ========== ============
</TABLE>
Page 16
<PAGE>
The amortized cost and estimated fair values of investments in debt securities
by contractual maturity at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 5,097,372 $ 5,103,819 $ 2,655,162 $ 2,671,140
Due after one year through five years 24,182,942 24,308,242 21,789,463 21,921,119
Due after five years through ten years 210,000 204,602 - -
Due after ten years - - 702,120 662,095
------------ ------------ ------------- ------------
29,490,314 29,616,663 25,146,745 25,254,354
Mortgage-backed securities 2,580,092 2,584,498 5,461,615 5,489,217
------------ ------------ ------------- ------------
$ 32,070,406 $ 32,201,161 $ 30,608,360 $ 30,743,571
============ ============ ============= ============
</TABLE>
The Bank has pledged certain securities as collateral for obligations to
federal, state and local government agencies as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------------- -------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- --------- --------- ----------
<S> <C> <C> <C> <C>
Available for sale $ 26,921,137 $ 27,069,490 $ 25,916,329 $ 26,020,900
Held to maturity 17,911,554 17,987,021 20,068,377 20,345,165
------------ ------------ ------------- ------------
$ 44,832,691 $ 45,056,511 $ 45,984,706 $ 46,366,065
============ ============ ============= ============
</TABLE>
There were no obligations of states and political subdivisions whose carrying
value, as to any issuer, exceeded 10% of stockholders' equity at December 31,
1996 or 1995.
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Bank grants residential mortgage, consumer and commercial loans to customers
primarily in Talbot County, Maryland. The principal categories of the loan
portfolio of the Bank at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Construction and land development $ 6,807,545 $ 6,631,546
Secured by farmland 2,400,251 478,471
Secured by residential properties 58,332,796 53,028,498
Secured by nonfarm, nonresidential properties 64,498,241 65,878,700
Loans to farmers (loans to finance agricultural
production and other loans) 197,112 144,553
Commercial and industrial loans 29,135,660 25,609,378
Loans to individuals for household, family, and
other personal expenditures 9,507,532 8,800,899
Obligations of States and political subdivisions
in the United States, tax-exempt 877,263 1,663,153
All other loans 52,002 159,461
-------------- --------------
171,808,402 162,394,659
Less: Unearned income on loans (107,842) (110,204)
-------------- ---------------
171,700,560 162,284,455
Less: Allowance for credit losses (2,728,320) (2,077,315)
-------------- ---------------
$ 168,972,240 $ 160,207,140
============== ==============
</TABLE>
In the normal course of banking business, loans are made to officers and
directors and their affiliated interests. These loans are made on substantially
the same terms and conditions as those prevailing at the time for comparable
transactions with outsiders and are not considered to involve more than the
normal risk of collectibility. As of December 31, 1996 and 1995, such loans
outstanding, both direct and indirect (including guarantees), to directors,
their associates and policy making officers, totaled approximately $6,091,000
and $3,202,000, respectively. During 1996 and 1995, loan additions were
approximately $3,872,000 and $844,000, and loan deletions were approximately
$1,083,000 and $945,000, respectively.
Page 17
<PAGE>
The allowance for credit losses at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Balance, beginning of year $ 2,077,315 $ 1,867,665 $ 1,750,000
------------ ------------- ------------
Recoveries:
Real estate loans 11,442 5,420 32,751
Installment loans 48,226 34,135 56,608
Commercial and other 47,568 43,525 68,971
------------ ------------- ------------
107,236 83,080 158,330
------------ ------------- ------------
Provision 955,000 540,000 525,000
------------ ------------- ------------
Loans charged-off:
Real estate loans (106,538) (119,836) (168,931)
Installment loans (67,345) (57,970) (103,875)
Commercial and other (237,348) (235,624) (292,859)
------------- ------------- -------------
(411,231) (413,430) (565,665)
------------- ------------- -------------
Balance, end of year $ 2,728,320 $ 2,077,315 $ 1,867,665
============= ============ ============
</TABLE>
Information with respect to impaired loans and the related valuation allowance
as of December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Impaired loans with valuation allowance $ 302,053 $ 339,814
Impaired loans with no valuation allowance 1,249,352 2,198,610
------------ ------------
Total impaired loans $ 1,551,405 $ 2,538,424
============ ============
Allowance for loan losses related to impaired loans $ 77,000 $ 137,000
Allowance for loan losses related to other than
impaired loans 2,651,320 1,940,315
------------ ------------
Total allowance for loan losses $ 2,728,320 $ 2,077,315
============ ============
Interest income on impaired loans recorded on
the cash basis $ 71,421 $ 64,810
============ ============
Average recorded investment in impaired
loans for the year $ 4,107,775 $ 2,695,813
============ ============
</TABLE>
Page 18
<PAGE>
NOTE 6. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment, at cost, and accumulated depreciation
at December 31 is as follows:
1996 1995
------------ --------
Land:
Dover Street 189,734 $ 189,734
Tred Avon 90,000 90,000
Elliott Road 172,905 172,905
Edgar Building 150,000 150,000
Premises:
Dover Street 902,758 878,334
Tred Avon 467,949 452,855
St. Michaels 70,875 68,806
Edgar Building 502,248 502,248
Elliott Road 435,532 435,532
Cambridge Metro 204,589 -
Equipment:
Dover Street 928,404 994,969
Tred Avon 274,133 291,717
St. Michaels 215,773 205,406
Elliott Road 269,738 260,762
Cambridge Metro 90,316 -
------ ---
4,964,954 4,693,268
Accumulated depreciation (1,777,289) (1,725,184)
------------- --------------
$ 3,187,665 $ 2,968,084
============ =============
Depreciation expense totaled $272,767, $241,332 and $220,475 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Bank leases a branch under an operating lease expiring in 2001. The lease
provides the Bank with a renewal option. Future minimum annual rental payments
are approximately as follows:
1997 $ 32,400
1998 32,400
1999 32,400
2000 32,400
2001 18,900
---------
$148,500
========
Rental expense for the years ended December 31, 1996, 1995 and 1994 was $27,900,
$27,000 and $27,000, respectively.
NOTE 7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
During 1995, Eastern Shore Mortgage Corporation reacquired the common stock of
one of its 25% owners, thereby increasing the Bank's ownership interest to 33%.
This investment is carried on the Bank's books at cost, adjusted for its equity
in the net earnings as follows:
December 31,
------------------------------------
1996 1995 1994
------------------------------------
Balance, beginning of year $ 199,916 $ 220,319 $ 197,640
Additional paid-in capital 15,000 - -
Equity interest redemption - (13,353) -
Equity in (loss) earnings for the year (32,699) (7,050) 22,679
---------- ---------- ---------
Balance, end of year $ 182,217 $ 199,916 $ 220,319
========= ========= =========
The Bank had $958,000 in outstanding loans to Eastern Shore Mortgage Corporation
at December 31, 1996. Interest income on loans to Eastern Shore Mortgage
Corporation totaled approximately $27,700, $9,000 and $46,800 for 1996, 1995 and
1994, respectively.
Page 19
<PAGE>
NOTE 8. SIGNIFICANT DEPOSITS
The approximate maturities of certificates of deposit of $100,000 or more at
December 31 are as follows:
1996 1995
------------ ------------
Three months or less 18,465,000 $ 11,400,000
Three through six months 3,382,000 3,704,000
Six through twelve months 6,196,000 5,599,000
Over twelve months 309,000 514,000
------------ -------------
$ 28,352,000 $ 21,217,000
============ =============
NOTE 9. BENEFIT PLANS
401(k) Plan:
The Bank has a 401(k) Plan into which employees may direct up to 15% of their
compensation. Several investment options are available to Plan participants. The
Bank makes matching contributions to the Plan in the form of its common stock.
These matching contributions amount to 100% of the first 3% of participants'
compensation and 50% of the next 2% and vest at the rate of 20%, per year from
the second to the sixth year of the employers' service. Bank contributions
included in expense totaled $69,915 (1996), $68,651 (1995) and $66,937 (1994).
Defined Benefit Pension Plan:
Effective January 1, 1995, the Bank froze its defined benefit pension plan so
that no future benefits will accrue after that date. The Plan covers
substantially all full-time employees with more than six months of service.
Projected benefits are based on the participants' compensation, years of service
and age at retirement and vest at the rate of 20% per year from the
participants' second to sixth year of service. The Bank's policy has been to
fund the actuarially determined minimum annual required amount.
The following table sets forth the Plan's funded status and amounts recognized
in the Bank's balance sheets at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of accumulated
benefit obligation, including
vested benefits of $1,039,729 and
$966,328 for 1996 and 1995, respectively $ 1,042,433 $ 970,599
=========== ==========
Projected benefits $ 1,042,433 $ 970,599
Plan assets at fair value 934,380 822,472
----------- ----------
Projected benefit obligations in excess of Plan assets 108,053 148,127
Unrecognized transition obligation 68,547 58,589
Unrecognized net loss (68,547) (58,589)
------------ -----------
Accrued pension cost included in other liabilities $ 108,053 $ 148,127
=========== ==========
Net pension cost includes the following components:
1996 1995 1994
-------- ---------- ----------
Service cost - benefits earned during the year $ - $ - $ 95,321
Interest cost on projected benefit obligation 73,728 77,178 87,984
Actual return on Plan assets (86,101) (178,430) (6,808)
Net amortization and deferral 23,304 115,964 (38,656)
-------- --------- ----------
Net pension cost $ 10,931 $ 14,712 $ 137,841
======== ========= ==========
</TABLE>
During 1995, the Bank settled its pension obligations with certain Plan
participants by purchasing annuity contracts for benefit obligations. The loss
associated with this settlement totaled $12,148 and is included in expense for
1995.
A Plan curtailment occurred from the freezing of benefits in 1995 and resulted
in a gain of $43,299 being recognized.
Page 20
<PAGE>
Assumptions used in the determination of pension information consisted of the
following:
1996 1995 1994
---- ---- ----
Discount rate 7.50% 7.50% 8.50%
Rate of increase in compensation levels N/A N/A 4.00
Expected long-term rate of return on Plan assets 7.50 7.50 8.00
Profit Sharing Plan:
Effective January 1, 1995, the Bank adopted The Talbot Bank Profit Sharing and
Retirement Plan which covers substantially all full-time employees with more
than six months of service. The Bank makes discretionary contributions to the
Plan based on profits. Contributions included in expense in both 1996 and 1995
totaled $80,000.
NOTE 10. STOCK OPTION PLAN During 1995, the Bank adopted the Employee Stock
Option Plan (the "1995 Plan"). Options granted under the 1995 Plan may be either
incentive stock options or nonqualified options. The terms of the options
granted are at the sole discretion of a committee of the Bank's Board of
Directors, and are not to exceed ten years. The 1995 Plan provides that the Bank
may grant options for not more than 20,000 shares of common stock to certain key
employees. Options which have been granted are immediately exercisable and were
granted at exercise prices not less than the fair market value of the stock at
the date of grant.
Following is a summary of changes in shares under option for the 1995 Plan for
the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
---- ----
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
--------- -------------- --------- --------------
<S> <C> <C> <C>
Outstanding at beginning of year 10,500 $ 39.00 - $ -
Granted 9,100 50.00 10,500 39.00
Exercised (200) 39.00 - -
-------- -------
Outstanding at end of year 19,400 44.16 10,500 39.00
======= =======
Weighted average fair value of options
granted during the year $ 16.59 $ 12.26
================ =======
</TABLE>
The following summarizes information about options outstanding at December 31,
1996:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
Weighted Average Weighted
Range of Remaining Average
Exercise Prices Number Contract Life Exercise Price
<S> <C> <C> <C> <C> <C> <C>
$39.00 - $50.00 19,400 9.26 years $44.16
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumption used for grants during the two years ended December 31:
1996 1995
---- ----
Dividend yield 3.0% 3.1%
Expected volatility 30.0% 30.0%
Risk-free interest rate 6.3% 5.6%
Expected lives 8.6 years 10.0 years
The Bank has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-based Compensation (SFAS
123), but applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its Plan. No compensation expense related to
the Plan was recorded during the two years ended December 31, 1996. If the Bank
had elected to recognize compensation cost based on fair value at the grant
dates for awards under the Plan consistent with the method prescribed by SFAS
<PAGE>
123, net income and earnings per share would have been changed to the pro forma
amounts as follows:
Year Ended December 31,
-----------------------
1996 1995
---- ----
Net income $ 3,069,348 $ 2,555,615
Earnings per share $5.18 $4.33
Page 21
<PAGE>
NOTE 11. DEFERRED COMPENSATION
During 1996, the Bank adopted a supplemental deferred compensation plan to
provide retirement benefits to its President and Chief Executive Officer. The
plan calls for fixed annual payments of $20,000 to be credited to the
participant's account. The participant is 100% vested in amounts credited to his
account. Contributions to the plan totaled $20,000 for the year ended December
31, 1996.
NOTE 12. INCOME TAXES
Income taxes included in the balance sheets as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes currently payable (receivable) $ 80,490 $ (8,026)
State income taxes currently payable (18,263) 37,573
Deferred income tax benefits 736,619 788,758
</TABLE>
Components of income tax expense for each of the three years ended
December 31 are as follows:
1996 1995 1994
---------- ---------- ----------
Currently payable:
Federal ...................... $1,560,516 $1,331,237 $1,097,043
State ........................ 283,452 313,414 259,239
1,843,968 1,644,651 1,356,282
---------- ---------- ----------
Deferred income taxes (benefits):
Federal ......................... (75,966) (87,659) (101,444)
State ........................... (16,818) (19,406) (22,457)
----------- ----------- -----------
(92,784) (107,065) (123,901)
----------- ----------- -----------
$1,751,184 $ 1,537,586 $ 1,232,381
=========== =========== ===========
A reconciliation of tax computed at the statutory federal tax rates of 34% to
the actual tax expense for the three years ended December 31 follows:
1996 1995 1994
------ ------ ------
Tax at federal statutory rate ................. 34.0% 34.0% 34.0%
Tax effect of:
Tax-exempt income ........................... (2.8) (2.2) (2.7)
Nondeductible expenses ...................... .5 .5 .5
Other .0 .................................... (.7) (1.4)
State income taxes, net of federal benefit .. 3.5 4.8 4.9
------ ------ ------
Income tax expense ............................ 35.2% 36.4% 35.3%
====== ====== ======
The sources of deferred income taxes (benefits) and the tax effects of each for
the years ended December 31 are as follows:
1996 1995 1994
--------- --------- ---------
Depreciation ...................... $ 15,288 $ 27,415 $ (8,323)
Provision for credit losses ....... (250,788) (47,720) (72,300)
Income on loans ................... 106,673 (67,420) (27,947)
Other ............................. 36,043 (19,340) (15,331)
--------- --------- ---------
$ (92,784) $(107,065) $(123,901)
========= ========= =========
Page 22
<PAGE>
Significant components of the Bank's deferred tax assets and liabilities as of
December 31 are as follows:
1996 1995
-------- --------
Deferred tax assets:
Provision for credit losses .......................... $653,457 $402,669
Loan interest ........................................ 40,179 145,940
Provision for loss on other real estate .............. 41,562 36,349
Pension expense ...................................... 41,730 57,207
Loan fees ............................................ 41,649 42,561
Deferred compensation ................................ 40,260 43,247
Unrealized losses on available for sale securities ... 90,236 235,158
-------- --------
Total deferred tax assets ......................... 949,073 963,131
-------- --------
Deferred tax liabilities:
Depreciation ......................................... 158,255 142,967
Other ................................................ 54,199 31,406
-------- --------
Total deferred tax liabilities .................... 212,454 174,373
-------- --------
Net deferred tax assets ........................... $736,619 $788,758
======== ========
NOTE 13. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators, that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitive measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitive measures established by regulation to ensure capital adequacy require
the Bank to maintain amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
A comparison of the Bank's capital as of December 31, 1996 and 1995 with the
minimum requirements is presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) $ 30,002,000 17.75% $ 13,523,000 8.00% $ 16,904,000 10.00%
Tier 1 Capital (to Risk Weighted Assets) 28,063,000 16.60 6,762,000 4.00 10,143,000 6.00
Tier 1 Capital (to Average Assets) 28,063,000 11.04 10,170,000 4.00 12,713,000 5.00
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) 27,445,000 15.81 13,891,000 8.00 17,364,000 10.00
Tier 1 Capital (to Risk Weighted Assets) 25,568,000 14.73 6,946,000 4.00 10,418,000 6.00
Tier 1 Capital (to Average Assets) 25,568,000 12.52 8,769,000 4.00 10,961,000 5.00
</TABLE>
Page 23
<PAGE>
Under Maryland banking law, the Board of Directors may declare cash dividends
from undivided profits with the prior consent and approval of the Commissioner
of Financial Regulation, from surplus in excess of $5,931,210 after providing
for expenses, losses, interest and taxes accrued or due.
NOTE 14. LINE OF CREDIT
The Bank has a $10,000,000 unsecured federal funds line of credit which is
available on a short-term basis.
NOTE 15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Cash Equivalents
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Investments in Debt Securities
For all investments in debt securities, fair values are based on
quoted market prices. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loan Receivables
The fair value of categories of fixed rate loans, such as commercial
loans, residential mortgage, and other consumer loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. Other loans, including
variable rates loans, are adjusted for differences in loan
characteristics.
Financial Liabilities
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits
of similar remaining maturities. These estimates do not take into
consideration the value of core deposit intangibles. The fair value
of securities sold under agreements to repurchase is estimated using
the rates offered for similar borrowings.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness
of the counterparties.
The estimated fair values of the Bank's financial instruments,
excluding goodwill, as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------- --------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 14,586,445 $ 14,586,000 $ 7,100,132 $ 7,100,000
Investments in debt securities 62,809,521 62,945,000 60,891,270 61,324,000
Loans 171,700,560 168,185,000 162,284,455 159,897,000
Less: allowance for loan losses (2,728,320) - (2,077,315) -
--------------- -------------- --------------- --------------
$ 246,368,206 $ 245,716,000 $ 228,198,542 $ 228,321,000
============== ============== ============== ==============
Financial liabilities:
Deposits $ 215,101,440 $ 215,202,000 $ 195,446,991 $ 195,643,000
Securities sold under agreements to repurchase 9,267,693 9,268,000 12,946,247 12,946,000
-------------- -------------- -------------- --------------
$ 224,369,133 $ 224,470,000 $ 208,393,238 $ 208,589,000
============== ============== ============== ==============
Unrecognized financial instruments:
Commitments to extend credit $ 32,293,000 $ 32,293,000 $ 35,843,000 $ 35,843,000
Standby letters of credit 4,225,000 4,225,000 4,534,000 4,534,000
-------------- -------------- -------------- --------------
$ 36,518,000 $ 36,518,000 $ 40,377,000 $ 40,377,000
============== ============== ============== ==============
</TABLE>
Page 24
<PAGE>
NOTE 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, to meet the financial needs of its customers,
the Bank is a party to financial instruments with off-balance sheet risk. These
financial instruments include commitments to extend credit and standby letters
of credit.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to these financial instruments is represented by the contractual amount of
the instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
The Bank generally requires collateral or other security to support the
financial instruments with credit risk. The amount of collateral or other
security is determined based on management's credit evaluation of the
counterparty. The Bank evaluates each customer's creditworthiness on a
case-by-case basis.
Commitments to extend credit are agreements to lend to a customer 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 many of the commitments are expected to expire
without being drawn upon, the total commitment amount does not necessarily
represent future cash requirements.
Commitments outstanding as of December 31 are as follows:
1996 1995
------------- -------------
Commitments to extend credit $ 32,293,000 $ 35,843,000
Letters of credit 4,225,000 4,534,000
------------- -------------
$ 36,518,000 $ 40,377,000
============= =============
Page 25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
The Talbot Bank of Easton, Maryland
Easton, Maryland
We have audited the accompanying consolidated balance sheets of The Talbot Bank
of Easton, Maryland as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Talbot Bank of Easton, Maryland as of December 31, 1996 and 1995, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Stegman & Company
Towson, Maryland
January 24, 1997
Page 26
<PAGE>
<TABLE>
BOARD OF DIRECTORS
<S> <C> <C> <C> <C> <C> <C>
HERBERT L. ANDREW, III JEROME M. MCCONNELL
Farmer and County Councilman Executive Vice President, The Talbot Bank
BLENDA W. ARMISTEAD SHARI L. MCCORD
County Manager, Talbot County, Maryland Owner, Chesapeake Travel, Inc.
LLOYD L. BEATTY, JR. WILLIAM H. MYERS
Certified Public Accountant Chairman of the Board
Beatty, Satchell & Company, LLC
DONALD D. CASSON DAVID L. PYLES
Stockbroker, Washington Investing Corp Investor
GARY L. FAIRBANK CHRISTOPHER F. SPURRY
Owner, Fairbank Tackle President, Spurry & Associates, Inc.
RONALD N. FOX W. MOORHEAD VERMILYE
Co-Owner, Washington Street Pub President & CEO, The Talbot Bank
RICHARD C. GRANVILLE
President, Celeste Industries Corporation
</TABLE>
- --------------------------------------------------------------------------------
OFFICERS
W. Moorhead Vermilye ......... . . . . . . . . . . . President & CEO
Jerome M. McConnell ........... . . . . . Executive Vice President
G. Rodney Taylor ......... . . . . . . . . Senior Vice President
Susan E. Leaverton ........ . . . . . . . . Vice President Finance
Robert J. Meade ................ Vice President Human Resources
Bruce M. Burkhardt ........... . . . . . Vice President Operations
Linda S. Cheezum .......... . . . . . . . Vice President Lending
Robyn K. Gannon .............. . . Vice President New Accounts
Newton E. Wildasin ............ . . . Vice President Comptroller
Mildred C. Bullock .....................Vice President Bookkeeping
Nancy B. Chance .......................Assistant Vice President
Deborah L. Danenmann .......................Assistant Vice President
Valerie C. Falcone .......................Assistant Vice President
Laura P. Heikes .......................Assistant Vice President
Dawn D. Henck .......................Assistant Vice President
Wanda W. Hutchison .......................Assistant Vice President
J. Michael Lawrence .......................Assistant Vice President
Jennifer W. Lister .......................Assistant Vice President
Bonnie R. Meade .......................Assistant Vice President
W. David Morse .......................Assistant Vice President
Robin B. O'Brien .......................Assistant Vice President
John C. Pattillo .....................Commercial Banking Officer
Charles J. Selby .......................Assistant Vice President
Parker K. Spurry .......................Assistant Vice President
Page 27
<PAGE>
DESCRIPTION OF BUSINESS
The Talbot Bank of Easton, Maryland is a commercial bank whose primary service
area is Talbot County, Maryland. The Bank commenced operations in 1885 and is
chartered under the laws of the State of Maryland. The Bank has three locations
in Easton, Maryland and one in St. Michaels, Maryland. As of December 31, 1995,
the Bank had total assets of $234 million, total deposits of $194 million, and
total loans of $160 million.
Services provided to businesses include commercial checking, savings, and
related depository services. The Bank offers all forms of commercial lending,
including lines of credit, term loans, accounts receivable financing and
commercial and construction real estate and other forms of secured financing.
Services provided to individuals include checking accounts, various savings
programs, mortgage loans, home improvement loans, installment and other personal
loans, credit cards, personal lines of credit, automobile and other consumer
financing, safe deposit services, debit cards and 24-hour automated teller
machines. The Bank, through correspondent banks, offers "Visa" and "Mastercard"
credit card services. During 1996, the Bank opened an in-store branch in
Cambridge, Maryland offering full service banking 7 days a week. Alternative
real estate financing is also available through Eastern Shore Mortgage
Corporation, an affiliate of the Bank.
The Bank is subject to federal and state laws applicable to banks and to
regulations by the Commissioner of Financial Regulation of the State of Maryland
and the Federal Deposit Insurance Corporation.
- --------------------------------------------------------------------------------
BANK LOCATIONS
MAIN OFFICE TRED AVON SQUARE BRANCH ELLIOT ROAD BRANCH
18 East Dover Street 210 Marlboro Road 8275 Elliot Road
Easton Maryland 21601 Easton, Maryland 21601 Easton, Maryland 21601
Phone (410) 822-1400 Phone (410) 822-1400 Phone (410) 822-1400
Fax (410) 820-7180 Fax (410) 819-3013 Fax 9410) 822-0524
SAINT MICHAELS BRANCH METRO MARKET BRANCH
1013 S. Talbot Street 2737 Dorchester Square
St. Michaels, Maryland 21663 Cambridge, Maryland 21613
Phone (410) 745-9166 Phone (410) 221-7690
Fax (410) 819-3061 Fax (410) 476-5128
- --------------------------------------------------------------------------------
EMPLOYEES
Nancy L. Bartlett Debra C. Hause Donna D. Parks
Barbara A. Bell Kerri M. Hunt Dawn A. Patrick
Bevlee A. Burks Amy L. Hutchison Jennifer A. Perkins
Amy H. Butler Suzanne S. Jefferson Angela M. Potthast
Lori A. Cain Pauline V. Johnson Jacqueline D. Ruark
Carol J.C. Callahan Linda N. Jones Kellee K. Russ
Kathrine M. Christensen Patricia A. Jones Marilyn P. Russell
Suzanne K. Croll Beatrice T. Juliano Terri M.Tarr
Laura L. Davis Sandra A. Kenton Paula I. Taylor
Elizabeth H. Dise Kathryn O. Larrimore Rhonda L. Townsend
Stacey L. Dulin Stephanie D. Layton Nancy J. Urbanczk
Laura L. Edwards Kathryn V. Lister Margaret B. Voshell
Kristin M. Emerson N. Melissa McNamire Daphne L. Wagner
Dale E. Fike LaVonne D. Medford Deborah C. Watson
Penny A. Fontana Sherri L. Messix Karen L. Whitby
Beverly A. Fort Stephanie L. Miller Sandra G. Wilson
Michaele A. Graves Deborah H. Morton Brenda L. Wooden
Robin L. Haddaway Donna L. Neal
Page 28
<PAGE>
Exhibit 99.3
Form F-4 Quarterly Report for Period Ended March 31, 1997
<PAGE>
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, DC 20429
-------------------------------------------------------------------
FORM F-4
QUARTERLY REPORT PURSUANT TO
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1997
-------------------------------------------------------------------
FDIC INSURANCE CERTIFICATE NO. 01893
THE TALBOT BANK OF EASTON, MARYLAND
(Exact name of bank as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
52-0504630 P.O. Box 949
(IRS Employer Identification No.) Easton, Maryland 21601-0949
(Address of principal office)
(410) 822-1400
(Bank's telephone number, including area code)
-------------------------------------------------------------------
Indicate by check mark if the bank, as a small business issuer as
defined under 17 CFR 240.12b-2, is providing alternative disclosures
as permitted for small business issuers in this Form F-4.
Yes . . . . . . No . . .X. . .
Indicate by check mark whether the bank (1) has filed all reports
required to be filed by Section 13 of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the bank
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes . . .X. . . No . . . . . .
As of March 31, 1997, there were 593,774 shares of Common Stock issued
and outstanding; the Bank has no other class of stock outstanding.
<PAGE>
ITEM 1
FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
THE TALBOT BANK OF EASTON, MARYLAND
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
ASSETS: 1997 1996
- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 6,454 $ 7,014
Federal funds sold 13,527 7,573
Investment in debt securities:
Held to maturity, at amortized cost, fair value (1997) $29,144;
(1996) $30,744 29,207 30,608
Available for sale, at fair value 27,698 32,201
Loans, less allowance for credit losses (1997) $2,646; (1996) $2,728 167,952 168,972
Bank premises and equipment 3,158 3,188
Other real estate 124 299
Accrued interest receivable on loans and investment securities 1,916 1,828
Investments in unconsolidated subsidiary 176 182
Deferred income tax benefits 803 737
Other assets 731 582
------------- ------------
TOTAL ASSETS $ 251,746 $ 253,184
============= ============
LIABILITIES:
Deposits:
Non-interest bearing demand $ 20,460 $ 22,141
NOW and Super NOW 40,754 43,038
Certificates of deposit, $100,000 or more 24,568 28,352
Other time and savings 125,332 121,571
-------------- ------------
Total Deposits 211,114 215,102
Securities sold under agreement to repurchase 11,111 9,268
Other liabilities 1,029 894
-------------- ------------
TOTAL LIABILITIES 223,254 225,264
-------------- ------------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $10, authorized 650,000 shares; shares issued and
outstanding:
December 31, 1996 593,121
March 31, 1997 593,774 5,938 5,931
Surplus 6,541 6,516
Retained earnings 16,262 15,616
Net unrealized holding loss on debit securities available for sale (249) (143)
-------------- ------------
TOTAL STOCKHOLDERS' EQUITY 28,492 27,920
-------------- ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 251,746 $ 253,184
============== ============
All dollar amounts in thousands, except per share data
</TABLE>
<PAGE>
THE TALBOT BANK OF EASTON, MARYLAND
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 3,844 $ 3,666
U.S. Treasury securities and obligations of other U.S.
Government agencies and corporation 781 749
Obligations of States and political subdivisions 78 58
Federal funds sold 97 86
-------- --------
Total interest income 4,800 4,559
-------- --------
INTEREST EXPENSE Interest on deposits:
Certificates of deposit, $100,000 or more 355 316
Other deposits 1,603 1,605
Other interest 102 141
-------- --------
Total interest expense 2,060 2,062
-------- --------
NET INTEREST INCOME 2,740 2,497
Provision for credit losses 105 159
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 2,635 2,338
-------- --------
NON-INTEREST INCOME
Service charges on deposit accounts 131 119
Gain (loss) on sale of securities (7) (4)
Other non-interest income 32 30
-------- --------
Total non-interest income 156 145
-------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits 879 775
Expenses of premises and fixed assets 178 170
Other non-interest expense 460 387
-------- --------
Total non-interest expense 1,517 1,332
-------- --------
INCOME BEFORE TAXES ON INCOME 1,274 1,151
Federal and State income taxes 450 430
-------- --------
NET INCOME $ 824 $ 721
======== ========
EARNINGS PER COMMON SHARE:
Net income $ 1.39 $ 1.22
Average Shares Outstanding 593,326 590,881
</TABLE>
All dollar amounts in thousands, except per share data
<PAGE>
THE TALBOT BANK OF EASTON, MARYLAND
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Net
Unrealized
Holding
Gain (Loss) on
Common Retained Debt Securities
Stock Surplus Earnings Available for sale
----- ------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 $ 5,909 $ 6,434 $ 13,225 ($374)
Net Income - - 721 -
Cash Dividends Paid, $0.25 per share - - (148) -
Net unrealized holding gain (loss) on
debt securities, available for sale - - - 15
Shares issued 5 18 - -
--------- -------- --------- ------------
Balances, March 31, 1996 $ 5,914 $ 6,452 $ 13,798 ($359)
========= ======== ========= ============
Balances, December 31, 1996 $ 5,931 $ 6,516 $ 15,616 ($143)
Net income - - 824 -
Cash Dividends Paid, $0.03 per share - - (178) -
Net unrealized holding gain (loss) on
debt securities, available for sale - - - (106)
Shares issued 7 25 - -
--------- -------- --------- ------------
Balances, March 31, 1997 $ 5,938 $ 6,541 $ 16,262 ($249)
========= ======== ========= ============
</TABLE>
All dollar amounts in thousands, except per share data
<PAGE>
THE TALBOT BANK OF EASTON, MARYLAND
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 824 $ 721
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 107 125
Discount accretion on debt securities (26) (19)
Discount accretion on matured debt securities 3 6
Loss on sale of securities - 4
Provision for credit losses, net 105 159
Gain on disposal of bank premises and equipment (3) -
Loss on other real estate owned 11 -
Net changes in:
Accrued interest receivable (88) (279)
Other assets (83) (105)
Accrued interest payable on deposits (12) 4
Income taxes payable 246 394
Other liabilities (99) (112)
------- ------
Net cash provided by operating activities 985 898
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES;
Proceeds from sales of securities available for sale 1,003 996
Proceeds from maturities and principal payments of securities available for sale 3,273 4,404
Purchase of securities available for sale - (4267)
Proceeds from maturities and principal payments of securities held to maturity 1,442 217
Purchase of securities held to maturity - (2,000)
Net (increase) decrease in loans 1,595 (4,051)
Purchase of loans (700) (198)
Proceeds from sale of loans 20 1,062
Proceeds from sale of equipment 20 (61)
Proceeds from sale of other real estate owned 104 -
Purchase of bank premises and equipment (57) -
------- -------
Net cash provided (used) in investing activities 6700 (3,898)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand, NOW, money market and savings deposits (1,795) 2,929
Net (decrease) increase in certificates of deposit (2,193) 4,511
Net increase in securities sold under agreement in repurchase 1,843 1,641
Proceeds from issuance of common stock 32 23
Dividends paid (178) (148)
------- -------
Net cash provided by financing activities (2,291) 8,956
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,394 5,956
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,587 7,100
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,981 $13,056
======= =======
</TABLE>
All dollar amounts in thousands
<PAGE>
Notes to Consolidated Financial Statements
Note 1. Presentation and Disclosure
The accompanying unaudited financial statements for the three months
ended March 31, 1997 and 1996 are furnished pursuant to Section 13 of
the Securities and Exchange Act of 1934.
In the opinion of management, all adjustments necessary for a fair
presentation have been included. The information in this report should
be read in conjunction with the financial information, statements and
related footnotes included in the Bank's Registration statement on Form
F-1 (filed April, 1990) and 1996 Annual Report filed on Form F-2 (filed
March 1997).
The consolidated financial statements include the accounts of the Bank
and Dover Street Realty, Inc., its wholly owned subsidiary with all
significant intercompany transactions eliminated.
Note 2. Investment in Debt Securities
Investment securities available for sale are stated at estimated fair
value based on quoted market prices. They represent those securities
management may sell as part of its asset/liability strategy or which
may be sold in response to changing interest rates, changes in
prepayment risk or other similar factors. The cost of securities sold
is determined by the specific identification method. Net unrealized
holding gains and losses on these securities are reported as a separate
component of stockholders' equity, net of related income taxes.
Investment securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Bank intends
and has the ability to hold such securities until maturity. When
securities are transferred into the held to maturity category from
available for sale, they are accounted for at estimated fair value with
any unrealized holding gain or loss as a separate component of
stockholders' equity and amortized over the remaining life of the
security as an adjustment of yield.
Note 3. Earnings Per Common Share
Earnings per common share amounts are based on the weighted average
number of shares outstanding. There were 19,100 shares of unexercised
options outstanding as of March 31, 1997. The assumed exercise of
options does not result in material dilution.
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity
The Bank's liquidity position is maintained through increased customer deposits,
maturities in the investment portfolio, loan repayments and income from earning
assets. The Bank's liquidity ratio was approximately 26% as of March 31, 1997.
This ratio is within the guidelines of the asset-liability management policy
adopted by the board of directors.
Capital Resources
Bank regulatory agencies have adopted various capital standards for financial
institutions, including risk-based capital standards. The primary objectives of
the risk-based capital framework are to provide a more consistent system for
comparing capital positions of financial institutions and to take into account
the different risks among financial institutions' assets and off-balance sheet
items.
Risk based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition, regulatory
agencies consider the published capital levels as minimum levels and may require
a financial institution to maintain capital at higher levels.
A comparison of the bank's capital as of March 31, 1997, with the minimum
requirements is presented below.
Minimum
Actual Requirements
------ ------------
Tier 1 Risk-based Capital 17.07% 4.00%
Total Risk-based Capital 18.33% 8.00%
Leverage Ratio 11.51% 3.00%
Results of Operations
Net income for the three months ended March 31, 1997 increased $103,000 or 14%
over the corresponding period in 1996. Net income was $824,000 or $1.39 per
share for the three months ended March 31, 1997.
Average earning assets increased to $240 million at March 31, 1997 from $238
million at December 31, 1996. This increase resulted in an increase in interest
income of $241,000 for the first three months of 1997 compared to the same
period in 1996. The average yield on earning assets increased from 9.02% at
March 31, 1996 to 9.10% at March 31, 1997. Interest bearing deposits declined
slightly during the first quarter when compared to December 31, 1996. The
average balance of deposits increased during the first quarter of 1997 compared
to the same period in 1996. This growth was offset in part by a decrease in the
average balance of securities sold under agreement to repurchase. Total interest
expense decreased $2,000 as a result of these changes and a decline in the rate
paid on interest bearing liabilities. The average rate paid on interest bearing
liabilities was 4.03 % at March 31, 1997 compared to 4.23% at March 31, 1996.
The Bank's net interest margin at March 31, 1997 was 4.71% compared to 4.53% for
the year ended December 31, 1996.
The provision for credit losses of $105,000 and net write-offs of $187,000 as of
March 31, 1997 resulted in a decrease in the allowance for credit losses of
$82,000.
Noninterest income increased $11,000 primarily due to an increase in the volume
of service charges on deposit accounts. Salaries and employee benefits increased
$104,000 or 13.4% due to the operation of the newest bank branch which opened in
1996. In addition, general salaries and the number of employees has increased
due to the growth of the bank. Other noninterest expenses increased $73,000 or
18.9% due to the increased operating costs of the new branch, as well as general
increases in data processing costs, professional fees, stationary and supplies.
<PAGE>
Signatures
Under the requirements of the Securities Exchange Act of 1934, the Bank has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
THE TALBOT BANK OF EASTON, MARYLAND
Date: May 12, 1997 By: /s/W. Moorhead Vermilye
--------------------------------
W. Moorhead Vermilye
President and Chief Executive Officer
Date: May 12, 1997 By: /s/Susan E. Leaverton, CPA
--------------------------------
Susan E. Leaverton, CPA
Vice President - Finance
<PAGE>
