UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
000-22929
-------------------
Commission File No.
TALBOT BANCSHARES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Maryland 52-2033630
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
18 East Dover Street, Easton, Maryland 21601
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(410) 822-1400
--------------------------------------------------
Registrant's Telephone Number, Including Area Code
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X. No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
The aggregate market value of the Corporation's voting stock held by
non-affiliates of the registrant as of March 23, 1998 was $46,938,537
The number of shares outstanding of the registrant's common stock, as of March
23, 1998 was 1,189,610.
<PAGE>
Document Incorporated by Reference
Portions of Talbot Bancshares, Inc definitive Proxy Statement for its 1998
Annual Stockholders' Meeting, as filed with the Commission on March 27, 1998 are
incorporated by reference into Part III of this report. Portions of the Annual
Report to Stockholders for the year ended December 31, 1997 are incorporated by
reference into Parts I and II of this report. Except for parts of the Talbot
Bancshares, Inc. Annual Report expressly incorporated herein by reference, this
Annual Report in not to be deemed filed with the Securities and Exchange
Commission.
FORM 10K INDEX
<TABLE>
<CAPTION>
Page(s)
<S><C>
Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 10
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 10
Part III
Item 10. Directors and Executive Officers of the Registrant (A)10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 11
Item 13. Certain Relationships and Related Transactions 11
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 11
</TABLE>
(A) Portions of Talbot Bancshares, Inc. Definitive Proxy Statement to
Stockholders are incorporated by reference, except for Items 402 (k) and (L) of
Regulation S-K, in Parts I and III of this Annual Report.
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Talbot Bancshares, Inc. (the "Company") is a Maryland corporation organized on
March 10, 1997 which became a registered bank holding company on May 1, 1997
under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The
Company engages in the business of banking through its sole subsidiary The
Talbot Bank of Easton, Maryland (the "Bank"), a commercial bank chartered under
the laws of the State of Maryland. The Company acquired the Bank under a Plan of
Reorganization and Share Exchange (the "Plan) proposed by management and
approved by the Bank's stockholder's at their annual meeting held April 23,
1997. Pursuant to the Plan each share of Bank stock was exchanged for two shares
of Company stock. The Bank's charter was not affected by the reorganization. The
Company has issued and outstanding 1,189,610 shares of common stock , par value
$0.01 per share ("Shares") held by 464 holders of record March 23, 1998.
The Company's and the Bank's main office is located in Talbot County, Maryland,
at 18 East Dover Street, Easton, Maryland 21601. The Bank commenced operation in
1885 and is engaged in general commercial and retail banking business serving
individuals and businesses in Talbot and Dorchester Counties, Maryland. The Bank
currently operated four banking offices in Talbot County, three in Easton,
Maryland, one in Saint Michaels, Maryland. The Bank also operated an in-store
branch in Dorchester County, Maryland in the city of Cambridge.
The Bank owns 33% of the outstanding common stock of Eastern Shore Mortgage
Corporation, a Maryland corporation. Eastern Shore Mortgage Corporation is
located in Easton, Maryland. It is engaged in mortgage banking activities ,
primarily the origination of residential mortgage loans and the subsequent sale
of those loans to permanent investors. It's service area is primarily the
Eastern Shore of Maryland.
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 lending.
Services 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, 24 hour telephone banking, and 24 hour
automatic teller machine services through the HONOR network. The Bank has an
in-store branch in Cambridge, Maryland offering full service banking 7 days per
week. Alternative real estate financing is also available to the Bank's
customers through Eastern Shore Mortgage Corporation, an affiliate of the Bank.
COMPETITIVE CONDITIONS
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, four of which have resources substantially greater
than the Bank's. In Dorchester County the Bank competes principally with seven
other commercial banks and one savings bank. The Bank also encounters
competition from consumer loan companies, brokerage firms, credit unions and
other nonbank institutions in both Talbot and Dorchester counties. The Bank
engages in traditional marketing activities such as advertising in local
newspapers, trade journals and other publications, and radio advertising.
Officers, Directors and employees of the Bank represent the bank through their
involvement on boards of nonprofit organizations and other community
organizations, as well as their participation in community events. The Bank also
relies on referrals from satisfied customers.
The following table sets forth deposit data for Talbot and Dorchester Counties
as of June 30, 1997, the most recent date for which comparative information is
available.
3
<PAGE>
<TABLE>
<CAPTION>
%of
Talbot County Deposits Total
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S><C>
THE TALBOT BANK OF EASTON, MARYLAND $205,756 37.76%
St. Michaels Bank 103,893 19.07
NationsBank, National Association 77,667 14.26
Crestar Bank 58,692 10.77
Easton Bank & Trust 35,712 6.55
The First National Bank of Maryland 31,858 5.85
Signet Bank 31,282 5.74
-------- ------
Total $544,860 100.00%
======== ======
</TABLE>
SOURCE: FDIC DATABOOK
<TABLE>
<CAPTION>
%of
Dorchester County Deposits Total
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S><C>
The National Bank of Cambridge $123,514 34.00%
Bank of the Eastern Shore 82,829 22.80
NationsBank, National Association 37,361 10.29
The First National Bank of Maryland 31,300 8.62
Signet Bank 30,909 8.51
Hebron Savings Bank 23,886 6.58
Crestar Bank 20,572 5.66
Provident State Bank of Preston, Maryland 11,421 3.14
THE TALBOT BANK OF EASTON, MARYLAND 1,455 .40
-------- ------
Total $363,247 100.00%
======== ======
</TABLE>
SOURCE: FDIC DATABOOK
SUPERVISION AND REGULATION
The following is a summary of the material regulations and policies applicable
to the Company and its subsidiaries and is not intended to be a comprehensive
discussion. Changes in applicable laws and regulations may have a material
effect on the business of the Company and Bank.
GENERAL
The Company is a bank holding company, registered with the Federal Reserve under
the BHC Act and as such is subject to the supervision, examination and reporting
requirements of the BHC Act and the regulations of the Federal Reserve Board
(the "FRB").
The Bank is a state chartered bank in Maryland and is a member of the Federal
Deposit Insurance Corporation (the "FDIC"). The Bank is subject to the
regulation, supervision, and reporting requirements of the FDIC, as well as the
Maryland Commissioner of Financial Regulation. The Bank is also subject to
numerous state and federal statutes and regulations that affect its business,
activities
4
<PAGE>
REGULATION OF BANK HOLDING COMPANIES
Under the BHC Act, the company may not directly or indirectly acquire the
ownership or control of five percent or more of the voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the FRB. The BHC Act also restricts the types of businesses
and activities in which a bank holding company and its subsidiaries may engage.
Activities are generally limited to those which the FRB finds to be closely
related to, or incidental to, the business of banking.
Subsidiary banks of bank holding companies are subject to certain statutory
limits of the transfer of funds to the holding company or any of its nonbank
subsidiaries, whether in the form of loans or other extensions of credit,
investments in their securities and on the use of their securities as collateral
for loans to any borrower. Such transfers of a subsidiary bank to a holding
company or one of its nonbanking subsidiaries is limited in amount, and such
loans and extensions of credit are required to be collateralized in specified
amounts.
Under FRB policy, the Company is expected to act as a source of strength to its
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. In addition, under the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), 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 (i) the default of a
commonly controlled FDIC-insured depository institution or (ii) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution in danger of default. Accordingly in the event that any insured
subsidiary of the Company causes a loss to the FDIC, other insured subsidiaries
of the Company could be required to compensate the FDIC by reimbursing it for
the estimated amount of such loss. Such cross guaranty liabilities generally.
CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators, that if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines there are two
basic measures: a risk-based measure and a leverage measure.
The risk-based capital guidelines are established to make regulatory capital
requirements more sensitive to risk profiles of banks and bank holding companies
and to account for off balance sheet exposure. Assets and off balance sheet
items are assigned to broad risk categories, each with appropriate weights.
A banking organization's capital is divided into two tiers. "Tier 1", or core
capital, includes common equity, retained earnings, minority interest in the
equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
stock, and a limited amount of cumulative perpetual preferred stock, less
goodwill and certain other intangible assets. "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. "Total Capital" is the sum of Tier 1
and Tier 2 capital. The Tier1component must comprise at least 50% of qualifying
total capital. Regulatory guidelines require a minimum of total capital to
risk-adjusted assets ratio of 8 percent and a minimum Tier 1 capital to risk
weighted assets ratio of 4 percent. Institutions which meet or exceed a Tier 1
ratio of 6 percent, a total capital ratio of 10 percent and a tier 1 leverage
ratio of 5 percent are considered well capitalized by regulatory standards.
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) a recapitalization of the Bank Insurance Fund of
the FDIC (the "BIF") by increasing the FDIC's borrowing authority and providing
for adjustments in its assessment rates; (ii) annual on-site examinations of
federally-insured depository institutions by banking regulators; (iii) publicly
available annual financial condition and management reports for financial
institutions, including
5
<PAGE>
audits by independent accountants; (iv) the establishment of uniform accounting
standards by federal banking agencies; and (v) the establishment of a "prompt
corrective action" system of regulatory supervision and intervention, based on
capitalization levels, with more scrutiny and restrictions placed on
institutions with lower levels of capital.
FDICIA establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system the federal banking
regulators are required to rate supervised institutions on the basis of five
capital categories: "well -capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized;" and to take certain mandatory actions, and are authorized to
take other discretionary actions, with respect to institutions in the three
undercapitalized categories. The severity of the actions will depend upon the
category in which the institution is placed. A depository institution is "well
capitalized" if it has a total risk based capital ratio of 10% of greater, a
Tier 1 risk based capital ratio of 6% of greater, and a leverage ratio of 5% or
greater and is not subject to any order, regulatory agreement, or written
directive to meet and maintain a specific capital level for any capital measure.
An "adequately capitalized" institution is defined as one that has a total risk
based capital ratio of 8% of greater, a Tier 1 risk based capital ratio of 4% or
greater and a leverage ratio of 4% or greater (or 3% or greater in the case of a
bank with a composite CAMEL rating of 1).
FDICIA generally prohibits a depository institution from making any capital
distribution, including the payment of cash dividends, or paying a management
fee 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. For a capital
restoration plan to be acceptable, the depository institution's parent holding
company must guarantee (subject to certain limitations) that the institution
will comply with such capital restoration plan.
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 and requirements to
reduce total assets and stop accepting deposits form correspondent banks.
Critically undercapitalized depository 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.
At December 31, 1997 the Bank had the necessary capital levels to be considered
"well capitalized."
INTERSTATE BANKING LEGISLATION
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 was
enacted into law on September 29, 1994. The law provides that, among other
things, substantially all state law barriers tot he acquisition of banks by out
of state bank holding companies are eliminated effective September 29, 1995. The
law will also permit interstate branching by banks effective 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.
EFFECTS OF MONETARY POLICY
The Company and its bank subsidiary are effected by the ongoing and changing
monetary policy set forth by the FRB. Through its powers the FRB can influence
the supply of bank credit and affect the level of economic activity. Changes in
the discount rate and reserve requirements are among the instruments used to
influence the market.
The monetary policies of the FRB have in the past and will continue to affect
the operating results of all financial institutions including Talbot Bancshares,
Inc., and its subsidiary.
FEDERAL SECURITIES LAW
The Company's common stock is registered with the SEC under Section 12(g) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The
Company is subject to information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
6
<PAGE>
EMPLOYEES
At March 23, 1998 the Company had no employees, the Bank had 76 full-time
employees and 4 part-time employees.
SEASONALITY
Seasonality does not have a material impact on the Company's operations.
STATISTICAL INFORMATION
INVESTMENT PORTFOLIO
December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
1997
-------------------------------
Book Taxable Equivalent
HELD-TO-MATURITY Value Yield*
----- ------------------
<S><C>
U.S. Treasury
Within one year $ 6,942 6.69%
One to five years 3,032 6.21
------- ----
Total 9,974 6.55%
------- ----
U.S. Government Agencies
Within one year 1,986 6.39
One to five years 5,036 6.17
------- ----
Total 7,022 6.24%
------- ----
State and Municipal
Within one year 2,059 7.10%
One to five years 1,858 7.16
Five through ten years 207 6.94
After ten years 827 7.54
------- ----
Total 4,951 7.17%
------- ----
Mortgage Backed
Within one year 1,106 7.46
One to five years 1,096 6.54
------- ----
Total 2,202 7.00%
------- ----
Total held-to-maturity $24,149
=======
AVAILABLE-FOR-SALE
U.S. Treasury
Within one year $ 3,995 6.11%
One to five years 21,342 6.25
Five to ten years 1,053 6.03
------- ----
Total 26,390 6.22%
------- ----
U.S. Government Agencies
Within one year 2,002 5.81%
One to five years 3,018 6.32
Five to ten years 1,996 6.35
------- ----
Total 7,016 6.18%
------- ----
State and Municipal
Within one year 628 5.98%
One to five years 729 6.21
Five to ten years 110 6.58
------- ----
Total 1,468 6.14%
------- ----
Mortgage Backed
Within one year 101 7.52%
One to five years 506 6.48
------- ----
Total 607 6.66%
------- ----
Federal Home Loan Bank Stock 792 N/A
Federal National Mortgage Association
Cumulative Preferred Stock 1,058 N/A
------- ----
Total Available-for-Sale $37,330
=======
</TABLE>
* Yields adjusted to reflect a tax equivalent basis assuming a federal tax rate
of 34%.
7
<PAGE>
MATURITIES OF LOAN PORTFOLIO
December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
Maturing
Maturing After one Maturing
Within But Within After Five
One Year Five Years Years Total
-------------------------------------------------------------
<S><C>
Real Estate:
Construction and land development $ 6,542 $ 2,995 $ - $ 9,537
Commercial, financial and agricultural 16,317 14,916 115 31,348
Mortgage 34,018 98,502 4,673 137,193
Consumer 3,559 3,493 163 7,215
------- -------- ------ --------
Total $60,436 $119,906 $4,951 $185,293
======= ======== ====== ========
</TABLE>
CLASSIFIED BY SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
<TABLE>
<S><C>
Fixed-Interest Rate Loans $43,700 $ 99,047 $1,219 $143,966
Adjustable-Interest Rate Loans 16,736 20,859 3,732 41,327
------- -------- ------ --------
Total $60,436 $119,906 $4,951 $185,293
======= ======== ====== ========
</TABLE>
ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(In Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---------------------------------------------------------
<S><C>
Commercial Financial and Agricultural $ 880 $ 883 $ 768 $ 711 $ 604
Real Estate-Construction 100 71 69 66 48
Real Estate-Mortgage 944 936 984 725 797
Consumer 238 155 138 111 150
Unallocated 376 683 118 255 151
------ ------ ------ ------ ------
$2,538 $2,728 $2,077 $1,868 $1,750
====== ====== ====== ====== ======
</TABLE>
SUMMARY OF SIGNIFICANT RATIOS
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------
<S><C>
Return on average total assets 1.44% 1.30% 1.17%
Return on average total equity 12.52 12.14 11.25
Dividend payout ratio 27.78 25.74 27.53
Total average equity to total average assets ratio 11.93 10.72 10.37
</TABLE>
8
<PAGE>
Other statistical information required in this Item 1 is incorporated by
reference from the information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1997, as follows:
<TABLE>
<CAPTION>
DISCLOSURE REQUIRED BY GUIDE 3 REFERENCE TO 1997 ANNUAL REPORT
- ------------------------------ -------------------------------
<S><C>
(I) Distribution of Assets, Liabilities and
Stockholders' Equity; Interest Rates and
Interest Differentia Analysis of Interest Rates and Interest Rate
Differentials (page 3)
Rate/Volume Analysis (page 4)
Non-performing Assets (page 7)
(II) Investment Portfolio Notes to Financial Statements, Note 4 - Investment in
Debt Securities - page 22
(III) Loan Portfolio Year End Loan Data (page 6)
Non-performing Assets
(page 7)
(IV) Summary of Loan Loss Experience Allowance for Loan Losses (page 7)
(V) Deposits Analysis of Interest Rates and Interest Differentials (page 3)
Deposits (pages 8 and 9)
(VI) Return on Equity and Assets Return on Equity and Assets (page 13)
(VII) Short-Term Borrowings Other Interest Bearing Liabilities (page 9)
Notes to Financial Statements, Note 14 -Line of Credit (page 30)
</TABLE>
Item 2. PROPERTIES
The Company's and the Bank's main office is located at 18 East Dover Street,
Easton, Maryland. A second Easton office is located on Marlboro Road at Tred
Avon Square and the Third Easton office is located on Elliott Road in the
Carlton Business Park. The Saint Michaels office is located on Route 33 at Saint
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 in Saint Michaels
Village. The annual rent 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 pending legal proceeding other than the ordinary routine
litigation incidental to the business to which the Company, the Bank, or its
subsidiaries is party or to which any of their properties is subject. There are
also no material proceedings known to management to which any Director, officer,
or affiliate of the Company, any person holding beneficially in excess of five
(5) percent of the Company's Shares, or any associate of any such Director,
officer or security holder is a party.
9
<PAGE>
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to security holders for vote during the fourth quarter
of 1997. Information required for this Item for Executive Officers of the
Registrant is included in Item 10 -- "Directors and Executive Officers of the
Registrant" which is incorporated herein by reference.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from Annual Report to Stockholders for the year ended
December 31, 1997 under "Managements Discussion and Analysis of Financial
Condition and Results of Operations - Recent Stock Prices and Dividends," page
12, and "Notes to Financial Statements - Regulatory Capital Requirements" on
page 29. The Company has issued and outstanding 1,189,610 shares of common
stock, par value $0.01 per share ("Shares") held by 464 holders of record March
23, 1998.
Item 6. SELECTED FINANCIAL DATA
Incorporated by reference from Annual Report to Stockholders for the year ended
December 31, 1997, page 13.
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, 1997 under "Managements Discussion and Analysis of Financial
Condition and Results of Operations," pages 3 through 12.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Market Risk of the Company's financial instruments
see "Managements Discussion and Analysis of Financial Condition and Results of
Operations - Interest Rate Sensitivity" on pages 10 and 11 of the Annual Report
to Stockholders for the year ended December 31, 1997. The Company's principal
market risk exposure is to interest rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated by reference from the Annual Report to Stockholders for the year
ended December 31, 1997 under "Consolidated Financial Statements and Independent
Auditors' Report" on pages 14 through 34.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A listing of Directors of the Registrant is Incorporated by reference from
Definitive Proxy Statement to Stockholders for the 1998 Annual Meeting under
"Election of Directors," pages 1 through 3.
A listing of Executive Officers of the Registrant is Incorporated by reference
from the Definitive Proxy Statement to Stockholders for the 1998 Annual Meeting
under "Executive Officers," page 10.
Item 11. EXECUTIVE COMPENSATION
Incorporated by reference from the Definitive Proxy Statement to Stockholders
for the 1998 Annual Meeting under "Executive Compensation, Benefit Plans and
Executive Compensation Committee Report," pages 6 through 10.
10
<PAGE>
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the Definitive Proxy Statement to Stockholders
for the 1998 Annual Meeting under "Beneficial Ownership of Common Stock," pages
5 and 6.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Definitive Proxy Statement to Stockholders
for the 1998 Annual Meeting under "Election of Directors" page 3.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1),(2) FINANCIAL STATEMENTS
Consolidated Statements of Income -- Years Ended December 31, 1997,
1996, and 1995
Consolidated Balance Sheets at December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity -- Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -- Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements as of December 31, 1997,
1996 and 1995
Report of Independent Auditors
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization by and between Talbot
Bancshares, Inc. and The Talbot Bank of Easton, Maryland is
incorporated by reference from the Company's Form 8-K, filed with the
Commission on August 25, 1997 (File No. 000-22929)
3.1 Articles of Incorporation of the Company is incorporated by reference
from the Company's form 8-A, filed with the Commission on August 1,
1997 (File No. 000-22929)
3.2 Bylaws of the Company is incorporated by reference from the Company's
Form 8-A, filed with the Commission on August 1, 1997 (File No.
000-22929)
13 1997 Annual Report to Stockholders filed herewith.
21 List of Subsidiaries is incorporated by reference from the Company's
Form 8-K, filed with the Commission on August 25, 1997 (File No.
000-22929)
23 Consent of Independent Auditors filed herewith.
27 Financial Data Schedule is filed electronically herewith via EDGAR
(b) Reports on Form 8-K
None
(c) Exhibits required by Item 601 of Regulation S-K
See the Exhibits described in Item 14(a)(3) above.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 25, 1998.
Talbot Bancshares, Inc.
Date: March 25, 1998 By: /S/ W. Moorhead Vermilye
_________________________
W. Moorhead Vermilye
Date: March 25, 1998 By: /S/ Susan E. Leaverton
_________________________
Susan E. Leaverton, Secretary/Treasurer
(Principal Accounting and Financial Officer)
DIRECTORS
/S/ Herbert L. Andrew, III
_______________________________
Herbert L. Andrew, III
/S/ Jerome M. McConnell
_______________________________
Jerome M. McConnell
_______________________________
Blenda W. Armistead
/S/ Shari L. McCord
_______________________________
Shari L. McCord
/S/ Lloyd L. Beatty, Jr.
_______________________________
Lloyd L. Beatty, Jr.
_______________________________
William H. Myers
/S/ Donald D. Casson
_______________________________
Donald D. Casson
/S/ David L. Pyles
_______________________________
David L. Pyles
/S/ Gary L. Fairbank
_______________________________
Gary L. Fairbank
/S/ Christopher F. Spurry
_______________________________
Christopher F. Spurry
/S/ Ronald N. Fox
_______________________________
Ronald N. Fox
_______________________________
Richard C. Granville
/S/ W. Moorhead Vermilye
_______________________________
W. Moorhead Vermilye
12
[TALBOT BANCSHARES, INC. LOGO]
1997
ANNUAL
REPORT
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Percent
Increase
Years ended December 31, 1997 1996 (Decrease)
- -------------------------------------------------------------------------------------------------------
<S><C>
FOR THE YEAR
Interest income $ 19,672 $ 19,019 3.4%
Interest expense 8,596 8,448 1.8%
Net interest income 11,076 10,571 4.8%
Net income 3,674 3,220 14.1%
Cash dividends 1,010 829 21.8%
- -------------------------------------------------------------------------------------------------------
AVERAGE
Total assets $255,650 $247,384 3.3%
Total deposits 214,298 207,026 3.5%
Total loans 174,865 168,607 3.7%
Stockholders' equity 29,349 26,527 10.6%
- -------------------------------------------------------------------------------------------------------
AT YEAR END
Total assets $267,029 $253,184 5.5%
Total deposits 224,914 215,101 4.6%
Total loans, net of unearned income 185,293 171,701 7.9%
Stockholders' equity 30,972 27,920 10.9%
- -------------------------------------------------------------------------------------------------------
PER SHARE
Diluted net income $ 3.06 $ 2.72 12.5%
Cash dividends .85 .70 21.4%
Book value at year-end 26.04 23.54 10.6%
- -------------------------------------------------------------------------------------------------------
</TABLE>
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 13
CONSOLIDATED FINANCIAL STATEMENTS PAGE 14
INDEPENDENT AUDITORS' REPORT PAGE 34
DIRECTORS AND OFFICERS PAGE 35
DESCRIPTION OF BUSINESS AND EMPLOYEES PAGE 36
PAGE 1
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
LETTER TO SHAREHOLDERS
Dear Shareholder,
Nineteen ninety seven was another year of record earnings for Talbot Bancshares,
Inc. I am pleased to report a 14.1% increase in earnings for the year. Net
income for 1997 totalled $3,674,012 compared to $3,220,317 for 1996. Diluted
earnings per share were $3.06 for 1997 compared to $2.72 one year ago. This
increased profitability resulted in an increase in the Company's return on
average assets to 1.44% and return on stockholders' equity to 12.52% for the
year. Return on average assets and return on average stockholders' equity were
1.30% and 12.14%, respectively for 1996.
Growth in loans and deposits continued in 1997, but at slower rates than we have
experienced in recent years. Total loans and deposits as of December 31, 1997
were $185,293,432 and $224,913,659, respectively. As a percentage loans
increased 7.9% and deposits increased 4.6%. The average yield on earning assets
and rate paid on interest bearing liabilities remained unchanged from 1996 to
1997. The net interest margin increased 5 basis points to 4.58%. Net interest
income increased 4.8% as a result of increased volume of loans and deposits.
Several other factors contributing to the Company's good performance in 1997
were the improvements in asset quality which resulted in a decline in the
necessary provision for loan losses and an increase in noninterest income due to
revised policies relating to the assessment of fees for services and the
addition of new fee generating products. As expected, overhead expense increased
significantly in 1997 due to the first full year of operation of our in-store
branch at the Metro Supermarket in Cambridge. We also added a new full service
ATM in Cambridge and incurred a variety of expenses in connection with the
introduction of new products and services.
The formation of Talbot Bancshares, Inc. during 1997 was the beginning of a year
of exceptional growth in shareholder value. The approval of the two for one
share exchange between The Talbot Bank and Talbot Bancshares, Inc., was the
beginning of a trend which resulted in the price of your stock increasing 78%
for the year. In addition, the Board of Directors voted to increase cash
dividends over 21% resulting in dividends of 85 cents per share being paid for
the year. Capital ratios remain very strong in comparison with regulatory
capital guidelines. At the end of the year our capital to asset ratio was 18.39%
and our Tier 1 capital ratio was 17.13%, well above the regulatory guidelines of
8.0% and 4.0%, respectively.
While we are pleased with our performance in 1997 we remain aware of the need to
continue to identify opportunities for growth and enhanced shareholder value. We
look forward to those challenges again in 1998. On behalf of the Board of
Directors, management and staff we wish to thank you for your continued support
of The Talbot Bank and Talbot Bancshares, Inc.
/s/ W. Moorhead Vermilye
________________________
W. MOORHEAD VERMILYE
President
PAGE 2
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------
OVERVIEW
The Company's net income for 1997 was $3.67 million compared to $3.22 million in
1996 and $2.68 million in 1995. Diluted earnings per share for 1997 were $3.06
compared to $2.72 and $2.27 for 1996 and 1995, respectively. All per share items
have been adjusted to reflect the two for one exchange effective May 1, 1997.
The Company experienced growth in total assets of 5.5% and in total deposits of
4.6% in 1997. Loan growth of 7.9% was the primary component of total asset
growth for the year. The return on average assets increased to 1.44% in 1997
from 1.30% in 1996. In addition, the return on average stockholders' equity
increased to 12.52% in 1997 from 12.14% in 1996.
---------------------
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 Company's earnings. Net interest income for 1997
was $11,076,000 compared to $10,571,000 for 1996 and $9,228,000 for 1995. This
represents an increase of 4.8% and 14.6% for 1997 and 1996, respectively.
The following table sets forth the major components of net interest income, on a
tax equivalent basis, as of December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Earning Assets
Investment Securities:
Taxable $ 53,900 $ 3,189 5.92% $ 54,325 $ 3,086 5.68% $ 59,110 $ 3,121 5.28%
Non-taxable 7,287 443 6.08 6,352 384 6.05 5,172 300 5.80
Loans 174,865 15,681 8.97 168,607 15,287 9.07 151,292 13,787 9.11
Federal Funds Sold 9,590 531 5.54 8,650 463 5.36 5,838 342 5.86
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total earning assets $245,642 $19,844 8.08% $237,934 $19,220 8.08% $221,412 $17,550 7.93%
------- ------- -------
Non-interest earning
assets $ 10,008 $ 9,450 $ 8,747
-------- -------- --------
Total assets $255,650 $247,384 $230,159
======== ======== ========
Interest bearing liabilities:
Demand $ 42,945 $ 1,334 3.11% $ 41,003 $ 1,250 3.05% $ 39,607 $ 1,363 3.44%
Savings 62,908 1,939 3.08 64,570 1,999 3.10 66,328 2,348 3.54
Time 88,326 4,859 5.50 83,226 4,661 5.60 67,206 3,807 5.66
-------- ------- ---- -------- ------- ---- -------- ------- -----
Interest bearing deposits 194,179 $ 8,132 4.19 $188,799 $ 7,910 4.19 173,141 7,518 4.34
Borrowings 10,862 464 4.29 12,675 538 4.25 14,605 689 4.65
-------- ------- ---- -------- ------- ---- -------- ------- -----
Total interest bearing
liabilities $205,041 $ 8,596 4.19% $201,474 $ 8,448 4.19% $187,746 $ 8,207 4.37%
------- ------- -------
Non-interest bearing
liabilities $20,119 $ 19,383 $ 18,549
Stockholders' equity 30,490 26,527 23,864
-------- -------- --------
Total liabilities and
stockholders' equity $255,650 $247,384 $230,159
======== ======== ========
Net interest spread $11,248 3.89% $10,772 3.89% $ 9,343 3.56%
======= ======= =======
Net interest margin 4.58% 4.53% 4.22%
</TABLE>
PAGE 3
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest income on a tax equivalent basis increased $476 thousand or 4.4% in
1997 due to growth in loans. The average balance of earning assets increased
$7.7 million or 3.2% in 1997. Average loans accounted for $6.3 million of this
increase and represented 71% of average earning assets in 1997 compared to 71%
and 68% in 1996 and 1995, respectively.
The overall yield on earning assets remained unchanged at 8.08%. Increases in
the yield on investment securities and Federal funds sold were absorbed by a
slight decline in loan yields. Even though interest rates were stable during
1997, the competition for quality loans resulted in lower overall yields. The
average yield on earning assets increased 13 basis points to 8.08% in 1996
compared to 1995.
Overall interest expense increased due to growth in interest bearing deposits.
The average rate paid on those deposits remained unchanged at 4.19% for 1997 and
1996. The rate paid on interest bearing liabilities decreased 18 basis points to
4.19% in 1996 compared to 1995. The Company's net interest margin for 1997 was
4.58% compared to 4.53% and 4.22% for 1996 and 1995, respectively.
The following Rate/Volume Variance Analysis identifies the portion of the
changes in net interest income which are attributable to changes in volume of
average balances or to changes in the yield on earning assets and rates paid on
interest bearing liabilities.
<TABLE>
<CAPTION>
1997 OVER(UNDER) 1996 1996 over(under) 1995
-------------------------- ------------------------------
TOTAL CAUSED BY Total Caused By
--------- ---------
(dollars in thousands) VARIANCE RATE VOLUME Variance Rate Volume
- -----------------------------------------------------------------------------------------------------------------
<S><C>
Interest income from earning assets:
Federal funds sold $ 68 $ 15 $ 53 $ 122 $ (29) $ 151
Taxable investment securities 165 130 35 (35) 235 (270)
Non-taxable investment securities (4) -- (4) 84 13 71
Loans 395 (166) 561 1,500 (70) 1,570
- -----------------------------------------------------------------------------------------------------------------
Total interest income 624 (21) 645 1,671 149 1,522
- -----------------------------------------------------------------------------------------------------------------
Interest expense on deposits and borrowed funds:
Interest bearing demand 84 32 52 (113) (178) 65
Savings deposits (60) (8) (52) (349) (295) (54)
Time deposits 198 (83) 281 854 (24) 878
Securities sold under
agreements to repurchase (74) 5 (79) (147) (68) (79)
Short term borrowings -- -- -- (4) -- (4)
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 148 (54) 202 241 (565) 806
- -----------------------------------------------------------------------------------------------------------------
Net interest income $476 $ 33 $443 $1,430 $ 714 $ 716
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
PROVISION FOR CREDIT LOSSES
The provision for credit losses is the amount necessary to maintain the
allowance for credit losses at a level sufficient to absorb potential losses in
the loan portfolio. Management's analysis of the adequacy of the allowance for
credit losses is based on a risk rating system which is updated quarterly.
Reviews of individual problem loans or loan relationships are performed to
assess the potential loss exposure to the Company and a specific reserve is
established. Past credit loss experience and local economic trends are
considered in determining a loss percentage inherent in smaller balance loans
and homogenous loan pools.
The provision for credit losses was $225,000 in 1997 compared to $955,000 in
1996 and $540,000 in 1995. Net charge-offs in 1997 totalled $415,400 compared to
$303,995 in 1996 and $330,350 in 1995. Net charge-offs as a percentage of
average loans outstanding increased to .24% in 1997 compared to .18% and .22% in
1996 and 1995, respectively. Past due loans at December 31, 1997 included
$1,024,000 of mortgages which were well secured and in the process of
collection. Management feels the allowance for credit losses of $2,537,920 is
adequate at December 31, 1997.
PAGE 4
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 increased approximately $139,000
or 24% in 1997 from the previous year. Changes in the Company's policies
relating to the assessment of service charges resulted in significant increases
for 1997. Gains on sales of securities totaled $5,519 in 1997 compared to losses
of $22,732 and gains of $22,070 in 1996 and 1995, respectively. Earnings of the
Company's unconsolidated subsidiary, Eastern Shore Mortgage Corporation improved
in 1997 as the result of a reorganization of the Company. In 1997 the bank
recorded a loss on it's investment in Eastern Shore Mortgage Corporation of
$8,681 compared to a loss of $32,699 in 1996 and $7,050 in 1995.
<TABLE>
<CAPTION>
Years Ended Change from Prior Year
-------------------------- ----------------------------------------
1997/96 1996/95
------------------ -----------------
1997 1996 1995 AMOUNT PERCENT Amount Percent
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Service charges on deposit accounts $536,801 $504,746 $485,514 $ 32,055 6.4% $ 19,232 4.0%
Other service charges and fees 120,700 77,072 79,767 43,628 56.6% (2,695) (3.4)
Gain on sale of securities 5,519 (22,732) 22,070 28,251 124.3% (44,802) (203.0)
Income(Loss) from unconsolidated
subsidiary (8,681) (32,700) (7,050) 24,019 73.51% (25,650) (363.8)
Other noninterest income 59,023 47,827 36,700 11,196 23.4% 11,127 30.3
- ------------------------------------------------------------------------------------------------------------------
Total $713,362 $574,213 $617,001 $139,149 24.2% $(42,788) (6.9)%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST EXPENSES
Total noninterest expense increased approximately $610,000 or 11.7% in 1997. The
primary factor contributing to this increase was the full year operating
expenses associated with the Metro Market branch which opened in September 1996.
As a percentage salaries and employee benefits increased 8.7%. Without the
expense of the Metro branch the increase was approximately 5.5%. The development
and introduction of new products such as Debit and Credit Cards, Telephone
Banking and PC Banking also contributed to increased overhead. In 1996, the Bank
experienced a decline in FDIC insurance premiums of $225,000. During 1997,
premiums increased $25,000.
<TABLE>
<CAPTION>
Years Ended Change from Prior Year
-------------------------- ----------------------------------------
1997/96 1996/95
------------------ -----------------
1997 1996 1995 AMOUNT PERCENT Amount Percent
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Salaries and Employee benefits $3,381,687 $3,111,577 $2,880,724 $270,110 8.7% $ 230,853 8.0%
Occupancy expense 396,753 332,039 310,275 64,714 19.5% 21,764 7.0
Furniture and equipment expense 285,208 280,133 257,766 5,075 1.8% 22,367 8.7
Data processing 320,430 272,899 266,376 47,531 17.4% 6,523 2.4
FDIC Insurance 26,408 1,500 226,447 24,908 -- (224,947) (99.3)
Other operating expenses 1,417,938 1,220,629 1,141,910 197,309 16.2% 78,719 6.9
- ------------------------------------------------------------------------------------------------------------------
Total $5,828,424 $5,218,777 $5,083,498 $609,647 11.7% $ 135,279 2.7%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
PAGE 5
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES
In 1997, 1996 and 1995 the Bank's effective tax rates on earnings were 35.9%,
35.2% and 36.4%, respectively. These effective rates differ from statutory rates
due to levels of tax-exempt income and non-deductibility of some interest
expense.
-------------------
FINANCIAL CONDITION
Asset and liability composition, asset quality, capital resources, liquidity and
sensitivity to changes in interest rates are all factors which are used to
measure the Company's financial condition.
ASSETS
Asset growth slowed in 1997 when compared to growth rates experienced in 1996
and consisted primarily of loan growth. Total assets increased 5.5% to
$267,029,000 at December 31, 1997 compared to an increase of 8.0% for 1996.
Average total assets increased 3.3% for 1997 compared to an increase of 7.5% for
1996. The loan portfolio represents 71% of earning assets and is the primary
source of income for the Company. Funding for loans is primarily provided by
core deposits and short term borrowings.
The following table sets forth the average balance of the components of average
earning assets as a percentage of total average earning assets as of December
31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
Investment Securities 24.91% 25.50% 29.03% 30.61% 25.31%
Loans 71.18 70.86 68.33 65.57 69.26
Federal funds sold 3.91 3.64 2.64 3.82 5.43
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
</TABLE>
LOANS
Average loans increased 3.7% in 1997 compared to 11.4% growth experienced in
1996. Total loans, net of unearned income totaled $185,293,000 on December 31,
1997 an increase of $13,593,000 or 7.9% when compared to 1996.
Real estate construction loans increased $2,729,000 totalling $9,537,000 at
December 31, 1997. Mortgage loans increased $14,470,000 or 11.8% during 1997.
These increases were attributable primarily to increased activity in the local
real estate market. Because the Company's loans are predominantly real estate
secured weaknesses in the local real estate market may have an adverse effect on
collateral values. The Company does not have any concentrations of loans in any
particular industry, nor does it engage in foreign lending activities.
The table below sets forth the composition of the loan portfolio at December 31.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S><C>
Commercial, financial and agricultural $ 31,348 $ 32,662 $ 28,054 $ 22,034 $ 27,339
Real Estate - Construction 9,537 6,808 6,631 3,890 4,550
Real Estate - Mortgage 137,193 122,723 118,798 105,110 101,640
Consumer 7,215 9,508 8,801 12,191 14,486
-------- -------- -------- -------- --------
Total Loans $185,293 $171,701 $162,284 $143,225 $148,015
======== ======== ======== ======== ========
</TABLE>
PAGE 6
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company maintains an allowance for credit losses based upon its analysis of
non-performing and problem loans, as well as historical credit loss experience
and local economic trends. Total non-performing assets of the Company decreased
and represented .75% of total loans, net of unearned income at December 31, 1997
compared to 1.08% one year earlier. Past due loans increased at December 31,
1997, however, they consisted primarily of well secured real estate loans.
The following table summarizes the past due and non-performing assets of the
Company as of December 31.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S><C>
Non-performing assets:
Non-accrual loans $1,282 $1,551 $2,539
Other real estate and other assets owned 114 299 147
------ ------ ------
Total non-performing assets 1,396 1,850 2,686
Past due loans 1,422 654 356
------ ------ ------
Total non-performing assets and past due loans $2,818 $2,504 $3,042
====== ====== ======
Non-performing assets to total loans,
net of unearned income, at period end .75% 1.08% 1.68%
Non-performing assets and past due loans,
to total loans, net of unearned income, at period end 1.52% 1.46% 1.90%
</TABLE>
The allowance for credit losses as a percentage of average loans was 1.45% at
December 31, 1997 compared to 1.62% at December 31, 1996 and 1.37% at December
31, 1995. During 1996 the Company increased its provision for credit losses due
to the growth in loans and other relevant factors. Management feels the
allowance is adequate at December 31, 1997.
The following table sets forth a summary of the Company's loan loss experience
for the years ended December 31.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S><C>
Balance, beginning of year $ 2,728 $ 2,077 $ 1,868 $ 1,750 $ 1,525
-------- -------- -------- -------- --------
Recoveries:
Real estate loans 5 11 5 33 9
Installment loans 34 48 34 57 44
Commercial and other 20 48 44 69 118
-------- -------- -------- -------- --------
59 107 83 159 171
-------- -------- -------- -------- --------
Provision 225 955 540 525 2,911
-------- -------- -------- -------- --------
Loans charged-off:
Real estate loans (137) (107) (120) (169) (383)
Installment loans (69) (67) (58) (104) (118)
Commercial and other (268) (237) (236) (293) (2,356)
-------- -------- -------- -------- --------
(474) (411) (414) (566) (2,857)
-------- -------- -------- -------- --------
Balance, end of year $ 2,538 $ 2,728 $ 2,077 $ 1,868 $ 1,750
-------- -------- -------- -------- --------
Average loans outstanding $174,865 $168,607 $151,292 $144,039 $145,082
======== ======== ======== ======== ========
Percentage of net charge-offs to average
loans outstanding during the year .24% .18% .22% .28% 1.85%
Percentage of allowance for loan losses
at year-end to average loans 1.45% 1.62% 1.37% 1.30% 1.21%
</TABLE>
PAGE 7
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INVESTMENT SECURITIES
The investment portfolio is structured to provide liquidity for the Company and
also plays an important role in the overall management of interest rate risk. In
accordance with Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, the securities in the
investment portfolio are classified as Held to Maturity or Available for Sale.
Investment securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. The Company has the intent
and ability to hold such securities until maturity. Investment securities
available for sale are stated at estimated fair value based on quoted market
prices. They represent securities which may be sold as part of the Company's
asset/liability strategy or which may be sold in response to changing interest
rates. Net unrealized holding gains and losses on these securities are reported
as a separate component of stockholders' equity, net of related income taxes. At
December 31, 1997 the Company had classified 61% of the portfolio as available
for sale and 39% as held to maturity compared to 51% and 49% one year ago. The
percentage of securities designated as available for sale have increased since
1996 to support the anticipated growth and liquidity needs of the Company.
The average balance of the investment portfolio increased $510,000 in 1997 after
declining $3,605,000 during 1996. Growth in loans during 1997 was funded through
increased deposits, while in 1996 loan growth exceeded deposit growth and
maturities in the investment portfolio were used to fund loans. During 1997
maturities of mortgage backed securities and collateralized mortgage obligations
were reinvested in U.S. Government agency securities to provide a higher average
yield to the Company without affecting the overall safety of the portfolio. The
Company does not generally invest in structured notes or other derivative
securities.
FEDERAL FUNDS SOLD
The Company invests excess cash balances in overnight investments, or federal
funds sold, with its correspondent banks. Federal funds sold are maintained at a
level necessary to meet the immediate liquidity needs of the Company. The
average balance of federal funds sold increased $940,000 to $9,590,000 for 1997
representing a 10.9% increase over 1996.
DEPOSITS
The Company utilizes core deposits to fund its earning assets. At December 31,
1997 and 1996 deposits provided funding for 87% of average earning assets. For
1995 the ratio was 86%. Average deposits increased 3.5% in 1997 and 8.6% in
1996. Rates paid on interest-bearing liabilities remained essentially unchanged
from 1996 to 1997 resulting in an overall cost of funds for both years of 4.19%.
The Company lowered rates paid on interest-bearing deposits in 1996 resulting in
a decline in the cost of funds of 18 basis points from 4.37% to 4.19%. The
overall mix of deposits did not change significantly from 1996 to 1997. Average
demand deposits increased 10.4% in 1997 compared to 4.2% in 1996. Average NOW
and SuperNOW deposits increased 4.7% compared to 3.5% in 1996. Demand deposits
and interest-bearing transaction accounts comprised 29.4% and 28.6% of total
average deposits for 1997 and 1996 respectively.
The following table sets forth the average balances of deposits and the
percentage of each category to total deposits for the years ended December 31.
<TABLE>
<CAPTION>
Average Balances
-----------------------------------------------------------------------
1997 1996 1995
--------------------- -------------------- -------------------
(Dollars in thousands)
<S><C>
Non interest-bearing demand $ 20,119 9.39% $ 18,227 8.80% $ 17,487 9.17%
Interest-bearing deposits
NOW and SuperNOW 42,945 20.04% 41,003 19.81% 39,607 20.78%
Savings 12,931 6.03% 12,874 6.22% 13,870 7.27%
Money Management 49,977 23.32% 51,696 24.97% 52,458 27.52%
CD's and other Time deposits
less than $100,000 60,508 28.24% 57,014 27.54% 50,605 26.55%
CD's $100,000 or more 27,818 12.98% 26,212 12.66% 16,601 8.71%
-------- ------ -------- ------ -------- ------
$214,298 100.00% $207,026 100.00% $190,628 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
PAGE 8
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The average balance of certificates of deposit with balances of $100,000 or more
increased $1,606,000 or 6.1% in 1997 compared to an increase of $9,611,000 or
57.9% in 1996. The growth in 1996 was primarily attributable to growth in the
deposits of counties and municipalities in the Company's market area. The
Company does not accept brokered deposits, nor does it rely on purchased
deposits as a funding source for loans.
The following table sets forth the maturity ranges of certificates of deposit
with balances of $100,000 or more on December 31, 1997 (in thousands):
Three months or less $14,772
Three through six months 3,857
Six through twelve months 5,622
Over twelve months 1,512
-------
$25,763
=======
OTHER INTEREST-BEARING LIABILITIES
Short term borrowings consist primarily of securities sold under agreement to
repurchase. These short term obligations are issued in conjunction with cash
management services for deposit customers. The average balance of these
borrowings decreased $1,813,000 or 14.3% in 1997 and $1,930,000 or 13.2% in
1996. From time to time in order to meet short term liquidity needs the Company
may borrow from a correspondent bank under a federal funds line of credit
arrangement. There were no borrowings under this arrangement during 1997 or
1996.
The following table sets forth the Company's position with respect to short term
borrowings:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- ----------------
INTEREST Interest Interest
BALANCE RATE Balance Rate Balance Rate
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S><C>
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD
UNDER AGREEMENTS TO REPURCHASE:
Outstanding at year end $10,264 4.41% $ 9,268 5.03% $12,946 4.36%
Average outstanding for the year 10,862 4.29 12,675 4.25 14,605 4.72
Maximum outstanding at any month end 14,301 -- 16,724 -- 17,556 --
</TABLE>
The Company does not have any long term debt.
-----------------
CAPITAL RESOURCES
The Company continues to maintain capital at levels in excess of those required
by the federal banking agencies. Total stockholders' equity was $30,972,000 at
December 31, 1997, 10.9% higher than the previous year. Average stockholders'
equity was $29,349,000 for 1997, an increase of 10.6% compared to 1996. The
Board of Directors increased dividends paid to shareholders 21% during 1997
without any negative impact on capital ratios.
Statement of Financial Accounting Standards No. 115 requires the Bank to record
unrealized holding gains (losses) on investment securities available-for-sale as
a separate component of stockholder's equity. As of December 31, 1997, the
portion of the Bank's investment portfolio designated as "available-for-sale"
had unrealized holding gains of $131,231, net of tax. Management has established
policies to monitor the investment portfolio in order to prevent any material
negative affect on capital.
PAGE 9
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table compares the Company's capital ratios to the regulatory
requirements:
<TABLE>
<CAPTION>
Regulatory
December 31, 1997 1996 Requirements
- ---------------------------------------------------------------------------------------------------------------------------
($ in thousands)
<S><C>
Tier 1 capital $ 30,841 $ 28,063
Tier 2 capital 2,253 1,939
- ---------------------------------------------------------------------------------------------------------------------------
Total capital, less deductions $ 33,094 $ 30,002
Risk-adjusted assets $179,993 $169,043
Risk-based capital ratios:
Tier 1 17.13% 16.60% 4.0%
Total capital 18.39% 17.75% 8.0%
- ---------------------------------------------------------------------------------------------------------------------------
Total capital $ 30,841 $ 28,063
Total adjusted assets $266,271 $254,267
Leverage capital ratio 11.58% 11.04% 4.0%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Management knows of no trends or demands, commitments, events or uncertainties
which may materially affect capital.
---------
LIQUIDITY
Liquidity describes the ability of the Company 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 customers and to
fund current and planned expenditures. Liquidity is derived 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 Company 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. There are no known trends or demands,
commitments, events or uncertainties that management is aware of which will
materially affect the Company's ability to maintain liquidity at satisfactory
levels.
-------------------------
INTEREST RATE SENSITIVITY
The earnings of the Company are dependent on the net interest income of the
Bank. 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. The Board of
Directors has adopted an asset liability management policy which requires
management and the asset liability committee to closely monitor the Bank's
exposure to changes in interest rates.
Management's primary tool for monitoring interest rate sensitivity is "gap"
analysis which summarizes the amount of interest sensitive assets and
liabilities which will reprice over various time intervals. The difference
between the volume of assets and liabilities repricing in each interval is the
interest sensitivity "gap". "Positive gap" occurs when more assets reprice in a
given time interval, while "negative gap" occurs when more liabili-
PAGE 10
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ties reprice. The Company had a positive gap position within the one year
repricing interval. Management has classified money management, savings and NOW
accounts primarily in the over 1 year interval because they have not
historically repriced in accordance with general changes in interest rates. The
following table summarizes the Company's interest sensitivity at December 31,
1997 based upon contractual maturity if fixed rate or earliest repricing date if
variable rate.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
3 Months Total Over 1 Year
3 Months Through Within and not
December 31, 1997 Immediate or Less 12 Months One Year Classified Total
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S><C>
EARNING ASSETS:
Loans - net of unearned income $41,014 $ 15,593 $ 28,140 $ 84,747 $100,546 $185,293
Investment securities -- 2,543 13,638 16,181 45,297 61,478
Federal Funds Sold 8,057 -- -- 8,057 -- 8,057
- ---------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 49,071 18,136 41,778 108,985 145,843 254,828
- ---------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Money management, Savings and NOW's -- -- 11,574 11,574 102,088 113,662
Certificates of deposit $100,000 and over -- 14,772 9,479 24,251 1,512 25,763
All other time deposits 224 21,148 35,429 56,801 4,992 61,793
Short-term borrowings 10,264 -- -- 10,264 -- 10,264
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 10,488 35,920 56,482 102,890 108,592 211,482
- ---------------------------------------------------------------------------------------------------------------------
NET NONINTEREST BEARING LIABILITIES AND
OTHERFUNDINGSOURCES -- -- -- -- 43,346 43,346
- ---------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY GAP
ASSET SENSITIVE (LIABILITY SENSITIVE) $38,583 $(17,784) $(14,704) $ 6,095 $ (6,095) $ --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to gap analysis, the Bank utilizes a simulation model to quantify
the effect a hypothetical plus or minus 200 basis point change in rates would
have on net interest income and the fair value of capital. The model takes into
consideration the effect of call features of investments as well as prepayments
of loans in periods of declining rates. When actual changes in interest rates
occur the changes in interest earning assets and interest bearing liabilities
may differ from the assumptions used in the model. As of December 31, 1997 the
model produced the following sensitivity profile for net interest income and the
fair value of capital:
<TABLE>
<CAPTION>
Immediate Change in Rates
-------------------------------------------------------
+200 Basis Points -200 Basis Points Policy Limit
- -----------------------------------------------------------------------------------------------------------------
<S><C>
% Change in Net Interest Income 9.95% (11.76)% + 25%
-
% Change in Fair Value of Capital 1.46% (5.03)% + 15%
-
</TABLE>
PAGE 11
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000
Since the earliest days of electronic computers programmers have used two digits
to represent the year in date fields. The year 2000 problem exists because a two
digit representation of the year will be interpreted in many applications to be
the year 1900, not 2000, unless date or program logic is modified. Left
uncorrected the improper recognition of dates in computer applications would
result in disruptions to operations, miscalculations and possible system
failures.
The Company began preparing for the year 2000 in 1996 with the formation of a
special Y2K committee. Management recently completed its formal Year 2000
Compliance Plan which calls for all operating systems to be Year 2000 compliant
by December 31, 1998. The committee members each have responsibility for
different aspects of the Year 2000 ranging from in-house systems, to service
bureaus, vendors, customers and suppliers. The company utilizes a service bureau
for the processing of customer accounts and transactions, and other accounting
records. The service bureau has provided the company with a copy of its Year
2000 compliance plan which has been reviewed and is incorporated in the
Company's plan. The largest cost for Year 2000 compliance will consist of
computer hardware and software costs. These costs will be capitalized and
expensed over their useful lives in accordance with Company policy. Personnel
costs associated with the Year 2000 are being expensed as incurred. The cost of
Year 2000 compliance is not expected to have a material impact on the Company's
results of operations.
---------------------------------
RECENT STOCK PRICES AND DIVIDENDS
The Company's stock is quoted on the OTC Bulletin Board (OTCBB) under the symbol
TABS and is traded infrequently. Price information listed on the OTCBB is based
upon the participation of market makers for the Company's stock. The following
table indicates cash dividends paid per share for each quarter of 1997, 1996 and
1995 and the ranges of representative sales prices for the stated periods, based
on actual transfers recorded by the transfer agent.
<TABLE>
<CAPTION>
1997 1996 1995
Price Range Dividends Price Range Dividends Price Range Dividends
High Low Paid High Low Paid High Low Paid
- -----------------------------------------------------------------------------------------------------------------
<S><C>
First Quarter $26.00 - 25.00 $.15 $22.50 - 22.00 $.125 $20.00 - 19.00 $ .10
Second Quarter 33.75 - 27.25 .15 23.00 - 22.00 .125 20.00 - 19.00 .125
Third Quarter 40.00 - 40.00 .15 25.00 - 23.50 .125 21.00 - 19.50 .125
---- ----- -----
Fourth Quarter 44.50 - 40.00 .40 25.00 - 24.50 .325 22.50 - 20.00 .275
==== ===== =====
$.85 $ .70 $.625
</TABLE>
PAGE 12
<PAGE>
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for the five
years ended December 31, 1997 and is qualified in its entirety by the detailed
information and financial statements, including notes thereto, included
elsewhere or incorporated by reference in this annual report. This data should
be read in conjunction with the financial statements and related notes thereto,
included elsewhere in this annual report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
($ in thousands, except per share data)
<S><C>
SUMMARY OF OPERATING RESULTS:
Total interest income $ 19,672 $ 19,019 $ 17,435 $ 15,452 $ 14,781
Total interest expense 8,596 8,448 8,207 7,178 6,911
---------- ---------- ---------- ---------- ----------
Net interest income 11,076 10,571 9,228 8,274 7,870
Provision for credit losses 225 955 540 525 2,911
---------- ---------- ---------- ---------- ----------
Net interest income after provision for credit losses 10,851 9,616 8,688 7,749 4,959
Noninterest income 713 574 617 633 982
Noninterest expense 5,828 5,219 5,083 4,887 4,540
---------- ---------- ---------- ---------- ----------
Income before income taxes 5,736 4,971 4,222 3,495 1,401
Provision for income taxes 2,062 1,751 1,538 1,232 483
---------- ---------- ---------- ---------- ----------
NET INCOME $ 3,674 $ 3,220 $ 2,684 $ 2,263 $ 918
========== ========== ========== ========== ==========
PER SHARE DATA:
Diluted Net income $ 3.06 $ 2.72 $ 2.27 $ 1.93 $.79
Dividends paid .85 .70 .625 .50 .475
Book value at end of period 26.04 23.54 21.32 18.86 18.60
Weighted average common shares(1) 1,199,130 1,185,410 1,180,154 1,175,958 1,168,002
OTHER DATA (AT YEAR END):
Total assets $ 267,029 $ 253,184 $ 234,406 $ 231,700 $ 226,622
Total deposits 224,914 215,101 195,447 193,364 199,143
Total loans, net of unearned income
and allowance for credit losses 182,756 168,972 160,207 141,358 146,265
Total stockholders' equity 30,972 27,920 25,193 22,204 21,798
RETURN ON EQUITY AND ASSETS:
Return on average total assets 1.44% 1.30% 1.17% .99% .46%
Return on average stockholders' equity 12.52% 12.14% 11.25% 10.32% 4.18%
Average stockholders' equity to average total assets 11.93% 10.72% 10.37% 9.59% 9.99%
</TABLE>
(1) The weighted average common shares includes the effect of dilution of stock
options outstanding at period end.
PAGE 13
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S><C>
ASSETS
Cash and due from banks (Note 3) $ 8,108,370 $ 7,013,605
Federal funds sold 8,056,873 7,572,840
Investments in debt securities: (Notes 1 and 4)
Available for sale - at fair value 37,329,801 32,201,161
Held to maturity - at amortized cost - fair value of
$24,256,659 (1997) and $30,743,571 (1996) 24,148,612 30,608,360
Loans, less allowance for credit losses (1997) $2,537,920
(1996) $2,728,320 (Note 5) 182,755,512 168,972,240
Premises and equipment (Notes 1 and 6) 3,144,436 3,187,665
Accrued interest receivable on loans and investment securities 1,948,608 1,828,130
Deferred income tax benefits (Notes 1 and 12) 455,070 736,619
Other real estate (Note 1) 113,579 298,513
Other assets (Notes 7 and 11) 968,278 764,873
------------- ------------
Total assets $267,029,139 $253,184,006
============ ============
LIABILITIES
Deposits: (Notes 4 and 8)
Noninterest-bearing demand $ 23,695,553 $ 22,140,586
NOW and Super NOW 51,159,113 43,038,382
Certificates of deposit, $100,000 or more 25,762,804 28,351,993
Other time and savings 124,296,189 121,570,479
------------- ------------
224,913,659 215,101,440
Securities sold under agreements to repurchase (Note 4) 10,263,528 9,267,693
Accrued interest payable on deposits 388,199 393,089
Other liabilities (Note 9) 492,139 501,779
------------- ------------
Total liabilities 236,057,525 225,264,001
------------- ------------
COMMITMENTS (Notes 6 and 9)
STOCKHOLDERS' EQUITY (Notes 9, 10 and 13)
Common stock, par value $.01, authorized 25,000,000 shares;
issued and outstanding (1997) 1,189,610 shares;
(1996) 1,186,242 shares 11,896 11,862
Surplus 12,548,111 12,435,292
Retained earnings 18,280,376 15,616,264
Net unrealized holding gains(losses) on securities
available for sale (Notes 1 and 4) 131,231 (143,413)
------------- ------------
Total stockholders' equity 30,971,614 27,920,005
------------- ------------
Total liabilities and stockholders' equity $267,029,139 $253,184,006
============ ============
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
PAGE 14
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S><C>
INTEREST INCOME
Loans, including fees (Notes 1 and 5) $15,659,584 $15,215,968 $13,774,563
Interest and dividends on investment securities
Taxable 3,189,376 3,085,546 3,120,445
Tax-exempt 292,467 253,733 198,047
Federal funds sold 530,721 463,549 341,966
----------- ----------- -----------
Total interest income 19,672,148 19,018,796 17,435,021
----------- ----------- -----------
INTEREST EXPENSE
NOW and Super NOW accounts 1,333,672 1,249,532 1,363,038
Certificates of deposit, $100,000 or more 1,463,450 1,388,908 916,659
Other time and savings 5,334,401 5,271,092 5,237,936
Securities sold under agreements to repurchase 464,496 538,199 688,960
----------- ----------- -----------
Total interest expense 8,596,019 8,447,731 8,206,593
----------- ----------- -----------
NET INTEREST INCOME 11,076,129 10,571,065 9,228,428
PROVISION FOR CREDIT LOSSES (Notes 1 and 5) 225,000 955,000 540,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 10,851,129 9,616,065 8,688,428
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 536,801 504,746 485,514
Other service charges, commissions and fees 120,700 77,072 79,767
Gain (loss) on sale of securities (Note 4) 5,519 (22,732) 22,070
Other operating income, net (Note 7) 50,342 15,127 29,650
----------- ----------- -----------
713,362 574,213 617,001
----------- ----------- -----------
NONINTEREST EXPENSES
Salaries and wages 2,490,013 2,313,247 2,126,071
Employee benefits (Notes 9, 10 and 11) 891,674 798,330 754,653
Occupancy expense (Note 6) 396,753 332,039 310,275
Furniture and equipment expense 285,208 280,133 257,766
Data processing 320,430 272,899 266,376
Other operating expenses 1,444,346 1,222,129 1,368,357
----------- ----------- -----------
5,828,424 5,218,777 5,083,498
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,736,067 4,971,501 4,221,931
Federal and State income taxes (Note 12) 2,062,055 1,751,184 1,537,586
----------- ----------- -----------
NET INCOME $ 3,674,012 $ 3,220,317 $ 2,684,345
=========== =========== ===========
Basic earnings per common share (Note 1) $ 3.09 $ 2.72 $ 2.28
=========== =========== ===========
Diluted earnings per common share $ 3.06 $ 2.72 $ 2.27
=========== =========== ===========
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
PAGE 15
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Holding Gains
(Losses)
on Debt
Securities
Common Retained Available-
Stock Surplus Earnings for Sale
------ ------- -------- -------------
<S><C>
Balances, January 1, 1995 $ 11,772 $12,236,808 $11,290,673 $(1,335,018)
4,568 shares issued under 401(k) plan 46 93,944 -- --
Net income -- -- 2,684,345 --
Cash dividends paid, $.625 per share -- -- (737,036) --
Change, net of income taxes, in unrealized
losses on securities available for sale -- -- -- 961,274
Adjustment related to Treasury stock purchase
of unconsolidated subsidiary -- -- (13,353) --
------- ----------- ----------- ---------
Balances, December 31, 1995 11,818 12,330,752 13,224,629 (373,744)
4,092 shares issued under 401(k) plan 40 96,744 -- --
Exercise of stock options 4 7,796 -- --
Net income -- -- 3,220,317 --
Cash dividends paid, $.70 per share -- -- (828,682) --
Change, net of income taxes, in unrealized
losses on securities available for sale -- -- -- 230,331
------- ----------- ----------- ---------
Balances, December 31, 1996 11,862 12,435,292 15,616,264 (143,413)
2,968 shares issued under 401(k) plan 30 105,023 -- --
Exercise of stock options 4 7,796 -- --
Net income -- -- 3,674,012 --
Cash dividends paid, $.85 per share -- -- (1,009,900) --
Change, net of income taxes, in unrealized
gains on securities available for sale -- -- -- 274,644
------- ----------- ----------- ---------
Balances, December 31, 1997 $11,896 $12,548,111 $18,280,376 $ 131,231
======= =========== =========== =========
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
PAGE 16
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,674,012 $ 3,220,317 $ 2,684,345
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 453,830 472,441 278,967
Discount accretion on debt securities (119,149) (88,246) 9,678
Discount accretion on matured debt securities 79,100 30,815 218,133
(Gain) loss on sale of securities (5,519) 22,732 (22,070)
Provision for credit losses, net (190,400) 651,005 209,650
Deferred income taxes 108,745 (92,784) (107,065)
Loss on disposal of premises and equipment (15) 6,482 3,385
Loss on other real estate owned 19,061 13,500 --
Net changes in:
Accrued interest receivable (120,478) (74,152) 191,833
Other assets (143,405) (132,464) (99,280)
Accrued interest payable on deposits (4,890) 34,199 82,109
Other liabilities (9,640) 41,836 (196,651)
------------ ------------ ------------
Net cash provided by operating activities 3,741,252 4,105,681 3,253,034
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 5,954,000 4,976,911 9,008,719
Proceeds from maturities and principal payments
of securities available for sale 5,981,895 10,682,736 11,707,931
Purchases of securities available for sale (16,911,099) (17,056,224) (15,583,542)
Proceeds from maturities and principal payments
of securities held to maturity 8,329,268 10,841,694 9,106,982
Purchases of securities held to maturity (1,709,507) (11,153,089) (489,498)
Net increase in loans (14,823,887) (11,843,709) (19,068,969)
Purchase of loans (700,000) (198,000) (199,613)
Proceeds from sale of loans 1,728,508 2,460,604 342,979
Purchase of premises and equipment (251,019) (582,088) (247,480)
Redemption of stockholder in unconsolidated subsidiary -- -- (13,353)
Proceeds from sale of other real estate owned 308,380 -- --
Proceeds from sale of premises and equipment 20,000 -- 26,600
------------ ------------ ------------
Net cash used in investing activities (12,073,461) (11,871,165) (5,409,244)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand, NOW,
money market, and savings deposits 8,153,158 9,923,185 (14,529,451)
Net increase in certificates of deposit 1,659,061 9,731,264 16,612,648
Net (decrease) increase in securities sold
under agreement to repurchase 995,835 (3,678,554) (2,252,625)
Proceeds from issuance of common stock 112,853 104,584 93,990
Dividends paid (1,009,900) (828,682) (737,036)
------------ ------------ ------------
Net cash provided (used) by financing activities 9,911,007 15,251,797 (812,474)
------------ ------------ ------------
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
PAGE 17
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S><C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,578,798 7,486,313 (2,968,684)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 14,586,445 7,100,132 10,068,816
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $16,165,243 $14,586,445 $ 7,100,132
=========== =========== ===========
Supplemental cash flows information:
Interest paid $ 8,600,909 $ 8,413,532 $ 8,124,484
=========== =========== ===========
Income taxes paid $ 1,956,219 $ 1,830,877 $ 1,885,326
=========== =========== ===========
Transfers from loans to other real estate owned $ 202,507 $ 165,000 $ --
=========== =========== ===========
</TABLE>
The notes to consolidated financial statements are an
integral part of these statements.
PAGE 18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Talbot Bancshares,
Inc. (the "Company") and its subsidiary, The Talbot Bank of Easton, Maryland
(the "Bank") with all significant intercompany transactions eliminated. The
investment in subsidiary is recorded on the Company's books on the basis of it's
equity in the net assets of the subsidiary. The accounting and reporting
policies of the Company 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 1997.
NATURE OF OPERATIONS
The Company, through its bank subsidiary, provides commercial banking services
from its locations in Talbot and Dorchester 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 Company 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 on loans is accrued 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 Company 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.
PAGE 19
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
LONG-LIVED ASSETS
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.
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 Company.
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.
FINANCIAL ASSETS AND LIABILITIES
On January 1, 1997, the Company 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 did not have a material impact on the financial position of the
Company.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers cash and due
from banks, and federal funds sold to be cash and cash equivalents.
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 Company adopted SFAS 123 on
January 1, 1996 as presented in Note 10.
PAGE 20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROSPECTIVE ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (SFAS 125), which
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets and extinguishments of
liabilities. SFAS 125 is effective for transactions occurring after December 31,
1996, except for the provisions relating to repurchase agreements, securities
lending and other similar transactions and pledged collateral, which have been
delayed until after December 31, 1997 by SFAS 127, "Deferral of the Effective
Date of Certain Provisions of SFAS Statement No. 125, an amendment of SFAS
Statement No. 125." Adoption of SFAS 125 was not material; SFAS 127 will be
adopted as required in 1998 and is not exptected to be material.
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
per Share" (SFAS 128), was issued and establishes new standards for computing
and presenting earnings per share. SFAS 128 is effective for the corporation's
December 31, 1997 financial statements, and is presented in Note 18. The effect
of the new standard did not have material effect on previously reported earnings
per share.
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), was issued and establishes standards for
reporting and displaying comprehensive income and its components. SFAS 130
requires comprehensive income and its components, as recognized under the
accounting standards, to be displayed in a financial statement with the same
prominence as other financial statements. The corporation plans to adopt the
standard, as required, beginning in 1998; adoption of this disclosure
requirement will not have a material impact on the corporation.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (FASB 131), also issued in June 1997,
establishes new standards for reporting information about operating segments in
annual and interim financial Statements. The standard also requires descriptive
information about the way the operating segments are determined, the products
and services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated enterprise.
This standard is effective for years beginning after December 15, 1997. Adoption
in interim financial statements is not required until the year after initial
adoption, however, comparative prior period information is required. The
corporation is evaluating the standard and plans adoption as required in 1998;
adoption of this disclosure requirement will not have a significant financial
impact on the corporation.
NOTE 2. FORMATION OF HOLDING COMPANY
Talbot Bancshares, Inc., a one-bank holding company, commenced operations on May
1, 1997 pursuant to a Plan of Reorganization and Share Exchange proposed by
management and approved by the stockholders on April 23, 1997. Under the plan
each outstanding share of Bank common stock was exchanged for two shares of
holding company common stock. The Bank continues its banking business under its
same name as a wholly owned subsidiary of the holding company.
Comparative data in the accompanying consolidated financial statements for 1996
and 1995 are those of the Bank, the sole subsidiary and predecessor of the
Company, restated to reflect the exchange of shares.
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 $2,399,000 and $1,854,000
during 1997 and 1996, respectively.
PAGE 21
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INVESTMENT IN DEBT SECURITIES
The amortized cost and estimated fair values of investment securities are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
Available for sale securities:
DECEMBER 31, 1997:
U.S. Treasury securities $26,082,044 $308,276 $ -- $26,390,320
Obligations of U.S. Government agencies
and corporations 6,987,628 34,342 5,620 7,016,350
Obligations of states and political subdivisions 1,468,767 -- 1,736 1,467,031
Federal Home Loan Bank Stock 791,800 -- -- 791,800
Federal National Mortgage Association Cumulative
Preferred Stock 1,057,721 -- -- 1,057,721
----------- -------- ------- -----------
36,387,960 342,618 7,356 36,723,222
Mortgage-backed securities 606,834 439 694 606,579
----------- -------- ------- -----------
$36,994,794 $343,057 $ 8,050 $37,329,801
=========== ======== ======= ===========
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
=========== ======== ======= ===========
Held to maturity securities:
DECEMBER 31, 1997:
U.S. Treasury securities $ 9,974,130 $ 55,880 $ -- $10,030,010
Obligations of U.S. Government agencies
and corporations 7,022,192 21,593 13,193 7,030,592
Obligations of states and political subdivisions 4,950,894 38,621 7,038 4,982,477
----------- -------- ------- -----------
21,947,216 116,094 20,231 22,043,079
Mortgage-backed securities 2,201,396 15,251 3,067 2,213,580
----------- -------- ------- -----------
$24,148,612 $131,345 $23,298 $24,256,659
=========== ======== ======= ===========
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
=========== ======== ======= ===========
</TABLE>
PAGE 22
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair values of investment securities by
contractual maturity at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------ -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S><C>
Due in one year or less $ 4,088,197 $ 4,095,604 $12,093,008 $12,150,664
Due after one year through five years 27,912,895 28,225,872 11,021,490 11,078,826
Due after five years through ten years 3,144,181 3,158,804 207,192 205,668
Due after ten years -- -- 826,922 821,501
----------- ----------- ----------- -----------
35,145,273 35,480,280 24,148,612 24,256,659
Investments in equity securities 1,849,521 1,849,521 -- --
----------- ----------- ----------- -----------
$36,994,794 $37,329,801 $24,148,612 $24,256,659
=========== =========== =========== ===========
</TABLE>
The Company has pledged certain securities as collateral for obligations to
federal, state and local government agencies as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S><C>
Available for sale $29,575,313 $29,911,985 $26,921,137 $27,069,490
Held to maturity 17,475,118 17,544,705 17,911,554 17,987,021
----------- ----------- ----------- -----------
$47,050,431 $47,456,690 $44,832,691 $45,056,511
=========== =========== =========== ===========
</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,
1997 or 1996.
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Company 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>
1997 1996
---- ----
<S><C>
Real estate loans:
Construction and land development $ 9,536,900 $ 6,807,545
Secured by farmland 3,979,047 2,400,251
Secured by residential properties 72,730,359 58,332,796
Secured by nonfarm, nonresidential properties 64,568,138 64,498,241
Loans to farmers (loans to finance agricultural production and other loans) 310,439 197,112
Commercial and industrial loans 26,139,229 29,135,660
Loans to individuals for household, family, and other personal expenditures 7,215,452 9,507,532
Obligations of States and political subdivisions in the United States, tax-exempt 869,364 877,263
All other loans 49,162 52,002
------------ ------------
185,398,090 171,808,402
Less: Unearned income on loans (104,658) (107,842)
------------ ------------
185,293,432 171,700,560
Less: Allowance for credit losses (2,537,920) (2,728,320)
------------ ------------
$182,755,512 $168,972,240
============ ============
</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, 1997 and 1996, such loans
outstanding, both direct and indirect (including guarantees), to directors,
their associates and policy making officers, totaled approximately $5,012,000
and $6,091,000, respectively. During 1997 and 1996, loan additions were
approximately $3,590,000 and $3,872,000, and loan deletions were approximately
$4,669,000 and $1,083,000, respectively.
PAGE 23
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for credit losses at December 31 is summarized as follows:
1997 1996 1995
---- ---- ----
Balance, beginning of year $2,728,320 $2,077,315 $1,867,665
---------- ---------- ----------
Recoveries:
Real estate loans 4,603 11,442 5,420
Installment loans 34,290 48,226 34,135
Commercial and other 20,274 47,568 43,525
---------- ---------- ----------
59,167 107,236 83,080
---------- ---------- ----------
Provision 225,000 955,000 540,000
---------- ---------- ----------
Loans charged-off:
Real estate loans (136,946) (106,538) (119,836)
Installment loans (69,625) (67,345) (57,970)
Commercial and other (267,996) (237,348) (235,624)
---------- ---------- ----------
(474,567) (411,231) (413,430)
========== ========== ==========
Balance, end of year $2,537,920 $2,728,320 $2,077,315
========== ========== ==========
Information with respect to impaired loans and the related valuation allowance
as of December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S><C>
Impaired loans with valuation allowance $ 587,315 $ 302,053
Impaired loans with no valuation allowance 694,721 1,249,352
---------- ----------
Total impaired loans $1,282,036 $1,551,405
========== ==========
Allowance for loan losses related to impaired loans $ 122,000 $ 77,000
Allowance for loan losses related to other than impaired loans 2,415,920 2,651,320
---------- ----------
Total allowance for loan losses $2,537,920 $2,728,320
========== ==========
Interest income on impaired loans recorded on the cash basis $ 18,988 $ 71,421
========== ==========
Average recorded investment in impaired loans for the year $1,234,686 $4,107,775
========== ==========
</TABLE>
PAGE 24
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. PREMISES AND EQUIPMENT
A summary of premises and equipment, at cost, and accumulated depreciation at
December 31 is as follows:
1997 1996
---- ----
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 911,628 902,758
Tred Avon 467,949 467,949
St. Michaels 70,875 70,875
Edgar Building 502,248 502,248
Elliott Road 435,532 435,532
Cambridge Metro 213,445 204,589
Equipment:
Dover Street 1,030,781 928,404
Tred Avon 290,219 274,133
St. Michaels 217,903 215,773
Elliott Road 280,195 269,738
Cambridge Metro 141,037 90,316
----------- -----------
5,164,451 4,964,954
Accumulated depreciation (2,020,015) (1,777,289)
----------- -----------
$ 3,144,436 $ 3,187,665
=========== ===========
Depreciation expense totaled $274,262, $272,767 and $241,332 for the years ended
December 31, 1997, 1996 and 1995, 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:
1998 $ 32,400
1999 32,400
2000 32,400
2001 18,900
--------
$116,100
========
Rental expense for the years ended December 31, 1997, 1996 and 1995 was $32,400,
$27,900 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 Company's ownership interest to
33%. This investment is carried on the Company's books at cost, adjusted for its
equity in the net earnings as follows:
December 31,
-----------------------------------
1997 1996 1995
---- ---- ----
Balance, beginning of year $182,217 $199,916 $220,319
Additional paid-in capital -- 15,000 --
Equity interest redemption -- -- (13,353)
Equity in loss for the year (8,681) (32,699) (7,050)
-------- -------- --------
Balance, end of year $173,536 $182,217 $199,916
======== ======== ========
The Company had $977,254 in outstanding loans to Eastern Shore Mortgage
Corporation at December 31, 1997. Interest income on loans to Eastern Shore
Mortgage Corporation totaled approximately $47,800, $27,700 and $9,000 for 1997,
1996 and 1995, respectively.
PAGE 25
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. SIGNIFICANT DEPOSITS
The approximate maturities or earliest repricing interval of certificates of
deposit of $100,000 or more at December 31 are as follows:
1997 1996
---- ----
Three months or less $14,772,000 $18,465,000
Three through six months 3,857,000 3,382,000
Six through twelve months 5,622,000 6,196,000
Over twelve months 1,512,000 309,000
----------- -----------
$25,763,000 $28,352,000
=========== ===========
NOTE 9. BENEFIT PLANS
401(K) PLAN
The Company 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
Company 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 employees' service. Company
contributions included in expense totaled $76,117 (1997), $69,915 (1996) and
$68,651 (1995).
DEFINED BENEFIT PENSION PLAN
Effective January 1, 1995, the Company 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 Company'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 Company's balance sheets at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S><C>
Actuarial present value of accumulated benefit obligation, including
vested benefits of $1,030,414 and $1,039,729 for 1997 and 1996, respectively $1,031,994 $1,042,433
========== ==========
Projected Benefits 1,031,994 $1,042,433
Plan assets at fair value 940,765 934,380
---------- ----------
Projected benefit obligations in excess of Plan assets 91,229 108,053
Unrecognized transition obligation 53,297 68,547
Unrecognized net loss (53,297) (68,547)
---------- ----------
Accrued pension cost included in other liabilities $ 91,229 $ 108,053
========== ==========
Net pension cost includes the following components:
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Service cost - benefits earned during the year $ -- $ -- $ --
Interest cost on projected benefit obligation 69,304 73,728 77,178
Actual return on Plan assets (140,628) (86,101) (178,430)
Net amortization and deferral 80,999 23,304 115,964
--------- -------- ---------
Net pension cost $ 9,675 $ 10,931 $ 14,712
========= ======== =========
</TABLE>
PAGE 26
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assumptions used in the determination of pension information consisted of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Discount rate 7.25% 7.50% 7.50%
Rate of increase in compensation levels N/A N/A N/A
Expected long-term rate of return on Plan assets 7.50 7.50 7.50
</TABLE>
PROFIT SHARING PLAN
Effective January 1, 1995, the Company 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 totaled $100,000
(1997), $80,000 (1996) and $80,000 (1995).
NOTE 10. STOCK OPTION PLAN
During 1995, the Company 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 Company's Board of Directors, and are not to exceed ten
years. The 1995 Plan provides that the Company may grant options for not more
than 40,000 shares of common stock to certain key employees of the Company.
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,
---------------------------------------------------------------
1997 1996
----------------------------- ----------------------------
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
--------- ---------------- -------- ----------------
<S><C>
Outstanding at beginning of year 38,800 $22.08 21,000 19.50
Granted -- -- 18,200 25.00
Exercised (400) 19.50 (400) 19.50
Expired (400) -- -- --
------ ------ ------- -----
Outstanding at end of year 38,000 $22.08 $38,800 22.08
====== ====== ======= =====
Weighted average fair value of options
granted during the year $ -- $ 8.30
====== ======
</TABLE>
The following summarizes information about options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------
Weighted Average
Remaining Weighted Average
Range of Exercise Prices Number Contract Life Exercise Price
------------------------ ------ --------------- ----------------
<S><C>
19.50 - 25.00 38,000 8.26 22.08
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The Black-Scholes option pricing model was
originally developed for use in estimating the fair value of traded options
which have different characteristics than the Company's employee stock options.
The model is also sensitive to changes in the subjective assumptions which can
materially affect the fair value estimate. As a result, management believes that
the Black-Scholes model may not necessarily provide a reliable single measure of
the fair value of employee stock options. No options were granted during 1997.
The following weighted-average assumption used for grants during the year ended
December 31, 1996:
1997 1996
---- ----
Dividend yield -- 3.0%
Expected volatility -- 30.0%
Risk-free interest rate -- 6.3%
Expected lives -- 8.6 years
PAGE 27
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company 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 year ended December 31, 1996. If the Company
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
123, net income and earnings per share would have been changed to the pro forma
amounts as follows for the years ended December 31:
1997 1996 1995
---- ---- ----
Net income $3,674,012 $3,069,348 $2,555,615
Earnings per share 3.06 2.59 2.17
NOTE 11. DEFERRED COMPENSATION
During 1996, the Company 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 were $20,000 in both 1997 and 1996.
NOTE 12. INCOME TAXES
Income taxes included in the balance sheets as of December 31 are as follows:
1997 1996
---- ----
Federal income taxes currently payable $126,198 $ 80,490
State income taxes currently receivable (68,476) (18,263)
Deferred income tax benefits 455,070 736,619
Components of income tax expense for each of the three years ended December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Currently payable:
Federal $1,729,786 $1,560,516 $1,331,237
State 223,524 283,452 313,414
---------- ---------- ----------
1,953,310 1,843,968 1,644,651
---------- ---------- ----------
Deferred income taxes (benefits):
Federal 89,035 (75,966) (87,659)
State 19,710 (16,818) (19,406)
---------- ---------- ----------
108,745 (92,784) (107,065)
---------- ---------- ----------
$2,062,055 $1,751,184 $1,537,586
========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Tax at federal statutory rate 34.0% 34.0% 34.0%
Tax effect of:
Tax-exempt income (1.6) (2.8) (2.2)
Non-deductible expenses .1 .5 .5
Other .6 .0 (.7)
State income taxes, net of federal benefit 2.8 3.5 4.8
---- ---- ----
Income tax expense 35.9% 35.2% 36.4%
==== ==== ====
</TABLE>
PAGE 28
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The sources of deferred income taxes (benefits) and the tax effects of each for
the years ended December 31 are as follows:
1997 1996 1995
---- ---- ----
Depreciation $ 17,322 $ 15,288 $ 27,415
Provision for credit losses 59,755 (250,788) (47,720)
Income on loans 17,555 106,673 (67,420)
Other 14,113 36,043 (19,340)
-------- --------- ---------
$108,745 $ (92,784) $(107,065)
======== ========= =========
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S><C>
Deferred tax assets:
Provision for credit losses $593,702 $653,457
Loan interest 28,867 40,179
Provision for loss on other real estate 45,478 41,562
Pension expense 35,233 41,730
Loan fees 40,414 41,649
Deferred compensation 37,218 40,260
Unrealized losses on available for sale securities -- 90,236
-------- --------
Total deferred tax assets 780,912 949,073
-------- --------
Deferred tax liabilities:
Depreciation 175,577 158,255
Other 67,697 54,199
Unrealized gains on available for sale securities 82,568 --
-------- --------
Total deferred tax liabilities 325,842 212,454
-------- --------
Net deferred tax assets $455,070 $736,619
======== ========
</TABLE>
NOTE 13. REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional discretionary--actions
by regulators, that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitive measures of the Company's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitive measures established by regulation to ensure capital adequacy require
the Company to maintain amounts and ratios (set forth in the table below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined), and of Tier 1 capital (as defined) to average assets (as defined).
Management believes as of December 31, 1997, that the Company meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Company 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 Company's category.
PAGE 29
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the formation of the holding company, ratios for the Company and
the Bank are presented for December 31, 1997.
A comparison of the Company's capital as of December 31, 1997 and 1996 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>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Company $33,094,000 18.39% $14,399,000 8.00% $17,999,000 10.00%
The Talbot Bank 32,962,000 18.32 14,397,000 8.00 17,997,000 10.00
Tier 1 Capital (to Risk Weighted Assets):
Company 30,841,000 17.13 7,200,000 4.00 10,800,000 6.00
The Talbot Bank 30,709,000 17.06 7,200,000 4.00 10,798,000 6.00
Tier 1 Capital (to Average Assets):
Company 30,841,000 11.58 10,650,000 4.00 13,314,000 5.00
The Talbot Bank 30,709,000 11.53 10,650,000 4.00 13,313,000 5.00
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S><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
</TABLE>
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 $5,937,740 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.
PAGE 30
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1997 1996
--------------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- --------- -------- ---------
<S><C>
Financial assets:
Cash and cash equivalents $ 16,165,243 $ 16,165,000 $ 14,586,445 $ 14,586,000
Investments in debt securities 61,478,413 61,586,000 62,809,521 62,945,000
Loans 185,293,432 182,819,000 171,700,560 168,185,000
Less: allowance for loan losses (2,537,920) -- (2,728,320) --
------------ ------------ ------------ ------------
$260,399,168 $260,570,000 $246,368,206 $245,716,000
============ ============ ============ ============
Financial liabilities:
Deposits $224,913,659 $224,863,000 $215,101,440 $215,202,000
Securities sold under agreements to repurchase 10,263,528 10,264,000 9,267,693 9,268,000
------------ ------------ ------------ ------------
$235,177,187 $235,127,000 $224,369,133 $224,470,000
============ ============ ============ ============
Unrecognized financial instruments:
Commitments to extend credit $ 48,301,000 $ 48,301,000 $ 32,293,000 $ 32,293,000
Standby letters of credit 5,497,000 5,497,000 4,225,000 4,225,000
------------ ------------ ------------ ------------
$ 53,798,000 $ 53,798,000 $ 36,518,000 $ 36,518,000
============ ============ ============ ============
</TABLE>
NOTE 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, to meet the financial needs of its customers,
the Company 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 Company'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 Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Company 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 Company 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.
PAGE 31
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments outstanding as of December 31 are as follows:
1997 1996
---- ----
Commitments to extend credit $48,301,000 $32,293,000
Letters of credit 5,497,000 4,225,000
----------- -----------
$53,798,000 $36,518,000
=========== ===========
NOTE 17. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Talbot Bancshares, Inc. (Parent Company
Only) is as follows:
Condensed Balance Sheet
December 31, 1997
Assets
Cash $ 106,060
Investment in Subsidiary 30,839,566
Other Assets 25,988
-----------
Total Assets $30,971,614
===========
Liabilities --
Stockholders' Equity $ 11,896
Common Stock 12,548,111
Surplus 18,280,376
Retained Earnings
Net unrealized gain on securities available for sale 131,231
-----------
Total Stockholders' Equity 30,971,614
-----------
Total Liabilities and Stockholders' Equity $30,971,614
===========
Condensed Statement of Income
For the year ended December 31, 1997
Dividends from Subsidiary $ 891,283
Interest Income 1,104
-----------
892,387
Operating Expenses 12,986
-----------
Income before Income Tax
Benefit and equity in undistributed income of subsidiary 879,401
Income Tax Benefit 3,055
-----------
Income before equity in undistributed income of subsidiary 882,456
Equity in undistributed income of subsidiary 2,791,556
-----------
Net Income $ 3,674,012
===========
PAGE 32
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Statement of Cash Flows
For the year ended December 31, 1997
Net Income $ 3,674,012
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed income of subsidiary (2,791,556)
Net increase in other assets (25,988)
-----------
Net Cash provided by operating activities 856,468
-----------
Cash Flows from financing activities:
Proceeds from issuance of common stock 81,497
Dividends paid (831,905)
-----------
Net cash used by financing activities (750,408)
-----------
Net increase in cash 106,060
Cash, beginning of year --
-----------
Cash, end of year $ 106,060
===========
NOTE 18. EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share, which became effective for the Company for reporting periods
ending after December 15, 1997. Under the provisions of SFAS No. 128, primary
and fully-diluted earnings per share were replaced with basic and diluted
earnings per share in an effort to simplify the computation of these measures
and align them more closely with the methodology used internationally. Basic
earnings per share is arrived at by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding and
does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is arrived at by
dividing net income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options and warrants. For
purposes of comparability, all prior-period earnings per share data has been
restated.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S><C>
Basic:
Net income (applicable to common stock) $3,674,012 $3,220,317 $2,684,345
Average common shares outstanding 1,187,814 1,183,252 1,179,366
Basic net income per share $ 3.09 $ 2.72 $ 2.28
Diluted:
Net income (applicable to common stock) $3,674,012 $3,220,317 $2,684,345
Average common shares outstanding 1,187,814 1,183,252 1,179,366
Dilutive effect of stock options 11,316 2,158 788
---------- ---------- ----------
Average common shares outstanding - diluted 1,199,130 1,185,410 1,180,154
Diluted net income per share $ 3.06 $ 2.72 $ 2.27
</TABLE>
PAGE 33
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
[STEGMAN & COMPANY LOGO]
------------------------
CERTIFIED PUBLIC ACCOUNTANTS AND
MANAGEMENT CONSULTANTS SINCE 1915
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Talbot Bancshares, Inc.
Easton, Maryland
We have audited the accompanying consolidated balance sheets of Talbot
Bancshares, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Talbot
Bancshares, Inc. as of December 31, 1997 and 1996, and the consolidated results
of its operations and cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Stegman & Company
_____________________
Baltimore, Maryland
January 16, 1998
PAGE 34
<PAGE>
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
TALBOT BANCSHARES, INC.
THE TALBOT BANK OF EASTON, MARYLAND
<TABLE>
<S><C>
HERBERT L. ANDREW, III JEROME M. MCCONNELL
Farmer and County Councilman Vice President, Talbot Bancshares, Inc.
Executive Vice President, The Talbot Bank
BLENDA W. ARMISTEAD
County Manager, Talbot County, Maryland SHARI L. MCCORD
Owner, Chesapeake Travel Services, Inc.
LLOYD L. BEATTY, JR.
Certified Public Accountant WILLIAM H. MYERS
Beatty, Satchell & Company, LLC Chairman of the Board
Farmer
DONALD D. CASSON
Certified Public Accountant &Real Estate Broker DAVID L. PYLES
Investor
GARY L. FAIRBANK
Owner, Fairbank Tackle CHRISTOPHER F. SPURRY
President, Spurry & Associates, Inc.
RONALD N. FOX
Investor W. MOORHEAD VERMILYE
President, Talbot Bancshares, Inc.
RICHARD C. GRANVILLE President and CEO, The Talbot Bank
President, Celeste Industries Corporation
</TABLE>
- --------------------------------------------------------------------------------
OFFICERS
TALBOT BANCSHARES, INC.
W. Moorhead Vermilye President
Jerome M. McConnell Vice President
Susan E. Leaverton Secretary/Treasurer
THE TALBOT BANK OF EASTON MARYLAND
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
Mildred C. Bullock Vice President Bookkeeping
Nancy B. Chance Assistant Vice President
Deborah L. Danenmann Assistant Vice President
Valerie C. Pelkey Assistant Vice President
Laura P. Heikes Assistant Vice President
Dawn D. Henckel 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 35
<PAGE>
[TALBOT BANCSHARES, INC. LOGO]--------------------------------------------------
DESCRIPTION OF BUSINESS
Talbot Bancshares, Inc. (the "Company") is a bank holding company formed in 1997
and is based in Easton, Maryland. The Talbot Bank of Easton, Maryland (the
"Bank") is a commercial bank whose service areas are Talbot and Dorchester
Counties inMaryland. The Bank is the sole subsidiary of the Company. The Bank
commenced operations in 1885 and is chartered under the laws of the State of
Maryland. The Bank has three locations in Easton, one in St. Michaels and one in
Cambridge. As of December 31, 1997 the Company had total assets of $267 million,
total loans of $185 million and total deposits of $225 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, 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. During 1996 the Bank opened an in-store branch in Cambridge, Maryland
offering full service banking 7 days a week.
----------------------------
EMPLOYEES
Billie J. Ball Amy L. Hutchison N. Melissa Riggins
Nancy L. Bartlett Suzanne S. Jefferson Jacqueline D. Ruark
Barbara A. Bell Tunisia C. Johns Christie D. Rush
Bevlee A. Burks Pauline V. Johnson Kellee K. Russ
Amy H. Butler Linda N. Jones Maryilyn Russell
Lori A. Cain Patricia A. Jones Kay Schaar-Wagenblatt
Carol J.C. Callahan Beatrice T. Juliano Kristin Shaw
Elizabeth H. Dise Sandra A. Kenton David W. Snow
Melissa Doyle Kathryn O. Larrimore Terri M.Tarr
Stacey L. Dulin Stephanie D. Layton Paula I. Taylor
Jennifer Eason Kathryn V. Lister Nancy J. Urbanczk
Laura L. Edwards LaVonne D. Medford Margaret B. Voshell
Ryan E. Ewing Sherri L. Messix Daphne L. Wagner
Dale E. Fike Stephanie L. Miller Deborah C. Watson
Penny A. Fontana Deborah H. Morton Karen L. Whitby
Beverly A. Fort Donna L. Neal Kendall B. Williams
Michaele A. Graves Donna D. Parks Sandra G. Wilson
Robin L. Haddaway Dawn A. Patrick Brenda L. Wooden
Kelly L. Haga-Hill Yvonne W. Quimby
Rose M. Hurst Rose R. Rice
PAGE 36
<PAGE>
- --------------------------------------------------------------------------------
The notes to consolidated statements are an integral part of these statements.
PAGE 37
<PAGE>
TALBOT BANK LOCATIONS
MAIN OFFICE
18 East Dover Street
Easton, MD 21601
TRED AVON SQUARE BRANCH
210 Marlboro Road
Easton, MD 21601
ELLIOTT ROAD BRANCH
8275 Elliott Road
Easton, MD 21601
ST. MICHAELS BRANCH
1013 S. Talbot Street
St. Michaels, MD 21663
METRO MARKET BRANCH
2737 Dorchester Square
Cambridge, MD 21613
ATM LOCATIONS
MEMORIAL HOSPITAL AT EASTON
219 S. Washington Street
Easton, MD 21601
SAILWINDS AMOCO
511 Maryland Avenue
Cambridge, MD 21613
Phone (410) 822-1400 Fax (410) 820-7180
E-Mail: [email protected]
Website: http://talbot-bank.com
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Form 10-K of
Talbot Bancshares, Inc., for the year ended December 31, 1997 of our report
dated January 16, 1998, relating to the consolidated financial statements of
Talbot Bancshares, Inc.
/S/ Stegman and Company
_______________________
Baltimore, Maryland
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,108
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,057
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,330
<INVESTMENTS-CARRYING> 24,149
<INVESTMENTS-MARKET> 24,257
<LOANS> 185,293
<ALLOWANCE> 2,538
<TOTAL-ASSETS> 267,029
<DEPOSITS> 224,914
<SHORT-TERM> 10,264
<LIABILITIES-OTHER> 880
<LONG-TERM> 0
0
0
<COMMON> 12
<OTHER-SE> 30,960
<TOTAL-LIABILITIES-AND-EQUITY> 267,029
<INTEREST-LOAN> 15,660
<INTEREST-INVEST> 3,481
<INTEREST-OTHER> 531
<INTEREST-TOTAL> 19,672
<INTEREST-DEPOSIT> 8,132
<INTEREST-EXPENSE> 8,596
<INTEREST-INCOME-NET> 11,076
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 5,828
<INCOME-PRETAX> 5,736
<INCOME-PRE-EXTRAORDINARY> 3,674
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,674
<EPS-PRIMARY> 3.09
<EPS-DILUTED> 3.06
<YIELD-ACTUAL> 8.08
<LOANS-NON> 1,282
<LOANS-PAST> 1,422
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,787
<ALLOWANCE-OPEN> 2,728
<CHARGE-OFFS> 474
<RECOVERIES> 59
<ALLOWANCE-CLOSE> 2,538
<ALLOWANCE-DOMESTIC> 2,538
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 376
</TABLE>
