UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
0-22929
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 preceeding 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 .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of April 30, 1998, registrant had outstanding 1,190,110
shares of common stock.
<PAGE>
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
March 31, 1998 and 1997 (unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of changes in Stockholders' Equity -
For the three month period ended March 31, 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-8
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Part II.
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
Part I
Item 1. Financial Statements
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, March 31, December 31,
ASSETS: 1998 1997 1997
- ------- --------------- --------------- ------------
(unaudited) (unaudited)
<S> <C>
Cash and due from banks $ 7,590 $ 6,454 $ 8,108
Federal funds sold 12,265 13,527 8,057
Investment in debt securities:
Held-to-maturity, at amortized cost (fair value of $21,296,
$29,144, $24,257, respectively) 21,190 29,207 24,149
Available for sale, at fair value 37,296 27,698 37,330
Loans, less allowance for credit losses ($2,513, $2,646,
$2,538, respectively) 185,580 167,952 182,755
Bank premise and equipment 3,120 3,158 3,144
Other real estate owned 303 124 114
Accrued interest receivable on loans and investment securities 1,962 1,916 1,949
Investments in unconsolidated subsidiary 160 176 174
Deferred income tax benefits 406 803 455
Other assets 842 731 794
-------- -------- --------
TOTAL ASSETS $270,714 $251,746 $267,029
======== ======== ========
LIABILITIES:
Deposits:
Non-interest bearing demand $ 22,106 $ 20,460 $ 23,696
NOW and Super NOW 45,492 40,754 51,159
Certificates of deposit $100,000 or more 31,855 24,568 25,763
Other time and savings 126,279 125,332 124,296
-------- -------- --------
Total Deposits 225,732 211,114 224,914
Securities sold under agreements to repurchase 12,244 11,111 10,264
Other liabilities 1,011 1,029 880
-------- -------- --------
TOTAL LIABILITIES 238,987 223,254 236,058
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 25,000,000 shares; issued and
outstanding:
March 31, 1998 1,190,110
March 31, 1997 1,187,548
December 31, 1997 1,189,610 12 12 12
Surplus 12,572 12,467 12,548
Retained earnings 18,933 16,262 18,280
Accumulated other comprehensive income 210 (249) 131
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY 31,727 28,492 30,971
-------- -------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $270,714 $251,746 $267,029
======== ======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------ ------------
<S> <C>
INTEREST INCOME
Loans, including fees $4,043 $3,844
Interest and dividends on investment securities
Taxable 807 781
Tax-exempt 65 78
Federal funds sold 87 97
------ ------
Total interest income 5,002 4,800
------ ------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 380 355
Other deposits 1,692 1,603
Other interest 110 102
------ ------
Total interest expense 2,182 2,060
------ ------
NET INTEREST INCOME 2,820 2,740
PROVISION FOR CREDIT LOSSES 60 105
------ ------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 2,760 2,635
------ ------
NONINTEREST INCOME
Service charges on deposit accounts 135 131
Other noninterest income 20 25
------ ------
Total noninterest income 155 156
------ ------
NONINTEREST EXPENSES
Salaries and employee benefits 908 879
Expenses of premises and fixed assets 182 178
Other noninterest expense 482 460
------ ------
Total noninterest expense 1,572 1,517
------ ------
INCOME BEFORE TAXES ON INCOME 1,343 1,274
Federal and State income taxes 452 450
------ ------
NET INCOME $ 891 $ 824
====== ======
Diluted earnings per common share $ .74 $ .69
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
------ ------- -------- ------------- -------
<S> <C>
Balances, December 31, 1996 $12 $12,435 $15,616 ($143) $27,920
Net Income - - 824 - 824
Cash Dividends Paid $0.15 per share - - (178) - (178)
Comprehensive income, net of tax:
Net unrealized holding gain on
debt securities, available-for-sale - - - (106) (106)
-------
Other comprehensive income - - - - (106)
-------
Shares issued - 32 - - 32
------ ------- ------- --------- --------
Balances, March 31, 1997 $12 $12,467 $16,262 ($249) $ 28,492
====== ======= ======= ========= ========
Balances, December 31, 1997 $12 $12,548 $18,280 $131 $30,971
Net Income - - 891 - 891
Cash Dividends Paid $0.20 per share - - (238) - (238)
Comprehensive income, net of tax:
Net unrealized holding gain on
debt securities, available-for-sale - - - 79 79
--------
Other comprehensive income - - - - 79
--------
Shares issued - - - 24
------ ------- ------- --------- --------
Balances, March 31, 1998 $12 $12,548 $18,933 $210 $31,727
====== ======= ======= ========= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1998 1997
-------- --------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 891 $ 824
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 115 107
Discount accretion on debt securities (20) (26)
Discount accretion on matured debt securities 22 3
Gain on sale of bank equipment - (3)
Provision for credit losses, net 60 105
Loss on other real estate owned - 11
Net changes in:
Accrued interest receivable (13) (88)
Other assets (34) (83)
Accrued interest payable on deposits 6 (12)
Accrued expenses 127 246
Other liabilities (2) (99)
------- -------
Net cash provided by operating activities 1,152 985
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale - 1,003
Proceeds from maturities and principal payments of securities
available for sale 1,093 3,273
Purchase of securities available for sale (1,009) -
Proceeds from maturities and principal payments of securities
held to maturity 2,996 1,442
Net (increase) decrease in loans (3,074) 1,595
Purchase of loans - (700)
Proceeds from sale of loans - 20
Purchase of bank premises and equipment (52) (57)
Proceeds from sale of equipment - 20
Proceeds from sale of other real estate owned - 104
------- -------
Net cash provided (used) in investing activities (46) 6,700
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in demand, NOW, money market and
savings deposits (6,561) (1,795)
Net increase (decrease) in certificates of deposit 7,379 (2,193)
Net increase in securities sold under agreement to repurchase 1,980 1,843
Proceeds from issuance of common stock 24 32
Dividends paid (238) (178)
------- -------
Net cash provided (used) by financing activities 2,584 (2,291)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,690 5,394
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,165 14,587
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $19,855 $19,981
======= =======
</TABLE>
<PAGE>
Talbot Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) Effective May 1, 1997, the common shareholders of The Talbot Bank of
Easton, Maryland (the "Bank") exchanged each one of their common shares of
the Bank for two shares of common stock of Talbot Bancshares, Inc (the
"Holding Company") and at that time the Bank became a wholly-owned
subsidiary of the Holding Company. The only current business of the Holding
Company is the ownership and operation of the Bank. The Holding Company and
the Bank are collectively referred to as the "Company." The formation of
the Holding Company and exchange of shares has been accounted for as a
pooling of interests.
In the opinion of the management of the Company the accompanying condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position at March 31, 1998, the results of
operations for the three month period ended March 31, 1998 and 1997, and
cash flows for the three month period ended March 31, 1998 and 1997. The
results of operations for the three month ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
2) 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 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 availaible 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, the prior-period earnings per share data has been
restated.
March 31, March 31,
1998 1997
--------- ---------
Basic:
Net income (applicable to common stock) $ 891,000 $ 824,000
Average common shares outstanding 1,189,616 1,186,257
Basic net income per share $0.75 $0.69
Diluted:
Net income (applicable to common stock) 891,000 824,000
Average common shares outstanding 1,189,616 1,186,257
Dilutive effect of stock options 19,715 5,650
---------- ----------
Average common shares outstanding diluted 1,209,331 1,191,907
Diluted net income per share $0.74 $0.69
3) Under the provisions of Statements of Financial Accounting Standards (SFAS)
Nos. 114 and 118, "Accounting by Creditors for Impairment of a Loan" a loan
is considered impaired if it is probable that the Company will not collect
all principal and interest payments according to the loan's contracted
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 of
the loan is collateral dependent. Interest income on impaired loans is
recognized on a cash basis.
<PAGE>
Information with respect to impaired loans and the related valuation allowance
is shown below:
<TABLE>
<CAPTION>
March 31, March 31, December 31,
(Dollars in thousands) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Impaired loans with valuation allowance $ 119 $ 333 $ 587
Impaired loans with no valuation allowance 1,079 721 695
------ ------ ------
Total impaired loans $1,198 $1,054 $1,282
====== ====== ======
Allowance for credit losses applicable to impaired loans $ 55 $ 82 $ 122
Allowance for credit losses applicable to other than impaired loans 2,458 2,564 2,416
------ ------ ------
Total allowance for credit losses $2,513 $2,646 $2,538
====== ====== ======
</TABLE>
Impaired loans do not include groups of smaller balance homogenous 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.
4) In the normal course of business, to meet the financial needs of its
customers, the Bank is a party to financial instruments with off-balance
sheet risk. These financial instruments include commitments to extend
credit and standby letters of credit. At March 31, 1998 total commitments
to extend credit were approximately $42,113,000. Outstanding letters of
credit were approximately $5,743,000 at March 31, 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
Net income for the first qurarter of 1998 was $891,000 an increase of 8%
over the $824,000 for the first quarter of 1997. On a per share basis
earnings were $ .74 compared to $ .69 for the same period last year.
NET INTEREST INCOME
Net interest income for the three months ended March 31, 1998 was higher
than the same period last year due to an increase in the average earning
assets. The net interest margin decreased 19 basis points to 4.52% compared
to 4.71% one year ago. Growth in average earning assets was concentrated in
loans with an average yield of 8.85%. Loans comprised 73.5% and 71.4% of
total average earning assets at March 31, 1998 and 1997, respectively.
NON-INTEREST INCOME
Total non-interest income remained about the same for the first quarter of
1998 when compared to the same period in 1997, however, the components of
non-interest income changed. Service charges on deposit accounts increased
3% or $4,000 due to changes in the Company's policies relating to the
assessment of service charges. This increase was offset by an increase in
losses from an unconsolidated subsidiary of $6,000.
NON-INTEREST EXPENSE
Total non-interest expense, excluding the provision for loan losses,
increased 3.6% for the quarter ended March 31, 1998 from the comparable
period in 1997. This increase is due to the growth of the bank and expanded
services being provided.
LIQUIDITY AND CAPITAL RESOURCES
The Bank derives liquidity through increased customer deposits, maturities
in the investment portfolio, loan repayments and income from earning
assets. At March 31, 1998 the Company's liquidity ratio was approximately
24%. There are no known trends or demands, commitments, events or
uncertainties that management is aware of which will materially affect the
Bank's ability to maintain liquidity at satisfactory levels.
Total Stockholders' equity was $31.7 million at March 31, 1998, 11.2%
higher than one year ago.
Bank regulatory agencies have adopted various capital standards for
financial institutions, including risk-based capital standards. The primary
objectives of the risk-based capital framework are to provide a more
consistent system for comparing capital positions of financial institutions
and to take into account the different risks among financial institutions'
assets and off-balance sheet items.
Risk-based capital standards have been supplemented with requirements for a
minimum Tier 1 capital to assets ratio (leverage ratio). In addition,
regulatory agencies consider the published capital levels as minimum levels
and may require a financial institution to maintain capital at higher
levels.
A comparison of the Bank's capital as of March 31, 1998, with the minimum
requirements is presented below.
Minimum
Actual Requirements
------ ------------
Tier 1 Risk-based Capital 17.22% 4.00%
Total Risk-based Capital 18.48% 8.00%
Leverage Ratio 11.87% 4.00%
<PAGE>
PROVISIONS FOR CREDIT LOSSES
The Company is required to maintain an adequate allowance for credit
losses, therefore, the Board of Directors and management perform regular
reviews to assure its' adequacy. Significant credit exposures, non-accrual
and impaired loans and other real estate owned are examined to assure the
adequacy of the allowance.
The following table presents a summary of the activity in the Allowance for
Loan Losses.
Three Months Ended March 31,
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
Allowance balance - beginning of year $ 2,538 $ 2,728
Charge-offs:
Commercial and other 12 148
Real estate 89 42
Consumer 11 7
-------- --------
Totals 112 197
-------- --------
Recoveries:
Commercial 4 2
Real Estate 18 1
Consumer 5 7
-------- --------
Totals 27 10
-------- --------
Net Charge-offs:
Provision for loan losses 60 105
-------- --------
Allowance balance-ending $ 2,513 $ 2,646
======== ========
Average Loans outstanding during period $185,491 $171,092
======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .18% .44%
======== ========
Allowance for loan losses at period end as a
percentage of average loans 1.35% 1.55%
======== ========
<PAGE>
ANALYSIS OF INTEREST RATES AND INTEREST DIFFERENTIALS.
The following table presents the distribution of the average consolidated
balance sheets, interest income/expense and yields earned and rates paid through
the first three months of the year.
<TABLE>
<CAPTION>
1998 1997
---- ----
Average Income* Yield* Average Income* Yield*
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Earning Assets
Investment Securities $ 60,399 $ 903 5.98% $ 61,201 $ 899 5.96%
Loans 185,491 4,049 8.85 171,092 3,848 9.12
Federal Funds Sold 6,643 87 5.24 7,347 97 5.36
-------- ------ ---- -------- ------ ----
Total earning assets 252,533 5,039 7.98% 239,640 4,844 8.19%
------ ---- ------- ----- ----
Non-interest earning assets 11,720 10,114
-------- --------
Total Assets $264,253 $249,754
======== ========
Interest bearing liabilities
Interest bearing deposits $199,829 $2,072 4.15% $191,531 $1,958 4.15%
Borrowings 10,851 110 4.09 9,594 102 4.31
-------- ------ ---- -------- ------ ----
Total interest bearing liabilities 210,680 2,182 4.15 201,125 2,060 4.15
------ ---- ------ ----
Non-interest bearing liabilities 22,200 20,421
Stockholders' equity 31,373 28,208
-------- --------
Total liabilities and stockholders' equity $264,253 $249,754
======== ========
Net interest spread $2,857 3.83% $2,784 4.04%
Net interest margin 4.52% 4.71%
</TABLE>
* Presented on a tax equivalent basis using a statutory federal corporate income
tax rate of 34%.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company 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
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>
Based on the composition of the Balance Sheet and the current interest rate
environment the results of this simulation would not be materially different at
March 31, 1998.
Part II
Other Information
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit 27 - Financial Data Schedule
b) No Forms 8-K filed.
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
TALBOT BANCSHARES, INC.
Date: May 14, 1998 By: /s/ W. Moorhead Vermilye
________________________
President
Date: May 14, 1998 By: /s/ Susan E. Leaverton
________________________
Susan E. Leaverton, CPA
Treasurer/Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED MARCH 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001043056
<NAME> TALBOT BANCSHARES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,590
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,265
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,296
<INVESTMENTS-CARRYING> 21,190
<INVESTMENTS-MARKET> 21,296
<LOANS> 188,093
<ALLOWANCE> 2,513
<TOTAL-ASSETS> 270,714
<DEPOSITS> 225,732
<SHORT-TERM> 12,244
<LIABILITIES-OTHER> 1,011
<LONG-TERM> 0
0
0
<COMMON> 12
<OTHER-SE> 31,715
<TOTAL-LIABILITIES-AND-EQUITY> 270,714
<INTEREST-LOAN> 4,043
<INTEREST-INVEST> 872
<INTEREST-OTHER> 87
<INTEREST-TOTAL> 5,002
<INTEREST-DEPOSIT> 2,072
<INTEREST-EXPENSE> 2,182
<INTEREST-INCOME-NET> 2,820
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,572
<INCOME-PRETAX> 1,343
<INCOME-PRE-EXTRAORDINARY> 891
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 891
<EPS-PRIMARY> .75
<EPS-DILUTED> .74
<YIELD-ACTUAL> 7.98
<LOANS-NON> 1,198
<LOANS-PAST> 749
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,616
<ALLOWANCE-OPEN> 2,538
<CHARGE-OFFS> 112
<RECOVERIES> 27
<ALLOWANCE-CLOSE> 2,513
<ALLOWANCE-DOMESTIC> 2,513
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 407
</TABLE>
