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 September 30, 1999
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 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 .
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 October 31, 1999, registrant had outstanding 1,192,672
shares of common stock.
<PAGE>
<TABLE>
<CAPTION>
INDEX
Part I.
Page
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 and 1998 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
Nine months ended September 30, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II.
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE>
Part I
Item 1. Financial Statements
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share amounts)
September 30, September 30, December 31,
ASSETS: 1999 1998 1998
- ------- -------------- --------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 10,952 $ 6,552 $ 8,004
Federal funds sold 11,566 23,667 12,403
Investment securities:
Held-to-maturity, at amortized cost (fair value of $ 9,307,
$16,523, $13,963 respectively) 9,392 16,414 13,871
Available for sale, at fair value 62,301 53,171 69,500
Loans, less allowance for credit losses ($2,659,
$2,523, $2,583 respectively) 207,933 188,305 191,781
Bank premises and equipment 3,038 3,042 2,977
Other real estate owned 74 192 164
Accrued interest receivable on loans and investment securities 2,444 2,241 2,169
Deferred income tax benefits 1,087 177 342
Other assets 767 1,009 1,043
-------- -------- -------
TOTAL ASSETS $309,554 $294,770 $302,254
======== ======== ========
LIABILITIES:
Deposits:
Non-interest bearing demand $ 26,212 $ 22,374 $ 25,483
NOW and Super NOW 46,021 48,581 50,207
Certificates of deposit $100,000 or more 47,119 45,717 45,733
Other time and savings 135,292 125,401 128,506
--------- --------- ---------
Total Deposits 254,644 242,073 249,929
Securities sold under agreements to repurchase 18,617 18,088 17,111
Other liabilities 767 901 930
---------- ---------- ----------
TOTAL LIABILITIES 274,028 261,062 267,970
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 25,000,000 shares;
issued and outstanding:
September 30, 1999 1,193,172
September 30, 1998 1,191,616
December 31, 1998 1,192,202 12 12 12
Surplus 12,717 12,632 12,663
Retained earnings 23,536 20,490 21,164
Accumulated other comprehensive income (739) 574 445
------------ ------------ ----------
TOTAL STOCKHOLDERS' EQUITY 35,526 33,708 34,284
--------- --------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $309,554 $294,770 $302,254
======== ======== ========
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,449 $ 4,203 $ 12,805 $ 12,405
Interest and dividends on investment securities
Taxable 1,027 883 3,219 2,477
Tax-exempt 43 55 125 180
Federal funds sold 164 249 359 441
-------- -------- -------- ---------
Total interest income 5,683 5,390 16,508 15,503
------- ------- -------- --------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 562 539 1,659 1,281
Other deposits 1,749 1,759 5,156 5,163
Other interest 179 172 495 434
------- ------- ------- -------
Total interest expense 2,490 2,470 7,310 6,878
------ ------ ------ ------
NET INTEREST INCOME 3,193 2,920 9,198 8,625
PROVISION FOR CREDIT LOSSES 60 60 180 180
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 3,133 2,860 9,018 8,445
------ ------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 206 193 610 482
Loss on sale of securities - - 12 9
Other noninterest income 32 36 102 100
------ ------ ------ -------
Total noninterest income 238 229 724 591
----- ----- ----- -----
NONINTEREST EXPENSES
Salaries and employee benefits 909 867 2,721 2,641
Expenses of premises and fixed assets 190 194 562 544
Other noninterest expense 494 460 1,472 1,405
------ ------- ------ ------
Total noninterest expense 1,593 1,521 4,755 4,590
------ ------ ------ ------
INCOME BEFORE TAXES ON INCOME 1,778 1,568 4,987 4,446
Federal and State income taxes 620 536 1,720 1,522
------- ------- ------- -------
NET INCOME $1,158 $1,032 $3,267 $2,924
====== ====== ====== ======
Basic earnings per common share $ .97 $ .87 $ 2.74 $ 2.46
Diluted earnings per common share $ .94 $ .85 $ 2.69 $ 2.41
Dividend declared per common share $ .25 $ .20 $ .75 $ .60
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
Accumulated
other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1997 $12 $12,548 $18,280 $131 $30,971
Comprehensive income:
Net Income - - 2,924 - 2,924
Other comprehensive income, net of tax:
Unrealized gain on available for sale securities
net of reclassification adjustment - - - 443 443
--------
Total comprehensive income 3,367
Cash Dividends Paid $0.60 per share - - (714) - (714)
Shares issued - 84 - - 84
----------- ----------- ------------ ---- --------
Balances, September 30, 1998 $12 $ 12,632 $ 20,490 $574 $33,708
=========== ======== ======== ======== ==========
Balances, December 31, 1998 $12 $12,663 $21,164 $445 $34,284
Comprehensive income:
Net Income - - 3,267 - 3,267
Other comprehensive income, net of tax:
Unrealized loss on available for sale securities
net of reclassification adjustment - - - (1,184) (1,184)
---------
Total comprehensive income 2,083
Cash Dividends Paid $0.75 per share - - (895) - (895)
Shares issued - 84 - - 84
Shares repurchased and retired - (30) - - (30)
------------- ------------- ------------ -------------------- -----------
Balances, September 30, 1999 $12 $12,717 $23,536 ($739) $35,526
=========== ======== ======== =================== =======
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,267 $ 2,924
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 448 396
Discount accretion on debt securities (40) (52)
Discount accretion on matured debt securities 10 120
Gain on sale of securities (12) (9)
Loss on sale of bank equipment 12 3
Provision for credit losses 77 (15)
Loss on other real estate owned 8 4
Net changes in:
Accrued interest receivable (275) (292)
Other assets 276 (41)
Accrued interest payable on deposits (60) 71
Other liabilities (103) (50)
--------------- -------------
Net cash provided by operating activities 3,608 3,059
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 6,073 5,062
Proceeds from maturities and principal payments of securities
available for sale 12,114 1,299
Purchase of securities available for sale (13,084) (21,711)
Proceeds from maturities and principal payments of securities
held to maturity 7,843 13,789
Purchase of securities held to maturity (3,382) (6,024)
Net increase in loans (15,710) (5,535)
Purchase of loans (1,400) -
Proceeds from sale of loans 881 -
Purchase of bank premises and equipment (294) (180)
Proceeds from sale of equipment - 24
Proceeds from sale of other real estate owned 132 139
Purchase other real estate owned (50) (221)
------------- --------------
Net cash used by investing activities (6,877) (13,358)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand, NOW, money market and
savings deposits 1,181 (4,746)
Net increase in certificates of deposit 3,534 21,905
Net increase in securities sold under agreement to repurchase 1,506 7,824
Proceeds from issuance of common stock 84 84
Purchase of Common Stock (30) -
Dividends paid (895) (714)
------------- --------------
Net cash provided by financing activities 5,380 24,353
------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,111 14,054
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,407 16,165
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,518 $ 30,219
============= =============
</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.
The unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instruction to Form 10Q. In the opinion of the
management of the Company, all adjustments necessary to present fairly the
financial position at September 30, 1999, the results of operations for the
three and nine month periods ended September 30, 1999 and 1998, and cash flows
for the nine month period ended September 30, 1999 and 1998. The results of
operations for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the audited consolidated financial statements and
footnotes included in the 1998 Annual Report to Shareholders and Form 10K.
2) Year to date basic earnings per share is arrived at by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding during the period of 1,192,327 shares for 1999 and 1,190,397 for
1998. The diluted earnings per share calculation is arrived at by dividing net
income by the weighted average number of shares outstanding, adjusted for the
dilutive effect of outstanding options and warrants. The adjusted average shares
for the nine months ended September 30, 1999 and 1998 were 1,214,630 and
1,211,216, respectively.
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 if the loan is collateral
dependent. 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.
<TABLE>
<CAPTION>
Information with respect to impaired loans and the related valuation allowance
is shown below:
September 30, September 30, December 31,
(Dollars in thousands) 1999 1998 1998
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Impaired loans with valuation allowance $ - $ 110 $ 109
Impaired loans with no valuation allowance 794 731 718
-------- -------- -------
Total impaired loans $ 794 $ 841 $ 827
======= ======= =======
Allowance for credit losses applicable to impaired loans $ - $ 43 $ 79
Allowance for credit losses applicable to other than impaired loans 2,659 2,480 2,504
------- ------- -------
Total allowance for credit losses $ 2,659 $ 2,523 $ 2,583
======= ======= =======
Interest income on impaired loans recorded on the cash basis 23 18 23
========= ======== =======
</TABLE>
Interest income of $88,000 would have been recorded for the period ended
September 30, 1999 had the loans been current and in accordance with their
original terms. 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 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 September 30, 1999 total commitments to extend
credit were approximately $63,120,000. Outstanding letters of credit were
approximately $2,619,000 at September 30, 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion is designed to provide a better
understanding of the financial position of Talbot Bancshares, Inc., and should
be read in conjunction with the December 31, 1998 audited consolidated financial
statements and notes.
Forward - Looking Information
Portions of this Quarterly Report on Form 10-Q contain forward-looking
statements within the meaning of The Private Securities Litigation Reform Act of
1995. Such statements are not historical facts and include expressions about the
Company's confidence, policies, and strategies, the Year 2000 issue, adequacy of
capital levels, and liquidity. Such forward-looking statements involve certain
risks and uncertainties, including economic conditions, competition in the
geographic and business areas in which the Company and its affiliates operate,
inflation, fluctuations in interest rates, legislation, and governmental
regulation. These risks and uncertainties are described in more detail in the
Company's Form 10-K, under the heading "Risk Factors." Actual results may differ
materially from such forward looking statements, and the Company assumes no
obligation to update forward looking statements at any time.
Overview
Net income for the third quarter of 1999 was $1,158,000 an increase of 12.2%
over the $1,032,000 for the third quarter of 1998. On a per share basis earnings
were $ .94 compared to $ .85 for the same period last year. Net income for the
nine months ended September 30, 1999 was $3,267,000 compared to $2,924,000 for
the same period in 1998. This represents a 11.7% increase. Diluted net income
per share was $2.69 and $2.41 for the nine months ended September 30, 1999 and
1998, respectively.
Return on average assets was 1.43% for the first three quarters of 1999 compared
to 1.44% for the first three quarters of 1998. Return on average stockholders'
equity was 12.47% for the first nine months of 1999 compared to 12.26% for the
same period in 1998.
Increased volume of investment securities and loans funded by deposit growth are
the primary source of increased earnings. The average balance of investment
securities increased approximately $17,000,000 to $78,357,000 and the average
balance of loans increased $16,600,000 to $205,027,000 at September 30, 1999
when compared to one year ago. Average deposits at September 30, 1999 were
$252,014,000 representing an increase of $27,500,000 compared to last year. The
increase in deposits is attributable in part to the deposits of a municipal
customer of the Bank.
Net Interest Income
Net interest income on a fully tax equivalent basis increased $566,000 or 6.5%
for the nine month period ended September 30, 1999, when compared to the same
period last year. The overall yield on earning assets declined .43% compared to
last year. This decline was offset in part by a decline of .25% in the rate paid
for interest bearing liabilities; primarily deposits. The resulting net interest
margin at September 30, 1999 was 4.24%, a .24% decline from one year ago. The
increase in the average balance of earning assets of $32,736,000 resulted in
increased net income despite the lower yields. See the Analysis of Interest
Rates and Interest Differentials on page 11 for further details.
Net interest income on a fully tax equivalent basis was $3,227,000 for the three
months ended September 30, 1999. This represents a 9.6% increase over the same
period in 1998. The increase is attributable to increased volume of earning
assets. Average investment securities increased 6.5% to $74,139,000 and average
loans increased 11.2% to $211,315,000 for the quarter ended September 30, 1999
when compared to the quarter ended September 30, 1998. This growth was funded by
increased deposits and securities sold under agreements to repurchase, as well
as a decline in the average balance of Federal Funds Sold. Average Deposits for
the quarter ended September 30, 1999 increased 8.9% totalling $230,574,000 and
securities sold under agreements to repurchase increased 17.5% totalling
$18,326,000. The average balance of Federal Funds Sold was $12,801,000 a
decrease of 27.7% compared to one year ago.
Non-interest Income
Non-interest income increased 3.9% and 22.5% for the quarter and nine months
ended September 30, 1999 compared to the same periods in 1998. Service charges
on deposit accounts increased 7% and 27%, respectively for the quarter and nine
months ended September 30, 1999 when compared to the same periods in 1998.
Implementation of new service charge rates in July of 1998 is the primary cause
of this increase.
Non-interest expense
Total non-interest expense, excluding the provision for loan losses, increased
4.7% for the quarter ended September 30, 1999 from the comparable period in
1998. For the nine month period ended September 30, 1999, the percentage
increase in non-interest expenses was 3.6% when compared to the same period in
1998. Increases in salaries and employee benefits, as well as a general increase
in operating expenses were the causes of the increases.
Analysis of Financial Condition
Loan growth during the nine month period ended September 30, 1999 was funded
through deposit growth, an increase in securities sold under agreements to
repurchase, and a decline in investment securities. Investment securities
declined $11,678,000 or 14% totalling $71,693,000 at September 30, 1999 compared
to $83,371,000 at December 31, 1998. Total loans increased 8.3% totalling
$210,592,000 at September 30, 1999 from $191,364,000 at December 31, 1998. Total
deposits increased $4,715,000 to $254,644,000 at September 30, 1999 from
$249,929,000 at December 31, 1998. Securities sold under agreements to
repurchase increased $1,506,000 to $18,617,000 at September 30, 1999 from
$17,111,000 at December 31, 1998.
<PAGE>
Liquidity and Capital Resources
The Company derives liquidity through increased customer deposits,
maturities in the investment portfolio, loan repayments and income from
earning assets. At September 30, 1999 the Company's liquidity ratio was
approximately 21%. 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.
Total Stockholders' equity increased 3.6% to $35,526,000 at September 30,
1999 from $34,284,000 at December 31, 1998. Net unrealized losses on
investment securities available for sale reduced stockholders' equity
$1,184,000 for the nine months ended September 30, 1999. The Company
continues to maintain capital ratios well in excess of regulatory minimums.
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.
<TABLE>
<CAPTION>
A comparison of the Company's capital as of September 30, 1999, with the
minimum requirements is presented below.
Minimum
Actual Requirements
------ ------------
<S> <C> <C>
Tier 1 Risk-based Capital 17.00% 4.00%
Total Risk-based Capital 18.24% 8.00%
Leverage Ratio 11.67% 3.00%
</TABLE>
Loans and Allowance for Loan Losses
The Company has established an allowance for credit losses, which is
increased by provisions charged against earnings and recoveries of
previously charged-off debts. The allowance is decreased by current period
charge-off of uncollectible debts. Management evaluates the adequacy of the
allowance for credit losses on a quarterly basis and adjust the provision
for credit losses based upon this analysis. The evaluation of the adequacy
of the allowance for credit losses is based on risk rating system of
individual loans as well as collective evaluation of smaller balance
homogenous loans based on factors such as past credit loss experience,
local economic trends, non-performing and problem loans, and other factors
which may impact collectibility, such as Year 2000. A loan is placed on
nonaccrual when it is specifically determined to be impaired and principal
and interest are delinquent for 90 days or more.
<TABLE>
<CAPTION>
The following table summarizes past due and non-performing assets of the
Company.
September 30, September 30, December 31,
Non-performing Assets: 1999 1998 1998
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Non-accrual loans 794 841 827
Other real estate owned 74 192 164
---- ------ ----
868 1,033 991
Past due loans 796 697 671
--- ------ ---
Total non-performing and past due loans $1,664 $1,730 $1,662
====== ====== ======
</TABLE>
The provision for loan losses for the nine months ended September 30, 1999
and 1998 was $180,000. For both the third quarter of 1999 and 1998 the provision
for loan losses was $60,000. Despite improvement in net charge-offs during the
three and nine month periods ended September 30, 1999, non-performing assets of
the Company have remained relatively unchanged at $1,664,000 when compared to
December 31, 1998. The allowance for loan losses as a percentage of average
loans was 1.30% and 1.34% as of September 30, 1999 and 1998, respectively. Based
on Management's quarterly evaluation of the adequacy of the loan loss reserve,
including the review of non-performing assets, and continued growth of the loan
portfolio, Management feels that the allowance for loan losses and the related
provision are adequate at September 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
The following table presents a summary of the activity in the Allowance for
Loan Losses.
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 1999 1998 1999 1998
- ---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance balance - beginning $ 2,605 $ 2,524 $ 2,582 $ 2,538
Charge-offs:
Commercial and other 33 - 113 55
Real estate - 45 25 172
Consumer 14 19 47 35
-------- -------- -------- ---------
Totals 47 64 185 262
-------- -------- ------- --------
Recoveries:
Commercial 21 - 40 26
Real Estate 10 - 19 19
Consumer 10 3 23 22
---------- --------- -------- --------
Totals 41 3 82 67
---------- -------- -------- --------
Net Charge-offs: 6 61 103 195
Provision for loan losses 60 60 180 180
-------- --------- --------- ---------
Allowance balance-ending $ 2,659 $ 2,523 $ 2,659 $ 2,523
======= ======== ======= ========
Average Loans outstanding during period $211,315 $190,085 $205,027 $188,460
======== ======== ======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .01% .13% .07% .14%
========= ========= ========= ==========
Allowance for loan losses at period end as a
percentage of average loans 1.26% 1.33% 1.30% 1.34%
======== ======== ========= =========
</TABLE>
Because the Company's loans are predominately 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.
Analysis of Interest Rates and Interest Differentials.
<TABLE>
<CAPTION>
The following table presents the distribution of the average consolidated
balance sheets, interest income/expense and yields earned and rates paid through
the first nine months of the year.
1999 1998
---- ----
Average Income Yield Average Income Yield
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ---------------------- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Investment Securities $ 78,357 $ 3,408 5.82% $ 61,342 $ 2,746 5.99%
Loans 205,027 12,838 8.38 188,460 12,424 8.81
Federal Funds Sold 9,724 359 4.89 10,570 441 5.50
-------- -------- ---- --------- ------- ----
Total earning assets 293,108 16,605 7.58% 260,372 15,611 8.01%
------- ------
Non-interest earning assets 12,520 10,876
------- ---------
Total Assets $305,628 $271,248
======== ========
Interest bearing liabilities
Interest bearing deposits $227,402 $ 6,815 4.01% $203,172 $ 6,445 4.24%
Borrowings 17,431 495 3.80 13,650 437 4.22
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 244,833 7,310 3.99% 216,822 6,882 4.24%
------ ------
Non-interest bearing liabilities 25,776 22,542
Stockholders' equity 35,019 31,884
-------- --------
Total liabilities and stockholders' equity $305,628 $271,248
======== ========
Net interest spread $ 9,295 3.59% $ 8,729 3.77%
======= =======
Net interest margin 4.24% 4.48%
</TABLE>
<PAGE>
(1) All amounts are reported on a tax equivalent basis computed using the
statutory federal income tax rate exclusive of the alternative minimum tax rate
of 34% and nondeductible interest expense.
(2) Average loan balances include non-accrual loans.
(3) Loan fee income is included in interest income for each loan category and
yield calculations are based on the total.
Year 2000 Issue
This is a Year 2000 readiness disclosure under the Year 2000
Information and Readiness Act of 1998.
"Year 2000 Issue", which is common to most corporations, including
banks, is a general term used to describe the problems that may result from the
improper processing of dates and date-sensitive "Year "Year 2000 Issue", which
is common to most corporations, including banks, is a general term used to
describe the problems that my result from the improper processing of dates and
date-sensitive calculations as the Year 2000 approaches. This issue is caused by
the fact that many of the world's existing computer programs use only two digits
to identify the year in the date field of a program. These programs could
experience serious malfunctions when the last two digits of the year change to
"00" as a result of identifying a year designated "00" as the year 1900 rather
than the Year 2000.
The Company formed a Year 2000 Committee, which is comprised of a
cross-section of the Company's employees, in 1996. This Committee is leading the
Company's Year 2000 efforts to ensure that the Company is properly prepared for
the Year 2000. The Company's Board of Directors has approved a plan submitted by
the year 2000 Committee that was developed in accordance with guidelines set
forth by the Federal Financial Institutions Examination Council. This plan has
five primary phases related to internal Year 2000 compliance:
1. Awareness - this phase is ongoing and is designed to inform the
Company's Board of Directors (the "Board") and Executive management
("Management"), employees, customers and vendors of the impact of the Year
2000 Issue. Since September 1997, the Board has been apprised of the
Company's efforts at their regular meetings. In addition, all customers
were updated with respect to the Company's Year 2000 efforts through
several mailings sent in 1998 and 1999.
2. Assessment - during this phase an inventory was conducted of all known
Company processes that could reasonably be expected to be impacted by the
Year 2000 Issue and their related vendors, if applicable. The
identification process included information technology and communication
systems such as personal computers, local area networks and servers, ATM
modems, printers, copy machines, facsimile machines, telephones and the
operating systems and software for these systems. It also included
non-information technology systems, such as heating, air conditioning and
vault controls, alarm systems, surveillance systems, time clocks, coin and
currency counters, and postage meters. The Company inventoried all the
systems listed above in October 1997 and performed an initial assessment of
potential risks from either under or nonperformance arising from incorrect
processing and usage of dates after December 31, 1999. All outside services
and major vendors were contacted to ascertain their individual levels of
Year 2000 compliance. From vendor responses and/or certifications of Year
2000 compliance the Company determined that all vendors are aware of the
issue and are working toward compliance. The Company expects all vendors to
be Year 2000 compliant prior to December 31, l999. The assessment phase is
complete, although it is updated periodically as necessary.
3. Renovation and/or replacement - this phase includes programming code
enhancements, hardware and software upgrades, system replacements, vendor
certification and any other changes necessary to make any hardware,
software and other equipment Year 2000 compliant. The Company does not
perform in-house programming, and thus is dependent on external vendors to
ensure and modify, if needed, the hardware, software or other services it
provides to the Company for Year 2000 compliance. The Company's data
processing for its core services (deposit, loan and related support
processing) is performed by Delmarva Bank Data Processing Center,
Inc.("Delmarva"). Delmarva reports its Year 2000 compliance progress to the
Company on a regular basis. These reports indicate that they are on or
ahead of schedule in all areas and the Company expects Delmarva to be Year
2000 compliant prior to December 31, l999.
4. Validation - the next phase for the Company under the plan was to
complete a comprehensive testing of all known processes. Testing with
Delmarva was completed in August 1998. All core systems tested compliant.
The Company has performed Year 2000 testing of all employee computer work
stations, and all were either upgraded or replaced with compliant systems.
The testing of all known processes was complete by June 30, 1999.
5. Implementation - this phase will occur when Year 2000 processing
commences. On some applications the Company is already entering dates
greater than December 31, 1999 into its systems. In these situations no
adverse events have been noted. The significant part of the implementation
phase will occur after December 31, 1999.
The Company has developed contingency plans for processes that do not process
information reliably and accurately after December 31, 1999, including a
contingency plan to provide operating alternatives for continuation of services
to the Bank's customers in the event of systems or communications failures at
the beginning of the Year 2000. The contingency plan was
<PAGE>
completed at December 31, 1998. Based on preliminary planning during development
of the contingency plan, Management believes that the Company will be able to
continue to operate in the Year 2000 even if some systems fail. At the end of
December 1999, the Company will generate paper and spreadsheet backup of all
customer and general ledger accounts. Due to the size of the Bank, management
believes that the Bank would be able to operate with all transactions processed
manually until normal operations can be restored. This procedure could require
changing of schedules and hiring of temporary staff. Management expects this
procedure, if necessary, to be short term and not materially increase the
Company's operating costs, however, if this procedure were to continue for any
extended period of time, or if the Bank ultimately had to change data service
providers, the cost could be material.
Ultimately, the success of the Company's efforts to address the Year 2000
issue depends to a large extent not only on the corrective measures that the
Company undertakes, but also on the efforts undertaken by businesses and other
independent entities who provide data to, or receive data from, the Company such
as borrowers, vendors or customers. In particular, the Company's credit risk
associated with its borrowers may increase as a result of problems such
borrowers may have resolving their own Year 2000 issues. The Company has
assessed the Year 2000 readiness of significant borrowers and depositors.
Significant borrowers and depositors are commercial customers with individual
non-mortgage loans in excess of $300,000 or loan relationships in excess of
$750,000 if secured, $500,000 if unsecured. Surveys of each significant
borrower's and depositor's awareness of the Year 2000 issue and their ability to
become compliant have been performed. This step did not require a significant
amount of time or resources. Based on the survey responses, Management is not
aware of any material risks posed by the Year 2000 status of significant
borrowers and depositors. From now until 2000, the Company will continue to
monitor the Year 2000 efforts of its borrowers and will implement a course of
action and procedures designed to reduce any increased potential risk as a
result of Year 2000 issues.
<TABLE>
<CAPTION>
As of October 31, 1999 the following chart shows the current and
projected status of the Bank's Year 2000 compliance efforts:
Phase 12/31/98 6/30/99 9/30/99
----- -------- ------- -------
<S> <C> <C> <C>
Awareness 100% 100% 100%
Assessment 100% 100% 100%
Renovation 95% 100% 100%
Validation 85% 100% 100%
</TABLE>
The Company expensed approximately $106,000 during the nine month period
ended September 30, 1999 on Year 2000 costs. For the years ended December 31,
1998 and 1997 the Company expensed approximately $101,000 and $58,000,
respectively. Based on an analysis of projected expenses performed the total
cost of the Year 2000 project is currently estimated at $305,000. Funding of the
Year 2000 project costs will come from normal operating cash flow, however, the
majority of expenses associated with the Year 2000 Issue are the cost of
existing personnel and will not have a material effect on the reported net
income for the Company. Should the Company have to resort to alternative
operating procedures due to major systems or communication failures at the
beginning of the Year 2000, the extra costs could be material. Other projects
have been delayed due to time spent on the Year 2000 project, however, these
have not had a material effect on our financial condition or results of
operations.
Management of the Company believes that the potential effects on the
Company's internal operations of the Year 2000 Issue can and will be addressed
prior to the Year 2000. However, if required modifications or conversions are
not made or are not completed on a timely basis prior to the Year 2000, the Year
2000 scenarios foreseeable at this time would include the Company temporarily
not being able to process, in some combination, various types of customer
transactions. This could affect the ability of the Company to, among other
things, originate new loans, post loan payments, accept deposits or allow
immediate withdrawals, and, depending on the amount of time such a scenario
lasted, could have a material adverse effect on the Company.
Because of the serious implications of these scenarios, the primary emphasis
of the Company's Year 2000 efforts is to correct, with complete replacement if
necessary, any systems or processes whose Year 2000 test results are not
satisfactory prior to the Year 2000. Nevertheless, should one of the most
reasonably likely worst case scenarios occur in the Year 2000, the Company, as
noted above, has formalized a contingency plan that would allow for limited
transactions until the Year 2000 problems are fixed.
The costs of the Year 2000 project and the date on which the Company plans to
complete Year 2000 compliance are based on Management's best estimates, which
were derived using numerous assumptions of future events such as the
availability of certain resources (including internal and external resources),
third party vendor plans and other factors. However, there can be no guarantee
that these estimates will be achieved at the cost disclosed or within the
timeframe indicated, and actual results could differ materially from these
plans. Factors that might affect the timely and efficient completion of the
Company's Year 2000 project include, but are not limited to, vendors' abilities
to adequately correct or convert software and the effect on the Company's
ability to test its systems, the availability and cost of personnel trained in
the Year 2000 area, the ability to identify and correct all relevant computer
programs and similar uncertainties.
<PAGE>
Bank regulatory agencies have issued guidance under which they are
assessing Year 2000 readiness. The failure of a financial institution to take
appropriate action to address deficiencies in the Year 2000 project management
process may result in enforcement actions which could have a material adverse
effect on such institution, result in the imposition of civil money penalties or
result in the delay (or receipt of an unfavorable or critical evaluation of
management of a financial institution in connection with regulatory review) of
applications seeking to acquire other entities or otherwise expand the
institution's activities.
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 repayments 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 June 30, 1999 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> <C> <C>
% Change in Net Interest Income 6.0% ( 8.3%) +/-25%
% Change in Fair Value of Capital 13.4% (12.6%) +/-15%
</TABLE>
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: November 12, 1999 By: /s/ W. Moorhead Vermilye
--------------------------------------
W. Moorhead Vermilye
President
Date: November 12, 1999 By: /s/ Susan E. Leaverton
--------------------------------------
Susan E. Leaverton, CPA
Treasurer/Principal Accounting Officer
<PAGE>
<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, 1999, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001043056
<NAME> Talbot Bancshares, Inc.
<MULTIPLIER> 1000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Sep-30-1999
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<CASH> 10,952
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0
0
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<INTEREST-TOTAL> 16,508
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<NET-INCOME> 3,267
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<LOANS-NON> 794
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</TABLE>
