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, 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 April 30, 1999, registrant had outstanding 1,192,136 shares of common
stock.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Part I.
<S> <C>
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
March 31, 1999 and 1998 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of changes in Stockholders' Equity -
For the three month period ended March 31, 1999 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Part II.
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Part I
Item 1. Financial Statements
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share amounts)
March 31, March 31, December 31,
ASSETS: 1999 1998 1998
- ------- --------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 7,163 $ 7,590 $ 8,004
Federal funds sold 12,863 12,265 12,403
Investment in debt securities:
Held-to-maturity, at amortized cost (fair value of $15,742,
$21,296, $13,963, respectively) 15,689 21,190 13,871
Available for sale, at fair value 69,307 37,296 69,500
Loans, less allowance for credit losses ($2,596, $2,513,
$2,582, respectively) 198,864 185,580 191,781
Bank premise and equipment 2,983 3,120 2,977
Other real estate owned 119 303 164
Accrued interest receivable on loans and investment securities 2,494 1,962 2,169
Investments in unconsolidated subsidiary 125 160 124
Deferred income tax benefits 605 406 342
Other assets 922 842 919
---------- ---------- ---------
TOTAL ASSETS $311,134 $270,714 $302,254
======== ======== ========
LIABILITIES:
Deposits:
Non-interest bearing demand $ 24,413 $ 22,106 $ 25,483
NOW and Super NOW 56,437 45,492 50,207
Certificates of deposit $100,000 or more 43,986 31,855 45,733
Other time and savings 131,409 126,279 128,506
--------- --------- ---------
Total Deposits 256,245 225,732 249,929
Securities sold under agreements to repurchase 19,161 12,244 17,111
Other liabilities 1,185 1,011 930
---------- ---------- ----------
TOTAL LIABILITIES 276,591 238,987 267,970
---------- ---------- ----------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 25,000,000 shares; issued and
outstanding:
March 31, 1999 1,192,686
March 31, 1998 1,190,110
December 31, 1998 1,192,202 12 12 12
Surplus 12,688 12,572 12,663
Retained earnings 21,816 18,933 21,164
Accumulated other comprehensive income 27 210 445
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 34,543 31,727 34,284
--------- --------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 311,134 $ 270,714 $ 302,254
======== ======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
---------------- ----------------
INTEREST INCOME
<S> <C> <C>
Loans, including fees $ 4,028 $ 4,043
Interest and dividends on investment securities
Taxable 1,122 807
Tax-exempt 46 65
Federal funds sold 147 87
--------- --------
Total interest income 5,343 5,002
------- -------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 632 380
Other deposits 1,681 1,692
Other interest 137 110
------- -------
Total interest expense 2,450 2,182
------ ------
NET INTEREST INCOME 2,893 2,820
PROVISION FOR CREDIT LOSSES 60 60
-------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 2,833 2,760
------ ------
NONINTEREST INCOME
Service charges on deposit accounts 186 135
Other noninterest income 40 20
------- -------
Total noninterest income 226 155
------ ------
NONINTEREST EXPENSES
Salaries and employee benefits 915 908
Expenses of premises and fixed assets 191 182
Other noninterest expense 521 482
------- -------
Total noninterest expense 1,627 1,572
------ ------
INCOME BEFORE TAXES ON INCOME 1,432 1,343
Federal and State income taxes 482 452
------- -------
NET INCOME $ 950 $ 891
====== ======
Diluted earnings per common share $ .79 $ .74
Basic earnings per common share $ .80 $ .75
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
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<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 - - 891 - 891
Other Comprehensive income, net of tax:
Unrealized gain on available for sale
Securities, net of reclassification
adjustment of $ 0 - - - 79 79
----------
Other comprehensive income - - - - 970
----------
Shares issued - 24 - - 24
Cash Dividends Paid $0.20 per share - - (238) - (238)
------------ ------------ ---------- -------------------- ----------
Balances, March 31, 1998 $ 12 $ 12,572 $ 18,933 $ 210 $ 31,727
========== ======== ======== ================= ========
Balances, December 31, 1998 $ 12 $ 12,663 $ 21,164 $ 445 $ 34,284
Comprehensive Income:
Net Income - - 950 - 950
Other Comprehensive income, net of tax:
Unrealized (loss) on available for sale
securities net of reclassification
adjustment of $ 0 - - - (418) (418)
---------
Other comprehensive income - - - - 532
----------
Shares issued - 25 - - 25
Cash Dividends Paid $0.20 per share - - (298) - (298)
------------ ------------ ---------- ------------- ----------
Balances, March 31, 1999 $ 12 $ 12,688 $ 21,816 $ 27 $ 34,543
========== ======== ======== =============== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 950 $ 891
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 152 115
Discount accretion on debt securities (10) (20)
Discount accretion on matured debt securities 10 22
Provision for credit losses, net 14 60
Loss on other real estate owned 9 -
Net changes in:
Accrued interest receivable (325) (13)
Other assets (4) (34)
Accrued interest payable on deposits 59 6
Accrued expenses 195 127
Other liabilities 1 (2)
--------------- -------------
Net cash provided by operating activities 1,051 1,152
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and principal payments of securities
available for sale 7,096 1,093
Purchase of securities available for sale (7,657) (1,009)
Proceeds from maturities and principal payments of securities
held to maturity 559 2,996
Purchase of securities held to maturity (2,382) -
Net increase in loans (5,862) (3,074)
Purchase of loans (1,400) -
Proceeds from sale of loans 165 -
Purchase of bank premises and equipment (80) (52)
Proceeds from sale of other real estate owned 36 -
-------------- ------------
Net cash used in investing activities (9,525) (46)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, NOW, money market and
savings deposits 7,260 (6,561)
Net increase (decrease) in certificates of deposit (944) 7,379
Net increase in securities sold under agreement to repurchase 2,050 1,980
Proceeds from issuance of common stock 25 24
Dividends paid (298) (238)
------------- ------------
Net cash provided decrease by financing activities 8,093 2,584
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (381) 3,690
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,407 16,165
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,026 $ 19,855
============ ===========
</TABLE>
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Talbot Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) The consolidated financial statements conform to generally accepted
accounting principles and to general industry practices. The accompanying
interim financial statements are unaudited; however, in the opinion of
management all adjustments necessary to present fairly the financial
position at March 31, 1999 the results of operations for the three month
period ended March 31, 1999 and 1998, and cash flows for the three month
period ended March 31, 1999 and 1998 have been included. All such
adjustments are of a normal recurring nature. The results of operations
for the three month ended March 31, 1999 are not necessarily indicative
of the results to be expected for the full year.
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 1,192,225 share for 1999
and 1,189,616 shares 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 three months
ended March 31, 1999 and 1998 were 1,207,541 and 1,209,331, 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 of 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.
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) 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans with valuation allowance $ 78 $ 119 $ 109
Impaired loans with no valuation allowance 754 1,079 718
-------- ------ ------
Total impaired loans $ 832 $1,198 $ 827
======== ====== =======
Allowance for credit losses applicable to impaired loans $ 48 $ 55 $ 79
Allowance for credit losses applicable to other than impaired loans 2,548 2,458 2,504
------- ------ -----
Total allowance for credit losses $ 2,596 $2,513 $2,582
======= ====== ======
Interest income on impaired loans recorded on the cash basis $ 8 $ 2 $ 23
========== ========= ========
</TABLE>
Interest income of $27,660 would have been recorded for the period ended
March 31, 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 March 31, 1999 total commitments to extend
credit were approximately $46,320,000. Outstanding letters of credit total
commitments included were approximately $2,406,000 at March 31, 1999.
- 7 -
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 the
such forward looking statements, and the Company assumes no obligation to
update forward looking statements at any time.
Overview
Net income for the first quarter of 1999 was $950,000 an increase of 6.6%
over the $891,000 for the first quarter of 1998. On a per share basis
earnings were $ .79 compared to $ .74 for the same period last year.
Net Interest Income
Net interest income for the three months ended March 31, 1999 was higher
than the same period last year due to an increase in average earning
assets. The net interest margin decreased 43 basis points to 4.09% compared
to 4.52% one year ago. Growth in average earning assets was concentrated in
investment securities with an average yield of 5.85%. This growth was
funded by growth in interest bearing deposits. The rate paid on interest
bearing deposits decreased 8 basis points to 4.07% compared to 4.15% one
year ago. Average loans increased approximately $10 million, however the
overall yield on loans declined 47 basis points to 8.38% compared to 8.85%
one year ago. Loans comprised 67.3% and 73.5% of total average earning
assets at March 31, 1999 and 1998, respectively.
Non-interest Income
Total non-interest income increased 45.8% in the first quarter of 1999 when
compared to the same period in 1998. This increase is due to increased
service charge assessed on deposit accounts, Automated Teller Machine fees
assessed on non-bank customer transactions and income from non deposit
product sales.
Non-interest expense
Total non-interest expense, excluding taxes and the provision for loan
losses, increased 3.5% for the quarter ended March 31, 1999 from the
comparable period in 1998. This increase is due to the growth of the bank
and expanded services being provided.
Analysis of Financial Condition
Growth in Investment Securities and Loans was funded through increased
customer deposits and securities sold under agreements to repurchase.
Investment securities increased $1,625,000 or 1.9% totalling $84,996,000 at
March 31, 1999 from $83,371,000 at December 31, 1998. Total loans increased
$7,097,000 or 3.7% totalling $201,460,000 at March 31, 1999 compared to
$194,363,000 at December 31, 1998. Total deposits increased $6,316,000 or
2.5% totalling $256,245,000 at March 31, 1999 compared to $249,929,000 at
December 31, 1998. Securities sold under agreements to repurchase increased
$2,050,000 or 12% totalling $19,161,000 at March 31, 1999 compared to
$17,111,000 at December 31, 1998.
- 8 -
<PAGE>
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, 1999 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 $34.5 million at March 31, 1999, 8.9% 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 capital as of March 31, 1999, with the minimum
requirements is presented below.
Minimum
Actual Requirements
------ ------------
Tier 1 Risk-based Capital 17.15% 4.00%
Total Risk-based Capital 18.40% 8.00%
Leverage Ratio 11.39% 4.00%
Loans
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 adjusts the provision
for credit losses based upon this analysis. The evaluation of the adequacy
of the allowance for credit losses is based on a 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 is delinquent for 90 days or more.
The following table summarizes past due and non-performing assets of the
Company.
<TABLE>
<CAPTION>
March 31, March 31, December 31,
Non-performing Assets: 1999 1998 1998
------------ ------------ ----------------
<S> <C> <C> <C>
Non-accrual loans 832 1,198 827
Other real estate owned 119 303 164
-------- ------- --------
951 1,501 991
Past due loans 1,362 749 671
------- ------- --------
Total non-performing and past due loans $2,313 $2,250 $1,662
====== ====== ======
</TABLE>
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<PAGE>
The following table presents a summary of the activity in the Allowance for
Loan Losses.
Three Months Ended March 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Allowance balance - beginning of year $ 2,582 $ 2,538
Charge-offs:
Commercial and other 13 12
Real estate 25 89
Consumer 14 11
-------- ----------
Totals 52 112
-------- -------
Recoveries:
Commercial 2 4
Real Estate - 18
Consumer 4 5
--------- ---------
Totals 6 27
--------- --------
Net Charge-offs:
Provision for loan losses 60 60
--------- --------
Allowance balance-ending $ 2,596 $ 2,513
========= =========
Average Loans outstanding during period $195,450 $185,491
======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .09% .18%
========= ==========
Allowance for loan losses at period end as a
percentage of average loans 1.33% 1.35%
======== ========
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.
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>
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 $ 82,704 $1,193 5.85% $ 60 ,399 $ 903 5.98%
Loans 195,450 4,028 8.38 185,491 4,049 8.85
Federal Funds Sold 12,295 147 5.78 6,643 87 5.24
--------- -------- ---- -------- ------- ----
Total earning assets 290,449 5,343 7.51% 252,533 5,039 7.98%
------- ----- ----- -----
Non-interest earning assets 12,145 11,720
--------- ---------
Total Assets $302,594 $264,253
======== ========
Interest bearing liabilities
Interest bearing deposits $228,759 $ 2,313 4.10% $199,829 $2,072 4.15%
Borrowings 15,235 137 4.68 10,851 110 4.09
--------- ------- ---- --------- ------ ----
Total interest bearing liabilities 243,994 2,450 4.07 210,680 2,182 4.15
------ ---- ------ ----
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<PAGE>
Non-interest bearing liabilities 23,233 22,200
Stockholders' equity 35,367 31,373
-------- --------
Total liabilities and stockholders' equity $302,594 $264,253
======== ========
Net interest spread $2,928 3.43% $2,857 3.83%
Net interest margin 4.09% 4.52%
</TABLE>
(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,
which also is reflected in the yields.
Year 2000
This is a year 2000 readiness disclosure under the Year 2000
Information and Readiness Disclosure Act of 1998.
The "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 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.
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, 1999. 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
- 11 -
<PAGE>
the Company expects Delmarva to be Year 2000 compliant prior to
December 31, 1999.
4. Validation - The next phase for the Company under the plan is 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 substantially
complete at March 31, 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 communication failures at the
beginning of the Year 2000. The contingency plan was 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, we will
generate paper and spreadsheet backup of all customer and general ledger
accounts. Due to the size of the Bank, we believe that we 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. We expect this procedure, if necessary, to be short term and
not materially increase our operating cost, however, if this procedure were to
continue for any extended period of time, or if we 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 is also in
the process of assessing 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 and depositor's awareness of the Year 2000 issue and their
ability to become compliant are being performed. This step is not expected to
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 endeavor 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.
As of April 30, 1999 the following chart shows the current and projected status
of the Bank's Year 2000 compliance efforts:
Phase 12/31/98 04/30/99 6/30/99
----- -------- -------- -------
Awareness 100% - -
Assessment 100% - -
Renovation 95% 100% -
Validation 85% 95% 100%
The Company expensed approximately $36,000 in the first quarter of 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 $300,000. 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.
- 12 -
<PAGE>
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 time
frame 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.
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.
- 13 -
<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, 1998 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 8.67% (11.46%) +/-25%
% Change in Fair Value of Capital 10.01% (12.28%) +/-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, 1999.
- 14 -
<PAGE>
Part II
Other Information
Item 4. Submission of Mattes to Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 28, 1999, the
stockholders elected four individuals to serve as a Director until the 2002
Annual Meeting of Stockholders, and until their successors are duly elected and
qualify. The Company submitted the matter to a vote through the solicitation of
proxies. The results of the election are as follows:
Class I Nominees (Term expires 2002) For Against Abstain
--- ------- -------
Herbert L. Andrew, III 967,602 3,484 500
Blenda W. Armistead 963,404 7,682 500
Lloyd L. Beatty, Jr. 970,002 1,084 500
Donald D. Casson 968,402 2,684 500
The stockholders also approved the 1999 Stock Option Plan. The results of the
voting are as follows:
For Against Abstain
--- ------- -------
712,375 84,893 23,654
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit 27 - Financial Data Schedule
b) No Forms 8-K filed.
- 15 -
<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 13, 1999 By: /s/ W. Moorhead Vermilye
----------------------------------------
President
Date: May 13, 1999 By: /s/ Susan E. Leaverton
----------------------------------------
Susan E. Leaverton, CPA
Treasurer/Principal Accounting Officer
- 16 -
<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 MARCH 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001043056
<NAME> TALBOT BANCSHARES, INC
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 7,163
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,863
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,307
<INVESTMENTS-CARRYING> 15,689
<INVESTMENTS-MARKET> 15,742
<LOANS> 201,093
<ALLOWANCE> 2,596
<TOTAL-ASSETS> 311,134
<DEPOSITS> 256,245
<SHORT-TERM> 19,161
<LIABILITIES-OTHER> 1,185
<LONG-TERM> 0
0
0
<COMMON> 12
<OTHER-SE> 34,531
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<INTEREST-OTHER> 147
<INTEREST-TOTAL> 5,343
<INTEREST-DEPOSIT> 2,313
<INTEREST-EXPENSE> 2,450
<INTEREST-INCOME-NET> 2,893
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<EXPENSE-OTHER> 1,627
<INCOME-PRETAX> 1,432
<INCOME-PRE-EXTRAORDINARY> 950
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 950
<EPS-PRIMARY> .80
<EPS-DILUTED> .79
<YIELD-ACTUAL> 7.51
<LOANS-NON> 832
<LOANS-PAST> 1,361
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,085
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</TABLE>
