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 June 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 ________
Commission File Number 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 July 31, 1999, there were 1,192,632 shares of common stock outstanding.
This is the only class of outstanding shares.
<PAGE>
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
June 30, 1999 and 1998 (unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of changes in Stockholders' Equity -
For the six Month Period ended June 30, 1999 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-8
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations 9-11
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>
June 30, June 30, December 31,
ASSETS: 1999 1998 1998
- ------- --------------- --------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash and due from banks $7,774 $ 7,021 $ 8,004
Federal funds sold 525 15,153 12,403
Investment in debt securities:
Held-to-maturity, at amortized cost (fair value of $11,530,
$16,727, $13,963, respectively) 11,577 16,668 13,871
Available for sale, at fair value 61,279 39,134 69,500
Loans, less allowance for credit losses ($2,605, $2,524,
$2,583, respectively) 207,376 186,157 191,781
Bank premises and equipment 3,067 3,078 2,977
Other real estate owned 124 318 164
Accrued interest receivable on loans and investment securities 2,149 1,838 2,169
Deferred income tax benefits 946 409 342
Other assets 975 1,068 1,043
---------- ---------- ----------
TOTAL ASSETS $295,792 $270,844 $302,254
======== ======== ========
LIABILITIES:
Deposits:
Non-interest bearing demand $ 25,392 $ 21,768 $ 25,483
NOW and Super NOW 48,591 50,769 50,207
Certificates of deposit $100,000 or more 28,262 25,054 45,733
Other time and savings 135,030 125,363 128,506
-------- -------- --------
Total Deposits 237,275 222,954 249,929
Short term borrowings 22,884 14,676 17,111
Other liabilities 772 689 930
--------- ---------- ----------
TOTAL LIABILITIES 260,931 238,319 267,970
-------- -------- --------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 25,000,000 shares; issued and
outstanding:
June 30, 1999 1,192,632
June 30, 1998 1,191,202
December 31, 1998 1,192,202 12 12 12
Surplus 12,686 12,611 12,663
Retained earnings 22,677 19,697 21,164
Accumulated other comprehensive income (514) 205 445
------------ --------- ----------
TOTAL STOCKHOLDERS' EQUITY 34,861 32,525 34,284
--------- --------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $295,792 $270,844 $302,254
======== ======== ========
</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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,328 $ 4,159 $ 8,356 $ 8,202
Interest and dividends on investment securities
Taxable 1,070 787 2,192 1,594
Tax-exempt 36 60 82 125
Federal funds sold 48 105 195 192
------- -------- -------- --------
Total interest income 5,482 5,111 10,825 10,113
------- ------- ------- --------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 465 362 1,097 742
Other deposits 1,726 1,712 3,407 3,404
Other interest 179 151 316 262
------- ------- ------- -------
Total interest expense 2,370 2,225 4,820 4,408
------- ------ ------- ------
NET INTEREST INCOME 3,112 2,886 6,005 5,705
PROVISION FOR CREDIT LOSSES 60 60 120 120
-------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 3,052 2,826 5,885 5,585
------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 218 154 404 289
Loss on sale of securities 12 9 12 9
Other noninterest income 30 44 70 64
------- ------- ------ --
Total noninterest income 260 207 486 362
------ ----- ----- -----
NONINTEREST EXPENSES
Salaries and employee benefits 897 866 1,812 1,774
Expenses of premises and fixed assets 181 168 372 350
Other noninterest expense 457 465 978 945
------- ------- ------- -------
Total noninterest expense 1,535 1,499 3,162 3,069
------ ------ ------ ------
INCOME BEFORE TAXES ON INCOME 1,777 1,534 3,209 2,878
Federal and State income taxes 618 533 1,100 986
------- ------- --------- ---
NET INCOME $1,159 $1,001 $2,109 $1,892
====== ====== ====== ======
PER SHARE DATA:
Diluted earnings per common share $ .96 $ .82 $ 1.75 $ 1.56
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
<CAPTION>
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
Net Income - - 1,892 - 1,892
Cash Dividends Paid $0.40 per share - - (475) - (475)
Other Comprehensive income, net of tax:
Unrealized gain on available for sale securities,
net of reclassification adjustment of $(1) - - - 74 74
---------
Other comprehensive income 74
Shares issued - 63 - - 63
------------ ---------- ----------- -------------------- ---------
Balances, June 30, 1998 $ 12 $12,611 $19,697 $205 $32,525
=========== ======= ======= ================ =======
Balances, December 31, 1998 $ 12 $12,663 $21,164 $445 $34,284
Net Income - - 2,109 - 2,109
Cash Dividends Paid $0.50 per share - - (596) - (596)
Other Comprehensive income, net of tax:
Unrealized loss on available for sale securities,
net of reclassification adjustment of $101 - - - (959) (959)
-----------
Other comprehensive income (959)
Shares issued - 52 - - 52
Shares repurchased and retired - (29) - - (29)
------------- --------------------------- -------------------- -----------
Balances, June 30, 1999 $ 12 $12,686 $22,677 (514) $34,861
=========== ======= ======= ================ =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Six Months Ended June 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 2,109 $ 1,892
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 311 235
Discount accretion on debt securities (18) (35)
Discount accretion on matured debt securities 10 91
Gain on sale of securities (12) (9)
Loss on sale of other real estate owned 10 -
Provision for credit losses, net 22 120
Net changes in:
Accrued interest receivable 20 111
Other assets 68 (100)
Accrued interest payable on deposits (35) (12)
Other liabilities (123) (179)
----------------- -------------------
Net cash provided by operating activities 2,362 2,114
----------------- -----------------
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 9,114 1,181
Purchase of securities available for sale (8,648) (8,107)
Proceeds from maturities and principal payments of securities
held to maturity 4,654 8,532
Purchase of securities held to maturity (2,382) (1,000)
Net increase in loans (14,402) (3,522)
Purchase of loans (1,400) -
Proceeds from sale of loans 185 -
Purchase of bank premises and equipment (240) (87)
Proceeds from sale of other real estate owned 80 -
Purchase other real estate owned (50) (204)
------------------ -------------------
Net cash provided by investing activities (7,016) 1,855
--------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand, NOW, money market and
savings deposits 3,109 (3,343)
Net increase(decrease) in certificates of deposit (15,763) 1,383
Net increase in securities sold under agreement to repurchase 5,773 4,412
Proceeds from issuance of common stock 52 63
Common stock repurchased and retired (29) -
Dividends paid (596) (475)
---------------- ---------------
Net cash provided (used) by financing activities (7,454) 2,040
-------------- --------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (12,108) 6,009
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,407 16,165
--------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,299 $ 22,174
============== =============
</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 June 30, 1999, the results of
operations for the three and six month periods ended June 30, 1999 and
1998, and cash flows for the six month period ended June 30, 1999 and 1998.
The results of operations for the three and six months ended June 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 1,192,208 share for 1999 and
1,189,987 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 six months ended June 30,
1999 and 1998 were 1,207,428 and 1,210,273, 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.
Information with respect to impaired loans and the related valuation allowance
is shown below:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
(Dollars in thousands) 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans with valuation allowance $ 60 $ 90 $ 109
Impaired loans with no valuation allowance 657 817 718
------- ------- -------
Total impaired loans $ 717 $ 907 $ 827
====== ======= =======
Allowance for credit losses applicable to impaired loans $ 30 $ 40 $ 79
Allowance for credit losses applicable to other than impaired loans 2,575 2,484 2,504
-------- ------- -------
Total allowance for credit losses $ 2,605 $ 2,524 $ 2,583
======= ======= =======
Interest income on impaired loans recorded on the cash basis $ 15 $ 8 $ 23
========= ========== ========
</TABLE>
Interest income of $55,600 would have been recorded for the period ended
June 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 June 30, 1999 total commitments to
extend credit were approximately $46,989,000. Outstanding letters of credit
were approximately $2,668,000 at June 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 six months ended June 30, 1999 increased 11.5% totalling
$2,109,000 compared to $1,892,000 for June 30, 1998. On a per share basis
earnings were $1.75 and $1.56 for the six month periods ended June 30, 1999
and 1998, respectively. Net income for the second quarter of 1999 increased
$158,000 or 13.6% totalling $1,159,000 compared to $1,001,000 for 1998. On
a per share basis earnings for the quarter were $0.96 compared to $0.82 for
the same period last year.
Increased volume of investment securities and loans compared to last year
are the primary source of increased earnings. Investment securities
totalled $72,856,000 and $55,802,000 at June 30, 1999 and 1998,
respectively. Total loans were $209,981,000 and $188,861,000 at June 30,
1999 and 1998, respectively. Deposits increased 6% totalling $237,275,000
when compared to one year ago, however during the first six months of 1999
deposits declined 5% due to a decline in balances of a municipal depositor.
Net Interest Income
Net interest income on a fully tax equivalent basis increased $284,000 or
4.9% for the six month period ended June 30, 1999 compared to the same
period in 1998. The overall yield on earning assets declined .52% compared
to last year, however a decline in the rate paid for interest bearing
liabilities of .21% resulted in a lesser .38% decline in the net interest
margin. The effect of the decline in net interest yields on interest income
was offset by a $34,340,000 increase in the average balances of earning
assets for the six month period ended June 30, 1999.
Increased volume of investment securities generated a net increase in
interest income of $531,000 of 29.7% for the six months ended June 30, 1999
compared to 1998. The average yield on investment securities continued to
decline in the first six months of 1999 from from 5.93% at December 31,
1998 to 5.78% at June 30, 1999. The yield on investment securities at June
30, 1998 was 6.01%. Loans contributed $163,000 to increased interest income
due to increased volume. The yield on loans decreased .37% from 8.75% at
December 31, 1998 to 8.38% at June 30, 1999. Loan yield at June 30, 1998
was 8.84%. The growth in earning assets was funded by an increase in
interest bearing liabilities comprised primarily of growth in deposits. The
rate paid on interest bearing liabilities declined from 4.21% to 4.00% for
the six months ended June 30, 1999 compared to one year ago.
Non-interest Income
Total non-interest income increased 25.6% and 34.3% for the quarter and six
months ended June 30, 1999 compared to the same periods in 1998. These
increases are a result of increases in service charges assessed on deposit
accounts, Automated Teller Machine fees assessed on non-bank customer
transactions, and fees earned on the sale of non-deposit investment
products. Service charges, on deposit accounts increased 41.6% and 37.4%,
respectively for the quarter and six months ended June 30, 1999 when
compared to the same periods in 1998.
Non-interest expense
Total non-interest expense, excluding the provision for credit losses
increased $36,000 or 2.4% and $93,000 or 3% for the quarter and six months
ended June 30, 1999. These increases are the result of general increase in
salaries and benefits, and other expenses, associated with the growth of
the Bank and expanded services being provided.
<PAGE>
Analysis of Financial Condition
Loan growth and a decline in customer deposits during the six months ended
June 30, 1999 were funded through sales and maturities of investment
securities, as well as an increase in short term borrowings. At June 30,
1999 the bank had outstanding $5,000,000 in overnight advances from the
Federal Home Loan Bank under an established line of credit. Investment
securities decreased $10,515,000 or 13% totalling $72,856,000 at June 30,
1999 from $83,371,000 at December 31, 1998. Loans increased 8% to
$209,981,000 at June 30, 1999 from $194,364,000 at December 31, 1998. Total
deposits decreased $12,654,000 to $237,275,000 at June 30, 1999 from
$249,929,000 at December 31, 1998. Securities sold under agreements to
repurchase increased $773,000 totalling $17,884,000 at June 30, 1999,
compared to $17,111,000 at December 31, 1998.
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 June 30, 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 Company's ability to maintain liquidity at satisfactory levels.
Total Stockholders' equity was $34.8 million at June 30, 1999, 7.2% higher
than one year ago.
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 Company's capital as of June 30, 1999, with the minimum
requirements is presented below.
Minimum
Actual Requirements
Tier 1 Risk-based Capital 17.16% 4.00%
Total Risk-based Capital 18.35% 8.00%
Leverage Ratio 11.66% 3.00%
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 adjust 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 are delinquent for 90 days or more.
The following table summarizes past due and non-performing assets of the
Company.
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Non performing Assets: (dollars in thousands)
Non-accrual loans $ 717 $ 907 $ 827
Other real estate owned 119 318 164
------- ------- ------
836 1,225 991
Past due loans 1,370 1,333 671
------- -------- ------
Total non-performing and past due loans $ 2,206 $ 2,558 $1,662
======= ======= ======
</TABLE>
<PAGE>
The following table presents a summary of the activity in the Allowance for
Loan Losses.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance balance - beginning $ 2,596 $ 2,513 $ 2,582 $ 2,538
Charge-offs:
Commercial and other 67 43 80 55
Real estate - 38 25 127
Consumer 19 5 33 16
--------- -------- --------- --------
Totals 86 86 138 198
--------- ------- -------- --------
Recoveries:
Commercial 17 22 19 26
Real Estate 9 1 9 19
Consumer 9 14 13 19
--------- -------- --------- --------
Totals 35 37 41 64
--------- --------- --------- --------
Net Charge-offs: 51 49 97 134
Provision for loan losses 60 60 120 120
--------- --------- -------- ---------
Allowance balance-ending $ 2,605 $ 2,524 $ 2,605 $ 2,524
========= ========= ========= =========
Average Loans outstanding during period $207,211 $188,553 $201,498 $187,323
======== ======== ======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .10% .10% .10% .14%
========== ========== ========== ==========
Allowance for loan losses at period end as a
percentage of average loans 1.26% 1.34% 1.29% 1.35%
========= ========= ========= ========
</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 loan 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 six 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 $ 81,059 $ 2,317 5.78% $ 59,972 $ 1,786 6.01%
Loans 201,498 8,378 8.38 187,323 8,215 8.84
Federal Funds Sold 8,115 195 4.76 6,947 192 5.49
-------- -------- ---- --------- ------- ----
Total earning assets $290,672 $10,890 7.56% $254,242 $10,193 8.08%
------- -------
Non-interest earning Assets $ 12,311 $ 10,872
-------- ---------
Total Assets $302,983 $265,114
======== ========
Interest bearing liabilities
Interest bearing deposits $225,777 $ 4,505 4.02% $198,778 $ 4,145 4.21%
Borrowings 17,035 317 3.75 12,659 264 4.15
-------- -------- ---- -------- ------ ----
Total interest bearing liabilities $242,812 $ 4,822 4.00% $211,437 $ 4,409 4.21%
-------- -------
Non-interest bearing liabilities $ 25,408 $ 21,983
Stockholders' equity 34,763 31,694
-------- --------
Total liabilities and Stockholders' equity $302,983 $265,114
======== ========
Net interest spread $ 6,068 3.55% $ 5,784 3.88%
======= =======
Net interest margin 4.21% 4.59%
<FN>
(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.
</FN>
</TABLE>
<PAGE>
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 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, 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
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 complete at
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 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.
<PAGE>
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 have been performed. This step has not, and 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 June 30, 1999 the following chart shows the 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 $72,000 during the six month period ended
June 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 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.
<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 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 March 31, 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 7.70% (10.9%) +/-25%
% Change in Fair Value of Capital 1.8% ( 7.4%) +/-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
June 30, 1999.
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: August 13, 1999 By: /s/ W. Moorhead Vermilye
-----------------------------------------
W. Moorhead Vermilye
President
Date: August 13, 1999 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 JUNE 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001043056
<NAME> TALBOT BANCSHARES, INC.
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