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, 2000
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, 2000, registrant had outstanding 1,195,534
shares of common stock.
<PAGE>
INDEX
Part I.
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
September 30, 2000(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three and nine months ended September 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
Nine months ended September 30, 2000 and 1999 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
Part II.
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
<PAGE>
Part I
Item 1. Financial Statements
<TABLE>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share amounts)
<CAPTION>
September 30, December 31,
ASSETS: 2000 1999
------- --------------- ------------
(unaudited)
<S> <C> <C>
Cash and due from banks $ 10,035 $ 5,535
Federal funds sold 5,024 24,714
Investment securities:
Available for sale, at fair value 70,942 64,888
Held-to-maturity, at amortized cost (fair value of $ 5,546,
and $8,162 respectively) 5,626 8,302
Loans, less allowance for credit losses ($2,880
and $2,743 respectively) 237,671 216,033
Bank premises and equipment, net 2,980 2,978
Other real estate owned 161 74
Accrued interest receivable on loans and investment securities 3,017 2,122
Deferred income taxes 1,321 1,430
Other assets 518 993
---------- ----------
TOTAL ASSETS $337,295 $327,069
========== ==========
LIABILITIES:
Deposits:
Non-interest bearing demand $ 31,027 $ 31,691
NOW and Super NOW 51,783 50,104
Certificates of deposit $100,000 or more 59,521 58,324
Other time and savings 135,229 133,829
--------- ---------
Total Deposits 277,560 273,948
Short term borrowings 19,071 16,343
Other liabilities 1,388 896
--------- ---------
TOTAL LIABILITIES 298,019 291,187
--------- ---------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 25,000,000 shares; issued and
outstanding:
September 30, 2000 1,195,534
December 31, 1999 1,193,308 12 12
Surplus 12,821 12,724
Retained earnings 27,435 24,312
Accumulated other comprehensive income(loss) (992) (1,166)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 39,276 35,882
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $337,295 $327,069
========= =========
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
3
<PAGE>
<TABLE>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 5,164 $ 4,449 $ 14,765 $ 12,805
Interest and dividends on investment securities:
Taxable 1,008 1,027 3,082 3,219
Tax-exempt 27 43 84 125
Federal funds sold 110 164 378 359
-------- -------- -------- ---------
Total interest income 6,309 5,683 18,309 16,508
-------- -------- --------- ---------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 736 562 2,122 1,659
Other deposits 1,829 1,749 5,296 5,156
Other interest 235 179 666 495
------- ------- ------- -------
Total interest expense 2,800 2,490 8,084 7,310
------ ------ ------ ------
NET INTEREST INCOME 3,509 3,193 10,225 9,198
PROVISION FOR CREDIT LOSSES 110 60 224 180
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 3,399 3,133 10,001 9,018
------ ------ ------- ------
NONINTEREST INCOME
Service charges on deposit accounts 234 206 693 610
Gain on sale of securities - - 1 12
Other noninterest income 742 32 869 102
------ ------ ------ -------
Total noninterest income 976 238 1,563 724
----- ----- ------ -----
NONINTEREST EXPENSES
Salaries and employee benefits 967 909 2,926 2,721
Expenses of premises and fixed assets 188 190 596 562
Other noninterest expense 487 494 1,528 1,472
------ ------- ------ ------
Total noninterest expense 1,642 1,593 5,050 4,755
------ ------ ------ ------
INCOME BEFORE TAXES ON INCOME 2,733 1,778 6,514 4,987
Federal and State income taxes 989 620 2,317 1,720
------- ------- ------- -------
NET INCOME $1,744 $1,158 $4,197 $3,267
====== ====== ====== ======
Basic earnings per commons share $ 1.46 $ .97 $ 3.51 $ 2.74
Diluted earnings per common share $ 1.44 $ .94 $ 3.46 $ 2.69
Dividends declared per common share $ .30 $ .25 $ .90 $ .75
See accompanying notes to Condensed Consolidated Financial Statements.
</TABLE>
4
<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, 1999 $12 $12,724 $24,312 $(1,166) $35,882
Comprehensive income:
Net Income - - 4,197 - 4,197
Other comprehensive income, net of tax:
Unrealized gain on available for sale securities
net of reclassification adjustment - - - 174 174
----------
Total comprehensive income 4,371
----------
Cash Dividends Paid $0.90 per share - - (1,074) - (1,074)
Shares issued - 126 - - 126
Shares repurchased and retired - (29) - - (29)
------------- ------------- ------------ ------------------- -----------
Balances, September 30, 2000 $12 $12,821 $27,435 ($992) $39,276
============= ============= ============ =================== ===========
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>
5
<PAGE>
<TABLE>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<CAPTION>
For the Nine Months Ended September 30,
2000 1999
------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,197 $ 3,267
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 391 448
Discount accretion on debt securities (16) (30)
Gain on sale of securities (1) (12)
Loss on sale of bank equipment 2 12
Provision for credit losses 224 77
Loss on other real estate owned 11 8
Net changes in:
Accrued interest receivable (895) (275)
Other assets 475 276
Accrued interest payable on deposits 159 (60)
Other liabilities 333 (103)
--------------- ----------------
Net cash provided by operating activities 4,880 3,608
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 1,000 6,073
Proceeds from maturities and principal payments of securities
available for sale 53,736 12,114
Purchase of securities available for sale (60,642) (13,084)
Proceeds from maturities and principal payments of securities
held to maturity 2,981 7,843
Purchase of securities held to maturity (311) (3,382)
Net increase in loans (21,182) (15,710)
Purchase of loans (680) (1,400)
Proceeds from sale of loans - 881
Purchase of bank premises and equipment (257) (294)
Proceeds from sale of equipment 20 -
Proceeds from sale of other real estate owned 102 132
Purchase other real estate owned (200) (50)
-------------- --------------
Net cash used by investing activities (25,433) (6,877)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market and
savings deposits 478 1,181
Net increase in certificates of deposit 3,134 3,534
Net increase in securities sold under agreement to repurchase 2,728 1,506
Proceeds from issuance of common stock 126 84
Purchase of common stock (29) (30)
Dividends paid (1,074) (895)
------------- --------------
Net cash provided by financing activities 5,363 5,380
------------- --------------
NET (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS (15,190) 2,111
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,249 20,407
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,059 $ 22,518
============= =============
6
</TABLE>
<PAGE>
Talbot Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) The unaudited condensed consolidated financial statements of Talbot
Bancshares, Inc. (the "Company") 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, 2000, the results of operations for the three and
nine month periods ended September 30, 2000 and 1999, and cash flows for
the nine month period ended September 30, 2000 and 1999 have been included.
The results of operations for the three and nine months ended September 30,
2000 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 1999 Annual Report to
Shareholders and Form 10-K.
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 1,194,127 shares for 2000 and
1,192,327 for 1999. 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, 2000 and 1999 were 1,214,170 and 1,214,630, 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>
September 30, December 31,
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with valuation allowance $ 135 $ -
Impaired loans with no valuation allowance 455 773
-------- --------
Total impaired loans $ 590 $ 773
======= =======
Allowance for credit losses applicable to impaired loans $ 135 $ -
Allowance for credit losses applicable to other than impaired loans 2,745 2,743
------- -------
Total allowance for credit losses $ 2,880 $ 2,743
======= =======
Interest income on impaired loans recorded on the cash basis 26 32
========= =========
</TABLE>
Interest income of $75,000 would have been recorded for the period ended
September 30, 2000 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, 2000 total
commitments to extend credit were approximately $56,473,000. Outstanding
letters of credit were approximately $4,233,000 at September 30, 2000.
7
<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, 1999 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,
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 2000 was $1,744,000 an increase of
50.6% over the $1,158,000 for the third quarter of 1999. On a per share
basis earnings were $1.44 compared to $ .94 for the same period last year.
Net income for the nine months ended September 30, 2000 was $4,197,000
compared to $3,267,000, representing a 28.5% increase over the same period
in 1999. Diluted net income per share was $3.46 and $2.69 for the nine
months ended September 30, 2000 and 1999, respectively.
Return on average assets was 1.74% for the first three quarters of 2000
compared to 1.43% for the first three quarters of 1999. Return on average
stockholders' equity was 14.94% for the first nine months of 2000 compared
to 12.47% for the same period in 1999.
Increased loan volume and proceeds from life insurance policies are the
primary sources of increased earnings. The average balance of loans
increased $24,871,000 to $229,898,000 at September 30, 2000 when compared
to one year ago. Proceeds from life insurance policies totalling $676,000
caused a significant increase in noninterest income during the quarter and
nine month period ended September 30, 2000. Average deposits for the nine
month period ended September 30, 2000 were $237,456,000 representing an
increase of $10,054,000 over last year. The average balance of investment
securities declined $7,520,000 during the nine month period ended September
30, 2000.
Net Interest Income
Net interest income on a fully tax equivalent basis increased $1,006,000 or
10.8% for the nine month period ended September 30, 2000, when compared to
the same period last year. Increased volume and higher yields on earning
assets drove the increase for the period. The average balance of earning
assets increased $15,714,000. The overall yield on earning assets increased
from 7.58% at September 30, 1999 to 7.85% at September 30, 2000. This
increase was offset in part by increasing rates paid for deposits and short
term borrowings. The average rate paid on deposits increased .11% from
4.01% to 4.12%, and the rate paid for short term borrowings increased from
3.80% to 4.80%. Despite a slightly higher cost of funds, the increased
yields on earning assets contributed to a higher overall interest spread
and an increased net interest margin at September 30, 2000 when compared to
one year ago. Interest spread increased from 3.59% to 3.68% and the net
interest margin increased from 4.24% to 4.46% for the nine month period
ended September 30, 2000 compared to same period last year. 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 $3,535,000 for the
three months ended September 30, 2000, representing a 9.5% increase over
the same period in 1999. The increase is attributable to higher yields on
earning assets and an increased volume of loans. Average loans for the
quarter ended September 30, 2000 were $235,638,000 an increase of
$24,323,000 compared to the same period last year. Average deposits for the
quarter totalled $238,025,000 an increase of $7,451,000 over the same
period last year. The average balances of investment securities and federal
funds sold for the quarter ended September 30, 2000 declined as a result of
loan demand.
Non-interest Income
Noninterest income for the three and nine month periods ended September 30,
2000 increased $738,000 and $839,000, respectively. A significant portion
of the increase is attributable to $676,000 in life insurance proceeds
8
<PAGE>
collected during the quarter ended September 30, 2000. Life insurance is
not typically held by the bank, therefore it is expected that the level of
noninterest income will decline in future periods to an amount reflective
of the current levels, exclusive of life insurance. Other increases in
noninterest income for the nine month period totalling $153,000 related to
increased volume of service charges on deposit accounts($83,000), increased
revenue from the sale of non-deposit products ($39,000) and other fee
income ($31,000).
Non-interest expense
Total noninterest expense, excluding the provision for credit losses,
increased 3.1% and 6.2% for the quarter and nine month periods ended
September 30, respectively. The increase is attributable to increased
benefit costs associated with the termination of the Bank's defined benefit
pension plan as well as increased cost of health insurance for employees.
Increased occupancy expenses for the nine month period are related to
general increases in insurance and service contracts for the maintenance of
banking equipment. Data processing cost increases of approximately $30,000
for the nine month period are directly related to additional services being
offered and the overall growth of the Bank.
Analysis of Financial Condition
Loan growth during the nine month period ended September 30, 2000 was funded
primarily by a decline in federal funds sold. Total loans increased
$21,775,000 or 10%, totalling $240,551,000 at September 30, 2000 compared to
$218,776,000 at December 31, 2000. Federal funds sold declined $19,690,000
totalling $5,024,000 at September 30, 2000 compared to $24,714,000 at
December 31, 1999. Total deposits increased $3,612,000 totalling $277,560,000
and securities sold under agreements to repurchase increased $2,728,000
totalling $19,071,000 at September 30, 2000. Investment securities increased
$3,378,000 during the nine month period ended September 30, 2000.
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, 2000 the Company's liquidity ratio was
approximately 14%. The Bank has an arrangement with a correspondent bank
whereby it has a $10,000,000 line of credit available to meet any
short-term liquidity needs which arise. The Bank is also a member of the
Federal Home Loan Bank of Atlanta which provides another source of
liquidity. 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 9.5% to $39,276,000 at September 30,
2000 from $35,882,000 at December 31, 1999. Accumulated other comprehensive
income(loss) declined $174,000 for the nine months ended September 30,
2000. 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.
A comparison of the Company's capital as of September 30, 2000, with the
minimum requirements is presented below.
Minimum
Actual Requirements
------ ------------
Tier 1 Risk-based Capital 16.18% 4.00%
Total Risk-based Capital 17.35% 8.00%
Leverage Ratio 12.25% 3.00%
9
<PAGE>
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 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 a 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. 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>
September 30, December 31,
Non-performing Assets: 2000 1999
----------------- -----------------
<S> <C> <C>
Non-accrual loans 590 773
Other real estate owned 161 74
------ ------
751 847
Past due loans 517 1,146
------ ------
Total non-performing and past due loans $1,268 $1,993
====== ======
</TABLE>
The provision for loan losses was $224,000 and $180,000 for the nine months
ended September 30, 2000 and 1999, respectively. For the three months ended
September 30, 2000 and 1999 the provision for loan losses was $110,000 and
$60,000, respectively. Charge-offs during the third quarter totalled $74,000
representing 48% of the year-to-date charge-offs. This included significant
increases in consumer loan charge-offs for the three and nine month periods
ended September 30, 2000. Non-performing assets of the Company declined $725,000
totalling $1,268,000 compared to $1,993,000 at December 31, 1999. The allowance
for loan losses as a percentage of average loans was 1.25% and 1.30% as of
September 30, 2000 and 1999, respectively. Based on Management's quarterly
evaluation of the adequacy of the loan loss reserve, which includes current
industry and economic trends, historical performance, 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, 2000.
The following table presents a summary of the activity in the Allowance for
Loan Losses.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance balance - beginning $ 2,803 $ 2,605 $ 2,743 $ 2,582
Charge-offs:
Commercial and other 16 33 50 113
Real estate 35 - 42 25
Consumer 23 14 63 47
-------- -------- -------- ---------
Totals 74 47 155 185
-------- -------- ------- --------
Recoveries:
Commercial 33 21 42 40
Real Estate 1 10 7 19
Consumer 7 10 19 23
----------- --------- -------- --------
Totals 41 41 68 82
---------- --------- -------- --------
Net Charge-offs: 33 6 87 103
Provision for loan losses 110 60 224 180
-------- --------- --------- ---------
Allowance balance-ending $ 2,880 $ 2,659 $ 2,880 $ 2,659
======= ======== ======= ========
Average Loans outstanding during period $235,638 $211,315 $229,898 $205,027
======== ======== ======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .06% .01% .05% .07%
========== ========= ========= ==========
Allowance for loan losses at period end as a
percentage of average loans 1.22% 1.26% 1.25% 1.30%
========= ======== ========= =========
</TABLE>
10
<PAGE>
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 nine months of the year.
<TABLE>
<CAPTION>
2000 1999
---- ----
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 $ 70,837 $ 3,209 5.97% $ 78,357 $ 3,408 5.82%
Loans 229,898 14,798 8.49 205,027 12,838 8.38
Federal Funds Sold 8,087 378 6.17 9,724 359 4.89
-------- -------- ---- --------- ------- ----
Total earning assets 308,822 18,385 7.85% 293,108 16,605 7.58%
------- ------
Non-interest earning assets 13,591 12,520
------- ---------
Total Assets $322,413 $305,628
======== ========
Interest bearing liabilities
Interest bearing deposits $237,456 $ 7,418 4.12% $227,402 $ 6,815 4.01%
Borrowings 18,279 666 4.80 17,431 495 3.80
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 255,735 8,084 4.17% 244,833 7,310 3.99%
------ -------
Non-interest bearing liabilities 29,232 25,776
Stockholders' equity 37,446 35,019
-------- --------
Total liabilities and stockholders' equity $322,413 $305,628
======== ========
Net interest spread $10,301 3.68% $ 9,295 3.59%
======= =======
Net interest margin 4.46% 4.24%
</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 and
yield calculations are based on the total.
Recent Developments
On July 25, 2000, the Company entered into a Plan and Agreement to Merge (the
"Merger Agreement") with Shore Bancshares, Inc., a Maryland corporation ("Shore
Bancshares"), which provides for the merger of the Company with and into Shore
Bancshares (the "Merger") in a pooling-of-interests transaction. Upon completion
of the Merger, Shore Bancshares will be the surviving entity. The Merger is
conditioned upon, among other things, the approvals of stockholders of the
Company and of Shore Bancshares and receipt of certain bank regulatory
approvals. Under the Merger Agreement, each of the issued and outstanding shares
of the Company's common stock will be converted into the right to receive 2.85
shares of Shore Bancshares common stock. In addition, all Company stock options
will be exchanged for options to purchase shares of Shore Bancshares common
stock.
11
<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 June 30, 2000 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 8.8% (10.6%) +-25%
% Change in Fair Value of Capital 3.1% (6.9%) +-15%
</TABLE>
Part II
Item 4. Submission of Matters to Vote of Security Holders
The Company mailed or otherwise delivered to stockholders a proxy
statement/prospectus on or about October 17, 2000 related to a Special
Meeting of Stockholders to be held on November 21, 2000 and any
adjournments thereof for the purpose of considering and approving the Plan
and Agreement to Merge dated July 25, 2000, between the Company and Shore
Bancshares.
Item 5. Other Information
On November 8, 2000, the Board of Directors of the Company declared a $0.50
per share cash dividend to common stockholders of record November 20, 2000,
payable November 24, 2000.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit 2.1 - Plan and Agreement to Merge, dated July 25, 2000, by and
between Shore Bancshares, Inc. and Talbot Bancshares, Inc. is
incorporated by reference from the Company's Current Report on Form
8-K, filed with the Commission on July 31, 2000.
Exhibit 27 - Financial Data Schedule
b) Form 8-K filed, dated July 27, 2000, Item 5. Other Events and Item 7.
Financial Statements, Pro Forma Financial Information and Exhibits.
12
<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 13, 2000 By: /s/ W. Moorhead Vermilye
---------------------------------------------
W. Moorhead Vermilye
President
Date: November 13, 2000 By: /s/ Susan E. Leaverton
---------------------------------------------
Susan E. Leaverton, CPA
Treasurer/Principal Accounting Officer
