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, 2000
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, 2000, there were 1,194,876 shares of common stock
outstanding. This is the only class of outstanding shares.
- 1 -
<PAGE>
INDEX
Part I.
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2000(unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three and six months ended June 30, 2000 and 1999 (unaudited) 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
For the six Month Period ended June 30, 2000 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7-8
Item 2. Management's 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
- 2 -
<PAGE>
Part I
Item 1. Financial Statements
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share amounts)
June 30, December 31,
ASSETS: 2000 1999
------- --------------- -----------------
(unaudited)
<S> <C> <C>
Cash and due from banks $ 7,722 $ 5,535
Federal funds sold 11,197 24,714
Investment in debt securities:
Held-to-maturity, at amortized cost (fair value of $6,171
and $8,162, respectively) 6,318 8,302
Available for sale, at fair value 62,517 64,888
Loans, less allowance for credit losses ($2,803 and
$2,743, respectively) 229,056 216,033
Bank premises and equipment 2,960 2,978
Other real estate owned 214 74
Accrued interest receivable on loans and investment securities 2,218 2,122
Deferred income tax benefits 1,534 1,430
Other assets 865 993
---------- ------------
TOTAL ASSETS $324,601 $ 327,069
======== ========
LIABILITIES:
Deposits:
Non-interest bearing demand $ 28,874 $ 31,691
NOW and Super NOW 52,919 50,104
Certificates of deposit $100,000 or more 49,939 58,324
Other time and savings 132,668 133,829
-------- --------
Total Deposits 264,400 273,948
Short term borrowings 21,690 16,343
Other liabilities 991 896
--------- ----------
TOTAL LIABILITIES 287,081 291,187
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock, Par Value $.01; authorized 25,000,000 shares;
issued and outstanding:
June 30, 2000 1,194,876 12 12
December 13, 1999 1,193,308
Surplus 12,790 12,724
Retained earnings 26,049 24,312
Accumulated other comprehensive income (1,331) (1,166)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 37,520 35,882
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 324,601 $327,069
======== ========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $ 4,924 $ 4,328 $ 9,601 $ 8,356
Interest and dividends on investment securities
Taxable 1,001 1,070 2,074 2,192
Tax-exempt 29 36 57 82
Federal funds sold 151 48 268 195
-------- -------- -------- --------
Total interest income 6,105 5,482 12,000 10,825
------- ------- ------- --------
INTEREST EXPENSE
Certificates of deposit, $100,000 or more 684 465 1,386 1,097
Other deposits 1,753 1,726 3,467 3,407
Other interest 253 179 431 316
------- ------- ------- -------
Total interest expense 2,690 2,370 5,284 4,820
------- ------ ------- ------
NET INTEREST INCOME 3,415 3,112 6,716 6,005
PROVISION FOR CREDIT LOSSES 56 60 114 120
-------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 3,359 3,052 6,602 5,885
------- ------- ------- -------
NONINTEREST INCOME
Service charges on deposit accounts 241 218 459 404
Loss on sale of securities 1 12 1 12
Other noninterest income 75 30 127 70
------- ------- ------- ------
Total noninterest income 317 260 587 486
------ ----- ------ -----
NONINTEREST EXPENSES
Salaries and employee benefits 965 897 1,959 1,812
Expenses of premises and fixed assets 203 181 408 372
Other noninterest expense 557 457 1,041 978
------- ------- ------- -------
Total noninterest expense 1,725 1,535 3,408 3,162
------ ------ ------ ------
INCOME BEFORE TAXES ON INCOME 1,951 1,777 3,781 3,209
Federal and State income taxes 689 618 1,328 1,100
------- ------- --------- -----
NET INCOME $ 1,262 $1,159 $2,453 $ 2,109
====== ====== ====== ======
PER SHARE DATA:
Basic earnings per common share $ 1.05 $ .97 $ 2.05 $ 1.77
Diluted earnings per common share $ 1.04 $ .96 $ 2.02 $ 1.75
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
Accumulated
other
Common Retained Comprehensive
Stock Surplus Earnings Income Total
----------- ----------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1999 $ 12 $12,724 $24,312 $(1,166) $35,882
Net Income - - 2,453 - 2,453
Cash Dividends Paid $0.60 per share - - (716) - (716)
Other Comprehensive income, net of tax:
Unrealized loss on available for sale securities,
net of reclassification adjustment of $1 - - - (165) (165)
-------- --------
Total other comprehensive income (165)
--------
Shares Issued - 68 - - 68
Shares Repurchased and Retired - (2) - - (2)
------------ ---------- ----------- ---------- ---------
Balances, June 30, 2000 $ 12 $12,790 $26,049 $(1,331) $37,520
=========== ======= ======= ============= =======
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)
--------
Total 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.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
TALBOT BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
For the Six Months Ended June 30,
2000 1999
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,453 $ 2,109
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 264 311
Discount accretion 16 (8)
Loss (Gain) on sale of securities 1 (12)
Loss on sale of bank equipment 2 -
Loss on sale of other real estate owned 8 10
Provision for credit losses, net 60 22
Net changes in:
Accrued interest receivable (96) 20
Other assets 127 68
Accrued interest payable on deposits 76 (35)
Other liabilities 19 (123)
--------------- ------------------
Net cash provided by operating activities 2,930 2,362
------------- ----------------
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 39,809 9,114
Purchase of securities available for sale (38,828) (8,648)
Proceeds from maturities and principal payments of securities
held to maturity 2,291 4,654
Purchase of securities held to maturity (311) (2,382)
Net increase in loans (12,403) (14,402)
Purchase of loans (680) (1,400)
Proceeds from sale of loans - 185
Purchase of bank premises and equipment (159) (240)
Proceeds from sale of bank equipment 20 -
Proceeds from sale of other real estate owned 52 80
Purchase other real estate owned (200) (50)
--------------- -------------------
Net cash used in investing activities (9,409) (7,016)
------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in demand, NOW, money market and
savings deposits (990) 3,109
Net decrease in certificates of deposit (8,558) (15,763)
Net increase(decrease) in securities sold under agreement to repurchase (653) 5,773
Proceeds from short term borrowings 6,000 -
Proceeds from issuance of common stock 68 52
Common stock repurchased and retired (2) (29)
Dividends paid (716) (596)
--------------- --------------
Net cash used by financing activities (4,851) (7,454)
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,330) (12,108)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,249 20,407
-------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,919 $ 8,299
============= ============
</TABLE>
- 6 -
<PAGE>
Talbot Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1) 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 10-Q. In the
opinion of the management of the Company, all adjustments necessary to
present fairly the financial position at June 30, 2000, the results of
operations for the three and six month periods ended June 30, 2000 and
1999, and cash flows for the six month period ended June 30, 2000 and 1999.
The results of operations for the three and six months ended June 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) 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 1,193,744 shares for 2000 and 1,192,208
shares 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 six months ended June 30,
2000 and 1999 were 1,212,886 and 1,207,428, 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, December 31,
(Dollars in thousands) 2000 1999
-------------------------- --------- ------------
<S> <C> <C>
Impaired loans with valuation allowance $ - $ 109
Impaired loans with no valuation allowance 502 718
------- -------
Total impaired loans $ 502 $ 827
======= =======
Allowance for credit losses applicable to impaired loans $ - $ 79
Allowance for credit losses applicable to other than impaired loans 2,803 2,504
------- -------
Total allowance for credit losses $ 2,803 $ 2,583
======= =======
Interest income on impaired loans recorded on the cash basis $ 13 $ 23
=========== ========
</TABLE>
Interest income of $40,600 would have been recorded for the period ended
June 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 June 30, 2000 total commitments to
extend credit were approximately $52,897,000. Outstanding letters of credit
were approximately $3,882,000 at June 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, merger activities, 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
--------
Basic net income per share for the six months ended June 30, 2000 increased
15.82%, totalling $2.05 compared to $1.77 for the same period last year. Diluted
net income per share was $2.02 for the first six months of 2000, an increase of
15.43% over $1.75 for 1999. Net income increased 16.3% totalling $2,453,000 for
the six month period ended June 30, 2000 compared to $2,109,000 for the same
period in 1999.
Basic net income for the second quarter of 2000 was $1.05, an increase of 8.25%
over the $0.97 for the same period last year. Diluted net income per share
increased 8.33% totalling $1.04 per share for the second quarter of 2000,
compared to $0.96 for 1999. Net income was $1,262,000 for the three months ended
June 30, 2000, an increase of 8.9% over the 1,159,000 for the same period in
1999.
Return on average assets for the first six months of 2000 was 1.53% compared to
1.39% for 1999. Return on average equity increased to 13.39% for the first six
months of 2000 compared to 12.13% for the same period in 1999.
Return on average assets was 1.56% for the quarter ended June 30, 2000 and 1.53%
for the second quarter of 1999. Return on average equity increased to 13.56% for
the quarter ended June 30, 2000 and 13.26% for the second quarter of 1999.
Net Interest Income and Net Interest Margin
-------------------------------------------
Net interest income on a fully tax equivalent basis was $6,766,000 for the six
months ended June 30, 2000, representing an increase of $698,000 or 11.5% over
the same period last year. This increase is the result of growth in average
loans of $25,324,000 or 12.6%. Average loans totalled $226,822,000 and
$201,498,000 at June 30, 2000 and 1999, respectively. Loan growth was funded by
deposit growth and a reduction in investment securities. Average deposits
increased $14,284,000 compared to the first six months of 1999, with $6,210,0000
of the growth in Certificates of Deposit $100,000 or more. The average balance
of investment securities declined $9,470,000 for the first six months of 2000
compared to 1999. The net interest margin on earning assets increased from 4.21%
in 1999 to 4.42% for the first six months of 2000. This increase resulted
primarily from the increased yields on loans during the period. See the Analysis
of Interest Rates and Differentials on page 11 for further details.
Net interest income on a fully taxable equivalent basis was $3,441,000 for the
three months ended June 30, 2000. This represents a 9.6% increase over the
quarter ended June 30, 1999. This increase was the result of an increase in
earning assets of 7.2%. Average loans increased 11.1% or $22,981,000 compared to
the same period last year. Average Investment securities decreased $7,709,000
for the quarter ended June 30, 2000, a 9.7% decrease compared to June 30, 1999
and federal funds sold increased $5,602,000 or 140.7% for the quarter ended June
30, 2000 compared to the same period in 1999. In addition to a decline in
investment securities, earning asset growth was funded by increased deposits of
$14,359,0000 and other short term borrowings of $1,028,000 for the three months
ended June 30, 2000 when compared to the same period in 1999.
Non-interest Income
-------------------
Noninterest income increased $101,000 or 20.8% for the six months ended June 30,
2000 compared to the same period in 1999. The most significant components of the
increase were increases in service charges on deposit accounts of $55,000 and
revenue from sales of nondeposit investment products of $29,000.
Total noninterest income for the quarter ended June 30, 2000 increased $57,000
or 21.9% when compared to the same period in 1999. The increase was caused
primarily by increases in service charges on deposit accounts of $ $23,000 and
increased revenue from the sale of nondeposit investment products of $17,000.
- 8 -
<PAGE>
Non-interest expense
--------------------
Total noninterest expense for the six months ended June 30, 2000 was $3,408,000
an increase of $246,000 or 7.8% over the six months ended June 30, 1999. The
increase resulted from increases in salaries and benefits of $147,000 or 8.1%,
increased occupancy expenses of $36,000 or 9.7% and increases in other operating
expenses of $63,000 or 6.4%.
For the quarter ended June 30, 2000 noninterest expense increased $190,000 or
12.4% over the same period last year. The increase resulted from increases in
salaries and benefits of $68,000 or 7.6%, increased occupancy expense of $22,000
or 12.2%, and increases in other expenses of $100,000 or 21.9%. Increased other
operating expenses includes increases in expenditures for printing and supplies,
postage and data processing costs.
Analysis of Financial Condition
-------------------------------
Investment securities decreased $4,355,000 or 6% totalling $68,835,000 at June
30, 2000 when compared to $73,190,000 at December 31, 1999. Total loans at June
30, 2000 were 231,859,000, an increase of $13,083,000 of 6% from December 31,
1999. Federal Funds sold decreased $13,517,000 or 54.7% when compared to
December 31, 1999.
Total deposits decreased $9,548,000 or 3.5% totalling $264,400,000 compared to
$273,948,000 at December 31, 1999. The most significant component of the decline
in deposits was certificates of deposit $100,000 or more which decreased
$8,385,000 primarily due to the deposits of a large municipal depositor. When
compared to June 30, 1999, however, deposits at June 30, 2000 had increased
$27,125,000, which included increased certificates of deposit of $100,000 or
more of $21,677,000. Noninterest bearing deposits decreased $2,817,000 to
$28,874,000 at June 30, 2000, compared to $31,691,000 at December 31, 2000.
Short-term borrowings at June 30, 2000 consisted of securities sold under
agreements to repurchase and a short term advance from the Federal Home Loan
Bank of Atlanta. Securities sold under agreements to repurchase declined
$653,000 totalling $15,690,000 at June 30, 2000 when compared to December 31,
1999. At June 30, 2000 the Bank had an outstanding advance form the Federal Home
Loan Bank of Atlanta of $6,000,000 which matures on July 31, 2000. There were no
advances outstanding at December 31, 1999.
Total stockholders' equity increased $1,638,000 or 4.6% totalling $37,520,000 at
June 30, 2000 from $35,882,000 at December 31, 1999. The Company continues to
maintain strong capital ratios in compliance with regulatory standards.
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, 2000 the Company's liquidity ratio was approximately 17.5%. 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 $37.5 million at June 30, 2000, 7.6% 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, 2000, with the minimum
requirements is presented below.
For Capital
Adequacy
Actual Purposes
------ --------
Tier 1 Risk-based Capital 16.19% 4.00%
Total Risk-based Capital 17.37% 8.00%
Leverage Ratio 11.91% 4.00%
- 9 -
<PAGE>
Asset Quality
-------------
Nonperforming assets consist of non-accrual loans, loans which are past due 90
days or more and still accruing interest and other real estate owned. A loan is
placed on nonaccrual status when it is specifically determined to be impaired
and principal and interest are delinquent for 90 days or more. A loan may be
placed on nonaccrual status sooner if management determines such action is
necessary and prudent. During the six months ended June 30, 2000 non accrual
loans and delinquent loans past due 90 days or more have declined $271,000 and
$898,000, respectively. Other real estate owned increased $140,000 for the six
months ended June 30, 2000.
The following table summarizes past due and non-performing assets of the
Company.
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
(dollars in thousands)
<S> <C> <C>
Non performing Assets:
Non-accrual loans $ 502 $ 773
Loans past due 90 days or more and still accruing interest 248 1,146
-------- -------
Total nonperforming loans 750 1,919
Other real estate owned 214 74
------ ------
Total non-performing assets $ 964 $1,993
======== ======
</TABLE>
Provision and Allowance for Credit Losses
-----------------------------------------
The Company has established an allowance for credit losses, which is increased
by provisions charged against earnings and recoveries of previously charged-off
debts. The allowance is decreased by current period charge-off of uncollectible
debts. Management evaluates the adequacy of the allowance for credit losses on a
quarterly basis and adjust the provision for credit losses based upon this
analysis. The evaluation of the adequacy of the allowance for credit losses is
based on 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.
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) 2000 1999 2000 1999
---------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance balance - beginning $ 2,808 $ 2,596 $ 2,743 $ 2,582
Charge-offs:
Commercial and other 34 67 34 80
Real estate 7 - 7 25
Consumer 29 19 40 33
--------- --------- --------- --------
Totals 70 86 81 138
--------- --------- --------- --------
Recoveries:
Commercial 5 17 9 19
Real Estate 1 9 6 9
Consumer 3 9 12 13
--------- ---------- --------- --------
Totals 9 35 27 41
--------- --------- --------- --------
Net Charge-offs: 61 51 54 97
Provision for credit losses 56 60 114 120
--------- --------- -------- ---------
Allowance balance-ending $ 2,803 $ 2,605 $ 2,803 $ 2,605
========= ========= ========= =========
Average Loans outstanding during period $230,192 $207,211 $227,001 $201,498
======== ======== ======== ========
Net charge-offs (annualized) as a percentage of
average loans outstanding during period .11% .10% .05% .10%
========== ========== ========== ==========
Allowance for loan losses at period end as a
percentage of average loans 1.22% 1.26% 1.23% 1.29%
========= ========= ========= ========
</TABLE>
Because the Company's loans are predominately real estate secured, weaknesses in
the local real estate market may have an adverse effect on collateral values.
The Company does not have any concentrations of loans in any particular
industry, nor does it engage in foreign lending activities.
- 10 -
<PAGE>
Analysis of Interest Rates and Interest Differentials.
------------------------------------------------------
The following table presents the distribution of the average consolidated
balance sheets, interest income/expense and yields earned and rates paid through
the first six 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 $ 71,589 $ 2,161 6.04% $ 81,059 $ 2,317 5.78%
Loans 226,822 9,621 8.51 201,498 8,378 8.38
Federal Funds Sold 8,716 268 6.10 8,115 195 4.76
-------- -------- ---- --------- ------- ----
Total earning assets $307,127 $12,050 7.85% $290,672 $10,890 7.56%
-------- --------
Non-interest earning Assets $ 13,379 $ 12,311
-------- ---------
Total Assets $320,506 $302,983
======== ========
Interest bearing liabilities
Interest bearing deposits $237,177 $ 4,853 4.10% $225,777 $ 4,505 4.02%
Borrowings 18,248 431 4.73 17,035 317 3.75
-------- -------- ---- -------- ------ ----
Total interest bearing liabilities $255,425 $ 5,284 4.14% $242,812 $ 4,822 4.00%
--------- --------
Non-interest bearing liabilities $ 28,441 $ 25,408
Stockholders' equity 36,640 34,763
-------- --------
Total liabilities and Stockholders' equity $320,506 $302,983
======== ========
Net interest spread $ 6,766 3.71% $ 6,068 3.55%
======== ========
Net interest margin 4.42% 4.21%
<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>
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.
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<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, 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 12.8% (14.6%) +/-25%
% Change in Fair Value of Capital 4.4% (9.1%) +/-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, 2000.
Part II
Other Information
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) No Forms 8-K filed for the quarterly period ended June 30, 2000.
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<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 11, 2000 By:/s/ W. Moorhead Vermilye
--------------------------------------
W. Moorhead Vermilye
President
Date: August 11, 2000 By:/s/ Susan E. Leaverton
--------------------------------------
Susan E. Leaverton, CPA
Treasurer/Principal Accounting Officer
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<PAGE>
