-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GFHiSImbGGQzFfxf8BnskkVlsgU0m5DCRjX7qFW2jsb2IZKZtfg/+uD7t7aXcTvS U0P857P6OsyQjB+87f+Q1Q== 0001014100-01-000022.txt : 20010212 0001014100-01-000022.hdr.sgml : 20010212 ACCESSION NUMBER: 0001014100-01-000022 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001213 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010209 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHORE BANCSHARES INC CENTRAL INDEX KEY: 0001035092 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 521974638 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-22345 FILM NUMBER: 1530598 BUSINESS ADDRESS: STREET 1: 109 NORTH COMMERCE ST CITY: CENTREVILLE STATE: MD ZIP: 21617-0400 BUSINESS PHONE: 4107581600 MAIL ADDRESS: STREET 1: P O BOX 400 CITY: CENTREVILLE STATE: MD ZIP: 21617-0400 8-K/A 1 0001.txt AMENDMENT TO FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) December 13, 2000 (December 1, 2000) SHORE BANCSHARES, INC. (Exact name of Registrant as specified in Charter) Maryland 000-22345 52-1974638 State or other Jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 18 East Dover Street, Easton, MD 21601 (Address of Principal Executive Offices/Zip Code) Registrant's telephone number, including area code: (410) 822-1400 -------------- 109 North Commerce Street, Centreville, MD 21617 (Former Name or Former Address, if Changed Since Last Report) INFORMATION TO BE INCLUDED IN THE REPORT Item 1. Change in Control of Registrant Effective December 1, 2000, Talbot Bancshares, Inc., a Maryland corporation, was merged with and into Shore Bancshares, Inc., in a pooling transaction, pursuant to a Plan and Agreement to Merge dated July 25, 2000, and amended on November 30, 2000, by and between Talbot Bancshares, Inc. and Shore Bancshares, Inc. under which each share of common stock of Talbot Bancshares, Inc. was converted into the right to receive 2.85 shares of common stock of Shore Bancshares, Inc., with cash being paid in lieu of fractional shares. Shore Bancshares, Inc. issued 3,407,098 shares of its common stock pursuant to the merger. Prior to the merger, Shore Bancshares, Inc. had 1,194,237 shares of common stock issued and outstanding. Pursuant to the Plan and Agreement to Merge, Shore Bancshares, Inc. has a new board of directors consisting of eleven members, six of whom were directors of Talbot Bancshares, Inc. before the merger, and five of whom were directors of Shore Bancshares, Inc. before the merger. The six new directors of Shore Bancshares, Inc. are as follows: Herbert L. Andrew, III, Lloyd L. Beatty, Jr., Ronald N. Fox, Richard C. Granville, David L. Pyles, and W. Moorhead Vermilye. These directors join Paul M. Bowman, David C. Bryan, Daniel T. Cannon, B. Vance Carmean, Jr., and Neil R. LeCompte, who were serving previously on the Shore Bancshares, Inc. Board of Directors. Six individuals who served on the Board of Directors of Shore Bancshares, Inc. before the merger are no longer directors of Shore Bancshares, Inc. after the merger, but continue to serve as directors of The Centreville National Bank of Maryland, a national banking association, and wholly owned subsidiary of Shore Bancshares, Inc. Seven individuals who served on the Board of Directors of Talbot Bancshares, Inc. before the merger continue to serve as directors of The Talbot Bank of Easton, Maryland, a Maryland state-chartered commercial bank, which, after the merger, became a wholly owned subsidiary of Shore Bancshares, Inc. Mr. Vermilye, who served as President of Talbot Bancshares, Inc. before the merger, has become President and Chief Executive Officer of Shore Bancshares, Inc. Mr. Cannon, President of Shore Bancshares, Inc. before the merger, has been named Executive Vice President and Chief Operating Officer of Shore Bancshares, Inc. The principal office of Shore Bancshares, Inc. has been moved from 109 North Commerce Street, Centreville, Maryland 21617 to 18 East Dover Street, Easton, Maryland 21601. As part of the merger, the stockholders amended and restated Shore Bancshares, Inc.'s Articles of Incorporation and Bylaws. A copy of the Amended and Restated Articles of Incorporation is filed as Exhibit 3.1 to this Current Report and is incorporated by reference herein. A copy of the Amended and Restated Bylaws is filed as Exhibit 3.2 to this Current Report and is incorporated by reference herein. Item 2. Acquisition or Disposition of Assets The merger of Talbot Bancshares, Inc. with and into Shore Bancshares, Inc. was consummated on December 1, 2000, pursuant to a Plan and Agreement to Merge dated July 25, 2000, as amended. Shore Bancshares, Inc.'s Registration Statement on Form S-4 (Registration No. 333-46890), which was declared effective by the Securities and Exchange Commission on October 16, 2000, sets forth certain information regarding the merger, Talbot Bancshares, Inc., and Shore Bancshares, Inc., including, but not limited to, the date and manner of the merger, a description of the assets involved, the nature and amount of consideration paid by Shore Bancshares, Inc., the method used for determining the amount of such consideration, the nature of any material relationships between Shore Bancshares, Inc. and Talbot Bancshares, Inc. or any officer or director of the entities, or any associate of any such officer or director, and the nature of the business of operation of the combined company after the merger. The additional information set forth under Item 1 of this Current Report is incorporated by reference herein. A copy of the press release announcing the closing of the merger is filed as Exhibit 99.1 to this Current Report and is incorporated by reference herein. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Business Acquired. TALBOT BANCSHARES, INC. Independent Auditors' Report F-1 Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998, 1997 F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-7 TALBOT BANCSHARES, INC. Consolidated Balance Sheets - September 30, 2000 (unaudited) and December 31, 1999 F-23 Consolidated Statements of Income (unaudited) - Nine months ended September 30, 2000 and 1999 F-24 Statements of Cash Flows (unaudited) - Nine month periods ended September 30, 2000 and 1999 F-25 Notes to Consolidated Financial Statements F-26 b) Pro Forma Financial Information Pro Forma Consolidated Balance Sheet as of December 31, 1999 (unaudited) F-27 Pro Forma Consolidated Statements of Income for the Nine Months Ended September 30, 2000 (unaudited) F-28 Pro Forma Consolidated Statements of Income of the Year Ended December 31, 1999 (unaudited) F-29 (c) Exhibits. The following exhibits are filed with this report: 2.1 Plan and Agreement to Merge, dated July 25, 2000, by and between Shore Bancshares, Inc. and Talbot Bancshares, Inc. (incorporated by reference to Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000.) *2.2 Amendment to Plan and Agreement to Merge, dated November 30, 2000, by and between Shore Bancshares, Inc. and Talbot Bancshares, Inc. *3.1 Shore Bancshares, Inc. Amended and Restated Articles of Incorporation. *3.2 Shore Bancshares, Inc. Amended and Restated By-Laws. 10.1 Form of Employment Agreement with W. Moorhead Vermilye (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.2 Form of Employment Agreement with Daniel T. Cannon (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). *21 Subsidiaries of Shore Bancshares, Inc. 23 Consent of Stegman & Company *99.1 Press Release, dated December 1, 2000. - ---------------------------- *Previously filed on Form 8-K filed December 14, 2000 and incorporated by reference herein. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SHORE BANCSHARES, INC. Date: February 9, 2001 By: /s/ W. Moorhead Vermilye __________________________________ W. Moorhead Vermilye President and CEO EXHIBIT INDEX Exhibit Number Description of Exhibit 2.1 Plan and Agreement to Merge, dated July 25, 2000, by and between Shore Bancshares, Inc. and Talbot Bancshares, Inc. (incorporated by reference to Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000.) *2.2 Amendment to Plan and Agreement to Merge, dated November 30, 2000, by and between Shore Bancshares, Inc. and Talbot Bancshares, Inc. *3.1 Shore Bancshares, Inc. Amended and Restated Articles of Incorporation. *3.2 Shore Bancshares, Inc. Amended and Restated By-Laws. 10.1 Form of Employment Agreement with W. Moorhead Vermilye (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). 10.2 Form of Employment Agreement with Daniel T. Cannon (incorporated by reference to Appendix XIII of Exhibit 2.1 on Form 8-K filed by Shore Bancshares, Inc. on July 31, 2000). *21 Subsidiaries of Shore Bancshares, Inc. 23 Consent of Stegman & Company *99.1 Press Release, dated December 1, 2000. - ---------------------------- *Previously filed on Form 8-K filed December 14, 2000 and incorporated by reference herein. INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Talbot Bancshares, Inc. Easton, Maryland We have audited the accompanying consolidated balance sheets of Talbot Bancshares, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Talbot Bancshares, Inc. as of December 31, 1999 and 1998, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Baltimore, Maryland January 21, 2000 F-1
CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998 1999 1998 ASSETS Cash and due from banks (Notes 1 and 2) $ 5,535,294 $ 8,003,809 Federal funds sold 24,714,372 12,402,615 Investment securities: (Notes 1, 3 and 8) Available for sale - at fair value 64,887,961 69,500,252 Held to maturity - at amortized cost - fair value of $8,161,653 (1999) and $13,962,764 (1998) 8,301,833 13,870,709 Loans, less allowance for credit losses (1999) $2,742,984 (1998) $2,582,433 (Notes 1 and 4) 216,033,115 191,780,928 Premises and equipment (Notes 1 and 5) 2,977,982 2,976,637 Accrued interest receivable on loans and investment securities 2,121,616 2,169,505 Deferred income taxes (Notes 1 and 12) 1,430,702 342,440 Other real estate (Note 1) 74,116 163,765 Other assets (Notes 6 and 9) 992,276 1,043,083 --------------- ----------------- Total assets $327,069,267 $302,253,743 ============ ============ LIABILITIES Deposits: (Notes 3 and 7) Noninterest-bearing demand $ 31,691,459 $ 25,483,195 NOW and Super NOW 50,103,825 50,206,909 Certificates of deposit, $100,000 or more 58,324,287 45,733,348 Other time and savings 133,828,780 128,505,823 ------------- ------------- 273,948,351 249,929,275 Short term borrowings (Notes 1, 3 and 8) 16,343,413 17,111,375 Accrued interest payable on deposits and borrowings 474,006 483,148 Other liabilities (Note 9) 421,340 446,215 ------------- ------------- Total liabilities 291,187,110 267,970,013 ------------- ------------- COMMITMENTS (Notes 5, 9 and 16) STOCKHOLDERS' EQUITY (Notes 10 and 13) Common stock, par value $.01, authorized 25,000,000 shares; issued and outstanding (1999) 1,193,308 shares; (1998) 1,192,202 shares 11,933 11,922 Surplus 12,724,287 12,663,141 Retained earnings 24,312,342 21,163,696 Accumulated other comprehensive income (loss) (Notes 1 and 3) (1,166,405) 444,971 ------------- ------------- Total stockholders' equity 35,882,157 34,283,730 ------------- ------------- Total liabilities and stockholders' equity $ 327,069,267 $302,253,743 ============= ============
The notes to consolidated financial statements are an integral part of these statements. F-2
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ----- ----- ---- INTEREST INCOME Loans, including fees (Notes 1 and 4) $17,366,724 $16,571,485 $15,659,584 Interest and dividends on investment securities Taxable 4,307,242 3,564,032 3,189,376 Tax-exempt 154,139 219,038 292,467 Federal funds sold 548,672 693,272 530,721 ------------- -------------- -------------- Total interest income 22,376,777 21,047,827 19,672,148 ------------ ------------ ------------ INTEREST EXPENSE NOW and Super NOW accounts 1,272,386 1,468,201 1,333,672 Certificates of deposit, $100,000 or more 2,324,481 1,936,399 1,463,450 Other time and savings 5,616,962 5,455,539 5,334,401 Securities sold under agreements to repurchase 677,198 602,534 464,496 ------------- ------------- ------------- Total interest expense 9,891,027 9,462,673 8,596,019 ------------ ------------ ------------- NET INTEREST INCOME 12,485,750 11,585,154 11,076,129 PROVISION FOR CREDIT LOSSES (Notes 1 and 4) 240,000 240,000 225,000 ------------- ------------ ------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 12,245,750 11,345,154 10,851,129 NONINTEREST INCOME Service charges on deposit accounts 761,330 623,698 536,801 Other service charges, commissions and fees 169,302 151,266 120,700 Gain (loss) on sale of securities (Note 3) 12,171 (9,692) 5,519 Other operating income, net (Note 6) 42,082 21,599 50,342 --------------- ------------ ------------- 984,885 786,871 713,362 ------------- ------------ ------------- NONINTEREST EXPENSES Salaries and wages 2,671,492 2,559,543 2,490,013 Employee benefits (Notes 9, 10 and 11) 933,381 861,862 891,674 Occupancy expense (Note 5) 450,249 394,101 396,753 Furniture and equipment expense 330,478 306,890 285,208 Data processing 382,172 331,979 320,430 Other operating expenses 1,533,544 1,516,655 1,444,346 ------------ ----------- ------------ 6,301,316 5,971,030 5,828,424 ------------ ----------- ------------ INCOME BEFORE INCOME TAXES 6,929,319 6,160,995 5,736,067 Federal and State income taxes (Note 12) 2,409,357 2,146,309 2,062,055 ------------ ------------ ------------ NET INCOME $ 4,519,962 $ 4,014,686 $ 3,674,012 =========== =========== =========== Basic earnings per common share (Notes 1 and 18) $3.79 $3.37 $3.09 ===== ===== ===== Diluted earnings per common share $3.72 $3.33 $3.06 ===== ===== =====
The notes to consolidated financial statements are an integral part of these statements. F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997 Accumulated Other Total Common Retained Comprehensive Stockholders' Stock Surplus Earnings Income (Loss) Equity -------------------------------------------------------------------------------- Balances, January 1, 1997 $ 11,862 $12,435,292 $15,616,264 $(143,413) $27,920,005 Comprehensive income: Net income - - 3,674,012 - 3,674,012 Other comprehensive income, net of tax: Unrealized gain on available for sale securities, net of reclassification adjustment of $(17,120) - - - 274,644 274,644 ------------ Total comprehensive income 3,948,656 ------------ 2,968 shares issued under 401(k) plan 30 105,023 - - 105,053 Exercise of stock options 4 7,796 - - 7,800 Cash dividends paid, $.85 per share - - (1,009,900) - (1,009,900) -------------------------------------------------------------------------------- Balances, December 31, 1997 11,896 12,548,111 18,280,376 131,231 30,971,614 Comprehensive income: Net income - - 4,014,686 - 4,014,686 Other comprehensive income, net of tax: Unrealized gain on available for sale securities, net of reclassification adjustment of $20,943 - - - 313,740 313,740 ------------- Total comprehensive income - - - - 4,328,426 ------------- 2,017 shares issued under 401(k) plan 20 101,761 - - 101,781 Exercise of stock options 6 13,269 - - 13,275 Cash dividends paid, $.95 per share - - (1,131,366) - (1,131,366) -------------------------------------------------------------------------------- Balances, December 31, 1998 11,922 12,663,141 21,163,696 444,971 34,283,730 Comprehensive income: Net income - - 4,519,962 4,519,962 Other comprehensive income, net of tax: Unrealized loss on available for sale securities, net of reclassification adjustment of $(101,010) - - - (1,611,376) (1,611,376) ------------ Total comprehensive income - - - - 2,908,586 ------------ 2,130 shares issued under 401(k) plan 21 119,269 - - 119,290 Exercise of stock options - 605 - 605 Stock repurchased and retired (10) (58,728) - - (58,738) Cash dividends paid, $1.15 per share - - (1,371,316) - (1,371,316) --------------------------------------------------------------------------------- Balances, December 31, 1999 $ 11,933 $12,724,287 $24,312,342 $(1,166,405) $35,882,157 =================================================================================
The notes to consolidated financial statements are an integral part of these statements. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,519,962 $4,014,686 $ 3,674,012 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 610,523 501,229 453,830 Discount accretion on debt securities (132,444) (65,608) (119,149) Discount accretion on matured debt securities 79,976 61,631 79,100 (Gain) loss on sale of securities (12,171) 9,692 (5,519) Provision for credit losses, net 160,551 44,513 (190,400) Deferred income taxes (74,654) (84,775) 108,745 (Gain) loss on disposal of premises and equipment 18,692 7,713 (15) Loss on other real estate owned 7,614 18,124 19,061 Net changes in: Accrued interest receivable 47,889 (220,897) (120,478) Other assets 50,807 (74,805) (143,405) Accrued interest payable on deposits and borrowings (142) 94,949 (4,890) Other liabilities (24,875) (45,924) (9,640) ------------- ------------ ------------ Net cash provided by operating activities 5,242,728 4,260,528 3,741,252 ------------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of securities available for sale 7,073,600 9,054,240 5,954,000 Proceeds from maturities and principal payments of securities available for sale 22,204,101 3,465,196 5,981,895 Purchases of securities available for sale (26,492,239) (42,418,520) (16,911,099) Proceeds from maturities and principal payments of securities held to maturity 15,892,131 14,327,204 8,329,268 Purchases of securities held to maturity (11,346,647) (6,023,906) (1,709,507) Net increase in loans (23,943,575) (9,291,576) (14,823,887) Purchase of loans (1,400,000) - (700,000) Proceeds from sale of loan 880,837 - 1,728,508 Purchase of premises and equipment (341,134) (151,678) (251,019) Proceeds from sale of other real estate owned 132,035 153,337 308,380 Proceeds from sale of premises and equipment 450 19,203 20,000 ------------- ------------ ------------ Net cash used in investing activities (17,340,441) (30,866,500) (12,073,461) ------------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand, NOW, money market, and savings deposits 10,946,664 128,089 8,153,158 Net increase in certificates of deposit 13,072,412 24,887,527 1,659,061 Net increase (decrease) in securities sold under agreement to repurchase (767,962) 6,847,847 995,835 Proceeds from issuance of common stock 119,895 115,056 112,853 Repurchase of common stock (58,738) Dividends paid (1,371,316) (1,131,366) (1,009,900) ------------- ------------- ------------ Net cash provided by financing activities 21,940,955 30,847,153 9,911,007 ------------- ------------- ------------
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ---- ---- ---- NET INCREASE IN CASH AND CASH EQUIVALENTS 9,843,242 4,241,181 1,578,798 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 20,406,424 16,165,243 14,586,445 ----------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $30,249,666 $20,406,424 $16,165,243 =========== ========== =========== Supplemental cash flows information: Interest paid $9,900,169 $9,372,177 $8,600,909 ========== ========== ========== Income taxes paid $2,538,154 $2,248,519 $1,956,219 ========== ========== ========== Transfers from loans to other real estate $ 50,000 $ 221,647 $ 202,507 ========== =========== ===========
The notes to consolidated financial statements are an integral part of these statements. F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Talbot Bancshares, Inc. (the "Company") and its subsidiary, The Talbot Bank of Easton, Maryland (the "Bank") with all significant intercompany transactions eliminated. The investment in subsidiary is recorded on the Company's books on the basis of it's equity in the net assets of the subsidiary. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to prevailing practices within the banking industry. Certain reclassifications have been made to amounts previously reported to conform with the classifications made in 1999. Nature of Operations The Company, through its bank subsidiary, provides commercial banking services from its locations in Talbot and Dorchester Counties, Maryland. Its primary source of revenue is from providing commercial and real estate loans to customers who are predominately small businesses, professionals and middle income individuals located in the general Talbot County area of Maryland's eastern shore. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Investment Securities Available for Sale Investment securities available for sale are stated at estimated fair value based on quoted market prices. They represent those securities which management may sell as part of its asset/liability strategy or which may be sold in response to changing interest rates, changes in prepayment risk or other similar factors. The cost of securities sold is determined by the specific identification method. Net unrealized holding gains and losses on these securities are reported as accumulated other comprehensive income, a separate component of stockholders' equity, net of related income taxes. Investment Securities Held to Maturity Investment securities held to maturity are stated at cost adjusted for amortization of premiums and accretion of discounts. The Company intends and has the ability to hold such securities until maturity. When securities are transferred into the held to maturity category from available for sale, they are accounted for at estimated fair value with any unrealized holding gain or loss at the date of the transfer reported as a separate component of stockholders' equity and amortized over the remaining life of the security as an adjustment of yield. Loans Loans are stated at their principal amount outstanding net of any deferred fees and costs. Interest income on loans is accrued at the contractual rate based on the principal amount outstanding. Fees charged and costs capitalized for originating loans are being amortized primarily on the interest method over the term of the loan. A loan is placed on nonaccrual when it is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Any unpaid interest previously accrued on those loans is reversed from income. 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. Loans are considered impaired when it is probable that the Bank will not collect all principal and interest payments according to the loan's contractual 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. Impaired loans do not include groups of smaller balance homogeneous 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. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Allowance for Credit Losses The allowance for credit losses is established through a provision for credit losses charged to expense. Loans are charged against the allowance for credit losses when management believes that the collectibility of the principal is unlikely. The allowance, based on evaluations of the collectibility of loans and prior loan loss experience, is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect the borrowers' ability to pay. Long-Lived Assets Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed under the straight-line and accelerated methods over the estimated useful lives of the assets. Long-lived assets are evaluated regularly for other-than-temporary impairment. If circumstances suggest that their value may be impaired and the write-down would be material, an assessment of recoverability is performed prior to any write-down of the asset. Other Real Estate Other real estate represents assets acquired in satisfaction of loans either by foreclosure or deeds taken in lieu of foreclosure. Properties acquired are recorded at the lower of cost or fair value less estimated selling costs at the time of acquisition with any deficiency charged to the allowance for credit losses. Thereafter, costs incurred to operate or carry the properties as well as reductions in value as determined by periodic appraisals are charged to operating expense. Gains and losses resulting from the final disposition of the properties are included in noninterest expense. Repurchase Agreements Repurchase agreements are securities sold to the Bank's customers, at the customer's request, under a continuing "roll-over" contract that matures in one business day. The underlying securities sold are U.S. Treasury notes or Federal Agency bonds which are segregated from the Company's other investment securities by the Bank's safekeeping agent. Income Taxes Deferred income taxes are provided under the liability method based on the difference between the financial statement and tax bases of assets and liabilities and are measured at the current statutory tax rates. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers cash and due from banks, and federal funds sold to be cash and cash equivalents. Stock-Based Compensation Stock-based compensation is recognized using the intrinsic value method. For disclosure purposes, pro forma net income and earnings per share effects are provided as if the fair value method had been applied. New Accounting Standards Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, requires derivative instruments be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. The statement also provides for offsetting changes in fair value or cash flows of both the derivative and the hedged asset or liability to be recognized in earnings in the same period; however, any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The Company plans to adopt the provisions of this statement, as amended, for its quarterly and annual reporting beginning January 1, 2001, the statement's effective date. The impact of adopting the provisions of this statement on the Company's financial position, results of operations and cash flows subsequent to the effective date is not currently estimable and will depend on the financial positionCompany and the nature and purpose of any derivative instruments in use at that time. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. CASH AND DUE FROM BANKS The Federal Reserve requires banks to maintain certain minimum cash balances consisting of vault cash and deposits in the Federal Reserve Bank or in other commercial banks. Such balances averaged approximately $3,758,000 and $2,954,000 during 1999 and 1998, respectively. NOTE 3. INVESTMENT SECURITIES The amortized cost and estimated fair values of investment securities are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------------------------------------------------------- Available for sale securities: December 31, 1999: U.S. Treasury securities $22,427,930 $31,294 $189,184 $22,270,040 Obligations of U.S. Government agencies and corporations 39,858,184 940 1,244,893 38,614,231 Obligations of states and political subdivisions 834,320 - 3,343 830,977 Federal Home Loan Bank Stock 906,700 - - 906,700 Federal Home Loan Mortgage Corporation Cumulative Preferred Stock 2,480,513 - 494,500 1,986,013 Other Equity Securities 280,000 - - 280,000 --------------------------------------------------------- $66,787,647 $32,234 $1,931,920 $64,887,961 ========================================================= December 31, 1998: U.S. Treasury securities $30,394,816 $733,314 $ - $31,128,130 Obligations of U.S. Government agencies and corporations 33,505,975 135,130 139,820 33,501,285 Obligations of states and political subdivisions 1,463,930 12,553 - 1,467,483 Federal Home Loan Bank Stock 801,100 - - 801,100 Federal National Mortgage Association Cumulative Preferred Stock 2,475,675 - - 2,475,673 --------------------------------------------------------- 68,641,496 880,997 139,820 69,382,673 Mortgage-backed securities 117,694 - 115 117,579 --------------------------------------------------------- $68,759,190 $880,997 $ 139,935 $69,500,252 ========================================================= Held to Maturity securities: December 31, 1999: U.S. Treasury securities $ 2,001,083 $ 177 $ - $ 2,001,260 Obligations of U.S. Government agencies and corporations 4,000,000 - 93,640 3,906,360 Obligations of states and political subdivisions 1,650,917 898 40,984 1,610,831 --------------------------------------------------------- 7,652,000 1,075 134,624 7,518,451 Mortgage-backed securities 649,833 231 6,862 643,202 -------------------------------------------------------- $ 8,301,833 $1,306 $141,486 $8,161,653 ========================================================= December 31, 1998: U.S. Treasury securities $ 7,029,615 $ 53,225 $ - $ 7,082,840 Obligations of U.S. Government agencies and corporations 3,000,000 9,980 - 3,009,980 Obligations of states and political subdivisions 2,859,909 22,824 95 2,882,638 --------------------------------------------------------- 12,889,524 86,029 95 12,975,458 Mortgage-backed securities 981,185 6,996 875 987,306 --------------------------------------------------------- $13,870,709 $ 93,025 $ 970 $13,962,764 =========================================================
F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and estimated fair values of investment securities by earliest possible repricing date at December 31, 1999 are as follows:
Available for Sale Held to Maturity ------------------------------- ------------------------------ Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value -------------------------------------------------------------- Due in one year or less $ 30,702,021 $ 30,049,268 $ 5,968,868 $ 5,880,502 Due after one year through five years 25,067,059 24,617,530 1,381,713 1,358,009 Due after five years through ten years 7,351,354 7,048,450 951,252 923,142 ---------------------------------------------------------- 63,120,434 61,715,248 8,301,833 8,161,653 Investments in equity securities 3,667,213 3,172,713 - - ---------------------------------------------------------- $66,787,647 $64,887,961 $ 8,301,833 $ 8,161,653 =========================================================
The Company has pledged certain securities as collateral for obligations to federal, state and local government agencies as follows:
December 31, 1999 December 31, 1998 ----------------- ----------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value -------------------------------------------------------- Available for sale $62,120,433 $60,715,248 $50,406,743 $51,163,509 Held to maturity 7,241,448 7,118,510 10,997,672 11,071,384 --------------------------------------------------------- $69,361,881 $67,833,758 $61,404,415 $62,234,893 =========================================================
There were no obligations of states and political subdivisions whose carrying value, as to any issuer, exceeded 10% of stockholders' equity at December 31, 1999 or 1998. NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES The Company grants residential mortgage, consumer and commercial loans to customers primarily in Talbot County, Maryland. The principal categories of the loan portfolio at December 31 are summarized as follows:
1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Real estate loans: Construction and land development $ 11,368,045 $ 8,740,083 Secured by farmland 8,606,777 4,962,831 Secured by residential properties 80,927,334 75,241,449 Secured by nonfarm, nonresidential properties 65,209,493 64,618,451 Loans to farmers (loans to finance agricultural production and other loans) 280,045 462,533 Commercial and industrial loans 42,846,083 31,600,515 Loans to individuals for household, family, and other personal expenditures 7,793,386 7,074,632 Obligations of States and political subdivisions in the United States, tax-exempt 1,469,657 1,546,268 All other loans 210,645 50,782 ---------------- ---------------- 218,711,465 194,297,544 Net deferred loan costs 64,634 65,817 --------------- ---------------- 218,776,099 194,363,361 Allowance for credit losses (2,742,984) (2,582,433) -------------- -------------- $216,033,115 $191,780,928 ============ ============
In the normal course of banking business, loans are made to officers and directors and their affiliated interests. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with outsiders and are not considered to involve more than the normal risk of collectibility. As of December 31, 1999 and 1998, such loans outstanding, both direct and indirect (including guarantees), to directors, their associates and policy making officers, totaled approximately $5,857,000 and $4,299,000, respectively. During 1999 and 1998, loan additions were approximately $3,345,000 and $1,407,000, and loan repayments were approximately $1,787,000 and $2,120,000, respectively. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The allowance for credit losses at December 31 is summarized as follows:
1999 1998 1997 ---------------------------------------------- Balance, beginning of year $2,582,433 $2,537,920 $2,728,320 ---------- ---------- ---------- Recoveries: Real estate loans 49,556 26,543 4,603 Installment loans 18,497 33,456 34,290 Commercial and other 52,551 24,013 20,274 ------------ ------------- ------------- 120,604 84,012 59,167 ----------- ------------- ------------ Provision 240,000 240,000 225,000 ----------- ------------ ------------ Loans charged-off: Real estate loans (117,805) ( 54,586) (136,946) Installment loans (30,561) (32,239) (69,625) Commercial and other (51,687) (192,674) (267,996) ------------- ------------ ------------ (200,053) (279,499) (474,567) ------------ ------------ ------------ Balance, end of year $2,742,984 $2,582,433 $2,537,920 ========== ========== ==========
Information with respect to impaired loans and the related valuation allowance as of December 31 is as follows:
1999 1998 ------------------------------ Impaired loans with valuation allowance $ - $ 108,954 Impaired loans with no valuation allowance 773,114 717,773 ------------ ------------ Total impaired loans $ 773,114 $ 826,727 =========== ========== Allowance for loan losses related to impaired loans $ - $ 78,928 Allowance for loan losses related to other than impaired loans 2,742,984 2,503,505 ----------- ----------- Total allowance for loan losses $2,742,984 $2,582,433 ========== ========== Interest income on impaired loans recorded on the cash basis $ 31,962 $ 22,545 ========== ========== Average recorded investment in impaired loans for the year $ 877,398 $1,152,944 =========== ==========
F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. PREMISES AND EQUIPMENT A summary of premises and equipment at December 31 is as follows: 1999 1998 ------------------------------- Land: Dover Street $ 189,734 $ 189,734 Tred Avon 90,000 90,000 Elliott Road 172,905 172,905 Edgar Building 150,000 150,000 Premises: Dover Street 927,949 921,454 Tred Avon 467,949 467,949 St. Michaels 91,626 70,875 Edgar Building 503,423 503,423 Elliott Road 435,532 435,532 Cambridge 275,939 248,222 Equipment: Dover Street 1,058,938 1,042,489 Tred Avon 285,462 290,122 St. Michaels 255,509 218,500 Elliott Road 278,574 284,626 Cambridge 227,930 157,534 ------------ ----------- 5,411,470 5,243,365 Accumulated depreciation (2,433,488) (2,266,728) ------------ ------------ $2,977,982 $2,976,637 ============ ============ Depreciation expense totaled $320,647, $292,561 and $274,262 for the years ended December 31, 1999, 1998 and 1997, respectively. The Bank leases facilities under operating leases. Rental expense for the years ended December 31, 1999, 1998, and 1997 was $89,373, $49,555 and $32,400, respectively. Future minimum annual rental payments are approximately as follows: 2000 $92,000 2001 58,000 2002 15,000 2003 6,500 2004 5,000 Thereafter 28,000 NOTE 6. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY The company had a 33% ownership interest in Eastern Shore Mortgage Corporation (the "Corporation"). This investment was carried on the Company's books based on its proportionate share of the net realizable assets of the Corporation. As of December 31, 1999, the Corporation is in the process of liquidation and the Company does not expect to receive any further distributions. December 31, ------------ 1999 1998 1997 ---------------------------------- Balance, beginning of year $123,813 $173,536 $182,217 Equity Distribution (100,000) - - Equity in loss for the year (23,813) (49,723) ( 8,681) --------- --------- ----------- Balance, end of year $ 0 $123,813 $173,536 ====================================== F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company had $ 62,000 in outstanding letters of credit to Eastern Shore Mortgage Corporation at December 31, 1998. Interest income on loans to Eastern Shore Mortgage Corporation totaled approximately $38,700 and $47,800 for 1998 and 1997, respectively. There was no interest income earned in 1999. NOTE 7. SIGNIFICANT DEPOSITS The approximate maturities or earliest repricing interval of certificates of deposit of $100,000 or more at December 31 are as follows: 1999 1998 ---- ----- Three months or less $42,151,000 $26,702,000 Three through twelve 7,574,000 6,162,000 Over twelve months 8,599,000 12,869,000 ------------ ------------ $58,324,000 $45,733,000 =========== =========== NOTE 8. SHORT TERM BORROWINGS Short term borrowings, at December 31, 1999, consisted of securities sold under agreements to repurchase. These short term obligations represent securities sold to customers, at the customers' request, under a "roll-over" contract that matures in one business day. The underlying securities sold are U.S. Treasury Notes or Federal agency securities which are segregated in the company's custodial accounts from other investment securities. From time to time in order to meet short term liquidity needs the Company may borrow from a correspondent federal funds line of credit arrangement. The following table summarizes certain information for short-term borrowings: 1999 1998 ---- ---- Average amount outstanding during the year $17,481,711 $14,558,849 Weighted average interest rate during the year 3.87% 4.11% Amount outstanding at year end 16,343,413 17,111,375 Weighted average rate at year end 4.03% 3.99% Maximum amount at any month end 21,905,911 19,879,370 NOTE 9. BENEFIT PLANS 401(k) Plan The Company has a 401(k) Plan into which employees may direct up to 15% of their compensation. Several investment options are available to Plan participants. The Company makes matching contributions to the Plan in the form of its common stock. These matching contributions amount to 100% of the first 3% of participants' compensation and 50% of the next 2% and vest at the rate of 20%, per year from the second to the sixth year of the employees' service. Company contributions included in expense totaled $98,944 (1999), $71,751 (1998) and $76,117 (1997). Defined Benefit Pension Plan Effective January 1, 1995, the Company froze its defined benefit pension plan so that no future benefits will accrue after that date. The Plan covered substantially all full-time employees with more than six months of service. Projected benefits are based on the participants' compensation, years of service and age at retirement and vest at the rate of 20% per year from the participants' second to sixth year of service. The Company's policy has been to fund the actuarially determined minimum annual required amount. F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the Plan's funded status and amounts recognized in the Company's balance sheets at December 31:
1999 1998 ---- ---- Change in benefit obligation Benefit obligation at beginning of year $1,092,792 $1,031,994 Interest cost 76,186 74,409 Actuarial gain (3,506) (2,273) Benefits paid (93,010) (11,338) ----------- ----------- Benefit obligation at end of year 1,072,462 1,092,792 ----------- ----------- Change in plan assets Fair value of plan assets at beginning of year 1,107,344 940,765 Actual return on plan assets 211,820 143,458 Employer contribution - 34,459 Benefits paid (100,577) (11,338) ---------- ----------- Fair value of plan assets at end of year 1,218,587 1,107,344 ---------- ----------- Funded status 146,125 14,552 Unrecognized net actuarial loss (144,717) (21,059) Adjustment for minimum liability - - ---------- ----------- Prepaid (accrued) benefit cost $ 1,408 $ (6,507) ========== ===========
Components of net periodic benefit cost 1999 1998 1997 -------------------------------------------------- Service cost - - - Interest cost $ 76,186 $ 74,409 $ 69,304 Expected return on plan assets (80,850) (71,375) (59,629) Amortization of prior service cost - - - Recognized net actuarial loss - - - --------- -------- --------- Net periodic benefit cost $ (4,664) $ 3,034 $ 9,675 ========= ======== =========
Assumptions used in the determination of pension information consisted of the following:
1999 1998 1997 ------------------------------------------- Discount rate 7.25% 7.25% 7.25% Expected return on plan assets 7.50 7.50 7.50 Rate of compensation increase N/A N/A N/A
Profit Sharing Plan Effective January 1, 1995, the Bank adopted The Talbot Bank Profit Sharing and Retirement Plan which covers substantially all full-time employees with more than six months of service. The Bank makes discretionary contributions to the Plan based on profits. Contributions included in expense totaled $112,000 (1999), $100,000 (1998) and $100,000 (1997). NOTE 10. STOCK OPTION PLAN During 1999, the Company adopted an Employee Stock Option Plan (the "1999 Plan"). Options granted under the 1999 Plan may be either incentive stock options or nonqualified stock options. The terms of the options granted are at the sole discretion of the Company's Board of Directors, and are for a term not to exceed ten years. Options that have been granted are immediately exercisable and are granted at an exercise price not less than the fair market value at the date of grant. The 1999 Plan allows for up to 85,000 options for common stock be granted to certain key employees of the Company. The Company also has a plan adopted in 1995 with similar provisions to the 1999 Plan whereby options for not more than 40,000 shares of common stock may be granted. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Following is a summary of changes in shares under option for both Plans for the years indicated: Year Ended December 31, ------------------------------------------------------ 1999 1998 ---- ---- Number Weighted Average Number Weighted Average of Shares Exercise Price of Shares Exercise Price --------------------------------------------------------------------- Outstanding at beginning of year 37,400 $22.08 38,800 22.08 Granted 9,400 55.00 - - Exercised (31) (19.50) (575) (23.09) Expired - - (25) - ---------- ----------- ----------- ----------- Outstanding at end of year 46,769 $28.73 37,400 $22.08 ====== =========== Weighted average fair value of options granted during the year $26.53 $ - ====== ==========
The following summarizes information about options outstanding at December 31, 1999: Options Outstanding and Exercisable Weighted Average Remaining Exercise Price Number Contract Life ----------------------------------------------------------------------------- 19.50 19,569 5.61 25.00 17,800 6.95 55.00 9,400 9.93 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the year ended December 31, 1999. No options were granted during 1998. Dividend yield 2.0% Expected volatility 10.0% Risk free interest 6.55% Expected lives (in years) 10 The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123), but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its Plan. No compensation expense related to the Plan was recorded during the year ended December 31, 1999. If the Company had elected to recognize compensation cost based on fair value at the grant dates for awards under the Plan consistent with the method prescribed by SFAS 123, net income and earnings per share would have been changed to the pro forma amounts as follows for the years ended December 31: Net income: 1999 --------------- As reported $4,519,962 Pro forma 4,270,554 Basic net income per share: As reported 3.79 Pro forma 3.58 Diluted earnings per share As reported 3.72 Pro forma 3.52 The pro forma amounts are not representative of the effects on reported net income for future years. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. DEFERRED COMPENSATION During 1996, the Company adopted a supplemental deferred compensation plan to provide retirement benefits to its President and Chief Executive Officer. The plan calls for fixed annual payments of $20,000 to be credited to the participant's account. The participant is 100% vested in amounts credited to his account. Contributions to the plan were $20,000 in 1999, 1998 and 1997. NOTE 12. INCOME TAXES Income taxes included in the balance sheets as of December 31 are as follows:
1999 1998 ----------------------------- Federal income taxes currently payable $ 64,121 $ 135,092 State income taxes currently receivable 8,047 20,997 Deferred income tax benefits 1,430,702 342,440
Components of income tax expense for each of the three years ended December 31 are as follows:
1999 1998 1997 ---------------------------------------------- Currently payable: Federal $2,279,504 $2,020,753 $1,729,786 State 204,507 210,331 223,524 ----------- ----------- ----------- 2,484,011 2,231,084 1,953,310 ----------- ---------- ----------- Deferred income taxes (benefits): Federal (61,123) (69,414) 89,035 State (13,531) (15,361) 19,710 ------------ ------------- ------------ (74,654) (84,775) 108,745 ------------- ------------ ----------- $2,409,357 $2,146,309 $2,062,055 ========== ========== ==========
A reconciliation of tax computed at the statutory federal tax rates of 34% to the actual tax expense for the three years ended December 31 follows:
1999 1998 1997 ---------------------------------------------- Tax at federal statutory rate 34.0% 34.0% 34.0% Tax effect of: Tax-exempt income (1.1) (1.5) (1.6) Non-deductible expenses - .1 .1 Other .1 .1 .6 State income taxes, net of federal benefit 1.8 2.1 2.8 ----- ------ ----- Income tax expense 34.8% 34.8% 35.9% ==== ==== ====
The sources of deferred income taxes (benefits) and the tax effects of each for the years ended December 31 are as follows: 1999 1998 1997 ---------- --------- ---------- Depreciation $(18,070) $ (13,832) $ 17,322 Provision for credit losses (92,688) (92,684) 59,755 Income on loans 6,974 21,671 17,555 Pension expense (1,491) 32,720 - Other 30,621 (32,650) 14,113 ---------- --------- ------ $ (74,654) $(84,775) $108,745 ========== ======== ======== F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
1999 1998 ----------- ----------- Deferred tax assets: Allowance for credit losses $ 779,074 $686,386 Loan interest 8,494 15,488 Provision for loss on other real estate 39,252 49,340 Pension expense - 2,513 Loan fees 32,140 32,122 Deferred compensation 54,109 49,560 Unrealized losses on available for sale securities 733,658 - ---------- --------- Total deferred tax assets 1,646,727 835,409 ---------- --------- Deferred tax liabilities: Depreciation 143,676 161,745 Pension expense 544 - Other 71,805 51,275 Unrealized gains on available for sale securities - 279,949 ------------------ --------- Total deferred tax liabilities 216,025 492,969 ----------- --------- Net deferred tax assets $1,430,702 $342,440 ========== ========
NOTE 13. REGULATORY CAPITAL REQUIREMENTS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators, that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes as of December 31, 1999, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A comparison of the Company's capital as of December 31, 1999 and 1998 with the minimum requirements is presented below:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------ As of December 31, 1999: Total Capital (to Risk Weighted Assets): Company $39,487,000 17.78% $17,770,000 8.00% The Talbot Bank 38,948,000 17.57 17,731,000 8.00 $22,164,000 10.00% Tier 1 Capital (to Risk Weighted Assets): Company 36,744,000 16.54 8,866,000 4.00 The Talbot Bank 36,205,000 16.34 8,866,000 4.00 13,298,000 6.00 Tier 1 Capital (to Average Assets): Company 36,744,000 11.47 12,811,000 4.00 The Talbot Bank 36,205,000 11.30 12,811,000 4.00 16,014,000 5.00
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------------------- As of December 31, 1998: Total Capital (to Risk Weighted Assets) Company $36,244,000 18.86% $15,377,000 8.00% The Talbot Bank 36,009,000 18.74 15,375,000 8.00 $19,219,000 10.00% Tier 1 Capital (to Risk Weighted Assets) Company 33,839,000 17.60 7,688,000 4.00 The Talbot Bank 33,604,000 17.49 7,687,000 4.00 11,531,000 6.00 Tier 1 Capital (to Average Assets) Company 33,839,000 11.18 12,109,000 4.00 The Talbot Bank 33,604,000 11.10 12,108,000 4.00 15,135,000 5.00
Bank and holding company regulations, as well as Maryland law, impose certain restrictions on divided payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At December 31, 1999, the Bank could have paid dividends to its parent company from undivided profits and, with the prior consent and approval of the Bank Commissioner, from surplus in excess of $5,937,740 after providing for expenses, losses, interest and taxes accrued or due. There were no loans outstanding between the Bank and the Company at December 31,1999 and 1998. NOTE 14. LINE OF CREDIT The Bank has a $10,000,000 unsecured federal funds line of credit expiring September 30, 2000, which is available on a short-term basis. In addition, the bank has credit availability of approximately $49,000,000 from the Federal Home Loan Bank of Atlanta. The Company has pledged, under blanket lien, all qualifying residentialoans as collateral under the borrowing agreement with the Federal Home Loan Bank. F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Investment Securities For all investments in debt securities, fair values are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loan Receivables The fair value of categories of fixed rate loans, such as commercial loans, residential mortgage, and other consumer loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Other loans, including variable rates loans, are adjusted for differences in loan characteristics. Financial Liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. These estimates do not take into consideration the value of core deposit intangibles. The fair value of securities sold under agreements to repurchase is estimated using the rates offered for similar borrowings. Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The estimated fair values of the Bank's financial instruments, excluding goodwill, as of December 31 are as follows: 1999 1998 ----- ----- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value -------- ------------ ------- ------------- Financial assets: Cash and cash equivalents $ 30,249,666 $ 30,250,000 $ 20,406,424 $ 20,406,000 Investment securities 73,189,794 71,875,000 83,370,961 83,463,000 Loans 218,776,099 215,275,000 194,363,361 192,000,000 Less: allowance for loan losses (2,742,984) - (2,582,433) - ---------------------------------- -------------- ------------ $319,472,575 $317,400,000 $295,558,313 $295,869,000 ============ ============ ============ ============ Financial liabilities: Deposits $273,948,351 $260,341,000 $249,929,275 $247,638,000 Securities sold under agreements to repurchase 16,343,413 16,343,000 17,111,375 17,111,000 -------------- ------------ ------------- ------------ $290,291,764 $276,684,000 $267,040,650 $264,749,000 ============ ============ ============ ============ Unrecognized financial instruments: Commitments to extend credit $ 51,534,000 $ 51,534,000 $ 44,189,000 $ 44,189,000 Standby letters of credit 3,133,000 3,133,000 2,754,000 2,754,000 --------------- --------------- -------------- --------------- $ 54,667,000 $ 54,667,000 $ 46,943,000 $ 46,943,000 ============= ============= ============= =============
F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, to meet the financial needs of its customers, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of the instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company generally requires collateral or other security to support the financial instruments with credit risk. The amount of collateral or other security is determined based on management's credit evaluation of the counterparty. The Company evaluates each customer's creditworthiness on a case-by-case basis. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Commitments outstanding as of December 31 are as follows: 1999 1998 ----------- ----------- Commitments to extend credit $51,534,000 $44,189,000 Letters of credit 3,133,000 2,754,000 ----------- ----------- $54,667,000 $46,943,000 =========== =========== NOTE 17. ARENT COMPANY FINANCIAL INFORMATION Condensed financial information for Talbot Bancshares, Inc. (Parent Company Only) is as follows: Condensed Balance Sheets December 31, 1999 and 1998
1999 1998 ---- ---- Assets Cash 36,537 $ 31,058 Securities purchased under agreement to resell 18,140 176,378 Investment in subsidiary 35,533,101 34,048,994 Investment in equity securities 280,000 - Other assets 14,379 27,300 -------------- -------------- Total assets $35,882,157 $34,283,730 ============== ============== Liabilities - - Stockholders' equity Common stock $ 11,933 $ 11,922 Surplus 12,724,287 12,663,141 Retained earnings 24,312,342 21,163,696 Accumulated other comprehensive income (1,166,405) 444,971 ------------- ------------- Total stockholders' equity 35,882,157 34,283,730 ------------- ------------- Total liabilities and stockholders' equity $35,882,157 $34,283,730 ============= =============
F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Statements of Income For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ------ Dividends from subsidiary $1,456,317 $ 1,131,365 $ 891,283 Interest income 1,074 4,453 1,104 ----------- ------------ ------------ 1,457,391 1,135,818 892,387 Operating expenses 47,290 23,425 12,986 ---------- ----------- ----------- Income before income tax benefit and equity in undistributed income of subsidiary 1,410,101 1,112,393 879,401 Income tax benefit 14,379 6,605 3,055 ---------- ----------- ----------- Income before equity in undistributed income of subsidiary 1,424,480 1,118,998 882,456 Equity in undistributed income of subsidiary 3,095,482 2,895,688 2,791,556 ----------- ----------- ----------- Net income $4,519,962 $4,014,686 $3,674,012 ========== ========== ==========
Condensed Statements of Cash Flows For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income $ 4,519,962 $ 4,014,686 $ 3,674,012 Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed income of subsidiary (3,095,482) (2,895,688) (2,791,556) Net increase (decrease) in other assets 12,921 (1,312) (25,988) ------------ ---------- ----------- Net cash provided by operating activities 1,437,401 1,117,686 856,468 ------------ ---------- ----------- Cash flows from investing activities: Sale (purchase) of securities order agreement to resell 158,238 (100,850) (75,528) Purchase of other equity securities (280,000) - - ----------- --------- ----------- Net cash used by investing activities (121,762) (100,850) (75,528) ----------- ---------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock 119,895 115,056 81,497 Purchase of common stock (58,738) - - Dividends paid (1,371,316) (1,131,366) (831,905) ----------- ------------ ----------- Net cash used by financing activities (1,310,159) (1,016,310) (750,408) ----------- ------------ ----------- Net increase in cash and cash equivalents 5,479 526 30,532 Cash and cash equivalents at beginning of year 31,058 30,532 - ------------- ----------- ----------- Cash and cash equivalents at end of year $ 36,537 $ 31,058 $ 30,532 ============= =========== ===========
F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. EARNINGS PER COMMON SHARE Basic earnings per share is arrived at by dividing net income available to common stockholders by the weighted-average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share calculation method is arrived at by dividing net income by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options and warrants. For purposes of comparability, all prior-period earnings per share data has been restated.
1999 1998 1997 ---- ---- ---- Basic: Net income (applicable to common stock) $4,519,962 $4,014,686 $3,674,012 Average common shares outstanding 1,192,457 1,190,705 1,187,814 Basic earnings per share $3.79 $3.37 $3.09 Diluted: Net income (applicable to common stock) $4,519,962 $4,014,686 $3,674,012 Average common shares outstanding 1,192,457 1,190,705 1,187,814 Diluted effect of stock options 22,441 16,323 11,316 ---------- ---------- ----------- Average common shares outstanding - diluted 1,214,898 1,207,028 1,199,130 Diluted earnings per share $3.72 $3.33 $3.06
F-22 TALBOT BANCSHARES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, except per share amounts)
September 30, December 31, ASSETS: 2000 1999 ------- ------------- ------------ (unaudited) Cash and due from banks $ 10,035 $ 5,535 Federal funds sold 5,024 24,714 Investment securities: Held-to-maturity, at amortized cost (fair value of $ 5,546, and $8,162 respectively) 5,626 8,302 Available for sale, at fair value 70,942 64,888 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.
F-23 TALBOT BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) Nine Months Ended September 30, 2000 1999 ------------- ------------ INTEREST INCOME Loans, including fees $ 14,765 $ 12,805 Interest and dividends on investment securities Taxable 3,082 3,219 Tax-exempt 84 125 Federal funds sold 378 359 -------- --------- Total interest income 18,309 16,508 ------ -------- INTEREST EXPENSE Certificates of deposit, $100,000 or more 2,122 1,659 Other deposits 5,296 5,156 Other interest 666 495 ------- ------- Total interest expense 8,084 7,310 ------ ------ NET INTEREST INCOME 10,225 9,198 PROVISION FOR CREDIT LOSSES 224 180 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 10,001 9,018 ------ ------ NONINTEREST INCOME Service charges on deposit accounts 693 610 Loss on sale of securities 1 12 Other noninterest income 869 102 ------- ------- Total noninterest income 1,563 724 ----- ----- NONINTEREST EXPENSES Salaries and employee benefits 2,926 2,721 Expenses of premises and fixed assets 596 562 Other noninterest expense 1,528 1,472 ------ ------ Total noninterest expense 5,050 4,755 ------ ------ INCOME BEFORE TAXES ON INCOME 6,514 4,987 Federal and State income taxes 2,317 1,720 ------- ------- NET INCOME $4,197 $3,267 ====== ====== Basic earnings per commons share $ 3.51 $ 2.74 Diluted earnings per common share $ 3.46 $ 2.69 Dividends declared per common share $ .90 $ .75
See accompanying notes to Condensed Consolidated Financial Statements. F-24 TALBOT BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Nine Months Ended September 30, 2000 1999 ---- ---- 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 390 448 Discount accretion on debt securities (281) (40) Discount accretion on matured debt securities 264 10 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 ============= ============
F-25 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. 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 nine month periods ended September 30, 2000 and 1999, and cash flows for the nine month periods ended September 30, 2000 and 1999. The results of operations for the 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:
September 30, December 31, (Dollars in thousands) 2000 1999 ---- ---- 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 ========= =========
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. F-26 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The following tables set forth certain pro forma combined condensed financial information of Shore Bancshares and Talbot Bancshares presented using the pooling-of-interests method of accounting for the merger. The pro forma combined condensed balance sheet gives effect to the acquisition as of September 30, 2000. The pro forma combined condensed statements of income give effect to the acquisition as of September 30, 2000 and December 31, 1999. The information in the tables is not necessarily indicative of the results that would have been achieved had such transaction been consummated on such dates and should not be construed as representative of future operations. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS September 30, 2000
Shore Talbot Pro Forma Bancshares, Inc. Bancshares, Inc. Adjustments(s) Consolidated --------------- --------------- ------------- ------------ (Dollars in Thousands) ASSETS: Cash and due from banks $ 8,023 $ 10,035 - $ 18,058 Federal funds sold 1,449 5,024 - 6,473 Investment Securities Held to maturity 16,958 5,626 - 22,584 Available for sale 32,081 70,942 - 103,023 Loans, less allowance for credit losses 133,450 237,671 - 371,121 Bank premises and equipment 3,958 2,980 - 6,938 Accrued interest receivable 1,713 3,017 - 4,730 Investment in unconsolidated subsidiary 1,057 - - 1,057 Goodwill 1,659 - - 1,659 Other Assets 2,212 2,000 - 4,212 ----------------------------------------------------------------------------- Total Assets $202,560 $ 337,295 - $539,855 ============================================================================= LIABILITIES: Noninterest bearing demand $21,564 $31,027 - $52,591 Interest bearing transaction 26,371 51,783 - 78,154 Time $100,000 or more 20,030 59,521 - 79,551 Other time and savings 104,551 135,229 - 239,780 ----------------------------------------------------------------------------- Total Deposits 172,516 277,560 - 450,076 Short-term borrowings 281 19,071 - 19,352 Accrued interest payable 231 633 - 864 Other liabilities 711 755 - 1,466 Long term debt 5,000 - - 5,000 ----------------------------------------------------------------------------- Total liabilities 178,739 298,019 - 476,758 ----------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock 19 12 22 53 Surplus 10,078 12,821 (22) 22,877 Retained earnings 14,209 27,435 - 41,644 Accumulated other comprehensive income (485) (992) - (1,477) ----------------------------------------------------------------------------- Total Stockholders' Equity 23,821 39,276 - 63,097 ----------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $202,560 $337,295 - $ 539,855 =============================================================================
(a) Capital adjustment reflects the effect of the conversion of Talbot Bancshares, Inc. common stock for 2.85 shares of Shore Bancshares, Inc. Common stock accounted for as a pooling-of-interests. F-27 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME September 30, 2000
Shore Talbot Pro Forma Bancshares, Inc. Bancshares, Inc. Adjustments Consolidated ---------------- ---------------- ----------- ------------ (Dollars in Thousands) INTEREST INCOME: - Interest and fees on loans $ 8,503 14,765 - $ 23,268 Interest and dividends on securities Taxable 1,910 3,082 - 4,992 Tax exempt securities 297 84 - 381 Interest on federal funds sold 71 378 - 449 ------------------------------------------------------------------------------- Total interest income 10,781 18,309 - 29,090 ------------------------------------------------------------------------------- INTEREST EXPENSE: - Certificates of deposit, $100,000 or more 730 2,122 - 2,852 Other deposits 3,799 5,296 - 9,095 Short term borrowings 154 666 - 820 Long term debt 301 0 - 301 ------------------------------------------------------------------------------- Total interest expense 4,984 8,084 - 13,068 ------------------------------------------------------------------------------- Net interest income 5,797 10,225 - 16,022 Provision for credit losses 75 224 - 299 ------------------------------------------------------------------------------- Net interest income after provision for credit losses 5,722 10,001 - 15,723 ------------------------------------------------------------------------------- NONINTEREST INCOME: - Service charges on deposit accounts 657 693 - 1,350 Gain(loss) on sale of investment securities (49) 1 - (48) Other noninterest income 869 188 - 1,057 ------------------------------------------------------------------------------- Total noninterest income 796 1,563 - 2,359 ------------------------------------------------------------------------------- NONINTEREST EXPENSE: Salaries and Employee Benefits 1,893 2,926 - 4,819 Premises and fixed assets 437 596 - 1,033 Other noninterest expense 1,216 1,528 - 2,744 ------------------------------------------------------------------------------- Total noninterest expense 3,546 5,050 - 8,596 ------------------------------------------------------------------------------- INCOME BEFORE TAXES 2,972 6,514 - 9,486 Federal and State Income taxes 1,057 2,317 - 3,374 ------------------------------------------------------------------------------- NET INCOME $ 1,915 $4,197 - $ 6,112 =============================================================================== Basic earnings per share(a) $1.00 $3.51 $1.15 Diluted earnings per share(a) $1.00 $3.46 $1.14 Dividends declared per share(b) $0.43 $0.90 $0.36
(a) Shore Bancshares pro-forma earnings per common share, basic and diluted, represents historical net income for Shore Bancshares and Talbot Bancshares combined on the assumption that Shore Bancshares and Talbot Bancshares have been combined for the periods presented on a pooling of interests basis, divided by the sum of the total number of shares of Shore Bancshares common stock outstanding at such date and the total number of Talbot Bancshares common stock outstanding at such date multiplied by the exchange ratio of 2.85 shares of Shore Bancshares common stock issued for Talbot Bancshares common stock, and including the dilutive securities in the case of diluted pro-forma income per common share. (b) Pro-forma cash dividends per share of Shore Bancshares common stock is calculated by dividing the historical amount of dividends declared by Shore Bancshares and Talbot Bancshares by the sum of the total number of Shore Bancshares common stock outstanding at such date and the total number of shares of Talbot Bancshares common stock outstanding at such date multiplied by the exchange ratio of 2.85 shares of Shore Bancshares common stock issued for Talbot Bancshares common stock. F-28 PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME December 31, 1999
Shore Talbot Pro Forma Bancshares, Inc. Bancshares, Inc. Adjustments Consolidated ---------------- ---------------- ----------- ------------ (Dollars in Thousands) INTEREST INCOME: Interest and fees on loans $ 9,718 17,367 - $ 27,085 Interest and dividends on securities Taxable 2,466 4,307 - 6,773 Tax exempt securities 436 154 - 590 Interest on federal funds sold 438 549 - 987 -------------------------------------------------------------- Total interest income 13,058 22,377 - 35,435 -------------------------------------------------------------- INTEREST EXPENSE: Certificates of deposit, $100,000 or more 823 2,325 - 3,148 Other deposits 5,041 6,889 - 11,930 Short term borrowings 10 677 - 687 Long term debt 274 0 - 274 -------------------------------------------------------------- Total interest expense 6,148 9,891 - 16,039 -------------------------------------------------------------- Net interest income 6,910 12,486 - 19,396 Provision for credit losses 0 240 - 240 -------------------------------------------------------------- Net interest income after provision for credit losses 6,910 12,246 - 19,156 -------------------------------------------------------------- NONINTEREST INCOME: Service charges on deposit accounts 808 761 - 1,739 Gain(loss) on sale of investment securities 21 12 - 33 Other noninterest income 324 211 - 366 -------------------------------------------------------------- Total noninterest income 1,153 985 - 2,138 -------------------------------------------------------------- NONINTEREST EXPENSE: Salaries and Employee Benefits 2,437 3,605 - 6,042 Premises and fixed assets 592 781 - 1,373 Other noninterest expense 1,630 1,916 - 3,546 -------------------------------------------------------------- Total noninterest expense 4,659 6,302 - 10,961 -------------------------------------------------------------- INCOME BEFORE TAXES 3,404 6,929 - 10,333 Federal and State Income taxes 1,119 2,409 - 3,528 -------------------------------------------------------------- NET INCOME $2,285 $ 4,520 - 6,805 ============================================================== Basic earnings per share(c) $1.19 $3.79 $1.28 Diluted earnings per share(c) $1.19 $3.72 $1.27 Dividends declared per share(d) $0.54 $1.15 $0.45
(c) Shore Bancshares pro-forma earnings per common share, basic and diluted, represents historical net income for Shore Bancshares and Talbot Bancshares combined on the assumption that Shore Bancshares and Talbot Bancshares have been combined for the periods presented on a pooling of interests basis, divided by the sum of the total number of shares of Shore Bancshares common stock outstanding at such date and the total number of Talbot Bancshares common stock outstanding at such date multiplied by the exchange ratio of 2.85 shares of Shore Bancshares common stock issued for Talbot Bancshares common stock, and including the dilutive securities in the case of diluted pro-forma income per common share. (d) Pro-forma cash dividends per share of Shore Bancshares common stock is calculated by dividing the historical amount of dividends declared by Shore Bancshares and Talbot Bancshares by the sum of the total number of Shore Bancshares common stock outstanding at such date and the total number of shares of Talbot Bancshares common stock outstanding at such date multiplied by the exchange ratio of 2.85 shares of Shore Bancshares common stock issued for Talbot Bancshares common stock. F-29 EX-23 2 0002.txt CONSENT OF THE BOARD OF DIRECTORS Board of Directors Shore Bancshares, Inc. We hereby consent to the inclusion of our independent auditors' report dated January 21, 2000, relating to the consolidated financial statements as of December 31, 1999 and 1998 and for the three years ended December 31, 1999 of Talbot Bancshares, Inc. in this Current Report on Form 8-K/A. Sincerely, /s/ Stegman & Company -------------------------- Stegman and Company Baltimore, Maryland February 7, 2001 -----END PRIVACY-ENHANCED MESSAGE-----