UNITED STATES

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2011
Commission File No. 000-50047

Calvin B. Taylor Bankshares, Inc.
(Exact name of registrant as specified in its Charter)

Maryland
(State of incorporation)

52-1948274
(I.R.S. Employer Identification No.)

24 North Main Street, Berlin, Maryland 21811
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (410) 641-1700

 

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]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____                                                                                                  Accelerated filer [X]
Non- accelerated filer ____ (Do not check if a smaller reporting company)                 Smaller reporting company ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). No [X]

On July 31, 2011, 3,000,508 shares of the registrant's common stock were issued and outstanding.

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Form 10-Q
Index

Part I - Financial Information Page
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 3
Consolidated Statements of Income for the three months
ended June 30, 2011 and 2010 4
Consolidated Statements of Income for the six months
ended June 30, 2011 and 2010 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2011and 2010 6-7
Notes to Consolidated Financial Statements 8-17
Item 2 Management’s Discussion and Analysis of Financial Condition
and Results of Operations 18-25
Item 3 Quantitative and Qualitative Disclosures About Market Risks 25
Item 4 Controls and Procedures 25
Part II - Other Information
Item 1 Legal Proceedings 26
Item 1A Risk Factors 26
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3 Defaults Upon Senior Securities 26
Item 5 Other Information 26
Item 6 Exhibits 26-29
Signatures 30

 

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Part I - Financial Information, Item 1 Financial Statements  
Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Balance Sheets    
(unaudited)  
June 30 December 31,
2011 2010
Assets
Cash and due from banks  $             19,070,231  $             14,319,142
Federal funds sold                 41,299,150                 36,081,862
Interest-bearing deposits                   9,581,383                 11,650,849
Investment securities available for sale                 46,478,368                 59,801,920
Investment securities held to maturity (approximate     
  fair value of $43,827,011 and $32,491,819)                 43,538,077                 32,303,572
Loans, less allowance for loan losses    
  of $1,950,834 and $983,178               239,669,929               237,001,219
Premises and equipment                   6,265,346                   6,319,854
Other real estate owned                      779,500                      779,500
Accrued interest receivable                   1,378,536                   1,224,920
Computer software                      137,158                        89,521
Bank owned life insurance                   5,346,989                   5,260,539
Prepaid Expenses 953,044                   1,285,266
Other assets                   473,025                        29,640
 $           414,970,736  $           406,147,804
Liabilities and Stockholders' Equity
Deposits    
  Noninterest-bearing  $             81,324,451  $             76,763,686
  Interest-bearing               251,783,187               250,014,068
              333,107,638               326,777,754
Securities sold under agreements to repurchase                   5,026,003                   4,490,512
Accrued interest payable                       116,170                      150,299
Deferred income taxes                      333,509                      383,326
Other liabilities                        43,407                      151,361
              338,626,727               331,953,252
Stockholders' equity    
  Common stock, par value $1 per share     
   authorized 10,000,000 shares, issued and outstanding    
   3,000,508 shares at June 30, 2011, and December 31, 2010                   3,000,508                   3,000,508
  Additional paid-in capital                   8,733,438                   8,733,438
  Retained earnings                 63,607,865                 61,441,595
                75,341,811                 73,175,541
  Accumulated other comprehensive income                   1,002,198                   1,019,011
                76,344,009                 74,194,552
 $           414,970,736  $           406,147,804
   
   
See accompanying Notes to Consolidated Financial Statements

 

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Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Statements of Income (unaudited)    
For the three months ended
June 30
2011 2010
Interest and dividend revenue    
  Loans, including fees  $               3,946,500  $               4,101,783
  U.S. Treasury and government agency securities                      248,240                      308,680
  State and municipal securities                        14,510                        13,957
  Federal funds sold                           9,980                        16,129
  Interest-bearing deposits                        14,589                        14,015
  Equity securities                          8,813                        10,162
          Total interest and dividend revenue                   4,242,632                   4,464,726
   
Interest expense    
  Deposits                      363,530                      486,378
  Borrowings                          5,160                          7,291
    Total interest expense                      368,690                      493,669
   
    Net interest income                   3,873,942                   3,971,057
   
Provision for loan losses                      803,500                      180,000
    Net interest income after provision for loan losses                   3,070,442                   3,791,057
   
Noninterest revenue    
  Service charges on deposit accounts                      235,866                      255,800
  ATM and debit card                      156,753                      144,394
  Bank owned life insurance                        43,677                        42,757
  Gain on sale of assets                               50                        37,003
  Loss on other than temporary impairment of investment value                    (178,325)                               -  
  Miscellaneous revenue                        90,511                      146,775
    Total noninterest revenue                      348,532                      626,729
   
Noninterest expenses    
  Salaries                      873,440                      877,636
  Employee benefits                      253,060                      272,685
  Occupancy                      190,373                      178,414
  Furniture and equipment                      113,272                      106,579
  Data processing                        60,302                        73,169
  ATM and debit card                        42,521                        35,255
  Deposit insurance premiums                        73,660                        67,233
  Other operating                      423,534                      411,929
    Total noninterest expenses                   2,030,162                   2,022,900
   
    Income before income taxes                   1,388,812                   2,394,886
Income taxes                      473,750                      871,500
   
Net income  $                  915,062  $               1,523,386
   
Earnings per common share - basic and diluted  $                        0.30  $                        0.51
   
See accompanying Notes to Consolidated Financial Statements

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Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Statements of Income (unaudited)    
For the six months ended
June 30
2011 2010
Interest and dividend revenue    
  Loans, including fees  $               7,837,121  $               8,061,953
  U.S. Treasury and government agency securities                      492,758                      653,732
  State and municipal securities                        29,287                        26,282
  Federal funds sold                         24,460                        28,085
  Interest-bearing deposits                        29,264                        33,511
  Equity securities                        16,827                        29,006
          Total interest and dividend revenue                   8,429,717                   8,832,569
   
Interest expense    
  Deposits                      767,004                      986,238
  Borrowings                        10,561                        16,137
    Total interest expense                      777,565                   1,002,375
   
    Net interest income                   7,652,152                   7,830,194
   
Provision for loan losses                      948,900                      601,000
    Net interest income after provision for loan losses                   6,703,252                   7,229,194
   
Noninterest revenue    
  Service charges on deposit accounts                      451,361                      480,535
  ATM and debit card                      294,012                      266,041
  Bank owned life insurance                        86,449                        84,645
  Gain on sale of assets                             250                      185,239
  Loss on other than temporary impairment of investment value                    (178,325)                               -  
  Miscellaneous revenue                      143,737                      248,461
    Total noninterest revenue                      797,484                   1,264,921
   
Noninterest expenses    
  Salaries                   1,748,427                   1,744,483
  Employee benefits                      615,655                      523,514
  Occupancy                      413,232                      407,256
  Furniture and equipment                      240,083                      231,249
  Data processing                      127,414                      146,395
  ATM and debit card                        89,161                        98,902
  Deposit insurance premiums                      149,614                      145,688
  Other operating                      759,630                      818,863
    Total noninterest expenses                   4,143,216                   4,116,350
   
    Income before income taxes                   3,357,520                   4,377,765
Income taxes                   1,191,250                   1,589,000
   
Net income  $               2,166,270  $               2,788,765
   
Earnings per common share - basic and diluted  $                        0.72  $                        0.93
   
See accompanying Notes to Consolidated Financial Statements

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Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Statements of Cash Flows (unaudited)    
For the six months ended
June 30,
2011 2010
Cash flows from operating activities    
  Interest and dividends received  $                8,404,824  $                8,847,588
  Fees and commissions received                    1,085,005                    1,124,678
  Interest paid                     (811,695)                  (1,029,565)
  Cash paid to suppliers and employees                  (3,830,228)                  (3,865,268)
  Income taxes paid                  (1,651,955)                  (1,220,956)
                   3,195,951                    3,856,477
Cash flows from investing activities    
  Certificates of deposit purchased, net of maturities                    1,990,820                    5,828,265
  Proceeds from maturities of investments available    
     for sale                  28,075,000                  13,005,000
  Purchase of investments available for sale                (15,082,996)                  (5,990,653)
  Proceeds from maturities of investments held to     
     maturity                    7,315,000                  16,590,000
  Purchase of investments held to maturity                (18,591,635)                  (9,938,810)
  Loans made, net of principal reductions                  (3,617,610)                (10,554,312)
  Proceeds from sale of repossessed loan collateral, net of    
    cost of sale                                 -                           60,273
  Purchases of premises, equipment,    
    and computer software                     (260,425)                       (97,105)
  Proceeds from sale of premises and equipment                              250                         72,100
                    (171,596)                    8,974,758
   
Cash flows from financing activities    
  Net increase (decrease) in    
    Time deposits                  (6,520,844)                    1,459,136
    Other deposits                  12,850,730                    7,068,132
    Securities sold under agreements to repurchase                       535,491                     (273,189)
  Payments on note payable                                 -                         (13,349)
                   6,865,377                    8,240,730
   
Net increase in cash and cash equivalents                    9,889,732                  21,071,965
Cash and cash equivalents at beginning of period                  50,531,537                  43,489,772
Cash and cash equivalents at end of period  $              60,421,269  $              64,561,737
   
   
   
   
   
   
   
See accompanying Notes to Consolidated Financial Statements

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Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Statements of Cash Flows (unaudited)    
For the six months ended
June 30,
2011 2010
Reconciliation of net income to net cash provided    
  by operating activities    
  Net income  $               2,166,270  $               2,788,765
  Adjustments to reconcile net income to net cash    
    provided by operating activities    
Provision for loan losses                      948,900                      601,000
    Gain on sale of repossessed loan collateral                               -                          (5,773)
    Gain on sale of premises & equipment                           (250)                      (55,061)
    Loss on other than temporary impairment of investment value                      178,325                               -  
    Amortization of premiums and accretion of    
      discount, net                      128,723                        86,131
    Depreciation and amortization                      267,296                      287,557
    Decrease (increase) in    
      Accrued interest receivable                    (153,616)                      (71,194)
      Cash surrender value of bank owned life insurance                      (86,449)                      (84,645)
      Other assets                    (111,163)                      525,490
    Increase (decrease) in    
      Accrued interest payable                      (34,129)                      (27,190)
      Accrued income taxes                               -                          38,012
      Other liabilities                    (107,956)                    (226,615)
 $               3,195,951  $               3,856,477
   
   
  Composition of cash and cash equivalents    
    Cash and due from banks  $             19,070,231  $             24,057,111
    Federal funds sold                  41,299,150                 40,376,765
    Interest-bearing deposits, except for time deposits                        51,888                      127,861
 $             60,421,269  $             64,561,737
   
   
   
   
   
   
   
   
   
   
   
See accompanying Notes to Consolidated Financial Statements

 

 

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited)

 

1. Basis of Presentation
    The accompanying unaudited consolidated financial statements conform with accounting principles generally accepted in the United States of America and to the instructions to Form 10-Q. Interim financial statements do not include all the information and footnotes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of financial position and results of operations for these interim periods have been made. These adjustments are of a normal recurring nature. Results of operations for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected in any other interim period or for the year ending December 31, 2011. For further information, refer to the audited consolidated financial statements and related footnotes included in the Company's Form 10-K for the year ended December 31, 2010.
    Consolidation has resulted in the elimination of all significant intercompany accounts and transactions.

Cash Flows
    For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and interest-bearing deposits except for time deposits. Federal funds are purchased and sold for one-day periods.

Per share data
    Earnings per common share are determined by dividing net income by the weighted average number of common shares outstanding for the period, as follows:

2011 2010
Three months ended June 30                     3,000,508                     3,000,508
Six months ended June 30                     3,000,508                     3,000,508

 

2. Comprehensive Income
    Comprehensive income consists of:

For the six months ended
June 30,
2011 2010
Net income  $                 2,166,270  $                 2,788,765
Unrealized loss on investment securities    
  available for sale, net of income taxes                        (16,813)                      (328,534)
Comprehensive income  $                 2,149,457  $                 2,460,231

 

 

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

3. Investment Securities
    Investment securities are summarized as follows:

    Amortized  Unrealized Unrealized Fair
    cost gains losses value
  June 30, 2011        
  Available for sale        
    U.S. Treasury  $         43,047,248  $       1,015,172  $                  -    $         44,062,420
    State and municipal                  290,136                  3,895                1,959                  292,072
    Equity               1,613,512              863,964            353,600               2,123,876
     $         44,950,896  $       1,883,031  $        355,559  $         46,478,368
  Held to maturity        
    U.S. Treasury  $         28,981,222  $          262,748  $                  -    $         29,243,970
    U.S. Government agency               9,000,524                  5,252                1,416               9,004,360
    State and municipal               5,556,331                22,415                     65               5,578,681
     $         43,538,077  $          290,415  $            1,481  $         43,827,011
           
  December 31, 2010        
  Available for sale        
    U.S. Treasury  $         56,150,205  $          966,157  $          16,871  $         57,099,491
    State and municipal                  365,772                  4,031                3,709                  366,094
    Equity               1,691,841           1,008,745            364,251               2,336,335
     $         58,207,818  $       1,978,933  $        384,831  $         59,801,920
  Held to maturity        
    U.S. Treasury  $         19,487,287  $          178,407  $            5,147  $         19,660,547
    U.S. Government agency               7,002,448                13,646                6,850               7,009,244
    State and municipal               5,813,837                11,979                3,788               5,822,028
     $         32,303,572  $          204,032  $          15,785  $         32,491,819

 

 

 

 

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

3. Investment Securities (Continued)
    The table below shows the gross unrealized losses and fair value of securities that are in an unrealized loss position as of June 30, 2011, aggregated by length of time that individual securities have been in a continuous unrealized loss position.

Less than 12 months 12 months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
           
U. S. Government Agency  $   2,998,000  $       1,416  $             -    $             -    $     2,998,000  $       1,416
State and municipal          229,043           2,024                 -                   -              229,043           2,024
Equity securities          144,996         27,000        259,401        326,600            404,397       353,600
   $   3,372,039  $     30,440  $    259,401  $    326,600  $     3,631,440  $   357,040

    The debt securities for which an unrealized loss is recorded are issues of the Federal Home Loan Bank (a U. S. government agency), and general and highly rated revenue obligations of states and municipalities. The Company has the ability and the intent to hold these securities until they are called or mature at face value. Equity securities for which an unrealized loss is recorded are issued by local community banks and bank holding companies. Management believes that these fluctuations in fair value reflect market conditions, and are not indicative of other-than-temporary impairment of the investments.
    In the second quarter of 2011, the Company recorded expense of $178,325 related to the other than temporary impairment of value of two equity holdings.
    The amortized cost and estimated fair value of debt securities, by contractual maturity and the amount of pledged securities, follow. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2011 December 31, 2010
Amortized Fair Amortized Fair
cost value cost value
       
Available for sale        
  Within one year  $        34,119,913  $        34,272,965  $        35,163,533  $        35,292,775
  After one year        
   through five years              7,220,686              7,301,927            19,355,802            19,481,248
  After ten years              1,996,785              2,779,600              1,996,642              2,691,562
   $        43,337,384  $        44,354,492  $        56,515,977  $        57,465,585
       
Held to maturity        
  Within one year  $        16,520,410  $        16,565,861  $          8,758,541  $          8,789,063
  After one year        
   through five years            27,017,667            27,261,150            23,545,031            23,702,756
   $        43,538,077  $        43,827,011  $        32,303,572  $        32,491,819
       
Pledged securities  $        21,073,668  $        21,252,320  $        26,567,879  $        27,558,868

    Investments are pledged to secure deposits of federal and local governments. Pledged securities also serve as collateral for securities sold under agreements to repurchase.

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

4. Loans and Allowance for Loan Losses
    Major classifications of loans are as follows:

June 30, 2011 December 31, 2010
Real estate mortgages    
Construction, land development, and land  $             14,639,007  $             21,792,060
Residential 1 to 4 family                 92,649,098                 94,296,749
Commercial properties               117,594,015               102,578,171
Commercial                  15,118,015                 17,596,451
Consumer                   1,620,628                   1,720,966
              241,620,763               237,984,397
Allowance for loan losses                   1,950,834                      983,178
Loans, net  $           239,669,929  $           237,001,219

    Nonperforming loans are loans past due 90 or more days and still accruing plus nonaccrual loans. Nonperforming assets are comprised of nonperforming loans combined with real estate acquired in foreclosure and held for sale. The following table details the composition of nonperforming assets:

June 30, December 31,
2011 2010
Loans 90 days or more past due and still accruing    
Real estate mortgages    
Construction, land development, and land  $             344,890  $                       -  
Residential 1 to 4 family                 929,151                           -  
Commercial properties              1,264,009                 684,422
Commercial                            -                             -  
Consumer                           -                             -  
               2,538,050                 684,422
Nonaccruing loans    
Real estate mortgages    
Construction, land development, and land              1,421,290              1,171,127
Residential 1 to 4 family                 786,510                 318,076
Commercial properties              1,865,099              2,610,204
Commercial                            -                       7,114
Consumer                           -                             -  
               4,072,899              4,106,521
   
Total nonperforming loans              6,610,949              4,790,943
Other real estate owned                 779,500                 779,500
Total nonperforming assets  $          7,390,449  $          5,570,443
   
Interest not accrued on nonaccruing loans  $             196,698  $             156,805
     
Interest included in net income on nonaccruing loans,    
year-to-date  $                       -    $               93,033

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

4. Loans and Allowance for Loan Losses (continued)
    The following is a schedule of transactions in the allowance for loan losses by type of loan. The Company did not acquire any loans with deteriorated credit quality during the periods presented.

Real estate mortgages        
Construction            
June 30, 2011 and Land Residential Commercial Commercial Consumer Unallocated Total
Beginning balance  $           235,437  $             50,602  $            356,993  $          194,946  $          119,228  $        25,972 $                     983,178
Loans charged off                   (11,553)                              -                                  -        (2,946)               (9,105)                    -                         (23,604)
Recoveries                   39,072                          300                                -                     400                2,588                    -                       42,360
Provision charged to operations                 197,989               254,000                 500,000               53,729             (58,872)              2,054                       948,900
Ending balance  $           460,945  $          304,902  $            856,993  $          246,129  $           53,839  $        28,026  $                 1,950,834
             
Individually evaluated for impairment:            
Balance in allowance  $            193,672  $          234,000  $            850,000  $                   -    $                   -      $                 1,277,672
Related loan balance  $        1,421,290  $           786,510  $        2,549,520  $                   -    $                   -      $                 4,757,320
             
Collectively evaluated for impairment:            
Balance in allowance  $           267,273  $             70,902  $                  6,993  $          246,129  $           53,839  $        28,026  $                    673,162
Related loan balance  $      13,217,717  $    91,862,588  $    115,044,495  $     15,118,015  $      1,620,628    $             236,863,443
             
             
December 31, 2010              
Beginning balance  $            145,262  $             48,034  $                   2,192  $          380,161  $           53,638  $          8,474  $                    637,761
Loans charged off               (100,000)              (190,093)                                -   (354,854)             (52,935)                    -                       (697,882)
Recoveries                               -                         1,100                                -                   1,073              29,126                    -                           31,299
Provision charged to operations                  190,175                  191,561                  354,801             168,566               89,399            17,498                     1,012,000
Ending balance  $           235,437  $             50,602  $            356,993  $          194,946  $          119,228  $        25,972  $                    983,178
             
Individually evaluated for impairment:            
Balance in allowance  $                          -    $                         -    $            330,759  $                   -    $                   -      $                    330,759
Related loan balance  $          1,171,127  $           361,743  $        2,566,537  $             7,114  $                   -      $                 4,106,521
             
Collectively evaluated for impairment:            
Balance in allowance  $           235,437  $             50,602  $               26,234  $          194,946  $          119,228  $        25,972  $                    652,419
Related loan balance  $   20,620,933  $   93,935,006  $     100,011,634  $   17,589,337  $      1,720,966    $             233,877,876
             
             
June 30, 2010              
Beginning balance  $            145,262  $             48,034  $                   2,192  $          380,161  $           53,638  $          8,474  $                    637,761
Loans charged off                               -                                -                                  -             (347,873) (33,745)                   -                   (381,618)
Recoveries                               -                                -                                  -                     178              17,386                    -                           17,564
Provision charged to operations                   64,627                  43,320                  276,681             190,390               13,678            12,304                       601,000
Ending balance  $           209,889  $              91,354  $            278,873  $         222,856  $           50,957  $        20,778  $                    874,707
             
Individually evaluated for impairment:            
Balance in allowance  $                          -    $             58,765  $              261,213  $             5,248  $             1,500    $                    326,726
Related loan balance  $                          -    $          507,967  $         2,835,471  $             5,248  $             2,419    $                 3,351,105
             
Collectively evaluated for impairment:            
Balance in allowance  $           209,889  $             32,589  $                17,660  $          217,608  $           49,457  $        20,778  $                    547,981
Related loan balance  $   23,929,493  $   97,206,208  $   103,997,846  $   20,369,317  $      2,035,919    $             247,538,783

 

- 12 -

 

Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

4. Loans and Allowance for Loan Losses (continued)
    The table below shows the relationship of net charged-off loans and the balance in the allowance to gross loans and average loans.

Allowance for Loan Losses      
For six months ended   For the year ended  
June 30   December 31  
2011 2010   2010  
         
Net loans charged off (recovered)  $         (18,756)  $        364,054    $        666,583  
         
Balance at end of period  $     1,950,834  $        874,707    $        983,178  
         
Gross loans outstanding at the end of the period  $ 241,620,763  $ 250,889,888    $ 237,984,397  
Allowance for loan loses to gross loans          
outstanding at the end of the period 0.81% 0.35%   0.41%  
         
Average loans outstanding during the period  $ 246,535,270  $ 249,809,716    $ 244,189,000  
Annualized net charge-offs as a percentage of          
average loans outstanding during the period -0.02% 0.29%   0.27%  

    Loans are considered past due when either principal or interest is not paid by the date on which payment is due. The following table is an analysis of past due loans by days past due and type of loan.

Age Analysis of Past Due Loans
    Greater than       > 90 Days
30-59 Days 60-89 Days 90 Days Total   Total Past Due and
June 30, 2011 Past Due Past Due Past Due Past Due Current Loans Accruing
Real Estate              
Construction, land development,              
and land  $       196,940  $       235,191  $    1,100,548  $    1,532,679           13,106,328           14,639,007  $        344,890
Residential 1 to 4 family        1,110,673        2,144,183        1,466,324        4,721,180           87,927,918           92,649,098            929,151
Commercial properties                     -               36,393        3,129,108        3,165,501         114,428,514         117,594,015         1,264,009
Commercial                      -                       -                       -                       -             15,118,015           15,118,015                     -  
Consumer             24,959               2,618                     -               27,577             1,593,051             1,620,628                     -  
Total  $    1,332,572  $    2,418,385  $    5,695,980  $    9,446,937  $     232,173,826  $     241,620,763  $     2,538,050
             
December 31, 2010              
Real Estate              
Construction, land development,              
and land  $       474,843  $       234,719  $    1,089,719  $    1,799,281  $       19,992,779  $       21,792,060  $                 -  
Residential 1 to 4 family        1,390,288           336,134                     -          1,726,422           92,570,327           94,296,749                     -  
Commercial properties                     -               37,957        2,508,675        2,546,632         100,031,539         102,578,171            684,422
Commercial            103,759               7,114                     -             110,873           17,485,578           17,596,451                     -  
Consumer                     -               19,415                     -               19,415             1,701,551             1,720,966                     -  
Total  $    1,968,890  $       635,339  $    3,598,394  $    6,202,623  $     231,781,774  $     237,984,397  $        684,422

 

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

4. Loans and Allowance for Loan Losses (continued)
   Loans are considered impaired when management considers it unlikely that collection of principal and interest payments will be made according to contractual terms, including principal and interest payments. A performing loan may be categorized as impaired based on knowledge of circumstances that are deemed relevant to loan collection. Not all impaired loans are past due nor are losses expected for every impaired loan. If a loss is expected, an impaired loan may have specific reserves allocated to it in the allowance for loan losses. A schedule of impaired loans at period ends and their average balances for the year follows:

Unpaid     Average
Principal Recorded Related Recorded
June 30, 2011 Balance Investment Allowance Investment
With no related allowance recorded        
Construction, land development, and land  $           665,632  $           665,632  $                    -    $           684,802
Residential 1 to 4 family               276,689               276,689                        -                 279,144
Commercial properties               684,422               684,422                        -                 684,422
With an allowance recorded        
Construction, land development, and land               755,658               755,658               193,672               760,816
Residential 1 to 4 family               509,821               509,821               234,000               508,074
Commercial properties            1,865,098            1,865,098               850,000            1,887,642
Total:        
Construction, land development, and land            1,421,290            1,421,290               193,672            1,445,618
Residential 1 to 4 family               786,510               786,510               234,000               787,218
Commercial properties            2,549,520            2,549,520               850,000            2,572,064
Total, all categories  $        4,757,320  $        4,757,320  $        1,277,672  $        4,804,900

 

December 31, 2010        
With no related allowance recorded        
Construction, land development, and land  $        1,171,127  $        1,171,127  $                    -    $        1,194,397
Residential 1 to 4 family               361,743               361,743                        -                 379,546
Commercial properties                 88,488                 88,488                        -                   93,244
Commercial                    7,114                   7,114                        -                     8,122
With an allowance recorded        
Commercial properties            2,478,049            2,478,049               330,759            2,484,804
Total:        
Construction, land development, and land            1,171,127            1,171,127                        -              1,194,397
Residential 1 to 4 family               361,743               361,743                        -                 379,546
Commercial properties            2,566,537            2,566,537               330,759            2,578,048
Commercial                    7,114                   7,114                        -                     8,122
Total, all categories  $        4,106,521  $        4,106,521  $           330,759  $        4,160,113

 

 

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

4. Loans and Allowance for Loan Losses (continued)
    Credit risk is measured based on an internally designed grading scale. The grades correspond to regulatory rating categories of pass, special mention, substandard, and doubtful. Evaluation of grades assigned to individual loans is completed no less than quarterly. Credit quality, as measured by internally assigned grades, is an important component in the calculation of an adequate allowance for loan losses. The following table summarizes loans by credit quality indicator.

June 30, 2011 December 31, 2010
   
Real Estate Credit Risk Profile by Internally Assigned Grade  
Construction, land development, and land    
Pass  $              12,773,074  $                 16,063,618
Substandard                       444,643                       4,557,315
Doubtful    
Less than 90 days past due and accruing                                 -                            761,189
Nonperforming: 90 days or more    
past due and/or non-accruing                    1,421,290                          409,938
Total  $              14,639,007  $                 21,792,060
   
Residential 1 to 4 family    
Pass  $              87,468,333  $                 90,393,936
Special Mention                       248,395                                    -  
Substandard                    4,145,860                       3,584,737
Doubtful    
Less than 90 days past due and accruing                                 -                            292,091
Nonperforming: 90 days or more    
past due and/or non-accruing                       786,510                            25,985
Total  $              92,649,098  $                 94,296,749
   
Commercial properties    
Pass  $            110,237,582  $                 95,620,813
Special Mention                                 -                                      -  
Substandard                    4,806,912                       4,347,154
Doubtful    
Less than 90 days past due and accruing                       684,422                          132,155
Nonperforming: 90 days or more    
past due and/or non-accruing                    1,865,099                       2,478,049
Total  $            117,594,015  $               102,578,171
   
Commercial Credit Risk Profile by Internally Assigned Grade  
Pass  $              15,118,015  $                 17,589,337
Doubtful    
Less than 90 days past due and accruing                                 -                                7,114
Total  $              15,118,015  $                 17,596,451
   
Consumer Credit Risk Profile by Internally Assigned Grade    
Pass  $                1,620,628  $                   1,720,966
Total  $                1,620,628  $                   1,720,966

 

- 15 -

 

Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

5. Loan commitments
    Loan commitments are agreements to lend to customers as long as there is no violation of any conditions of the contracts. Outstanding loan commitments and letters of credit consist of:

June 30, 2011 December 31, 2010
Loan commitments and lines of credit    
  Construction and land development  $                 4,602,443  $                 8,569,169
  Other                   20,561,721                   21,164,229
   $               25,164,164  $               29,733,398
   
Standby letters of credit  $                 1,299,096  $                 1,590,367

6. Assets Measured at Fair Value
    The Company values investment securities classified as available for sale on a recurring basis and other real estate acquired through foreclosure at fair value on a non-recurring basis. The fair value hierarchy established in the Financial Accounting Standards Board Codification Topic 820 titled Fair Value Measurements defines three input levels for fair value measurement. Level 1 is based on quoted market prices in active markets for identical assets. Level 2 is based on significant observable inputs other than those in Level 1. Level 3 is based on significant unobservable inputs. The Company values US Treasury securities, government agency securities, and an equity investment in an actively traded public utility under Level 1. Municipal debt securities, equity investments in community banks, and other real estate acquired through foreclosure are valued under Level 2. The Company has no assets measured at fair value on a recurring or non-recurring basis that are valued under Level 3 criteria. No assets were transferred between levels of the fair value hierarchy during this period. At June 30, 2011, values for available for sale investment securities and other real estate owned were established as follows:

Total Level 1 Inputs Level 2 Inputs
Investment securities available for sale (recurring)      
U.S. Treasury  $      44,062,420  $      44,062,420  $                    -  
State and municipal               292,072                        -                 292,072
Equity            2,123,876               345,928            1,777,948
Other real estate owned (non-recurring)               779,500                        -                 779,500
   $      47,257,868  $      44,408,348  $        2,849,520

    The fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis, and the valuation methods used in estimating the fair value of financial instruments is disclosed in the Company’s Annual Report on Form 10-K. It is not practicable to report quarterly the fair value of financial assets and liabilities measured on a non-recurring basis.

 

- 16 -

 

Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

7. New accounting standards
    The following accounting pronouncements have been approved by the Financial Accounting Standards Board but had not become effective as of June 30, 2011. These pronouncements would apply to the Company if the Company or the Bank entered into an applicable activity.
    ASU No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements." ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) company’s should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. Disclosures related to the gross presentation of Level 3 purchases, sales, issuances and settlements of assets and liabilities was required for the Company beginning January 1, 2011 and are included in Note 5.
    ASU No. 2010-20, "Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses."
ASU 2010-20 was effective for the Company with its annual reporting period ended December 31, 2010. Since its adoption, the Company provides more information about the credit quality of its financing receivables (loans), including aging information and credit quality indicators. The disclosures are disaggregated by portfolio segment. ASU No. 2011-01 postpones the effective date for disclosures relating to troubled debt restructures (see below).
    ASU No. 2011-01, "Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20." The amendments in ASU 2011-01 temporarily delay the effective date of disclosures about troubled debt restructurings required under ASU 2010-20. These disclosures are required in the first interim or annual period beginning after June 15, 2011.
    ASU No. 2011-02, "Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring." The amendments in ASU 2011-02 provide further clarification as to when a loan modification or restructuring is considered a troubled debt restructuring (TDR) for the purpose of achieving more consistent application of U.S. GAAP for debt restructurings. In evaluating whether a restructuring constitutes a TDR, a creditor must conclude that 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties. These disclosures are required in the first interim or annual period beginning after June 15, 2011.
    The accounting policies adopted by management are consistent with accounting principles generally accepted in the United States of America and are consistent with those followed by peer Banks.

 

- 17 -

 

Calvin B. Taylor Bankshares, Inc. and Subsidiary
Part I. Financial Information

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

    This Report contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements appear in a number of places in this Report and include all statements regarding the intent, belief or current expectations of the Company, its directors, or its officers with respect to, among other things: (i) the Company's financing plans; (ii) trends affecting the Company's financial condition or results of operations; (iii) the Company's growth strategy and operating strategy; and (iv) the declaration and payment of dividends. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors discussed herein and those factors discussed in detail in the Company's filings with the Securities and Exchange Commission.

    The following discussion of the financial condition and results of operations of the Registrant (the Company) should be read in conjunction with the Company's financial statements and related notes and other statistical information included elsewhere herein.

General
    Calvin B. Taylor Bankshares, Inc. (Company) was incorporated as a Maryland corporation on October 31, 1995. The Company owns all of the stock of Calvin B. Taylor Banking Company (Bank), a commercial bank that was established in 1890 and incorporated under the laws of the State of Maryland on December 17, 1907. The Bank operates nine banking offices in Worcester County, Maryland and one banking office in Ocean View, Delaware. The Bank's administrative office is located in Berlin, Maryland. The Bank is engaged in a general commercial and retail banking business serving individuals, businesses, and governmental units in Worcester County, Maryland, Ocean View, Delaware, and neighboring counties.
    The Company currently engages in no business other than owning and managing the Bank. The Bank employed 86 full time equivalent employees as of June 30, 2011. The Bank hires seasonal employees during the summer. The Company has no employees other than those hired by the Bank.

Use of estimates
    The preparation of financial statements in conformity with accounting principles generally accepted in the United State of America 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. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Critical Accounting Policies
    The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of inherently uncertain matters. When applying accounting policies in areas that are subjective in nature, management uses its best judgment to arrive at the carrying value of certain assets. One of the most critical accounting policies applied is related to the valuation of the loan portfolio.
    The allowance for loan losses (ALLL) represents management’s best estimate of inherent probable losses in the loan portfolio as of the balance sheet date. It is one of the most difficult and subjective judgments. The adequacy of the allowance for loan losses is evaluated no less than quarterly. The determination of the balance of the allowance for loan losses is based on management’s judgments about the credit quality of the loan portfolio as of the review date. It should be sufficient to absorb losses in the loan portfolio as determined by management’s consideration of factors including an analysis of historical losses, specific reserves for non-performing or past due loans, delinquency trends, portfolio composition (including segment growth or shifting of balances between segments, products and processes, and concentrations of credit, both regional and by relationship), lending staff experience and changes, critical documentation and policy exceptions, risk rating analysis, interest rates and the competitive environment, economic conditions in the Bank’s service area, and results of independent reviews, including audits and regulatory examinations.

- 18 -

 

Financial Condition
    Total assets of the Company increased $8.8 million (2.17%) from December 31, 2010 to June 30, 2011. Combined deposits and customer repurchase agreements increased $6.9 million (2.07%) during the same period. Much of the deposit and asset growth from the previous year-end to the end of the second quarter stems from seasonal activity, which is further discussed in the section titled Liquidity.
    Average assets and average deposits increased $14.6 million (3.74%) and $14.1 million (4.54%), respectively, from second quarter 2010 to second quarter 2011. Management believes that some of the year-to-year growth in deposits results from continuing market instability due to the slow recovery following the recession of 2008-2009. Consumers often seek the safety of conservatively run community banks when the stock market suffers a significant downturn. Increased deposit insurance limits also give customers a greater sense of security in bank deposits.

Loan Portfolio
    During the first half of 2011, the Bank’s gross loan portfolio has grown $3.6 million (1.53%). It is typical for the Bank to experience growth in both deposits and loans by the end of the second quarter. By late June, many seasonal merchants have drawn on their working capital lines of credit and, if the tourist season is successful, they are experiencing increased sales. Growth in the loan portfolio has been funded by increased deposit balances. Because loans earn at higher average rates than the cost of funds, this use of available funds has a positive effect on earnings. There is no adverse impact on the Company’s ability to meet liquidity demands resulting from increases in the loan portfolio.
    The Company makes loans to customers located primarily in the Delmarva region. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region. Since late 2008, the local and regional economies have been adversely affected by a recession of national and international reach. While economists consider that the recession ended in mid-2009, our local economy continues to experience high unemployment and significant declines in property values.

Loan Quality and the Allowance for Loan Losses
    The allowance for loan losses (ALLL) represents an amount which management believes to be adequate to absorb identified and inherent losses in the loan portfolio as of the balance sheet date. Valuation of the allowance is completed no less than quarterly. The determination of the allowance is inherently subjective as it relies on estimates of potential loss related to specific loans, the effects of portfolio trends, and other internal and external factors.
    The ALLL consists of (i) formula-based reserves comprised of potential losses in the balance of the loan portfolio segmented into homogeneous pools, (ii) specific reserves comprised of potential losses on loans that management has identified as impaired and (iii) unallocated reserves. Unallocated reserves are not associated with a specific portfolio segment or a specific loan, but may be appropriate if properly supported and in accordance with GAAP.
    The Company evaluates loan portfolio risk for the purpose of establishing an adequate allowance for loan losses. In determining an adequate level for the formula-based portion of the ALLL, management considers historical loss experience for major types of loans. Homogenous categories of loans are evaluated based on loss experience in the most recent three years. Based on this evaluation, management applies a formula to the current portfolio which gives weight to portfolio size and loss experience for categories of real estate construction loans, other real estate secured loans, other loans to commercial borrowers, and other consumer loans. However, historical data may not be an accurate predictor of loss potential in the current loan portfolio.
    Management also evaluates trends in delinquencies, the composition of the portfolio, concentrations of credit, and changes in lending products, processes, or staffing. Management further considers external factors such as the interest rate environment, competition, current local and national economic trends, and the results of recent independent reviews by auditors and banking regulators. The protracted slow-down in the real-estate market has affected both the price and time to market residential and commercial properties. Management closely monitors such trends and the potential effect on the Company. The impact of the current adverse economic conditions is reflected in historically high loan losses and provisions for loan losses in 2009, 2010, and the current year.

 

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    Management employs a risk rating system which gives weight to collateral status (secured vs. unsecured), and to the absence or improper execution of critical contract or collateral documents. Unsecured loans and those loans with critical documentation exceptions, as defined by management, are considered to have greater loss exposure. Management incorporates these factors in the formula-based portion of the ALLL. Additionally, consideration is given to those segments of the loan portfolio which management deems to pose the greatest likelihood of loss. A schedule of loans by credit quality indicator (risk rating) can be found in Note 4.
    Management believes that in a general economic downturn, such as the region has experienced since mid-2008, the Bank has an increased likelihood of loss in unsecured loans - commercial and consumer, and in secured consumer loans. Reserves for these segments of the portfolio are included in the formula-based portion of the ALLL. As of June 30, 2011, management reserved 125 bp against all unsecured loans, and consumer loans secured by other than real estate. This reserve level was increased during the first quarter of this year in recognition of the prolonged economic challenges to regional, national, and global economies. Additionally, management reserved 10% against overdrawn checking accounts which are a distinct high risk category of unsecured loan. The bank does not offer an approved overdraft loan product, so all overdrawn deposit balances result from unauthorized presentment of items against insufficient funds.
    Borrowers whose cash flow is impaired as a result of prevailing economic conditions have also experienced depressed real estate values. Management recognizes that the combination of these circumstances – reduced revenue and depressed collateral values, may increase the likelihood of loss in the Bank’s real estate secured loan portfolio. Management closely monitors conditions that might indicate deterioration of collateral value on significant loans and, when possible, obtains additional collateral as required to limit the Bank’s loss exposure. The Bank expects commercial and consumer mortgage foreclosures to continue in 2011. Foreclosures may result in loan losses, costs to hold real estate acquired in foreclosure, and losses on the sale of real estate acquired in foreclosure. While management is unable to predict the financial consequences of future foreclosure activity, provision for loss on likely loan foreclosures is included in specific reserves in the ALLL.
    Historically, the absence or improper execution of a document has not resulted in a loss to the Bank, however, management recognizes that the Bank’s loss exposure is increased until a critical contract or collateral documentation exception is cured. At June 30, 2011, management reserved 10 bp against the outstanding balances of loans identified as having critical documentation exceptions.
    The provision for loan losses is a charge to earnings in the current period to maintain the allowance at a level management has determined to be appropriate. The allowance is increased by current period provisions and by recoveries of amounts previously charged-off. The allowance is decreased when loans are charged-off as losses, which occurs when they are deemed to be uncollectible. Adjustments made to bring the balance in the allowance to the level established by management may result in an increase or decrease to expense. Provisions for loan losses of $803,500 and $948,900 were made for the second quarter of 2011and year-to-date, respectively. This compares to provisions for loan losses of $180,000 and $601,000 for the comparable periods in 2010. The year-to-date increases in the level of the ALLL and the provision for loan loss reflect the consequences of the current economy. As borrowers continue to suffer personal and professional financial hardship, the likelihood of loss on previously performing loans has increased. As management identifies loans with heightened loss potential, a provision for those losses is recorded.
    Management considers the June 30, 2011 allowance appropriate and adequate to absorb identified and inherent losses in the loan portfolio. However, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required. As of June 30, 2011, management has not identified any loans which are anticipated to be wholly charged-off within the next 12 months.
    The Bank experienced net recoveries of $6,357 and $27,042 in the second quarters of 2010 and 2011, respectively, and net charge-offs (recoveries) of 364,054 and ($18,756) in 2010 and 2011 years to date, respectively. In 2010, a loss of $347,214 was attributable to a single unsecured commercial line of credit. Management expects loan losses to continue throughout 2011, as reflected in the elevated level of the ALLL. See Note 4 for a schedule of transactions in the allowance for loan losses.
    The accrual of interest on a loan is discontinued when principal or interest is ninety days past due or when the loan is determined to be impaired, unless collateral is sufficient to discharge the debt in full and the loan is in process of collection. When a loan is placed in nonaccruing status, any interest previously accrued but unpaid, is reversed from interest income. Interest payments received on nonaccrual loans may be recorded as cash basis income, or as a reduction of principal, depending on management’s judgment on a loan by loan basis. Accrual of interest may be restored when all principal and interest are current and management believes that future payments will be received in accordance with the loan agreement.

 

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    Nonperforming loans are loans past due 90 or more days and still accruing plus nonaccrual loans. Nonperforming assets are comprised of nonperforming loans combined with real estate acquired in foreclosure and held for sale. Nonperforming assets increased $1,820,006 (32.67%) from December 31, 2010 to June 30, 2011. While levels of nonaccrual loans and OREO have remained stable, loans past due 90 days or more and still accruing have increased. The five loans in this category are real estate mortgages, which Management closely monitors to assure that collateral is sufficient to discharge the debt to Bank. See Note 4 for additional information about nonperforming assets.
    Loans are considered impaired when management considers it unlikely that collection of principal and interest payments will be made according to contractual terms. A performing loan may be categorized as impaired based on knowledge of circumstances that are deemed relevant to loan collection, including deterioration of the borrower’s financial condition or devaluation of collateral. Not all impaired loans are past due nor are losses expected for every impaired loan.
    Impaired loans may have specific reserves, or valuation allowances, allocated to them in the ALLL. Estimates of loss reserves on impaired loans may be determined based on any of the three following measurement methods which conform to authoritative accounting guidance: (1) the present value of future cash flows, (2) the fair value of collateral, if repayment of the loan is expected to be provided by underlying collateral, or (3) the loan’s observable fair value. The Bank selects and applies, on a loan-by-loan basis, the appropriate valuation method. Loans determined to be impaired, but for which no specific valuation allowance is made because management believes the loan is secured with adequate collateral or the Bank will not take a loss on such loan, are grouped with other homogeneous loans for evaluation under formula-based criteria described previously. Impaired loans including nonaccruing loans totaled $4,757,320 and $4,106,521 at June 30, 2011, and December 31, 2010, respectively. See Note 4 for additional information about impaired loans.

Liquidity
    Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to provide sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. These funds can be obtained by converting assets to cash or by attracting new deposits. The Company’s major sources of liquidity are loan repayments, maturities of short-term investments including federal funds sold, and increases in core deposits. Funds from seasonal deposits are generally invested in short-term U.S. Treasury Bills and overnight federal funds.
    Due to its location in a seasonal resort area, the Bank typically experiences a decline in deposits, federal funds sold and investment securities throughout the first quarter of the year when business customers are using their deposits to meet cash flow needs. Beginning late in the second quarter and throughout the third quarter, additional sources of liquidity become more readily available as business borrowers start repaying loans, and the Bank receives deposits from seasonal business customers, summer residents and tourists.
    Average liquid assets (cash and amounts due from banks, interest-bearing deposits in other banks, federal funds sold, and investment securities) compared to average deposits and retail repurchase agreements were 43.84% for the second quarter of 2011 compared to 39.52% for the same quarter of 2010.
    The Company has available lines of credit, including overnight federal funds and reverse repurchase agreements, totaling $28,000,000 as of June 30, 2011
    Average net loans to average deposits were 75.47% versus 80.16% as of June 30, 2011 and 2010, respectively. Average net loans decreased by 1.59% while average deposits grew by 4.54%. Reductions in the loan portfolio result from low demand. Reductions in the loan portfolio result in increased investment in debt securities or federal funds sold. These investment vehicles are less profitable than loans. The Company will not lower its credit underwriting standards to bolster loan volume, as it considers that the longer term risk does not justify the risk of more aggressive lending. Average deposit balance increases occurred in non-interest and interest-bearing accounts, except time deposits which dropped 5.19%. Management believes that this indicates that depositors are migrating to more liquid types of accounts in order to be able to invest at higher rates should they become available. Neither changes in deposit portfolio composition nor the decrease in outstanding loan balances has a negative impact on the Company’s ability to meet liquidity demands.

 

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Interest Rate Sensitivity
    The primary objective of asset/liability management is to ensure the steady growth of the Company's primary source of earnings, net interest income. Net interest income can fluctuate with significant interest rate movements. To lessen the impact of these margin swings, the balance sheet should be structured so that repricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest rate sensitivity.
    Interest rate sensitivity refers to the responsiveness of interest-bearing assets and liabilities to changes in market interest rates. The rate-sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities at a given time interval. The general objective of gap management is to actively manage rate-sensitive assets and liabilities to reduce the impact of interest rate fluctuations on the net interest margin. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize the overall interest rate risk to the Company.
    Interest rate sensitivity may be controlled on either side of the balance sheet. On the asset side, management exercises some control over maturities. Also, loans are written to provide repricing opportunities on fixed rate notes. The Company's investment portfolio, including federal funds sold, provides the most flexible and fastest control over rate sensitivity since it can generally be restructured more quickly than the loan portfolio.
    On the liability side, deposit products are structured to offer incentives to attain the maturity distribution desired. Competitive factors sometimes make control over deposits more difficult and, therefore, less effective as an interest rate sensitivity management tool.
    The asset mix of the balance sheet is continually evaluated in terms of several variables: yield, credit quality, appropriate funding sources, and liquidity. Management of the liability mix of the balance sheet focuses on expanding the various funding sources.
    As of June 30, 2011, the Company was cumulatively asset-sensitive for all time horizons. For asset-sensitive institutions, if interest rates should decrease, the net interest margins should decline. Since all interest rates and yields do not adjust at the same velocity, the gap is only a general indicator of rate sensitivity.

Results of Operations
    Net income for the quarter ended June 30, 2011, was $915,062 ($.30 per share), compared to $1,523,386 ($.51 per share) for the second quarter of 2010, resulting in a decrease of $608,324 or 39.93%. Year to date net income has decreased $622,495 ($.21 per share) from $2,788,765 ($.93 per share) in 2010 to $2,166,270 ($.72 per share) in 2011. The key components of net income are discussed in the following paragraphs.
    In the second quarter of 2011 compared to 2010, net interest income decreased $97,115 (2.45%). Net interest income decreased $178,042 (2.27%) in the first six months of 2011 compared to the same period in 2010. The decrease in interest and dividend revenue continues a multi-year trend primarily attributable to extremely low market rates. In 2009, federal funds sold, which are immediately responsive to market rates, saw dramatic revenue declines. Fed funds rates have remained at those historically low levels since then. During 2010 and 2011, the gradual downward repricing of debt securities and certificates of deposit in other banks has caused further erosion of revenues. To offset the interest revenue decreases, management has gradually lowered deposit rates throughout 2009 to present. Interest expense decreased in the second quarter of 2011 by $124,979 (25.32%) relative to the comparable period last year. For the year to date, interest expense is down $224,810 (22.43%) relative to last year. Although average balances of interest-bearing deposits have increased, rate reductions have resulted in reduced expense.
    The Company’s net interest income is one of the most important factors in evaluating its financial performance. Management uses interest rate sensitivity analysis to determine the effect of rate changes. Net interest income is projected over a one-year period to determine the effect of an increase or decrease in the prime rate of 100 basis points. If prime were to decrease one hundred basis points, and all assets and liabilities maturing within that period were fully adjusted for the rate change, the Company would experience a decrease of approximately 5.5% in net interest income. Conversely, if prime were to increase one hundred basis points, and all assets and liabilities maturing within that period were fully adjusted for the rate change, the Company would experience an increase in net interest income of the same percentage. The sensitivity analysis does not consider the likelihood of these rate changes nor whether management’s reaction to this rate change would be to reprice its loans or deposits or both.

 

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    The tax-equivalent quarterly yield on interest-earning assets decreased by 46 basis points from 5.13% in second quarter 2010 to 4.67% in 2011. The quarterly yield on interest-bearing liabilities decreased by 23 basis points from .81% in 2010 to .58% in 2011. In combination, these shifts contribute to a decrease in net margin on interest-earning assets of 30 basis points.
    The following table presents information including average balances of interest-earning assets and interest-bearing liabilities, the amount of related interest income and interest expense, and the resulting yields by category of interest-earning asset and interest-bearing liability. In this table, dividends and interest on tax-exempt securities and loans are reported on a fully taxable equivalent basis, which is a non-GAAP measure as defined in SEC Regulation G and Item 10 of SEC Regulation S-K. Management believes that these measures provide better yield comparability as a tool for managing net interest income.

Average Balances, Interest, and Yields
For the quarter ended For the quarter ended
June 30, 2011 June 30, 2010
Average     Average    
balance Interest Yield balance Interest Yield
           
Assets            
  Federal funds sold  $   29,902,034  $          9,980 0.13%  $   33,845,165  $        16,129 0.19%
  Interest-bearing deposits         9,671,070            14,589 0.61%         6,881,897            14,015 0.82%
  Investment securities       87,883,740          325,299 1.48%       64,660,854          363,879 2.26%
  Loans, net of allowance     245,073,007       3,986,438 6.52%     249,022,106       4,136,416 6.66%
    Total interest-earning assets     372,529,851       4,336,306 4.67%     354,410,022       4,530,439 5.13%
Noninterest-bearing cash       16,746,991           19,514,507    
Other assets       14,992,871           15,779,339    
        Total assets  $ 404,269,713      $ 389,703,868    
           
Liabilities and Stockholders' Equity            
Interest-bearing deposits            
  NOW   $   61,895,896            48,473 0.31%  $   55,898,114            56,514 0.41%
  Money market       44,549,087            53,840 0.48%       36,311,278            45,091 0.50%
  Savings       48,771,823            36,298 0.30%       47,959,025            59,420 0.50%
  Other time       94,260,680          224,919 0.96%       99,418,035          325,353 1.31%
    Total interest-bearing deposits     249,477,486          363,530 0.58%     239,586,452          486,378 0.81%
Securities sold under agreements to repurchase & federal funds purchased         4,179,561              5,160 0.50%         5,411,273              6,696 0.50%
Borrowed funds                        -                      -                37,518                 595 6.36%
    Total interest-bearing liabilities     253,657,047          368,690 0.58%     245,035,243          493,669 0.81%
Noninterest-bearing deposits       75,266,507           71,067,292    
    328,923,554          368,690 0.45%     316,102,535          493,669 0.63%
Other liabilities            104,202                580,806    
Stockholders' equity       75,241,957           73,020,527    
        Total liabilities and            
        stockholders' equity  $ 404,269,713      $ 389,703,868    
Net interest spread     4.09%     4.32%
Net interest income    $   3,967,616      $   4,036,770  
Net margin on interest-earning assets     4.27%     4.57%
           
Tax equivalent adjustment in:            
    Investment income    $        53,736      $        31,080  
    Loan income    $        39,938      $        34,633  

 

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    Provisions for loan losses of $803,500 and $180,000 were recorded during the second quarter of 2011 and 2010, respectively. For the 2011 and 2010 years to date, provisions for loan losses were $948,900 and $601,000, respectively. Net loans charged-off (recovered) were (18,756) and $364,054 during the first half of 2011 and 2010, respectively. Management attributes the continuing need to provide for high potential loan losses to the generally poor state of the economy which has had an adverse effect on certain borrowing customers. See Loan Quality and the Allowance for Loan Losses for a discussion of the provision for loan losses.
    Noninterest revenue for the second quarter of 2011is $278,197 (44.39%) lower than the comparable period last year. Noninterest revenue for the year-to-date is $467,437 (36.95%) less than last year. The negative variances in both the quarter and the year-to-date result from non-recurring revenues in 2010 and the recording of a $178,325 other than temporary impairment (OTTI) loss on equity investments in 2011. The 2010 non-recurring revenues were comprised of gains on the sale of old coins with high precious metal content that had been stored in the Bank’s vault for decades, as well as gains on the sale of real property to the State of Delaware for road expansion and related right of ways. Management does not expect other OTTI losses in the remainder of 2011 to be of this magnitude. Additionally, the gains in 2010 were substantially all recorded in the first half of the year.
    Noninterest expense for the second quarter of 2011 is $7,262 (.36%), more than last year with no notable line item variances. Noninterest expense year-to-date is up $26,866 (.65%), including an increase of $92,141 in employee benefits related primarily to group insurance costs.
    Income taxes for the six months ended June 30, 2011are $397,750 (25.03%) lower than the same period last year, on a pre-tax income decrease of $1,020,245 (23.31%).

Plans of Operation
    The Bank offers a full range of deposit services including checking, NOW, Money Market, and savings accounts, and time deposits including certificates of deposit. The transaction, savings, and certificate of deposit accounts are tailored to the Bank’s principal market areas at rates competitive to those offered in the area. The Bank also offers Individual Retirement Accounts (IRA), Health Savings Accounts, and Education Savings Accounts. All deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum amount allowed by law, which is currently $250,000 per depositor. The Bank solicits these accounts from individuals, businesses, associations and organizations, and governmental authorities. The Bank offers individual customers up to $50 million in FDIC insured deposits through the Certificate of Deposit Account Registry Services® network.
    The Bank also offers a full range of short- to medium-term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. The Bank originates commercial and residential mortgage loans and real estate construction and acquisition loans. These lending activities are subject to a variety of lending limits imposed by state and federal law. The Bank lends to directors and officers of the Company and the Bank under terms comparable to those offered to other borrowers entering into similar loan transactions. The Board of Directors approves all loans to officers and directors and reviews these loans every six months.
    Other bank services include cash management services, 24-hour ATM’s, debit cards, safe deposit boxes, travelers’ checks, direct deposit of payroll and social security funds, and automatic drafts for various accounts. The Bank offers bank-by-phone and Internet banking services, including electronic bill-payment, to both commercial and retail customers. The Bank offers a remote capture service that enables commercial customers to electronically capture check images and make on-line deposits. The Bank also offers non-deposit products including retail repurchase agreements and discount brokerage services through a correspondent bank.

 

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Capital Resources and Adequacy
    Total stockholders’ equity increased $2,149,457 from December 31, 2010 to June 30, 2011 This increase is attributable to comprehensive income recorded during the period, as detailed in Note 2 of the Notes to Financial Statements.
    Under the capital guidelines of the Federal Reserve Board and the FDIC, the Company and Bank are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of stockholders' equity less accumulated other comprehensive income. In addition, the Company and the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 4%, but this minimum ratio is increased by 100 to 200 basis points for other than the highest-rated institutions.
    Tier one risk-based capital ratios of the Company as of June 30, 2011 and December 31, 2010 were 33.1% and 33.0%, respectively. Both are substantially in excess of regulatory minimum requirements.

Website Access to SEC Reports
    The Bank maintains an Internet website at
www.taylorbank.com. The Company’s periodic SEC reports, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, are accessible through this website. Access to these filings is free of charge. The reports are available as soon as practicable after they are filed electronically with the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
    The Company’s principal market risk exposure relates to interest rates on interest-earning assets and interest-bearing liabilities. Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management monitors and seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
    At June 30, 2011, the Company’s interest rate sensitivity, as measured by gap analysis, showed the Company was asset-sensitive with a one-year cumulative gap of 24.71%, as a percentage of interest-earning assets. Generally asset-sensitivity indicates that assets reprice more quickly than liabilities and in a rising rate environment net interest income typically increases. Conversely, if interest rates decrease, net interest income would decline. The Bank has classified its demand mortgage and commercial loans as immediately repriceable. Unlike loans tied to prime, these rates do not necessarily change as prime changes since the decision to call the loans and change the rates rests with management.

Item 4. Controls and procedures
    Disclosure controls and procedures are designed and maintained by the Company to ensure that information required to be disclosed in the Company’s publicly filed reports is recorded, processed, summarized and reported in a timely manner. Such information must be available to management, including the Chief Executive Officer (CEO) and Treasurer, to allow them to make timely decisions about required disclosures. Even a well-designed and maintained control system can provide only reasonable, not absolute, assurance that its objectives are achieved. Inherent limitations in any system of controls include flawed judgment, errors, omissions, or intentional circumvention of controls.
    The Company’s management, including the CEO and Treasurer, performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2011. Based on that evaluation, the Company’s management, including the CEO and Treasurer, has concluded that the Company’s disclosure controls and procedures are effective. The projection of an evaluation of controls to future periods is subject to the risk that procedures may become inadequate due to changes in conditions including the degree of compliance with procedures.

Changes in Internal Controls
    During the quarter ended on the date of this report, there were no significant changes in the Company’s internal control over financial reporting that have had or are reasonably likely to have a material effect on the Company’s internal control over financial reporting. As of June 30, 2011, the Company’s management, including the CEO and Treasurer, has concluded that the Company’s internal controls over financial reporting are effective.

 

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Part II. Other Information

Item 1 Legal Proceedings
     Not applicable

Item 1A. Risk Factors
    The Company and the Bank are subject to various types of risk during the normal conduct of business. There has been no material change in risk factors or levels of risk as previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    Company publicly announced on August 14, 2003, that it would repurchase up to 10% of its outstanding equity stock at that time. As of January 1, 2005, and again on May 18, 2007, this plan was renewed by public announcement, making up to 10% of the Company’s outstanding equity stock available for repurchase at the time of each renewal. On January 13, 2010, as part of its capital planning, the Board of Directors voted to temporarily suspend the stock buy-back program. On February 9, 2011, the Board of Directors voted to suspend this program indefinitely.
    There is no set expiration date for this program. No other stock repurchase plan or program existed or exists simultaneously, nor has any other plan or program expired during the period covered by this table. Common shares repurchased under this plan are retired. From its inception through December 31, 2009, 239,492 shares were retired under this program. No shares were retired during retired during 2010 or year-to-date 2011.
    The following table presents high and low bid information obtained from the Over the Counter Bulletin Board and from other trades known to management of the Company. Because transactions in the Company’s common stock are infrequent and are often negotiated privately between the persons involved in those transactions, actual prices may be higher or lower than those included in this table. Additionally, the number of shares traded at high or low prices may vary significantly. There is no established public trading market in the stock, and there is no likelihood that a trading market will develop in the near future.

2011   2010
Sales price per share High Low   High Low
First quarter  $          34.00  $          26.50    $          36.00  $          32.00
Second quarter  $          28.50  $          26.00    $          42.00  $          29.00
Third quarter        $          42.00  $          29.00
Fourth quarter        $          40.00  $          26.00

 

Item 3 Defaults Upon Senior Securities
    Not applicable

Item 4 (Removed and Reserved)

Item 5 Other information
    There is no information required to be disclosed in a report on Form 8-K during the period covered by this report, which has not been reported.

Item 6 Exhibits and Reports on Form 8-K
    a) Exhibits
        31. Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
        32. Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Exhibit 31.1
Rule 13a-14(a) Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Raymond M. Thompson, certify that:

I have reviewed this quarterly report on Form 10-Q of Calvin B. Taylor Bankshares, Inc.;

1. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

3. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the most recent fiscal quarter that has or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

4. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Calvin B. Taylor Bankshares, Inc.

Date: July 26, 2011

By: /s/ Raymond M. Thompson
Raymond M. Thompson
Chief Executive Officer

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Exhibit 31.2
Rule 13a-14(a) Certification of the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jennifer G. Hawkins, certify that:

I have reviewed this quarterly report on Form 10-Q of Calvin B. Taylor Bankshares, Inc.;

1. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

2. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

3. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the most recent fiscal quarter that has or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

4. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Calvin B. Taylor Bankshares, Inc.

Date: July 26, 2011

By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer (Principal Financial & Accounting Officer)

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Exhibit 32
Certification - Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

We, the undersigned, certify that to the best of our knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended June 30, 2010, of Calvin B. Taylor Bankshares, Inc:

(1) The referenced report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

 

Calvin B. Taylor Bankshares, Inc.

Date: July 26, 2011

By: /s/ Raymond M. Thompson
Raymond M. Thompson
Chief Executive Officer

By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer (Principal Financial & Accounting Officer)

 

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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 thereunto duly authorized.

 

Calvin B. Taylor Bankshares, Inc.

Date: July 26, 2011

By: /s/ Raymond M. Thompson
Raymond M. Thompson
Chief Executive Officer

By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer (Principal Financial & Accounting Officer)

 

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