SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001
Commission File Number: 0001003986
CALVIN B. TAYLOR BANKSHARES, INC.
I.R.S. Employer Identification No.: 52-1948274
State of incorporation: Maryland
Address of principal executive offices: 24 North Main Street, Berlin,
Maryland 21811
Issuer's telephone number: (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 Exchange Act during
the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: The registrant
had 3,240,000 shares of common stock ($1.00 par) outstanding as of
July 31, 2001.
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Form 10-Q
Index
Part I - Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Notes to Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation
Item 3 Quantitative and Qualitative Disclosures About Market Risks
Part II - Other Information
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Notes to Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been made.
These adjustments are of a normal recurring nature. Results of
operations for the six months ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the audited
consolidated financial statements and related footnotes for the Registrant's
fiscal period ended December 31, 2000.
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 and
overnight investments in federal funds sold.
Per share data
Earnings per common share and dividends per common share
are determined by dividing net income and dividends by the 3,240,000
shares outstanding, giving retroactive effect to stock dividends
distributed.
2. Comprehensive Income
Comprehensive income consists of:
Six months ended June 30,
2001 2000
Net income $2,848,348 $2,602,452
Unrealized gain (loss) on investment securities
available for sale, net of income taxes (35,381) 70,935
Comprehensive income $2,812,967 $2,673,387
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part I - Financial Information
Consolidated Statements of Condition
(unaudited)
30-Jun 31-Dec
2001 2000
Assets
Cash and due from banks 14,889,325 13,332,279
Federal funds sold 42,094,877 18,167,527
Interest-bearing deposits 784,000 784,000
Investment securities available for sale 3,634,477 4,052,934
Investment securities held to maturity
(approximate fair value of $62,083,983
and $76,610,933) 61,617,466 76,273,558
Loans, less allowance for credit losses
of $2,187,275 and $2,192,755 171,583,770 168,571,199
Premises and equipment 5,797,841 5,620,478
Accrued interest income 2,074,681 1,948,199
Deferred income taxes 129,489 107,227
Other assets 194,132 190,610
302,800,058 289,048,011
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing 55,713,537 49,674,943
Interest-bearing 186,032,708 182,251,249
241,746,245 231,926,192
Securities sold under agreements to repurchase
4,266,689 3,113,671
Accrued interest payable 521,343 503,519
Note payable 223,728 231,517
Accrued income taxes 138,508 103,818
Other liabilities 5,369 84,085
246,901,882 235,962,802
Stockholders' equity
Common stock, par value $1 per share
authorized 10,000,000 shares, issued and
issued and outstanding 3,240,000 shrs 3,240,000 3,240,000
Additional paid in capital 17,290,000 17,290,000
Retained earnings 34,906,846 32,058,498
55,436,846 52,588,498
Net unrealized gain on securities
available for sale 461,330 496,711
55,898,176 53,085,209
302,800,058 289,048,011
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
For the three months ended
June 30,
2001 2000
Interest and dividend revenue
Loans, including fees 3,622,418 3,386,255
U.S. Treasury and Agency securities 798,692 799,047
State and municipal securities 92,535 96,356
Federal funds sold 351,967 380,430
Deposits with banks 12,076 10,402
Equity securities 4,769 5,708
Total interest and dividend revenue 4,882,457 4,678,198
Interest expense
Deposit interest 1,526,482 1,397,301
Other 15,801 3,605
Total interest expense 1,542,283 1,400,906
Net interest income 3,340,174 3,277,292
Provision for credit losses - 41,000
Net interest income after
provision for credit losses 3,340,174 3,236,292
Other operating revenue
Service charges on deposit accounts 206,734 187,640
Miscellaneous revenue 160,814 124,447
Total other operating revenue 367,548 312,087
Other expenses
Salaries and employee benefits 810,247 818,945
Occupancy 76,655 140,310
Furniture and equipment 147,687 93,701
Other operating 399,662 484,173
Total other expenses 1,434,251 1,537,129
Income before income taxes 2,273,471 2,011,250
Income taxes 781,979 704,925
Net income 1,491,492 1,306,325
Basic earnings per share 0.46 0.40
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
For the six months ended
June 30,
2001 2000
Interest and dividend revenue
Loans, including fees 7,198,542 6,650,015
U.S. Treasury and Agency securities 1,695,103 1,752,879
State and municipal securities 186,948 202,662
Federal funds sold 613,251 680,937
Deposits with banks 24,048 22,338
Equity securities 19,472 14,815
Total interest and dividend revenue 9,737,364 9,323,646
Interest expense
Deposit interest 3,039,738 2,825,493
Other 31,844 8,497
Total interest expense 3,071,582 2,833,990
Net interest income 6,665,782 6,489,656
Provision for credit losses - 83,080
Net interest income after
provision for credit losses 6,665,782 6,406,576
Other operating revenue
Service charges on deposit accounts 409,121 362,073
Miscellaneous revenue 243,327 193,409
Total other operating revenue 652,448 555,482
Other expenses
Salaries and employee benefits 1,652,394 1,543,568
Occupancy 204,687 310,622
Furniture and equipment 290,157 330,549
Other operating 812,232 794,053
Total other expenses 2,959,470 2,978,792
Income before income taxes 4,358,760 3,983,266
Income taxes 1,510,412 1,380,814
Net income 2,848,348 2,602,452
Basic earnings per share 0.88 0.80
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
For the six months ended
June 30,
2001 2000
Cash flows from operating activities
Interest received 9,575,982 9,322,123
Fees and commissions received 691,617 572,728
Interest paid -3,053,758 -2,848,913
Cash paid to suppliers and employees -2,837,651 -2,735,723
Income taxes paid -1,475,723 -1,437,305
2,900,467 2,872,910
Cash flows from investing activities
Proceeds from maturities of investment securities
32,185,000 31,115,000
Purchase of investment securities held to maturity
-17,133,193 -10,363,137
Certificates of deposit purchased,
net of redemptions - 199,000
Purchases of premises, equipment, and
intangibles -437,589 -340,108
Loans made, net of principal collected -3,012,571 -13,371,369
Proceeds from sales of equipment 17,000 423
11,618,647 7,239,809
Cash flows from financing activities
Net change in time deposits 5,158,643 -2,686,390
Net change in other deposits 4,661,410 -4,640,937
Net change in repurchase agreements 1,153,018 -
Payment on mortgage obligation -7,789 -12,169
Dividend paid - -
10,965,282 -7,339,496
Net increase (decrease) in cash 25,484,396 2,773,223
Cash and equivalents at beg of period 31,499,806 34,423,959
Cash and equivalents at end of period 56,984,202 37,197,182
Reconciliation of net income to net cash provided
from operating activities
Net income 2,848,348 2,602,452
Adjustments
Depreciation and amortization 241,113 239,725
Deferred income tax - -
Provision for loan losses - 83,080
Security discount accretion, net of premium
amortization -34,900 16,233
(Gain) loss on disposition of assets -13,932 -
Decrease (increase) in accrued interest
receivable and other assets -113,960 -510
Increase (decrease) in accrued interest
payable and other liabilities -26,202 -68,070
2,900,467 2,872,910
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains certain forward-looking statements
within the meaning of and made pursuant to the safe harbor provisions of
the Private Litigation Securities Reform Act of 1995.
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. (the "Company") was incorporated
as a Maryland corporation on October 31, 1995. The Company owns all of
the stock of two banks. Calvin B. Taylor Banking Company (the "Maryland
bank") is a commercial bank that was established in 1890 and incorporated
under the laws of the State of Maryland on December 17, 1907. This bank
operates nine banking offices in Worcester County with the Bank's main
office located in Berlin, Maryland. It is engaged in a general commercial
and retail banking business serving individuals, businesses, and governmental
units in Worcester County, Maryland and neighboring counties.
Calvin B. Taylor Bank of Delaware (the "Delaware bank") was incorporated
in the state of Delaware in 1997. This one-branch Delaware bank, which offers
the same services as the Maryland bank, opened late in the second quarter 1998.
The Company currently engages in no business other than owning and managing
the Banks.
Financial Condition
Total assets of the Company increased $13.8 million from December 31,
2000 to June 30 2001. Combined deposits and customer repurchase agreements
increased $11.0 million during the same period. During the first quarter of
the year, the banks typically experience a decline in deposits since business
customers are using their deposits to meet cash flow needs. Generally, this
situation reverses late in the second quarter of the year as the banks receive
loan repayments from seasonal business customers, and deposits from summer
residents and tourists. Management believes that adverse conditions in the
stock markets may also have contributed to increased deposits in the banks
during the first half of 2001.
During the first six months of 2001, the banks' loan portfolios have
increased $3.0 million. Funding for these loans was provided by maturities
of investment securities. Management expects increased earnings from this
shift since loan yields are higher than investment yields. Management has
determined that this shift would not negatively impact the Company's ability
to meet liquidity demands.
The allowance for credit losses represents a reserve for potential loss
in the loan portfolio. The adequacy of the allowance for credit losses is
evaluated periodically based on a review of all significant loans, with a
particular emphasis on non-accruing, past due, and other loans that management
believes require attention. The determination of the reserve level rests upon
management's judgment about factors affecting loan quality and anticipated
changes in the composition and size of the portfolio, as well as assumptions
about the economy. Historically, the Company has low loan charge-offs.
The banks' target levels for their allowances as a percentage of gross loans
range from approximately 1.00% to 1.35%. Based on review of the
consolidated loan portfolio, the Company determined than an allowance of
1.26% of gross loans was adequate as of June 30, 2001. At December 31, 2000,
the allowance was 1.28% of gross loans. At June 30, 2001, one loan of $175,000
was nonaccruing, representing .10% of the portfolio, and $95,157 or .05%
of the portfolio was delinquent ninety days or more.
Liquidity
The company's major sources of liquidity arise from loan repayments,
short-term investments, including federal funds sold, and an increase in core
deposits. Throughout the first quarter of the year, when the banks typically
experience a decline in deposits, federal funds sold and investment securities
are primary sources of liquidity. During the second quarter of the year,
additional sources of liquidity become more readily available as business
borrowers start repaying loans, and the banks receive seasonal deposits.
Throughout the second and third quarters the banks maintain a high liquidity
level. Funds from seasonal deposits are generally invested in short-term
U.S. Treasury Bills and overnight federal funds. 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
were 48.05% for the second quarter of 2001 compared to 46.21% for the first
quarter of 2001 and 47.53% for the second quarter of 2000.
Results of Operations
Net income for the three months ended June 30, 2001, was $1,491,492
or $.46 per share, compared to $1,306,325 or $.40 per share for the second
quarter of 2000. This represents an increase of $185,167 or 14.17% from
the prior year. Year to date net income increased $245,896 or $.08 per share
from $2,602,452 or $.80 per share in 2000 to $2,848,348 or$.88 per share
in 2001. Significant reasons for the year to date increase in net income are
an increase in net interest income, reduction of the provision for credit
losses, and increased other revenues.
Net interest income increased $176,126 in the first six months of
2001 as compared to the first six months of 2000. This increase is
attributable to the shift from investment securities to higher earning loans,
and to increased levels of federal funds sold. The Company's net interest
income is one of the most important factors in evaluating its financial
performance. Management uses interest 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 less than six percent in net interest income. 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.
No provision for loan losses was made in the first half of 2001,
versus an $83,080 provision in first half of 2000. Net charge-offs
during the second quarter of 2001, and the year-to-date, were $5,480.
Personnel expenses are higher for the six months ended June 30,
2001 compared to the same period in 2000 due to general increases in
salaries and the addition of two new positions. The banks employed 106
full time equivalent employees as of June 30, 2001, an increase of three
employees from June 30, 2000. The Maryland bank hires seasonal employees
during the summer. The Company has no employees other than those hired
by the banks.
The Company's occupancy expense decreased $106 thousand from
first half 2000 to 2001. Of this, $39 thousand was due to the
relocation in 2000, of vehicular access to a branch, which was necessary
due to road construction. Also in 2000, the Maryland bank consolidated
two branches in Pocomoke Maryland, and incurred cost to move and
otherwise disposed of assets from the abandoned branch. In the same six
month period, furniture and equipment expense decreased by $40 thousand
due to lower service contract costs and a change in accounting for
service contracts from cash basis to amortizing the cost through out the
year. Although the Company's current data processing equipment meets
the needs of the banks, it is nearing the end of its economic life.
The Company expects to replace its core processing system in the fourth
quarter of 2001 and expects related depreciation, maintenance costs,
and software amortization expense to increase with this replacement.
Prior to the installation of the new processing system, improved data
storage, networking, and Internet banking systems are planned. It is
anticipated that these, too, will cause an increase in related costs.
Plans of Operation
The banks conduct general commercial banking businesses in their
service areas, of Worcester County, Maryland and Sussex County, Delaware,
while also emphasizing the banking needs of individuals and small- to
medium-sized businesses and professional concerns. The banks offer a
full range of federally insured deposit services that are typically
available in most banks and savings and loan associations, including
checking accounts, NOW accounts, savings accounts and other time
deposits of various types ranging from daily money market accounts to
longer-term certificates of deposit.
The Company, through its banks, offers a full range of short-
to medium-term commercial and personal loans, and originates mortgage
loans, including real estate construction and acquisition loans. The
banks have the intent and the ability to hold loans that their
portfolios.
Other bank services include cash management services, safe
deposit boxes, travelers checks, direct deposit of payroll and social
security checks, debit cards, and automatic drafts for various accounts.
The Company is associated with the MAC network of automated teller
machines that may be used by customers throughout Maryland, Delaware
and other regions. The Company offers credit card services through a
correspondent bank.
Capital Resources and Adequacy
Total stockholders' equity increased $2,812,967 from
December 31, 2000 to June 30, 2001. This increase is attributable to
the 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 its banks 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 common
shareholders' equity, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries,
less certain intangibles. In addition, the Company and the banks must
maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total
assets) of at least 3%, 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, 2001 and 2000 were 35.80% and 35.41%, respectively. Both
are substantially in excess of regulatory minimum requirements.
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 banks 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, 2001, the Company's interest rate sensitivity, as
measured by gap analysis, showed the Company was asset-sensitive with
a one-year cumulative gap of 26.52%, 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. Both banks have
classified their demand mortgage and commercial loans as immediately
repricing. 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.
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part II. Other Information
Item 1 Legal Proceedings
Not applicable
Item 2 Changes in Securities and Use of Proceeds
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on May 2, 2001, during which the
items detailed in the proxy statement dated March 7, 2001, were approved.
This includes the reelection of the Board of Directors.
Item 5 Other information
Not applicable.
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits
2. Proxy Statement dated March 7, 2001, is incorporated by
reference.
b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
June 30, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: _________________ By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
President and Chief Executive Officer
Date: _________________ By: /s/ William H. Mitchell
William H. Mitchell
Chief Financial Officer