UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2005
Commission File No. 000-50047
Calvin B. Taylor Bankshares, Inc.
(Exact name of registrant as specified in its Charter)
Maryland (State of incorporation or organization)
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
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, par value $1.00 per share
Indicate by check mark whether the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ X ] No ____
Indicate by check mark whether the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ____ No [ X ]
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No ____
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non- accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. Large accelerated filer ____
Accelerated filer [ X ]
Non- accelerated filer ____
Indicate by check mark if the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ____ No [ X ]
The aggregate market value of the Common Stock, all of which has voting rights,
held by non-affiliates of the registrant on December 31, 2005, was $97,956,200.
This calculation is based upon the last price known to the registrant at which
its Common Stock was sold as of the last business day of the registrant's most
recently completed second fiscal quarter. As of June 30, 2005, the last known
sale price was $36.25 per share. There is not an active trading market for the
Common Stock and it is not possible to identify precisely the market value of
the Common Stock.
On February 15, 2006, 3,186,956 shares of the registrant's common stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for Annual Meeting of Shareholders to be held on
May 17, 2006, is incorporated by reference in this Form 10-K in Part III,
Item 10, Item 11, Item 12, Item 13, and Item 14.
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.
PART I
Item 1. Business
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 of Berlin, Maryland (Bank). The Bank is a commercial
bank incorporated under the laws of the State of Maryland on December 17, 1907,
with a main office located in Berlin, Maryland.
Location and Service Area
The Company, through the Bank, is engaged in a general commercial and
retail banking business serving individuals, small- to medium-sized businesses,
professional organizations, and governmental units. The Bank operates nine
branches located throughout Worcester County, Maryland and one branch located in
Sussex County, Delaware. The Bank draws most of its customer deposits and
conducts most of its lending transactions within the communities in which these
branches are located.
Much of the Bank's service area is located along the shores of the Atlantic
Ocean and has grown as both a resort and a retirement community in recent years.
The principal components of the economy are tourism and agriculture. Berlin has
a strong component of health-care related businesses. The tourist businesses of
Ocean City, Maryland and Bethany, Delaware and the health-care facilities in
Berlin, Maryland (including Berlin Nursing Home and Atlantic General Hospital)
are among the largest employers in the counties.
Banking Products and Services
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 accounts and time certificates are tailored to the
Bank's principal market areas at rates competitive to those offered in the area.
In addition, the Bank offers certain retirement account services, such as
Individual Retirements Accounts. All deposits are insured by the Federal
Deposit Insurance Corporation (FDIC) up to the maximum amount allowed by law
(generally, $100,000 per depositor subject to aggregation rules). The Bank
solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
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 also offers
non-deposit products including retail repurchase agreements and discount
brokerage services through a correspondent bank.
Competition
The Company and the Bank face strong competition in all areas of
operations. The competition comes from entities operating in Worcester County,
Maryland and Sussex County, Delaware and neighboring counties and includes
branches of some of the largest banks in Maryland, Delaware, and Virginia. Its
most direct competition for deposits historically has come from other commercial
banks, savings banks, savings and loan associations, and credit unions operating
in its service areas. The Bank also competes for deposits with money market
mutual funds and corporate and government securities. The Bank competes for
loans with the same banking entities, as well as mortgage banking companies and
other institutional lenders. The competition for loans varies from time to time
depending on certain factors. These factors include, among others, the general
availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, conditions in the mortgage market,
and other factors which are not readily predictable.
The Bank employs traditional marketing media including local newspapers
and radio, to attract new customers. Bank officers, directors, and employees
are active in numerous community organizations and participate in
community-based events. These activities and referrals of satisfied customers
result in new business.
Employees
As of December 31, 2005, the Bank employed 96 full-time equivalent
employees. The Company's operations are conducted through the Bank.
Consequently, the Company does not have separate employees. None of the
employees of the Bank are represented by any collective bargaining unit. The
Bank considers its relations with its employees to be good.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on, and provide
for general regulatory oversight with respect to, virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. The following is a summary of certain statutes,
rules, and regulations affecting the Company and the Bank. To the extent that
the following summary describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions.
Proposed legislative changes and the policies of various regulatory
authorities may affect the operations of the Company and the Bank and those
effects may be material. The Company is unable to predict the nature or the
extent of the effect on its business and earnings that fiscal or monetary
policies, economic controls, or new federal or state legislation may have in
the future.
The Company
Bank Holding Company Act of 1956
The Company is a bank holding company within the meaning of the federal
Bank Holding Company Act of 1956 ( BHCA). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve and is required to file
periodic reports of its operations and such additional information as the
Federal Reserve may require. The Company's and the Bank's activities are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its Subsidiary, or engaging in any other activity that
the Federal Reserve determines to be so closely related to banking or managing
and controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the BHCA requires a bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior
to any person or company acquiring "control" of a bank holding company, such as
the Company. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Because the Company's Common Stock is registered under the
Securities Exchange Act of 1934, under Federal Reserve regulations, control
will be rebuttably presumed to exist if a person acquires at least 10% of the
outstanding shares of any class of voting securities of the Company. The
regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in non-banking activities, unless the Federal Reserve, by
order or regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Source of Strength; Cross-Guarantee. Under Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances in which the Company
might not otherwise do so. The Federal Reserve may require a bank holding
company to terminate an activity or relinquish control of a nonbank subsidiary
if the Federal Reserve determines that such activity or control poses serious
risk to the financial soundness or stability of a subsidiary bank. Further,
federal bank regulatory authorities have discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC
against losses it incurs with respect to any other bank controlled by the
Company, which in effect makes the Company's equity investments in healthy bank
subsidiaries available to the FDIC to assist any failing or failed bank
subsidiary of the Company.
Gramm-Leach-Bliley Act
In November 1999, the Gramm-Leach-Bliley Act was signed into law. Among
other things, the Act repeals the restriction, contained in the Glass-Steagall
Act, on banks affiliating with securities firms. The Act permits bank holding
companies to engage in a statutorily provided list of financial activities,
including insurance and securities underwriting and agency activities,
merchant banking, and insurance company portfolio investment activities.
The Act also authorizes activities that are "complementary" to financial
activities. The Act is intended to grant certain powers to community banks
that larger institutions have accumulated on an ad hoc basis. The Act may have
the result of increasing competition that the Company and the Bank face from
larger institutions and other types of companies. In fact, it is not possible
to predict the full effect that the Act will have on the Company and the Bank.
Securities Exchange Act of 1934
The Company's common stock is registered with the Securities and Exchange
Commission (SEC) under Section 12(g) of the Securities Exchange Act of 1934
(the Act). The Company is, therefore, subject to periodic and ad hoc
information reporting, proxy solicitation rules, restrictions on insider
trading, and other requirements of the Act.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act (SOX) of 2002 imposed additional disclosure
requirements in the Company's reports filed with SEC. SOX defines new standards
of independence for insiders, provides guidance for certain Board committees
including the composition of those committees, and establishes corporate
governance requirements.
The Bank
General. The Bank operates as a state nonmember banking association
incorporated under the laws of the State of Maryland. It is subject to
examination by the FDIC and the state department of banking regulation for each
state in which it has a branch. The States and FDIC regulate or monitor all
areas of the Bank's operations, including security devices and procedures,
adequacy of capitalization and loss reserves, loans, investments, borrowings,
deposits, mergers, issuances of securities, payment of dividends, interest
rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices. The FDIC requires the Bank to maintain certain capital
ratios and imposes limitations on the Bank's aggregate investment in real
estate, bank premises, and furniture and fixtures. The Bank is required by the
FDIC to prepare quarterly reports on the Bank's financial condition.
Under provisions of the FDICIA, all insured institutions must undergo
periodic on-site examination by the appropriate banking agency. The cost of
examinations of insured depository institutions and any affiliates may be
assessed by the agency against each institution or affiliate, as it deems
necessary or appropriate. Insured institutions are required to submit annual
reports to the FDIC and the appropriate agency (and state supervisor when
applicable). FDICIA also directs the FDIC to develop with other appropriate
agencies a method for insured depository institutions to provide supplemental
disclosure of the estimated fair market value of assets and liabilities, to
the extent feasible and practicable, in any balance sheet, financial statement,
report of condition, or other report of any insured depository institution.
FDICIA also requires the federal banking regulatory agencies to prescribe, by
regulation, standards for all insured depository institutions and depository
institution holding companies relating, among other things, to: (i) internal
controls, information systems, and audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset
quality.
Transactions With Affiliates and Insiders. The Bank is subject to Section
23A of the Federal Reserve Act, which places limits on the amount of loans or
extensions of credit to, or investment in, or certain other transactions with,
affiliates and on the amount of advances to third parties collateralized by the
securities or obligations of affiliates. The aggregate of all covered
transactions is limited in amount, as to any one affiliate, to 10% of the
Bank's capital and surplus and, as to all affiliates combined, to 20% of the
Bank's capital and surplus. In addition, each covered transaction must meet
specific collateral requirements. The Bank is also subject to Section 23B of
the Federal Reserve Act which, among other things, prohibits an institution
from engaging in certain transactions with certain affiliates unless the
transactions are on terms substantially the same, or at least as favorable to
such institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies. The Bank is subject to
certain restrictions on extensions of credit to executive officers, directors,
certain principal shareholders, and their related interests. Such extensions
of credit (i) must be made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with third parties, and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act requires that
the Bank shall be evaluated by its primary federal regulator with respect to its
record in meeting the credit needs of its local community, including low and
moderate income neighborhoods, consistent with safe and sound operations. These
factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. The Bank received a satisfactory
rating in its most recent evaluation.
USA Patriot Act. In response to the terrorist attacks on September 11,
2001, Congress passed the Patriot Act. The Patriot Act requires that Banks
prepare and retain additional records designed to assist the government in an
effort to combat terrorism. The Act includes anti-money laundering and
financial transparency provisions, and guidelines for verifying customer
identification during account opening. The Act promotes cooperation between
law enforcement, financial institutions, and financial regulators in identifying
persons involved in illegal acts such as money laundering and terrorism.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state and federal laws concerning
interest rates. The Bank's loan operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Home Mortgage
Disclosure Act of 1975 requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed, or other prohibited bases in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies, and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations of the Bank are also subject to the Right to Financial Privacy Act
which imposes a duty to maintain confidentiality of customers' financial
records and prescribes procedures for complying with administrative subpoenas of
financial records, and the Electronic Fund Transfers Act as implemented by the
Federal Reserve Board's Regulation E which governs automatic deposits to and
withdrawals from deposit accounts and customers' rights and liabilities arising
from the use of automated teller machines and other electronic banking services.
Deposit Insurance
The FDIC establishes rates for the payment of premiums by federally insured
banks and thrifts for deposit insurance. Separate insurance funds are
maintained for commercial banks (BIF) and thrifts (SAIF), with insurance
premiums from the industry used to offset losses from insurance payouts when
banks and thrifts fail. Since 1993, insured depository institutions like the
Bank have paid for deposit insurance under a risk-based premium system. With
BIF at its legally mandated reserve ratio, FDIC has set the premiums for
well-capitalized banks at a level of $.00 per $100 of insured deposits. The
BIF insurance assessment rate for the first semiannual assessment period of
2006 is proposed to remain at $.00 to $.27 per $100 in deposits. In addition
to the amount paid for deposit insurance, banks are assessed an additional
amount to service the interest on the bond obligations of the Financial
Corporation (FICO). Any increase in deposit insurance premiums for the Bank
will increase the Bank's operating expenses, and there can be no assurance that
such costs can be passed on to the Bank's customers.
Dividends
The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the Bank
to the Company depends on the Bank's earnings and capital position and is
limited by federal and state laws, regulations, and policies. The Federal
Reserve has stated that bank holding companies should refrain from or limit
dividend increases or reduce or eliminate dividends under circumstances in which
the bank holding company fails to meet minimum capital requirements or in which
earnings are impaired.
The Company's ability to pay any cash dividends to its shareholders in the
future will depend primarily on the Bank's ability to pay dividends to the
Company. In order to pay dividends to the Company, the Bank must comply with
the requirements of all applicable laws and regulations. Under Maryland law,
the Bank must pay a cash dividend only from the following, after providing for
due or accrued expenses, losses, interest, and taxes: (i) its undivided
profits, or (ii) with the prior approval of the Department of Financial
Regulation, its surplus in excess of 100% of its required capital stock. Under
FDICIA, the Bank may not pay a dividend if, after paying the dividend, the Bank
would be undercapitalized. See "Capital Regulations" below. See Item 5 for a
discussion of dividends paid by the Bank in the past three years.
In addition to the availability of funds from the Bank, the future dividend
policy of the Company is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future earnings, financial
condition, cash needs, and general business conditions. The amount of dividends
that might be declared in the future presently cannot be estimated and it cannot
be known whether such dividends would continue for future periods.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure,
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums.
Current guidelines require bank holding companies and federally regulated
banks to maintain a minimum ratio of total capital to risk-based assets equal to
8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common
stockholders' equity before the unrealized gains and losses on securities
available for sale, qualifying perpetual preferred stock, and minority interests
in equity accounts of consolidated subsidiaries, but excludes goodwill and most
other intangibles, and excludes the allowance for loan losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1 capital,
mandatory convertible securities, hybrid capital instruments, subordinated
debt and intermediate term-preferred stock, and general reserves for loan losses
up to 1.25% of risk-weighted assets. Total capital is the sum of Tier 1 plus
Tier 2 capital. The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least
100 to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories for compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 2005, the
Company and the Bank were qualified as "well capitalized." For further
discussions, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Capital."
Recent Legislative Developments
Periodically, the federal and state legislatures consider bills with
respect to the regulation of financial institutions. Some of these
proposals could significantly change the regulation of banks and the financial
services industry. The Company cannot predict if such proposals will be
adopted or the affect to the Company.
Item 1B. Unresolved Staff Comments
The registrant, an accelerated filer, has not received comments from the
Commission staff which remain unresolved at the time of this filing.
Item 2. Properties
The Company has ten branch locations, all of which are owned by the
Company or the Bank. The Bank leases the land on which the East Berlin
branch is located. The locations are described as follows:
Office Location Square Footage
Main Office, Maryland 24 North Main Street, Berlin, Maryland 21811 24,229
East Berlin Office 10524 Old Ocean City Blvd., Berlin, Maryland 21811 1,500
20th Street Office 100 20th Street, Ocean City, Maryland 21842 3,100
Ocean Pines Office 11003 Cathell Road, Berlin, Maryland 21811 2,420
Mid-Ocean City Office 9105 Coastal Highway, Ocean City, Maryland 21842 1,984
North Ocean City Office 14200 Coastal Highway, Ocean City, Maryland 21842 2,545
West Ocean City Office 9923 Golf Course Road, Ocean City, Maryland 21842 2,496
Pocomoke Office 2140 Old Snow Hill Road, Pocomoke, Maryland 21851 2,624
Snow Hill Office 108 West Market Street, Snow Hill, Maryland 21863 3,773
Ocean View, DE Office 50 Atlantic Avenue, Ocean View, Delaware 19970 4,900
The Berlin office is the centralized location for the Company and the Bank.
Executive offices, loan processing, proof, bookkeeping, and the computer
department are housed there. Most branches have a manager who also serves as a
loan officer. All offices participate in normal day-to-day banking operations.
The Company operates automated teller machines in all branches except the East
Berlin office, and at one non-branch location in a local hospital.
Item 3. Legal Proceedings
(a) There are no material pending legal proceedings to which the Company or
the Bank or any of their properties are subject.
(b) No proceedings were terminated during the fourth quarter of the fiscal
year covered by this report.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the shareholders of the
Company during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
The Company's Articles of Incorporation, as amended, authorize it to
issue up to 10,000,000 shares of common stock.
As of February 15, 2006 there were approximately 1,016 stockholders of
record and 3,186,956 shares of Common Stock issued and outstanding. 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. Transactions in the
common stock are infrequent and are frequently negotiated privately between
the persons involved in those transactions.
All outstanding shares of common stock of the Company are entitled to share
equally in dividends from funds legally available, when, as, and if declared by
the Board of Directors. The Company paid or declared dividends of $2.10 per
share in 2005, $.65 per share in 2004, and $.60 per share in 2003. Included is
a special cash dividend of $1.40 per share in 2005, which is not expected to be
an annual event.
The following table presents information about the Company's repurchase of
its equity securities during the calendar quarter ended on the date of this
Form 10-K.
(a) Total Number (b) Average (c ) Total Number of (d) Maximum Number of
of shares Price Paid Shares Purchased as Shares that may yet
per Share Part of a Publicly be Purchased Under
Announced Program the Program
Period
October -0- N/A -0- 300,026
November 100 $ 36.00 100 299,926
December -0- N/A -0- 299,926
Totals 100 $ 36.00 100 N/A
The Company publicly announced on August 14, 2003, that it would repurchase
up to 10% of its outstanding equity stock at that time, which equated to a total
of 324,000 common shares available for repurchase. There was no expiration date
for this program. No other stock repurchase plan or program existed
simultaneously, nor had any other plan or program expired during the period
covered by this table. Common shares repurchased under this plan were retired.
As of January 1, 2005, this plan was renewed, by public announcement,
making up to 10% of the Company's outstanding equity stock at that time, which
equates to a total of 320,848 common shares, available for repurchase. This
renewal continues into 2006. Common shares repurchased under this plan are
retired.
Item 6. Selected Financial Data
The following table presents selected financial data for the five years
ended December 31, 2005.
2005 2004 2003 2002 2001
(Dollars in thousands, except for per share data)
At Year End
Total assets $ 389,075 $ 393,333 $ 386,486 $ 369,243 $ 336,825
Total deposits $ 310,858 $ 319,772 $ 317,946 $ 301,495 $ 274,149
Total loans, net of unearned income
and allowance for loan losses $ 204,442 $ 161,510 $ 162,243 $ 161,825 $ 166,502
Total stockholders' equity $ 66,318 $ 66,698 $ 63,636 $ 60,015 $ 57,243
For the Year
Net interest income $ 15,912 $ 13,698 $ 13,647 $ 13,741 $ 13,297
Net income $ 6,798 $ 5,613 $ 5,540 $ 5,754 $ 5,414
Per share data
Book value $ 20.81 $ 20.79 $ 19.71 $ 18.52 $ 17.67
Net income $ 2.13 $ 1.74 $ 1.71 $ 1.78 $ 1.67
Cash dividends declared $ 2.10 $ .65 $ .60 $ 1.00 $ .37
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Company's financial
statements and related notes and other statistical information included in this
report.
Overview
Consolidated income of the Company is derived primarily from operations of
the Bank. Net income for 2005 was $6,797,638 compared to $5,613,187 for 2004
and $5,540,214 for 2003. The Company had a return on average equity of 10.01%
and return on average assets of 1.71% for 2005, compared to returns on average
equity of 8.64% and 8.97%, and returns on average assets of 1.42% and 1.45%,
for 2004 and 2003, respectively.
Results of Operations
The Company's net income of $6,797,638, or $2.13 per share, for the year
ended December 31, 2005, was an increase of $1,184,451 or 21.10%, from the net
income of $5,613,187, or $1.74 per share, for the year ended December 31, 2004.
Contributing to this increase was a $2,213,985 (16.16%) increase in net interest
income. Noninterest revenue increased $49,577 (2.83%) in 2005 compared to 2004,
while noninterest expense increased $351,211 (5.16%) during the same period.
The Company's net income of $5,613,187, or $1.74 per share, for the year
ended December 31, 2004, was an increase of $72,973 or 1.32%, from the net
income of $5,540,214, or $1.71 per share, for the year ended December 31, 2003.
Factors contributing to this increase included a $50,572 increase in net
interest income and a lower effective income tax rate that results from
tax-favored revenue becoming a higher percentage of total revenue. Increases in
noninterest revenues and noninterest expenses offset each other. Noninterest
revenue increased $185,961 (11.89%) in 2004 compared to 2003, while noninterest
expense increased $186,810 (2.82%) during the same period.
The Company's net income of $1,703,943 or $.53 per share, for the quarter
ended December 31, 2005, was an increase of $252,597, or 17.40%, from the net
income of $1,451,346 or $.45 per share, for the quarter ended December 31, 2004.
Increased net interest income, the primary reason for the increase, was due to
growth in the Bank's loan portfolio and higher earnings rates on the Bank's
investments. Deposit interest expense increased due to rate increases, but
the effect on earnings was ameliorated by a reduction in the volume of time
deposits.
The Company's net income of $1,451,346 or $.45 per share, for the quarter
ended December 31, 2004, was an increase of $142,802, or 10.91%, from the net
income of $1,308,544 or $.40 per share, for the quarter ended December 31, 2003.
Increased net interest income was the primary reason for the increase. As the
Bank's time deposits continued to reprice downward, reflecting rate reductions
from the previous year, the Bank enjoyed a widening interest spread. At the
same time, the bank had seen a shift in interest-bearing deposits from higher
rate time deposits to relatively lower rate NOW and Money Market accounts.
Net Interest Income
The primary source of income for the Company is net interest income, which
is the difference between revenue on interest-earning assets, such as investment
securities and loans, and interest incurred on interest-bearing sources of
funds, such as deposits and borrowings. The level of net interest income is
determined primarily by the average balance of interest-earning assets and
funding sources and the various rate spreads between the interest-earning
assets and the Company's funding sources. Changes in net interest income from
period to period result from increases or decreases in the volume of
interest-earning assets and interest-bearing liabilities, and increases or
decreases in the average rates earned and paid on such assets and liabilities.
The volume of interest-earning assets and interest-bearing liabilities is
affected by the ability to manage the earning-asset portfolio, which includes
loans, and the availability of particular sources of funds, such as
noninterest-bearing deposits.
The key performance measure for net interest income is the "net margin on
interest-earning assets," or net interest income divided by average
interest-earning assets. The Company's net interest margin for 2005 on a
non-GAAP tax-equivalent basis, was 4.45%, compared to 3.88% and 3.96% for 2004
and 2003, respectively. Because most of the Bank's loans are written with a
demand feature, the income of the Bank should not change dramatically as
interest rates change. Management of the Company expects to maintain the net
margin on interest-earning assets. The net margin may decline, however, if
competition increases, loan demand decreases, or the cost of funds rises
faster than the return on loans and securities. Although such expectations are
based on management's judgment, actual results will depend on a number of
factors that cannot be predicted with certainty, and fulfillment of
management's expectations cannot be assured.
The following tables present 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 these tables,
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
(Dollars stated in thousands)
For the Year Ended For the Year Ended For the Year Ended
December 31, 2005 December 31, 2004 December 31, 2003
Average Average Average
Balance Interest Yield Balance Interest Yield Balance Interest Yield
Assets
Federal funds sold $34,233 $1,078 3.15% $41,762 $ 547 1.31% $53,715 $ 541 1.01%
Interest-bearing
deposits 2,175 56 2.56% 2,201 48 2.16% 1,706 42 2.48%
Investment securities:
U. S. Treasury 105,456 2,881 2.73% 116,537 2,443 2.10% 99,711 2,411 2.42%
U. S. Government
Agency 19,666 525 2.67% 18,844 503 2.67% 18,172 531 2.92%
State and municipal 16,618 388 2.34% 19,004 407 2.14% 12,119 332 2.74%
Other 1,882 90 4.80% 1,786 79 4.43% 1,600 70 4.40%
Total investment
securities 143,622 3,884 2.70% 156,171 3,432 2.20% 131,602 3,344 2.54%
Loans:
Commercial 19,134 1,322 6.91% 15,243 1,052 6.90% 13,780 987 7.16%
Mortgage 165,415 11,485 6.94% 146,121 10,289 7.04% 150,491 10,879 7.23%
Consumer 2,083 178 8.53% 2,305 201 8.73% 3,108 284 9.15%
Total loans 186,632 12,985 6.96% 163,669 11,542 7.05% 167,379 12,150 7.26%
Allowance for loan
losses 2,193 2,188 2,185
Total loans, net of
allowance 184,439 12,985 7.04% 161,481 11,542 7.15% 165,194 12,150 7.36%
Total interest-earning
assets 364,469 $18,003 4.94% 361,615 $15,569 4.31% 352,217 $16,077 4.56%
Noninterest-bearing
cash 19,946 19,705 19,091
Premises and equipment 6,757 6,968 6,567
Other assets 6,194 6,428 3,220
Total assets $397,366 $394,716 $381,095
Interest-bearing
deposits
NOW $67,452 $ 101 0.15% $ 64,537 $ 97 0.15%$ 61,800 $ 122 0.20%
Money market 50,537 218 0.43% 49,733 198 0.40% 50,141 305 0.61%
Savings 54,988 218 0.40% 53,196 213 0.40% 48,838 300 0.61%
Other time 63,710 1,202 1.89% 72,621 1,028 1.42% 77,668 1,384 1.78%
Total interest-bearing
deposits 236,687 1,739 0.73% 240,087 1,536 0.64% 238,447 2,111 0.89%
Securities sold under
agreements to
repurchase 6,325 22 0.34% 5,021 8 0.17% 4,135 10 0.24%
Borrowed funds 151 9 6.07% 171 10 6.06% 189 11 6.05%
Total interest-bearing
liabilities 243,163 1,770 0.73% 245,279 1,554 0.63% 242,771 2,132 0.88%
Noninterest-bearing
deposits 85,526 - 83,498 - 75,898 -
328,689 $1,770 0.54% 328,777 $1,554 0.47% 318,669 $2,132 0.67%
Other liabilities 750 990 651
Stockholders' equity 67,927 64,949 61,775
Total liabilities and
stockholders'
equity $397,366 $394,716 $381,095
Net interest spread 4.21% 3.68% 3.68%
Net interest income $16,233 $14,015 $13,945
Net margin on interest-
earning assets 4.45% 3.88% 3.96%
Tax equivalent adjustment included in:
Investment income $294 $286 $263
Loan income $ 27 $ 31 $ 35
Analysis of Changes in Net
Interest Income
(Dollars stated in thousands)
Year ended December 31, Year ended December 31,
2005 compared with 2004 2004 compared with 2003
variance due to variance due to
Total Rate Volume Total Rate Volume
Earning assets
Federal funds sold 531 630 (99) 6 126 (120)
Interest-bearing
deposits 8 9 (1) 6 (6) 12
Investment securities:
U. S. Treasury 438 670 (232) 32 (375) 407
U. S. Government
Agency 22 - 22 (28) (48) 20
State and municipals (19) 32 (51) 75 (114) 189
Other 11 7 4 9 1 8
Loans:
Commercial 270 1 269 65 (40) 105
Mortgage 1,196 (163) 1,359 (590) (274) (316)
Consumer (23) (4) (19) (83) (10) (73)
Total interest
revenue 2,434 1,182 1,252 (508) (740) 232
Interest-bearing liabilities
NOW 4 - 4 (24) (28) 4
Money market 20 17 3 (107) (105) (2)
Savings 5 (2) 7 (88) (111) 23
Other time deposits 174 300 (126) (356) (266) (90)
Other borrowed funds 13 12 1 (3) (18) 15
Total interest
expense 216 327 (111) (578) (528) (50)
Net interest income 2,218 855 1,363 70 (212) 282
In the preceding table, the variance that is both rate and volume related is
reported with the rate variance.
Composition of Loan Portfolio
Because loans are expected to produce higher yields than investment
securities and other interest-earning assets (assuming that loan losses are not
excessive), the absolute volume of loans and the volume as a percentage of total
earning assets is an important determinant of net interest margin. Average
loans, net of the allowance for loan losses, were $184,438,751, $161,481,136,
and $165,194,000 during 2005, 2004, and 2003, respectively, which constituted
50.60%, 44.66%, and 46.90% of average interest-earning assets for the periods.
The Company's loan to deposit ratio was 65.77%, 50.51%, and 51.03% at December
31, 2005, 2004, and 2003, respectively. Average loans to average deposits were
57.24%, 49.90%, and 52.55% for 2005, 2004, and 2003. The increase in the loan
to deposit ratio from 2004 to 2005 is attributable to 14.22% growth in the
average loan portfolio due to the Bank's lending rates becoming more competitive
in the recent rising rate environment, accompanied by a .42% reduction in
average deposits during 2005.
The Company extends loans primarily to customers located in and near
Worcester County, Maryland and Sussex County, Delaware. There are no industry
concentrations in the Company's loan portfolio. The Company does, however, have
a substantial portion of its loans in real estate and performance will be
influenced by the real estate market in the region.
The following table sets forth the composition of the Company's loan
portfolio as of December 31, 2005, 2004, and 2003, respectively.
Composition of the Loan Portfolio
2005 2004 2003
Commercial $ 21,461,593 $ 14,007,430 $ 13,199,879
Real estate 170,277,344 141,029,581 134,492,195
Construction 12,678,430 6,640,665 14,107,588
Consumer 2,215,299 2,010,407 2,630,623
Total loans 206,632,666 163,688,083 164,430,285
Less allowance for
loan losses 2,190,709 2,177,926 2,187,277
Net loans $204,441,957 $161,510,157 $162,243,008
The following table sets forth the maturity distribution, classified
according to sensitivity to changes in interest rates, for selected components
of the Company's loan portfolio as of December 31, 2005.
Loan Maturity Schedule and Sensitivity
to Changes in Interest Rates
December 31, 2005
Over one
One year through Over five
or less five years years Total
Commercial $ 19,160,984 $ 1,755,046 $ 545,563 $ 21,461,593
Real estate 169,501,508 173,327 602,509 170,277,344
Construction 12,678,430 - - 12,678,430
Consumer 1,185,879 921,567 107,853 2,215,299
Total $202,526,801 $ 2,849,940 $ 1,255,925 $206,632,666
Fixed interest rate $ 1,185,879 $ 2,849,940 $ 1,255,925 $ 5,291,744
Variable interest
rate (or demand) 201,340,922 - - 201,340,922
Total $202,526,801 $ 2,849,940 $ 1,255,925 $206,632,666
As of December 31, 2005, $201,340,922 or 97.44%, of the total loans were
either variable rate loans or loans written on demand.
The Company has the following commitments, lines of credit, and letters of
credit outstanding as of December 31, 2005, 2004, and 2003, respectively.
2005 2004 2003
Construction loans $ 21,845,161 $ 7,294,592 $ 10,495,735
Other loan commitments 24,252,637 21,276,025 15,036,346
Standby letters of credit 1,272,000 1,535,210 2,957,508
Total $ 47,369,798 $ 30,105,827 $ 28,489,589
Loan commitments are agreements to lend to a customer as long as there is
no violation of any condition to the contract. Loan commitments may have
interest fixed at current rates, fixed expiration dates, and may require the
payment of a fee. Letters of credit are commitments issued to guarantee the
performance of a customer to a third party. Loan commitments and letters of
credit are made on the same terms, including collateral, as outstanding loans.
The Company's exposure to credit loss in the event of nonperformance by the
borrower is represented by the contract amount of the commitment.
Loan Quality
The allowance for loan losses represents an allowance for potential losses
in the loan portfolio. The adequacy of the allowance for loan 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 allowance rests upon
management's judgment about factors affecting loan quality and assumptions about
the economy. Management considers the year-end allowance appropriate and
adequate to cover possible losses in the loan portfolio; however, management's
judgment is based upon a number of assumptions about future events, which are
believed to be reasonable, but which may or may not prove valid. Thus, there
can be no assurance that charge-offs in future periods will not exceed the
allowance for loan loss or that additional increases in the loan loss allowance
will not be required. The Company has a history of low loan charge-offs.
For significant problem loans, management's review consists of evaluation
of the financial strengths of the borrowers and guarantors, the related
collateral, and the effects of economic conditions. The overall evaluation of
the adequacy of the total allowance for loan losses is based on an analysis of
historical loan loss ratios, loan charge-offs, delinquency trends, and previous
collection experience, along with an assessment of the effects of external
economic conditions. It is the Company's policy to evaluate loan portfolio risk
for the purpose of establishing an adequate allowance. The allowance may be
increased for reserves for specific loans identified as substandard during
management's loan review. Generally, the Company will not require a negative
provision to reduce the allowance as a result of either net recoveries or a
decrease in loans.
The provision for loan losses is a charge to earnings in the current period
to replenish the allowance and maintain it at a level management has determined
to be adequate. As of December 31, 2005, the allowance for loan losses was
1.06% of outstanding loans. As of December 31, 2004, and 2003 the allowance for
loan losses was 1.33% of outstanding loans.
No provision for loan losses was made in 2005, 2004 or 2003 due to low
levels of delinquencies.
The following table presents the allocation of the Allowance for Loan
Losses to major categories of loans as of December 31 2005, 2004, and 2003,
respectively.
Allocation of the Allowance for Loan Losses
2005 2004 2003
Commercial $ 223,411 $ 220,460 $ 163,059
Real estate 911,257 805,287 798,290
Construction 63,392 33,203 70,538
Consumer 65,748 78,948 81,845
General 926,901 1,040,028 1,073,545
Total $ 2,190,709 $ 2,177,926 $ 2,187,277
The following table sets forth the composition of the Company's loan
portfolio stated as percentages as of December 31, 2005, 2004, and 2003,
respectively.
Composition of the Loan Portfolio Stated as Percentages
2005 2004 2003
Commercial 10.39 % 8.56 % 8.03 %
Real estate 82.41 % 86.16 % 81.79 %
Construction 6.13 % 4.05 % 8.58 %
Consumer 1.07 % 1.23 % 1.60 %
Total loans 100.00 % 100.00 % 100.00 %
Allowance for Loan Losses
2005 2004 2003
Balance at beginning of year $2,177,926 $2,187,277 $2,181,135
Loan losses:
Commercial - - -
Mortgages - - -
Consumer 8,131 13,874 3,423
Total loan losses 8,131 13,874 3,423
Recoveries on loans previously
charged off:
Commercial - 2,577 533
Mortgages 15,263 - -
Consumer 5,651 1,946 9,032
Total loan recoveries 20,914 4,523 9,565
Net loan losses (recoveries) (12,783) 9,351 (6,142)
Provision for loan losses charged
to expense - - -
Balance at end of year $2,190,709 $2,177,926 $2,187,277
Allowance for loan losses to loans
outstanding at end of year 1.06% 1.33% 1.33%
Net charge-offs to average loans 0.00% 0.00% 0.00%
As a result of management's ongoing review of the loan portfolio, loans are
classified as nonaccrual when it is not reasonable to expect collection of
interest under the original terms. These loans are classified as nonaccrual
even though the presence of collateral or the borrower's financial strength may
be sufficient to provide for ultimate repayment. Interest on nonaccrual loans
is recognized only when received. A delinquent loan is generally placed in
nonaccrual status when it becomes 90 days or more past due. When a loan is
placed in nonaccrual status, all interest that has been accrued on the loan but
remains unpaid is reversed and deducted from earnings as a reduction of reported
interest income. No additional interest is accrued on the loan balance until
the collection of both principal and interest becomes reasonably certain. The
Company had no nonaccrual loans at December 31, 2005, 2004 or 2003. Amounts
past due 90 days or more, and still accruing interest at December 31, 2005,
2004, and 2003, were $131,717, $391,676, and $315,395, respectively.
When real estate acquired by foreclosure and held for sale is included with
nonperforming loans, the result comprises nonperforming assets. There were no
nonperforming assets at December 31, 2005, 2004, or 2003. Loans are classified
as impaired when the collection of contractual obligations, including principal
and interest, is doubtful. Management has identified no significant impaired
loans as of December 31, 2005, 2004, or 2003.
Liquidity and 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.
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. Average liquid assets (cash and amounts due from
banks, interest-bearing deposits in other banks, federal funds sold, and
investment securities) were 62.06% of average deposits for 2005, compared to
67.94% and 65.57% for 2004 and 2003, respectively.
As of December 31, 2005, $74,014,166, or 64.16% of the investment debt
securities mature in one year or less. Funds invested in federal funds sold
provide liquidity so the Bank does not need a large portfolio of securities
classified as "available-for-sale." Other sources of liquidity include letters
of credit, overnight federal funds, and reverse repurchase agreements available
from correspondent banks. The total lines and letters of credit available from
correspondent banks were $19,000,000 as of December 31, 2005, 2004 and 2003.
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 December 31, 2005, the Company was 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.
Interest Sensitivity Analysis
December 31, 2005
After three
Within but within After one
three twelve but within After
months months five years five years Total
Assets
Earning assets
Federal funds sold $ 26,296,780 $ - $ - $ - $ 26,296,780
Interest-bearing
deposits 59,025 1,342,019 791,687 - 2,192,731
Investment debt
securities 14,264,994 59,749,172 38,761,137 2,587,187 115,362,490
Loans 201,528,965 997,836 2,851,798 1,254,067 206,632,666
Total earning
asset $242,149,764 $ 62,089,027 $ 42,404,622 $ 3,841,254 $350,484,667
Liabilities
Interest-bearing deposits
NOW $ 62,601,973 $ - $ - $ - $ 62,601,973
Money market 46,464,340 - - - 46,464,340
Savings 51,648,088 - - - 51,648,088
Certificates
$100,000 and over 5,801,641 8,192,604 3,883,981 - 17,878,226
Certificates under
$100,000 14,258,095 19,991,677 9,779,075 - 44,028,847
Securities sold under
agreements to
repurchase 6,149,263 - - - 6,149,263
Note payable 5,214 16,118 99,320 21,417 142,069
Total interest-bearing
liabilities $186,928,614 $ 28,200,399 $ 13,762,376 $ 21,417 $228,912,806
Period gap $ 55,221,150 $ 33,888,628 $ 28,642,246 $ 3,819,837 $121,571,861
Cumulative gap $ 55,221,150 $ 89,109,778 $117,752,024 $121,571,861
Ratio of cumulative gap
to total earning assets 15.76% 25.42% 33.60% 34.69%
Investment Securities Maturity Distribution and Yields
December 31, 2005 December 31, 2004 December 31, 2003
Amount Yield Amount Yield Amount Yield
U. S. Treasury
One year or less $ 57,192,124 2.66% $ 58,255,488 1.71% $ 68,496,088 0.97%
Over one through
five years 27,462,872 3.48% 58,361,766 2.57% 51,965,421 1.74%
Over ten years 2,587,187 7.28% 2,554,687 7.28% 2,559,062 7.28%
Total U.S. Treasury
securities 87,242,183 3.05% 119,171,941 2.25% 123,020,571 1.43%
U.S. Government Agencies
One year or less 9,999,514 2.31% 3,250,000 2.20% 2,000,810 4.65%
Over one through
five years 7,746,483 3.13% 16,741,938 2.61% 15,000,000 2.31%
Total U. S. Government
Agencies 17,745,997 2.67% 19,991,938 2.55% 17,000,810 2.59%
State, county, and municipal
One year or less 6,822,528 1.59% 11,399,926 1.34% 6,395,697 1.72%
Over one through
five years 3,551,782 2.32% 8,121,361 1.60% 9,830,041 1.35%
Total state, county,
and municipal 10,374,310 1.84% 19,521,287 1.45% 16,225,738 1.49%
Total debt securities
One year or less 74,014,166 2.51% 72,905,414 1.67% 76,892,595 1.13%
Over one through
five years 38,761,137 3.30% 83,225,065 2.48% 76,795,462 1.80%
Over ten years 2,587,187 7.28% 2,554,687 7.28% 2,559,062 7.28%
Total debt securities 115,362,490 2.89% 158,685,166 2.19% 156,247,119 1.56%
Equity securities 3,721,950 2.95% 3,265,566 2.72% 2,685,158 2.70%
Total securities $119,084,440 2.89% $161,950,732 2.20% $158,932,277 1.58%
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities decreased $2,115,262, or .86%, from
$245,279,167 in 2004, to $243,163,905 in 2005. Average interest-bearing
deposits decreased $3,399,683, or 1.42%, from $240,087,443 in 2004 to
$236,687,760 in 2005, while average noninterest-bearing demand deposits
increased $2,027,298, or 2.43% from $83,499,032 in 2004 to $85,526,330 in 2005.
At December 31, 2005, total deposits were $310,857,607, compared to $319,772,358
at December 31, 2004, a decrease of 2.79%. Management believes that decreasing
deposit volume is indicative of a return by investors to non-deposit investment
products and strong competition for deposits in the local market. Management
monitors deposit volume decreases closely and implements counter-measures as
needed, including but not limited to rate increases on existing products and
the development of new products.
Average interest-bearing liabilities increased $2,507,550, or 1.03%, to
$245,279,167 in 2004, from $242,771,617 in 2003. Average interest-bearing
deposits increased $1,640,081, or .69%, to $240,087,443 in 2004 from
$238,447,362 in 2003, while average noninterest-bearing demand deposits
increased $7,600,593, or 10.01% to $83,499,032 in 2004 from $75,898,439 in 2003.
At December 31, 2004, total deposits were $319,772,358, compared to $317,946,053
at December 31, 2003, an increase of .57%. These rates of increase have slowed
significantly from the rates at which deposits have grown since mid-2001.
Management attributes the growth of deposits in recent years to investors'
discomfort with a depressed and volatile stock market, and a resultant flight
to the safety of insured deposits.
The following table sets forth the deposits of the Company by category as
of December 31, 2005, 2004, and 2003, respectively.
December 31,
2005 2004 2003
Percent of Percent of Percent of
Amount deposits Amount deposits Amount deposits
Demand deposit accounts $ 88,236,133 28.39% $ 78,542,414 24.56% $ 75,601,460 23.78%
NOW accounts 62,601,973 20.14% 68,892,269 21.55% 63,400,879 19.94%
Money market 46,464,340 14.95% 49,362,532 15.44% 50,168,501 15.78%
Savings accounts 51,648,088 16.61% 53,667,019 16.78% 51,495,252 16.20%
Time deposits less than
$100,000 44,028,847 14.16% 50,683,867 15.85% 57,242,198 18.00%
Time deposits of $100,000
or more 17,878,226 5.75% 18,624,257 5.82% 20,037,763 6.30%
Total deposits $310,857,607 100.00% $319,772,358 100.00% $317,946,053 100.00%
Core deposits, which exclude certificates of deposit of $100,000 or more,
provide a relatively stable funding source for the Company's loan portfolio and
other earning assets. The Company's core deposits decreased $8,168,720 during
2005. Management attributes this decrease to more aggressive competition for
time deposits in the rising rate environment of 2005, and to the reversal of the
some of the prior years' migration of funds from the stock market into insured
deposits. The Company's core deposits increased $3,239,811 and $12,254,910
during 2004, and 2003, respectively. Management believes that this increase
was largely attributable to a migration of funds from the stock market into
insured deposits.
Deposits, and particularly core deposits, have been the Company's primary
source of funding and have enabled the Company to meet both its short-term and
long-term liquidity needs. Management anticipates that while such deposits will
continue to be the Company's primary source of funding in the future, continued
reductions in deposit levels, if coupled with growth in the Company's loan
portfolio, could require periodic borrowing of funds. In this event, it is
likely that Management would purchase overnight federal funds as needed.
The maturity distribution of the Company's time deposits over $100,000 at
December 31, 2005, is shown in the following table.
Maturities of Certificates of Deposit
and Other Time Deposits of $100,000 or More
December 31, 2005
After six
After three through
Within three through Twelve After twelve
months six months months Months Total
Certificates of
deposit of
$100,000 or more $ 5,801,641 $ 2,547,291 $ 5,645,313 $ 3,883,981 $ 17,878,226
Large certificate of deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources of funding
for liquidity planning purposes than core deposits. Some financial
institutions partially fund their balance sheets using large certificates of
deposit obtained through brokers. These brokered deposits are generally
expensive and are unreliable as long-term funding sources. Accordingly, the
Company does not accept brokered deposits.
Noninterest revenue
Noninterest revenue for 2005 increased $49,577, or 2.83% from the previous
year. Of this, $49,710, representing a 15.40% line item increase, is
attributable to revenues from ATM and VISA debit card usage.
Noninterest revenue for 2004 increased $185,961, or 11.89% from the
previous year. Included is a $160,771 increase in cash surrender value of bank
owned life insurance policies with a face value of $4,000,000, which were
purchased by the Bank in August 2003. A second significant increase occurred
in ATM and debit card revenues, which were up $46,742 (16.94%) from 2003 due to
increased usage.
The following table presents the principal components of noninterest
revenue for the years ended December 31, 2005, 2004, and 2003, respectively.
Noninterest revenue
2005 2004 2003
Service charges on deposit accounts $1,053,443 $1,050,504 $1,028,306
ATM and debit card revenue 372,426 322,716 275,974
Miscellaneous revenue 373,505 376,577 259,556
Total noninterest revenue $1,799,374 $1,749,797 $1,563,836
Noninterest revenue as a percentage
of average total assets 0.45% 0.44% 0.41%
Noninterest Expense
Noninterest expense increased $351,211, or 5.16%, from 2004 to 2005.
Increased personnel costs of $194,255 include a $37,487 increase in expense
related to the Bank's employee retirement plan and the accrual of a 10-year
commitment, valued at $107,409, to provide long-term care insurance to the
Chairman of the Board. Occupancy expense increased $46,860 due to routine
increases in costs of utilities, real property taxes, and insurance, in addition
to several significant repairs. Furniture and equipment expense are down
$60,766, of which $26,769 is reduced depreciation expense, and $21,944 is lower
cost of service contracts and repairs. Other operating expense increased
$170,862, including a $29,452 increase in telephone and network
telecommunications.
Noninterest expense increased $186,810, or 2.82%, from 2003 to 2004.
Increased personnel costs of $75,864 include a $50,132 increase in the cost of
group insurance. Occupancy expense increased due to increased depreciation and
real property taxes related to the Bank's Berlin office expansion completed
late in 2003. Cost related to ATM and debit cards rose $30,999 due to increased
usage. The revenues net of expenses related to ATM and debit card usage,
increased $15,743 from 2003 to 2004.
The following table presents the principal components of noninterest
expense for the years ended December 31, 2005, 2004, and 2003, respectively.
2005 2004 2003
Salaries and employee benefits $4,097,533 $3,903,278 $3,827,414
Occupancy expense 640,335 593,475 536,269
Furniture and equipment expense 490,955 551,721 542,433
Advertising 147,541 145,583 152,358
Armored car service 76,068 60,829 67,517
ATM and debit card 234,732 232,353 201,354
Business and product development 78,399 70,720 66,480
Computer software amortization 121,982 117,191 91,736
Computer software maintenance 101,875 82,514 97,570
Courier service 105,148 103,922 93,457
Deposit insurance 42,098 45,403 46,975
Director fees 99,900 89,375 84,240
Dues, donations, and subscriptions 94,385 81,328 80,842
Liability insurance 40,380 41,556 47,160
Postage 179,462 169,569 168,083
Professional fees 65,090 22,745 37,551
Stationery and supplies 111,593 135,269 125,593
Telephone 152,464 123,012 117,602
Miscellaneous 279,742 238,628 237,027
Total noninterest expense $7,159,682 $6,808,471 $6,621,661
Noninterest expense as a percentage
of average total assets 1.80% 1.73% 1.75%
Capital
Under the capital guidelines of the Federal Reserve Board and the FDIC, the
Company and the 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 common stockholders' equity, qualifying perpetual preferred
stock, and minority interests in equity accounts of consolidated subsidiaries,
less certain intangibles. In addition, the Company and the Bank 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.
At December 31, 2005, the Company and the Bank were well-capitalized,
exceeding all minimum requirements, as set forth in the following table.
Analysis of Capital
Consolidated To be well Required
Company Bank capitalized minimums
2005
Total risk-based capital ratio 35.2% 32.9% 10.0% 8.0%
Tier I risk-based capital ratio 33.5% 31.7% 6.0% 4.0%
Tier I leverage ratio 16.2% 15.4% 5.0% 4.0%
2004
Total risk-based capital ratio 43.3% 41.3% 10.0% 8.0%
Tier I risk-based capital ratio 41.7% 40.1% 6.0% 4.0%
Tier I leverage ratio 16.0% 15.3% 5.0% 4.0%
2003
Total risk-based capital ratio 39.1% 37.1% 10.0% 8.0%
Tier I risk-based capital ratio 37.6% 35.9% 6.0% 4.0%
Tier I leverage ratio 16.0% 14.9% 5.0% 4.0%
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.
Accounting Rule Changes
The following accounting pronouncements have been approved by the Financial
Accounting Standards Board but not become effective as of December 31, 2005.
These pronouncements would apply to the Company if the Company or the Bank
entered into an applicable activity.
FASB Statement No. 154, Accounting Changes and Error Corrections replaces
APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting
Accounting Changes in Interim Financial Statements-An Amendment of APB Opinion
No. 28. FASB Statement No. 154 changes the requirements for the accounting for
and reporting of a change in accounting principle. It applies to all voluntary
changes in accounting principle. It establishes retrospective application as
the required method for reporting a change in accounting principle and the
reporting of a correction of an error. The Statement is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
FASB Statement No. 153, Exchanges of Nonmonetary Assets an Amendment of
APB Opinion No. 29, eliminates the exception to fair value for exchanges of
similar productive assets that was provided in APB Opinion No. 29.
FASB Statement No. 152, Accounting for Real Estate Time-Sharing
Transactions, amends FASB Statement No. 66 Accounting for Sales of Real Estate
to reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position 04-2,
Accounting for Real Estate Time Sharing Transactions. This Statement also
amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations
of Real Estate Projects, to state that the guidance for (a) incidental
operations and (b) costs incurred to sell real estate projects does not apply to
real estate time-sharing transactions.
FASB Statement No. 123R, Share Based Payment, revises FASB Statement No.
123, Accounting for Stock-Based Compensation and supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and its related implementation guidance. Statement 123R establishes standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. Statement 123R requires entities to recognize
the cost of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards. As such, it
eliminated the alternative provided by Statement 123 that such costs could be
measured either by using fair value or by using Opinion 25's intrinsic value
method of accounting which generally did not result in the recognition of
compensation costs as a result of the grant of stock options to employees.
In addition, Statement 123R amends FASB Statement No. 95, Statement of Cash
Flows, to require that excess tax benefits be reported as a financing cash
inflow rather than as a reduction of taxes paid. Statement 123R becomes
effective as of the first interim or annual reporting period that begins after
December 15, 2005.
AICPA Statement of Position No. 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer, prohibits the carrying over of valuation
allowances in loans and securities acquired in a transfer. At transfer, the
assets are to be recorded at the total cash flows expected to be collected.
The SOP is effective for loans acquired in fiscal years beginning after
December 15, 2004.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Impact of Inflation
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 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. See
"Liquidity and Interest Rate Sensitivity" above.
Item 8. Financial Statements and Supplementary Data
In response to this Item, the information included on pages 1 through 21
of the Company's Annual Report to Shareholders for the year ended December 31,
2005, is incorporated herein by reference.
PART III
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
There have been no changes in or disagreements with accountants on
accounting or financial disclosure during the fiscal year covered by this
report.
Item 9A. Controls and Procedures
Evaluation of disclosure 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 December 31, 2005. 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.
Internal Control Over Financial Reporting
Management Report on Internal Control over Financial Reporting
Calvin B. Taylor Bankshares, Inc. maintains a system of internal control
over financial reporting, which is designed to provide reasonable assurance to
the Company's management and board of directors regarding the preparation of
reliable published financial statements. The system includes an organizational
structure and division of responsibility, established policies and procedures
including a code of conduct to foster a strong ethical climate, and the careful
selection, training and development of our staff. The system contains
self-monitoring mechanisms, and an internal auditor monitors the operation of
the internal control system and reports findings and recommendations to
management and the board of directors. Corrective actions are taken to address
control deficiencies and other opportunities for improving the system as they
are identified. The board, operating through its audit committee, which is
composed entirely of directors who are not officers or employees of the Company,
provides oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of
internal controls, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective
internal control system can provide only reasonable assurance with respect to
financial statement preparation. Furthermore, the effectiveness of an internal
control system may vary over time and with circumstances.
The Company assessed its internal control system as of December 31, 2005
in relation to criteria for effective internal control over financial reporting
as described in "Internal Control - Integrated Framework," issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on its
assessment, the Company believes that, as of December 31, 2005, its system of
internal control over financial reporting met those criteria.
Calvin B. Taylor Bankshares, Inc.
/s/ Raymond M. Thompson March 8, 2006
by Raymond M. Thompson., Chief Executive Officer Date
/s/ Jennifer G. Hawkins March 8, 2006
by Jennifer G. Hawkins, Treasurer Date
Attestation Report of the Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Calvin B. Taylor Bankshares, Inc.
Berlin, Maryland
We have audited management's assessment, included in the accompanying
Management Report on Internal Control Over Financial Reporting, that Calvin B.
Taylor Bankshares, Inc. and Subsidiary maintained effective internal control
over financial reporting as of December 31, 2005, based on criteria established
in "Internal Control - Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed
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. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Calvin B. Taylor Bankshares,
Inc. and Subsidiary maintained effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all material respects,
based on criteria established in "Internal Control - Integrated Framework"
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Also, in our opinion, Calvin B. Taylor Bankshares, Inc. and Subsidiary
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have audited, in accordance with the standards of the Public Company
Accounting Oversight Board in the United States of America, the consolidated
balance sheets and the related consolidated statements of income, changes in
stockholders' equity and cash flows of Calvin B. Taylor Bankshares, Inc. and
Subsidiary, and our report dated January 31, 2006, expressed an unqualified
opinion.
/s/ Rowles & Company, LLP
Baltimore, Maryland
January 31, 2006
Changes in Internal Controls
During the quarter ended on the date of this report, there were no
significant changes in the Company's internal controls over financial reporting
that have had or are reasonably likely to have a material affect on the
Company's internal control over financial reporting. As of December 31, 2005,
the Company's management, including the CEO and Treasurer, has concluded that
the Company's internal controls over financial reporting are effective.
Audit Committee and Financial Expert
The Board of Directors has adopted a written Audit Policy, which serves as
a charter for the Audit Committee. The Audit Committee is comprised of seven
independent directors, including Chairman James R. Bergey, Jr. who serves as the
financial expert. The Audit Committee is scheduled to meet quarterly and held
four meetings in 2005.
Item 10. Directors and Executive Officers of the Registrant
In response to this item, the information included in the Company's Proxy
Statement for Annual Meeting of Shareholders To Be Held on May 17, 2006, is
incorporated herein by reference.
Item 11. Executive Compensation
In response to this item, the information included in the Company's Proxy
Statement for Annual Meeting of Shareholders To Be Held on May 17, 2006, is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
In response to this item, the information included in the Company's Proxy
Statement for Annual Meeting of Shareholders To Be Held on May 17, 2006, is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
In response to this item, the information included in the Company's Proxy
Statement for Annual Meeting of Shareholders To Be Held on May 17, 2006, is
incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
In response to this item, the information included in the Company's Proxy
Statement for Annual Meeting of Shareholders To Be Held on May 17, 2006, is
incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) Exhibits
3.1 Articles of Incorporation of the Company, incorporated by reference
to Exhibit 3.1 of Registration Statement Form S-4, File No.
33-99762.
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 of
Registration Statement Form S-4, File No. 33-99762.
13 Annual Report to Shareholders for the year ended December 31, 2005.
SIGNATURES
Pursuant to the requirements of Section 13(a) 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.
(Registrant)
Date: March 8, 2006 By: /s/ Raymond M. Thompson
Raymond M. Thompson
Chief Executive Officer
Date: March 8, 2006 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer / Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 8, 2006 By: /s/ James R. Bergey, Jr.
James R. Bergey, Jr., Director
Date: March 8, 2006 By: /s/ John H. Burbage, Jr.
John H. Burbage, Jr., Director
Date: March 8, 2006 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chairman of the Board of Directors
Date: March 8, 2006 By: /s/ Reese F. Cropper, III
Reese F. Cropper, III, Director
Date: March 8, 2006 By: /s/ Hale Harrison
Hale Harrison, Director
Date: March 8, 2006 By: /s/ Gerald T. Mason
Gerald T. Mason, Director
Date: March 8, 2006 By: /s/ William H. Mitchell
William H. Mitchell,
Vice President and Director
Date: March 8, 2006 By: /s/ Joseph E. Moore
Joseph E. Moore, Director
Date: March 8, 2006 By: /s/ Michael L. Quillin
Michael L. Quillin, Sr., Director
Date: March 8, 2006 By: /s/ D. Bruce Rogers
D. Bruce Rogers, Director
Date: March 8, 2006 By: /s/ Raymond M. Thompson
Raymond M. Thompson, Director
President and Chief Executive Officer
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 Annual Report on Form 10-K for the period ended December 31, 2005
of the Registrant (the "Report"):
(1) The 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: March 8, 2006 By: /s/ Raymond M. Thompson
Raymond M. Thompson
Chief Executive Officer
Date: March 8, 2006 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer/Principal Financial Officer
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Raymond M. Thompson, certify that:
I have reviewed this annual report on Form 10-K of Calvin B. Taylor Bankshares,
Inc.;
Based on my knowledge, this annual 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 annual report;
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;
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 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 evaluations; and
d) disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
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:
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: March 8, 2006 By: /s/ Raymond M. Thompson
Raymond M. Thompson
President & Chief Executive Officer
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jennifer G. Hawkins, certify that:
I have reviewed this annual report on Form 10-K of Calvin B. Taylor Bankshares,
Inc.;
Based on my knowledge, this annual 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 annual report;
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;
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
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 evaluations; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
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:
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: March 8, 2006 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer / Principal Financial Officer
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2005
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Financial Statements
December 31, 2005
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Table of Contents
Page
Report of registered public accounting firm 1
Consolidated financial statements
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of changes in stockholders' equity 4
Consolidated statements of cash flows 5-6
Notes to consolidated financial statements 7-21
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Calvin B. Taylor Bankshares, Inc.
Berlin, Maryland
We have audited the accompanying consolidated balance sheets of Calvin B.
Taylor Bankshares, Inc. and Subsidiary (the Company) as of December 31, 2005,
2004, and 2003 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Calvin B.
Taylor Bankshares, Inc. and Subsidiary as of December 31, 2005, 2004, and 2003,
and the results of its operations and its cash flows for each of the three
years then ended, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with standards of the Public Company
Accounting Oversight Board in the United States of America, the effectiveness
of the Company's internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated January 31, 2006, expressed an unqualified opinion on
management's assessment of internal control over financial reporting and an
unqualified opinion on the effectiveness of internal control over financial
reporting.
/s/ Rowles & Company, LLP
Baltimore, Maryland
January 31, 2006
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Balance Sheets
December 31,
2005 2004 2003
Assets
Cash and due from banks $ 24,069,790 $ 21,901,546 $ 20,482,866
Federal funds sold 26,296,780 32,692,233 29,525,781
Interest-bearing deposits 2,192,731 2,161,496 2,281,337
Investment securities
available for sale 6,505,278 5,921,287 9,265,471
Investment securities held
to maturity (approximate fair
value of $111,306,528,
$155,107,698, and $150,075,210) 112,579,162 156,029,445 149,666,806
Loans, less allowance for loan
losses of $2,190,709,
$2,177,926, and $2,187,277 204,441,957 161,510,157 162,243,008
Premises and equipment 6,664,051 6,891,238 7,064,970
Accrued interest receivable 1,504,945 1,415,775 1,344,613
Computer software 228,014 322,209 265,961
Bank owned life insurance 4,367,744 4,214,806 4,054,035
Other assets 224,172 272,790 291,553
$389,074,624 $393,332,982 $386,486,401
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 88,236,133 $ 78,542,414 $ 75,601,460
Interest-bearing 222,621,474 241,229,944 242,344,593
310,857,607 319,772,358 317,946,053
Securities sold under
agreements to repurchase 6,149,263 5,933,466 4,113,154
Dividend payable 4,462,578 - -
Accrued interest payable 177,357 116,502 145,044
Note payable 142,069 162,161 181,087
Deferred income taxes 635,336 549,070 355,632
Other liabilities 332,030 101,857 109,399
322,756,240 326,635,414 322,850,369
Stockholders' equity
Common stock, par value $1 per
share; authorized 10,000,000
shares; issued and outstanding
3,187,556 shares at December 31,
2005, 3,208,478 shares at
December 31, 2004,and 3,227,966
shares at December 31, 2003 3,187,556 3,208,478 3,227,966
Additional paid-in capital 15,454,735 16,187,005 16,869,085
Retained earnings 46,021,128 45,917,427 42,391,363
64,663,419 65,312,910 62,488,414
Accumulated other
comprehensive income 1,654,965 1,384,658 1,147,618
66,318,384 66,697,568 63,636,032
$389,074,624 $393,332,982 $386,486,401
The accompanying notes are an integral part of these financial statements.
2
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Income
Years Ended December 31,
2005 2004 2003
Interest and dividend revenue
Loans, including fees $ 12,957,693 $ 11,512,125 $ 12,115,447
U. S. Treasury and government
agency securities 3,267,544 2,822,526 2,817,600
State and municipal securities 267,243 273,712 219,806
Federal funds sold 1,077,571 547,226 540,804
Interest-bearing deposits 55,674 47,574 42,363
Equity securities 55,494 8,592 43,227
Total interest and dividend
revenue 17,681,219 15,251,755 15,779,247
Interest expense
Deposits 1,738,647 1,535,171 2,110,465
Borrowings 30,726 18,723 21,493
Total interest expense 1,769,373 1,553,894 2,131,958
Net interest income 15,911,846 13,697,861 13,647,289
Provision for loan losses - - -
Net interest income after
provision for loan losses 15,911,846 13,697,861 13,647,289
Noninterest revenue
Service charges on deposit
accounts 1,053,443 1,050,504 1,028,306
ATM and debit card revenue 372,426 322,716 275,974
Miscellaneous revenue 373,505 376,577 259,556
Total noninterest revenue 1,799,374 1,749,797 1,563,836
Noninterest expenses
Salaries 3,173,430 3,136,220 3,092,919
Employee benefits 924,103 767,058 734,495
Occupancy 640,335 593,475 536,269
Furniture and equipment 490,955 551,721 542,433
Other operating 1,930,859 1,759,997 1,715,545
Total noninterest expenses 7,159,682 6,808,471 6,621,661
Income before income taxes 10,551,538 8,639,187 8,589,464
Income taxes 3,753,900 3,026,000 3,049,250
Net income $ 6,797,638 $ 5,613,187 $ 5,540,214
Earnings per common share
- basic and diluted $2.13 $1.74 $1.71
The accompanying notes are an integral part of these financial statements.
3
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Accumulated
other
Common stock Additional Retained comprehensive Comprehensive
Shares Par value Paid-in capital earnings income income
Balance, December 31, 2002 3,240,000 $3,240,000 $17,290,000 $38,788,018 $697,268
Net income - - - 5,540,214 - $5,540,214
Unrealized gain on
investment securities
available for sale
net of income taxes
of $239,066 - - - - 450,350 450,350
Comprehensive income $5,990,564
Common shares repurchased (12,034) (12,034) (420,915) - -
Cash dividend,
$.60 per share - - - (1,936,869) -
Balance, December 31, 2003 3,227,966 3,227,966 16,869,085 42,391,363 1,147,618
Net income - - - 5,613,187 - $5,613,187
Unrealized gain on
investment securities
available for sale
net of income taxes
of $151,226 - - - - 237,040 237,040
Comprehensive income $5,850,227
Common shares repurchased (19,488) (19,488) (682,080) - -
Cash dividend,
$.65 per share - - - (2,087,123) -
Balance, December 31, 2004 3,208,478 3,208,478 16,187,005 45,917,427 1,384,658
Net income - - - 6,797,638 - $6,797,638
Unrealized gain on
investment securities
available for sale
net of income taxes
of $168,016 - - - - 270,307 270,307
Comprehensive income $7,067,945
Common shares repurchased (20,922) (20,922) (732,270) - -
Cash dividend,
$2.10 per share - - - (6,693,937) -
Balance, December 31, 2005 3,187,556 $3,187,556 $15,454,735 $46,021,128 $1,654,965
The accompanying notes are an integral part of these financial statements.
4
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
Years Ended December 31,
2005 2004 2003
Cash flows from operating activities
Interest received $ 17,301,217 $ 15,076,687 $ 15,761,248
Fees and commissions received 1,720,362 1,640,852 1,507,872
Interest paid (1,708,517) (1,582,435) (2,230,381)
Cash paid to suppliers
and employees (6,418,778) (6,149,693) (6,026,828)
Income taxes paid (3,738,920) (3,013,895) (3,232,338)
7,155,364 5,971,516 5,779,573
Cash flows from investing activities
Certificates of deposits
purchased, net of maturities (1,934) (567) (699,000)
Proceeds from maturity of
investments available for sale - 4,000,000 -
Purchase of investments
available for sale (45,379) (264,504) (182,500)
Proceeds from maturities of
investments held to maturity 89,345,000 102,010,000 107,310,000
Purchase of investments held
to maturity (45,704,174) (108,272,336) (145,709,919)
Loans made, net of principal
collected (42,931,800) 732,851 (418,331)
Purchases of and deposits on
premises, equipment, and
computer software (311,387) (551,236) (1,941,071)
Purchase of bank owned
life insurance - - (4,000,000)
350,326 (2,345,792) (45,640,821)
Cash flows from financing activities
Net increase (decrease) in
Time deposits (7,401,051) (9,431,045) (1,459,208)
Other deposits (1,513,700) 11,257,350 17,909,795
Securities sold under
agreements to repurchase 215,797 1,820,312 84,054
Payments on note payable (20,093) (18,926) (17,825)
Common shares repurchased (753,192) (701,568) (432,949)
Dividends paid (2,231,359) (2,087,123) (1,936,869)
(11,703,598) 839,000 14,146,998
Net increase (decrease) in cash
and cash equivalents (4,197,908) 4,464,724 (25,714,250)
Cash and cash equivalents
at beginning of year 54,623,503 50,158,779 75,873,029
Cash and cash equivalents
at end of year $50,425,595 $54,623,503 $50,158,779
The accompanying notes are an integral part of these financial statements.
5
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31,
2005 2004 2003
Reconciliation of net income to net
cash provided by operating
activities
Net income $ 6,797,638 $ 5,613,187 $ 5,540,214
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 630,606 656,293 633,383
Provision for loan losses - - -
Deferred income taxes (81,749) 42,212 46,409
Amortization of premiums and
accretion of discounts, net (290,831) (103,350) (78,972)
(Gain) loss on disposition of
assets 2,163 12,427 5,902
Decrease (increase) in
Accrued interest receivable (80,917) (71,162) 60,974
Cash surrender value of bank
owned life insurance (152,938) (160,771) (54,035)
Other assets 48,618 18,763 (185,549)
Increase (decrease) in
Accrued interest payable 60,855 (28,542) (98,424)
Accrued income taxes 88,474 (30,107) -
Other liabilities 133,445 22,566 (90,329)
$ 7,155,364 $ 5,971,516 $ 5,779,573
Composition of cash and cash equivalents
Cash and due from banks $24,069,790 $21,901,546 $20,482,866
Federal funds sold 26,296,780 32,692,233 29,525,781
Interest-bearing deposits,
except for time deposits 59,025 29,724 150,132
$50,425,595 $54,623,503 $50,158,779
The accompanying notes are an integral part of these financial statements.
6
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Calvin B. Taylor Bankshares, Inc. is a bank holding company. Its
subsidiary, Calvin B. Taylor Banking Company, is a financial institution
operating primarily in Worcester County, Maryland and Sussex County,
Delaware.
The accounting and reporting policies reflected in the
financial statements conform to accounting principles generally accepted in
the United States of America and to general practices within the banking
industry. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
Principles of consolidation
The consolidated financial statements of Calvin B. Taylor Bankshares,
Inc. include the accounts of its wholly owned subsidiary, Calvin B. Taylor
Banking Company. All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash equivalents
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.
Investment securities
As securities are purchased, management determines if the securities
should be classified as held to maturity or available for sale.
Securities which management has the intent and ability to hold to maturity are
recorded at amortized cost which is cost adjusted for amortization of premiums
and accretion of discounts to maturity. Securities classified as available-
for-sale are recorded at fair value.
Gains and losses on disposal are determined using the specific-
identification method.
Loans and allowance for loan losses
Loans are stated at face value less the allowance for loan losses.
Interest on loans is credited to income based on the principal amounts
outstanding. The accrual of interest is discontinued when any portion of the
principal or interest is ninety days past due and collateral is insufficient
to discharge the debt in full.
The allowance for loan losses is maintained at a level deemed appropriate
by management to provide adequately for known and inherent risks in the loan
portfolio. The minimum range of the allowance for loan losses is calculated
by applying risk-weighted percentages to loans based on their delinquency and
underlying collateral. The portion of the allowance that is a result of
geographic and industry concentrations and current economic conditions is not
allocated to specific loans. At December 31, 2005, the allowance included
approximately $926,900 that was not allocated to specific loans.
7
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (Continued)
Loans and allowance for loan losses (continued)
If the current economy or real estate market were to suffer a severe
downturn, the estimate for uncollectible accounts would need to be increased.
Loans that are deemed to be uncollectible are charged off and deducted from
the allowance. The provision for loan losses and recoveries on loans
previously charged off are added to the allowance.
Loans are considered impaired when, based on current information,
management considers it unlikely that collection of principal and interest
payments will be made according to contractual terms. Generally,loans are
not reviewed for impairment until the accrual of interest has been
discontinued.
Premises and equipment
Premises and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed under both straight-line and
accelerated methods over the estimated useful lives of the assets.
Computer software
The Company amortizes software costs over their useful lives using the
straight-line method.
Bank owned life insurance
The Company records increases in cash surrender value of bank owned
life insurance as current period income based on projections provided by
the underwriting company.
Advertising
Advertising costs are expensed as incurred.
Income taxes
The provision for income taxes includes taxes payable for the current
year and deferred income taxes. Deferred income taxes are provided for the
temporary differences between financial and taxable income. Tax expense
and tax benefits are allocated to the Bank and Company based on their
proportional share of taxable income.
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, which
was 3,194,669, 3,219,116, and 3,235,767 for the years ended December 31, 2005,
2004, and 2003, respectively.
2. Cash and Due From Banks
The Company normally carries balances with other banks that exceed the
federally insured limit. The average balances carried in excess of the limit,
including unsecured federal funds sold to the same banks, were $34,580,755 for
2005, $42,076,235 for 2004, and $53,869,724 for 2003.
Banks are required to carry noninterest-bearing cash reserves at
specified percentages of deposit balances. The Company's normal amount of cash
on hand and on deposit with other banks is sufficient to satisfy the reserve
requirements.
8
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
3. Investment Securities
Investment securities are summarized as follows:
Amortized Unrealized Unrealized Fair
cost gains losses value
December 31, 2005
Available for sale
U.S. Treasury $ 1,995,197 $ 591,990 $ - $ 2,587,187
State and municipal 200,000 - 3,859 196,141
Equity 1,658,091 2,063,859 - 3,721,950
$ 3,853,288 $ 2,655,849 $ 3,859 $ 6,505,278
Held to maturity
U.S. Treasury $ 84,654,996 $ - $ 890,971 $ 83,764,025
U.S. Government
agency 17,745,997 - 282,502 17,463,495
State and
municipal 10,178,169 - 99,161 10,079,008
$112,579,162 $ - $1,272,634 $111,306,528
December 31, 2004
Available for sale
U.S. Treasury $ 1,994,909 $ 559,778 $ - $ 2,554,687
State and municipal 100,000 1,034 - 101,034
Equity 1,612,712 1,653,106 252 3,265,566
$ 3,707,621 $ 2,213,918 $ 252 $ 5,921,287
Held to maturity
U.S. Treasury $116,617,254 $ 3,267 $ 602,820 $116,017,701
U.S. Government
agency 19,991,938 1,615 216,549 19,777,004
State and
municipal 19,420,253 982 108,242 19,312,993
$156,029,445 $ 5,864 $ 927,611 $155,107,698
December 31, 2003
Available for sale
U.S. Treasury $ 5,991,862 $ 588,451 $ - $ 6,580,313
Equity 1,448,208 1,236,950 - 2,685,158
$ 7,440,070 $ 1,825,401 $ - $ 9,265,471
Held to maturity
U.S. Treasury $116,440,258 $ 416,411 $ 34,334 $116,822,335
U.S. Government
agency 17,000,810 69,385 60,879 17,009,316
State and
municipal 16,225,738 34,016 16,195 16,243,559
$149,666,806 $ 519,812 $ 111,408 $150,075,210
9
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
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 December 31, 2005,
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 loss value loss value loss
U. S. Treasury $26,731,015 $ 199,773 $56,783,203 $ 691,198 $ 83,514,218 $ 890,971
U. S. Government
Agency 990,942 9,058 16,472,553 273,444 17,463,495 282,502
State and municipal 2,060,529 24,368 7,962,363 78,652 10,022,892 103,020
$29,782,486 $ 233,199 $81,218,119 $1,043,294 $111,000,605 $ 1,276,493
The debt securities for which an unrealized loss is recorded are issues
of the United States Treasury, Federal Home Loan Bank (a U. S. government
agency), and general obligations of states and municipalities. The Company
has the ability and the intent to hold the securities until they are called
or mature at face value. Fluctuations in fair value reflect market
conditions, and are not indicative of an other-than-temporary impairment of
the investment.
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 borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
December 31, 2005 December 31, 2004 December 31, 2003
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value
Available for sale
Within one year $ - $ - $ - $ - $ 3,997,243 $ 4,021,251
After one year
through five
years 200,000 196,141 100,000 101,034 - -
After ten years 1,995,197 2,587,187 1,994,909 2,554,687 1,994,619 2,559,062
$ 2,195,197 $ 2,783,328 $ 2,094,909 $ 2,655,721 $ 5,991,862 $ 6,580,313
Held to maturity due
Within one year $74,014,166 $73,304,862 $72,905,414 $72,619,263 $72,871,344 $73,184,592
After one year
through five
years 38,564,996 38,001,666 83,124,031 82,488,435 76,795,462 76,890,618
$112,579,162 $111,306,528 $156,029,445 $155,107,698 $149,666,806 $150,075,210
Pledged securities $26,980,663 $26,656,250 $27,289,502 $27,610,734 $21,790,367 $21,870,641
Investments are pledged to secure deposits of federal and local
governments. Pledged securities also serve as collateral for securities sold
under agreements to repurchase.
10
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
4. Lines of Credit
The Company has available lines of credit, including overnight federal
funds, reverse repurchase agreements and letters of credit, totaling
$19,000,000 as of December 31, 2005, 2004, and 2003.
5. Loans and Allowance for Loan Losses
Major classifications of loans are as follows:
2005 2004 2003
Commerical $ 21,461,593 $ 14,007,430 $ 13,199,879
Real estate 170,277,344 141,029,581 134,492,195
Construction 12,678,430 6,640,665 14,107,588
Consumer 2,215,299 2,010,407 2,630,623
206,632,666 163,688,083 164,430,285
Allowance for loan losses 2,190,709 2,177,926 2,187,277
Loans, net $204,441,957 $161,510,157 $162,243,008
The rate repricing distribution of the loan portfolio follows:
Immediately $201,175,220 $159,522,150 $160,730,764
Within one year 1,351,581 1,240,935 1,405,338
Over one to five years 2,849,940 2,107,774 2,031,134
Over five years 1,255,925 817,224 263,049
$206,632,666 $163,688,083 $164,430,285
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.
Transactions in the allowance for loan losses were as follows:
2005 2004 2003
Beginning balance $ 2,177,926 $ 2,187,277 $ 2,181,135
Provision charged to operations - - -
Recoveries 20,914 4,523 9,565
2,198,840 2,191,800 2,190,700
Loans charged off 8,131 13,874 3,423
Ending balance $ 2,190,709 $ 2,177,926 $ 2,187,277
11
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
5. Loans and Allowance for Loan Losses (Continued)
Amounts past due 90 days or more, and still accruing interest at December
31, are as follows:
2005 2004 2003
Commercial $ 11,443 $ 151,063 $ 55,795
Real estate 119,741 200,278 251,658
Consumer 533 40,335 7,942
$ 131,717 $ 391,676 $ 315,395
Management has identified no impaired loans at December 31, 2005, 2004,
and 2003. There were no nonaccrual loans at December 31, 2005, 2004 or 2003.
6. Loan Commitments
Loan commitments are agreements to lend to customers as long as there is
no violation of any conditions of the contracts. Loan commitments generally
have interest at current market rates, fixed expiration dates, and may require
payment of a fee. Letters of credit are commitments issued to guarantee the
performance of a customer to a third party.
Loan commitments and letters of credit are made on the same terms,
including collateral, as outstanding loans. The Company's exposure to loan
loss in the event of nonperformance by the borrower is represented by the
contract amount of the commitment.
Outstanding loan commitments, lines of credit, and letters of credit at
December 31, are as follows:
2005 2004 2003
Loan commitments and lines
of credit
Construction and land
development $ 21,845,161 $ 7,294,592 $ 10,495,735
Other 24,252,637 21,276,025 15,036,346
$ 46,097,798 $ 28,570,617 $ 25,532,081
Standby letters of credit $ 1,272,000 $ 1,535,210 $ 2,957,508
7. Lease Commitments
The Company leases the land on which the Route 50 branch in East Berlin is
located. The lease obligation, which expires August 31, 2009, requires
payments as follows:
Minimum
Period rentals
2006 $ 15,000
2007 15,000
2008 15,000
2009 10,000
$ 55,000
12
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
8. Premises and Equipment
A summary of premises and equipment and the related depreciation is as
follows:
Estimated
useful life 2005 2004 2003
Land $ 2,092,717 $ 2,076,097 $ 1,893,946
Premises 5 - 50 years 6,449,630 6,400,025 6,423,636
Furniture and equipment 5 - 40 years 3,517,505 3,473,775 3,446,813
12,059,852 11,949,897 11,764,395
Accumulated depreciation 5,395,801 5,058,659 4,699,425
Net premises and equipment $ 6,664,051 $ 6,891,238 $ 7,064,970
Depreciation expense $ 508,624 $ 539,102 $ 541,647
9. Interest-bearing Deposits
Major classifications of interest-bearing deposits are as follows:
2005 2004 2003
NOW $ 62,601,973 $ 68,892,269 $ 63,400,879
Money market 46,464,340 49,362,532 50,168,501
Savings 51,648,088 53,667,019 51,495,252
Other time, including
certificates of deposit 61,907,073 69,308,124 77,279,961
$222,621,474 $241,229,944 $242,344,593
The rate repricing distribution of other time deposits follows:
Three months or less $ 20,059,735 $ 22,567,632 $ 26,832,009
Over three through twelve
months 28,184,281 34,055,564 35,832,764
Over one through two years 13,663,057 12,684,928 14,615,188
$ 61,907,073 $ 69,308,124 $ 77,279,961
Included in other time deposits are certificates of deposit of $100,000
or more as follows:
Amount outstanding $ 17,878,226 $ 18,624,257 $ 20,037,763
Interest expense $ 337,314 $ 276,074 $ 324,822
13
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
10. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase represent overnight
borrowings from customers. The government agency securities that
collateralize these agreements are owned by the Company but maintained
in the custody of an unaffiliated bank designated by the Company.
Additional information follows:
2005 2004 2003
Maximum month-end amount outstanding $ 8,720,287 $ 7,617,275 $ 6,542,540
Average amount outstanding $ 6,324,760 $ 5,020,784 $ 4,134,892
Average rate paid during the year .34% .17% .24%
Investment securities underlying the
agreements at year end
Carrying value $18,986,750 $21,991,519 $16,993,472
Estimated fair value $18,805,000 $21,839,000 $17,051,000
11. Note Payable
In 1999, the Company purchased real estate in Berlin, financing 100% of
the purchase price. In 2003, an operations center was constructed on this
site. This 6% unsecured note has a final maturity of September, 2011.
The note requires principal payments as follows:
2006 $ 21,332
2007 22,647
2008 24,044
2009 25,527
2010 27,102
2011 21,417
$142,069
12. Profit Sharing Plan
In 1999, the Company adopted a defined contribution profit sharing plan
under Section 401(k) of the Internal Revenue Code. The plan covers
substantially all of the employees and allows discretionary Company
contributions. Annually, the Board of Directors approves a discretionary
contribution in addition to matching 50% of employee contributions to a
maximum of 6% of the employee wages.
The total cost of the profit sharing plan for 2005, 2004, and 2003, was
$186,657, $149,171, and $170,395, respectively.
14
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
13. Noninterest Expenses
The components of noninterest other operating expenses follow:
2005 2004 2003
Advertising $ 147,541 $ 145,583 $ 152,358
Armored car service 76,068 60,829 67,517
ATM and debit card 234,732 232,353 201,354
Business and product development 78,399 70,720 66,480
Computer software amortization 121,982 117,191 91,736
Computer software maintenance contracts 101,875 82,514 97,570
Courier service 105,148 103,922 93,457
Deposit insurance 42,098 45,403 46,975
Director fees 99,900 89,375 84,240
Dues, donations, and subscriptions 94,385 81,328 80,842
Liability insurance 40,380 41,556 47,160
Postage 179,462 169,569 168,083
Professional fees 65,090 22,745 37,551
Stationery and supplies 111,593 135,269 125,593
Telephone 152,464 123,012 117,602
Miscellaneous 279,742 238,628 237,027
$1,930,859 $1,759,997 $1,715,545
14. Related Party Transactions
The executive officers and directors of the Company enter into loan
transactions with the Bank in the ordinary course of business. The terms of
these transactions are similar to the terms provided to other borrowers
entering into similar loan transactions. Executive officers and directors
make deposits in the Bank, and invest in uninsured non-deposit investment
products. They receive the same rates and terms on insured deposit accounts
and securities sold under agreements to repurchase as other customers with
similar accounts.
Related party loan activity 2005 2004 2003
Beginning balance $ 6,207,252 $ 9,156,940 $ 11,133,959
Advances 23,755,489 9,146,486 8,550,318
29,962,741 18,303,426 19,684,277
Repayments 7,741,845 12,096,074 10,527,337
Other decreases - 100 -
Ending balance $ 22,220,896 $ 6,207,252 $ 9,156,940
Deposit and non-deposit investment balances
$ 6,670,094 $13,833,657 $ 9,466,866
The Company obtains legal services from a law firm in which one of the
principal attorneys is also a member of the Board of Directors. Fees charged
for these services are at similar rates charged by unrelated law firms for
similar legal work. Amounts paid to this related party totaled $13,438, and
$3,490 during the years ended December 31, 2005, and 2003, respectively.
There were no payments to this related party during 2004.
15
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
15. Income Taxes
The components of income tax expense are as follows:
2005 2004 2003
Current
Federal $3,339,742 $2,597,535 $2,613,587
State 495,907 386,253 389,254
3,835,649 2,983,788 3,002,841
Deferred (81,749) 42,212 46,409
$3,753,900 $3,026,000 $3,049,250
The components of the deferred taxes are as follows:
Provision for loan losses $ (4,774) $ 5,820 $ (2,372)
Nonaccrual loan interest - - 43
Depreciation (42,854) 30,862 47,512
Discount accretion 3,113 5,367 (128)
Employee benefit (37,234) - -
Net operating loss carryforward
for state income tax - 163 (163)
Organization costs
- - 1,517
$ (81,749) $ 42,212 $ 46,409
The components of the net deferred tax liability are as follows:
Deferred tax assets
Allowance for loan losses $ 602,449 $ 597,675 $ 603,495
Employee benefit 37,234 - -
Net operating loss
carryforward for state
income tax - - 163
639,683 597,675 603,658
Deferred tax liabilities
Depreciation 256,119 298,974 268,112
Discount accretion 21,875 18,762 13,395
Unrealized gain on securities
available for sale 997,025 829,009 677,783
1,275,019 1,146,745 959,290
Net deferred tax liability $ (635,336) $ (549,070) $ (355,632)
A reconciliation of the provision for taxes on income from the statutory
federal income tax rates to the effective income tax rates follows:
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increase (decrease) in tax rate
resulting from
Tax-exempt income (1.5) (2.0) (1.5)
State income taxes net of federal
income tax benefit 3.1 3.0 3.0
35.6% 35.0% 35.5%
16
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
16. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are
summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques prescribed by
the Financial Accounting Standards Board and may not be indicative of the net
realizable or liquidation values. The calculation of estimated fair values is
based on market conditions at a specific point in time and may not reflect
current or future fair values.
December 31, 2005 December 31, 2004 December 31, 2003
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value
Financial assets
Cash and due from
banks $ 24,069,790 $ 24,305,510 $ 21,901,546 $ 22,074,622 $ 20,482,866 $ 20,632,954
Interest-bearing
deposits 2,192,731 2,149,957 2,161,496 2,163,186 2,281,337 2,305,344
Investment
securities 119,084,440 117,811,806 161,950,732 161,028,985 158,932,277 159,340,681
Loans, net 204,441,957 204,438,718 161,510,157 161,534,247 162,243,008 162,289,522
Financial liabilities
Interest-bearing
deposits $222,621,474 $222,335,613 $241,229,944 $241,284,245 $242,344,593 $242,471,838
Note payable 142,069 137,990 162,161 158,414 181,087 176,288
The fair value of federal funds sold, noninterest-bearing deposits, and
securities sold under agreements to repurchase equals their carrying value.
The fair value of silver coin included with cash is determined based on
quoted market prices.
The fair value of interest-bearing deposits with other financial
institutions is estimated based on quoted interest rates for certificates of
deposit with similar remaining terms.
The fair values of equity securities are determined using market
quotations. The fair values of debt securities, which are provided by an
independent third party, are estimated using a matrix that considers yield to
maturity, credit quality, and marketability.
The fair value of fixed-rate loans is estimated to be the present value
of scheduled payments discounted using interest rates currently in effect for
loans of the same class and term. The fair value of variable-rate loans,
including loans with a demand feature, is estimated to equal the carrying
amount. The valuation of loans is adjusted for possible loan losses.
The fair value of interest-bearing checking, savings, and money market
deposit accounts is equal to the carrying amount. The fair value of
fixed-rate time deposits is estimated based on interest rates currently
offered for deposits of similar remaining maturities.
It is not practicable to estimate the fair value of outstanding loan
commitments, unused lines, and letters of credit.
17
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
17. Capital Standards
The Federal Reserve Board and the Federal Deposit Insurance Corporation
have adopted risk-based capital standards for banking organizations. These
standards require ratios of capital to assets for minimum capital adequacy
and to be classified as well capitalized under prompt corrective action
provisions. The capital ratios and minimum capital adequacy requirements of
the Company and the Bank are as follows:
Company Bank To be well Minimum
Actual Actual capitalized adequacy
(in thousands) Amount Ratio Amount Ratio Ratio Ratio
December 31, 2005
Total risk-based capital
(to risk weighted assets) $67,783 35.2% $62,749 32.9% 10.0% 8.0%
Tier 1 capital
(to risk-weighted assets) $64,663 33.5% $60,558 31.7% 6.0% 4.0%
Tier 1 capital
(to average fourth
quarter assets) $64,663 16.2% $60,558 15.4% 5.0% 4.0%
December 31, 2004
Total risk-based capital
(to risk weighted assets) $67,862 43.3% $63,174 41.3% 10.0% 8.0%
Tier 1 capital
(to risk-weighted assets) $65,313 41.7% $61,260 40.1% 6.0% 4.0%
Tier 1 capital
(to average fourth
quarter assets) $65,313 16.0% $61,260 15.3% 5.0% 4.0%
December 31, 2003
Total risk-based capital
(to risk weighted assets) $65,082 39.1% $60,447 37.1% 10.0% 8.0%
Tier 1 capital
(to risk-weighted assets) $62,488 37.6% $58,410 35.9% 6.0% 4.0%
Tier 1 capital
(to average fourth
quarter assets) $62,488 16.0% $58,410 14.9% 5.0% 4.0%
Tier 1 capital consists of common stock, additional paid-in capital,
and retained earnings. Total risk-based capital includes a limited amount of
the allowance for loan losses. In calculating risk-weighted assets, specific
risk percentages are applied to each category of asset and off-balance sheet
items.
Failure to meet the capital requirements could affect the Company's
ability to pay dividends and accept deposits, and may significantly affect
the operations of the Company.
In the most recent regulatory report, the Company was determined to be
well capitalized. Management has no plans that should change the
classification of the capital adequacy.
18
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
18. Parent Company Financial Information
Balance Sheets
December 31,
2005 2004 2003
Assets
Cash and due from banks $ 18,212 $ 10,651 $ 52,244
Interest-bearing deposits 561,527 530,291 650,132
Investment securities available
for sale 3,721,949 3,265,566 2,685,158
Investment securities held to
maturity 502,064 503,156 499,692
Investment in subsidiary bank 60,945,846 61,630,473 58,798,328
Premises and equipment 1,281,065 1,311,740 1,342,696
Other assets 4,467,685 77,742 163,001
Total assets $ 71,498,348 $ 67,329,619 $ 64,191,251
Liabilities and Stockholders' Equity
Dividend payable $ 4,462,578 $ - $ -
Deferred income taxes 709,207 552,841 393,950
Other liabilities 8,179 79,210 161,269
5,179,964 632,051 555,219
Stockholders' equity
Common stock 3,187,556 3,208,478 3,227,966
Additional paid-in capital 15,454,735 16,187,005 16,869,085
Retained earnings 46,021,128 45,917,427 42,391,363
Accumulated other comprehensive
income 1,654,965 1,384,658 1,147,618
Total stockholders' equity 66,318,384 66,697,568 63,636,032
Total liabilities and
stockholders' equity $ 71,498,348 $ 67,329,619 $ 64,191,251
Statements of Income
Years Ended December 31,
2005 2004 2003
Interest revenue $ 24,671 $ 19,480 $ 12,678
Dividend revenue 55,518 48,676 43,227
Dividends from subsidiary 2,984,551 2,721,640 2,936,869
Equity in undistributed income
of subsidiary 3,759,919 2,850,387 2,562,464
Rental income and other fees - - 2,028
6,824,659 5,640,183 5,557,266
Expenses
Occupancy 2,087 3,251 3,777
Furniture and equipment - - 1,167
Other 21,034 22,745 20,272
23,121 25,996 25,216
Income before income taxes 6,801,538 5,614,187 5,532,050
Income taxes (benefit) 3,900 1,000 (8,164)
Net income $ 6,797,638 $ 5,613,187 $ 5,540,214
19
Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
18. Parent Company Financial Information (Continued)
Years Ended December 31,
Statements of Cash Flows 2005 2004 2003
Cash flows from operating activities
Interest and dividends received $ 3,065,338 $ 2,789,328 $ 2,992,141
Rental payments and fees received 33,619 33,600 35,629
Cash paid for operating expenses (26,047) (28,639) (26,197)
Income taxes refunded (paid) (4,194) 1,310 (100,483)
3,068,716 2,795,599 2,901,090
Cash flows from investing activities
Certificates of deposit purchased,
net of maturities (1,923) (564) (500,000)
Purchase of investments available
for sale (45,379) (164,504) (182,500)
Proceeds from maturities of investments
held to maturity - 500,000 -
Purchase of investments held to maturity - (503,842) -
(47,302) (168,910) (682,500)
Cash flows from financing activities
Common shares repurchased (753,192) (701,568) (432,949)
Dividends paid (2,231,359) (2,087,123) (1,936,869)
(2,984,551) (2,788,691) (2,369,818)
Net increase (decrease) in cash 36,863 (162,002) (151,228)
Cash at beginning of year 40,374 202,376 353,604
Cash at end of year $ 77,237 $ 40,374 $ 202,376
Reconciliation of net income to net cash
provided by operating activities
Net income $ 6,797,638 $ 5,613,187 $ 5,540,214
Adjustments to reconcile net income
to net cash used in operating
activities
Undistributed net income of
subsidiary (3,759,919) (2,850,387) (2,562,464)
Amortization of premiums and
accretion of discounts 1,092 21 (462)
Depreciation 30,675 30,957 32,619
Decrease (increase) in other
assets (4,389,943) 85,259 (159,371)
Increase (decrease) in Deferred
income taxes and other
liabilities 4,389,173 (83,438) 50,554
$ 3,068,716 $ 2,795,599 $ 2,901,090
Composition of cash and cash equivalents
Cash and due from banks $ 18,212 $ 10,650 $ 52,244
Interest-bearing deposits, except
for time deposits 59,025 29,724 150,132
$ 77,237 $ 40,374 $ 202,376
20
Calvin B. Taylor Bankshares, Inc.
And Subsidiary
Notes to Consolidated Financial Statements
19. Quarterly Results of Operations (Unaudited)
Three months ended
December 31, September 30, June 30, March 31,
2005
Interest and
dividend revenue $4,793,757 $4,656,566 $4,289,745 $3,941,151
Interest expense 560,574 458,851 388,934 361,014
Net interest
income 4,233,183 4,197,715 3,900,811 3,580,137
Provision for loan losses - - - -
Net income 1,703,943 1,905,371 1,687,865 1,500,459
Comprehensive
income 1,686,643 1,883,824 1,900,312 1,597,166
Earnings per share $0.53 $0.60 $0.53 $0.47
2004
Interest and
dividend revenue $3,954,857 $3,820,243 $3,733,533 $3,743,122
Interest expense 384,375 382,761 384,221 402,537
Net interest
income 3,570,482 3,437,482 3,349,312 3,340,585
Provision for loan losses - - - -
Net income 1,451,346 1,447,964 1,371,093 1,342,784
Comprehensive
income 1,564,420 1,663,271 1,235,704 1,386,832
Earnings per share $0.45 $0.45 $0.43 $0.42
2003
Interest and
dividend revenue $3,826,749 $3,934,534 $4,024,543 $3,993,421
Interest expense 435,526 473,779 559,096 663,557
Net interest
income 3,391,223 3,460,755 3,465,447 3,329,864
Provision for loan losses - - - -
Net income 1,308,544 1,429,125 1,450,040 1,352,505
Comprehensive
income 1,372,451 1,288,388 1,994,551 1,335,174
Earnings per share $0.40 $0.44 $0.45 $0.42
21