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

Form 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011
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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No ____

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). N/A (not required at this time)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____                                                                                     Accelerated filer [X]
Non- accelerated filer ____ (Do not check if a smaller reporting company)     Smaller reporting company ____

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

On April 30, 2011, 3,000,508 shares of the registrant's common stock were issued and outstanding.

- 1 -

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

Part I - Financial Information Page
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 3
Consolidated Statements of Income for the three months
ended March 31, 2011 and 2010 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2011 and 2010 5-6
Notes to Consolidated Financial Statements 7-16
Item 2 Management’s Discussion and Analysis of Financial Condition
and Results of Operations 17-25
Item 3 Quantitative and Qualitative Disclosures About Market Risks 25
Item 4 Controls and Procedures 26
Part II - Other Information
Item 1 Legal Proceedings 26
Item 1A Risk Factors 26
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3 Defaults Upon Senior Securities 28
Item 5 Other Information 28
Item 6 Exhibits 28-30
Signatures 31

 

- 2 -

 

Part I - Financial Information, Item 1 Financial Statements  
Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Balance Sheets    
  (unaudited)  
  March 31, December 31,
  2011 2010
Assets
Cash and due from banks  $             17,051,016  $             14,319,142
Federal funds sold                 31,656,196                 36,081,862
Interest-bearing deposits                 10,658,500                 11,650,849
Investment securities available for sale                 44,813,118                 59,801,920
Investment securities held to maturity (approximate     
  fair value of $43,836,218 and $32,491,819)                 43,668,735                 32,303,572
Loans, less allowance for loan losses    
  of $1,120,292 and $983,178               244,805,499               237,001,219
Premises and equipment                   6,345,269                   6,319,854
Other real estate owned                      779,500                      779,500
Accrued interest receivable                   1,184,823                   1,224,920
Computer software                      106,020                        89,521
Bank owned life insurance                   5,303,312                   5,260,539
Prepaid expenses                   1,002,148                   1,285,266
  Other assets                          1,529                        29,640
   $           407,375,665  $           406,147,804
Liabilities and Stockholders' Equity
Deposits    
  Noninterest-bearing  $             74,691,581  $             76,763,686
  Interest-bearing               251,793,458               250,014,068
                326,485,039               326,777,754
Securities sold under agreements to repurchase                   4,572,801                   4,490,512
Accrued interest payable                       132,159                      150,299
Deferred income taxes                      247,100                      383,326
Other liabilities                      709,996                      151,361
                332,147,095               331,953,252
Stockholders' equity    
  Common stock, par value $1 per share     
   authorized 10,000,000 shares, issued and outstanding    
   3,000,508 shares at March 31, 2011 and December 31, 2010                   3,000,508                   3,000,508
  Additional paid-in capital                   8,733,438                   8,733,438
  Retained earnings                 62,692,803                 61,441,595
                  74,426,749                 73,175,541
  Accumulated other comprehensive income                      801,821                   1,019,011
                  75,228,570                 74,194,552
   $           407,375,665  $           406,147,804
     
     
See accompanying Notes to Consolidated Financial Statements

 

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Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Statements of Income (unaudited)    
For the three months ended
March 31,
2011 2010
Interest and dividend revenue    
  Loans, including fees  $               3,890,621  $               3,960,170
  U.S. Treasury and government agency securities                      244,518                      345,052
  State and municipal securities                        14,777                        12,325
  Federal funds sold                         14,480                        11,956
  Interest-bearing deposits                        14,675                        19,496
  Equity securities                          8,014                        18,844
          Total interest and dividend revenue                   4,187,085                   4,367,843
   
Interest expense    
  Deposits                      403,474                      499,860
  Borrowings                          5,401                          8,846
    Total interest expense                      408,875                      508,706
   
    Net interest income                   3,778,210                   3,859,137
   
Provision for loan losses                      145,400                      421,000
    Net interest income after provision for loan losses                   3,632,810                   3,438,137
   
Noninterest revenue    
  Service charges on deposit accounts                      215,495                      224,735
  ATM and debit card                      137,259                      121,647
  Increase in cash surrender value of  bank owned life insurance                        42,772                        41,888
  Gain on sale of assets                             200                      148,236
  Miscellaneous revenue                        53,226                      101,686
    Total noninterest revenue                      448,952                      638,192
   
Noninterest expenses    
  Salaries                      874,987                      866,847
  Employee benefits                      362,595                      250,829
  Occupancy                      222,859                      228,842
  Furniture and equipment                      126,811                      124,670
  Data proccessing                        67,112                        73,226
  ATM and debit card                        46,640                        63,647
  Deposit insurance premiums                        75,954                        78,455
  Other operating                      336,096                      406,934
    Total noninterest expenses                   2,113,054                   2,093,450
   
    Income before income taxes                   1,968,708                   1,982,879
Income taxes                      717,500                      717,500
   
Net income  $               1,251,208  $               1,265,379
   
Earnings per common share – basic and diluted  $                        0.42  $                        0.42

- 4 -

 

Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Statements of Cash Flows (unaudited)    
For the three months ended
March 31,
2011 2010
Cash flows from operating activities    
  Interest and dividends received  $                4,295,782  $                4,354,052
  Fees and commissions received                       434,290                       525,329
  Interest paid                     (427,015)                     (524,908)
  Cash paid to suppliers and employees                  (1,803,524)                  (1,999,269)
  Income taxes paid                       (51,955)                     (435,956)
                   2,447,578                    1,919,248
Cash flows from investing activities    
  Certificates of deposit purchased, net of maturities                       993,330                    3,830,680
  Proceeds from maturities of investments available    
     for sale                  23,575,000                  13,005,000
  Purchase of investments available for sale                  (8,985,881)                                 -  
  Proceeds from maturities of investments held to     
     maturity                         65,000                    5,190,000
  Purchase of investments held to maturity                (11,452,495)                  (5,769,273)
  Loans made, net of principal reductions                  (7,949,680)                  (7,671,344)
  Proceeds from sale of repossessed loan collateral, net of    
    cost of sale                                 -                           59,420
  Purchases of premises, equipment,    
    and computer software                     (175,437)                       (51,625)
  Proceeds from sale of premises and equipment                              200                         72,100
                 (3,929,963)                    8,664,958
   
Cash flows from financing activities    
  Net increase (decrease) in    
    Time deposits                  (3,481,121)                    1,452,960
    Other deposits                    3,188,406                  (5,043,398)
    Securities sold under agreements to repurchase                         82,289                     (812,911)
  Payments on note payable                                 -                           (6,625)
                    (210,426)                  (4,409,974)
   
Net increase in cash and cash equivalents                  (1,692,811)                    6,174,232
Cash and cash equivalents at beginning of period                  50,531,537                  43,489,772
Cash and cash equivalents at end of period  $              48,838,726  $              49,664,004
See accompanying Notes to Consolidated Financial Statements

 

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Calvin B. Taylor Bankshares, Inc. and Subsidiary  
Consolidated Statements of Cash Flows (unaudited)    
For the three months ended
March 31,
2011 2010
Reconciliation of net income to net cash provided    
  by operating activities    
  Net income  $               1,251,208  $               1,265,379
  Adjustments to reconcile net income to net cash    
    provided by operating activities    
Provision for loan losses                      145,400                      421,000
    Gain on sale of repossessed loan collateral                               -                          (4,920)
    Amortization of premiums and accretion of    
      discount, net                        68,599                        39,392
    Depreciation and amortization                      133,323                      145,034
    Gain on sale of real property                               -                        (55,061)
    Decrease (increase) in    
      Accrued interest receivable                        40,097                      (53,184)
      Cash surrender value of bank owned life insurance                      (42,773)                      (41,888)
      Other assets                      311,229                      406,851
    Increase (decrease) in    
      Accrued interest payable                      (18,140)                      (16,202)
      Accrued income taxes                      665,545                        34,374
      Other liabilities                    (106,910)                    (221,527)
 $               2,447,578  $               1,919,248
   
   
  Composition of cash and cash equivalents    
    Cash and due from banks  $             17,051,016  $             17,549,372
    Federal funds sold                  31,656,196                 31,988,106
    Interest-bearing deposits, except for time deposits                      131,514                      126,528
 $             48,838,726  $             49,664,006
   
   
   
   
   
   
   
   
   
   
   
   
   
See accompanying Notes to Consolidated Financial Statements

 

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

1. Basis of Presentation

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

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

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

  2011 2010
Three months ended March 31                     3,000,508                     3,000,508

 

2. Comprehensive Income

    Comprehensive income consists of:

  For the three months ended
  March 31,
  2011 2010
Net income  $                 1,251,208  $                 1,265,379
Unrealized gain (loss) on investment securities    
  available for sale, net of income taxes                      (217,190)                          22,282
Comprehensive income  $                 1,034,018  $                 1,287,661

 

 

- 7 -

 

 

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

3. Investment Securities

    Investment securities are summarized as follows:

  Amortized  Unrealized Unrealized Fair
  cost gains losses value
March 31, 2011        
Available for sale        
  U.S. Treasury  $         41,590,108  $          898,583  $            7,361  $         42,481,330
  State and municipal                  290,484                  3,458                3,480                  290,462
  Equity               1,691,841              711,922            362,437               2,041,326
   $         43,572,433  $       1,613,963  $        373,278  $         44,813,118
Held to maturity        
  U.S. Treasury  $         27,477,357  $          165,818  $          17,905  $         27,625,270
  U.S. Government agency             10,001,782                10,208              10,190             10,001,800
  State and municipal               6,189,596                19,837                   285               6,209,148
   $         43,668,735  $          195,863  $          28,380  $         43,836,218
         
December 31, 2010        
Available for sale        
  U.S. Treasury  $         56,150,205  $          966,157  $          16,871  $         57,099,491
  State and municipal                  365,772                  4,031                3,709                  366,094
  Equity               1,691,841           1,008,745            364,251               2,336,335
   $         58,207,818  $       1,978,933  $        384,831  $         59,801,920
Held to maturity        
  U.S. Treasury  $         19,487,287  $          178,407  $            5,147  $         19,660,547
  U.S. Government agency               7,002,448                13,646                6,850               7,009,244
  State and municipal               5,813,837                11,979                3,788               5,822,028
   $         32,303,572  $          204,032  $          15,785  $         32,491,819

 

 

- 8 -

 

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

3. Investment Securities (Continued)

    The table below shows the gross unrealized losses and fair value of securities that are in an unrealized loss position as of March 31, 2011, aggregated by length of time that individual securities have been in a continuous unrealized loss position.

Less than 12 months 12 months or more Total
Fair Unrealized Fair Unrealized Fair Unrealized
value losses value losses value losses
           
U. S. Treasury  $   12,006,780  $    25,266  $             -    $             -    $   12,006,780  $    25,266
U. S. Government Agency         4,989,810        10,190                 -                   -           4,989,810        10,190
State and municipal            993,430          3,765                 -                   -              993,430          3,765
Equity securities              14,695      100,325        323,889        262,112            338,584      362,437
   $   18,004,715  $  139,546  $    323,889  $    262,112  $   18,328,604  $  401,658

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

March 31, 2011 December 31, 2010
Amortized Fair Amortized Fair
cost value cost value
       
Available for sale        
  Within one year  $          22,667,422  $          22,750,679  $          35,163,533  $          35,292,775
  After one year        
   through five years              17,216,457              17,346,113              19,355,802              19,481,248
  After ten years                1,996,713                2,675,000                1,996,642                2,691,562
 $          41,880,592  $          42,771,792  $          56,515,977  $          57,465,585
       
Held to maturity        
  Within one year  $          15,002,755  $          15,052,645  $            8,758,541  $            8,789,063
  After one year        
   through five years              28,665,980              28,783,573              23,545,031              23,702,756
   $          43,668,735  $          43,836,218  $          32,303,572  $          32,491,819
       
Pledged securities  $          25,599,210  $          26,494,854  $          26,567,879  $          27,558,868

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

 

 

 

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

 

4. Loans and Allowance for Loan Losses

Major classifications of loans are as follows:

March 31, 2011 December 31, 2010
Real estate mortgages    
Construction, land development, and land  $             19,455,536  $             21,792,060
Residential 1 to 4 family                 92,258,901                 94,296,749
Commercial properties               117,194,515               102,578,171
Commercial                  15,457,291                 17,596,451
Consumer                   1,559,548                   1,720,966
              245,925,791               237,984,397
Allowance for loan losses                   1,120,292                      983,178
Loans, net  $           244,805,499  $           237,001,219

 

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

March 31, December 31,
2011 2010
Loans 90 days or more past due and still accruing    
Real estate mortgages    
Construction, land development, and land  $                       -    $                       -  
Residential 1 to 4 family                 302,215                           -  
Commercial properties                 684,422                 684,422
Commercial                            -                             -  
Consumer                           -                             -  
                  986,637                 684,422
Nonaccruing loans    
Real estate mortgages    
Construction, land development, and land              1,150,536              1,171,127
Residential 1 to 4 family                 823,350                 318,076
Commercial properties              1,885,085              2,610,204
Commercial                            -                       7,114
Consumer                           -                             -  
               3,858,971              4,106,521
   
Total nonperforming loans              4,845,608              4,790,943
Other real estate owned                 779,500                 779,500
Total nonperforming assets  $          5,625,108  $          5,570,443
   
Interest not accrued on nonaccruing loans  $             149,881  $             156,805
     
Interest included in net income on nonaccruing loans,    
year-to-date  $                 8,700  $               93,033

 

 

- 10 -

 

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

 

4. Loans and Allowance for Loan Losses (continued)

The following is a schedule of transactions in the allowance for loan losses by type of loan. The Company did not acquire any loans with deteriorated credit quality during the periods presented.

Real estate mortgages        
Construction            
March 31, 2011 and Land Residential Commercial Commercial Consumer Unallocated Total
Beginning balance $          235,437  $             50,602  $            356,993  $          194,946  $           119,228  $        25,972  $                   983,178
Loans charged off                              -                                -                                  -                (2,945)           (7,193)                   -                        (10,138)
Recoveries                              -                            150                                -                     284                 1,418                   -                            1,852
Provision charged to operations                  35,000                              -                     117,500               44,899             (41,353)          (10,646)                       145,400
Ending balance  $          270,437  $             50,752  $            474,493  $         237,184  $           72,100  $        15,326  $                1,120,292
             
Individually evaluated for impairment:            
Balance in allowance  $          110,509  $                   -    $            350,000  $                  -    $                   -      $                   460,509
Related loan balance  $       1,525,626  $          823,350  $         2,569,507  $                  -    $                   -      $                4,918,483
             
Collectively evaluated for impairment:            
Balance in allowance  $           159,928  $             50,752  $             124,493  $         237,184  $           72,100  $        15,326  $                   659,783
Related loan balance  $    17,929,910  $    91,435,551  $   114,625,008  $   15,457,291  $      1,559,548    $            241,007,308
             
             
December 31, 2010              
Beginning balance  $           145,262  $             48,034  $                   2,192  $         380,161  $           53,638  $          8,474  $                   637,761
Loans charged off              (100,000)              (190,093)                                -          (354,854)             (52,935)                   -                       (697,882)
Recoveries                              -                         1,100                                -                  1,073               29,126                   -                          31,299
Provision charged to operations                 190,175                  191,561                  354,801             168,566               89,399            17,498                    1,012,000
Ending balance  $          235,437  $             50,602  $            356,993  $         194,946  $          119,228  $        25,972  $                   983,178
             
Individually evaluated for impairment:            
Balance in allowance  $                         -    $                         -    $            330,759  $                  -    $                   -      $                  330,759
Related loan balance  $         1,171,127  $           361,743  $       2,566,537  $             7,114  $                   -      $                4,106,521
             
Collectively evaluated for impairment:            
Balance in allowance  $          235,437  $             50,602  $               26,234  $         194,946  $          119,228  $        25,972  $                   652,419
Related loan balance  $  20,620,933  $  93,935,006  $    100,011,634  $  17,589,337  $      1,720,966    $             233,877,876
             
             
March 31, 2010              
Beginning balance  $           145,262  $             48,034  $                   2,192  $         380,161  $           53,638  $          8,474  $                   637,761
Loans charged off                              -                                -                                  -              (347,872)               (27,981)                   -                      (375,853)
Recoveries                              -                                -                                  -                       78              5,364                   -                            5,442
Provision charged to operations                 115,000                   19,555                  143,029               76,077               25,295            42,044                       421,000
Ending balance  $          260,262  $             67,589  $              145,221  $         108,444  $           56,316  $        50,518  $                   688,350
             
Individually evaluated for impairment:            
Balance in allowance  $                         -    $                         -    $              127,561  $                  -    $                   -      $                   127,561
Related loan balance  $                         -    $            163,519  $        2,710,608  $                  -    $                   -      $                2,874,127
             
Collectively evaluated for impairment:            
Balance in allowance  $          260,262  $             67,589  $                17,660  $         108,444  $           56,316  $        50,518  $                   560,789
Related loan balance  $  23,506,980  $    98,102,641  $    102,454,131  $  19,009,547  $      2,053,137    $             245,126,436

 

 

- 11 -

 

 

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

 

4. Loans and Allowance for Loan Losses (continued)

The table below shows the relationship of net charged-off loans and the balance in the allowance to gross loans and average loans.

Allowance for Loan Losses      
For three months ended   For the year ended  
March 31   December 31  
2011 2010   2010  
         
Net loans charged off  $            8,286  $        370,411    $        666,583  
         
Balance at end of period  $     1,120,292  $        688,350    $        983,178  
         
Gross loans outstanding at the end of the period  $ 245,925,791  $ 248,000,563    $ 237,984,397  
Allowance for loan loses to gross loans          
outstanding at the end of the period 0.46% 0.28%   0.41%  
         
Average loans outstanding during the period  $ 240,422,747  $ 243,850,884    $ 244,189,000  
Annualized net charge-offs as a percentage of          
average loans outstanding during the period 0.01% 0.62%   0.27%  

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

Age Analysis of Past Due Loans
    Greater than       > 90 Days
30-59 Days 60-89 Days 90 Days Total   Total Past Due and
March 31, 2011 Past Due Past Due Past Due Past Due Current Loans Accruing
Real Estate              
Construction, land development,              
and land  $                 -    $       666,742  $       408,802  $    1,075,544  $       18,379,992  $       19,455,536  $                 -  
Residential 1 to 4 family        2,678,830           950,970           835,400        4,465,200           87,793,701           92,258,901            302,215
Commercial properties           600,000           601,439        2,481,825        3,683,264         113,511,251         117,194,515            684,422
Commercial            112,000                     -                       -             112,000           15,345,291           15,457,291                     -  
Consumer             35,808               5,460                     -               41,268             1,518,280             1,559,548                     -  
Total  $    3,426,638  $    2,224,611  $    3,726,027  $    9,377,276  $     236,548,515  $     245,925,791  $        986,637
             
December 31, 2010              
Real Estate              
Construction, land development,              
and land  $       474,843  $       234,719  $    1,089,719  $    1,799,281  $       19,992,779  $       21,792,060  $                 -  
Residential 1 to 4 family        1,390,288           336,134                     -          1,726,422           92,570,327           94,296,749                     -  
Commercial properties                     -               37,957        2,508,675        2,546,632         100,031,539         102,578,171            684,422
Commercial            103,759               7,114                     -             110,873           17,485,578           17,596,451                     -  
Consumer                     -               19,415                     -               19,415             1,701,551             1,720,966                     -  
Total  $    1,968,890  $       635,339  $    3,598,394  $    6,202,623  $     231,781,774  $     237,984,397  $        684,422

 

- 12 -

 

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

 

4. Loans and Allowance for Loan Losses (continued)

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

Unpaid     Average
Principal Recorded Related Recorded
March 31, 2011 Balance Investment Allowance Investment
With no related allowance recorded        
Construction, land development, and land  $           684,802  $           684,802  $                    -    $           694,387
Residential 1 to 4 family               823,350               823,350                 826,208
Commercial properties               684,422               684,422                 684,422
With an allowance recorded        
Construction, land development, and land               840,824               840,824               110,509               840,824
Commercial properties            1,885,085            1,885,085               350,000            1,885,085
Total:        
Construction, land development, and land            1,525,626            1,525,626               110,509            1,535,211
Residential 1 to 4 family               823,350               823,350                        -                 826,208
Commercial properties            2,569,507            2,569,507               350,000            2,569,507
Total, all categories  $        4,918,483  $        4,918,483  $           460,509  $        4,930,926

 

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

 

- 13 -

 

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

 

4. Loans and Allowance for Loan Losses (continued)

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

March 31, 2011 December 31, 2010
   
Real Estate Credit Risk Profile by Internally Assigned Grade  
Construction, land development, and land    
Pass  $              13,747,684  $                 16,063,618
Substandard                    4,182,226                       4,557,315
Doubtful    
Less than 90 days past due                       375,090                          761,189
Nonperforming: 90 days or more    
past due and/or non-accruing                    1,150,536                          409,938
Total  $              19,455,536  $                 21,792,060
   
Residential 1 to 4 family    
Pass  $              86,771,560  $                 90,393,936
Special Mention                       249,164                                    -  
Substandard                    4,112,612                       3,584,737
Doubtful    
Less than 90 days past due                                 -                            292,091
Nonperforming: 90 days or more    
past due and/or non-accruing                    1,125,565                            25,985
Total  $              92,258,901  $                 94,296,749
   
Commercial properties    
Pass  $            109,822,337  $                 95,620,813
Special Mention                                 -                                      -  
Substandard                    4,802,671                       4,347,154
Doubtful    
Less than 90 days past due                                 -                            132,155
Nonperforming: 90 days or more    
past due and/or non-accruing                    2,569,507                       2,478,049
Total  $            117,194,515  $               102,578,171
   
Commercial Credit Risk Profile by Internally Assigned Grade  
Pass  $              15,457,291  $                 17,589,337
Doubtful    
Less than 90 days past due                                 -                                7,114
Total  $              15,457,291  $                 17,596,451
   
Consumer Credit Risk Profile by Internally Assigned Grade    
Pass  $                1,559,548  $                   1,720,966
Total  $                1,559,548  $                   1,720,966

 

- 14 -

 

 

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

 

5. Loan commitments

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

March 31, 2011 December 31, 2010
Loan commitments and lines of credit    
  Construction and land development  $                 8,015,111  $                 8,569,169
  Other                   16,725,502                   21,164,229
   $               24,740,613  $               29,733,398
   
Standby letters of credit  $                 1,314,691  $                 1,590,367

 

 

6. Assets Measured at Fair Value on a Recurring Basis

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

At March 31, 2011, values for available for sale investment securities and other real estate owned were established as follows:

Total Level 1 Inputs Level 2 Inputs
Investment securities available for sale (recurring)      
U.S. Treasury  $      42,481,330  $      42,481,330  $                    -  
State and municipal               290,462                        -                 290,462
Equity            2,041,326               345,840            1,695,486
Other real estate owned (non-recurring)               779,500                        -                 779,500
   $      45,592,618  $      42,827,170  $        2,765,448

 

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

 

 

- 15 -

 

 

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

7.    New accounting standards

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

 

 

- 16 -

 

Calvin B. Taylor Bankshares, Inc. and Subsidiary
Part 1. Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

General

    Calvin B. Taylor Bankshares, Inc. (Company) was incorporated as a Maryland corporation on October 31, 1995. The Company owns all of the stock of Calvin B. Taylor Banking Company (Bank), a commercial bank that was established in 1890 and incorporated under the laws of the State of Maryland on December 17, 1907. The Bank operates nine banking offices in Worcester County, Maryland and one banking office in Ocean View, Delaware. The Bank's administrative office is located in Berlin, Maryland. The Bank is engaged in a general commercial and retail banking business serving individuals, businesses, and governmental units in Worcester County, Maryland, Ocean View, Delaware, and neighboring counties.
    The Company currently engages in no business other than owning and managing the Bank. The Bank employed 88 full time equivalent employees as of March 31, 2011. The Bank hires seasonal employees during the summer. The Company has no employees other than those hired by the Bank.

Use of estimates

    The preparation of financial statements in conformity with accounting principles generally accepted in the United State of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Critical Accounting Policies

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

 

- 17 -

 

Financial Condition

    Total assets of the Company increased $1.2 million (.30%) from December 31, 2010 to March 31, 2011. Combined deposits and customer repurchase agreements decreased $210,426 (.06%) during the same period. Average total assets and average total deposits each increased $18.0 million from first quarter 2010 to first quarter 2011. Throughout 2010, deposits and total assets grew as a result of market instability that was part of a continuing general economic recession. At such times, many consumers seek the safety of conservatively run community banks. The first quarter of 2011 conforms to the historical pattern in which the Bank sees a decrease in deposits during the first quarter of the year as business customers in the resort area purchase inventory for the upcoming summer season. For further discussion of seasonal activity that affects deposit levels, see the section titled Liquidity.

Loan Portfolio

    From December 31, 2010 to March 31, 2011 the gross loan portfolio has grown $7.9 million (3.34%). Growth in the loan portfolio has been funded by reductions in federal funds sold and the investment portfolio. Because loans earn at higher average rates than federal funds sold or investments, this shift has a positive effect on earnings. There is no adverse impact on the Company’s ability to meet liquidity demands resulting from recent increases in the loan portfolio.
    The Company makes loans to customers located primarily in the Delmarva region. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region.

Loan Quality and the Allowance for Loan Losses

    The allowance for loan losses (ALLL) represents an amount which management believes to be adequate to absorb identified and inherent losses in the loan portfolio as of the balance sheet date. Valuation of the allowance is completed no less than quarterly. The determination of the allowance is inherently subjective as it relies on estimates of potential loss related to specific loans, the effects of portfolio trends, and other internal and external factors.
    The ALLL consists of (i) formula-based reserves comprised of potential losses in the balance of the loan portfolio segmented into homogeneous pools, (ii) specific reserves comprised of potential losses on loans that management has identified as impaired and (iii) unallocated reserves. Unallocated reserves are not associated with a specific portfolio segment or a specific loan, but may be appropriate if properly supported and in accordance with GAAP.
    The Company evaluates loan portfolio risk for the purpose of establishing an adequate allowance for loan losses. In determining an adequate level for the formula-based portion of the ALLL, management considers historical loss experience for major types of loans. Homogenous categories of loans are evaluated based on loss experience in the most recent five years. Based on this evaluation, management applies a formula to the current portfolio which gives weight to portfolio size and loss experience for categories of real estate construction loans, other real estate secured loans, other loans to commercial borrowers, and other consumer loans. However, historical data may not be an accurate predictor of loss potential in the current loan portfolio.
    Management also evaluates trends in delinquencies, the composition of the portfolio, concentrations of credit, and changes in lending products, processes, or staffing. Management further considers external factors such as the interest rate environment, competition, current local and national economic trends, and the results of recent independent reviews by auditors and banking regulators. The protracted slow-down in the real-estate market has affected both the price and time to market residential and commercial properties. Management closely monitors such trends and the potential effect on the Company. Since the beginning of the current adverse economic conditions in 2008, the Company has experienced historically high loan losses and provisions for loan losses. Management expects more loan losses in 2011.

 

- 18 -

 

    Management employs a risk rating system which gives weight to collateral status (secured vs. unsecured), and to the absence or improper execution of critical contract or collateral documents. Unsecured loans and those loans with critical documentation exceptions, as defined by management, are considered to have greater loss exposure. Management incorporates these factors in the formula-based portion of the ALLL. Additionally, consideration is given to those segments of the loan portfolio which management deems to pose the greatest likelihood of loss. A schedule of loans by credit quality indicator (risk rating) can be found in Note 4.
    Management believes that in a general economic downturn, such as the region has experienced since mid-2008, the Bank’s greatest likelihood of loss is in unsecured loans - commercial and consumer, and in secured consumer loans. Reserves for these segments of the portfolio are included in the formula-based portion of the ALLL. As of March 31, 2011, management reserved 125 bp against unsecured loans, and consumer loans secured by other than real estate. Both of these reserves were increased during the first quarter of this year in recognition of the prolonged economic challenges to regional, national, and global economies. Additionally, management reserved 10% against overdrawn checking accounts which are a distinct high risk category of unsecured loan.
    Borrowers whose cash flow is impaired as a result of prevailing economic conditions have also experienced depressed real estate values. Management recognizes that the combination of these circumstances – reduced revenue and depressed collateral values, may increase the likelihood of loss in the Bank’s real estate secured loan portfolio. Management closely monitors conditions that might indicate deterioration of collateral value on significant loans and, when possible, obtains additional collateral as required to limit the Bank’s loss exposure. The Bank expects commercial and consumer mortgage foreclosures to continue in 2011. Foreclosures may result in loan losses, costs to hold real estate acquired in foreclosure, and losses on the sale of real estate acquired in foreclosure. While management is unable to predict the financial consequences of future foreclosure activity, provision for loss on likely loan foreclosures is included in specific reserves in the ALLL.
    Historically, the absence or improper execution of a document has not resulted in a loss to the Bank, however, management recognizes that the Bank’s loss exposure is increased until a critical contract or collateral documentation exception is cured. At March 31, 2011, management reserved 10 bp against the outstanding balances of loans identified as having critical documentation exceptions.
    The provision for loan losses is a charge to earnings in the current period to maintain the allowance at a level management has determined to be appropriate. The allowance is increased by current period provisions and by recoveries of amounts previously charged-off. The allowance is decreased when loans are charged-off as losses, which occurs when they are deemed to be uncollectible. Adjustments made to bring the balance in the allowance to the level established by management may result in an increase or decrease to expense. A provision of $145,400 was made in the first quarter of 2011. A provision of $421,000 was made in the comparable period in 2010. The year-to-year increase in the level of the ALLL reflects the consequences of the current economy. As the recession continues and borrowers’ suffer personal and professional financial hardship, the likelihood of loss on previously performing loans has increased. As Management identifies loans with heightened loss potential, a provision for those losses is recorded.
    Management considers the March 31, 2011 allowance appropriate and adequate to absorb identified and inherent losses in the loan portfolio. As of March 31, 2011, management has not identified any loans which are anticipated to be wholly charged-off within the next 12 months. However, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the loan loss allowance will not be required.

 

- 19 -

 

    The Bank experienced net charge-offs of $370,411 in the first quarter of 2010 and $8,286 in the current year to date. In 2010, a loss of $347,214 was attributable to a single unsecured commercial line of credit. Management expects loan losses to continue throughout 2011, as reflected in the elevated level of the ALLL. See Note 4 for a schedule of transactions in the allowance for loan losses.
    The accrual of interest on a loan is discontinued when principal or interest is ninety days past due or when the loan is determined to be impaired, unless collateral is sufficient to discharge the debt in full and the loan is in process of collection. When a loan is placed in nonaccruing status, any interest previously accrued but unpaid, is reversed from interest income. Interest payments received on nonaccrual loans may be recorded as cash basis income, or as a reduction of principal, depending on management’s judgment on a loan by loan basis. Accrual of interest may be restored when all principal and interest are current and management believes that future payments will be received in accordance with the loan agreement.
    Nonperforming loans are loans past due 90 or more days and still accruing plus nonaccrual loans. Nonperforming assets are comprised of nonperforming loans combined with real estate acquired in foreclosure and held for sale. Nonperforming assets increased $54,665 (.98%) from December 31, 2010 to March 31, 2011. See Note 4 for additional information about nonperforming assets.
    Loans are considered impaired when management considers it unlikely that collection of principal and interest payments will be made according to contractual terms. A performing loan may be categorized as impaired based on knowledge of circumstances that are deemed relevant to loan collection, including deterioration of the borrower’s financial condition or devaluation of collateral. Not all impaired loans are past due nor are losses expected for every impaired loan.
    Impaired loans may have specific reserves, or valuation allowances, allocated to them in the ALLL. Estimates of loss reserves on impaired loans may be determined based on any of the three following measurement methods which conform to authoritative accounting guidance: (1) the present value of future cash flows, (2) the fair value of collateral, if repayment of the loan is expected to be provided by underlying collateral, or (3) the loan’s observable fair value. The Bank selects and applies, on a loan-by-loan basis, the appropriate valuation method. Loans determined to be impaired, but for which no specific valuation allowance is made because management believes the loan is secured with adequate collateral or the Bank will not take a loss on such loan, are grouped with other homogeneous loans for evaluation under formula-based criteria described previously. Impaired loans including nonaccruing loans totaled $4,918,483 and $4,106,521 at March 31, 2011, and December 31, 2010, respectively. See Note 4 for additional information about impaired loans.

 

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Liquidity

    Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to provide sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. These funds can be obtained by converting assets to cash or by attracting new deposits. The Company’s major sources of liquidity are loan repayments, maturities of short-term investments including federal funds sold, and increases in core deposits. Funds from seasonal deposits are generally invested in short-term U.S. Treasury Bills and overnight federal funds.
    Due to its location in a seasonal resort area, the Bank typically experiences a decline in deposits, federal funds sold and investment securities throughout the first quarter of the year when business customers are using their deposits to meet cash flow needs. Beginning late in the second quarter and throughout the third quarter, additional sources of liquidity become more readily available as business borrowers start repaying loans, and the Bank receives deposits from seasonal business customers, summer residents and tourists.
    Average liquid assets (cash and amounts due from banks, interest-bearing deposits in other banks, federal funds sold, and investment securities) compared to average deposits and retail repurchase agreements were 45.26% for the first quarter of 2011 compared to 40.21% for the same quarter of 2010.
    The Company has available lines of credit, including overnight federal funds and reverse repurchase agreements, totaling $28,000,000 as of March 31, 2011.
    Average net loans to average deposits were 73.89% versus 79.47% as of March 31, 2011 and 2010, respectively. Average net loans decreased by 1.58% while average deposits grew by 5.85%. Deposit increases were generally reinvested in overnight federal funds sold and investment securities. Average deposit balance increases occurred in all categories of deposits except time deposits. When market interest rates are very low, as they have been since late 2008, investors may prefer to remain more liquid by moving funds into NOW or money market accounts. This allows them to be able to act on an opportunity for higher earnings without waiting for a time deposit to mature. Resulting changes in deposit portfolio composition do not have a negative impact on the Company’s ability to meet liquidity demands.

 

Interest Rate Sensitivity

    The primary objective of asset/liability management is to ensure the steady growth of the Company's primary source of earnings, net interest income. Net interest income can fluctuate with significant interest rate movements. To lessen the impact of these margin swings, the balance sheet should be structured so that repricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest rate sensitivity.
    Interest rate sensitivity refers to the responsiveness of interest-bearing assets and liabilities to changes in market interest rates. The rate-sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities at a given time interval. The general objective of gap management is to actively manage rate-sensitive assets and liabilities to reduce the impact of interest rate fluctuations on the net interest margin. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize the overall interest rate risk to the Company.
    Interest rate sensitivity may be controlled on either side of the balance sheet. On the asset side, management exercises some control over maturities. Also, loans are written to provide repricing opportunities on fixed rate notes. The Company's investment portfolio, including federal funds sold, provides the most flexible and fastest control over rate sensitivity since it can generally be restructured more quickly than the loan portfolio.
    On the liability side, deposit products are structured to offer incentives to attain the maturity distribution desired. Competitive factors sometimes make control over deposits more difficult and, therefore, less effective as an interest rate sensitivity management tool.
    The asset mix of the balance sheet is continually evaluated in terms of several variables: yield, credit quality, appropriate funding sources, and liquidity. Management of the liability mix of the balance sheet focuses on expanding the various funding sources.
    As of March 31, 2011, the Company was cumulatively asset-sensitive for all time horizons. For asset-sensitive institutions, if interest rates should decrease, the net interest margins should decline. Since all interest rates and yields do not adjust at the same velocity, the gap is only a general indicator of rate sensitivity.

 

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Results of Operations

    Net income for the three months ended March 31, 2011, was $1,251,208 or $.42 per share, compared to $1,265,379 or $.42 per share for the first quarter of 2010. This represents a decrease of $14,171 or 1.12% from the prior year. The key components of net income are discussed in the following paragraphs.
    For the first quarter of 2011 compared to 2010, net interest income decreased $80,927 (2.10%). While balances of interest-bearing assets and liabilities increased, lower yields caused overall reductions in both interest revenues and expense. Although average total interest-earning assets increased $19.2 million (5.42%), decreased rates offset any revenue increases attributable to volume. Average interest-bearing liabilities increased $9.8 million (4.02%) while experiencing reduced related expense, again due to rate reductions.
    The tax-equivalent quarterly yield on interest-earning assets decreased by 47 basis points from 5.09% for first quarter 2010 to 4.62% in 2011. The quarterly yield on interest-bearing liabilities decreased by 19 basis points from .84% in 2010 to .65% in 2011. In combination, these shifts contribute to a decrease in net margin on interest-earning assets of 32 basis points.
    The Company’s net interest income is one of the most important factors in evaluating its financial performance. Management uses interest rate sensitivity analysis to determine the effect of rate changes. Net interest income is projected over a one-year period to determine the effect of an increase or decrease in the prime rate of 100 basis points. If prime were to decrease one hundred basis points, and all assets and liabilities maturing within that period were fully adjusted for the rate change, the Company would experience a decrease of approximately 4.9% in net interest income. Conversely, if prime were to increase one hundred basis points, and all assets and liabilities maturing within that period were fully adjusted for the rate change, the Company would experience an increase in net interest income of the same percentage. The sensitivity analysis does not consider the likelihood of these rate changes nor whether management’s reaction to this rate change would be to reprice its loans or deposits or both.

 

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    The following table presents information including average balances of interest-earning assets and interest-bearing liabilities, the amount of related interest income and interest expense, and the resulting yields by category of interest-earning asset and interest-bearing liability. In this table, dividends and interest on tax-exempt securities and loans are reported on a fully taxable equivalent basis, which is a non-GAAP measure as defined in SEC Regulation G and Item 10 of SEC Regulation S-K. Management believes that these measures provide better yield comparability as a tool for managing net interest income.

Average Balances, Interest, and Yields
For the quarter ended For the quarter ended
March 31, 2011 March 31, 2010
Average     Average    
balance Interest Yield balance Interest Yield
           
Assets            
  Federal funds sold  $   33,530,469  $        14,480 0.18%  $   29,389,496  $        11,956 0.16%
  Interest-bearing deposits       10,941,834            14,675 0.54%         9,956,179            19,496 0.79%
  Investment securities       88,884,897          289,164 1.32%       71,006,973          411,297 2.35%
  Loans, net of allowance     239,372,627       3,930,946 6.66%     243,207,854       3,992,843 6.66%
    Total interest-earning assets     372,729,827       4,249,265 4.62%     353,560,502       4,435,592 5.09%
Noninterest-bearing cash       15,298,687           15,383,108    
Other assets       14,810,421           15,924,931    
        Total assets  $ 402,838,935      $ 384,868,541    
           
Liabilities and Stockholders' Equity            
Interest-bearing deposits            
  NOW   $   59,716,925            51,333 0.35%  $   54,539,056            49,383 0.37%
  Money market       44,655,962            54,071 0.49%       36,294,849            44,647 0.50%
  Savings       47,721,463            40,663 0.35%       47,316,166            57,861 0.50%
  Other time       97,753,213          257,407 1.07%       99,652,437          347,969 1.42%
    Total interest-bearing deposits     249,847,563          403,474 0.65%     237,802,508          499,860 0.85%
Securities sold under agreements to repurchase & federal funds purchased         4,472,621              5,401 0.49%         6,652,091              8,152 0.50%
Borrowed funds                        -                      -                44,159                 695 6.38%
    Total interest-bearing liabilities     254,320,184          408,875 0.65%     244,498,758          508,707 0.84%
Noninterest-bearing deposits       74,127,013           68,253,940    
    328,447,197          408,875 0.50%     312,752,698          508,707 0.66%
Other liabilities            346,740                504,585    
Stockholders' equity       74,044,998           71,611,258    
        Total liabilities and            
        stockholders' equity  $ 402,838,935      $ 384,868,541    
Net interest spread     3.97%     4.25%
Net interest income    $   3,840,390      $   3,926,885  
Net margin on interest-earning assets     4.18%     4.50%
           
Tax equivalent adjustment in:            
    Investment income    $        21,855      $        35,075  
    Loan income    $        40,325      $        32,673  

 

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    Provisions for loan losses of $145,400 and $421,000 were recorded during the three months ended March 31, 2011 and 2010, respectively. Net loans charged-off were $8,286 and $370,411 during the first quarters of 2011 and 2010, respectively. Management expects additional losses to occur during 2011, and those losses may be significant. Provisions for anticipated losses are included in the ALLL. The decrease in loan losses from first quarter 2010 to 2011 results from the timing of events which trigger the recognition of loss. See Loan Quality and the Allowance for Loan Losses for a discussion of the provision for loan losses.
    Noninterest revenue for the first quarter of 2011 is $189,240 (29.65%) lower than the comparable period last year. Non-recurring gains on sale of assets in 2010 account for most of this variance. In 2010 the Bank liquidated an inventory of old coin much of which has high precious metal content. Also, in the first quarter of 2010, the Delaware Department of Transportation purchased a portion of the Company’s property in Ocean View for expansion of the adjacent highway. Gains on these two transactions comprised $143,315 of 2010 non-interest revenue. Included in miscellaneous revenue in 2010 were proceeds totaling $45,000 from the granting of easements related to the Ocean View roadway expansion.
    Noninterest expense for the first quarter of 2011 is $19,604 (.94%), more than last year. While most noninterest expense categories are slightly lower or flat, employee benefits increased by $111,766 (44.56%). The most significant increase is in the cost of group insurance which increased $109,106 (78.60%).
    Income taxes for the quarter ended March 31, 2011 are the same amount as last year, on a pre-tax income decrease of $14,171. This is consistent with the Company’s effective tax rate of approximately 36.3%.

Plans of Operation

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

 

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Capital Resources and Adequacy

    Total stockholders’ equity increased $1,034,018 from December 31, 2010 to March 31, 2011. This increase is attributable to comprehensive income recorded during the period, as detailed in Note 2 of the Notes to Financial Statements.
    Under the capital guidelines of the Federal Reserve Board and the FDIC, the Company and Bank are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common stockholders' equity less accumulated other comprehensive income. In addition, the Company and the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 4%, but this minimum ratio is increased by 100 to 200 basis points for other than the highest-rated institutions.
    Tier one risk-based capital ratios of the Company as of March 31, 2011 and December 31, 2010 were 32.3% and 33.0%, respectively. Both are substantially in excess of regulatory minimum requirements.

Website Access to SEC Reports

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

    The Company’s principal market risk exposure relates to interest rates on interest-earning assets and interest-bearing liabilities. Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management monitors and seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
    At March 31, 2011, the Company’s interest rate sensitivity, as measured by gap analysis, showed the Company was asset-sensitive with a one-year cumulative gap of 21.83%, as a percentage of interest-earning assets. Generally asset-sensitivity indicates that assets reprice more quickly than liabilities and in a rising rate environment net interest income typically increases. Conversely, if interest rates decrease, net interest income would decline. The Bank has classified its demand mortgage and commercial loans as immediately repriceable. Unlike loans tied to prime, these rates do not necessarily change as prime changes since the decision to call the loans or change the rates rests with management.

 

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Item 4. Controls and procedures

    Disclosure controls and procedures are designed and maintained by the Company to ensure that information required to be disclosed in the Company’s publicly filed reports is recorded, processed, summarized and reported in a timely manner. Such information must be available to management, including the Chief Executive Officer (CEO) and Treasurer, to allow them to make timely decisions about required disclosures. Even a well-designed and maintained control system can provide only reasonable, not absolute, assurance that its objectives are achieved. Inherent limitations in any system of controls include flawed judgment, errors, omissions, or intentional circumvention of controls.
    The Company’s management, including the CEO and Treasurer, performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2011. Based on that evaluation, the Company’s management, including the CEO and Treasurer, has concluded that the Company’s disclosure controls and procedures are effective. The projection of an evaluation of controls to future periods is subject to the risk that procedures may become inadequate due to changes in conditions including the degree of compliance with procedures.

Changes in Internal Controls

    During the quarter ended on the date of this report, there were no significant changes in the Company’s internal control over financial reporting that have had or are reasonably likely to have a material effect on the Company’s internal control over financial reporting. As of March 31, 2011, the Company’s management, including the CEO and Treasurer, has concluded that the Company’s internal controls over financial reporting are effective.

 

 

Part II. Other Information

Item 1. Legal Proceedings
    Not applicable

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

 

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

    Company publicly announced on August 14, 2003, that it would repurchase up to 10% of its outstanding equity stock at that time. As of January 1, 2005, and again on May 18, 2007, this plan was renewed by public announcement, making up to 10% of the Company’s outstanding equity stock available for repurchase at the time of each renewal. On January 13, 2010, as part of its capital planning, the Board of Directors voted to temporarily suspend the stock buy-back program. On February 9, 2011, the Board of Directors voted to suspend this program indefinitely.
    There is no set expiration date for this program. No other stock repurchase plan or program existed or exists simultaneously, nor has any other plan or program expired during the period covered by this table. Common shares repurchased under this plan are retired. From its inception through December 31, 2009, 239,492 shares were retired under this program. No shares were retired during 2010 or year-to-date 2011.

    The following table presents high and low bid information obtained from the Over the Counter Bulletin Board and from other trades known to management of the Company. Because transactions in the Company’s common stock are infrequent and are often negotiated privately between the persons involved in those transactions, actual prices may be higher or lower than those included in this table. Additionally, the number of shares traded at high or low prices may vary significantly. There is no established public trading market in the stock, and there is no likelihood that a trading market will develop in the near future.

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

 


Item 3. Defaults Upon Senior Securities
    Not applicable

Item 4. (Removed and Reserved)

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

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

 

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Exhibit 31.1

Rule 13a-14(a) Certification of the Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Raymond M. Thompson, certify that:

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

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

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

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

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the most recent fiscal quarter that has or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

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

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Calvin B. Taylor Bankshares, Inc.

Date: May 9, 2011

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

 

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Exhibit 31.2

Rule 13a-14(a) Certification of the Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jennifer G. Hawkins, certify that:

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

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

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

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

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the most recent fiscal quarter that has or is reasonably likely to materially affect the registrant’s internal control over financial reporting; and

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

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Calvin B. Taylor Bankshares, Inc.

Date: May 9, 2011

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

 

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Exhibit 31.2Exhibit 32
Certification - Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

We, the undersigned, certify that to the best of our knowledge, based upon a review of the Quarterly Report on Form 10-Q for the period ended March 31, 2011, of Calvin B. Taylor Bankshares, Inc:

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

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

 

Calvin B. Taylor Bankshares, Inc.

Date: May 9, 2011

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

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

 

 

 

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Calvin B. Taylor Bankshares, Inc.

Date: May 9, 2011

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

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

 

 

 

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