SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
Commission File Number: 0001003986
CALVIN B. TAYLOR BANKSHARES, INC.
I.R.S. Employer Identification No.: 52-1948274
State of incorporation: Maryland
Address of principal executive offices: 24 North Main
Street, Berlin, Maryland 21811
Issuer's telephone number: (410) 641-1700
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days. YES X NO
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest
practicable date: The registrant had 3,240,000 shares
of common stock ($1.00 par) outstanding as of October
31, 2001.
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Form 10-Q
Index
Part I - Financial Information
Page
Item 1 Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operation 7-10
Item 3 Quantitative and Qualitative Disclosures
About Market Risks 10
Part II - Other Information
Item 1 Legal Proceedings 11
Item 2 Changes in Securities and Use of Proceeds 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security
Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part I - Financial Information
Consolidated Statements of Condition
(unaudited)
September 30 December 31
2001 2000
Assets
Cash and due from banks 16,956,191 13,332,279
Federal funds sold 50,130,391 18,167,527
Interest-bearing deposits 784,000 784,000
Investment securities available for sale 3,634,477 4,052,934
Investment securities held to maturity
(approximate fair value of $89,113,635
and $76,610,933) 86,354,239 76,273,558
Loans, less allowance for credit losses
of $2,177,132 and $2,192,755 167,865,919 168,571,199
Premises and equipment 5,920,941 5,620,478
Accrued interest income 1,734,334 1,948,199
Deferred income taxes 119,615 107,227
Other assets 296,736 190,610
333,796,843 289,048,011
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing 64,466,220 49,674,943
Interest-bearing 206,061,017 182,251,249
270,527,237 231,926,192
Securities sold under agreements to
repurchase 5,109,388 3,113,671
Accrued interest payable 560,378 503,519
Note payable 219,745 231,517
Accrued income taxes 57,132 103,818
Other liabilities 8,182 84,085
276,482,062 235,962,802
Stockholders' equity
Common stock, par value $1 per share
authorized 10,000,000 shares,
issued and outstanding 3,240,000
shares 3,240,000 3,240,000
Additional paid in capital 17,290,000 17,290,000
Retained earnings 36,307,758 32,058,498
56,837,758 52,588,498
Net unrealized gain on securities
available for sale 477,023 496,711
57,314,781 53,085,209
333,796,843 289,048,011
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
For the three months ended
September
2001 2000
Interest and dividend revenue
Loans, including fees 3,526,900 3,388,391
U.S. Treasury and Agency securities 894,005 971,672
State and municipal securities 74,748 102,288
Federal funds sold 490,283 580,011
Deposits with banks 11,622 10,792
Equity securities 6,314 3,289
Total interest and dividend revenue 5,003,872 5,056,443
Interest expense
Deposit interest 1,602,832 1,487,745
Other 23,843 10,994
Total interest expense 1,626,675 1,498,739
Net interest income 3,377,197 3,557,704
Provision for credit losses - 23,000
Net interest income after
provision for credit losses 3,377,197 3,534,704
Other operating revenue
Service charges on deposit accounts 199,001 177,679
Miscellaneous revenue 131,250 119,726
Total other operating revenue 330,251 297,405
Other expenses
Salaries and employee benefits 856,231 752,985
Occupancy 128,106 162,591
Furniture and equipment 155,494 67,566
Other operating 388,292 427,226
Total other expenses 1,528,123 1,410,368
Income before income taxes 2,179,325 2,421,741
Income taxes 778,413 837,824
Net income 1,400,912 1,583,917
Basic earnings per share 0.43 0.49
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
For the nine months ended
September
2001 2000
Interest and dividend revenue
Loans, including fees 10,725,442 10,038,406
U.S. Treasury and Agency securities 2,589,108 2,724,551
State and municipal securities 261,696 304,950
Federal funds sold 1,103,534 1,260,948
Deposits with banks 35,670 33,130
Equity securities 25,786 18,104
Total interest and dividend revenue 14,741,236 14,380,089
Interest expense
Deposit interest 4,642,570 4,313,238
Other 55,687 19,491
Total interest expense 4,698,257 4,332,729
Net interest income 10,042,979 10,047,360
Provision for credit losses - 106,080
Net interest income after
provision for credit losses 10,042,979 9,941,280
Other operating revenue
Service charges on deposit accounts 608,122 539,752
Miscellaneous revenue 374,577 313,135
Total other operating revenue 982,699 852,887
Other expenses
Salaries and employee benefits 2,508,625 2,296,553
Occupancy 332,793 473,213
Furniture and equipment 445,651 398,115
Other operating 1,200,524 1,221,279
Total other expenses 4,487,593 4,389,160
Income before income taxes 6,538,085 6,405,007
Income taxes 2,288,825 2,218,638
Net income 4,249,260 4,186,369
Basic earnings per share 1.31 1.29
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
For the nine months ended
September
2001 2000
Cash flows from operating activities
Interest received 14,847,228 14,583,888
Fees and commissions received 1,021,867 868,831
Interest paid (4,641,398) (4,276,398)
Cash paid to suppliers and employees (4,276,194) (4,012,433)
Income taxes paid (2,335,511) (2,149,480)
4,615,992 5,014,408
Cash flows from investing activities
Proceeds from maturities of investment
securities 47,747,000 45,935,000
Purchase of investment securities held
to maturity (57,333,426) (35,162,275)
Certificates of deposit purchased,
net of redemptions 199,000
Purchases of premises, equipment,
and inttangibles (750,060) (420,042)
Loans made, net of principal collected 705,280 (10,388,035)
Proceeds from sales of equipment 17,000 423
(9,614,206 164,071
Cash flows from financing activities
Net change in time deposits 14,054,954 2,909,579
Net change in other deposits 24,546,091 2,297,033
Net change in repurchase agreements 1,995,717 4,432,764
Payment on mortgage obligation (11,772) (14,675)
Dividend paid - -
40,584,990 9,624,701
Net increase (decrease) in cash 35,586,776 14,803,180
Cash and equivalents at beginning of period 31,499,806 34,423,959
Cash and equivalents at end of period 67,086,582 49,227,139
Reconciliation of net income to net cash
provided from operating activities
Net income 4,249,260 4,186,369
Adjustments
Depreciation and amortization 380,284 367,366
Deferred income tax -
Provision for loan losses - 106,080
Security discount accretion, net of
premium amortization (107,873) (37,170)
(Gain) loss on disposition of assets (13,933) -
Decrease (increase) in accrued interest
receivable and other assets 173,984 256,913
Increase (decrease) in accrued interest
payable and other liabilities (65,730) 134,850
4,615,992 5,014,408
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Notes to Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in
accordance with generally accepted accounting
principles for interim financial information and
with the instructions to Form 10-Q. Accordingly,
they do not include all the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In
the opinion of management, all adjustments
considered necessary for a fair presentation have
been made. These adjustments are of a normal
recurring nature. Results of operations for the
nine months ended September 30, 2001 are not
necessarily indicative of the results that may be
expected for the year ending December 31, 2001. For
further information, refer to the audited
consolidated financial statements and related
footnotes for the Registrant's fiscal period ended
December 31, 2000.
Consolidation has resulted in the elimination of
all significant intercompany accounts and transactions.
Cash Flows
For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due
from banks and overnight investments in federal
funds sold.
Per share data
Earnings per common share and dividends per
common share are determined by dividing net income
and dividends by the 3,240,000 shares outstanding,
giving retroactive effect to stock dividends
distributed.
2. Comprehensive Income
Comprehensive income consists of:
Nine months ended
September 30,
2001 2000
Net income $4,249,260 $4,186,369
Unrealized gain (loss) on
investment securities
available for sale, net of
income taxes (19,688) 152,623
Comprehensive income $4,229,572 $4,338,992
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion contains certain forward-
looking statements within the meaning of and made
pursuant to the safe harbor provisions of the Private
Litigation Securities Reform Act of 1995.
The following discussion of the financial condition
and results of operations of the Registrant (the
Company) should be read in conjunction with the
Company's financial statements and related notes and
other statistical information included elsewhere
herein.
General
Calvin B. Taylor Bankshares, Inc. (the "Company")
was incorporated as a Maryland corporation on October
31, 1995. The Company owns all of the stock of two
banks. Calvin B. Taylor Banking Company (the "Maryland
bank") is a commercial bank that was established in
1890 and incorporated under the laws of the State of
Maryland on December 17, 1907. This bank operates nine
banking offices in Worcester County with the Bank's
main office located in Berlin, Maryland. It is engaged
in a general commercial and retail banking business
serving individuals, businesses, and governmental units
in Worcester County, Maryland and neighboring counties.
Calvin B. Taylor Bank of Delaware (the "Delaware
bank") was incorporated in the state of Delaware in
1997. This one-branch Delaware bank, which offers the
same services as the Maryland bank, opened late in the
second quarter of 1998. The Company currently engages
in no business other than owning and managing the
Banks.
Financial Condition
Total assets of the Company increased $44.7 million
from December 31, 2000 to September 30, 2001. Combined
deposits and customer repurchase agreements increased
$40.6 million during the same period. During the first
quarter of the year, the banks typically experience a
decline in deposits since business customers are using
their deposits to meet cash flow needs. Generally,
this situation reverses late in the second quarter of
the year as the banks receive loan repayments from
seasonal business customers, and deposits from summer
residents and tourists. Late in the third quarter,
seasonal deposits decline. Management believes that
adverse conditions in the national stock markets, which
have been amplified by the terrorist attacks of
September 11, 2001, are contributing to the sustained
high level of deposits in the banks as of September 30,
2001.
During the first nine months of 2001, the banks'
loan portfolios have decreased $721 thousand. As
market rates have declined, the banks have faced
aggressive competition for low rate loans.
The allowance for credit losses represents a
reserve for potential losses in the loan portfolio.
The adequacy of the allowance for credit losses is
evaluated periodically based on a review of all
significant loans, with a particular emphasis on non-
accruing, past due, and other loans that management
believes require attention. The determination of the
reserve level rests upon management's judgment about
factors affecting loan quality and anticipated changes
in the composition and size of the portfolio, as well
as assumptions about the economy. Historically, the
Company has low loan charge-offs. The banks' target
levels for their allowances as a percentage of gross
loans range from approximately 1.00% to 1.27%. Based
on a review of the consolidated loan portfolio, the
Company determined that an allowance of 1.28% of gross
loans was adequate as of September 30, 2001. At
December 31, 2000, the allowance was 1.28% of gross
loans. At September 30, 2001, one loan of $175,000 was
nonaccruing, representing .10% of the portfolio, and
accruing loans of $137,587 or .08% of the portfolio
were delinquent ninety days or more.
Liquidity
The company's major sources of liquidity arise from
loan repayments, short-term investments, including
federal funds sold, and an increase in core deposits.
Throughout the first quarter of the year, when the
banks typically experience a decline in deposits,
federal funds sold and investment securities are
primary sources of liquidity. During the second
quarter of the year, additional sources of liquidity
become more readily available as business borrowers
start repaying loans, and the banks receive seasonal
deposits. Throughout the second and third quarters the
banks maintain a high liquidity level.
Funds from seasonal deposits are generally invested
in short-term U.S. Treasury Bills and overnight federal
funds. Average liquid assets (cash and amounts due
from banks, interest bearing deposits in other banks,
federal funds sold, and investment securities) compared
to average deposits were 56.66% for the third quarter
of 2001 as compared to 48.05% for the second quarter of
2001 and 53.20% for the third quarter of 2000.
Results of Operations
Net income for the three months ended September 30,
2001, was $1,400,912 or $.43 per share, compared to
$1,583,917 or $.49 per share for the third quarter of
2000. This represents a decrease of $183,005 or 11.55%
from the prior year. Year to date net income increased
$62,891 or $.02 per share from $4,186,369 or $1.29 per
share in 2000 to $4,249,260 or $1.31 per share in 2001.
Significant reasons for the year to date increase in
net income are increased non-interest income and a
reduction of the provision for credit losses, offset in
part by a decrease in net interest income and increased
operating expenses.
Net interest income decreased $4,381 in the first
nine months of 2001 as compared to the first nine
months of 2000. Net interest income decreased $180,507
in the three months ended September 30, 2001 as
compared to the three months ended September 30, 2000.
This decrease, both year-to-date and for the most
recent quarter, is attributable to the overall
reduction of rates on earning assets, and the growth of
interest-bearing deposits which are invested in U. S.
treasury securities and low yielding overnight federal
funds. Management views the influx of deposits as
temporary and has chosen not to invest in longer term
investment vehicles. The Company's net interest income
is one of the most important factors in evaluating its
financial performance. Management uses interest
sensitivity analysis to determine the effect of rate
changes. Net interest income is projected over a one-
year period to determine the effect of an increase or
decrease in the prime rate of 100 basis points. If
prime were to decrease one hundred basis points, and
all assets and liabilities maturing within that period
were fully adjusted for the rate change, the Company
would experience a decrease of less than six percent in
net interest income. The sensitivity analysis does not
consider the likelihood of these rate changes nor
whether management's reaction to this rate change would
be to reprice its loans or deposits.
No provision for loan losses was made in the three
quarters of 2001, versus a $106,080 provision in same
period in 2000. Net charge-offs during the third
quarter of 2001, and the year-to-date, were $10,143
and $15,623, respectively.
Other operating revenue, including service charges
on deposit accounts, increased $33 thousand from third
quarter 2000 to third quarter 2001. For the year to
date, other operating revenue has increased $130
thousand from 2000 to 2001. Revenue increases are
primarily due to deposit services charges assessed
against a larger deposit base, and fees related to
increased ATM and VISA debit card use.
Personnel expenses are higher for the nine months
ended September 30, 2001 compared to the same period in
2000 due to general increases in salaries and the
addition of two new positions, as well as increased
health care costs. The banks employed 98 full time
equivalent employees as of September 30, 2001. The
Maryland bank hires seasonal employees during the
summer. The Company has no employees other than those
hired by the banks.
The Company's occupancy expense decreased $140
thousand from first three quarters of 2000 to 2001. Of
this, $39 thousand was due to the relocation, in 2000,
of vehicular access to a branch, which was necessary
due to road construction. Also in 2000, the Maryland
bank consolidated two branches in Pocomoke Maryland,
and incurred cost to move and otherwise dispose of
assets from the abandoned branch. In 2001, the banks
changed their accounting for real property taxes from
cash basis to amortizing the cost throughout the year.
Furniture and fixture expenses increased $48
thousand from the first three quarters of 2000 to 2001.
Depreciation associated with the replacement and
upgrade of the banks' computer equipment comprises most
of the increase. Although the Company's current data
processing equipment meets the needs of the banks, it
is nearing the end of its economic life. The Company
expects to replace its core processing system in the
fourth quarter of 2001 and expects related
depreciation, maintenance costs, and software
amortization expense to increase with this replacement.
Prior to the installation of the new processing system,
improved data storage, networking, and Internet banking
systems are planned. It is anticipated that these,
too, will cause an increase in related costs.
Plans of Operation
The banks conduct general commercial banking
businesses in their service areas, of Worcester County,
Maryland and Sussex County, Delaware, while also
emphasizing the banking needs of individuals and small-
to medium-sized businesses and professional concerns.
The banks offer a full range of federally insured
deposit services that are typically available in most
banks and savings and loan associations, including
checking accounts, NOW accounts, savings accounts and
other time deposits of various types ranging from daily
money market accounts to longer-term certificates of
deposit.
The Company, through its banks, offers a full range
of short- to medium-term commercial and personal loans,
and originates mortgage loans, including real estate
construction and acquisition loans. The banks have the
intent and the ability to hold loans that they
originate in their portfolios.
Other bank services include cash management
services, safe deposit boxes, travelers checks, direct
deposit of payroll and social security checks, debit
cards, and automatic drafts for various accounts. The
Company is associated with the MAC network of automated
teller machines that may be used by customers
throughout Maryland, Delaware and other regions. The
Company offers credit card services through a
correspondent bank.
Capital Resources and Adequacy
Total stockholders' equity increased $4,229,572
from December 31, 2000 to September 30, 2001. This
increase is attributable to the comprehensive income
recorded during the period, as detailed in Note 2 of
the Notes to Financial Statements.
Under the capital guidelines of the Federal Reserve
Board and the FDIC, the Company and its banks are
currently required to maintain a minimum risk-based
total capital ratio of 8%, with at least 4% being Tier
1 capital. Tier 1 capital consists of common
shareholders' equity, qualifying perpetual preferred
stock, and minority interests in equity accounts of
consolidated subsidiaries, less certain intangibles.
In addition, the Company and the banks must maintain a
minimum Tier 1 leverage ratio (Tier 1 capital to total
assets) of at least 3%, but this minimum ratio is
increased by 100 to 200 basis points for other than the
highest-rated institutions.
Tier one risk-based capital ratios of the Company
as of September 30, 2001 and 2000 were 32.31% and
36.53%, respectively. Both are substantially in excess
of regulatory minimum requirements.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
The Company's principal market risk exposure
relates to interest rates on interest-earning assets
and interest-bearing liabilities. Unlike most
industrial companies, the assets and liabilities of
financial institutions such as the Company and the
banks are primarily monetary in nature. Therefore,
interest rates have a more significant effect on the
Company's performance than do the effects of changes in
the general rate of inflation and change in prices. In
addition, interest rates do not necessarily move in the
same direction or in the same magnitude as the prices
of goods and services. As discussed previously,
management monitors and seeks to manage the
relationships between interest sensitive assets and
liabilities in order to protect against wide interest
rate fluctuations, including those resulting from
inflation.
At September 30, 2001, the Company's interest rate
sensitivity, as measured by gap analysis, showed the
Company was asset-sensitive with a one-year cumulative
gap of 23.48%, as a percentage of interest-earning
assets. Generally asset-sensitivity indicates that
assets reprice more quickly than liabilities and in a
rising rate environment net interest income typically
increases. Conversely, if interest rates decrease, net
interest income would decline. Both banks have
classified their demand mortgage and commercial loans
as immediately repricing. Unlike loans tied to prime,
these rates do not necessarily change as prime changes
since the decision to call the loans and change the
rates rests with management.
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part II. Other Information
Item 1 Legal Proceedings
Not applicable
Item 2 Changes in Securities and Use of Proceeds
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security
Holders
Not applicable
Item 5 Other information
Not applicable.
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits
2. Proxy Statement dated March 7, 2001, is
incorporated by reference.
b) Reports on Form 8-K
There were no reports on Form 8-K filed for
the quarter ended September 30, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
Calvin B. Taylor Bankshares, Inc.
Date: November 01, 2001 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
President and Chief
Executive Officer
Date: November 01, 2001 By: /s/ William H. Mitchell
William H. Mitchell
Chief Financial Officer
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