SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13(a) OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2002
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(a) or 15(d)
of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest
practicable date: The registrant had 3,240,000 shares of
common stock ($1.00 par) outstanding as of July 31, 2002.
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 7-11
Item 3 Quantitative and Qualitative Disclosures
About Market Risks 11
Part II - Other Information
Item 1 Legal Proceedings 12
Item 2 Changes in Securities and Use of
Proceeds 12
Item 3 Defaults Upon Senior Securities 12
Item 4 Submission of Matters to a Vote of
Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
Signatures 13
Attachment: Certification of Principal Executive
Officer and Principal Financial Officer 14
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part I - Financial Information
Consolidated Balance Sheets
(unaudited)
June December
2002 2001
Assets
Cash and due from banks $ 16,641,473 $ 18,397,266
Federal funds sold 47,181,444 54,389,656
Interest-bearing deposits 979,518 879,000
Investment securities available
for sale 4,035,534 3,974,099
Investment securities held to
maturity (approximate fair
value of $98,673,000 and
$85,604,080) 97,807,644 84,398,152
Loans, less allowance for loan
losses of $2,167,627 and
$2,195,922 172,579,860 166,501,512
Premises and equipment 6,016,694 5,895,275
Accrued interest income 2,129,605 1,753,816
Deferred income taxes 113,215 134,639
Other assets 398,071 501,152
$347,883,058 $336,824,567
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 67,322,928 $ 60,508,663
Interest-bearing 217,193,200 213,640,518
284,516,128 274,149,181
Securities sold under
agreements to repurchase 4,526,498 4,555,323
Accrued interest payable 354,707 529,348
Note payable 207,433 215,702
Accrued income taxes 123,758 2,298
Other liabilities 1,822 130,145
289,730,346 279,581,997
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 37,150,192 36,274,102
57,680,192 56,804,102
Net unrealized gain on
securities available
for sale 472,520 438,468
58,152,712 57,242,570
$347,883,058 $336,824,567
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
For the three months ended June 30,
2002 2001
Interest and dividend revenue
Loans, including fees $ 3,379,640 $ 3,622,418
U.S. Treasury and Agency
securities 927,630 798,692
State and municipal securities 62,122 92,535
Federal funds sold 169,215 351,967
Deposits with banks 10,417 12,076
Equity securities 6,948 4,769
Total interest and dividend
revenue 4,555,972 4,882,457
Interest expense
Deposit interest 1,027,029 1,526,482
Other 9,036 15,801
Total interest expense 1,036,065 1,542,283
Net interest income 3,519,907 3,340,174
Provision for loan losses - -
Net interest income after
provision for loan losses 3,519,907 3,340,174
Other operating revenue
Service charges on deposit
accounts 253,727 206,734
Miscellaneous revenue 138,097 160,814
Total other operating revenue 391,824 367,548
Other expenses
Salaries and employee benefits 858,642 810,247
Occupancy 105,010 76,655
Furniture and equipment 119,319 147,687
Other operating 459,583 399,662
Total other expenses 1,542,554 1,434,251
Income before income taxes 2,369,177 2,273,471
Income taxes 829,000 781,979
Net income $ 1,540,177 $ 1,491,492
Basic earnings per share $ 0.47 $ 0.46
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
For the six months ended June 30,
2002 2001
Interest and dividend revenue
Loans, including fees $ 6,640,117 $ 7,198,542
U.S. Treasury and Agency
securities 1,802,016 1,695,103
State and municipal securities 123,160 186,948
Federal funds sold 389,732 613,251
Deposits with banks 20,939 24,048
Equity securities 22,106 19,472
Total interest and dividend
revenue 8,998,070 9,737,364
Interest expense
Deposit interest 2,187,427 3,039,738
Other 19,418 31,844
Total interest expense 2,206,845 3,071,582
Net interest income 6,791,225 6,665,782
Provision for loan losses - -
Net interest income after
provision for loan losses 6,791,225 6,665,782
Other operating revenue
Service charges on deposit
accounts 472,447 409,121
Miscellaneous revenue 232,555 243,327
Total other operating revenue 705,002 652,448
Other expenses
Salaries and employee benefits1,722,832 1,652,394
Occupancy 224,326 204,687
Furniture and equipment 276,804 290,157
Other operating 931,975 812,232
Total other expenses 3,155,937 2,959,470
Income before income taxes 4,340,290 4,358,760
Income taxes 1,520,200 1,510,412
Net income $ 2,820,090 $ 2,848,348
Basic earnings per share $ 0.87 $ 0.88
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
For the six months ended June 30,
2002 2001
Cash flows from operating activities
Interest received $ 8,571,635 $ 9,575,982
Fees and commissions received 704,900 691,617
Interest paid (2,381,486) (3,053,758)
Cash paid to suppliers and
employees (2,895,906) (2,837,651)
Income taxes paid (1,396,787) (1,475,723)
2,602,356 2,900,467
Cash flows from investing activities
Proceeds from maturities of
investment securities 34,875,000 32,185,000
Purchase of investment
securities held to
maturity (43,239,805) (17,133,193)
Certificates of deposit
purchased, net of
redemptions (100,518) -
Purchases of premises, equipment,
and intangibles (408,542) (437,589)
Loans made, net of principal
collected (6,078,348) (3,012,571)
Proceeds from sales of equipment - 17,000
(14,952,213) 11,618,647
Cash flows from financing activities
Net change in time deposits (6,301,875) 5,158,643
Net change in other deposits 16,668,822 4,661,410
Net change in repurchase
agreements (28,825) 1,153,018
Payment on mortgage obligation (8,270) (7,789)
Dividend paid (1,944,000) -
8,385,852 10,965,282
Net increase (decrease) in cash(3,964,005) 25,484,396
Cash and equivalents at
beginning of period 72,786,922 31,499,806
Cash and equivalents at
end of period $ 68,822,917 $ 56,984,202
Reconciliation of net income to net
cash provided from operating
activities
Net income $ 2,820,090 $ 2,848,348
Adjustments
Depreciation and
amortization 307,928 241,113
Deferred income tax - -
Provision for loan losses - -
Security discount accretion,
net of premium amortization (50,646) (34,900)
(Gain) loss on disposition
of assets 8,343 (13,932)
Decrease (increase) in accrued
interest receivable and
other assets (301,856) (113,960)
Increase (decrease) in accrued
interest payable and
other liabilities (181,503) (26,202)
$ 2,602,356 $ 2,900,467
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Notes to Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance
with generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q. Accordingly, they do not include all the
information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, all adjustments considered
necessary for a fair presentation have been made. These
adjustments are of a normal recurring nature. Results of
operations for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be
expected for the year ending December 31, 2002. For
further information, refer to the audited consolidated
financial statements and related footnotes for the
Registrant's fiscal period ended December 31, 2001.
Consolidation has resulted in the elimination
of all significant intercompany accounts and
transactions.
Cash Flows
For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from
banks and overnight investments in federal funds sold.
Per share data
Earnings per common share and dividends per
common share are determined by dividing net income and
dividends by the 3,240,000 shares outstanding, giving
retroactive effect to stock dividends distributed.
2. Comprehensive Income
Comprehensive income consists of:
Six months ended June 30,
2002 2001
Net income $ 2,820,090 $ 2,848,348
Unrealized gain (loss) on
investment securities
available for sale, net of
income taxes 34,052 (35,381)
Comprehensive income $ 2,854,142 $ 2,812,967
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. The
Company currently engages in no business other than owning
and managing the Banks.
Calvin B. Taylor Banking Company of Berlin, Maryland
(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 bank opened late in the second quarter of
1998, offering the same services as the Maryland bank,.
Financial Condition
Total assets of the Company increased $11.1 million
from December 31, 2001 to June 30, 2002. Combined deposits
and customer repurchase agreements increased $10.3 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. During this year-to-
date, this traditional pattern has not applied. Management
believes that adverse conditions in the stock markets have
contributed to an unusually large increase in deposits
throughout the first half of 2002.
During the first six months of 2002, the banks'
loan portfolios have increased $6.1 million. Funding for
these loans was provided by the deposit influx which has
occurred over the past three quarters. This increase in
loans does not negatively impact the Company's ability to
meet liquidity demands.
The allowance for loan losses represents a reserve
for potential losses in the loan portfolio. The adequacy of
the allowance for loan losses is evaluated periodically based
on a review of all significant loans, with a particular
emphasis on non-accruing, past due, and other loans that
management believes require attention. The determination of
the reserve level rests upon management's judgment about
factors affecting loan quality and anticipated changes in the
composition and size of the portfolio, as well as assumptions
about the economy. Historically, the Company has low loan
charge-offs. The banks' target levels for their allowances
as a percentage of gross loans range from approximately 1.00%
to 1.35%. Based on review of the consolidated loan
portfolio, the Company determined that an allowance of 1.24%
of gross loans was adequate as of June 30, 2002. At December
31, 2001, the allowance was 1.30% of gross loans. At June
30, 2002, there were no non-accruing loans. Loans delinquent
ninety days or more totaled $207,331 or .12% of the
portfolio.
Liquidity
The company's major sources of liquidity are loan
repayments, maturities of short-term investments including
federal funds sold, and increases 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
57.28% for the second quarter of 2002 compared to 58.36% for
the first quarter of 2002 and 48.05% for the second quarter
of 2001. This increase in liquidity is primarily due to the
rapid growth in deposits which has not been accompanied by a
corresponding increase in demand for loans.
Results of Operations
Net income for the three months ended June 30,
2002, was $1,540,177 or $.47 per share, compared to
$1,491,492 or $.46 per share for the first quarter of 2001.
This represents an increase of $48,685 or 3.26% from the
prior year. Year to date net income has decreased $28,258 or
$.01 per share from $2,848,348 or $.88 per share in 2001 to
$2,820,090 or $.87 per share in 2002. The key components of
net income are discussed in the following paragraphs.
Net interest income increased $125,443 in the first
six months of 2002 as compared to the first six months of
2001. This increase is attributable to a higher volume of
earning assets. 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 five percent in net
interest income. The sensitivity analysis does not consider
the likelihood of these rate changes nor whether management's
reaction to this rate change would be to reprice its loans or
deposits.
No provision for loan losses was made in the first
half of 2002 or 2001. Net charge-offs during the second
quarter of 2002 and the year-to-date were $20,920 and
$28,295, respectively.
Personnel expenses are higher for the six months ended
June 30, 2002 compared to the same period in 2001 due to
general increases in salaries and increased cost of group
insurance. The banks employed 102 full time equivalent
employees as of June 30, 2002, a decrease of four employees
from June 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 increased $19.6
thousand from first half 2001 to 2002. This is due to the
amortization of prepaid property taxes which began in mid-
2001, netted against reductions in repairs and maintenance
costs due to improved classification of equipment repairs.
In the same six month period, furniture and equipment expense
decreased by $13.4 thousand. Increases in depreciation and
repairs and maintenance costs were offset by improved
classification of software maintenance contracts from
furniture and equipment to other operating expense. Also, in
2001 the company paid two years' personal property taxes due
to the timing of municipal billings. As a result of upgrades
to the Company's computer systems made throughout 2001,
depreciation and hardware and software maintenance costs have
increased, as expected.
Other operating expenses are $119.7 thousand higher in
the first half of 2002 versus the first half of 2001.
Telephone expense has increased $38.8 thousand due to internet
and network demands, and correspondent bank fees are $49.8
thousand higher as a result of low interest rates generating
less earning credit to offset fees. Software maintenance
contract costs contribute $48.7 thousand of this increase due
to improved classification as other operating expense versus
furniture and equipment expense.
Income taxes are higher on lower pre-tax income due to
an increase in the Company's effective tax rate. This is the
result of tax-favored income becoming a smaller percentage of
total revenues.
Plans of Operation
The banks conduct general commercial banking
businesses in their service areas, of Worcester County,
Maryland and Sussex County, Delaware, 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/STAR 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.
The banks have submitted applications to their primary
regulators, State of Maryland Division of Financial
Regulation and Delaware State Bank Commissioner, and to the
Federal Deposit Insurance Corporation, to combine by merger
and branch acquisition into one commercial bank effective at
the close of business on September 26, 2002. The resultant
bank will be Calvin B. Taylor Banking Company of Berlin,
Maryland. Calvin B. Taylor Bank of Delaware will cease to
exist, and the location that has served as its main office
and its only branch will continue to serve customers as a
branch of the Maryland bank. Service, hours and staff will
not change significantly at the Delaware location as a result
of this transaction. Convenience will increase for customers
of the Delaware bank due to availability of certain
additional services, such as Internet banking, which will be
offered to Delaware-based customers after the merger.
Because the banks are both 100% owned by the Company, this
transaction will be recorded as a pooling of interests. No
assets, liabilities or equity accounts will transfer to the
resultant bank at other than their book value immediately
prior to combination. The boards of directors of each bank
and of the Company, as sole shareholder of the banks, have
approved this merger and branch acquisition.
Capital Resources and Adequacy
Total stockholders' equity increased $910,142 from
December 31, 2001 to June 30, 2002. This increase is
attributable to the comprehensive income of $2,854,142
recorded during the period, as detailed in Note 2 of the
Notes to Financial Statements, reduced by payment of a cash
dividend of $1,944,000.
Under the capital guidelines of the Federal Reserve
Board and the FDIC, the Company and its banks are currently
required to maintain a minimum risk-based total capital ratio
of 8%, with at least 4% being Tier 1 capital. Tier 1 capital
consists of common shareholders' equity, qualifying perpetual
preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, less certain intangibles. In
addition, the Company and the banks must maintain a minimum
Tier 1 leverage ratio (Tier 1 capital to total assets) of at
least 3%, but this minimum ratio is increased by 100 to 200
basis points for other than the highest-rated institutions.
Tier one risk-based capital ratios of the Company
as of June 30, 2002 and 2001 were 36.26% and 35.80%,
respectively. Both are substantially in excess of regulatory
minimum requirements.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
The Company's principal market risk exposure
relates to interest rates on interest-earning assets and
interest-bearing liabilities. Unlike most industrial
companies, the assets and liabilities of financial
institutions such as the Company and the banks are primarily
monetary in nature. Therefore, interest rates have a more
significant effect on the Company's performance than do the
effects of changes in the general rate of inflation and
change in prices. In addition, interest rates do not
necessarily move in the same direction or in the same
magnitude as the prices of goods and services. As discussed
previously, management monitors and seeks to manage the
relationships between interest sensitive assets and
liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
At June 30, 2002 the Company's interest rate
sensitivity, as measured by gap analysis, showed the Company
was asset-sensitive with a one-year cumulative gap of 20.12%,
as a percentage of interest-earning assets. Generally asset-
sensitivity indicates that assets reprice more quickly than
liabilities and in a rising rate environment net interest
income typically increases. Conversely, if interest rates
decrease, net interest income would decline. Both banks have
classified their demand mortgage and commercial loans as
immediately repricing. Unlike loans tied to prime, these
rates do not necessarily change as prime changes since the
decision to call the loans and change the rates rests with
management.
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part II. Other Information
Item 1 Legal Proceedings
Not applicable
Item 2 Changes in Securities and Use of Proceeds
Not applicable
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of
Security Holders
The Company held its annual meeting on
May 8, 2002, during which the items detailed
in the proxy statement dated March 15, 2002,
were approved. This includes the reelection
of the Board of Directors.
Item 5 Other information
Not applicable.
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits
2. Proxy Statement dated March 15, 2002,
is incorporated by reference.
b) Reports on Form 8-K
There were no reports on Form 8-K filed for the
quarter ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, 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: August 8, 2002 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.,
Chairman & Chief Executive Officer
Date: August 8, 2002 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
Certification of Principal Executive Officer
and Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
We, the undersigned, certify that to the best of our
knowledge, based upon a review of the Quarterly Report on
Form 10-Q for the period ended June 30, 2002 of the
Registrant (the "Report"):
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Registrant.
Calvin B. Taylor Bankshares, Inc.
Date: August 8, 2002 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.,
Chairman & Chief Executive Officer
(Principal Executive Officer)
Date: August 8, 2002 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)