UNITED STATES 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 QUARTERLY PERIOD ENDED MARCH 31, 2006
Commission File Number: 000-50047
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 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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer __ Accelerated filer [X] Non- accelerated filer __
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES __ NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The registrant had 3,186,014
shares of common stock ($1.00 par) outstanding as of April 30, 2006.
Page 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, 2006 and
December 31, 2005 3
Consolidated Statements of Income for the three months
ended March 31, 2006 and 2005 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005 5-6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 12
Item 4 Controls and Procedures 13
Part II - Other Information
Item 1 Legal Proceedings 14
Item 1A Risk Factors 14
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits 15-18
Signatures 19
Page 2
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Part I - Financial Information
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2006 2005
Assets
Cash and due from banks $ 19,865,647 $ 24,069,790
Federal funds sold 14,885,421 26,296,780
Interest-bearing deposits 2,220,151 2,192,731
Investment securities available for sale 6,755,411 6,505,278
Investment securities held to maturity
(approximate fair value of $97,199,326
and $111,306,528) 98,312,721 112,579,162
Loans, less allowance for loan losses
of $2,190,734 and $2,190,709 219,875,078 204,441,957
Premises and equipment 6,597,851 6,664,051
Accrued interest receivable 1,632,310 1,504,945
Computer software 205,408 228,014
Bank owned life insurance 4,406,058 4,367,744
Other assets 164,101 224,172
$ 374,920,157 $ 389,074,624
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 80,342,041 $ 88,236,133
Interest-bearing 220,077,435 222,621,474
300,419,476 310,857,607
Securities sold under agreements to repurchase 5,211,045 6,149,263
Dividend payable - 4,462,578
Accrued interest payable 236,012 177,357
Note payable 136,855 142,069
Deferred income taxes 720,462 635,336
Other liabilities 105,098 332,030
306,828,948 322,756,240
Stockholders' equity
Common stock, par value $1 per share
Authorized 10,000,000 shares,
issued and outstanding
3,186,014 shares at March 31, 2006, and
3,187,556 shares at December 31, 2005 3,186,014 3,187,556
Additional paid-in capital 15,400,765 15,454,735
Retained earnings 47,784,529 46,021,128
66,371,308 64,663,419
Accumulated other comprehensive income 1,719,901 1,654,965
68,091,209 66,318,384
$ 374,920,157 $ 389,074,624
See accompanying Notes to Consolidated Financial Statements
Page 3
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Consolidated Statements of Income (unaudited)
For the three months ended March 31,
2006 2005
Interest and dividend revenue
Loans, including fees $ 3,714,599 $ 2,883,229
U.S. Treasury and
government agency securities 731,685 771,093
State and municipal securities 47,959 73,027
Federal funds sold 137,488 180,184
Interest-bearing deposits 17,233 12,162
Equity securities 24,993 21,456
Total interest and dividend revenue 4,673,957 3,941,151
Interest expense
Deposits 639,642 356,595
Borrowings 11,048 4,419
Total interest expense 650,690 361,014
Net interest income 4,023,267 3,580,137
Provision for loan losses - -
Net interest income after
provision for loan losses 4,023,267 3,580,137
Noninterest revenue
Service charges on deposit accounts 282,220 255,598
ATM and debit card revenue 107,398 76,172
Miscellaneous revenue 86,008 97,891
Total noninterest revenue 475,626 429,661
Noninterest expenses
Salaries 835,017 766,179
Employee benefits 212,141 183,027
Occupancy 180,479 163,897
Furniture and equipment 109,158 121,711
Other operating 432,697 447,525
Total noninterest expenses 1,769,492 1,682,339
Income before income taxes 2,729,401 2,327,459
Income taxes 966,000 827,000
Net income $ 1,763,401 $ 1,500,459
Earnings per common share-basic and diluted $ 0.55 $ 0.47
See accompanying Notes to Consolidated Financial Statements
Page 4
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows (unaudited)
For the three months ended March 31,
2006 2005
Cash flows from operating activities
Interest and dividends received $ 4,507,986 $ 3,766,288
Fees and commissions received 421,970 466,133
Interest paid (592,035) (367,928)
Cash paid to suppliers and employees (1,682,583) (1,561,650)
Income taxes paid (1,054,938) (78,920)
1,600,401 2,223,923
Cash flows from investing activities
Certificates of deposit purchased,
net of maturities (1,257) -
Purchase of investments available for sale (100,000) (100,000)
Proceeds from maturities of investments held
to maturity 14,305,000 22,520,000
Purchase of investments held to maturity - (11,805,437)
Loans made, net of principal collected (15,433,121) (10,097,793)
Purchases of premises, equipment, and
computer software (60,709) (69,346)
(1,290,087) 447,424
Cash flows from financing activities
Net increase (decrease) in
Time deposits 4,237,151 (4,709,437)
Other deposits (14,675,281) 10,038,004
Securities sold under agreements
to repurchase (938,219) (1,009,976)
Payments on note payable (5,214) (4,911)
Common shares repurchased (55,512) (179,064)
Dividends paid (4,462,578) -
(15,899,653) 4,134,616
Net increase (decrease) in cash
and cash equivalents (15,589,339) 6,805,963
Cash and cash equivalents at
beginning of period 50,425,595 54,623,503
Cash and cash equivalents at end of period $ 34,836,256 $ 61,429,466
See accompanying Notes to Consolidated Financial Statements
Page 5
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows (unaudited)
For the three months ended March 31,
2006 2005
Reconciliation of net income to net cash
provided by operating activities
Net income $ 1,763,401 $ 1,500,459
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 149,515 162,880
Amortization of premiums and
accretion of discount, net (38,630) (42,661)
Decrease (increase) in
Accrued interest receivable (127,365) (132,204)
Cash surrender value of bank owned
life insurance (38,314) (37,812)
Other assets 60,071 133,463
Increase (decrease) in
Accrued interest payable 58,655 (6,914)
Accrued income taxes (97,142) 748,080
Other liabilities (129,790) (101,368)
$ 1,600,401 $ 2,223,923
Composition of cash and cash equivalents
Cash and due from banks $ 19,865,647 $ 29,187,591
Federal funds sold 14,885,421 32,181,358
Interest-bearing deposits,
except for time deposits 85,188 60,517
$ 34,836,256 $ 61,429,466
See accompanying Notes to Consolidated Financial Statements
Page 6
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America 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 of financial position and results of
operations have been made. These adjustments are of a normal recurring nature.
Results of operations for the three months ended March 31, 2006 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2006. For further information, refer to the audited consolidated
financial statements and related footnotes for the Company's year ended
December 31, 2005.
Consolidation has resulted in the elimination of all significant inter-
company 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, which was 3,186,656 and
3,207,262, for the quarters ended March 31, 2006 and 2005, respectively.
2. Comprehensive Income
Comprehensive income consists of:
Three months ended March 31,
2006 2005
Net income $ 1,763,401 $ 1,500,459
Unrealized gain (loss) on
investment securities available for sale,
net of income taxes 64,936 96,707
Comprehensive income $ 1,828,337 $ 1,597,166
3. 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, December 31,
2006 2005
Loan commitments $ 42,553,092 $ 46,097,798
Standby letters of credit $ 1,112,769 $ 1,272,000
Page 7
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Part I. 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 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. (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.
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. Management estimates the appropriate allowance for loan
losses, including the timing of loan charge-offs.
The allowance for loan losses represents a reserve for potential losses in
the loan portfolio. It is one of the most difficult and subjective judgments.
The adequacy of the allowance for loan losses is evaluated periodically based
on a review of the loan portfolio, with a particular emphasis on non-accruing,
past due, and other loans that management believes require attention. The
determination of the reserve level relies on management's judgment about factors
affecting loan quality, current trends in delinquencies and charge-offs, and
anticipated changes in the composition and size of the portfolio. Management
also considers external factors such as changes in the interest rate environ-
ment, the view of the Bank's regulators, economic conditions in the Bank's
service area and beyond, and legislation that affects the banking industry.
Financial Condition
Total assets of the Company decreased $14.2 million from December 31, 2005
to March 31, 2006. Historically, during the first quarter of the year, the Bank
experiences a decline in deposits since business customers are using their
deposits to meet cash flow needs. In the first quarter of 2006 this decline has
been larger in both dollars and percentage than in recent past years.
Page 8
Management attributes this to the rising rate environment in which competitive
pressures have increased. Generally, this situation reverses late in the second
quarter of the year as the Bank receives deposits from seasonal business
customers, summer residents and tourists. This seasonal deposit influx peaks
in the third quarter and begins to fall off in the last quarter of each year.
Average total assets decreased $16.1 million and average deposits decreased
$17.8 million from first quarter 2005 to first quarter 2006. Management
carefully monitors deposit reductions and the effect on liquidity, taking
necessary steps to retain core deposits.
During the first quarter of 2006, the Bank's gross loan portfolio has
increased $15.4 million. Funding for these loans was provided primarily by a
reduction in the Bank's investment portfolio. As loans earn at higher rate than
investments, this shift has a positive impact on earnings.
Historically, the Company has low loan charge-offs. Based on a review of
the consolidated loan portfolio, the Company determined that an allowance of
..99% of gross loans was adequate as of March 31, 2006. At December 31, 2005,
the allowance was 1.06% of gross loans. At March 31, 2006, loans delinquent
ninety days or more totaled $33,729 or .02% of the portfolio. At December 31,
2005, loans delinquent ninety days or more totaled $131,717 or .06% of the
portfolio. There were no non-accruing loans as of March 31, 2006 or December
31, 2005.
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.
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 Bank typically
experiences 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 Bank receives seasonal deposits.
Throughout the second and third quarters the Bank maintains a high liquidity
level. Funds from seasonal deposits are generally invested in short-term U.S.
Treasury Bills and overnight federal funds.
The Company has available lines of credit, including overnight federal
funds, reverse repurchase agreements and letters of credit, totaling
$21,000,000 as of March 31, 2006.
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 47.57% for the first quarter of 2006,
compared to 65.11% for the first quarter of 2005. This decrease in
liquidity is primarily due to growth in the loan portfolio, which has been
funded by a decrease in federal funds sold and investment securities. This
shift in earning assets is considered to be favorable to earnings, as average
loan rates are higher than average rates on federal funds or the investment
portfolio.
Results of Operations
Net income for the three months ended March 31, 2006, was $1,763,401 or
$.55 per share, compared to $1,500,459 or $.47 per share per share for the first
quarter of 2005. This represents an increase of $262,942. The key components
of net income are discussed in the following paragraphs.
Net interest income increased $443,130 in the first three months of 2006
compared to the first three months of 2005. The fully taxable equivalent yield
on interest earning assets increased by 105 basis points from 4.60% for first
quarter 2005 to 5.65% in 2006, while the quarterly yield on interest-bearing
liabilities increased by 58 basis points from .60% to 1.18%. These increases
Page 9
reflect the rise of market rates that began in mid-2004. The Company's
overnight investment in federal funds sold has repriced with the market, while
short-term debt securities are repricing more slowly. Loan rates are
relatively unchanged, although increases in the loan portfolio contribute to
increased net interest spread. The Company has implemented gradual increases
to deposit rates.
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, 2006 March 31, 2005
Average Average
Balance Interest Yield Balance Interest Yield
Assets
Federal funds sold $ 11,961,214 $ 137,488 4.66% $ 31,530,783 $ 180,184 2.32%
Interest-bearing deposits 2,210,639 17,233 3.16% 2,179,780 12,162 2.26%
Investment securities 111,527,103 868,428 3.16% 155,331,061 944,260 2.47%
Loans, net of allowance 214,622,776 3,721,059 7.03% 165,952,679 2,890,210 7.06%
Total interest-earning assets 340,321,732 $ 4,744,208 5.65% 354,994,303 $ 4,026,816 4.60%
Noninterest-bearing cash 17,665,735 19,195,122
Other assets 13,335,106 13,211,140
Total assets $ 371,322,573 $ 387,400,565
Liabilities and Stockholders' Equity
Interest-bearing deposits
Savings and NOW $ 109,892,061 $ 88,712 0.33% $ 124,020,021 $ 80,489 0.26%
Money market 43,825,976 78,852 0.73% 47,581,736 46,494 0.40%
Other time 64,635,447 472,078 2.96% 66,760,638 229,612 1.39%
Total interest-bearing
deposits 218,353,484 639,642 1.19% 238,362,395 356,595 0.61%
Securities sold under
agreements to repurchase &
federal funds purchased 5,384,692 8,943 0.67% 5,298,550 2,011 0.15%
Borrowed funds 138,638 2,105 6.16% 158,929 2,408 6.14%
Total interest-bearing
liabilities 223,876,814 650,690 1.18% 243,819,874 361,014 0.60%
Noninterest-bearing deposits 79,003,525 - 76,907,823 -
302,880,339 $ 650,690 0.87% 320,727,697 $ 361,014 0.46%
Other liabilities 2,596,084 423,570
Stockholders' equity 65,846,150 66,249,298
Total liabilities and
stockholders' equity $ 371,322,573 $ 387,400,565
Net interest spread 4.47% 4.00%
Net interest income $ 4,093,518 $ 3,665,802
Net margin on interest-earning assets 4.88% 4.19%
Tax equivalent adjustment included in:
Investment income $ 63,791 $ 78,684
Loan income $ 6,460 $ 6,981
Page 10
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 charged to expense during the first
quarters of 2006 or 2005. Net loan charge-offs (recoveries) were ($25) during
the first quarter of 2006 versus ($14,626) during the first quarter of 2005.
Noninterest revenues exceeds last year by $45,965. Two significant
factors are increases to the Bank's fee schedule which were effective in January
2006 and increased usage of VISA debit cards.
Noninterest expense variances include an increase in salaries of $68,838,
of which $48,300 was a special bonus paid to nearly all employees. The Bank
employed 97 full time equivalent employees as of March 31, 2006. The Bank
hires seasonal employees during the summer. The Company has no employees other
than those hired by the Bank.
Income taxes are $139,000 higher than last year, on a pre-tax income
increase of $401,942. This is consistent with the Company's effective tax rate
of approximately 35.6%.
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 accounts and time certificates are tailored to the
Bank's principal market areas at rates competitive to those offered in the area.
In addition, the Bank offers certain retirement account services, such as
Individual Retirements Accounts ("IRAs"). All deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount
allowed by law (generally, $100,000 for non-IRA accounts per depositor and
$250,000 for IRAs per depositor, subject to aggregation rules). The Bank
solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
The Company, through 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 Company 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 may not make any loans to any director or
executive officer (except for commercial loans to directors who are not
officers or employees) unless the Board of Directors of the Bank approves the
loans. The Board of Directors reviews these such loans every six months.
Other bank services include cash management services, 24-hour ATM's, debit
cards, safe deposit boxes, travelers' checks, direct deposit of payroll and
social security funds, and automatic drafts for various accounts. The Bank
offers bank-by-phone and Internet banking services, including electronic bill-
payment, to both commercial and retail customers. The Bank also offers non-
deposit products including retail repurchase agreements and discount brokerage
services through a correspondent bank.
Page 11
Capital Resources and Adequacy
Total stockholders' equity increased $1,772,825 from December 31, 2005 to
March 31, 2006. This increase is attributable to the comprehensive income
recorded during the period, as detailed in Note 2 of the Notes to Financial
Statements, reduced by $55,512 used to repurchase and retire 1,542 shares of
common stock. Stock repurchases were at a price of $36.00 dollars per share.
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 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, 2006 and
December 31, 2005 were 32.7% and 33.5%, 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, 2006, the Company's interest rate sensitivity, as measured by
gap analysis, showed the Company was asset-sensitive with a one-year cumulative
gap of 28.63%, 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 and change the rates rests with
management.
Page 12
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, 2006. 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 signif-
icant changes in the Company's internal control over financial reporting that
have had or are reasonably likely to have a material affect on the Company's
internal control over financial reporting. As of March 31, 2006, the Company's
management, including the CEO and Treasurer, has concluded that the Company's
internal controls over financial reporting are effective.
Page 13
Calvin B. Taylor Bankshares, Inc. and Subsidiary
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 increase in any level of
risk incurred by the Company or the Bank during the quarter ended March 31,
2006. Following are descriptions of the significant categories of risk most
relevant to the Company.
Credit risk is the risk to a bank's earnings or capital from the potential
of an obligor to fulfill its contractual commitment to the bank. Credit risk
is most closely associated with a bank's lending.
Interest rate risk is the risk to earnings or capital from the potential
movement in interest rates. It is the sensitivity of a bank's future earnings
to interest rate changes.
Liquidity risk is the risk to earnings or capital from a bank's inability
to meet its obligations when they come due without incurring unacceptable
losses or costs.
Market risk is the risk to earnings or capital from changes in the value
of portfolios of financial instruments. For most banks, market risk is the
risk of a decline in market value of its securities portfolio.
Transaction risk is the risk to earnings or capital arising from problems
with service or product delivery. Transaction risk is the risk of a failure in
a bank's operating processes. It is a risk of failure in a bank's automation,
its employee integrity, or its internal controls.
Compliance risk is the risk to earnings or capital from noncompliance with
laws, rules, and regulations. In many banks compliance risk is the greatest
risk a bank faces.
Reputation risk is the risk to earnings or capital from negative public
opinion. The consumer and consumer relations are critical to a bank's success.
Accordingly, a bank's reputation is extremely important and anything that would
impair that reputation is a significant risk.
Strategic risk is the risk to earnings to capital arising from adverse
business decisions or improper implementation of those decisions.
Page 14
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
(c) The following table presents information about the Company's repurchase of
its equity securities during the calendar quarter ended on the date of this
Form 10-Q.
(c) Total number (d) Maximum Number
(a) Total (b) Average of Shares Purchased of Shares that may
Number Price Paid as Part of a Publicly yet be Purchased
Period of Shares per Share Announced Program Under the Program
January 600 $36.00 600 299,326
February 942 $36.00 942 298,384
March - N/A - 298,384
Totals 1,542 $36.00 1,542 N/A
The Company publicly announced on August 14, 2003, that it would repurchase
up to 10% of its outstanding equity stock at that time, which equated to a total
of 324,000 common shares available for repurchase. On January 1, 2005, this
plan was renewed, by public announcement, making up to 10% of the Company's
outstanding equity stock at that time, which equated to a total of 320,848
common shares, available for repurchase. There is no expiration date for this
program. No other stock repurchase plan or program existed or exists simultan-
eously, nor has any other plan or program expired during the period covered by
this table. Common shares repurchased under this plan are retired.
Item 3 Defaults Upon Senior Securities
Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
There were no matters submitted to security holders for a vote during
the quarter ended March 31, 2006.
Item 5 Other information
Not applicable.
Item 6 Exhibits and Reports on Form 8-K
a) Exhibits
2. Proxy Statement dated April 17, 2006, is incorporated by reference.
31. Certifications of Principal Executive Officer and Principal
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 are presented on pages 16 and 17, respectively.
32. Certification of Principal Executive Officer and Principal
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 is presented on page 18.
b) Reports on Form 8-K
There was one report on Form 8-K filed during the quarter ended
March 31, 2006.
Page 15
Exhibit 31.1
Certification - Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Raymond M. Thompson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calvin B. Taylor
Bankshares, Inc.;
2. 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;
3. 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;
4. 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
5. 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 5, 2006 By: /s/ Raymond M. Thompson
Raymond M. Thompson,
Chief Executive Officer
Page 16
Exhibit 31.2
Certification - Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jennifer G. Hawkins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Calvin B. Taylor
Bankshares, Inc.;
2. 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;
3. 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;
4. 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
5. 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 5, 2006 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)
Page 17
Exhibit 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, 2006
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: May 5, 2006 By: /s/ Raymond M. Thompson
Raymond M. Thompson,
Chief Executive Officer
Date: May 5, 2006 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)
Page 18
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: May 5, 2006 By: /s/ Raymond M. Thompson
Raymond M. Thompson,
Chief Executive Officer
Date: May 5, 2006 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)
Page 19