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 MARCH 31, 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 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 April 30, 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 Balance Sheets
(unaudited)
March December
2002 2001
Assets
Cash and due from banks 14,773,266 18,397,266
Federal funds sold 54,432,446 54,389,656
Interest-bearing deposits 879,000 879,000
Investment securities available
for sale 3,918,479 3,974,099
Investment securities held to
maturity (approximate fair value
of $88,090,100 and $85,604,080) 87,542,086 84,398,152
Loans, less allowance for loan
losses of 2,188,547 and 2,195,922 167,612,114 166,501,512
Premises and equipment 6,040,735 5,895,275
Accrued interest income 1,714,032 1,753,816
Deferred income taxes 156,147 134,639
Other assets 458,586 501,152
337,526,891 336,824,567
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing 61,571,649 60,508,663
Interest-bearing 213,505,480 213,640,518
275,077,129 274,149,181
Securities sold under agreements
to repurchase 4,546,882 4,555,323
Accrued interest payable 457,171 529,348
Note payable 211,599 215,702
Accrued income taxes 690,819 2,298
Other liabilities (1,009) 130,145
280,982,591 279,581,997
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 35,610,015 36,274,102
56,140,015 56,804,102
Net unrealized gain on
securities available for sale 404,285 438,468
56,544,300 57,242,570
337,526,891 336,824,567
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
For the three months ended March 31,
2002 2001
Interest and dividend revenue
Loans, including fees 3,260,478 3,576,124
U.S. Treasury and Agency securities 874,386 896,411
State and municipal securities 61,038 94,413
Federal funds sold 220,517 261,284
Deposits with banks 10,522 11,972
Equity securities 15,158 14,703
Total interest and dividend
revenue 4,442,099 4,854,907
Interest expense
Deposit interest 1,160,399 1,513,256
Other 10,382 16,043
Total interest expense 1,170,781 1,529,299
Net interest income 3,271,318 3,325,608
Provision for loan losses - -
Net interest income after
provision for loan losses 3,271,318 3,325,608
Other operating revenue
Service charges on deposit accounts 218,719 202,387
Miscellaneous revenue 94,458 82,513
Total other operating revenue 313,177 284,900
Other expenses
Salaries and employee benefits 864,189 842,147
Occupancy 119,316 128,032
Furniture and equipment 157,485 142,470
Other operating 472,392 412,570
Total other expenses 1,613,382 1,525,219
Income before income taxes 1,971,113 2,085,289
Income taxes 691,200 728,433
Net income 1,279,913 1,356,856
Basic earnings per share 0.40 0.42
Calvin B. Taylor Bankshares, Inc. and
Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
For the three months ended March 31,
2002 2001
Cash flows from operating activities
Interest received 4,454,002 5,087,621
Fees and commissions received 313,169 319,770
Interest paid (1,242,958) (1,522,212)
Cash paid to suppliers / employees (1,556,159) (1,522,349)
Income taxes paid (2,679) (103,593)
1,965,375 2,259,237
Cash flows from investing activities
Proceeds from maturities of
investment securities 17,365,000 20,465,000
Purchase of investment securities
held to maturity (20,481,124) (4,014,548)
Certificates of deposit purchased,
net of redemptions - -
Purchases of premises, equipment,
and intangibles (291,262) (253,395)
Loans made, net of principal
collected (1,110,602) (4,671,433)
Proceeds from sales of equipment - 17,000
(4,517,988) 11,542,624
Cash flows from financing activities
Net change in time deposits 186,122,263 501,653
Net change in other deposits (185,194,315) (4,174,155)
Net change in repurchase agreements (8,441) (120,363)
Payment on mortgage obligation (4,104) (3,865)
Dividend paid (1,944,000) -
(1,028,597) (3,796,730)
Net increase (decrease) in cash (3,581,210) 10,005,131
Cash and equivalents at beginning of
period 72,786,922 31,499,806
Cash and equivalents at end of period 69,205,712 41,504,937
Reconciliation of net income to net
cash provided from operating activities
Net income 1,279,913 1,356,856
Adjustments
Depreciation and amortization 153,964 116,872
Deferred income tax - -
Provision for loan losses - -
Security discount accretion, net
of premium amortization (27,881) (33,419)
Loss on disposition of assets 8,343 -
Decrease in accrued interest
receivable and other assets 65,844 261,748
Increase in accrued interest
payable and other liabilities 485,192 557,180
1,965,375 2,259,237
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 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, 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 the stock dividends distributed.
2. Comprehensive Income
Comprehensive income consists of:
Three months ended March 31,
2002 2001
Net income 1,279,913 1,356,856
Unrealized gain (loss) on
investment securities available
for sale, net of income taxes (34,183) 2,645
Comprehensive income 1,245,730 1,359,501
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 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 Maryland
bank is a commercial bank 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. The second bank
was incorporated in Delaware in 1997 and opened late in the
second quarter of 1998. This one-branch Delaware bank offers
the same services as the Maryland bank. The Company
currently engages in no business other than owning and
managing the Banks.
Financial Condition, Liquidity and Sources of Capital
Total assets of the Company increased $702 thousand from
December 31, 2001 to March 31, 2002. An increase in asset
size is unusual for the banks during this quarter.
Management attributes the increase to depositors' lack of
confidence in the stock market and a resultant flight to the
safety of insured deposits. 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 the first quarter of 2002, the banks' loan
portfolios increased $1.1 million. Funding for these loans
was provided primarily by growth in deposits.
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 relies on 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 than an allowance of 1.29% of gross
loans was adequate as of March 31, 2002. At December 31,
2001, the allowance was 1.30% of gross loans. At March 31,
2002, non-accruing loans totaled $25,265 or .01% of the
portfolio and loans delinquent ninety days or more, excluding
non-accruing loans, totaled $191,948 or .11% of the
portfolio.
Financial Condition, Liquidity and Sources of Capital
(continued)
The company's major sources of liquidity are loan
repayments, and 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
58.36% for the first quarter of 2002, compared to 46.21% for
the first quarter of 2001.
At March 31, 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 19.06%,
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 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.
Tier one risk-based capital ratios of the Company as of
March 31, 2002 and 2001 were 34.60% and 35.05%, respectively.
Both are substantially in excess of regulatory minimum
requirements.
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.
Net income for the three months ended March 31, 2002,
was $1,279,913 or $.40 per
share, compared to $1,356,856 or $.42 per share for the first
quarter of 2001. This represents a decrease of $76,943. The
primary reasons for the decrease in net income are lower net
interest income and increased other operating costs. Net
interest income decreased $54,290 in the first quarter of
2002 as compared to the first quarter of 2001 due to lower
interest rates on higher balances of both interest-earning
assets and interest-bearing liabilities. The banks reduced
loan and deposit rates in response to overall market
conditions. Market rate reductions have also diminished
rates of return on federal funds sold and investment
securities.
Results of Operations (continued)
Net interest income of the company is one of the most
important factors in evaluating the financial performance of
the Company. The Company 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
quarters of 2002 or 2001. Loans charged-off during the
first quarter of 2002 totaled $7,775. There were no loans
charged-off during the first three months of 2001.
The banks employed 97 full time equivalent employees as
of March 31, 2002, a decrease of ten employees from March
31, 2001. The Maryland bank hires seasonal employees during
the summer. The Company has no employees other than those
hired by the banks.
During the fourth quarter of 2001, the Company replaced
its core processing system. Related equipment depreciation,
software amortization, and maintenance costs for both
equipment and software increased with this replacement.
Prior to the installation of the new processing system,
upgrades to the company's data storage, networking and
Internet banking systems were installed. These, too, caused
an increase in related costs.
Other expense increased $88 thousand in the first
quarter of 2002 as compared to the first quarter of 2001.
Significant components of this increase include a $22
thousand increase in telephone costs due to network and
Internet usage, and additional correspondent bank fees of $29
thousand. Additionally, increased amortization and software
maintenance costs related to recent upgrades and enhancements
to the company's data processing capabilities are record in
other operating expense.
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 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 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 decreased $698,270 from
December 31, 2001 to March 31, 2002. This change is
attributable to the comprehensive income of $1,245,730
recorded during the period, as detailed in Note 2 of the
Notes to Financial Statements, reduced by the payment 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.
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.
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 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 March 31, 2002.
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: By: /s/Reese F.Cropper,Jr.
Reese F. Cropper, Jr.
President and
Chief Executive Officer
Date: By: /s/ William H. Mitchell
William H. Mitchell
Senior Vice President and
Chief Financial Officer