SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission File No. 33-99762
CALVIN B. TAYLOR BANKSHARES, INC.
(Exact name of registrant as specified in its Charter)
Maryland 52-1948274
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
P. O. Box 5, Berlin, Maryland 21811
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (410) 641-1700
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the small business issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the past
12 months (or for such shorter period that the small business issuer was
required to file such reports), and (2) has been subject to such filing
requirements
for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the small business issuer's knowledge, in definitive
proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. [ ]
State small business issuer's revenues for its most recent fiscal
year: $18,258,544.
The aggregate market value of the Common Stock held by non-affiliates
of the small business issuer on December 31, 1997, was $56,700,000. This
calculation is based upon an estimation by the Company's Board of Directors
of fair market value of the Common Stock of $70 per share. There is not an
active trading market for the Common Stock and it is not possible to identify
precisely the market value of the Common Stock.
The Company is filing delinquent Forms 10-SB, Form 3, and Schedule 13D. The
aformentioned forms and schedules are for Directors, Officers, and beneficial
owners of the company, and 5% owners the Company's outstanding Common Stock.
On March 4, 1998, 810,000 shares of the small business issuer's common
stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Annual report to Shareholders for the year ended December
31, 1997, is incorporated by reference in this Form 10-KSB in Part II Item 5,
Item 6, and Item 7. The Company's Proxy Statement for Annual Meeting of
Shareholders to be held on May 13, 1998, is incorporated by reference in this
Form 10-KSB in Part III, Item 9, Item 10, Item 11, and Item 12.
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.
PART I
Item 1. Description of Business
General
Calvin B. Taylor Bankshares, Inc. (the "Company") was incorporated
as a Maryland corporation on October 31, 1995. The Bank is a commercial
bank incorporated under the laws of the State of Maryland on December 17,
The Bank operates 10 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 Company has acquired land for future Bank
expansion but engaged in no other business excluding the operation of the
Bank.
The Company's holding company structure can assist the
Bank in maintaining its required capital ratios because the Company
may, subject to compliance with debt guidelines implemented by the
Board of Governors of the Federal Reserve System (the "Board
of Governors" or the "Federal Reserve"), borrow money and contribute
the proceeds to the Bank as primary capital. The holding company
structure also permits greater flexibility in issuing stock for cash,
property, or services and in reorganization transactions. Moreover,
subject to certain regulatory limitations, a holding company can purchase
shares of its own stock, which the Bank may not do. A holding
company may also engage in certain nonbanking activities which
the Board of Governors has deemed to be closely related to banking
and proper incidents to the business of a bank holding company.
These activities include making or servicing loans and certain types
of leases; performing certain data processing services; acting as a
fiduciary or investment or financial advisor; acting as a management
consultant for other depository institutions; providing courier, appraisal,
and consumer financial counseling services; providing tax planning and
preparation services; providing check guaranty and collection agency
services; engaging in limited real estate investment activities; underwriting,
brokering, and selling credit life and disability insurance; engaging in
certain other limited insurance activities; providing discount brokerage
services; underwriting and dealing in certain government obligations
and money market instruments and providing portfolio investment advice;
acting as a futures commission merchant with respect to certain financial
instrument transactions; providing foreign exchange advisory and
transactional services; making investments in certain corporations for
projects designed primarily to promote community welfare; and owning
and operating certain healthy savings and loans associations. Although
the Company has no present intention of engaging in any of these
services, if circumstances should lead the Company's management to believe
that there is a need for these services in the Bank's marketing area and
that such activities could be profitably conducted, the management of the
Company would have the flexibility of commencing these activities upon
filing notice thereof with the Board of Governors.
Location and Service Area
The Bank conducts a general commercial banking industry in its
primary service area, emphasizing the banking needs of individuals and small
- - to medium-sized businesses and professional concerns. The Bank operates
from ten branches located throughout Worcester County, Maryland. The Bank
draws most of its customer deposits and conducts most of its lending
transactions from within its primary service area which encompasses
Worcester County,Maryland and neighboring counties.
Worcester County is located along the shores of the Atlantic Ocean
and has experienced growth in population in recent years. The area is growing
as both a resort and retirement community.
The principal components of the economy of Worcester County are
tourism and agriculture. Berlin has a strong component of health-care related
businesses. The tourist businesses of Ocean City, Maryland, with health-care
facilities in Berlin, Maryland (including Berlin Nursing Home and Atlantic
General Hospital) are the largest employers in the County. The largest
Industrial employers are Perdue Farms and Hudson Farms.
Banking Services
The Bank offers a full range of 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
transaction accounts and time certificates are tailored to the Bank's principal
market area 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 per depositor subject to aggregation rules). The
Bank solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
The Bank also offers a full range of short- to medium-term commercial
and personal loans. Commercial loans include both secured and unsecured loans
for working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans
for financing automobiles, home improvements, education, and personal
investments. The Bank also originates mortgage loans and real estate
construction and acquisition loans. The Bank's 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, officer, or employee of
the Bank (except for commercial loans to directors who are not officers
or employees) unless the loan is approved by the Board of Directors of the
Bank. Any such loans must be reviewed every six months by the Board of
Directors.
Other bank services include cash management services, safe
deposit boxes, travelers checks, direct deposit of payroll and social security
checks, and automatic drafts for various accounts. The Bank is associated
with the MAC network of automated teller machines that may be used by Bank
customers throughout Maryland and other regions. The Bank also offers
credit card services through a correspondent bank as an agent for the Bank.
Competition
The Bank faces strong competition in all areas of its operations.
The competition comes from entities operating in Worcester County and
neighboring counties and includes branches of some of the largest banks in
Maryland, Delaware, and Virginia. Its most direct competition for deposits
historically has come from other commercial banks, savings banks, savings
and loan associations, and credit unions operating in Worcester County,
Maryland. The Bank competes for deposits with money market mutual funds
and corporate and government securities. The Bank competes with the same
banking entities for loans, as well as mortgage banking companies and other
institutional lenders. The competition for loans varies from time to time
depending on certain factors. These factors include, among others, the
general availability of dependable funds and credit, general and local
economic conditions, current interest rate levels, conditions in the mortgage
market, and other factors which are not readily predictable.
At December 31, 1997, there were six other commercial banks and two
savings banks operating in Worcester County, together accounting for twenty
banking offices.
Employees
As of December 31, 1997, the Bank had 95 full-time employees and
4 part-time employees. The Company's operations are conducted through the
Bank. Consequently, the Company does not have separate employees. None
of the employees of the Bank are represented by any collective bargaining unit.
The Bank considers its relations with its employees to be good.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking
laws and regulations which impose specific requirements or restrictions on, and
provide for general regulatory oversight with respect to, virtually all
aspects of operations. These laws and regulations are generally intended to
protect depositors, not shareholders. The following is a brief summary of
certain statutes, rules, and regulations affecting the Company and the Bank.
To the extent that the following summary describes statutory or regulatory
provisions, it is qualified in its entirety by reference to the particular
statutory and regulatory provisions. Any change in applicable laws or
regulations may have a material adverse effect on the business and prospects
of the Company. The banking industry is also likely to change significantly
as a result of the passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"). The operations of the
Company and the Bank may be affected by legislative changes and the policies
of various regulatory authorities. The Company is unable to predict the
nature or the extent of the effect on its business and earnings that fiscal
or monetary policies, economic control, or new federal or state legislation
may have in the future.
The Company
Because it owns the outstanding common stock of the Bank, the Company
is a bank holding company within the meaning of the federal Bank Holding
Company Act of 1956 (the "BHCA"). Under the BHCA, the Company is subject to
periodic examination by the Federal Reserve and is required to file periodic
reports of its operations and such additional information as the
Federal Reserve may require. The Company's and the Bank's activities are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries, or engaging in any other activity
that the Federal Reserve determines to be so closely related to banking or
managing and controlling banks as to be a proper incident thereto.
Investments, Control, and Activities. With certain limited exceptions,
the BHCA requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) acquiring substantially all the assets of any
bank, acquiring direct or indirect ownership or control of any voting shares of
any
bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
In addition, and subject to certain exceptions, the BHCA and the
Change in Bank Control Act, together with regulations thereunder, require
Federal Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Because the Company's Common Stock
is registered under the Securities Exchange Act of 1934, under Federal Reserve
regulations control will be rebuttably presumed to exist if a person acquires
least 10% of the outstanding shares of any class of voting securities of the
Company. The regulations provide a procedure for challenge of the rebuttable
control presumption.
Under the BHCA, the Company is generally prohibited from
engaging in, or acquiring direct or indirect control of more than 5% of t
he voting shares of any company engaged in nonbanking activities, unless
the Federal Reserve, by order or regulation, has found those activities to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Some of the activities that the Federal Reserve has
determined by regulation to be proper incidents to the business of banking
include making or servicing loans and certain types of leases, engaging in
certain insurance and discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a fiduciary or
investment or financial advisor, owning savings associations, and making
investments in certain corporations or projects designed primarily to promote
community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances in
which the Company might not otherwise do so. Under the BHCA, the Federal
Reserve may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary
of a bank) upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial
soundness or stability of any subsidiary depository institution of the
bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself
of any bank or nonbank subsidiary if the agency determines that divestiture
may aid the depository institution's financial condition. The Bank may be
required to indemnify, or cross-guarantee, the FDIC
against losses it incurs with respect to any other Bank controlled by the
Company, which in effect makes the Company's equity investments in healthy
bank subsidiariesavailable to the FDIC to assist
any failing or failed bank subsidiary of the Company.
The Bank
General. The Bank operates as a state nonmember banking association
incorporated under the laws of the State of Maryland and is subject to
examination by the FDIC and the Commissioner. Deposits in the Bank
are insured by theFDIC up to a maximum amount
(generally $100,000 per depositor, subject to aggregation rules).
The Commissioner and FDIC regulate or monitor all areas of the Bank's
operations, including security devices and procedures, adequacy
of capitalization and loss reserves, loans, investments, borrowings,
deposits, mergers, issuances of securities, payment of dividends, interest
rates payable on deposits,interest rates or fees
chargeable on loans, establishment of branches, corporate
reorganizations, maintenance of books and records, and adequacy of staff
training to carry on safe lending and deposit gathering practices.
The FDIC requires the Bank to maintain certain capital ratios and imposes
limitations on the Bank's aggregate investment in real estate,
bank premises, and furniture and fixtures.
The Bank is required by the FDIC and the Commissioner to prepare quarterly
reports on the Bank's financial condition.
Under FDICIA, all insured institutions must undergo periodic on-site
examination by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems
necessary or appropriate.
Insured institutions are required to submit annual reports to the FDIC and
the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other
appropriate agencies a method for insured depository
institutions to provide supplemental disclosure of the estimated fair market
valueof assets and liabilities, to the extent feasible and practicable, in
any balance sheet, financial statement, report of condition, or other report
of any insured depository
institution. FDICIA also requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating, among other things, to:(i)
internal controls, information systems, and audit systems; (ii) loan
documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset
quality.
Transactions With Affiliates and Insiders. The Bank is subject to
Section 23A of the Federal Reserve Act, which places limits on the amount
of loans or extensions of credit to, or investment in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates.
In addition, most of these loans and certain other transactions must
be secured in prescribed amounts. The Bank is
also subject to Section 23B of the Federal Reserve Act which, among other
things, prohibits an institution from engaging in certain
transactions with certain affiliates unless the transactions are
on terms substantially the same, or at least
as favorable to such institution or its subsidiaries,
as those prevailing at the time
for comparable transactions with nonaffiliate companies. The Bank is subject
to certain restrictions on extensions of credit to executive officers,
directors, certain principal shareholders, and their related interests.
Such extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with third parties, and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.
Branching. Under Maryland law, the Bank may open branches
state-wide, subject to the prior approval of the Commissioner and the FDIC.
Maryland law permits banking organizations in other states to
acquire Maryland banking organizations, as long as such states
grant similar privileges for acquiring banking organizations in
their states to banking organizations in
Maryland, by opening a de novo branch, by acquiring an existing branch from
a Maryland depository institution, or as a result of an interstate
merger with a Maryland banking organization. The Company is planning to open
a new Bank in the State of Delaware. The new bank will be subject to the laws
of the State of Delaware.
Community Reinvestment Act. The Community Reinvestment Act
requires that each insured depository institution shall be evaluated by its
primary federal regulator with respect to its record in meeting the credit
needsof its local community, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. These
factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. The Bank received a satisfactory
rating in its most recent evaluation.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject
to certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials
determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves,
the Equal Credit Opportunity Act prohibiting discrimination on the basis of
race, creed, or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected
by collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such
federal laws. The deposit operations of the Bank are also subject
to the Right to Financial Privacy
Act, which imposes a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas
of financial records, and the Electronic Funds Transfer Act and Regulation E
issued by the Federal Reserve Board to implement that act, which governs
automatic deposits to and withdrawals from deposit accounts and customers'
rights and liabilities arising from the use of automated teller machines
and other electronic banking services.
Deposit Insurance
The deposits of the Bank are currently insured to a maximum of
$100,000 per depositor, subject to certain aggregation rules. The FDIC
establishes rates for the payment of premiums by federally insured banks
and thrifts for deposit insurance. Separate insurance funds (BIF and SAIF)
are maintained for commercial banks and thrifts, with insurance premiums
from the industry used to offset losses from insurance payouts when banks
and thrifts fail. During 1996, the FDIC revised the range of premiums from
$.00 to $.31 per $100 in deposits.
The assessment rate for the Bank is currently $1,000 for each six-month
period.In addition to the FDIC assessment, banks are required to pay
an assessment to the Financial Corporation (FICO)
to service the interest on its bond obligations. For the first
semi-annual period of 1997, the FICO assessment rate was 1.30
basis points for BIF deposits. The insurance assessment will remain
at $.00 to $.31 per $100 in deposits through June, 1998.
Any increase in deposit insurance premiums for the Bank will
increase the Bank's cost of funds, and
there can be no assurance that such costs can be passed on to the
Bank's customers.
Dividends
The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the Bank
to the Company depends on the Bank's earnings
and capital position and is limited by federal
and state laws, regulations, and policies. The Federal Reserve has
stated that bank dividends under circumstances in which the bank holding
company fails to meet minimum capital requirements or in which earnings
are impaired.
The Company's ability to pay any cash dividends to its shareholders in
the future will depend primarily on the Bank's ability to pay dividends to the
Company. In order to pay dividends to the Company, the Bank must comply
with the requirements of all applicable laws and regulations. Under Maryland
law, the Bank must pay a cash dividend only from the following, after
providing for due or accrued expenses, losses, interest,
and taxes: (i) its undivided profits, or (ii) with the prior approval of the
Commissioner, its surplus in excess
of 100% of its required capital stock. Under FDICIA, the Bank may not pay a
dividend if, after paying the dividend,
the Bank would be undercapitalized. See
"Capital Regulations" below. See Item 5 for a discussion of dividends paid by
the Bank in the past two years.
In addition to the availability of funds from the Bank, the future dividend
policy of the Company is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future earnings, financial
condition, cash needs, and general business conditions. If dividends should
be declared in the future, the amount of such dividends presently cannot be
estimated and it cannot be known whether such dividends would continue
for future periods.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based
capital guidelines for banks and bank holding companies that are designed
to make regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, account for off-balance
sheet exposure, and minimize disincentives for holding liquid assets. The
resulting capital ratios represent qualifying capital as a percentage of total
risk-weighted assets and off-balance sheet items. The guidelines are minimums,
and the regulators have noted that banks and bank holding companies
contemplating significant expansion programs should not allow expansion to
diminish their capital ratios and should maintain ratios well in excess of
minimums. The current guidelines require all bank holding companies
and federally regulated banks to maintain a minimum risk-based total capital
ratio equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capital
includes common shareholders' equity before the unrealized gains and losses
on securities available for sale, qualifying perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, but excludes
goodwill and most other intangibles, and excludes the allowance for loan and
lease losses. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, subordinated debt and intermediate
term-preferred stock, and general reserves for loan and lease losses
up to 1.25% of risk-weighted assets.
Under the guidelines, banks' and bank holding companies' assets
are given risk-weights of 0%, 20%, 50%, and 100%. In addition, certain
off-balance sheet items are given credit conversion
factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are
assigned to the 20% category, except for municipal or state revenue bonds,
which have a 50% rating, and direct obligations of or obligations guaranteed
by the United States Treasury or United States Government agencies, which
have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines.
The principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity
capital base. The minimum required leverage ratio for top-rated institutions
is 3%, but most institutions are required to maintain an additional cushion of
at least 100 to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed
to promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories for compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank
must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no
less than 6%, and a total risk-based capital ratio of no less than 10%, and
the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. As of
December 31, 1997, the Company and the Bank were qualified as "well
capitalized." See "Item 6. Management's Discussion and Analysis or
Plan of Operation - Capital."
Item 2. Description of Property
The Company has a main office and nine branch locations, all of
which are owned by the Company. The locations are described as follows:
OFFICE LOCATION Square Footage
Main Office 24 North Main Street, Berlin, Maryland 21811 6,500
East Berlin Office 10524 Old Ocean City Boulevard, Berlin, Maryland 21811 1,500
20th Street Office 100 20th Street, Ocean City, Maryland 21842 3,100
Ocean Pines Office 11003 Cathell Road, Berlin, Maryland 21811 2,420
Mid-Ocean City Office 9105 Coastal Highway, Ocean City, Maryland 21842 1,984
North Ocean City Office 14200 Coastal Highway, Ocean City, Maryland 21842 2,545
West Ocean City Office 9923 Golf Course Road, Ocean City, Maryland 21842 2,496
Downtown Pocomoke Office 144 Market Street, Pocomoke, Maryland 21851 3,240
South Pocomoke Office 121 Ames Plaza, Pocomoke, Maryland 21851 1,715
Snow Hill Office 108 West Market Street, Snow Hill, Maryland 21863 3,773
The Main Office is the centralized location for all nine branches; that
is to say that all proof and bookkeeping is performed there.
Each branch has a manager that also serves as its loan officer as
well, with exception of the East Berlin Office which does not have a loan
officer. All ten offices participate in normal day-to-day banking operations.
Five offices offer automated teller machines; these being the
20th Street, Ocean Pines, Mid-Ocean City, West Ocean City, and South
Pocomoke Offices. The Company operates one automated teller machine
which is located off premises at a local hospital.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Company
or the Bank or any of their properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the shareholders
of the Company during the fourth quarter of 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
In response to this Item, the information included on page 15
of the Company's Annual Report to Shareholders for the year ended
December 31, 1997, is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
In response to this Item, the information included on pages 2
through 14 of the Company's Annual Report to Shareholders for the
year ended December 31, 1997, is incorporated herein by reference.
Item 7. Financial Statements
In response to this Item, the information included on pages 16
through 38 of the Company's Annual Report to Shareholders for the year
ended December 31, 1997, is incorporated herein by reference.
PART III
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
Not applicable.
Item 9. Directors and Executive Officers; Compliance with Section 16(a)
of the Exchange Act
The table below sets forth certain information about the nominees and
officers, including age, position with the Company, and position the Calvin
B. Taylor Banking Company (the "Bank), the Company's wholly owned banking
C. subsidiary. All of the nominees are currently directors of the Company
D. and the bank are nominated as directors. Each of the nominees has
E. been a director of the Company since its formation on October 31, 1995.
Title or Position with the
Name Age Corporation Title or Position with the Bank
James R. Bergey, Jr. 42 Director Director
James R. Bergey, Sr. 63 Senior Vice President, Senior Vice President,
Secretary and Director Manager of Ocean City
Branches, and Director
Richard L. Bunting. 68 Director Director
John H. Burbage, Jr. 54 Director Director
Reese F. Cropper, Jr. 55 President, Chief Executive President, CEO
Director
Hale Harrison. 50 Director Director
Gerald T. Mason 49 Director Director
William H. Mitchell 48 Treasurer Vice President and Cashier
Joseph E. Moore 54 Director Director
Horace D. Quillin, Sr. 69 Director Director
Michael L. Quillin, Sr. 58 Director Director
Hugh F. Wilde, Sr. 69 Director Director
Item 10. Executive Compensation
The table below presents a summary of the compensation for the last three
fiscal years of Mr. Reese F. Cropper , Jr., Chief Executive Officer and
President of the Company and Bank, and Mr. James R. Bergey, Sr., Senior
Vice President and Secretary of the Company and Bank. No other executive
officers of the Company and Bank received an annual salary and bonus which
exceeded $100,000 during any of the past three fiscal years.
Annual Compensation
Name and Principal Position Year Salary Bonus All Other Compensation (1)
Reese F. Cropper, Jr. - President
and Chief Executive Officer
1997 $157,300 6,642 3,325
1996 $142,509 5,720 3,153
1995 $115,623 4,818 2,299
James R. Bergey, Jr., Senior
Vice President and Secretary
1997 $113,740 4,890 1,450
1996 $102,959 4,136 1,411
1995 $ 93,640 3,760 1,432
(1) Represents benefits paid by the bank in connection with the use
of an automobile.
Directors of the Company received a fee of $440 for each board
meeting attended and $440 for each of the Bank's executive committee meetings
attended. The Company also paid a director emeriti fee of $160 for each board
meeting attended. Two directors, Richard L. Bunting and Horace D, Quillin, Sr.,
are paid by salary rather than a director's fee. Mr. Bunting and Mr. Quillin
received a salary of $33,068 each in 1997. The total fees paid by the Company to
directors, excluding Mr. Cropper, Mr. Bergey, Mr. Bunting, and Mr. Quillin,
during 1997, were $61,200.
Item 11. Security Ownership of Certain Beneficial Owners and Management
In response to this item, the information included on pages 7 through
8 of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held May 12, 1998, is incorporated herein by reference.
The table below sets forth certain information about the nominees and officers,
including age, position with the Company, and position the
Calvin B. Taylor Banking
Company (the "Bank), the Company's wholly owned banking subsidiary. All of the
nominees are currently directors of the Company and the bank are nominated as
directors. Each of the nominees has been a director of the Company since its
formation on October 31, 1995.
Title or Position with the
Name Age Corporation Title or Position with the Bank
James R. Bergey, Jr. 42 Director Director
James R. Bergey, Sr. 63 Senior Vice President, Senior Vice President,
Secretary and Director Manager of Ocean City
Branches, and Director
Richard L. Bunting. 68 Director Director
John H. Burbage, Jr. 54 Director Director
Reese F. Cropper, Jr. 55 President, Chief Executive President, Chief Exec.
Officer, and Director Officer, and Director
Hale Harrison. 50 Director Director
Gerald T. Mason 49 Director Director
William H. Mitchell 48 Treasurer Vice President and Cashier
Joseph E. Moore 54 Director Director
Horace D. Quillin, Sr. 69 Director Director
Michael L. Quillin, Sr. 58 Director Director
Hugh F. Wilde, Sr. 69 Director Director
Mr. James R. Bergey, Jr. was first elected as a Director of the Bank
on February 2, 1994. His current term expires May, 1998. Mr. Bergey became
a Director of the Company on October 31, 1995. Mr. Bergey is a Certified
Public Accountant and a Partner with Faw, Casson, & Co., LLP in Ocean City,
Maryland. He is also Chairman of the Board of Directors of Atlantic General
Hospital in Berlin, Maryland.
Mr. James R. Bergey, Sr. was first elected as a Director of the Bank
on February 4, 1987. His current term expires May, 1998. Mr. Bergey became
a Director, Senior Vice President, and Secretary of the Company on October
31, 1995. Mr. Bergey has been employed by the Bank since 1954.
Mr. Richard L. Bunting was first elected Director of the bank on
February 3, 1988. His current term expires May, 1998. He is also a member of t
he Bank's Executive Committee. Mr. Bunting became a Director of the Company
on October 31, 1995. He is the retired President and owner of William B.
Tilghman Co., in Pocomoke, Maryland.
Mr. John H. Burbage, Jr. was first elected as a Director of the Bank
on February 4, 1987. His current term expires May, 1998. Mr. Burbage became
a Director of the Company on October 31, 1995. Mr. Burbage is the owner
of Mystic Harbour Development Co., Mystic Harbour Utility Co., Bethany
Land Co., and Style Guide Clothing Stores.
Mr. Reese F. Cropper, Jr. has been employed by the Bank since May
1962 and was elected President in January 1974. Mr. Cropper was first elected
Director of the Bank on March 6, 1974. His current term expires May, 1998. He
is a member of the Executive Committee of the Bank. Mr. Cropper became
President, Chief executive officer, and a director of the Company on October
31, 1995. He is the past president of the Maryland Bankers Association and he
serveda six year term as a member of the Banking Board of the State of
Maryland from 1983 to 1989. Mr. Cropper is also a Director of
Atlantic General Hospital.
Mr. Hale Harrison was first elected as a Director of the Bank on January
8, 1975. His current term expires May, 1998. Mr. Harrison became a Director of
the Company on October 31, 1995. He owns and operates several motels and
restaurants in Ocean City, Maryland. Mr. Harrison serves as a member of the
board of directors and as a member of the finance committee of Atlantic General
Hospital.
Mr. Gerald T. Mason was first elected as a Director of the bank on
February 2, 1994. His current term expires May, 1998. Mr. Mason became a
Director of the Company on October 31, 1995. Mr. Mason is the Administrator
for Worcester County and serves as a director of Hospice.
Mr. Joseph E. Moore was first elected Director of the Bank on November
3, 1976. His current term expires May, 1998. Mr. Moore became a Director of the
Company on October 31, 1995. Mr. Moore is a Partner at the law firm Williams,
Hammond, Moore, Shockley & Harrison, P.A. He is the Chairman of the Berlin
Board of Zoning Appeals and a member of the board of directors at Atlantic
General Hospital.
Mr. Horace D. Quillin, Sr. was first elected as Director of the Bank
on August 2, 1972. His current term expires May, 1998. Mr. Quillin became
a Director of the Company on October 31, 1995. He is the Chairman of the
Executive Committee. He is the retired owner and operator of Berlin Ice
Company in Berlin, Maryland.
Mr. Michael L. Quillin, Sr. was first elected Director of the Bank on
December 6, 1978. His current term expires May, 1998. Mr. Quillin became a
Director of the Company on October 31, 1995. Mr. Quillin owns and operates
several motels in Ocean City, Maryland. He is a director and treasurer of the
Quillin Foundation. Mr. Quillin is also a member of the Ocean City Chamber
of Commerce.
Mr. Hugh F. Wilde. Sr. Was first elected as a Director of the Bank
on December 12, 1967. His current term expires May, 1998. Mr. Wilde became
a Director of the Company on October 31, 1995. He is the President of the
Executive Corporation and a Partner in W.I.I. Ltd. Partnership.
Mr. Wilde operatesa motel in Ocean City, Maryland and is a
member of the ocean City Chamber of Commerce.
Mr. William H. Mitchell has been employed by the Bank since June
1970. He became Vice President of the Bank on February 3, 1988. Mr. Mitchell
became Cashier of the Bank on February 5, 1986. He became Treasurer of the
Corporation on October 31, 1995.
Item 12. Certain Relationships and Related Transactions
In response to this item, the information included on page 8 of the
Company's Proxy Statement for the Annual Meeting of Shareholders to be
held May 13, 1998, is incorporated herein by reference.
There are two sets of directors that have a family relationship. James R.
Bergey, Sr. is the father of James R. Bergey, Jr.; and Reese F.
Cropper, Jr. and Joseph E. Moore are first cousins.
None of the directors of the Company and the Bank have been
involved in any administrative or criminal proceedings. Mr. Mitchell has not
been involved in any administrative or criminal proceedings.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company (incorporated by
reference to Exhibit 3.1 of Registration Statement Form
S-4, File No. 33-99762).
3.2 Bylaws of the Company (incorporated by reference to Exhibit
3.2 of Registration Statement Form S-4, File
No. 33-99762).
13 Annual Report to Shareholders for the year ended December 31,
1996.
21 Subsidiaries of the Company.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter
of the year ended December 31, 1997.
SIGNATURES
In accordance with 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.
(Registrant)
Date: By:
Reese F. Cropper, Jr.
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: By:
James R. Bergey, Jr.
Director
Date: By:
James R. Bergey, Sr.
Executive Vice President
Date: By:
Richard L. Bunting
Director
Date: By:
John H. Burbage, Jr.
Director
Date: By:
Reese F. Cropper, Jr.
President and Chief Executive Officer
Date: By:
Hale Harrison
Director
Date: By:
Gerald T. Mason
Director
Date: By:
Joseph E. Moore
Director
Date: By:
Horace D. Quillin, Sr.
Director
Date: By:
Michael L. Quillin
Director
Date: By:
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1997
Calvin B. Taylor Bankshares, Inc.
1997 Annual Report
Calvin B. Taylor Banking Company
BUSINESS OF THE COMPANY
Calvin B. Taylor Bankshares, Inc. (the "Company") was incorporated
as a Maryland corporation on October 31, 1995, to become a one-bank holding
company by acquiring all of the capital stock of Calvin B. Taylor Banking
Company (the "Bank"). The Bank was incorporated
under the laws of the State of Maryland
on December 17, 1907. The Bank was organized as a nonmember state bank under
the laws of the State of Maryland. The Bank is engaged in a general commercial
banking business, emphasizing in its marketing the Bank's local management and
ownership, from its main office location in its primary service area of
WorcesterCounty and its neighboring counties. The Bank offers a full range
of depositservices that are typically available in most
banks and savings and loan associations, includingchecking accounts, NOW
accounts, savings accounts and other time deposits of
various types, ranging from daily money market accounts to longer-term
certificates of deposit. In addition, the Bank offers certain retirement
account services, such as Individual Retirement Accounts.
The Bank also offers a full range of short- to medium-term commercial and
personal loans. The Bank also originates and holds
or sells into the secondary market fixed and variable rate
mortgage loans and real estate construction and acquisition loans.
Other bank services include cash management services, safe deposit boxes,
travellers checks, direct deposit of payroll
and social security checks, and automatic drafts for various accounts.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Company's financial
statements and related notes and other statistical information included
elsewhere herein.
Overview
Consolidated income of the Company is derived primarily from operations
of the Bank. The 1997 net income was $4,934,903, compared to $4,535,641
for 1996. The Company continued its history of above average earnings with
a return on equity of 11.90% and return on assets of 1.99% for 1997, compared
to returns of 11.71% and 1.87% for 1996.
Results of Operations
The Company reported net income of $4,934,903, or $6.09 per share,
for the year ended December 31, 1997, which was
an increase of $399,262, or 8.80%,
over the net income of $4,535,641, or $5.60
per share, for the year ended December
31, 1996. The primary reason for the change in profitability is the increase
in net interest income.
Net interest income increased $737,565, or 6.88%, to $11,464,583 in
1997, from $10,727,018 in 1996. This increase in net interest income was the
result of an increase in interest revenue of
$611,837 and a decrease in interest
expense of $125,728. The yield
on interest-earning assets increased to 7.60%
in 1997, from 7.53% in 1996, while the combined yield on deposits and
borrowed funds decreased to 2.90% from 3.01% for the same period.
Net interest income increased primarily because the balance of
interest-earningassets grew faster than the
balance of deposits and borrowed funds. A secondary cause of the increase
in net interest income is the decline in the cost of funds.
The provision for loan losses was $50,000 in 1997, a decrease of
$143,000 from the $193,000 provision in 1996. The decreased provision is
the result of a $1,839 decrease in net charge-offs for 1997, while the loan
portfolio growth slowed during 1997. During 1997, the Company had net
charge-offs of $9,677 which was .01% of average loans while during 1996
there were net charge-offs of $11,516.
Both noninterest income and noninterest expense changed by less
than 8.00% during 1997, compared to 1996. Discussion of these items is
presented later under their respective headings.
Net Interest Income
The primary source of income for the Company is net interest income,
which is the difference between revenue on interest-earning
assets, such as investment securities and loans, and interest
incurred on interest-bearing sources of funds, such as
deposits and borrowings. The level of net interest income is
determined primarily by the average balance of interest-earning
assets and funding sources and the various rate spreads
between the interest-earning assets and the Company's funding sources.
The table "Average Balances, Income and Expenses,
and Rates" which follows shows the Company's average volume of interest-earning
assets and interest-bearing liabilities for 1997 and 1996, and
related income/expense and yields. Changes in net interest income from
period to period result from
increases or decreases in the volume of interest-earning
assets and interest-bearing liabilities, and increases or decreases in
the average rates earned and paid on such assets and liabilities.
The volume of interest-earning assets and interest-bearing
liabilities is affected by the ability to manage the earning-asset portfolio
(which includes loans), and the availability of particular sources
of funds, such as noninterest bearing deposits. The table "Analysis of
Changes in Net Interest Income" shows the amount of net interest
income change from rate changes and from activity changes.
The key performance measure for net interest income is the "net
margin on interest-bearing assets," or net interest income divided by average
interest-earning assets. The Company's net interest margin for 1997, was
5.03% compared to 4.84% for 1996. Because most of the loans of the Bank
are written with a demand feature, the income of the Bank should not change
dramatically as interest rates change. Management of the Company expects to
maintain the net margin on interest-earning assets. The net margin may decline,
however, if competition increases, loan demand decreases, or the cost of funds
rises faster than the return on loans and securities.
Although such expectations arebased on management's judgment, actual
results will depend on a number of factors that cannot be predicted with
certainty, and fulfillment of management's
expectations cannot be assured.
Average Balances, Interest, and Yields
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
Average balance Interest Yield Average balance Interest Yield
Assets
Federal funds sold and
securities sold
under repurchase
agreements$21,772,942 $1,213,039 5.57% $23,969,126 $1,259,685 5.26%
Interest bearing
deposits 1,243,208 69,397 5.58% 1,704,150 95,268 5.59%
Investment
securities:
U. S.
Treasury 47,767,048 2,856,937 5.98% 43,711,492 2,583,671 5.91%
State and
municipal 11,991,438 706,528 5.89% 13,903,680 801,909 5.77%
Other 249,030 20,000 8.03% 239,800 17,511 7.30%
Total
investment
securities 60,007,516 3,583,465 5.97% 57,854,972 3,403,091 5.88%
Loans:
Commercial 15,039,707 1,272,668 8.46% 15,633,923 1,367,904 8.75%
Mortgage 131,512,234 11,012,492 8.37% 124,541,433 10,420,312 8.37%
Consumer 5,010,982 510,50010.19% 5,093,110 530,99010.43%
Total
loans 151,562,923 12,795,660 8.44% 145,268,466 12,319,206 8.48%
Allowance
for loan
losses 2,053,552 1,882,458
Total
loans, net
of
allowance 149,509,371 12,795,660 8.56% 143,386,008 12,319,206 8.59%
Total
interest-earning
assets 232,533,037 17,661,561 7.60% 226,914,256 17,077,250 7.53%
Noninterest-bearing
cash 9,997,110 - 10,031,886 -
Premises
and
equipment 3,967,373 - 3,526,237 -
Other
assets 1,839,672 - 1,776,380 -
Total
assets $ 248,337,192 17,661,561 $ 242,248,759 17,077,250
Liabilities and Stockholders' Equity
Interest-bearing
Deposits
Savings
and NOW
deposits $ 53,793,965 1,389,996 2.58% 52,217,712 1,360,659 2.61%
Money market
and
supernow 55,012,180 1,497,011 2.72% 53,398,291 1,486,936 2.78%
Other
time
deposits 62,944,109 3,078,856 4.89% 63,458,397 3,242,018 5.11%
Total
interest-bearing
deposits 171,750,254 5,965,863 3.47% 169,074,400 6,089,613 3.60%
Borrowed
funds 80,743 1,820 2.25% 135,884 3,798 2.80%
Total interest-bearing
liabilities171,830,997 5,967,683 3.47% 169,210,284 6,089,613 3.60%
Noninterest-bearing
deposits 34,304,946 - 33,499,139 -
206,135,943 5,967,683 202,709,423 6,093,411
Other
liabilities 738,550 - 820,691 -
Stockholders'
equity 41,462,699 - 38,718,645 -
Total liabilities
and
stockholders'
equity $ 248,337,192 5,967,683 242,248,759 6,093,411
Net interest
spread 4.13% 3.93%
Net interest income 11,693,878 10,983,839
Net margin on
interest-earning
assets 5.03% 4.84%
Interest on tax-exempt securities, including dividends, are reported
on fully taxable equivalent basis.
Analysis of Changes in Net Interest Income
Year ended December 31, Year ended December 31,
1997 compared with 1996 1996 compared with 1995
variance due to variance due to
Total Rate Volume Total Rate Volume
Earning assets
Interest bearing
deposits $(25,871) (104) (25,767) $(19,813) 4,324 (24,137)
Federal funds
sold (46,646) 68,873 (115,519) 142,948 (86,922) 229,870
Investment securities:
U. S. Treasury 273,266 33,583 239,683 (51,095) 61,263 (112,358)
U. S. Agency (95,381) 14,955 (110,336) 157,715 (1,457) 159,172
Other 2,489 1,815 674 4,905 3,683 1,222
Loans:
Demand and time (95,236)(43,242) (51,994) 198,482 3,412 195,070
Mortgage 592,180 8,724 583,456 528,199 (10,752) 538,951
Installment (20,490)(11,924) (8,566) (18,433) 4,753 (23,186)
Total interest
revenue 584,311 72,680 511,631 942,908 (21,696) 964,604
Interest-bearing liabilities
Savings and NOW
deposits 29,337 (11,803) 41,140 (62,047)(105,360) 43,313
Money market
and supernow 10,075 (34,791) 44,866 (99,684) (65,391) (34,293)
Other time
deposits (163,162)(136,882) (26,280) 477,137 125,456 351,681
Other borrowed
funds (1,978) (434) (1,544) (2,007) (162) (1,845)
Total interest
expense (125,728)(183,910) 58,182 313,399 (45,457) 358,856
Net interest
income $ 710,03 256,590 453,449 629,509 23,761 605,748
Interest on tax-exempt securities, including dividends, are reported
on fully taxable equivalent basis.
The variance that is both rate/volume related is reported with
the rate variance.
Composition of Loan Portfolio
Because loans are expected to produce higher yields than
investment securities and other interest-earning assets (assuming that
loan losses are not excessive), the absolute volume of loans and the
volume as a percentage of total earning assets is an important determinant
of net interest margin. Average loans, net of the allowance for loan
losses, were $149,509,371 and $143,386,008 during 1997 and 1996,
respectively, which constituted 64.30% and 63.19% of average
interest-earning assets for the periods. At December 31, 1997, the
Company's loan to deposit ratio was 71.18% compared to 72.96% at
December 31, 1996, while the 1997 average loans to average deposits
were 72.56%. The Bank extends loans primarily to customers located
in and near Worcester County. There are no industry concentrations
in the Bank's loan portfolio. The Bank does, however, have a substantial
portion of its loans in real estate and its performance will be influenced
by the real estate market in the region.
Compositon of Loan Portfolio
December 31,
1997 1996
Percent Percent
Amount of total Amount of total
Commercial $ 13,237,003 8.87% 16,481,935 10.91%
Real estate 129,549,396 86.79% 127,381,520 84.30%
Construction 1,372,853 0.92% 2,277,132 1.51%
Consumer 5,112,378 3.42% 4,959,548 3.48%
Total loans 149,271,630 100.00% 151,100,135 100.00%
Less allowance for credit losses
2,080,798 2,040,475
Net loans 147,190,832 149,059,660
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
December 31, 1997
Over one
One year through Over five
or less five years years Total
Commercial $ 13,237,003 - - 13,237,003
Real estate 129,549,396 - - 129,549,396
Construction 1,372,853 - - 1,372,853
Consumer 436,889 4,122,176 553,313 5,112,378
Total 144,596,141 4,122,176 553,313 149,271,630
Fixed interest
rate $ 436,889 4,122,176 553,313 5,112,378
Variable interest
rate (demand) 144,159,252 - - 144,159,252
Total 144,596,141 4,122,176 553,313 149,271,630
As of December 31, 1997, $144,159,252, or 96.58%, of the total
loans were either variable arte loans or loans written on demand.
The Company has the following commitments, lines of credit, and
letters of credit outstanding as of December 31, 1997 and 1996, respectively.
1997 1996
Construction loans $ 2,616,516 $ 6,948,259
Other loan commitments 1,981,942 4,500,515
Standby letters of credit 1,119,080 1,162,117
Total $ 5,717,538 $ 12,610,891
The following table sets forth the composition of the Company's
loan portfolio as of December 31, 1997 and
1996, respectively.
Loan commitments are agreements to lend to a customer as
long as there is no violation of any condition to the contract. Loan
commitments may have interest fixed at current rates, fixed expiration
dates, and may require the payment of a fee. Letters of credit are commitments
issued to guarantee the performance of a customer to a third party. Loan
commitments and letters of credit are made on the same terms, including
collateral, as outstanding loans. The Company's exposure to credit loss
in the event of nonperformance by the borrower is represented by the contract
amount of the commitment. Management is not aware of any accounting
loss the Company will incur by the funding of these commitments.
Loan Quality
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 assumptions about the economy.
Management considers the year-end allowance appropriate and adequate to
cover possible losses in the loan portfolio; however, management's judgment
is based upon a number of assumptions about future events, which are believed
to be reasonable, but which may or may not prove valid. Thus, there can be no
assurance that charge-offs in future periods will not exceed the allowance for
loan loss or that additional increases in the loan loss allowance will not be
required.
For significant problem loans, management's review consists of
evaluation of the financial strengths of the borrowers and guarantors, the
related collateral, and the effects of economic conditions. The overall
evaluation of the adequacy of the total allowance for
loan losses is based on an analysis of historical loan loss
ratios, loan charge-offs, delinquency trends, and previous
collection experience, along with an assessment of the effects of external
economic conditions. Although the Bank has a history
of low loan charge-offs, its current
policy is to maintain an allowance of approximately 1.35% of gross loans unless
management's evaluation of the risk associated with each loan indicates that
the allowance should be higher. This allowance may be increased for
reserves for specific loans identified as substandard during
management's loan review.
The table "Allocation of Allowance for Loan Losses" which follows
shows the specific allowance applied by loan type and also the general
allowance included in the December 31, 1997 and 1996, allowance for loan losses.
The provision for loan losses is a charge to earnings in the current period
to replenish the allowance and maintain it at a level management has determined
to be adequate. As of December 31, 1997 and 1996, the respective allowance for
loan losses were 1.39% and 1.35% of outstanding loans.
Allocation of Allowance for Loan Losses
1997 1996
Commercial 135,128 6.49% 191,819 9.40%
Real estate 749,644 36.03% 665,194 32.60%
Construction 5,491 0.26% 9,109 0.45%
Consumer 158,785 7.63% 159,296 7.81%
Commitments 22,992 1.10% 57,244 2.81%
General 1,008,758 48.49% 957,813 46.93%
Total $ 2,080,798 100.00% $ 2,040,475 100.00%
Allowance for Loan Losses
1997 1996
Balance at beginning
of year $ 2,040,475 $ 1,858,991
Loan losses:
Commercial - 196
Mortgages 13,701 4,694
Consumer 4,854 18,105
Total loan losses 18,555 22,995
Recoveries on loans
previously charged off:
Commercial 198 425
Consumer 8,680 11,054
Total loan recoveries 8,878 11,479
Net loan losses 9,677 11,516
Provision for loan losses
charged to expense 50,000 193,000
Balance at end of year $ 2,080,798 $ 2,040,475
Allowance for loan losses
to loans outstanding
at end of year 1.39% 1.35%
Net charge-offs to
average loans 0.01% 0.01%
As a result of management's ongoing review of the loan portfolio,
loans are classified as nonaccrual when it is not reasonable to expect
collection of interest under the original terms. These loans are classified as
nonaccrualeven though the presence of collateral or the borrower's
financial strength may be sufficient toprovide for ultimate repayment.
Interest on nonaccrualloans is recognized only when received. A delinquent loan
is generally placed in nonaccrual status when it becomes 90 days
or more past due. When a loan is placed in nonaccrual status, all
interest which has been accrued on the loan but remains unpaid is reversed
and deducted from earnings as a reduction of reported
interest income. No additional interest is accrued on the loan balance
until the collection of both principal and interest becomes reasonably certain.
The Company had no nonperforming loans at December 31, 1997, while
year-end 1996 nonperforming loans totaled $67,194. Where real estate acquired
by foreclosure and held for sale is included with nonperforming
loans, the result comprises nonperforming assets. Loans are classified as
impaired when the collection of contractual obligations, including
principal and interest, is doubtful. Management has identified no significant
impaired loans as of December 31, 1997 or 1996.
Liquidity and Interest Rate Sensitivity
The primary objective of asset/liability management is to ensure the
steady growth of the Company's primary source of earnings, net interest income.
Net interest income can fluctuate with significant interest rate movements. To
lessen the impact of these margin swings, the balance sheet should be
structured so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in
time constitute interest rate sensitivity.
Liquidity represents the ability to provide steady sources of funds for loan
commitments and investment activities, as well as to provide sufficient
funds to cover deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by converting assets to
cash or by attracting new deposits.
Average liquid assets (cash and amounts due from banks, interest bearing
deposits in other banks, federal funds sold, and investment securities) were
45.14% of average deposits for 1997, compared to 46.19% for 1996.
Interest rate sensitivity may be controlled on either side of the balance
sheet. On the asset side, management can exercise some control on maturities.
Also, loans may be structured with rate floors and ceilings on variable
rate notes and by providing for repricing opportunities on fixed rate notes.
The Company's investment portfolio, including federal funds sold,
provides the most flexible and fastest control over rate sensitivity since
it can generally be restructured more quickly than the loan portfolio.
On the liability side, deposit products can be restructured so as to offer
incentives to attain the maturity distribution desired. Competitive factors
sometimes make control over deposits more difficult and less effective.
Interest rate sensitivity refers to the responsiveness of interest-bearing
assets and liabilities to changes in market interest rates. The
rate-sensitive position, or gap, is the difference in the volume
of rate-sensitive assets and liabilities at a given time interval.
The general objective of gap management is to actively manage
rate-sensitive assets and liabilities to reduce the impact of
interest rate fluctuations on the net interest margin. Management
generally attempts to maintain a balance between rate-sensitive assets and
liabilities as the exposure period is lengthened to minimize the overall
interest rate risk to the Company.
The asset mix of the balance sheet is continually evaluated in terms of
several variables; yield, credit quality, appropriate funding sources,
and liquidity. Management of the liability mix of the balance sheet
focuses on expanding the various funding sources.
The interest rate sensitivity position at December 31, 1997, is presented
in the table "Interest Sensitivity Analysis." The difference between
rate-sensitive assets and rate-sensitive liabilities, or the
interest rate sensitivity gap, is shown at the bottom of the table.
The Company was asset-sensitive for all time horizons. For asset-sensitive
institutions, if interest rates should decrease, the net interest
margins should decline. Since all interest rates and yields do not adjust
at the same velocity, the gap is only a general indicator of rate sensitivity.
Interest Sensitivity Analysis
December 31, 1997
After three
Within but within After one
three twelve but within After
months months five years five years Total
Assets
Earning assets:
Federal funds
sold 20,207,703 $ - $ - $ - $ 20,207,703
Interest-bearing
deposits 100,000 935,000 194,000 - 1,229,000
Investment
securities 18,330,186 22,310,552 22,608,522 2,310,000 65,559,260
Loans 144,214,543 381,598 4,122,176 553,313 149,271,630
Total earning
assets $ 182,852,432 23,627,150 26,924,698 2,863,313 236,267,593
Liabilities
Interest-bearing
liabilities:
Money market 55,482,239 - - - 55,482,239
Savings and
NOW deposits 55,214,983 - - - 55,214,983
Certificates
$100,000 and
over 1,490,525 5,653,695 1,203,917 - 8,348,137
Certificates
under $100,000 17,566,176 27,644,757 9,443,318 - 54,654,251
Total
interest-bearing
liabilities 129,753,923 33,298,452 10,647,235 - 173,699,610
Period gap 53,098,509 (9,671,302) 16,277,463 2,863,313 62,567,983
Cumulative
gap 53,098,509 43,427,207 59,704,670 62,567,983 62,567,983
Ratio of
cumulative gap
to total earning
assets 22.47% 18.38% 25.27% 26.48% 26.48%
The table "Investment Securities Maturity Distribution and Yields" shows that
as of December 31, 1997, $40,640,738 of the investment portfolio matures in one
year or less. The balance of the debt securities mature within five
years except for the only debt security classified as "available-for-sale."
The funds invested in federal funds sold provide liquidity so that only
debt securities with an original maturity in excess of ten years have
been classified as "available-for-sale." Other sources of liquidity
include letters of credit, overnight federal funds, and reverse repurchase
agreements available from correspondent banks. The total
lines of credit available from correspondent banks at December 31, 1997,
was $15,000,000.
Investment Security Maturity Distribution and Yields
1997 1996
Year-end Year-end
tax equivalent tax equivalent
Book value yields Book value yields
U.S. Treasury
securities:
One year or less $ 34,909,733 5.76% $ 21,739,065 5.56%
Over one
through five 18,980,412 6.00% 25,452,039 6.12%
Over ten years 2,310,000 7.29% 2,125,000 7.29%
Total U.S. Treasury
securities 56,200,145 5.90% 49,316,104 5.92%
State, county, and
municipal
securities:
One year or less 5,731,005 5.74% 7,843,837 5.75%
Over one through
five 3,628,110 6.10% 7,575,301 6.14%
Over ten years - - % - - %
Total state, county,
and municipal
securities 9,359,115 5.88% 15,419,138 5.94%
Total investment
securities:
One year or less 40,640,738 5.75% 29,582,902 5.61%
Over one
through five 22,608,522 6.02% 33,027,340 6.12%
Over ten years 2,310,000 7.29% 2,125,000 7.29%
Total debt
securities 65,559,260 5.90% 64,735,242 5.92%
Equity securities 263,450 8.03% 235,400 8.33%
Total securities $ 65,822,710 5.91% $ 64,970,642 5.93%
Yields are calculated based on amortized cost.
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities increased $2,620,713, or
1.55%, to $171,830,997 in 1997, from $169,210,284 in
1996. Average interest-bearing deposits increased $2,675,404, or 1.58%,
1997. to $171,750,254 in 1997, from $169,074,400 in 1996,
while average demand deposits increased $805,807, or 2.41% to $34,304,946
in 1997, from $33,499,139 in 1996. A December 31, 1997, total deposits were
$206,793,198, compared to $204,297,806 at December 31, 1996,
an increase of 1.22%.
The following table sets forth the deposits of the Company by
category as of December 31, 1997 and 1996, respectively.
December 31,
1997 1996
Percent of Percent of
Amount deposits Amount deposits
Demand deposit
accounts 33,093,588 16.00% 31,837,470 15.58%
NOW accounts 23,836,816 11.53% 23,873,331 11.69%
Money market
and Supernow
accounts 55,482,239 26.83% 53,907,865 26.39%
Savings
accounts 31,378,167 15.17% 30,003,012 14.69%
Time deposits
less than
$100,000 54,654,251 26.43% 55,270,915 27.05%
Time deposits
of $100,000
or more 8,348,137 4.04% 9,405,213 4.60%
Total deposits 206,793,198 100.00% 204,297,806 100.00%
Core deposits, which exclude certificates of deposit of $100,000
or more, provide a relatively stable funding source for the Company's loan
portfolio and other earning assets. The Company's core deposits increased
$3,552,468 during 1997. Deposits, and particularly core deposits, have been
the Company's primary source of funding and have enabled the Company to
meet both its short-term and long-term liquidity needs. Management anticipates
that such deposits will continue to be the Company's primary source of funding
in the future. The maturity distribution of the Company's time deposits over
$100,000 at December 31, 1997, is shown in the following table.
December 31, 1997
After six
After three through After
Within three through twelve twelve
months six months months months Total
Certificates
ofdeposit
of $100,000
or more $ 1,490,525 $ 5,653,695 $ 1,203,917 - $ 8,348,137
Large certificate of deposit customers tend to be extremely sensitive to
interest rate levels, making these deposits less reliable sources
of funding for liquidity planning purposes than core deposits. Some financial
institutions partially fund their balance sheets using large certificates of
deposit obtained through brokers. These brokered deposits are generally
expensiveand are unreliable as long-term funding sources. Accordingly, the
Company does not accept brokered deposits.
Borrowed funds consist of an obligation under capital lease which is
paying down over the five year lease term which expires in 1998.
Noninterest Income
Noninterest income for 1997 was $853,278, compared to noninterest
income in 1996 of $791,305, an increase of $61,973, or 7.83%. The Bank has
restructured its credit card merchant fees which resulted in an increased in
credit card income of $18,115. Service charges on deposits have grown with the
growth in deposits while the Bank has implemented only a modest increase
in the fee schedule.
The following table presents the principal components of noninterest
income for the years ended December 31, 1997 and 1996, respectively.
Noninterest Income
1997 1996
Serivice charges on
deposit accounts $ 607,647 $ 567,154
Other noninterest
revenue 245,631 224,151
Total noninterest
income $ 853,278 $ 791,305
Noninterest income as
a percentage of average
total assets 0.34% 0.33%
Noninterest Expense
Noninterest expense increased by $325,286, or 7.54%, from $4,314,750
in 1996 to $4,640,036 in 1997. Increased personnel costs were due primarily to
annual raises. Other operating expenses have increased with the growth in
deposits and loans and as general prices have increased.
The Company has plans to open a second bank in Delaware during the first
half of 1998. The opening of this office is expected to increase noninterest
expense.
The following table presents the principal components of noninterest
expense for the years ended December 31, 1997 and 1996, respectively.
Noninterest Expense
1997 1996
Compensation and related expenses 2,757,865 2,573,228
Occupancy expense 366,170 363,175
Furniture and equipment expense 450,593 417,582
Amortization of intangible assets 18,249 18,368
Advertising 117,356 124,635
Courier service 66,615 66,910
Deposit insurance 31,666 2,000
Director fees 64,352 61,200
Dues, donations, and subscriptions 58,658 41,384
Freight 47,145 28,604
Liability insurance 56,172 52,068
Postage 150,210 153,123
Professional fees 63,194 53,864
Stationery and supplies 163,105 139,428
Telephone 61,145 65,388
Teller machine fees 65,207 53,197
Miscellaneous 102,334 100,596
Total noninterest expense $ 4,640,036 $ 4,314,750
Noninterest expense as a
percentage of average
total assets 1.87% 1.78%
Capital
Under the capital guidelines of the Federal Reserve Board and the
FDIC, the Company and the Bank are currently required to maintain a minimum
risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital.
Tier 1 capital consists of common shareholders' equity, qualifying perpetual
preferred stock, and minority interests in equity accounts
of consolidated subsidiaries,less certain intangibles. In addition, the
Company and the Bank must maintaina 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.
At December 31, 1997, the Company and the Bank exceeded their
regulatory capital ratios, as set forth in the following table.
Analysis of Capital
Analysis of Capital
Required 1997 1996
Minimums Company Bank Company Bank
Total risk-based
capital ratio 8.0% 36.1% 32.5% 33.6% 32.8%
Tier I risk-based
capital ratio 4.0% 34.9% 31.2% 32.3% 31.5%
Tier I
leverage ratio 3.0% 16.7% 14.8% 15.8% 15.4%
Accounting Rule Changes
FASB Statement No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities requires recognition of
financial and servicing assets an entity controls and the liabilities it has
incurred after a transfer has occurred. The Statement was effective for
transfers occurring after December 31, 1996.
FASB Statement No. 128, Earnings Per Share replaces the presentation
of primary earnings per share with a presentation of basic earnings per share.
It also requires a dual presentation of basic and diluted earnings per share
on the face of the income statement. It is effective for financial
statements issued for periods ending after December 15, 1997. Because of the
noncomplex capital structure of the Company, this pronouncement did not
change the earnings per share presentation.
FASB Statement No. 129, Disclosure of Information about Capital
Structure establishes standards for disclosing information about an entity's
capital structure, including dividend and liquidation preferences, participation
rights and any unusual voting rights. It is effective for financial
statements for periods ending after December 15, 1997. There were no changes
to the Bank's financial statements as a result of this new standard.
FASB Statement No. 130, Reporting Comprehensive Income requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Comprehensive income of the Bank would include unrealized gains and losses on
securities available for sale, net of tax. This Statement is effective for
financial statements for periods beginning after December 15, 1997.
FASB Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information requires that a public company report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by management in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. This Statement is effective for financial statements
for periods beginning after December 15, 1997.
Impact of Inflation
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 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. See "Liquidity and Interest Rate Sensitivity" above.
Industry Developments
Certain recently enacted and proposed legislation could have an effect on
both the costs of doing business and the competitive factors facing the
financial institution industry. The Company is unable at this time to assess
the impact of this legislation on its financial condition or results of
operations.
Year 2000 Issues
The Company anticipates replacing its in-house computer system by the
first quarter of 1999. It will only invest in hardware and software that
will operate effectively through and past the year 2000 (y2k). The current
hardware and software vendors have made changes to get their computers and
programs year 2000 compliant. In addition to its mainframe, the Company has
numerous portable computers. It is in the process of accessing which
computers and programs will need to be replaced before the end of 1999.
Because the Bank routinely upgrades its computers, the cost to replace old
machines and software is not expected to exceed the normal replacement costs
for the next two years. The largest y2k exposure to most banks is the
preparedness of its customers. Management is addressing with its customers
the possible consequences of not being prepared for y2k.
Should large borrowers not sufficiently address this area, the Company may
experience an increase in loan defaults. The amount of potential loss from
this issue is not quantifiable. Management is reducing its exposure to these
losses by educating its customers.
MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Articles of Incorporation authorize it to issue up to
2,000,000 shares of the common stock.
As of February 24, 1998, there were approximately 595 holders of
record of the common stock and 810,000 shares of Common Stock issued and
outstanding. There is no established public trading market in the stock, and
there is no likelihood that a trading market will develop in the near future.
The development of a trading market may be inhibited because a large portion
of the Company's shares is held by insiders. Transactions in the common
stock are infrequent and are negotiated privately between the persons
involved in those transactions.
All outstanding shares of common stock of the Company are entitled
to share equally in dividends from funds legally available, when, as, and if
declared by the Board of Directors. The Company paid dividends of $2.70 per
share in 1997, and $2.10 per share in 1996. During both 1997 and 1996, the
Company paid a special midyear dividend of $1.00 per share that is not expected
to be an annual event.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Calvin B. Taylor Banking Company, a state bank organized under the
laws of the State of Maryland.
Calvin B. Taylor Company, Delaware is in organization to be chartered
under the laws of the State of Delaware.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,150,979
<SECURITIES> 84,007,816
<RECEIVABLES> 1,229,000
<ALLOWANCES> 2,080,798
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<PP&E> 4,152,389
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<SALES> 16,149,830
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<CGS> 5,965,863
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