SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM __________________ TO _________________
Commission File Number: 0001003986
CALVIN B. TAYLOR BANKSHARES, INC.
(Exact name of issuer as specified in its charter)
Maryland 52-1948274
(State of incorporation) (I.R.S. Employer Identification No.)
24 North Main Street, Berlin, Maryland 21811
(Address of principal executive offices)
(410) 641-1700
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 has 1,620,000 shares of common stock ($1.00 par) outstanding
as of November 6, 1998.
Transitional Small Business Disclosure Format (check one) YES NO X
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Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Form 10-QSB
Index
Part I - Financial Information Page
Item 1 Financial Statements
Consolidated Statements of Condition 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 7-8
Part II - Other Information
Item 1 Legal Proceedings 9
Item 2 Changes in Securities 9
Item 3 Defaults Upon Senior Securities 9
Item 4 Submission of Matters to a Vote of
Security Holders 9
Item 5 Other Information 9
Item 6 Exhibits and Reports on Form 8-K 9
- -2-
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part I - Financial Information
Consolidated Statements of Condition
(unaudited)
September 30 December 31,
1998 1997
Assets
Cash and due from banks $ 10,359,153 $ 9,150,979
Federal funds sold 30,117,138 20,207,703
Interest-bearing deposits 1,228,000 1,229,000
Investment securities available
for sale 3,093,589 2,573,450
Investment securities held to maturity
(approximate fair value
of $83,996,825 and $63,457,503) 83,159,649 63,249,260
Loans, less allowance for credit losses
of $2,089,139 and $2,080,798 143,844,823 147,190,832
Premises and equipment 4,819,044 4,152,389
Accrued interest income 1,542,760 1,790,423
Intangible assets 90,475 107,476
Deferred income taxes 7,877 104,061
Other assets 97,758 137,039
$ 278,360,266 $ 249,892,612
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 37,159,124 $ 33,093,588
Interest-bearing 194,373,267 173,699,610
231,532,391 206,793,198
Accrued interest payable 484,547 433,344
Accrued income taxes - 21,527
Obligation under capital lease - 61,720
Other liabilities 4,472 5,806
232,021,410 207,315,595
Stockholders' equity
Common stock, par value $1 per share
authorized 2,000,000 shares, issued and
outstanding 1,620,000 shares in 1998 and
810,000 shares in 1997 1,620,000 810,000
Capital surplus 17,290,000 17,290,000
Retained earnings 26,890,130 24,120,666
45,800,130 42,220,666
Net unrealized gain on securities
available for sale 538,726 356,351
46,338,856 42,577,017
$ 278,360,266 $ 249,892,612
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Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (unaudited)
For the three months ended For the nine months ended
September 30 September 30
1998 1997 1998 1997
Interest and dividend revenue
Loans, including fees $ 3,090,783 $ 3,193,087 $ 9,354,603 $ 9,607,249
U.S. Treasury securities 966,122 740,258 2,537,354 2,005,109
State and municipal
securities 139,461 115,465 344,955 386,140
Federal funds sold 405,231 454,173 1,010,701 909,664
Deposits with banks 17,265 17,345 53,605 51,735
Equity securities 4,046 3,322 10,756 9,878
Total interest and
dividend revenue 4,622,908 4,523,650 13,311,974 12,969,775
Interest expense
Deposit interest 1,660,900 1,534,663 4,676,870 4,424,169
Other - - - 1,829
Total interest expense 1,660,900 1,534,663 4,676,870 4,425,998
Net interest income 2,962,008 2,988,987 8,635,104 8,543,777
Provision for credit losses 1,175 - 1,175 25,000
Net interest income after
provision for credit
losses 2,960,833 2,988,987 8,633,929 8,518,777
Other operating revenue
Service charges on deposit
accounts 186,292 155,407 508,661 452,771
Miscellaneous revenue 102,392 73,630 262,237 210,725
Total other operating revenue 288,684 229,037 770,898 663,496
Other expenses
Salaries and employee
benefits 703,773 638,798 2,180,312 2,039,343
Occupancy 175,148 156,851 382,821 370,152
Furniture and equipment 78,954 64,770 297,477 279,563
Other operating 328,244 301,488 1,074,734 809,046
Total other expenses 1,286,119 1,161,907 3,935,344 3,498,104
Income before income taxes 1,963,398 2,056,117 5,469,483 5,684,169
Income taxes 671,083 704,023 1,890,019 2,031,365
Net income $ 1,292,315 $ 1,352,094 $ 3,579,464 $ 3,652,804
Basic earnings per share $ 1.60 $ 1.67 $ 4.42 $ 4.51
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Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
For the nine months ended
September 30
1998 1997
Cash flows from operating activities
Interest received $ 13,353,423 $ 12,803,403
Other revenue received 711,584 613,425
Cash paid for operating expenses (3,652,745) (3,243,010)
Interest paid (4,625,667) (4,424,840)
Taxes paid (1,810,687) (2,026,802)
3,975,908 3,722,176
Cash flows from investing activities
Cash paid for premises, equipment,
intangibles,and construction in progress (935,851) (917,244)
Net customer loans repaid (advanced) 3,344,834 2,410,583
Redemption of matured securities 36,770,000 27,672,000
Investment in securities (56,715,755) (31,734,780)
Redemption of certificates, net of
purchases 1,000 194,000
(17,535,772) (2,375,441)
Cash flows from financing activities
Net change in time deposits 6,705,272 (250,414)
Net change in other deposits 18,033,921 9,086,007
Payment on capital lease (61,720) (64,891)
Dividends paid - (810,000)
24,677,473 7,960,702
Net increase (decrease) in cash 11,117,609 9,307,437
Cash and equivalents at beginning of period 29,358,682 23,802,923
Cash and equivalents at end of period $ 40,476,291 $ 33,110,360
Reconciliation of net income to net cash provided
from operating activities
Net income $ 3,579,464 $ 3,652,804
Adjustments
Depreciation and amortization 286,196 256,307
Deferred tax provision - (14,004)
Provision for loan losse 1,175 25,000
Security discount accretion, net of
Premium amortization (206,214) (297,782)
Decrease (increase) in accrued interest
receivable and other assets 286,945 83,079
Increase (decrease) in accrued interest
payable and other liabilities 28,342 16,772
$ 3,975,908 $ 3,722,176
- - 5 -
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Notes to Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for the interim
financial information and with the instructions to Form 10-QSB and Regulation
S-X of the Securities and Exchange Commission. 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 (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results of the
nine months ended September 30, 1998 and 1997 are not necessarily indicative of
the results that may be expected for the years ending December 31, 1998 and
1997. For further information, refer to the financial statements and
footnotes thereto for the Registrant's fiscal period ended December 31, 1997.
2. 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.
3. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, which requires
the reporting of comprehensive income. Comprehensive income includes
unrealized gains and losses, including the unrealized gains and losses on
available-for-sale securities that have been reported as a separate component
of stockholders' equity, not recognized in net income. The adoption of this
statement had no impact on the Company's net income or stockholders' equity.
For the nine months ended September 30, 1998 and 1997, total comprehensive
income, net of taxes, was $3,761,839 and $3,680,217, respectively.
3. Other Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, which requires
disclosures about reportable operating segments. Although this statement
is effective for periods beginning after December 15, 1997, it is not
required to be applied for interim periods during 1998. This statement will
require additional disclosures in the Company's 1998 annual report.
In June, 1998, the the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. The Company currently has no
derivative instruments or hedging activities so no effect is expected.
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Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Part I Financial Information
Item 2. Management's Discussion and Analysis or Plan of Operation.
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
The Company was incorporated in Maryland on October 31, 1995, as a bank
holding company. Stock of a Maryland state bank with the name Calvin B.
Taylor Banking Company was exchanged in February, 1996 for the outstanding
stock of the Company. A second bank was chartered as a Delaware state bank
with the name Calvin B. Taylor Bank of Delaware.
The Maryland bank was established in 1890 and incorporated in 1907 while
the Delaware bank. was chartered in 1997, opening late during the second
quarter of 1998. The Company currently engages in no business other than
owning and managing the Banks.
Financial Condition, Liquidity and Sources of Capital
The major sources of liquidity of the Company arise from loan repayments,
short-term investments, including federal funds sold, and an increase in
core deposits. During the first quarter of the year, the Bank typically
experiences a decline in deposits since these businesses are using their
deposits to meet their cash flow needs. Generally, this situation reverses
during the second quarter of the year as the businesses start repaying loans,
and the Banks receive seasonal deposits from tourists and summer
residents. Througout the second and
third quarters the Banks maintain a high liquidity level. Funds from
seasonal deposits are invested in short-term U.S. Treasury Bills and Federal
Funds. Because of decreased loan demand, the Maryland bank has shifted
funds to more liquid investments causing the 1998 liquidity ratios to be
higher than normal for the period. The new Delaware bank has opened deposit
accounts totaling approximately $947,000 while extending loans totaling
approximately $87,000. 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 55.17% for the
third quarter of 1998 compared to 46.49% for the second quarter of 1998 and
39.76% third quarter of 1997.
At September 30, 1998, the Company's interest rate sensitivity, as measured
by gap analysis, showed the Company was asset-sensitive with a one-year
cumulative gap, as a percentage of interest-earning assets, of 9.70%.
Generally asset-sensitivity indicates that assets reprice quicker 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 its demand mortgage and commercial
loans as immediately repriceable. Unlike loans tied to prime, these rates
rests with management. The cumulative gap declined primarily due to shift
from demand loans to investment securities with longer terms
while money market accounts, now accounts, and savings accounts, which are
considered immediately repriceable, have increased.
Tier one risk-based capital ratios of the Company as of September 30, 1998
and 1997 were 36.73% and 35.05%, respectively. Both are substantially in
excess of regulatory minimum requirements.
Results and Plan of Operation
Net income for the three months ended September 30, 1998, was $1,292,315 or
$1.60 per share, compared to $1,353,297 or $1.67 per share for the third
quarter of 1997. The Company experienced decreased earnings of $74,543,
through the third quarter from prior year earnings. The primary reason net
income decreased is due to an increase in other operating expense.
- - 7 -
Results and Plan of Operation (continued)
Increases in net interest income and other operating income were offset by
increased other operating expenses. The third quarter other operating
expenses were higher in 1998 compared to 1997 as the result of the opening
of the Delaware Bank. Typically new Banks do not break even until their
fourth or fifth year of operation. The Maryland Bank has also incurred
first year costs of its new club product in excess of revenues totaling
approximately $51,000.
The Company reviewed its consolidated loan portfolio and determined the
allowance, at 1.43% of gross loans, was adequate as of September 30, 1998.
At December 31, 1997, the allowance was 1.41% of gross loans. Because the
Maryland bank has experienced both net recoveries and a decline in gross
loans, the only loan loss provision recorded was $1,175 for the Delaware
bank. At September 30, 1998, there were no nonaccruing loans and only .05%
of the portfolio was delinquent ninety days or more.
The year 2000 (Y2k) poses many potential problems for businesses and
individuals. In an effort to conserve hard drive space, in the past
programmers wrote programs that would not recognize the year 2000 correctly.
This can cause system failures for computers and other electronic equipment
that has chip components. Management has a Y2k committee, which reports to
the Board, responsible for assessing progress in the Company's plans to
minimize the effects of the Y2k problem. Management has upgraded the hardware
and software it has identified as needing replacement to be Y2K compliant.
As of September 30, 1998, the Company thinks its systems are Y2k compliant.
Testing of these systems will begin during the middle of the fourth quarter
of 1998. Management has also sent surveys or met with its vendors and large
customers. The Y2k committee and loan officers are in the process of
following up with large customers who have not satisfactorily communicated
their Y2k preparedness to the Company.
The Company believes most of the costs to address the Y2k issues have
occurred. The remaining incremental costs should be the cost of
communicating with the customers not yet Y2k compliant. Management thinks
these costs will have no significant impact on its earnings.
Management believes its greatest Y2k issues are external issues, including
whether borrowers are actually Y2k compliant. If borrowers are not
prepared, their ability to continue in business and repay their debt could
become doubtful.
Management is in the process of evaluating alternatives to replace its
current in-house computer system which is almost five years old. The Company
expects this replacement to occur in 1999 or 2000. During the fourth
quarter of 1998, management will replace the reader/sorter which is integral
to the computer system, but older than most components. The cost of the new
reader/sorter is $522,939. Management also plans to upgrade its optical
system and replace its older personal computers late in 1998 at a total cost
of $52,000. Any new computer system will have to be year 2000
compliant and be able to interface with these new fourth quarter purchases.
The Banks employed one hundred and one full time equivalent employees as of
September 30, 1998. The Maryland bank hires seasonal employees during the
summer. The Company employs no employees outside those hired by the Banks.
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, the Company would
experience a decrease of net interest income of 3.79% if all assets and
liabilities maturing within that period were adjusted for the rate change.
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 and deposits. This paragraph contains certain forward-
looking statements within the meaning of and made pursuant to the safe
harbor provisions of the Private Litigation Securities Reform Act of 1995.
The 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
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 Banks also offer a full range of short- to medium-term commercial and
personal loans. The Banks originate demand mortgage loans and real estate
construction and acquisition loans. Loans originated to date are anticipated
to be held in the portfolios of the originating Banks. 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 Company is associated with the MAC network of
automated teller machines that may be used by Bank customers throughout
Maryland and other regions. The Banks offer MasterCard and VISA credit card
services through a correspondent bank as an agent for the Banks.
- -9-
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Part II Other Information
Item 1 Legal Proceedings
Not applicable
Item 2 Changes in Securities
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 April 22, 1998, is incorporated by reference.
b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended
September 30, 1998.
- -10-
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 CEO
Date: _________________ By: /s/ William H. Mitchell
William H. Mitchell
Chief Financial Officer
Calvin B. Taylor Bankshares, Inc.
Financial Data Schedule
Item September 30,
Number 1998
9-03(1) Cash and due from banks 10,359,153
9-03(2) Interest-bearing deposits 1,228,000
9-03(3) Federal Funds sold 30,117,138
9-03(4) Trading account assets
9-03(6) Investment and mortgage-backed securities
held for sale 3,093,589
9-03(6) Investment and mortgage-backed securities
held to maturity - carrying value 83,159,649
9-03(6) Investment and mortgage-backed securities
held to maturity - market value 83,996,825
9-03(7) Loans 145,933,962
9-03(7)(2) Allowance for losses 2,089,139
9-03(11) Total assets 278,360,266
9-03(12) Deposits 231,532,391
9-03(13) Short-term borrowings -
9-03(15) Other liabilities 489,019
9-03(16) Long-term debt
9-03(19) Preferred stock - mandatory redemption
9-03(20) Preferred stock - no mandatory redemption
9-03(21) Common stock 1,620,000
9-03(22) Other stockholders' equity 44,718,856
9-03(23) Total liabilities and stockholders' equity 278,360,266
Calvin B. Taylor Bankshares, Inc.
Financial Data Schedule
(continued)
Six Months Ended
Guide September 30,
Number 1998
9-04(1) Interest and fees on loans 9,354,603
9-04(2) Interest and dividends on investments 2,893,065
9-04(4) Other interest income 1,064,306
9-04(5) Total interest income 13,311,974
9-04(6) Interest on deposits 4,676,870
9-04(9) Total interest expense 4,676,870
9-04(10) Net interest income 8,635,104
9-04(11) Provision for loan losses 1,175
9-04(13)(b)Investment securities gains/(losses) -
9-04(14) Other expenses 3,935,344
9-04(15) Income/loss before income tax 5,469,483
9-04(17) Income/loss before extraordinary items 5,469,483
9-04(18) Extraordinary items, less tax -
9-04(19) Cumulative change in accounting principles -
9-04(20) Net income or loss 3,579,464
9-04(21) Earnings per share - basic 4.42
9-04(21) Earnings per share - diluted 4.42
I.B.5 Net yield on interest earning assets 5.19 %
III.C.1(a) Loans on nonaccrual -
III.C.1(b) Accruing loans past due 90 days or more 73,040
III.C.1(c) Troubled debt restructuring -
III.C.2 Potential problem loans -
IV.A.1 Allowance for loan loss-beginning of period 2,080,798
IV.A.2 Total chargeoffs 7,172
IV.A.3 Total recoveries 14,338
IV.A.4 Allowance for loan loss-end of period 2,089,139
IV.B.1 Loan loss allowance allocated to domestic
loans 2,089,139
IV.B.2 Loan loss allowance allocated to foreign
loans -
IV.B.3 Loan loss allowance - unallocated -
- -11-
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,359,153
<SECURITIES> 0
<RECEIVABLES> 145,933,962
<ALLOWANCES> 2,089,139
<INVENTORY> 0
<CURRENT-ASSETS> 3,093,589
<PP&E> 0
<DEPRECIATION> 286,196
<TOTAL-ASSETS> 278,360,266
<CURRENT-LIABILITIES> 231,532,391
<BONDS> 0
0
0
<COMMON> 1,620,000
<OTHER-SE> 44,718,856
<TOTAL-LIABILITY-AND-EQUITY> 278,360,266
<SALES> 3,090,783
<TOTAL-REVENUES> 4,622,908
<CGS> 1,660,900
<TOTAL-COSTS> 2,962,008
<OTHER-EXPENSES> 1,286,119
<LOSS-PROVISION> 2,960,833
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,963,398
<INCOME-TAX> 671,083
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,292,315
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