Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended
June 30, 2012
Commission File No.
000-50047
Calvin B. Taylor Bankshares, Inc.
(Exact name of registrant as specified in its Charter)
Large accelerated filer ____ Accelerated filer [X]
Non- accelerated filer ____ (Do not check if a smaller reporting company) Smaller reporting company ____
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements conform with
accounting principles generally accepted in the United States of America and to
the instructions to Form 10-Q. Interim financial statements do not include all
the information and footnotes required for complete financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation of financial position and results of operations for these interim
periods have been made. These adjustments are of a normal recurring nature.
Results of operations for the six months ended June 30, 2012 are not necessarily
indicative of the results that may be expected in any other interim period or
for the year ending December 31, 2012. For further information, refer to the
audited consolidated financial statements and related footnotes included in the
Company's Form 10-K for the year ended December 31, 2011.
Consolidation has resulted in the elimination of all significant intercompany
accounts and transactions.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, federal funds sold, and interest-bearing
deposits except for time deposits. Federal funds are purchased and sold for
one-day periods.
Per share data
Earnings per common share are determined by dividing net income by the
weighted average number of common shares outstanding for the period, as follows:
|
2012
|
2011
|
Three months ended June 30
|
2,993,971
|
3,000,508
|
Six months ended June 30
|
2,994,938
|
3,000,508
|
- 8 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
2. Investment Securities
Investment securities are summarized as follows:
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|
cost
|
gains
|
losses
|
value
|
June 30, 2012
|
|
|
|
|
Available for sale
|
|
|
|
|
U.S. Treasury
|
$ 42,009,625
|
$ 1,139,879
|
$ 6,615
|
$ 43,142,889
|
State and municipal
|
402,925
|
4,131
|
3,170
|
403,886
|
Equity
|
1,598,817
|
552,888
|
465,726
|
1,685,979
|
|
$ 44,011,367
|
$ 1,696,898
|
$ 475,511
|
$ 45,232,754
|
Held to maturity
|
U.S. Treasury
|
$ 52,979,905
|
$ 154,744
|
$ 7,088
|
$ 53,127,561
|
U.S. Government agency
|
7,000,000
|
1,400
|
1,700
|
6,999,700
|
State and municipal
|
5,918,268
|
11,737
|
1,487
|
5,928,518
|
|
$ 65,898,173
|
$ 167,881
|
$ 10,275
|
$ 66,055,779
|
|
December 31, 2011
|
|
|
|
|
Available for sale
|
|
|
|
|
U.S. Treasury
|
$ 46,013,913
|
$ 1,149,257
|
$ 4,231
|
$ 47,158,939
|
State and municipal
|
289,515
|
2,890
|
-
|
292,405
|
Equity
|
1,602,843
|
557,360
|
514,672
|
1,645,531
|
|
$ 47,906,271
|
$ 1,709,507
|
$ 518,903
|
$ 49,096,875
|
Held to maturity
|
U.S. Treasury
|
$ 44,993,821
|
$ 246,352
|
$ 5,402
|
$ 45,234,771
|
U.S. Government agency
|
9,500,004
|
1,556
|
16,310
|
9,485,250
|
State and municipal
|
6,130,414
|
18,079
|
2,211
|
6,146,282
|
|
$ 60,624,239
|
$ 265,987
|
$ 23,923
|
$ 60,866,303
|
- 9 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
2. Investment Securities (Continued)
The table below shows the gross unrealized losses and fair value of
securities that are in an unrealized loss position as of June 30, 2012,
aggregated by length of time that individual securities have been in a
continuous unrealized loss position.
|
Less than 12 months
|
12 months or more
|
Total
|
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|
value
|
losses
|
value
|
losses
|
value
|
losses
|
|
|
|
|
|
|
|
U.S. Treasury
|
$ 30,968,800
|
$ 13,703
|
$ -
|
$ -
|
$ 30,968,800
|
$ 13,703
|
U. S. Government Agency
|
1,998,300
|
1,700
|
-
|
-
|
1,998,300
|
1,700
|
State and municipal
|
1,381,391
|
4,657
|
-
|
-
|
1,381,391
|
4,657
|
Equity securities
|
349,214
|
54,786
|
347,057
|
410,940
|
696,271
|
465,726
|
Total
|
$ 34,697,705
|
$ 74,846
|
$ 347,057
|
$ 410,940
|
$ 35,044,762
|
$ 485,786
|
The debt securities for which an unrealized loss is recorded are issues
of the Federal Home Loan Bank (a U. S. government agency), and general and
highly rated revenue obligations of states and municipalities. The Company
has the ability and the intent to hold these securities until they are
called or mature at face value. Equity securities for which an unrealized
loss is recorded are issued by local community banks and bank holding
companies. Management believes that these fluctuations in fair value reflect
market conditions, and are not indicative of other-than-temporary impairment
of the investments.
In the second quarter of 2011, the Company recorded expense of $178,325
related to the other than temporary impairment (OTTI) of value of two equity
investments. In the current quarter, one of the two equity investments
ceased business operations and as a result the remaining carrying value of
$4,026 was recorded as a loss. The OTTI related to the failed investment was
$110,994, recorded in the second and third quarters of 2011. OTTI of $78,000
remains, associated with another equity holding.
The amortized cost and estimated fair value of debt securities, by
contractual maturity and the amount of pledged securities, follow. Actual
maturities may differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
|
June 30, 2012
|
|
December 31, 2011
|
|
Amortized
|
Fair
|
|
Amortized
|
Fair
|
|
cost
|
value
|
|
cost
|
value
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
Within one year
|
$ 23,004,906
|
$ 23,014,789
|
|
$ 32,099,999
|
$ 32,167,588
|
After one year
|
|
|
|
|
|
through five years
|
17,410,569
|
17,462,386
|
|
12,206,498
|
12,288,356
|
After ten years
|
1,997,075
|
3,069,600
|
|
1,996,931
|
2,995,400
|
|
$ 42,412,550
|
$ 43,546,775
|
|
$ 46,303,428
|
$ 47,451,344
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
Within one year
|
$ 29,229,182
|
$ 29,276,201
|
|
$ 27,304,678
|
$ 27,382,951
|
After one year
|
|
|
|
|
|
through five years
|
36,668,991
|
36,779,578
|
|
33,319,561
|
33,483,352
|
|
$ 65,898,173
|
$ 66,055,779
|
|
$ 60,624,239
|
$ 60,866,303
|
|
|
|
|
|
|
Pledged securities
|
$ 20,591,268
|
$ 20,696,491
|
|
$ 22,739,753
|
$ 22,905,072
|
Investments are pledged to secure deposits of federal and local
governments. Pledged securities also serve as collateral for securities sold
under agreements to repurchase.
- 10 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
3. Loans and Allowance for Loan Losses
Major classifications of loans are as follows:
|
June 30, 2012
|
December 31, 2011
|
Real estate mortgages
|
|
|
Construction, land development, and land
|
$ 14,258,481
|
$ 13,162,460
|
Residential 1 to 4 family, 1st liens
|
82,783,813
|
85,772,367
|
Residential 1 to 4 family, subordinate liens
|
1,983,536
|
2,015,355
|
Commercial properties
|
121,756,428
|
113,010,943
|
Commercial
|
14,308,510
|
12,507,978
|
Consumer
|
1,729,588
|
1,737,297
|
Total Loans
|
236,820,356
|
228,206,400
|
Allowance for loan losses
|
763,308
|
672,261
|
Loans, net
|
$ 236,057,048
|
$ 227,534,139
|
Nonperforming loans are loans past due 90 or more days and still accruing
plus nonaccrual loans. Nonperforming assets are comprised of nonperforming
loans combined with real estate acquired in foreclosure and held for sale.
The following table details the composition of nonperforming assets:
|
June 30,
|
December 31,
|
|
2012
|
2011
|
Loans 90 days or more past due and still accruing
|
|
|
Real estate mortgages
|
|
|
Construction, land development, and land
|
$ 233,411
|
$ -
|
Commercial properties
|
684,422
|
684,422
|
Total
|
917,833
|
684,422
|
|
Nonaccruing loans
|
|
|
Real estate mortgages
|
|
|
Construction, land development, and land
|
588,954
|
965,708
|
Residential 1 to 4 family, 1st liens
|
246,127
|
-
|
Total current
|
835,081
|
965,708
|
|
|
|
Real estate mortgages
|
|
|
Construction, land development, and land
|
333,414
|
255,081
|
Residential 1 to 4 family, 1st liens
|
614,138
|
1,214,516
|
Commercial properties
|
911,967
|
932,966
|
Total past due 30 days or more
|
1,859,519
|
2,402,563
|
Total nonaccruing loans
|
2,694,600
|
3,368,271
|
Total nonperforming loans
|
3,612,433
|
4,052,693
|
Other real estate owned
|
1,659,260
|
1,715,138
|
Total nonperforming assets
|
$ 5,271,693
|
$ 5,767,831
|
Interest income not recognized on nonaccruing loans was $91,386 for the
six months ended June 30, 2012 and $118,643 for the 12 months ended December
31, 2011.
- 11 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
3. Loans and Allowance for Loan Losses (continued)
The following is a schedule of transactions in the allowance for loan
losses by type of loan. The Company did not acquire any loans with
deteriorated credit quality during the periods presented.
|
Real estate mortgages
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
June 30, 2012
|
and Land
|
Residential
|
Commercial
|
Commercial
|
Consumer
|
Unallocated
|
Total
|
Beginning balance
|
$ 160,392
|
$ 42,064
|
$ 193,570
|
$ 197,353
|
$ 60,487
|
$ 18,395
|
$ 672,261
|
Loans charged off
|
(45,081)
|
(172,884)
|
-
|
(363)
|
(8,110)
|
-
|
(226,438)
|
Recoveries
|
-
|
15,000
|
-
|
3
|
4,982
|
-
|
19,985
|
Provision charged to operations
|
51,570
|
227,150
|
30,220
|
(18,702)
|
(7,597)
|
14,859
|
297,500
|
Ending balance
|
$ 166,881
|
$ 111,330
|
$ 223,790
|
$ 178,291
|
$ 49,762
|
$ 33,254
|
$ 763,308
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
Balance in allowance
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
|
$ -
|
Related loan balance
|
$ 922,369
|
$ 860,264
|
$ 1,596,388
|
$ -
|
$ -
|
|
$ 3,379,021
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
Balance in allowance
|
$ 166,881
|
$ 111,330
|
$ 223,790
|
$ 178,291
|
$ 49,762
|
$ 33,254
|
$ 763,308
|
Related loan balance
|
$ 13,336,112
|
$ 83,907,085
|
$ 120,160,040
|
$ 14,308,510
|
$ 1,729,588
|
|
$ 233,441,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
Beginning balance
|
$ 235,437
|
$ 50,602
|
$ 356,993
|
$ 194,946
|
$ 119,228
|
$ 25,972
|
$ 983,178
|
Loans charged off
|
(227,197)
|
(353,238)
|
(865,683)
|
(18,492)
|
(19,650)
|
-
|
(1,484,260)
|
Recoveries
|
39,072
|
300
|
-
|
410
|
6,261
|
-
|
46,043
|
Provision charged to operations
|
113,080
|
344,400
|
702,260
|
20,489
|
(45,352)
|
(7,577)
|
1,127,300
|
Ending balance
|
$ 160,392
|
$ 42,064
|
$ 193,570
|
$ 197,353
|
$ 60,487
|
$ 18,395
|
$ 672,261
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
Balance in allowance
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
|
$ -
|
Related loan balance
|
$ 1,220,789
|
$ 1,188,260
|
$ 1,617,388
|
$ -
|
$ -
|
|
$ 4,026,437
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
Balance in allowance
|
$ 160,392
|
$ 42,064
|
$ 193,570
|
$ 197,353
|
$ 60,487
|
$ 18,395
|
$ 672,261
|
Related loan balance
|
$ 11,941,671
|
$ 86,599,462
|
$ 111,393,555
|
$ 12,507,978
|
$ 1,737,297
|
|
$ 224,179,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
|
|
|
|
|
Beginning balance
|
$ 235,437
|
$ 50,602
|
$ 356,993
|
$ 194,946
|
$ 119,228
|
$ 25,972
|
$ 983,178
|
Loans charged off
|
(11,553)
|
-
|
-
|
(2,946)
|
(9,105)
|
-
|
(23,604)
|
Recoveries
|
39,072
|
300
|
-
|
400
|
2,588
|
-
|
42,360
|
Provision charged to operations
|
197,989
|
254,000
|
500,000
|
53,729
|
(58,872)
|
2,054
|
948,900
|
Ending balance
|
$ 460,945
|
$ 304,902
|
$ 856,993
|
$ 246,129
|
$ 53,839
|
$ 28,026
|
$ 1,950,834
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment:
|
|
|
|
|
|
|
Balance in allowance
|
$ 193,672
|
$ 234,000
|
$ 850,000
|
$ -
|
$ -
|
|
$ 1,277,672
|
Related loan balance
|
$ 1,421,290
|
$ 786,510
|
$ 2,549,520
|
$ -
|
$ -
|
|
$ 4,757,320
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment:
|
|
|
|
|
|
|
Balance in allowance
|
$ 267,273
|
$ 70,902
|
$ 6,993
|
$ 246,129
|
$ 53,839
|
$ 28,026
|
$ 673,162
|
Related loan balance
|
$ 13,217,717
|
$ 91,862,588
|
$ 115,044,495
|
$ 15,118,015
|
$ 1,620,628
|
|
$ 236,863,443
|
- 12 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
3. Loans and Allowance for Loan Losses (continued)
The table below shows the relationship of net charged-off loans and the
balance in the allowance to gross loans and average loans.
Allowance for Loan Losses
|
|
For six months ended
|
|
For the year ended
|
|
June 30
|
|
December 31
|
|
2012
|
2011
|
|
2011
|
|
|
|
|
|
Net loans charged off (recovered)
|
$ 206,453
|
$ (18,756)
|
|
$ 1,438,217
|
|
|
|
|
|
Balance at end of period
|
$ 763,308
|
$ 1,950,834
|
|
$ 672,261
|
|
|
|
|
|
Gross loans outstanding at the end of the period
|
$ 236,820,356
|
$ 241,620,763
|
|
$ 228,206,400
|
Allowance for loan loses to gross loans
|
|
|
|
|
outstanding at the end of the period
|
0.32%
|
0.81%
|
|
0.29%
|
|
|
|
|
|
Average loans outstanding during the period
|
$ 232,737,626
|
$ 246,535,270
|
|
$ 237,757,026
|
Annualized net charge-offs as a percentage of
|
|
|
|
|
average loans outstanding during the period
|
0.18%
|
-0.02%
|
|
0.60%
|
Loans are considered past due when either principal or interest is not paid
by the date on which payment is due. The following table is an analysis of past
due loans by days past due and type of loan.
Age Analysis of Past Due Loans
|
|
|
|
90 Days
|
|
|
|
90 Days Past
|
|
30-59 Days
|
60-89 Days
|
Past Due
|
Total
|
|
Total
|
Due or Greater
|
June 30, 2012
|
Past Due
|
Past Due
|
or Greater
|
Past Due
|
Current
|
Loans
|
and Accruing
|
Real Estate
|
|
|
|
|
|
|
|
Construction, land development,
|
|
|
|
|
|
|
|
and land
|
$ 333,415
|
$ -
|
$ 233,411
|
$ 566,826
|
$ 13,691,655
|
$ 14,258,481
|
$ 233,411
|
Residential 1 to 4 family, 1st lien
|
772,482
|
1,933,473
|
583,324
|
3,289,279
|
79,494,534
|
82,783,813
|
-
|
Residential 1 to 4 family, subordinate
|
-
|
-
|
-
|
-
|
1,983,536
|
1,983,536
|
-
|
Commercial properties
|
-
|
519,766
|
1,596,389
|
2,116,155
|
119,640,273
|
121,756,428
|
684,422
|
Commercial
|
-
|
-
|
-
|
-
|
14,308,510
|
14,308,510
|
-
|
Consumer
|
-
|
19,276
|
-
|
19,276
|
1,710,312
|
1,729,588
|
-
|
Total
|
$ 1,105,897
|
$ 2,472,515
|
$ 2,413,124
|
$ 5,991,536
|
$ 230,828,820
|
$ 236,820,356
|
$ 917,833
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
Construction, land development,
|
|
|
|
|
|
|
|
and land
|
$ -
|
$ 232,655
|
$ 255,081
|
$ 487,736
|
$ 12,674,724
|
$ 13,162,460
|
$ -
|
Residential 1 to 4 family, 1st lien
|
177,908
|
827,281
|
968,570
|
1,973,759
|
83,798,608
|
85,772,367
|
-
|
Residential 1 to 4 family, subordinate
|
-
|
-
|
-
|
-
|
2,015,355
|
2,015,355
|
-
|
Commercial properties
|
627,117
|
32,953
|
1,617,388
|
2,277,458
|
110,733,485
|
113,010,943
|
684,422
|
Commercial
|
-
|
-
|
-
|
-
|
12,507,978
|
12,507,978
|
-
|
Consumer
|
-
|
2,302
|
-
|
2,302
|
1,734,995
|
1,737,297
|
-
|
Total
|
$ 805,025
|
$ 1,095,191
|
$ 2,841,039
|
$ 4,741,255
|
$ 223,465,145
|
$ 228,206,400
|
$ 684,422
|
|
|
|
|
|
|
|
|
- 13 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
3. Loans and Allowance for Loan Losses (continued)
Loans are considered impaired when management considers it unlikely that
collection of principal and interest payments will be made according to
contractual terms, including principal and interest payments. A performing loan
may be categorized as impaired based on knowledge of circumstances that are
deemed relevant to loan collection. Not all impaired loans are past due nor are
losses expected for every impaired loan. If a loss is expected, an impaired loan
may have specific reserves allocated to it in the allowance for loan losses. A
schedule of impaired loans at period ends and their average balances for the
year follows:
|
Unpaid
|
|
Average
|
Interest Income
|
|
Principal
|
Related
|
Recorded
|
Recognized
|
June 30, 2012
|
Balance
|
Allowance
|
Investment
|
During Impairment
|
With no related allowance recorded
|
|
|
|
|
Construction, land development, and land
|
$ 922,369
|
$ -
|
$ 934,454
|
$ -
|
Residential 1 to 4 family
|
860,264
|
-
|
921,820
|
-
|
Commercial properties
|
1,596,388
|
-
|
1,606,888
|
17,620
|
Total
|
$ 3,379,021
|
$ -
|
$ 3,463,162
|
$ 17,620
|
December 31, 2011
|
|
|
|
|
With no related allowance recorded
|
|
|
|
|
Construction, land development, and land
|
$ 1,220,789
|
$ -
|
$ 1,322,323
|
$ -
|
Residential 1 to 4 family
|
1,214,516
|
-
|
1,329,911
|
-
|
Commercial properties
|
1,617,388
|
-
|
2,072,269
|
44,469
|
Total
|
$ 4,052,693
|
$ -
|
$ 4,724,503
|
$ 44,469
|
- 14 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
3. Loans and Allowance for Loan Losses (continued)
Credit risk is measured based on an internally designed grading scale. The
grades correspond to regulatory rating categories of pass, special mention,
substandard, and doubtful. Evaluation of grades assigned to individual loans is
completed no less than quarterly. Credit quality, as measured by internally
assigned grades, is an important component in the calculation of an adequate
allowance for loan losses. The following table summarizes loans by credit
quality indicator.
|
June 30, 2012
|
December 31, 2011
|
Real Estate Credit Risk Profile by Internally Assigned Grade
|
|
|
Construction, land development, and land
|
|
|
Pass
|
$ 13,336,112
|
$ 11,941,671
|
Doubtful
|
|
|
Less than 90 days past due
|
588,954
|
-
|
Nonperforming: 90 days or more past due and/or non-accruing
|
333,415
|
1,220,789
|
Total
|
$ 14,258,481
|
$ 13,162,460
|
|
|
|
Residential 1 to 4 family
|
|
|
Pass
|
$ 81,213,154
|
$ 83,934,669
|
Substandard
|
2,693,931
|
2,638,537
|
Doubtful
|
|
|
Less than 90 days past due
|
246,126
|
-
|
Nonperforming: 90 days or more past due and/or non-accruing
|
614,138
|
1,214,516
|
Total
|
$ 84,767,349
|
$ 87,787,722
|
|
|
|
Commercial properties
|
|
|
Pass
|
$ 114,853,706
|
$ 106,062,119
|
Substandard
|
5,306,334
|
5,331,436
|
Doubtful
|
|
|
Nonperforming: 90 days or more past due and/or non-accruing
|
1,596,388
|
1,617,388
|
Total
|
$ 121,756,428
|
$ 113,010,943
|
|
|
|
Commercial Credit Risk Profile by Internally Assigned Grade
|
|
|
Pass
|
$ 14,299,274
|
$ 12,507,978
|
Special Mention
|
9,236
|
-
|
Total
|
$ 14,308,510
|
$ 12,507,978
|
|
|
|
Consumer Credit Risk Profile by Internally Assigned Grade
|
|
|
Pass
|
$ 1,718,076
|
$ 1,737,297
|
Special Mention
|
11,512
|
-
|
Total
|
$ 1,729,588
|
$ 1,737,297
|
|
|
|
- 15 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
3. Loans and Allowance for Loan Losses (continued)
The modification or "restructuring" of terms on a loan is considered a
"troubled debt" restructuring if it is done to accommodate a borrower who is
experiencing financial difficulties. The lender may forgive principal, lower
the interest rate or payment amount, or may modify the payment due dates or
maturity date of a loan for a troubled borrower.
At the time of restructuring, the Company may reduce the outstanding
principal balance of a loan by recording a loss through the allowance for
loan losses. There were no losses recorded as part of a restructure in the
six months ended June 30, 2012 or the year ended December 31, 2011. Some
troubled debt restructurings have resulted in losses due to payment default
or principal reductions recorded as losses through the allowance for loan
losses subsequent to restructuring. Other restructured loans have been
collected with no loss of principal or have been returned to their original
contractual terms. During the six months ended June 30, 2012 there were no
restructures that defaulted within 12 months of the restructuring date
The following table details information about troubled debt
restructurings during the periods presented.
|
At the time of restructuring
|
Within 12 months of restructuring
|
|
Number of
|
Balance prior to
|
Balance after
|
Number of
|
Defaults on
|
Other principal
|
June 30, 2012
|
contracts
|
restructuring
|
restructuring
|
defaults
|
restructures
|
reductions
|
Real Estate
|
|
|
|
|
|
|
Residential 1-4 family, 1st liens
|
1
|
$ 337,727
|
$ 337,727
|
-
|
$ -
|
$ -
|
Commercial properties
|
1
|
604,997
|
604,997
|
-
|
-
|
-
|
Total
|
2
|
$ 942,724
|
$ 942,724
|
-
|
$ -
|
$ -
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
Residential 1-4 family, 1st liens
|
5
|
$ 1,851,393
|
$ 1,851,393
|
-
|
$ -
|
$ -
|
Commercial properties
|
1
|
517,998
|
517,998
|
-
|
-
|
-
|
Total
|
6
|
$ 2,369,391
|
$ 2,369,391
|
-
|
$ -
|
$ -
|
Troubled debt restructurings with outstanding principal balances as of
June 30, 2012 were as follows:
|
|
Paying as agreed
|
Past due 30 days or
|
|
Total
|
under modified terms
|
more or non-accruing
|
|
Number of
|
Current
|
Number of
|
Current
|
Number of
|
Current
|
|
contracts
|
Balance
|
contracts
|
Balance
|
contracts
|
Balance
|
Real Estate
|
|
|
|
|
|
|
Construction, land development, and land
|
1
|
$ 333,415
|
-
|
$ -
|
1
|
$ 333,415
|
Residential 1 to 4 family
|
14
|
3,107,597
|
11
|
1,629,106
|
3
|
1,478,491
|
Commercial properties
|
9
|
6,218,300
|
7
|
4,786,567
|
2
|
1,431,733
|
Total
|
24
|
$ 9,659,312
|
18
|
$ 6,415,673
|
6
|
$ 3,243,639
|
|
|
|
|
|
|
|
- 16 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
4. Loan commitments
Loan commitments are agreements to lend to customers as long as there is
no violation of any conditions of the contracts. Outstanding loan
commitments and letters of credit consist of:
|
June 30, 2012
|
December 31, 2011
|
Loan commitments and lines of credit
|
|
|
Construction and land development
|
$ 2,010,250
|
$ 1,999,670
|
Other
|
22,048,911
|
22,346,026
|
|
$ 24,059,161
|
$ 24,345,696
|
|
|
|
Standby letters of credit
|
$ 1,456,162
|
$ 1,486,677
|
5. Assets Measured at Fair Value
The Company values investment securities classified as available for sale
on a recurring basis. The fair value hierarchy established in the Financial
Accounting Standards Board accounting standards codification topic titled
Fair Value Measurements
defines three input levels for fair value
measurement. Level 1 is based on quoted market prices in active markets for
identical assets. Level 2 is based on significant observable inputs other
than those in Level 1. Level 3 is based on significant unobservable inputs.
The Company values US Treasury securities, government agency securities, and
an equity investment in an actively traded public utility under Level 1.
Municipal debt securities and equity investments in community banks are
valued under Level 2. The Company has no assets measured at fair value on a
recurring basis that are valued under Level 3 criteria. At June 30, 2012,
values for available for sale investment securities measured at fair value
on a recurring basis were established as follows:
|
Total
|
Level 1 Inputs
|
Level 2 Inputs
|
Measured on a recurring basis
|
|
|
|
U.S. Treasury
|
$ 43,142,889
|
$ 43,142,889
|
$ -
|
State and municipal
|
403,886
|
-
|
403,886
|
Equity
|
1,685,979
|
422,224
|
1,263,755
|
Total assets measured on a recurring basis
|
$ 45,232,754
|
$ 43,565,113
|
$ 1,667,641
|
The Company values impaired loans and other real estate acquired through
foreclosure at fair value on a non-recurring basis under Level 2. The
Company has no assets measured at fair value on a non-recurring basis that
are valued under Level 1 or Level 3 criteria. At June 30, 2012, values for
impaired loans and other real estate owned measured at fair value on a
non-recurring basis were established as follows:
|
Total
|
Level 1 Inputs
|
Level 2 Inputs
|
Measured on a non-recurring basis
|
|
|
|
Impaired loans
|
$ 3,379,021
|
$ -
|
$ 3,379,021
|
Other real estate owned
|
1,659,260
|
-
|
1,659,260
|
Total assets measured on a non-recurring basis
|
$ 5,038,281
|
$ -
|
$ 5,038,281
|
The fair value of financial assets and financial liabilities, including
those financial assets and financial liabilities that are not measured and
reported at fair value on a recurring basis or non-recurring basis, and the
valuation methods used in estimating the fair value of financial instruments
is disclosed in the Company’s Annual Report on Form 10-K. It is not
practicable to report quarterly the fair value of financial assets and
liabilities measured on a non-recurring basis.
- 17 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)
6. New accounting standards
The following accounting pronouncements have been approved by the
Financial Accounting Standards Board but had not become effective and
adopted by the Company as of June 30, 2012. These pronouncements would apply
to the Company, upon the effective dates noted, if the Company or the Bank
entered into an applicable activity.
ASU No. 2011-11, "
Balance Sheet (Topic 210) - Disclosures about
Offsetting Assets and Liabilities,
" amends Balance Sheet (Topic 210), to
require an entity to disclose both gross and net information about both
financial instruments and transactions eligible for offset in the statement
of financial position and instruments and transactions subject to an
agreement similar to a master netting arrangement. The financial instruments
and transactions would include derivatives, sale and repurchase agreements
and reverse sale and repurchase agreements, and securities borrowing and
lending arrangements. ASU 2011-11 is effective for annual and interim
periods beginning on January 1, 2013, and is not expected to have a
significant impact on the Company’s financial statements.
ASU No. 2011-05, "
Comprehensive Income (Topic 220) - Presentation of
Comprehensive Income.
" ASU 2011-05 amends Topic 220, "
Comprehensive
Income,
" to eliminate the option to present components of other
comprehensive income as part of the statement of changes in stockholders’
equity, among other amendments. An entity has the option to present the
total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive
statements. Additionally, ASU 2011-05 requires entities to present on the
face of the financial statements reclassification adjustments for items that
are reclassified from other comprehensive income to net income in the
statement(s) where the components of net income and the components of other
comprehensive income are presented. ASU 2011-05 is effective for annual and
interim periods beginning after December 15, 2011; however, certain
provisions related to the presentation of reclassification adjustments have
been deferred by ASU 2011-12 "
Comprehensive Income (Topic 220) - Deferral
of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05,
" as further discussed below.
ASU 2011-05 was adopted early by the Company and applied to the financial
statements for the period ended December 31, 2011. The Company’s financial
statements include a single continuous statement of comprehensive income
that includes the components of net income and the components of other
comprehensive income.
ASU No. 2011-12 "
Comprehensive Income (Topic 220) - Deferral of the
Effective Date for Amendments to the Presentation of Reclassifications of
Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05
."
ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the
presentation of reclassification adjustments to allow the FASB time to
further deliberate whether to require presentation on the face of the
financial statements the effects of reclassifications out of accumulated
other comprehensive income on the components of net income and other
comprehensive income. ASU 2011-12 allows entities to continue to report
reclassifications out of accumulated other comprehensive income consistent
with the presentation requirements in effect before ASU No. 2011-05. All
other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12.
The accounting policies adopted by management are consistent with
accounting principles generally accepted in the United States of America and
are consistent with those followed by peer Banks.
- 18 -
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Part I. Financial Information
Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
the Securities Exchange Act of 1934. These statements appear in a number of
places in this Report and include all statements regarding the intent, belief or
current expectations of the Company, its directors, or its officers with respect
to, among other things: (i) the Company's financing plans; (ii) trends affecting
the Company's financial condition or results of operations; (iii) the Company's
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. Investors are cautioned that any such forward-looking statements are
not guarantees of future performance and involve risks and uncertainties, and
that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors discussed herein and
those factors discussed in detail in the Company's filings with the Securities
and Exchange Commission.
The following discussion of the financial condition and results of operations
of the Registrant (the Company) should be read in conjunction with the Company's
financial statements and related notes and other statistical information
included elsewhere herein.
General
Calvin B. Taylor Bankshares, Inc. (Company) was incorporated as a Maryland
corporation on October 31, 1995. The Company owns all of the stock of Calvin B.
Taylor Banking Company (Bank), a commercial bank that was established in 1890
and incorporated under the laws of the State of Maryland on December 17, 1907.
The Bank operates nine banking offices in Worcester County, Maryland and one
banking office in Ocean View, Delaware. The Bank's administrative office is
located in Berlin, Maryland. The Bank is engaged in a general commercial and
retail banking business serving individuals, businesses, and governmental units
in Worcester County, Maryland, Ocean View, Delaware, and neighboring counties.
The Company currently engages in no business other than owning and managing
the Bank. The Bank employed 93 full time equivalent employees as of June 30,
2012. The Bank hires seasonal employees during the summer. The Company has no
employees other than those hired by the Bank.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United State of America requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. These estimates and assumptions may affect the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Critical Accounting Policies
The Company’s financial condition and results of operations are sensitive to
accounting measurements and estimates of inherently uncertain matters. When
applying accounting policies in areas that are subjective in nature, management
uses its best judgment to arrive at the carrying value of certain assets. One of
the most critical accounting policies applied is related to the valuation of the
loan portfolio.
The allowance for loan losses (ALLL) represents management’s best estimate of
inherent probable losses in the loan portfolio as of the balance sheet date. It
is one of the most difficult and subjective judgments. The adequacy of the
allowance for loan losses is evaluated no less than quarterly. The determination
of the balance of the allowance for loan losses is based on management’s
judgments about the credit quality of the loan portfolio as of the review date.
It should be sufficient to absorb losses in the loan portfolio as determined by
management’s consideration of factors including an analysis of historical
losses, specific reserves for non-performing or past due loans, delinquency
trends, portfolio composition (including segment growth or shifting of balances
between segments, products and processes, and concentrations of credit, both
regional and by relationship), lending staff experience and changes, critical
documentation and policy exceptions, risk rating analysis, interest rates and
the competitive environment, economic conditions in the Bank’s service area, and
results of independent reviews, including audits and regulatory examinations.
- 19 -
Financial Condition
Total assets of the Company increased $21.2 million (5.09%) from December 31,
2011 to June 30, 2012. Combined deposits and customer repurchase agreements
increased $19.0 million (5.59%) during the same period. Much of the deposit and
asset growth from the previous year-end to the end of the second quarter stems
from seasonal activity, which is further discussed in the section titled
Liquidity.
Average assets and average deposits increased $15.7 million (3.90%) and $13.4
million (4.11%), respectively, from second quarter 2011 to second quarter 2012.
Management believes the year-to-year growth in deposits results, to some extent,
from continuing economic uncertainty due to the slow recovery following the
recession of 2008-2009. Depositors often seek the safety of conservatively run,
well capitalized community banks when the financial markets are perceived to be
unstable. Increased deposits may also indicate economic recovery within the
Bank’s resort service area; however, depositors are not spending or investing
the funds as they remain uncertain about continued recovery. This is also
evident in the lack of demand for loans and is consistent with trends in the
banking industry. Increased deposit insurance limits also give customers a
greater sense of security in bank deposits.
Loan Portfolio
During the first half of 2012, the Bank’s gross loan portfolio has grown $8.6
million (3.77%). It is typical for the Bank to experience growth in both
deposits and loans by the end of the second quarter. By late June, many seasonal
merchants in the resort area have drawn on their working capital lines of credit
and, if the tourist season is successful, they are experiencing increased sales
and thus deposits. Growth of the loan portfolio was primarily driven by an $8.7
million (7.74%) increase in commercial real estate loans due mainly from
refinances. Residential mortgages decreased by $3.0 million (3.48%) which was
offset by increases in construction and development loans and non-real estate
commercial loans. Increased deposit balances were more than sufficient to cover
growth in the loan portfolio. Because loans earn higher average rates than the
Bank’s cost of funds, this use of available funds has a positive effect on
earnings. There is no adverse impact on the Company’s ability to meet liquidity
demands resulting from increases in the loan portfolio.
The Company makes loans to customers located primarily in the Delmarva
region. Although the loan portfolio is diversified, its performance will be
influenced by the economy of the region. While the Bank has experienced loan
growth in the first half of 2012, the overall demand for loans remains
suppressed due to the slow recovery of the national, regional, and local
economies.
Loan Quality and the Allowance for Loan Losses
The allowance for loan losses (ALLL) represents an amount which management
believes to be adequate to absorb identified and inherent losses in the loan
portfolio as of the balance sheet date. Valuation of the allowance is completed
no less than quarterly. The determination of the allowance is inherently
subjective as it relies on estimates of potential loss related to specific
loans, the effects of portfolio trends, and other internal and external factors.
The ALLL consists of (i) formula-based reserves comprised of potential losses
in the balance of the loan portfolio segmented into homogeneous pools, (ii)
specific reserves comprised of potential losses on loans that management has
identified as impaired and (iii) unallocated reserves. Unallocated reserves are
not associated with a specific portfolio segment or a specific loan, but may be
appropriate if properly supported and in accordance with GAAP.
The Company evaluates loan portfolio risk for the purpose of establishing an
adequate allowance for loan losses. In determining an adequate level for the
formula-based portion of the ALLL, management considers historical loss
experience for major types of loans. Homogenous categories of loans are
evaluated based on loss experience in the most recent five years, applied to the
current portfolio. This formulation gives weight to portfolio size and loss
experience for categories of real-estate secured loans, other loans to
commercial borrowers, and other consumer loans. However, historical data may not
be an accurate predictor of loss potential in the current loan portfolio.
Management also evaluates trends in delinquencies, the composition of the
portfolio, concentrations of credit, and changes in lending products, processes,
or staffing. Management further considers external factors such as the interest
rate environment, competition, current local and national economic trends, and
the results of recent independent reviews by auditors and banking regulators.
The protracted slow-down in the real-estate market has affected both the price
and time to market of residential and commercial properties. Management closely
monitors such trends and the potential effect on the Company. Since the
beginning of the current adverse economic conditions in late 2007, the Company
has experienced historically high loan losses and provisions for loan losses.
Management expects this trend to continue in 2012.
- 20 -
Management employs a risk rating system which gives weight to collateral
status (secured vs. unsecured), and to the absence or improper execution of
critical contract or collateral documents. Unsecured loans and those loans with
critical documentation exceptions, as defined by management, are considered to
have greater loss exposure. Management incorporates these factors in the
formula-based portion of the ALLL. Additionally, consideration is given to those
segments of the loan portfolio which management deems to pose the greatest
likelihood of loss. A schedule of loans by credit quality indicator (risk
rating) can be found in Note 3.
Management believes that in a general economic downturn, such as the region
has experienced since late 2007, the Bank has an increased likelihood of loss in
unsecured loans - commercial and consumer, and in secured consumer loans.
Reserves for these segments of the portfolio are included in the formula-based
portion of the ALLL. As of June 30, 2012, management reserved 135 bp against all
unsecured loans, and consumer loans secured by other than real estate. The
reserve has been increased 10 bp since June 30, 2011 due to the continued
uncertainty of regional, national, and global economic recovery. Additionally,
management reserved 10% against overdrawn checking accounts which are a distinct
high risk category of unsecured loans.
Borrowers whose cash flow is impaired as a result of prevailing economic
conditions have also experienced depressed real estate values. Management
recognizes that the combination of these circumstances – reduced revenue and
depressed collateral values, may increase the likelihood of loss in the Bank’s
real estate secured loan portfolio. Management closely monitors conditions that
might indicate deterioration of collateral value on significant loans and, when
possible, obtains additional collateral as required to limit the Bank’s loss
exposure. The Bank foreclosed on mortgages during 2009, 2010, and 2011 and
expects additional foreclosures in 2012. Foreclosures may result in loan losses,
costs to hold real estate acquired in foreclosure, and losses on the sale of
real estate acquired in foreclosure. While management is unable to predict the
financial consequences of future foreclosure activity, provision for loss on
likely loan foreclosures is considered in specific reserves in the ALLL.
Historically, the absence or improper execution of a document has not
resulted in a loss to the Bank, however, management recognizes that the Bank’s
loss exposure is increased until a critical contract or collateral documentation
exception is cured. At June 30, 2012, management reserved 10 bp against the
outstanding balances of loans identified as having critical documentation
exceptions.
The provision for loan losses is a decrease or increase to earnings in the
current period to bring the allowance to a level established by application of
management’s allowance methodology. The allowance is also increased by
recoveries of amounts previously charged-off and decreased when loans are
charged-off as losses, which occurs when they are deemed to be uncollectible. A
provision for loan losses of $105,000 was recorded in the 2
nd
quarter
of 2012 which resulted in $297,500 recorded year-to-date. This compares to a
provision for loan losses of $803,500 in the 2
nd
quarter of 2011
which resulted in $948,900 recorded for the six months ended June 30, 2011. The
provision of $105,000 recorded this quarter is mainly associated with a
charge-off on a collateral dependent real estate loan. As the recession
continues and borrowers’ suffer personal and professional financial hardship,
the likelihood of loss on previously performing loans remains high. As
Management identifies loans with heightened loss potential, a provision for
those losses is recorded.
Management considers the June 30, 2012 allowance appropriate and adequate to
absorb identified and inherent losses in the loan portfolio. However, there can
be no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the loan loss allowance will not
be required. As of June 30, 2012, management has not identified any loans which
are anticipated to be wholly charged-off within the next 12 months.
- 21 -
The Bank experienced net charge-offs (recoveries) of $114,558 and ($27,042)
in the 2nd quarters of 2012 and 2011, respectively, and year-to-date
net charge-offs (recoveries) of 206,453 and ($18,756) in 2012 and 2011,
respectively. The higher net charge-offs in 2012 are the result of short sales
during the 1st quarter and a charge-off on a collateral dependent
loan in the 2nd quarter. Management expects loan losses to continue
throughout the remainder of 2012. Refer to Note 3 for a schedule of transactions
in the allowance for loan losses.
The accrual of interest on a loan is discontinued when principal or interest
is ninety days past due or when the loan is determined to be impaired, unless
collateral is sufficient to discharge the debt in full and the loan is in
process of collection. When a loan is placed in nonaccruing status, any interest
previously accrued but unpaid, is reversed from interest income. Interest
payments received on nonaccrual loans may be recorded as cash basis income, or
as a reduction of principal, depending on management’s judgment on a loan by
loan basis. All nonaccrual loan payments received in 2012 were recorded as
reductions of principal. Accrual of interest may be restored when all principal
and interest are current and management believes that future payments will be
received in accordance with the loan agreement.
Nonperforming loans are loans past due 90 or more days and still accruing
plus nonaccrual loans. Nonperforming assets are comprised of nonperforming loans
combined with real estate acquired in foreclosure and held for sale.
Nonperforming assets decreased $496,138 (8.60%) from December 31, 2011 to June
30, 2012, primarily as a result of decreases in nonaccrual loans from short
sales and charge-offs during the same period. Refer to Note 3 for additional
information about nonperforming assets.
Loans are considered impaired when management considers it unlikely that
collection of principal and interest payments will be made according to
contractual terms. A performing loan may be categorized as impaired based on
knowledge of circumstances that are deemed relevant to loan collection,
including deterioration of the borrower’s financial condition or devaluation of
collateral. Not all impaired loans are past due nor are losses expected for
every impaired loan.
Impaired loans may have specific reserves, or valuation allowances, allocated
to them in the ALLL. Estimates of loss reserves on impaired loans may be
determined based on any of the three following measurement methods which conform
to authoritative accounting guidance: (1) the present value of future cash
flows, (2) the fair value of collateral, if repayment of the loan is expected to
be provided by the sale of the underlying collateral (i.e. collateral
dependent), or (3) the loan’s observable fair value. The Bank selects and
applies, on a loan-by-loan basis, the appropriate valuation method. Upon
identification of a loss on a collateral dependent loan, the loss amount is
recorded as a charge-off consistent with regulatory guidance. During the 2
nd
quarter of 2012, a charge-off of $105,000 was recorded related to a collateral
dependent real estate loan. Loans determined to be impaired, but for which no
specific valuation allowance is made because management believes the loan is
secured with adequate collateral or the Bank will not take a loss on such loan,
are grouped with other homogeneous loans for evaluation under formula-based
criteria described previously. Impaired loans including nonaccruing loans
decreased $673,672 (16.62%) from $4,052,693 at December 31, 2011 to $3,379,021
and at June 30, 2012, primarily as the result of short sales and charge-offs
noted previously. Refer to Note 3 for additional information about impaired
loans.
- 22 -
Liquidity
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. The Company’s major sources of liquidity are loan repayments,
maturities of short-term investments including federal funds sold, and increases
in core deposits. Funds from seasonal deposits are generally invested in
short-term U.S. Treasury Bills and overnight federal funds.
Due to its location in a seasonal resort area, the Bank typically experiences
a decline in deposits, federal funds sold and investment securities throughout
the 1st quarter of the year when business customers are using their
deposits to meet cash flow needs. This trend is not evident in 2012 as deposits
levels at the end of the 1st quarter were comparable with deposits as
of December 31, 2011. Refer to the Financial Condition section above for further
discussion of deposit activity. Beginning late in the second quarter and
throughout the third quarter, additional sources of liquidity become more
readily available as business borrowers start repaying loans, and the Bank
receives deposits from seasonal business customers, summer residents and
tourists. Consistent with historical 2nd quarter trends, deposits
have increased by $17.1 million (5.09%) since March 31, 2012.
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 and retail repurchase agreements were 49.00% for the 2nd
quarter of 2012 compared to 43.84% for the same quarter of 2011. The increased
liquidity during this period is the result of a decrease in the loan portfolio
and the redeployment of those funds into liquid assets. No significant changes
in liquidity have occurred since the prior quarter.
The Company has available lines of credit, including overnight federal funds
and reverse repurchase agreements, totaling $28,000,000 as of June 30, 2012.
Average net loans to average deposits were 69.30% versus 75.47% as of June
30, 2012 and 2011, respectively. Average net loans decreased by 4.40% while
average deposits grew by 4.11%. Reductions in the loan portfolio result from low
demand and refinances attributable to record low interest rates. Reductions in
the loan portfolio result in increased investment in debt securities or federal
funds sold. These investment vehicles are less profitable than loans. The
Company will not lower its credit underwriting standards to bolster loan volume.
Average deposit balance increases occurred in non-interest and interest-bearing
accounts, except average time deposits which decreased 6.18%. Management
believes this trend indicates that depositors are migrating to more liquid types
of accounts in order to be able to invest at higher rates should they become
available. The continued increase in overall deposits indicates that there are
signs of economic recovery within the Bank’s resort service, however, depositors
are not spending or investing the funds as they remain uncertain about continued
recovery. Neither changes in deposit portfolio composition nor the decrease in
outstanding loan balances has a negative impact on the Company’s ability to meet
liquidity demands.
- 23 -
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.
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.
Interest rate sensitivity may be controlled on either side of
the balance sheet. On the asset side, management exercises some control over
maturities. Also, loans are written to provide 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 are structured to
offer incentives to attain the desired maturity distributions and repricing
opportunities. Competitive factors sometimes make control over deposits more
difficult and, therefore, less effective as an interest rate sensitivity
management tool.
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 deposit product pricing and offerings.
As of June 30, 2012, the Company was cumulatively 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.
Results of Operations
Net income for the quarter ended June 30, 2012
,
was $1,264,041
($0.42 per share), compared to $915,062 ($0.30 per share) for the second quarter
of 2011, resulting in an increase of $348,979 or 38.14%. Year to date net income
has increased $154,452 ($0.05 per share) from $2,166,270 ($0.72 per share) in
2011 to $2,320,722 ($0.77 per share) in 2012. The key components of net income
are discussed in the following paragraphs.
In the second quarter of 2012 compared to 2011, net interest income decreased
$250,211 (6.46%). Net interest income decreased $485,784 (6.35%) in the first
six months of 2012 compared to the same period in 2011. Average interest-bearing
assets and liabilities have increased compared to the 2
nd
quarter of
2011; however these volume increases have been more than offset by lower rates,
resulting in reductions in both interest revenue and expense.
The tax-equivalent quarterly yield on interest-earning assets decreased by 55
bps from 4.67% for the 2
nd
quarter 2011 to 4.12% in the same period
in 2012. The quarterly tax-equivalent yield on interest-bearing liabilities
decreased 20 bps from 0.58% in 2011 to 0.38% in the same period in 2012. In
combination, these shifts contribute to a decrease in net interest margin
compared to interest-earning assets of 41 bps.
The Company’s net interest income is one of the most important factors in
evaluating its financial performance. Management uses interest rate sensitivity
analysis to determine the effect of rate changes. Net interest income is
projected over a one-year period to determine the effect of an increase or
decrease in the prime rate of 100 basis points. If prime were to decrease one
hundred basis points, and all assets and liabilities maturing or repricing
within that period were fully adjusted for the rate change, the Company would
experience a decrease of approximately 5.2% in net interest income. Conversely,
if prime were to increase one hundred basis points, and all assets and
liabilities maturing or repricing within that period were fully adjusted for the
rate change, the Company would experience an increase in net interest income of
the same percentage. The sensitivity analysis does not consider the likelihood
of these rate changes nor whether management’s reaction to this rate change
would be to reprice its loans or deposits or both.
- 24 -
The following table presents information including average balances of
interest-earning assets and interest-bearing liabilities, the amount of related
interest income and interest expense, and the resulting yields by category of
interest-earning asset and interest-bearing liability. In this table, dividends
and interest on tax-exempt securities and loans are reported on a fully taxable
equivalent basis, which is a non-GAAP measure as defined in SEC Regulation G and
Item 10 of SEC Regulation S-K. Management believes that these measures provide
better yield comparability as a tool for managing net interest income.
Average Balances, Interest, and Yields
|
|
For the quarter ended
|
For the quarter ended
|
|
June 30, 2012
|
June 30, 2011
|
|
Average
|
|
|
Average
|
|
|
|
balance
|
Interest
|
Yield
|
balance
|
Interest
|
Yield
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Federal funds sold
|
$ 31,749,315
|
$ 9,689
|
0.12%
|
$ 29,902,034
|
$ 9,980
|
0.13%
|
Interest-bearing deposits
|
11,292,739
|
13,239
|
0.47%
|
9,671,070
|
14,589
|
0.61%
|
Investment securities
|
106,388,646
|
215,861
|
0.82%
|
87,883,740
|
325,299
|
1.48%
|
Loans, net of allowance
|
234,295,102
|
3,690,774
|
6.34%
|
245,073,007
|
3,986,438
|
6.52%
|
Total interest-earning assets
|
383,725,802
|
3,929,563
|
4.12%
|
372,529,851
|
4,336,306
|
4.67%
|
Noninterest-bearing cash
|
18,645,311
|
|
|
16,746,991
|
|
|
Other assets
|
17,646,715
|
|
|
14,992,871
|
|
|
Total assets
|
$ 420,017,828
|
|
|
$ 404,269,713
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
NOW
|
$ 61,978,185
|
27,977
|
0.18%
|
$ 61,895,896
|
48,473
|
0.31%
|
Money market
|
51,704,383
|
36,704
|
0.29%
|
44,549,087
|
53,840
|
0.48%
|
Savings
|
52,902,467
|
26,134
|
0.20%
|
48,771,823
|
36,298
|
0.30%
|
Other time
|
88,439,830
|
149,024
|
0.68%
|
94,260,680
|
224,919
|
0.96%
|
Total interest-bearing deposits
|
255,024,865
|
239,839
|
0.38%
|
249,477,486
|
363,530
|
0.58%
|
Securities sold under agreements to repurchase & federal funds purchased
|
4,910,434
|
3,054
|
0.25%
|
4,179,561
|
5,160
|
0.50%
|
Borrowed funds
|
-
|
-
|
|
-
|
-
|
|
Total interest-bearing liabilities
|
259,935,299
|
242,893
|
0.38%
|
253,657,047
|
368,690
|
0.58%
|
Noninterest-bearing deposits
|
83,072,469
|
|
|
75,266,507
|
|
|
|
343,007,768
|
242,893
|
0.28%
|
328,923,554
|
368,690
|
0.45%
|
Other liabilities
|
148,774
|
|
|
104,202
|
|
|
Stockholders' equity
|
76,861,286
|
|
|
75,241,957
|
|
|
Total liabilities and
|
|
|
|
|
|
|
stockholders' equity
|
$ 420,017,828
|
|
|
$ 404,269,713
|
|
|
Net interest spread
|
|
|
3.74%
|
|
|
4.09%
|
Net interest income
|
|
$ 3,686,670
|
|
|
$ 3,967,616
|
|
Net margin on interest-earning assets
|
|
|
3.86%
|
|
|
4.27%
|
|
|
|
|
|
|
|
Tax equivalent adjustment in:
|
|
|
|
|
|
|
Investment income
|
|
$ 20,469
|
|
|
$ 53,736
|
|
Loan income
|
|
$ 42,470
|
|
|
$ 39,938
|
|
- 25 -
Provisions for loan losses of $105,000 and $803,500 were recorded during the
second quarter of 2012 and 2011, respectively. For the 2012 and 2011 years to
date, provisions for loan losses were $297,500 and $948,900, respectively. Net
loans charged-off (recovered) were $206,453 and ($18,756) during the first half
of 2012 and 2011, respectively. The quarterly and year-to-date provisions for
loan losses in 2012 are significantly less than the prior year amounts during
these periods due to specific reserves recorded on several impaired loans during
the first half of 2011. The increase in year-to-date loan losses from 2011 to
2012 is a result of short sales and a charge-off on a collateral dependent loan
during the 1
st
half of 2012. Management expects additional losses to
occur during 2012, and those losses may be significant. Provisions for
anticipated losses are included in the ALLL. Refer to the Loan Quality and the
Allowance for Loan Losses section above for a discussion of the provision for
loan losses.
Noninterest revenue for the second quarter of 2012 is $181,936 (52.20%)
higher than the comparable period last year. Noninterest revenue for the
year-to-date is $203,840 (25.56%) higher than last year. The positive variances
in both the quarterly and the year-to-date periods result from the recording of
a $178,325 other than temporary impairment (OTTI) loss on equity investments in
the 2
nd
quarter of 2011. The remaining increase over the prior year
is attributable to the incremental income from an additional investment made in
bank owned life insurance in the 1
st
quarter of 2012.
Noninterest expense for the 2
nd
quarter of 2012 is $47,796
(2.35%), higher than last year and primarily attributable to increases in
employee benefits, in particular the cost of group insurance. Noninterest
expense year-to-date is up $105,254 (2.54%), which is also driven by increases
in other operating expenses such as consulting fees and advertising.
Income taxes for the six months ended June 30, 2012 are $109,750 (9.21%)
higher than the same period last year with pre-tax income increasing by $264,
202 (7.87%). The increase in income taxes for the six months ended June 30, 2012
is proportionate to the increase in income before income taxes. The Company’s
effective tax rate of 35.92% for the six months ended June 30, 2012 is
consistent with the rate through June 30, 2011 of 35.48%. At this time, there
are no changes in the operations of the Company or tax laws applicable to the
Company that would have a significant impact on the effective income tax rate.
Plans of Operation
The Bank offers a full range of deposit services including checking, NOW,
Money Market, and savings accounts, and time deposits including certificates of
deposit. The transaction, savings, and certificate of deposit accounts are
tailored to the Bank’s principal market areas at rates competitive to those
offered in the area by other community banks. The Bank also offers Individual
Retirement Accounts (IRA), Health Savings Accounts, and Education Savings
Accounts. All deposits are insured by the Federal Deposit Insurance Corporation
(FDIC) up to the maximum amount allowed by law. The Bank solicits these accounts
from individuals, businesses, associations and organizations, and governmental
authorities. The Bank offers individual customers up to $50 million in FDIC
insured deposits through the Certificate of Deposit Account Registry Services
®
network (CDARS).
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 originates commercial and residential mortgage loans and real estate
construction, acquisition and development loans. These lending activities are
subject to a variety of lending limits imposed by state and federal law. The
Bank lends to directors and officers of the Company and the Bank under terms
comparable to those offered to other borrowers entering into similar loan
transactions. The Board of Directors approves all loans to officers and
directors and reviews these loans every six months.
Other bank services include cash management services, 24-hour ATMs, debit
cards, safe deposit boxes, direct deposit of payroll and social security funds,
and automatic drafts for various accounts. The Bank offers bank-by-phone and
Internet banking services, including electronic bill-payment, to both commercial
and retail customers. The Bank’s commercial customers can subscribe to a remote
capture service that enables them to electronically capture check images and
make on-line deposits. The Bank also offers non-deposit investment products
including retail repurchase agreements.
- 26 -
Capital Resources and Adequacy
Total stockholders’ equity increased $2,225,073 (2.94%) from December 31,
2011 to June 30, 2012 This increase is attributable to comprehensive income of
$2,338,616 for the 6 months ended June 30, 2012 less stock repurchases of
$113,543 recorded during the same period.
Under the capital guidelines of the Federal Reserve Board and the FDIC, the
Company and Bank are currently required to maintain a minimum risk-based total
capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital
consists of common stockholders' equity – common stock, additional paid-in
capital, and retained earnings. In addition, the Company and the Bank must
maintain a minimum Tier 1 leverage ratio (Tier 1 capital to average total
assets) of at least 4%, but this minimum ratio is increased by 100 to 200 basis
points for other than the highest-rated institutions.
Tier one risk-based capital ratios of the Company as of June 30, 2012 and
December 31, 2011 were 33.1% and 33.5%, respectively. Both are substantially in
excess of regulatory minimum requirements.
On June 7, 2012, the Board of Governors of the Federal Reserve, the Office of
the Comptroller of the Currency, and the Federal Deposit Insurance Corporation
(collectively the "banking agencies") issued joint notices of proposed
rulemaking that would revise and replace the banking agencies’ current
regulatory capital framework. The proposed rules would implement the Basel III
capital standards as established by the Basel Committee on Banking Supervision
and certain provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. As proposed, the new regulatory capital framework would apply to
the Company as well as the Bank and would establish higher minimum regulatory
capital ratios, add a new Common Tier 1 regulatory capital ratio, establish
capital conservation buffers, and significantly revise the rules for calculating
risk-weighted assets. Management is currently assessing the proposed rules to
determine their impact on the Company.
Website Access to SEC Reports
The Bank maintains an Internet website at
www.taylorbank.com
.
The Company’s periodic SEC reports, including annual reports on Form 10-K,
quarterly reports on Form 10-Q, and current reports on Form 8-K, are accessible
through this website. Access to these filings is free of charge. The reports are
available as soon as practicable after they are filed electronically with the
SEC.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The Company’s principal market risk exposure relates to interest rates on
interest-earning assets and interest-bearing liabilities. Unlike most industrial
companies, the assets and liabilities of financial institutions such as the
Company and the Bank are primarily monetary in nature. Therefore, interest rates
have a more significant effect on the Company's performance than do the effects
of changes in the general rate of inflation and change in prices. In addition,
interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. As discussed previously,
management monitors and seeks to manage the relationships between interest
sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
At June 30, 2012, the Company’s interest rate sensitivity, as measured by gap
analysis, showed the Company was asset-sensitive with a one-year cumulative gap
of 21.07%, as a percentage of average interest-earning assets. Generally
asset-sensitivity indicates that assets reprice more quickly than liabilities
and in a rising rate environment net interest income typically increases.
Conversely, if interest rates decrease, net interest income would decline. The
Bank has classified its demand mortgage and commercial loans as immediately
repriceable. Unlike loans tied to prime, these rates do not necessarily change
as prime changes since the decision to call the loans and change the rates rests
with management.
- 27 -
Item 4.
Controls and procedures
Disclosure controls and procedures are designed and maintained by the Company
to ensure that information required to be disclosed in the Company’s publicly
filed reports is recorded, processed, summarized and reported in a timely
manner. Such information must be available to management, including the Chief
Executive Officer (CEO) and Treasurer, to allow them to make timely decisions
about required disclosures. Even a well-designed and maintained control system
can provide only reasonable, not absolute, assurance that its objectives are
achieved. Inherent limitations in any system of controls include flawed
judgment, errors, omissions, or intentional circumvention of controls.
The Company’s management, including the CEO and Treasurer, performed an
evaluation of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of June 30, 2012. Based on that
evaluation, the Company’s management, including the CEO and Treasurer, has
concluded that the Company’s disclosure controls and procedures are effective.
The projection of an evaluation of controls to future periods is subject to the
risk that procedures may become inadequate due to changes in conditions
including the degree of compliance with procedures.
Changes in Internal Controls
During the quarter ended on the date of this report, there were no
significant changes in the Company’s internal controls that have had or are
reasonably likely to have a material effect on the Company’s internal control
over financial reporting, including disclosure controls. As of June 30, 2012,
the Company’s management, including the CEO and Treasurer, has concluded that
the Company’s internal controls over financial reporting are effective.
- 28 -
Part II. Other Information
Item 1.
Legal Proceedings
Not applicable
Item 1A.
Risk Factors
The Company and the Bank are subject to various types of risk during the
normal conduct of business. There has been no material change in risk factors or
levels of risk as previously disclosed in Item 1A of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2011.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
( c ) The following table presents information about the
Company’s repurchase of its equity securities during the calendar quarter ended
on the date of this report.
|
|
|
(c) Total number
|
(d) Maximum number
|
|
(a) Total
|
(b) Average
|
of Shares Purchased
|
of Shares that may
|
|
Number
|
Price Paid
|
as Part of a Publicly
|
yet be Purchased
|
Period
|
of Shares
|
per Share
|
Announced Program
|
Under the Program
|
April
|
900
|
24.85
|
900
|
294,365
|
May
|
1,400
|
24.18
|
1,400
|
292,965
|
June
|
1,880
|
22.99
|
1,880
|
291,085
|
Totals
|
4,180
|
23.79
|
4,180
|
|
The Company publicly announced on August 14, 2003, that it would repurchase
up to 10% of its outstanding equity stock at that time. As of January 1, 2005,
and again on May 18, 2007, this plan was renewed by public announcement, making
up to 10% of the Company’s outstanding equity stock available for repurchase at
the time of each renewal. On January 13, 2010 and again on February 9, 2011, as
part of its capital planning, the Board of Directors voted to suspend the stock
buy-back program. On September 14, 2011, the Board reinstated this program and
the Company publicly announced that it would repurchase up to 10% of its
outstanding equity at that time (300,050 shares).
There is no set expiration date for this program. No other stock repurchase
plan or program existed or exists simultaneously, nor has any other plan or
program expired during the period covered by this table. Common shares
repurchased under this plan are retired. From its inception through June 30,
2012, 248,457 shares were retired under this program with 4,780 of those shares
being retired during the six months ended June 30, 2012. As of June 30, 2012,
291,085 shares are available to repurchase under the reinstated program
announced on September 14, 2011.
The following table presents high and low bid information obtained from the
Over the Counter Bulletin Board and from other trades known to management of the
Company. Because transactions in the Company’s common stock are infrequent and
are often negotiated privately between the persons involved in those
transactions, actual prices may be higher or lower than those included in this
table. Additionally, the number of shares traded at high or low prices may vary
significantly. 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.
|
2012
|
|
2011
|
Sales price per share
|
High
|
Low
|
|
High
|
Low
|
First quarter
|
$ 24.50
|
$ 22.35
|
|
$ 34.00
|
$ 26.50
|
Second quarter
|
$ 24.85
|
$ 22.52
|
|
$ 28.50
|
$ 26.00
|
Third quarter
|
|
|
|
$ 32.00
|
$ 21.00
|
Fourth quarter
|
|
|
|
$ 25.50
|
$ 22.10
|
- 29 -
Item 3.
Defaults Upon Senior Securities
Not applicable
Item 4.
Mine Safety Disclosures
Not applicable
Item 5.
Other information
There is no information required to be disclosed in a report on Form
8-K during the period covered by this report, which has not been
reported.
Item 6.
Exhibits
a) Exhibits
31. Certifications of Principal Executive Officer and
Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32. Certification of Principal Executive Officer and
Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.