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, Sussex County, Delaware, and neighboring
counties.
The Company currently engages in no business other than owning and managing
the Bank. The Bank employed 92 full time equivalent employees as of September
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 in staffing,
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 $40.3 million (9.67%) from December 31,
2011 to September 30, 2012. Combined deposits and customer repurchase agreements
increased $37.3 million (10.96%) during the same period. Much of the deposit and
asset growth from the previous year-end to the end of the 3
rd
quarter
stems from seasonal activity, which is further discussed in the section titled
Liquidity.
Average assets and average deposits increased $23.0 million and $19.6
million, respectively, from the 3
rd
quarter 2011 to the 3
rd
quarter 2012. Management believes the year-to-year growth in deposits results,
to some extent, from continuing economic uncertainty due to the continued 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 nine months of 2012, the Bank’s gross loan portfolio has
decreased by $4.6 million (2.00%). 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 have drawn on their working capital lines of
credit and, if the tourist season is successful, they are experiencing increased
sales. Throughout the 3
rd
quarter, seasonal merchants pay down their
lines of credit. Due to the challenges of the current economy, management has
been proactive in monitoring the repayment of seasonal lines of credit.
Replenishment of the loan portfolio has slowed as demand for new credit has
fallen off due to the depressed economy and the challenges of competing with low
rates offered by other lenders.
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. Since late 2008, the local and regional
economies have been adversely affected by a recession of national and
international reach. Although economists consider that the recession ended in
mid-2009, the Bank continues to experience higher than historical levels of loan
delinquencies and losses due to trailing effects of the recession and the slow
pace of recovery.
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 for the remainder of 2012 and into
2013.
- 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 September 30, 2012, management reserved 135 bp
against all unsecured loans, and consumer loans secured by other than real
estate. Additionally, management reserved 10% against overdrawn checking account
balances which are a distinct high risk category of unsecured loan. The Bank
does not offer an approved overdraft loan product, so all overdrawn deposit
balances result from unauthorized presentment of items against insufficient
funds.
Borrowers whose cash flow is impaired as a result of prevailing economic
conditions likely 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 during the remainder of 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,
losses on anticipated loan foreclosures are recorded as specific reserves in the
ALLL or recorded as charge-offs if the loan is deemed to be collateral
dependent.
A troubled debt restructuring (TDR), which is defined as a modification or
restructuring of terms of a loan to accommodate a borrower who is experiencing
financial difficulties, is an important risk management tool utilized to improve
the likelihood of recovery. During the nine months ended September 30, 2012, the
Bank completed five restructurings including two loans that had been previously
restructured. A commercial mortgage restructured in the 1
st
quarter
of 2012 was partially charged off in the 3
rd
quarter of 2012 due to
further deterioration in the borrower’s financial position and underlying
collateral value. Subsequent to the partial charge-off, the loan was
restructured as part of a forbearance agreement. Another commercial mortgage,
restructured during the 3
rd
quarter of 2012, was advanced additional
funds as a result of new collateral added in the restructuring. Non-accruing
TDRs were 14.75% and 21.66% of total TDRs as of September 30, 2012 and December
31, 2011, respectively. The improvement in non-accruing TDRs is a result of
several short sales completed in the nine months ended September 30, 2012.
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 September 30, 2012, Management reserved 10 bp against the
outstanding balances of loans identified as having critical documentation
exceptions. Loans in this category are identified as "special mention" within
the schedule of loans by credit quality indicator (risk rating) in Note 3.
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 $206,200 was recorded in the 3
rd
quarter
of 2012 which resulted in $503,700 recorded year-to-date. This compares to a
provision for loan losses of $55,500 in the 3
rd
quarter of 2011 which
resulted in $1,004,400 recorded for the nine months ended September 30, 2011.
The provision of $206,200 recorded this quarter is primarily associated with
charge-offs on collateral dependent real estate loans. A decrease in the overall
loan portfolio and improving loan delinquencies partially offset the impact of
the charge-offs this quarter.
As economic recovery remains slow, borrowers may suffer personal and
professional financial hardship causing the likelihood of loss on previously
performing loans to remain high. As Management identifies loans with heightened
loss potential, a provision for those losses is recorded.
Management considers the September 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 September 30, 2012, management has
not identified any loans which are anticipated to be wholly charged-off within
the next 12 months.
The Bank experienced net charge-offs of $287,092 and $1,306,298 in the 3
rd
quarters of 2012 and 2011, respectively, and year-to-date net charge-offs of
$493,545 and $1,287,542 in 2012 and 2011, respectively. During the 3
rd
quarter of 2011, expected losses on several collateral-dependent real estate
loans were charged-off. Management had previously provided for these losses
though specific reserves. Management expects that additional loan losses may
occur in the remainder of 2012 and into 2013. Refer to Note 3 for a schedule of
transactions in the allowance for loan losses.
- 21 -
Loans are considered impaired when, based on current information, 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 the 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 3
rd
quarter of 2012, a charge-off of $206,707 was recorded related to a collateral
dependent real estate loan. Loans determined to be impaired, but for which no
specific valuation allowance or charge-off is appropriate 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 all
nonaccruing loans) decreased $358,059 (8.89%) from $4,026,437 at December 31,
2011 to $3,668,378 at September 30, 2012, primarily as the result of short sales
and charge-offs on collateral dependent loans. Refer to Note 3 for additional
information about impaired loans.
The accrual of interest on a loan is discontinued when principal or interest
is 90 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, on a loan by loan basis, based upon management’s
judgment. 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 (OREO).
Nonperforming assets decreased $599,444 (10.39%) from $5,767,831 at December 31,
2011 to $5,168,387 at September 30, 2012, primarily as a result of decreases in
nonaccrual loans from short sales and charge-offs on collateral dependent loans
during the same period. Management monitors the accruing loans in this category
closely to assure that collateral is sufficient to fully discharge the debt to
the Bank. Refer to Note 3 for additional information about nonperforming assets.
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 2
nd
quarter and throughout
the 3
rd
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 3rd quarter trends, deposits have increased by $16.4
million (4.64%) since June 30, 2012. Management anticipates that deposits will
decrease in the 4
th
quarter at a rate similar to or greater than the
same period in the two previous years.
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 55.27% for the 3
rd
quarter of 2012 compared to 51.19% for the same quarter of 2011. The increased
liquidity is a result of a decrease in average loans occurring primarily in the
3
rd
quarter of 2012.
The Company has available lines of credit, including overnight federal funds
and reverse repurchase agreements, totaling $28,000,000 as of September 30,
2012.
- 22 -
Average net loans to average deposits were 61.99% versus 67.09% as of
September 30, 2012 and 2011, respectively. Average net loans decreased by 2.40%
while average deposits grew by 5.63%. 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, as it considers the additional interest revenue does not
justify the increased risk of loss. Average deposit balance increases occurred
in non-interest and interest-bearing accounts, except time deposits which
dropped 4.17%. 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.
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 loans.
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. Short term investment
maturities are preferred and are utilized to manage interest rate risk.
On the liability side, deposit products are structured to offer incentives to
attain the desired maturity distribution 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 September 30, 2012, the Company was cumulatively asset-sensitive for
all time horizons primarily due to the ability to reprice fixed rate loans. 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.
- 23 -
Results of Operations
Net income for the three months ended September 30, 2012
,
was
$1,124,243 ($0.38 per share), compared to $1,321,612 ($0.44 per share) for the
same quarter of 2011, resulting in a decrease of $197,369 or 14.93%.
Year-to-date net income has decreased $42,749 ($0.01 per share) from $3,487,714
($1.16 per share) in 2011 to $3,444,965 ($1.15 per share) in 2012. The key
components of net income are discussed in the following paragraphs.
For the 3
rd
quarter of 2012 compared to the same quarter 2011, net
interest income decreased $116,888 (3.17%). Net interest income decreased
$602,504 (5.31%) in the first nine months of 2012 compared to the same period in
2011. Average interest-bearing assets and liabilities have increased compared to
the 3
rd
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 42
bps from 4.10% for the 3
rd
quarter 2011 to 3.68% in the same period
in 2012. The quarterly tax-equivalent yield on interest-bearing liabilities
decreased 23 bps from 0.51% in 2011 to 0.28% in the same period in 2012. In
combination, these shifts contribute to a decrease in net interest margin on
interest-earning assets of 27 bps.
To offset interest revenue decreases, management has gradually lowered
deposit rates from 2009 to the present. Interest expense for the quarter ended
September 30, 2012 decreased by $138,856 (41.97%) relative to the same period in
the prior year. Year-to-date interest expense through September 30, 2012 is
$396,872 (35.81%) lower than the same period in the previous year. Interest
rates on deposit products (excluding interest bearing checking) and repurchase
agreements have been reduced by at least 50% since the beginning of 2012 which
have resulted in the significant decrease in interest expense.
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 3.6% 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 current interest rate sensitivity of 3.6% is a
substantial decrease from the 5.2% in the previous quarter which can be
attributed to a lower percentage of assets (both investments and loans) that
will reprice in the next 3 months and an increase in immediately repriceable
deposits. 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
|
|
September 30, 2012
|
September 30, 2011
|
|
Average
|
|
|
Average
|
|
|
|
balance
|
Interest
|
Yield
|
balance
|
Interest
|
Yield
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Federal funds sold
|
$ 42,680,109
|
$ 12,507
|
0.12%
|
$ 51,712,959
|
$ 14,390
|
0.11%
|
Interest-bearing deposits
|
13,581,900
|
14,708
|
0.43%
|
9,860,269
|
15,011
|
0.60%
|
Investment securities
|
127,704,546
|
198,865
|
0.62%
|
99,104,227
|
265,888
|
1.06%
|
Loans, net of allowance
|
228,189,808
|
3,591,419
|
6.26%
|
233,798,058
|
3,784,852
|
6.42%
|
Total interest-earning assets
|
412,156,363
|
3,817,499
|
3.68%
|
394,475,513
|
4,080,141
|
4.10%
|
Noninterest-bearing cash
|
23,388,015
|
|
|
20,466,110
|
|
|
Other assets
|
17,713,171
|
|
|
15,271,553
|
|
|
Total assets
|
$ 453,257,549
|
|
|
$ 430,213,176
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
NOW
|
$ 63,037,262
|
27,881
|
0.18%
|
$ 61,963,239
|
38,869
|
0.25%
|
Money market
|
56,720,023
|
17,862
|
0.13%
|
47,559,004
|
50,148
|
0.42%
|
Savings
|
54,843,349
|
15,746
|
0.11%
|
51,119,456
|
34,079
|
0.26%
|
Other time
|
87,695,148
|
126,067
|
0.57%
|
91,512,503
|
201,045
|
0.87%
|
Total interest-bearing deposits
|
262,295,782
|
187,556
|
0.28%
|
252,154,202
|
324,141
|
0.51%
|
Securities sold under agreements to repurchase & federal funds purchased
|
7,064,313
|
4,441
|
0.25%
|
5,370,475
|
6,712
|
0.50%
|
Borrowed funds
|
-
|
-
|
|
-
|
-
|
|
Total interest-bearing liabilities
|
269,360,095
|
191,997
|
0.28%
|
257,524,677
|
330,853
|
0.51%
|
Noninterest-bearing deposits
|
105,789,957
|
|
|
96,315,801
|
|
|
|
375,150,052
|
191,997
|
0.20%
|
353,840,478
|
330,853
|
0.37%
|
Other liabilities
|
174,331
|
|
|
73,900
|
|
|
Stockholders' equity
|
77,933,166
|
|
|
76,298,798
|
|
|
Total liabilities and
|
|
|
|
|
|
|
stockholders' equity
|
$ 453,257,549
|
|
|
$ 430,213,176
|
|
|
Net interest spread
|
|
|
3.40%
|
|
|
3.59%
|
Net interest income
|
|
$ 3,625,502
|
|
|
$ 3,749,288
|
|
Net margin on interest-earning assets
|
|
|
3.50%
|
|
|
3.77%
|
|
|
|
|
|
|
|
Tax equivalent adjustment in:
|
|
|
|
|
|
|
Investment income
|
|
$ 16,027
|
|
|
$ 23,626
|
|
Loan income
|
|
$ 41,603
|
|
|
$ 40,902
|
|
- 25 -
Provisions for loan losses of $206,200 and $55,500 were recorded during the 3
rd
quarter of 2012 and 2011, respectively. The 3
rd
quarter provisions
were higher than the amount recorded in the same period in the prior year due to
charge-offs on several collateral dependent real estate loans. Provisions for
loan losses of $503,700 and $1,004,400 were recorded for the nine months ending
September 30, 2012 and 2011, respectively. The year-to-date provisions for loan
losses in 2012 are significantly less than the amount recorded during the same
period in the prior year due to substantial losses recorded on several
collateral dependent real estate loans in the first half of 2011. During the 3
rd
quarter of 2011, the expected losses on these collateral-dependent real estate
loans were charged-off. Net loans charged-off were $493,545 and $1,287,542
during the first nine months of 2012 and 2011, respectively. Management
attributes the continued high level of loan losses to the weak economic
conditions of the area and severely depressed real estate values. Management
expects additional losses to occur during the remainder of 2012 and into 2013,
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 3
rd
quarter of 2012 is approximately
the same as the comparable period last year. Year-to-date noninterest revenue is
$203,970 (15.77%) higher than the same period last year. The positive variances
in the year-to-date periods result from lower other than temporary impairment
(OTTI) losses on equity investments in 2012. OTTI losses were $157,090 lower in
2012. 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 1st quarter of 2012. Increases in fee income in other areas
such as ATM and debit card, merchant services, and wire transfers were offset by
a reduction in service charge revenue on deposit accounts associated with
prohibition of insufficient funds fees on non-recurring consumer point-of-sale
transaction and implementation of free online banking.
Non-interest expense for the 3
rd
quarter of 2012 is $102,161
(5.08%) higher than the comparable period last year driven by increased employee
payroll and group insurance costs. For the year-to-date period, non-interest
expense is $207,415 (3.37%) higher than last year also as a result of increased
employee payroll and group insurance costs along with higher consulting,
training, and OREO holding costs. The aforementioned increases in year-to-date
non-interest expenses were partially offset by decreases in FDIC deposit
insurance premiums, occupancy costs, and legal fees.
Income taxes for the nine months ended September 30, 2012 are $62,500 (3.15%)
lower than the same period last year while pre-tax income decreased by $105,249
(1.92%) during the same period. The decrease in income tax expense for the nine
months ended September 30, 2012 is proportionate to the decrease in income
before income taxes during the same period. The Company’s effective tax rate of
35.79% for the nine months ended September 30, 2012 is consistent with the rate
through September 30, 2011 of 36.24%. The slight decrease in the effective tax
rate is due to a higher percentage of tax-exempt income in 2012, mostly
attributable to the additional bank owned life insurance investment in the 1
st
quarter. 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 $3,093,801 from December 31, 2011 to
September 30, 2012. This increase is attributable to comprehensive income of
$3,450,576 for the nine months ended September 30, 2012, less the cost to
repurchase shares of $356,775 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 September 30, 2012
and December 31, 2011 were 35.9% and 34.6%, respectively. Both are substantially
in excess of regulatory minimum requirements. The increase in the tier one
capital ratio since December 31, 2011 is primarily attributable to a reduction
in the loan portfolio during the same period.
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 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. As
currently written, the proposed rules would not apply to the Company as its
total assets are currently less than $500 million.
During the 3
rd
quarter of 2012, management analyzed the proposed
rules and estimated the potential impact on the Bank’s regulatory capital
ratios, capital planning, and operations. A detailed comment letter identifying
the potential impact on the Bank including opposition to the proposed rules was
written by management and submitted to the Bank’s regulators. A copy of the
letter, in its entirety, can be found on the website of the FDIC. In summary,
three areas of the proposed rules will have a significant impact on the Bank’s
regulatory capital ratios including, inclusion of unrealized gains and losses on
available-for-sale securities in regulatory capital, increased risk weighting
for residential mortgages and increased risk weighting for unused commitments.
Inclusion of unrealized gains and losses on available-for-sale securities would
create volatility in the Bank’s regulatory capital ratios as interest rates
increase or decrease. However, the changes in capital would only be temporary as
the Bank typically holds its securities until maturity or until a call option is
exercised. Changes in the risk-weighting of residential mortgages and unused
commitments, as written in the proposed rules, are estimated to decrease the
Bank’s regulatory capital ratios by at least 550 bps. This reduction is
significant but the Bank’s capital ratios would remain substantially in excess
of regulatory minimum requirements. Due to the aforementioned impacts of the
proposed rules, the Bank may be required to designate fewer investment
securities as available-for-sale, make significant changes to its residential
mortgage and line of credit product offerings, and consider selling residential
mortgages from its portfolio. Costs of compliance related to the proposed rules
are expected to have a negative impact on the Bank’s earnings.
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, current reports on Form 8-K, and the related
XBRL files, 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.
- 27 -