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 March 31, 2013. 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 impaired 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.
Financial Condition
Total assets of the Company decreased $10.2 million (2.30%) from December 31, 2012 to March 31, 2013. Combined deposits and customer repurchase agreements decreased $11.2 million (3.06%) during the same period. The decrease in deposits and customer repurchase agreements is primarily attributable to a $6.4M decrease in Interest on Lawyer’s Trust Account (IOLTA) balances which are generally temporary in nature. As of December 31, 2012, IOLTA account balances exceeded their average balance by $6.9M which resulted in the outflow of those excess funds during the 1
st
quarter of 2013. The remaining outflow of deposits during the 1
st
quarter of 2013 was attributable to a $6.6M decrease in non-interest bearing business DDA accounts. This outflow of funds is consistent with outflows in the same period in previous years as business customers utilize funds to make repairs or improvements and purchase inventory for the upcoming tourism season. Management believes that the expiration of unlimited deposit insurance on non-interest bearing accounts on December 31, 2012 was not a significant factor in the aforementioned decrease in non-interest bearing business DDA accounts during the 1
st
quarter of 2013.
Average assets and average deposits increased $17.5 million and $16.2 million, respectively, from the 1
st
quarter 2012 to the 1
st
quarter 2013. 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 volatile. Increased deposits may be a sign of economic recovery within the Bank’s resort service area, but depositors remain hesitant to spend or invest excess funds they have saved during and after the recession as they remain uncertain about continued economic recovery.
Loan Portfolio
From December 31, 2012 to March 31, 2013 the gross loan portfolio has grown $8.4 million (3.68%). The Bank typically experiences loan growth during the 1
st
quarter as seasonal tourism businesses utilize lines of credit or request advances under commercial mortgages to prepare their businesses for the upcoming summer tourism season. Accordingly, commercial mortgages and other commercial loans increased $3.1M (2.41%) during the 1
st
quarter of 2013. Loans for construction, land development, and land increased by $2.9M (21.22%) from December 31, 2012 to March 31, 2013, primarily related to the continued funding of a hotel construction loan within the Bank’s resort service area. Residential mortgage originations (1 to 4 family, 1
st
lien) were higher in the 1
st
quarter of 2013 resulting in a $2.5M (3.00%) increase in this portfolio. Growth in the loan portfolio has been funded by maturities of short term securities in the investment portfolio. Because loans earn higher average interest rates than investments, this shift in assets has a positive effect on earnings. There is no adverse impact on the Company’s ability to meet liquidity demands resulting from recent increases in the loan portfolio.
The Company makes loans to customers located primarily in the Delmarva region with a focus on real estate secured lending. 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 national and global recessions. Although the recession ended in mid-2009, the Bank continues to experience historically high levels of delinquencies, nonaccrual loans, troubled debt restructurings and loan losses due to trailing effects of the recession, slow pace of economic recovery, and depressed real estate values.
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 reporting date. Valuation of the allowance is completed no less than quarterly based on the most recent loan portfolio data. The determination of the allowance is inherently subjective as it relies on estimates of potential loss related to specific loans, the effect 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. Management closely monitors such trends and the potential effect on the Company.
The price corrections to real estate in the Bank’s service area following the recession in 2008 and 2009 were significant and the post-recession recovery has lagged regional and national trends. Commercial real estate and development activity in the resort areas has increased while residential real estate activity continues to be led by distressed sales. Unemployment in the Bank’s service area also remains elevated and lags other parts of the region that include metropolitan areas. The aforementioned conditions have led the Company to experience historically high loan losses and provisions for loan losses. 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. While total nonperforming assets and impaired loans have decreased over the past two years, Management expects that loan losses will continue at historically high levels until local economic conditions as well as the local real estate market improve.
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 of the financial statements included herein.
Management believes that economic conditions and trends suggest the likelihood of loss in unsecured loans (commercial and consumer) and secured consumer loans remains high. Reserves for these segments of the portfolio are included in the formula-based portion of the ALLL. As of March 31, 2013, management reserved 135 basis points against all unsecured loans, and consumer loans secured by other than real estate. Additionally, management reserved 20% 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 to limit the Bank’s loss exposure. The Bank foreclosed on mortgages in each of the last 4 years and expects additional foreclosures in 2013. 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 charge-offs as these types of loans are deemed to be collateral dependent.
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 March 31, 2013, Management reserved 10 basis points 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 of the financial statements included herein.
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 $345,000 was recorded in the 1st quarter of 2013 which compares to a provision for loan losses of $192,500 in the 1
st
quarter of 2012. The provision of $345,000 recorded this quarter is primarily a result of the charge-off of $260,614 related to the troubled debt restructuring discussed further below. An increase in the overall loan portfolio and an increase in the 5 year historical loss percentage contributed to the remaining provision this quarter. The Bank experienced net charge-offs of $263,935 and $91,895 in the 1
st
quarters of 2013 and 2012, respectively. Refer to Note 3 of the financial statements contained herein for a schedule of transactions in the allowance for loan losses.
Management considers the March 31, 2013 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 March 31, 2013, management has not identified any loans which are anticipated to be wholly charged-off within the next 12 months.
A troubled debt restructuring (TDR), which is defined as a modification or restructuring of terms of a loan that results in a concession by the lender to accommodate a borrower who is experiencing financial difficulties, is an important risk management tool utilized to improve the likelihood of recovery. TDRs are considered impaired loans since all principal and interest payments according to the original contractual terms will not be collected. TDRs are evaluated for impairment at the time of restructure and each subsequent reporting period. Defaults have occurred on restructured loans which resulted in losses and, if needed, additional restructuring to accommodate changes in the borrower’s financial position. Other restructured loans have been collected with no loss of principal, returned to their original contractual terms, or refinanced at market rates and terms.
An identified loss on a TDR is recorded as a specific reserve in the allowance for loan losses or charged-off if the loan is deemed to be collateral dependent. During the 3 months ended March 31, 2013, the Bank completed the 2
nd
restructuring of 4 real estate loans in association with a forbearance agreement entered into with one borrower. The loans were deemed to be collateral dependent and a loss of $260,614 was recorded as part of the restructuring. A loss of $26,054 was recorded as part of a restructure completed in the 1
st
quarter of 2012. Non-accruing TDRs were 16.30% and 15.49% of total TDRs as of March 31, 2013 and December 31, 2012, respectively.
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 1
st
quarter of 2013, a charge-off of $260,614 was recorded related to the 2
nd
troubled debt restructuring of collateral dependent real estate loans of one borrower. 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 $1,094,313 (9.68%) from $11,301,555 at December 31, 2012 to $10,207,242 at March 31, 2013, primarily as the result of the payoff of a nonaccrual loan of $544,224 and the charge-off from the collateral dependent TDR noted above. Refer to Note 3 of the financial statements contained herein 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. During the 1
st
quarter of 2013, a nonaccrual loan was paid in full (including accrued interest) which resulted in cash basis recognition of interest income of $106,934. All other nonaccrual loan payments received in the 1
st
quarters of 2013 and 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 $563,735 (11.75%) from $4,799,190 at December 31, 2012 to $4,235,455 at March 31, 2013, primarily as a result of the payoff of a nonaccrual loan as discussed above. Management monitors the accruing loans in this category closely to assure that collateral is sufficient to fully discharge the debt to the Bank and the process of collection is ongoing. Refer to Note 3 of the financial statements contained herein 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.
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 51.28% for the 1
st
quarter of 2013 compared to 49.26% for the same quarter of 2012.
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 1
st
quarter of the year when business customers are using their deposits to meet cash flow needs in preparation for the upcoming tourism season.
Combined deposits and customer repurchase agreements decreased $11.2 million (3.06%) during the quarter ended March 31, 2013. The decrease in deposits and customer repurchase agreements is primarily attributable to a $6.4M decrease in Interest on Lawyer’s Trust Account (IOLTA) balances which are generally temporary in nature. As of December 31, 2012, IOLTA account balances exceeded their average balance by $6.9M which resulted in the outflow of those excess funds during the 1
st
quarter of 2013. The remaining outflow of deposits during the same period was attributable to a $6.6M decrease in non-interest bearing business DDA accounts. This outflow of funds is consistent with outflows in the same period in previous years as business customers utilize funds to meet cash flow needs for the upcoming tourism season.
Average net loans to average deposits were 66.52% versus 69.34% as of March 31, 2013 and 2012, respectively. Average net loans increased by 0.62% while average deposits grew by 4.88%. Deposit increases were generally reinvested in overnight federal funds sold and investment securities. Management believes the year-to-year growth in average deposits results, to some extent, from continuing economic uncertainty due to the continued slow recovery following the recession of 2008-2009. Management expects that beginning late in the 2nd quarter and throughout the 3
rd
quarter, liquidity levels will rise as business borrowers start repaying loans, and the Bank receives deposits from seasonal business customers, summer residents and tourists.
Average deposit balance increases occurred in non-interest and interest-bearing accounts, except time deposits which dropped 8.16%. 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. 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
The Company has available lines of credit, including overnight federal funds and reverse repurchase agreements, totaling $28,000,000 as of March 31, 2013.
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, most fixed rate mortgage and commercial loans are written with a demand feature in order to provide repricing opportunities. 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. During the recent surge in the Company’s liquidity the resultant investment purchases continued the preference towards short term maturities allowing the Company to maximize earnings when interest rates rise from the current historical lows. The asset mix of the balance sheet is continually evaluated in terms of several variables: yield, credit quality, appropriate funding sources, and liquidity.
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. Management of the liability mix of the balance sheet focuses on deposit product pricing and offerings. Increases in deposit balances experienced during and following the recession in 2008 and 2009 were generally unsolicited by the Company and are presumed to be a result of general financial market volatility.
As of March 31, 2013, the Company was cumulatively asset-sensitive for all time horizons due to the ability to reprice most fixed rate mortgage 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.
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 3.5% 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.
Results of Operations
Net income for the three months ended March 31, 2013
,
was $1,012,749 or $0.34 per share, compared to $1,056,681 or $0.35 per share for the 1
st
quarter of 2012. This represents a decrease of $43,932 or 4.16% from the prior year. The key components of net income are discussed in the following paragraphs.
For the 1
st
quarter of 2013 compared to the same period of 2012, net interest income increased $40,591 (1.15%). The increase was attributable to several items including increases in average loan balances, adjustments related to impaired loans, and lower deposit interest rates. While balances of interest-bearing assets and liabilities increased, lower yields caused overall reductions in both interest revenues and expense.
Average interest-earning assets increased $24.1 million (6.40%), but further decreases in rates on investments and loans offset revenue increases attributable to volume. Average net loan balances for the quarter ended March 31, 2013 increased $1.42 million (0.62%) compared to the same period of 2012. The increase in average loans helped partially offset the downward pressure on investment and loan portfolio yields. During the quarter ended March 31, 2013, additional interest income of $60,048 was recognized related to interest income adjustments recorded on two impaired loans. The full principal and all accrued interest related to a nonaccrual loan was recovered which resulted in the recognition of $106,934 of interest income. This recovery was partially offset by a $46,886 charge-off of accrued interest as part of a 2
nd
troubled debt restructuring for one borrower and related forbearance agreement. The tax-equivalent yield on interest-earning assets, including these adjustments, decreased by 33 basis points from 4.14% for the quarter ended March 31, 2012 to 3.81% for the same period in 2013.
Average interest-bearing liabilities increased $5.6 million (2.19%) while generating lower interest expense, again due to interest rate reductions. The yield on interest-bearing liabilities decreased by 23 basis points from 0.43% for the quarter ended March 31, 2012 to 0.20% for the same period in 2013. To offset interest revenue decreases, management has gradually lowered deposit rates from 2009 to the present. Interest expense for the quarter ended March 31, 2013 decreased by $144,733 (52.32%) relative to the same period in the prior year. Interest rates on deposit products and repurchase agreements have been reduced by at least 50% since the middle of 2012 which have resulted in the significant decrease in interest expense. Lower yields on interest-bearing liabilities could not fully offset the lower yields on interest-earning assets, therefore the net margin on interest-earning assets fell by 17 basis points from 3.85% for the quarter ended March 31, 2012 to 3.68% for the same period in 2013.
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
|
|
|
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
balance
|
|
|
Interest
|
|
|
Yield
|
|
|
balance
|
|
|
Interest
|
|
|
Yield
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
$
|
27,975,996
|
|
|
$
|
11,304
|
|
|
|
0.16
|
%
|
|
$
|
36,549,377
|
|
|
$
|
8,518
|
|
|
|
0.09
|
%
|
|
Interest-bearing deposits
|
|
|
12,375,427
|
|
|
|
11,731
|
|
|
|
0.38
|
%
|
|
|
10,563,682
|
|
|
|
13,235
|
|
|
|
0.50
|
%
|
|
Investment securities
|
|
|
129,637,685
|
|
|
|
183,418
|
|
|
|
0.57
|
%
|
|
|
100,149,832
|
|
|
|
224,119
|
|
|
|
0.90
|
%
|
|
Loans, net of allowance
|
|
|
231,127,097
|
|
|
|
3,562,970
|
|
|
|
6.25
|
%
|
|
|
229,711,615
|
|
|
|
3,635,241
|
|
|
|
6.36
|
%
|
|
Total interest-earning assets
|
|
|
401,116,205
|
|
|
|
3,769,423
|
|
|
|
3.81
|
%
|
|
|
376,974,506
|
|
|
|
3,881,113
|
|
|
|
4.14
|
%
|
|
Noninterest-bearing cash
|
|
|
10,640,483
|
|
|
|
|
|
|
|
|
|
|
|
18,171,013
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
17,495,073
|
|
|
|
|
|
|
|
|
|
|
|
16,592,674
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
429,251,761
|
|
|
|
|
|
|
|
|
|
|
$
|
411,738,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
|
|
$
|
62,805,898
|
|
|
|
22,015
|
|
|
|
0.14
|
%
|
|
$
|
60,323,780
|
|
|
|
31,434
|
|
|
|
0.21
|
%
|
|
Money market
|
|
|
54,700,281
|
|
|
|
13,439
|
|
|
|
0.10
|
%
|
|
|
50,571,367
|
|
|
|
45,945
|
|
|
|
0.37
|
%
|
|
Savings
|
|
|
57,667,417
|
|
|
|
14,207
|
|
|
|
0.10
|
%
|
|
|
51,582,444
|
|
|
|
30,633
|
|
|
|
0.24
|
%
|
|
Other time
|
|
|
82,144,601
|
|
|
|
80,506
|
|
|
|
0.40
|
%
|
|
|
89,444,016
|
|
|
|
165,824
|
|
|
|
0.75
|
%
|
|
Total interest-bearing deposits
|
|
|
257,318,197
|
|
|
|
130,167
|
|
|
|
0.21
|
%
|
|
|
251,921,607
|
|
|
|
273,836
|
|
|
|
0.44
|
%
|
|
Securities sold under agreements to repurchase
|
|
|
4,749,843
|
|
|
|
1,756
|
|
|
|
0.15
|
%
|
|
|
4,529,077
|
|
|
|
2,820
|
|
|
|
0.25
|
%
|
|
Total interest-bearing liabilities
|
|
|
262,068,040
|
|
|
|
131,923
|
|
|
|
0.20
|
%
|
|
|
256,450,684
|
|
|
|
276,656
|
|
|
|
0.43
|
%
|
|
Noninterest-bearing deposits
|
|
|
90,155,222
|
|
|
|
|
|
|
|
|
|
|
|
79,369,574
|
|
|
|
|
|
|
|
|
|
|
Total deposits and interest-bearing liabilities
|
|
|
352,223,262
|
|
|
|
131,923
|
|
|
|
0.15
|
%
|
|
|
335,820,258
|
|
|
|
276,656
|
|
|
|
0.33
|
%
|
|
Other liabilities
|
|
|
238,476
|
|
|
|
|
|
|
|
|
|
|
|
162,104
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
76,790,023
|
|
|
|
|
|
|
|
|
|
|
|
75,755,831
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
429,251,761
|
|
|
|
|
|
|
|
|
|
|
$
|
411,738,193
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.61
|
%
|
|
|
|
|
|
|
|
|
|
|
3.71
|
%
|
|
Net interest income
|
|
|
|
|
|
$
|
3,637,500
|
|
|
|
|
|
|
|
|
|
|
$
|
3,604,457
|
|
|
|
|
|
|
Net margin on interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
3.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
|
|
|
$
|
16,804
|
|
|
|
|
|
|
|
|
|
|
$
|
20,400
|
|
|
|
|
|
|
Loan income
|
|
|
|
|
|
$
|
37,468
|
|
|
|
|
|
|
|
|
|
|
$
|
41,420
|
|
|
|
|
|
Provisions for loan losses of $345,000 and $192,500 were recorded during the three months ended March 31, 2013 and 2012, respectively. Net loans charged-off were $263,935 and $91,895 during the 1
st
quarters of 2013 and 2012, respectively. The provision of $345,000 recorded this quarter is primarily a result of the charge-off of $260,614 related to the troubled debt restructuring described in the Loan Quality and Allowance for Loan Loss section above. An increase in the overall loan portfolio and an increase in the 5 year historical loss percentage contributed to the remaining provision this quarter. Management expects that loan losses will continue at historically high levels until the local economic conditions and real estate market improve, and those losses may be significant. Management considers the March 31, 2013 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 resulting in increased provision expense. Refer to the Loan Quality and the Allowance for Loan Losses section above for a detailed discussion of the provision for loan losses.
Noninterest revenue for the 1
st
quarter of 2013 is $7,058 (1.50%) higher than the comparable period in 2012 due primarily to the incremental income from an additional investment made in bank owned life insurance and lower losses on the disposition of assets. These increases were partially offset by a decrease in deposit account service charge revenue of $12,503 (6.46%) which is attributable to implementation of free online bill pay and a decline in the volume of items presented against insufficient funds.
Noninterest expense for the 1
st
quarter of 2013 is $29,619 (1.36%) lower than the same period in 2012, primarily as a result of a $67,192 (14.00%) decrease in other operating expenses. Decreases in other operating costs are attributable to lower legal fees from reduced loan collection and foreclosure efforts, fewer advertising costs, lower OREO holding costs, and elimination certain 3
rd
party deposit product fees. The decrease in other operating expenses was partially offset by a $22,290 (2.49%) increase in salary expense and a $13,737 (19.23%) increase in ATM and debit card expenses.
Income taxes for the 3 months ended March 31, 2013 are $31,300 (5.27%) lower than the same period in 2012 while pre-tax income decreased by $75,232 (4.56%) during the same period. The decrease in income tax expense for the 3 months ended March 31, 2013 is proportionate to the decrease in income before income taxes during the same period. The Company’s effective tax rate of 35.71% for the 3 months ended March 31, 2013 is consistent with the effective tax rate through March 31, 2012 of 35.98%. The slight decrease in the effective tax rate is due to a higher percentage of tax-exempt income in 2013, mostly attributable to the additional bank owned life insurance investment made in the middle of the 1
st
quarter in 2012. 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.
Capital Resources and Adequacy
Total stockholders’ equity increased $648,988 from December 31, 2012 to March 31, 2013. This increase is attributable to comprehensive income of $925,559 for the 3 months ended March 31, 2013, less the cost to repurchase shares of 276,571 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 March 31, 2013 and December 31, 2012 were 34.3% and 35.0%, respectively. Both are substantially in excess of regulatory minimum requirements. The decrease in the tier one capital ratio since December 31, 2012 is primarily attributable to the increase in the loan portfolio during the same period. Loans are risk weighted higher than most assets thus loan growth increases total risk weighted assets and reduces the tier one capital ratio.
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 3rd 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, 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.