Calvin B. Taylor Bankshares, Inc. and subsidiary

Table of Contents

 

 

|                                                             | Page |
|-------------------------------------------------------------|------|
|                                                             |      |
| Report of		Independent Registered Public Accounting Firm    | 1    |
| Consolidated		Financial Statements                          |      |
| Consolidated		Balance Sheets                                | 2    |
| Consolidated		Statements of Income                          | 3    |
| Consolidated		Statements of Changes in Stockholders' Equity | 4    |
| Consolidated		Statements of Cash Flows                      | 5-6  |
| Notes to		Consolidated Financial Statements                 | 7-26 |
|                                                             |      |

 

 

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and StockholdersCalvin B. Taylor Bankshares, Inc.Berlin, Maryland

    We have audited the accompanying consolidated balance sheets of Calvin B.Taylor Bankshares, Inc. and Subsidiary (the Company) as of December 31, 2010,2009, and 2008, and the related consolidated statements of income, changes instockholders' equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2010. These consolidated financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

    We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board in the United States of America. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financial statements.An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

    In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Calvin B.Taylor Bankshares, Inc. and Subsidiary as of December 31, 2010, 2009, and 2008,and the results of its operations and its cash flows for each of the years inthe three-year period ended December 31, 2010, in conformity with accountingprinciples generally accepted in the United States of America.

    We have also audited, in accordance with the standards of the Public	Company Accounting Oversight Board in the United States of America, the	Company’s internal control over financial reporting as of December 31, 2010,	based on criteria established in *Internal Control – Integrated Framework*	issued by the Committee of Sponsoring Organizations of the Treadway	Commission (COSO) and our report dated March 9, 2011, expressed March 9,	2011, expressed an unqualified opinion.

 

/s/ Rowles & Company LLP

 

Baltimore, MarylandMarch 9, 2011

 

- 1 -

 
		Calvin B. Taylor Bankshares, Inc. and subsidiary    		Consolidated Balance Sheets    		December 31,		2010		2009		2008   		Assets		Cash and due from banks		 $       14,319,142 		 $       15,117,190 		 $         8,769,784 		Federal funds sold		          36,081,862 		          28,222,472 		          26,460,842 		Interest-bearing deposits		          11,650,849 		          12,494,003 		          15,517,115 		Investment securities available for sale		          59,801,920 		          42,767,578 		          33,975,271 		Investment securities held to maturity (approximate fair   		   value of $32,491,819, $38,897,082, and $33,523,422)		          32,303,572 		          38,597,942 		          32,621,797 		Loans, less allowance for loan losses of $983,178,   		   $637,761, and $707,152		        237,001,219 		        240,061,869 		        241,430,914 		Premises and equipment		            6,319,854 		            6,594,757 		            6,326,312 		Other real estate owned		               779,500 		            1,433,000 		                         -   		Accrued interest receivable		            1,224,920 		            1,292,604 		            1,704,260 		Computer software		                 89,521 		               135,831 		               156,372 		Bank owned life insurance		            5,260,539 		            5,089,278 		            4,914,810 		Prepaid expenses		            1,285,266 		            1,485,120 		               333,874 		Other assets		                 29,640 		               236,652 		               391,160  		 $     406,147,804 		 $     393,528,296 		 $     372,602,511     		Liabilities and Stockholders' Equity		Deposits   		  Noninterest-bearing		 $       76,763,686 		 $       72,431,731 		 $       70,652,032 		  Interest-bearing		        250,014,068 		        240,215,888 		        221,807,181 		        326,777,754 		        312,647,619 		        292,459,213 		Securities sold under agreements to repurchase		            4,490,512 		            7,048,176 		            5,742,765 		Note payable		                         -   		                 48,519 		                 74,046 		Accrued interest payable		               150,299 		               192,621 		               359,673 		Deferred income taxes		               383,326 		            1,026,786 		            1,437,813 		Other liabilities		               151,361 		               287,282 		               245,507  		        331,953,252 		        321,251,003 		        300,319,017 		Stockholders' equity   		  Common stock, par value $1 per share;   		    authorized 10,000,000 shares; issued and outstanding   		    3,000,508 shares at December 31, 2010 and 2009, and   		    3,048,397 shares at December 31, 2008		            3,000,508 		            3,000,508 		            3,048,397 		  Additional paid-in capital		            8,733,438 		            8,733,438 		          10,406,403 		  Retained earnings		          61,441,595 		          58,975,278 		          56,569,913 		          73,175,541 		          70,709,224 		          70,024,713 		  Accumulated other comprehensive income		            1,019,011 		            1,568,069 		            2,258,781  		          74,194,552 		          72,277,293 		          72,283,494  		 $     406,147,804 		 $     393,528,296 		 $     372,602,511 
 

The accompanying notes are an integral part of these financialstatements.

2
** **		Calvin B. Taylor Bankshares, Inc. and subsidiary    		Consolidated Statements of Income    		             Years Ended December 31,             		2010		2009		2008		Interest and dividend revenue   		  Loans, including fees		 $       15,930,433 		 $       15,962,526 		 $       16,582,428 		  U. S. Treasury and government agency securities		            1,168,402 		            1,605,558 		            2,243,413 		  State and municipal securities		                 51,885 		                 45,674 		                 42,336 		  Federal funds sold 		                 65,585 		                 66,548 		               732,227 		  Interest-bearing deposits		                 58,347 		               158,496 		               325,396 		  Equity securities		                 45,154 		                 63,391 		                 74,843 		          Total interest and dividend revenue		          17,319,806 		          17,902,193 		          20,000,643     		Interest expense   		  Deposits		            1,909,855 		            2,506,433 		            3,963,962 		  Borrowings		                 33,251 		                 36,205 		                 58,292 		          Total interest expense		            1,943,106 		            2,542,638 		            4,022,254 		          Net interest income		          15,376,700 		          15,359,555 		          15,978,389    		Provision for loan losses		            1,012,000 		               850,000 		               617,526 		          Net interest income after provision for loan losses		          14,364,700 		          14,509,555 		          15,360,863     		Noninterest revenue   		  Service charges on deposit accounts		               949,377 		               987,169 		            1,092,899 		  ATM and debit card 		               570,382 		               533,822 		               518,859 		  Increase in cash surrender value of bank owned life insurance		               171,261 		               174,468 		               194,040 		  Gain (loss) on sale of assets		               252,703 		                 38,403 		                 (4,671)		  Loss on sale and revaluation of other real estate owned		             (200,904)		                    (490)		                         -   		  Miscellaneous		               334,634 		               255,254 		               236,063 		          Total noninterest revenue		            2,077,453 		            1,988,626 		            2,037,190     		Noninterest expenses   		  Salaries		            3,611,611 		            3,717,107 		            3,681,469 		  Employee benefits		            1,087,144 		               953,890 		               989,482 		  Occupancy 		               811,373 		               763,715 		               753,605 		  Furniture and equipment 		               441,459 		               476,518 		               464,559 		  ATM and debit card		               181,882 		               255,850 		               304,737 		  Deposit insurance premiums		               296,118 		               495,406 		                 43,186 		  Other operating		            1,852,287 		            1,851,086 		            1,715,230 		          Total noninterest expenses		            8,281,874 		            8,513,572 		            7,952,268     		          Income before income taxes 		            8,160,279 		            7,984,609 		            9,445,785    		Income taxes		            2,963,500 		            2,875,000 		            3,386,568     		Net income		 $         5,196,779 		 $         5,109,609 		 $         6,059,217     		Earnings per common share - basic and diluted		 $                  1.73 		 $                  1.69 		 $                  1.97 
The accompanying notes are an integral part of these financialstatements.

3

 
		                  		calvin b. taylor bankshares, inc. and subsidiary         		Consolidated Statements of Changes in Stockholders' Equity             		Accumulated      		other  		Common stock		Additional		Retained		comprehensive		 Comprehensive 		Shares 		Par value 		paid-in capital		earnings		income		 income         		Balance, December 31, 2007		   3,102,510 		 $  3,102,510 		 $      12,381,413 		 $    57,076,461 		 $     1,915,379    		Net income		                -   		                  -   		                       -   		         6,059,217 		                     -     		 $     6,059,217 		Unrealized gain on investment        		  securities available for sale net        		  of income taxes of $154,135		                -   		                  -   		                       -   		                      -   		           343,402   		           343,402 		Comprehensive income       		 $     6,402,619 		Common shares repurchased 		      (54,113)		        (54,113)		         (1,975,010)		                      -   		                     -      		Cash dividend, $2.15 per share		                -   		                  -   		                       -   		       (6,565,765)		                     -              		Balance, December 31, 2008		   3,048,397 		     3,048,397 		         10,406,403 		       56,569,913 		        2,258,781    		Net income		                -   		                  -   		                       -   		         5,109,609 		                     -     		 $     5,109,609 		Unrealized (loss) on investment        		  securities available for sale net        		  of income taxes of ($400,129)		                -   		                  -   		                       -   		                      -   		          (690,712)  		          (690,712)		Comprehensive income       		 $     4,418,897 		Common shares repurchased 		      (47,889)		        (47,889)		         (1,672,965)		                      -   		                     -      		Cash dividend, $.90 per share		                -   		                  -   		                       -   		       (2,704,244)		                     -              		Balance, December 31, 2009		   3,000,508 		     3,000,508 		           8,733,438 		       58,975,278 		        1,568,069    		Net income		                -   		                  -   		                       -   		         5,196,779 		                     -     		 $     5,196,779 		Unrealized (loss) on investment        		  securities available for sale net        		  of income taxes of ($339,606)		                -   		                  -   		                       -   		                      -   		          (549,058)  		          (549,058)		Comprehensive income       		 $     4,647,721 		Cash dividend, $.91 per share		                -   		                  -   		                       -   		       (2,730,462)		                     -              		Balance, December 31, 2010		   3,000,508 		 $  3,000,508 		 $        8,733,438 		 $    61,441,595 		 $     1,019,011    
** **
The accompanying notes are an integral part of these financialstatements.

4

 
		calvin b. taylor bankshares, inc. and subsidiary   		Consolidated Statements of Cash Flows   		Years Ended December 31, 		2010		2009		2008   		Cash flows from operating activities   		  Interest and dividends received		 $       17,590,438 		 $       18,404,895 		 $       19,804,313 		  Fees and commissions received		            1,860,905 		            1,745,339 		            1,499,929 		  Interest paid		          (1,985,208)		          (2,709,690)		          (4,164,490)		  Cash paid to suppliers and employees		          (7,729,288)		          (9,030,265)		          (7,016,197)		  Income taxes paid		          (3,010,956)		          (2,744,434)		          (3,657,415) 		            6,725,891 		            5,665,845 		            6,466,140    		Cash flows from investing activities   		  Proceeds from sale of collectible coin		               195,939 		                 33,410 		                         -   		  Certificates of deposit purchased, net of maturities		               823,576 		            3,133,184 		          (9,483,255)		  Proceeds from maturities of investments available for sale		          18,135,000 		          24,200,000 		          19,000,000 		  Purchase of investments available for sale		        (36,198,861)		        (34,149,247)		        (28,237,469)		  Proceeds from maturities of investments held to maturity		          29,040,000 		          26,975,000 		          29,360,000 		  Purchase of investments held to maturity		        (22,807,711)		        (32,976,024)		        (15,274,817)		  Loans made, net of principal reductions		            2,031,503 		             (938,487)		          (3,972,162)		  Proceeds from sale of real property and equipment		                 72,950 		                 20,900 		                         -   		  Purchases of premises, equipment, and computer software		             (240,609)		             (828,173)		             (369,363)		  Proceeds from sale of other real estate and repossessed assets, net		               470,596 		                 39,509 		                         -    		          (8,477,617)		        (14,489,928)		          (8,977,066)   		Cash flows from financing activities   		  Net increase (decrease) in   		     Time deposits		               310,407 		             (289,966)		            7,710,096 		     Other deposits		          13,819,729 		          20,478,372 		          (4,194,430)		     Securities sold under agreements to repurchase		          (2,557,664)		            1,305,411 		            2,316,592 		  Payments on note payable		               (48,519)		               (25,528)		               (24,044)		  Common shares repurchased 		                         -   		          (1,720,854)		          (2,029,123)		  Dividends paid		          (2,730,462)		          (2,704,244)		          (6,565,765) 		            8,793,491 		          17,043,191 		          (2,786,674)   		Net increase (decrease) in cash and cash equivalents		            7,041,765 		            8,219,108 		          (5,297,600)   		Cash and cash equivalents at beginning of year		          43,489,772 		          35,270,664 		          40,568,264 		Cash and cash equivalents at end of year		 $       50,531,537 		 $       43,489,772 		 $       35,270,664 
 

 

 

The accompanying notes are an integral part of these financialstatements.

5

 

 
		calvin b. taylor bankshares, inc. and subsidiary   		Consolidated Statements of Cash Flows		Continued    		Years Ended December 31,		2010		2009		2008   		Reconciliation of net income to net cash provided by   		   operating activities   		    Net income		 $         5,196,779 		 $         5,109,609 		 $         6,059,217    		   Adjustments to reconcile net income to net cash    		      provided by operating activities   		        Provision for loan losses		            1,012,000 		               850,000 		               617,526 		        Depreciation and amortization		               544,772 		               562,670 		               575,106 		        Deferred income taxes		             (303,854)		               (10,898)		             (197,433)		        Premium amortization and discount accretion 		               202,936 		                 90,979 		             (185,294)		        Gain on sale of collectible coin		             (195,939)		               (33,410)		                         -   		        Loss (gain) on disposition of premises, equipment,   		           and computer software		               (55,900)		                 (3,301)		                   4,671  				        Gain on sale of other real estate and repossessed assets		               (11,949)		                 (1,203)		                         -   		        Loss on revaluation of other real estate		               212,000 		                         -   		                         -   		        Decrease (increase) in   		           Accrued interest receivable		                 67,684 		               411,656 		               (11,087)		           Cash surrender value of bank owned life insurance		             (171,261)		             (174,468)		             (194,040)		           Other assets		               406,866 		          (1,010,512)		               (86,717)		        Increase (decrease) in   		           Accrued interest payable		               (42,322)		             (167,052)		             (142,236)		           Other liabilities		             (135,921)		                 41,775 		                 26,427  		 $         6,725,891 		 $         5,665,845 		 $         6,466,140          		Composition of cash and cash equivalents   		        Cash and due from banks		 $       14,319,142 		 $       15,117,190 		 $         8,769,784 		        Federal funds sold		          36,081,862 		          28,222,472 		          26,460,842 		        Interest-bearing deposits, except for time deposits		               130,533 		               150,110 		                 40,038  		 $       50,531,537 		 $       43,489,772 		 $       35,270,664       		Supplemental cash flows information:   		Non-cash transfers from loans to other real estate owned		 $                      -   		 $         1,448,500 		 $                      -   

 

 

 

The accompanying notes are an integral part of these financialstatements.

6

 

 

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

1. Summary of Significant Accounting Policies

    The consolidated financial statements of Calvin B.		Taylor Bankshares, Inc. (the Company) include the accounts of its wholly		owned subsidiary, Calvin B. Taylor Banking Company (the Bank). All		significant intercompany balances and transactions have been eliminated		in consolidation. The accounting and reporting policies reflected in		these financial statements conform to accounting principles generally		accepted in the United States of America and to general practices within		the banking industry. 

Nature of operations		   		Calvin B. Taylor Bankshares, Inc. is a bank holding		company. Its subsidiary, Calvin B. Taylor Banking Company, is a		financial institution operating primarily in Worcester County, Maryland		and Sussex County, Delaware. The Bank is a full-service commercial bank,		offering deposit services and loans to individuals, small- to		medium-sized businesses, associations and government entities. 

Use of estimates		    The preparation of financial statements in conformity		with accounting principles generally accepted in the United States 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.

Cash equivalents		    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.

Investment securities		    As securities are purchased, management determines if		the securities should be classified as held to maturity or available for		sale. Securities which management has the intent and ability to hold to		maturity are recorded at amortized cost which is cost adjusted for		amortization of premiums and accretion of discounts to maturity.		Securities classified as available-for-sale are recorded at fair value.		    Purchase premiums and discounts are recognized in		interest revenue using the straight line method over the terms of the		securities. Gains and losses on disposal are determined using the		specific-identification method.

Loans    Loans are stated at their outstanding principal		amounts less the allowance for loan losses. Interest on loans is accrued		and credited to income based on contractual interest rates applied to		principal amounts outstanding. A loan is considered to be past due when		principal or interest due is not paid on or before the payment date		agreed upon by the borrower and the Bank. The accrual of interest 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 revenue. Interest payments		received on nonaccrual loans are generally recorded as a reduction of		principal, but may be recorded as cash basis income depending on		management’s judgment on a loan by loan basis. 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.					    The Company does not defer loan origination costs			which management has determined to be immaterial.

 

 

7

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
1. Summary of Significant Accounting Policies (Continued)

Loans (continued)		   		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. Generally, loans are not reviewed for impairment until the		accrual of interest has been discontinued, although management may		categorize a performing loan as impaired based on knowledge of the		borrower’s financial condition, devaluation of collateral, or other		circumstances that are deemed relevant to loan collection. Impaired		loans may have specific reserves allocated to them in the allowance for		loan losses.

Allowance for loan losses		    The allowance for loan losses represents an amount		which management judges 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.		    In determining an adequate level for the allowance,		management considers historical loss experience for major types of		loans. However, historical data may not be an accurate predictor of loss		potential in the current loan portfolio. Management reviews the current		portfolio giving consideration to problem loans, delinquencies, the		composition of the portfolio, concentrations of credit, and changes in		lending products, processes, or staffing. Management 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 allowance is increased by current period		provisions recorded as expense and by recoveries of amounts previously		charged-off. The allowance is decreased when loans are charged-off as		losses, which occurs when they are deemed to be uncollectible.		Provisions for loan losses are made to bring the balance in the		allowance to the level established by application of management’s		allowance methodology, and may result in an increase or decrease to		expense.

Premises and equipment		    Premises and equipment are recorded at cost less		accumulated depreciation. Depreciation is computed under both		straight-line and accelerated methods over the estimated useful lives of		the assets.

Other real estate owned     Other real estate owned is comprised of real estate		acquired in satisfaction of a loan receivable either by foreclosure or		deed taken in lieu of foreclosure. Other real estate owned is recorded		at the lower of cost or net realizable value, which is fair value less		estimated costs to sell the property. If net realizable value is less		than the book value of the related loan at the time of foreclosure, a		loan loss is recorded through the allowance for loan losses. Quarterly,		the Company reviews net realizable value estimates and records declines		in value through expense. Costs to maintain properties, such as		maintenance, utilities, taxes and insurance are expensed as they are		incurred. Gains or losses resulting from the sale of other real estate		owned are included in noninterest income.

 

 

 

8

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
1. Summary of Significant Accounting Policies (Continued)

Computer software		    The Company amortizes software costs over their		useful lives using the straight-line method.

Bank owned life insurance		    The Company records increases in cash surrender value		of bank owned life insurance as current period income based on		projections provided by the underwriting company.

Advertising    Advertising costs are expensed during the period of therelated marketing effort.

Income taxes		    The provision for income taxes includes taxes payable		for the current year and deferred income taxes. Deferred income taxes		are provided for the temporary differences between financial and taxable		income. Tax expense and tax benefits are allocated to the Bank and		Company based on their proportional share of taxable income.

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, which was 3,000,508, 3,019,867, and 3,076,278 for the		years ended December 31, 2010, 2009, and 2008, respectively. 

Subsequent events		    The Company has evaluated events and transactions		subsequent to December 31, 2010 through March 9, 2011, the		date these financials statements were issued. No significant subsequent		events were identified which would affect the presentation of the		financial statements.

2.  Cash and Due From Banks

    The Company normally carries balances with other		banks that exceed the federally insured limit. Average balances carried		in excess of the limit, including unsecured federal funds sold to the		same banks, were $35,852,791 for 2010, $36,975,474 for 2009, and		$36,500,123 for 2008.		    Banks are required to carry noninterest-bearing cash		reserves at specified percentages of deposit balances. The Company's		normal amount of cash on hand and on deposit with other banks is		sufficient to satisfy the reserve requirements.

3.  Lines of Credit

    The Company has available lines of credit, including		overnight federal funds, reverse repurchase agreements and letters of		credit, totaling $28,000,000 as of December 31, 2010.

 

 

 

 

9

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

4. Investment Securities

        Investment securities are summarized as follows:
				Amortized 				Unrealized				Unrealized				Fair				cost				gains				losses				value				December 31, 2010    				Available for sale    				  U.S. Treasury				 $         56,150,205 				 $          966,157 				 $          16,871 				 $         57,099,491 				  State and municipal				                 365,772  								                 4,031 				               3,709 				                 366,094  								  Equity				              1,691,841 				          1,008,745 				           364,251 				              2,336,335  				 $         58,207,818 				 $       1,978,933 				 $        384,831 				 $         59,801,920 				Held to maturity    				  U.S. Treasury				 $         19,487,287 				 $          178,407 				 $            5,147 				 $         19,660,547 				  U.S. Government agency				              7,002,448 				               13,646 				               6,850 				              7,009,244 				  State and municipal				              5,813,837 				               11,979 				               3,788 				              5,822,028  				 $         32,303,572 				 $          204,032 				 $          15,785 				 $         32,491,819      				December 31, 2009    				Available for sale    				  U.S. Treasury				 $         38,197,971 				 $          950,429 				 $                  -   				 $         39,148,400 				  State and municipal				                 395,000  								                 5,392 				                  270 				                 400,122  								  Equity				              1,691,841 				          1,571,962 				             44,747 				              3,219,056  				 $         40,284,812 				 $       2,527,783 				 $          45,017 				 $         42,767,578 				Held to maturity    				  U.S. Treasury				 $         25,498,390 				 $          254,672 				 $            8,999 				 $         25,744,063 				  U.S. Government agency				            10,000,000 				               30,808 				                  650 				            10,030,158 				  State and municipal				              3,099,552 				               23,309 				                     -   				              3,122,861  				 $         38,597,942 				 $          308,789 				 $            9,649 				 $         38,897,082      				December 31, 2008    				Available for sale    				  U.S. Treasury				 $         28,309,823 				 $       1,408,794 				 $                  -   				 $         29,718,617 				  State and municipal				                 400,000  								                 5,220 				                  590 				                 404,630  								  Equity				              1,691,841 				          2,160,183 				                     -   				              3,852,024  				 $         30,401,664 				 $       3,574,197 				 $               590 				 $         33,975,271 				Held to maturity    				  U.S. Treasury				 $         24,519,603 				 $          861,569 				 $                  -   				 $         25,381,172 				  U.S. Government agency				              6,999,443 				               32,657 				               1,016 				              7,031,084 				  State and municipal				              1,102,751 				                 8,415 				                     -   				              1,111,166  				 $         32,621,797 				 $          902,641 				 $            1,016 				 $         33,523,422 
 

 

 

 

10

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

4. 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		December 31, 2010, 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				 $    14,062,266 				 $      22,018 				 $                   -   				 $             -   				 $    14,062,266 				 $      22,018 				U. S. Government Agency				         1,993,150 				           6,850 				                      -   				                -   				         1,993,150 				           6,850 				State and municipal				         2,474,315 				           7,497 				                      -   				                -   				         2,474,315 				           7,497 				Equity				              31,794 				       132,229 				            304,975 				       232,022 				            336,769 				       364,251  				 $    18,561,525 				 $    168,594 				 $         304,975 				 $    232,022 				 $    18,866,500 				 $    400,616 
    The debt securities for which an unrealized loss is		recorded are issues of the U.S. Treasury, 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.		Fluctuations in fair value reflect market conditions and are not		indicative of an other-than-temporary impairment of the investment.		    The equity securities for which an unrealized loss is		recorded are issues of community banks located in the same general		geographic area as the Company. In the opinion of management,		fluctuations in fair value reflect market conditions and are not		indicative of an other-than-temporary impairment of the investment.		Management continues to monitor the financial condition of the issuers.				    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.
				December 31, 2010				December 31, 2009				December 31, 2008				Amortized				Fair				Amortized				Fair				Amortized				Fair				cost				value				cost				value				cost				value      				Available for sale      				  Within one year				 $    35,163,533 				 $    35,292,775 				 $    15,106,388 				 $    15,136,254 				 $    17,159,259 				 $    17,201,296 				  After one year      				   through five years				       19,355,802 				       19,481,248 				       21,490,230 				       21,822,893 				         9,554,499 				         9,960,076 				  After ten years				         1,996,642 				         2,691,562 				         1,996,353 				         2,589,375 				         1,996,065 				         2,961,875  				 $    56,515,977 				 $    57,465,585 				 $    38,592,971 				 $    39,548,522 				 $    28,709,823 				 $    30,123,247       				Held to maturity      				  Within one year				 $      8,758,541 				 $      8,789,063 				 $    16,042,286 				 $    16,273,130 				 $    13,766,474 				 $    14,027,311 				  After one year      				   through five years				       23,545,031 				       23,702,756 				       22,555,656 				       22,623,952 				       18,855,323 				       19,496,111  				 $    32,303,572 				 $    32,491,819 				 $    38,597,942 				 $    38,897,082 				 $    32,621,797 				 $    33,523,422       				Pledged securities				 $    26,567,879 				 $    27,558,868 				 $    26,269,854 				 $    27,142,948 				 $    25,023,730 				 $    26,891,914 
    Investments are pledged to secure deposits of federal		and local governments. Pledged securities also serve as collateral for		securities sold under agreements to repurchase.

 

 

11

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
5. Loans and Allowance for Loan Losses
****
                Major classifications of loans are as follows:
				2010				2009				2008				Real estate mortgages   				Construction, land development, and land				 $         21,792,060 				 $         21,952,873 				 $         30,330,261 				Residential 1 to 4 family, 1st liens				            92,635,944 				            94,757,873 				            95,203,258 				Residential 1 to 4 family, subordinate liens				              1,660,805 				              2,460,550 				              2,952,418 				Commercial properties				          102,578,171 				          102,476,713 				            89,302,549 				Commercial 				            17,596,451 				            16,915,476 				            21,990,067 				Consumer				              1,720,966 				              2,136,145 				              2,359,513 				          237,984,397 				          240,699,630 				          242,138,066 				Allowance for loan losses				                 983,178  								                 637,761  								                 707,152  								Loans, net				 $       237,001,219 				 $       240,061,869 				 $       241,430,914 
                The rate repricing distribution of the loan portfoliofollows:
				2010				2009				2008   						Immediately						 $       233,514,965 						 $       235,500,380 						 $       236,027,947 						Within one year						                 845,858  												                 995,916  												              1,967,273 						Over one to five years						              2,400,182 						              2,634,299 						              2,608,201 						 						Over five years						              1,223,392 						              1,569,035 						              1,534,645 				 				 						 $       237,984,397 						 $       240,699,630 						 $       242,138,066 
    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.		    Nonperforming loans are loans past due 90 or more		days and still accruing interest plus nonaccrual loans. Nonperforming		assets are comprised of nonperforming loans combined with real estate		acquired in foreclosure and held for sale (other real estate owned). The		following table details the composition of nonperforming assets as of		December 31.
				2010				2009				2008				Loans 90 or more days past due and still accruing   				Real estate				 $              684,422 				 $              787,580 				 $           4,602,365 				Commercial				                   -   				                   -   				           40,000 				Consumer				                   -   				                   -   				             5,427  				         684,422 				         787,580 				      4,647,792 				Nonaccruing loans   				Current				      1,185,435 				         423,227 				                   -   				Past due 30 days or more				      2,921,086 				         599,856 				         199,724  				      4,106,521 				      1,023,083 				         199,724 				Total nonperforming loans				      4,790,943 				      1,810,663 				      4,847,516 				Other real estate owned				         779,500 				      1,433,000 				                   -   				Total nonperforming assets				 $   5,570,443 				 $   3,243,663 				 $   4,847,516    				Interest not accrued on nonaccruing loans				 $      156,805 				 $        46,467 				 $          6,797    				Interest included in net income on nonaccruing   				loans, year-to date				 $        93,033 				 $        30,492 				 $        12,275 
    Included in amounts past due 90 days or more and		still accruing at December 31, 2008, was a loan with a principal balance		of $4,500,000. Late in 2008, the Bank was notified of a lien on the		property securing this loan that was superior to the Bank’s liens, and		which the settlement agent did not discover during the title examination		process. As of December 31, 2010, the Bank has been restored to first		lien position and interest is current. 

12

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

5. Loans and Allowance for Loan Losses (continued)

The following table details 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      		December 31, 2010		and Land		Residential		Commercial		Commercial		Consumer		Unallocated		Total		Beginning balance		 $          145,262 		 $            48,034 		 $               2,192 		 $          380,161 		 $         53,638 		 $          8,474 		 $           637,761 		Loans charged off		           (100,000)		           (190,093)		                      -   		          (354,854)		           (52,935)		                  -   		            (697,882)		Recoveries		                     -   		                1,100 		                      -   		                1,073  				             29,126 		                  -   		                31,299 		Provision charged to operations		              190,175 		               191,561 		               354,801 		            168,566 		             89,399 		           17,498 		             1,012,000 		Ending balance		 $         235,437 		 $            50,602 		 $           356,993 		 $         194,946 		 $        119,228 		 $       25,972 		 $            983,178        		Individually evaluated for impairment:      		Balance in allowance		 $                  -   		 $                  -   		 $           330,759 		 $                 -   		 $                -    		 $            330,759 		Related loan balance		 $        1,171,127 		 $          361,743 		 $       2,566,537 		 $               7,114 		 $                -    		 $          4,106,521        		Collectively evaluated for impairment:      		Balance in allowance		 $         235,437 		 $            50,602 		 $             26,234 		 $         194,946 		 $        119,228 		 $       25,972 		 $            652,419 		Related loan balance		 $  20,620,933 		 $  93,935,006 		 $    100,011,634 		 $  17,589,337 		 $   1,720,966  		 $  233,877,876               		December 31, 2009       		Beginning balance		 $          170,000 		 $            17,236 		 $           287,863 		 $        202,484 		 $         30,807 		 $        (1,238)		 $            707,152 		Loans charged off		             (75,000)		           (295,520)		              (360,671)		          (200,357)		           (47,321)		                  -   		             (978,869)		Recoveries		                     -   		                   669 		                      -   		              40,364 		             18,445 		                  -   		                 59,478 		Provision charged to operations		               50,262 		             325,649 		                 75,000  				            337,670 		             51,707 		              9,712 		               850,000 		Ending balance		 $          145,262 		 $            48,034 		 $                 2,192 		 $          380,161 		 $         53,638 		 $          8,474 		 $            637,761        		Individually evaluated for impairment:      		Balance in allowance		 $            35,262 		 $                  -   		 $                    -   		 $        223,607 		 $                -    		 $            258,869 		Related loan balance		 $          352,619 		 $         259,298 		 $        1,842,727 		 $         447,214 		 $                -    		 $         2,901,858        		Collectively evaluated for impairment:      		Balance in allowance		 $          110,000 		 $            48,034 		 $                 2,192 		 $         156,554 		 $         53,638 		 $          8,474 		 $            378,892 		Related loan balance		 $      21,600,254 		 $      96,959,125 		 $  100,633,986 		 $   16,468,262 		 $    2,136,145  		 $      237,797,772               		December 31, 2008       		Beginning balance		 $                  -   		 $                  -   		 $                    -   		 $          144,152 		 $         50,950 		 $             423 		 $            195,525 		Loans charged off		                     -   		                     -   		                      -   		            (76,383)		           (34,532)		                  -   		             (110,915)		Recoveries		                     -   		                     -   		                      -   		                3,785 		              1,231 		                 -   		                  5,016 		Provision charged to operations		             170,000 		                17,236 		              287,863 		            130,930 		              13,158 		           (1,661)		               617,526  				Ending balance		 $          170,000 		 $            17,236 		 $           287,863 		 $        202,484 		 $         30,807 		 $        (1,238)		 $            707,152        		Individually evaluated for impairment:      		Balance in allowance		 $          170,000 		 $               17,111 		 $            109,863 		 $          128,521 		 $                -    		 $            425,495 		Related loan balance		 $       5,350,000 		 $          144,320 		 $       2,842,863 		 $        548,290 		 $            2,727  		 $        8,888,200        		Collectively evaluated for impairment:      		Balance in allowance		 $                  -   		 $                125 		 $            178,000 		 $           73,963 		 $         30,807 		 $        (1,238)		 $            281,657 		Related loan balance		 $      24,980,261 		 $      98,011,356 		 $    86,459,686 		 $   21,441,777 		 $  2,356,786  		 $  233,249,866 
 

 

13

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

5. Loans and Allowance for Loan Losses (continued)

    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  		Greater than   		> 90 Days		30-59 Days		60-89 Days		90 Days		Total 		Total		Past Due and		December 31, 2010		Past Due		Past Due		Past Due		Past Due		Current		Loans		Accruing		Real Estate       		Construction, land development,       		and land		 $       474,843 		 $       234,719 		 $    1,089,719 		 $    1,799,281 		 $       19,992,779 		 $       21,792,060 		 $                 -   		Residential 1-4 family, 1st liens		       1,390,288 		          336,134 		                    -   		       1,726,422 		          90,909,522 		          92,635,944 		                    -   		Residential 1-4 family, 2nd liens		                    -   		                    -   		                    -   		                    -   		            1,660,805 		            1,660,805 		                    -   		Commercial properties		                    -   		            37,957 		       2,508,675 		       2,546,632 		        100,031,539 		        102,578,171 		           684,422 		Commercial 		          103,759 		              7,114 		                    -   		          110,873 		          17,485,578 		          17,596,451 		                    -   		Consumer		                    -   		            19,415 		                    -   		            19,415 		            1,701,551 		            1,720,966 		                    -   		Total		 $    1,968,890 		 $       635,339 		 $    3,598,394 		 $    6,202,623 		 $     231,781,774 		 $     237,984,397 		 $        684,422   		     		December 31, 2009       		Real Estate       		Construction, land development,       		and land		 $    4,834,675 		 $                 -   		 $                 -   		 $    4,834,675 		 $       17,118,198 		 $       21,952,873 		 $                 -   		Residential 1-4 family, 1st liens		       1,573,907 		          909,582 		          111,987 		       2,595,476 		          92,162,397 		          94,757,873 		             62,532 		Residential 1-4 family, 2nd liens		                    -   		                    -   		          146,011 		          146,011 		            2,314,539 		            2,460,550 		             87,245 		Commercial properties		          173,603 		          699,787 		          637,803 		       1,511,193 		        100,965,520 		        102,476,713 		           637,803 		Commercial 		            30,201 		              9,442 		          447,214 		          486,857 		          16,428,619 		          16,915,476 		                    -   		Consumer		            43,846 		            29,697 		                    -   		            73,543 		            2,062,602 		            2,136,145  		Total		 $    6,656,232 		 $    1,648,508 		 $    1,343,015 		 $    9,647,755 		 $     231,051,875 		 $     240,699,630 		 $        787,580        		December 31, 2008       		Real Estate       		Construction, land development,       		and land		 $                 -   		 $    3,605,000 		 $    4,500,000 		 $    8,105,000 		 $       22,225,261 		 $       30,330,261 		 $     4,500,000 		Residential 1-4 family, 1st liens		       1,205,574 		          705,971 		          129,156 		       2,040,701 		          93,162,557 		          95,203,258 		             43,600 		Residential 1-4 family, 2nd liens		          168,797 		                    -   		            58,765 		          227,562 		            2,724,856 		            2,952,418 		             58,765 		Commercial properties		          801,878 		                    -   		            87,862 		          889,740 		          88,412,809 		          89,302,549 		                    -   		Commercial 		            63,140 		          118,954 		            63,578 		          245,672 		          21,744,395 		          21,990,067 		             40,000 		Consumer		            34,510 		            18,871 		              6,245 		            59,626 		            2,299,887 		            2,359,513 		               5,427 		Total		 $    2,273,899 		 $    4,448,796 		 $    4,845,606 		 $  11,568,301 		 $     230,569,765 		 $     242,138,066 		 $     4,647,792        
 

 

 

 

 

 

 

14

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

5. 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 year end and their average balances for		the year follows:
				Unpaid  				Average				Principal				Recorded				Related				Recorded				December 31, 2010				Balance				Investment				Allowance				Investment				With no related allowance recorded    				Construction, land development, and land				 $        1,171,127 				 $        1,171,127 				 $                    -   				 $        1,194,397 				Residential 1-4 family, 1st lien				              361,743 				              361,743  				              379,546 				Commercial properties				                88,488 				                88,488  				                93,244 				Commercial 				                  7,114 				                  7,114  				                  8,122 				With an allowance recorded    				Commercial properties				           2,478,049 				           2,478,049 				              330,759 				           2,484,804 				Total:    				Construction, land development, and land				           1,171,127 				           1,171,127 				                       -   				           1,194,397 				Residential 1-4 family, 1st lien				              361,743 				              361,743 				                       -   				              379,546 				Commercial properties				           2,566,537 				           2,566,537 				              330,759 				           2,578,048 				Commercial 				                  7,114 				                  7,114 				                       -   				                  8,122 				Total, all categories				 $        4,106,521 				 $        4,106,521 				 $           330,759 				 $        4,160,113 				December 31, 2009    				With no related allowance recorded    				Residential 1-4 family, 1st lien				 $           200,533 				 $           200,533 				 $                    -   				 $           197,634 				Residential 1-4 family, 2nd lien				                58,765 				                58,765  				                58,765 				Commercial properties				           1,842,727 				           1,842,727  				           2,207,636 				With an allowance recorded    				Construction, land development, and land				              352,619 				              352,619 				                35,262 				              350,614 				Commercial 				              447,214 				              447,214 				              223,607 				              447,528 				Total:    				Construction, land development, and land				              352,619 				              352,619 				                35,262 				              350,614 				Residential 1-4 family, 1st lien				              200,533 				              200,533 				                       -   				              197,634 				Residential 1-4 family, 2nd lien				                58,765 				                58,765 				                       -   				                58,765 				Commercial properties				           1,842,727 				           1,842,727 				                       -   				           2,207,636 				Commercial 				              447,214 				              447,214 				              223,607 				              447,528 				Total, all categories				 $        2,901,858 				 $        2,901,858 				 $           258,869 				 $        3,262,177 				December 31, 2008    				With no related allowance recorded    				Construction, land development, and land				 $        4,500,000 				 $        4,500,000 				 $                    -   				 $        4,500,000 				Residential 1-4 family, 2nd lien				                58,765 				                58,765  				                58,084 				Consumer				                     817  								                     817  				 				                  1,338 				With an allowance recorded    				Construction, land development, and land				              850,000 				              850,000 				              170,000 				              818,533 				Residential 1-4 family, 1st lien				                85,555 				                85,555 				                17,111 				                83,841 				Commercial properties				           2,842,863 				           2,842,863 				              287,863 				           2,770,717 				Commercial 				              548,290 				              548,290 				              128,521 				              549,871 				Consumer				                  1,910 				                  1,910 				                  1,910 				                  2,329 				Total:    				Construction, land development, and land				           5,350,000 				           5,350,000 				              170,000 				           5,318,533 				Residential 1-4 family, 1st lien				                85,555 				                85,555 				                17,111 				                83,841 				Residential 1-4 family, 2nd lien				                58,765 				                58,765 				                       -   				                58,084 				Commercial properties				           2,842,863 				           2,842,863 				              287,863 				           2,770,717 				Commercial 				              548,290 				              548,290 				              128,521 				              549,871 				Consumer				                  2,727 				                  2,727 				                  1,910 				                  3,667 				Total, all categories				 $        8,888,200 				 $        8,888,200 				 $           605,405 				 $        8,784,713 
15

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

5. Loans and Allowance for Loan Losses (continued)

    Credit quality 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. 		    Pass credits are secured or unsecured loans with		satisfactory payment history and supporting documentation. Special		mention loans are those with satisfactory payment history that have a		defect in supporting documentation which is defined by the Bank as a		critical defect. This may include missing financial data or improperly		executed collateral documents. Substandard credits are those with a		weakness that may jeopardize repayment, such as deteriorating collateral		value, or for which the borrower’s ability to meet payment obligations		is questionable. Included in substandard credits are loans on which		terms have been modified by a reduction of interest rate and/or payment		amount in order to enable a distressed borrower to service the debt.		Doubtful credits are loans which are past due at least 90 days or for		which the borrower’s ability to repay the loan is questionable. Loans		graded as doubtful are most likely to result in the loss of principal or		loss of revenue due to placement in nonaccrual status. Management		evaluates loans graded as doubtful individually and provides for		anticipated losses through adjustment of the allowance for loan losses		and charges to current earnings. 		    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 at each of the three most recent year-ends.
				December 31, 2010				December 31, 2009				December 31, 2008   				Real Estate Credit Risk Profile by Internally Assigned Grade  				Construction, land development, and land   				Pass				 $         16,063,618 				 $         17,100,254 				 $         24,509,229 				Substandard				              4,557,315 				              4,500,000 				                 471,032  								Doubtful   				Less than 90 days past due				                 761,189  								                 352,619  								                 850,000  								Nonperforming: 90 days or more   				past due and/or non-accruing				                 409,938  								                           -   				              4,500,000 				Total				 $         21,792,060 				 $         21,952,873 				 $         30,330,261    				Residential 1 to 4 family   				Pass				 $         90,393,936 				 $         95,716,716 				 $         97,956,183 				Special Mention				                           -   				                           -   				                   55,173 				Substandard				              3,584,737 				              1,357,438 				                           -   				Doubtful   				Less than 90 days past due				                 292,091  								                           -   				                           -   				Nonperforming: 90 days or more   				past due and/or non-accruing				                   25,985 				                 144,269  								                 144,320  								Total				 $         94,296,749 				 $         97,218,423 				 $         98,155,676    				Commercial properties   				Pass				 $         95,620,813 				 $         97,924,956 				 $         83,753,740 				Special Mention				                           -   				                           -   				                   70,000 				Substandard				              4,347,154 				              2,594,001 				              2,635,946 				Doubtful   				Less than 90 days past due				                 132,155  								              1,957,756 				              2,755,000 				Nonperforming: 90 days or more   				past due and/or non-accruing				              2,478,049 				                           -   				                   87,863 				Total				 $       102,578,171 				 $       102,476,713 				 $         89,302,549 
 

 

 

16

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

5. Loans and Allowance for Loan Losses (continued)
				December 31, 2010				December 31, 2009				December 31, 2008   				Commercial Credit Risk Profile by Internally Assigned Grade  				Pass				 $         17,589,337 				 $         16,468,262 				 $         21,398,777 				Special Mention				                           -   				                           -   				                     3,000 				Substandard				                           -   				                           -   				                   40,000 				Doubtful   				Less than 90 days past due				                     7,114 				                           -   				                 524,711  								Nonperforming: 90 days or more   				past due and/or non-accruing				                           -   				                 447,214  								                   23,579 				Total				 $         17,596,451 				 $         16,915,476 				 $         21,990,067    				Consumer Credit Risk Profile by Internally Assigned Grade  				Pass				 $           1,720,966 				 $           2,121,890 				 $           2,339,868 				Special Mention				                           -   				                   14,255 				                   16,918 				Doubtful   				Nonperforming: 90 days or more   				past due and/or non-accruing				                           -   				                           -   				                     2,727 				Total				 $           1,720,966 				 $           2,136,145 				 $           2,359,513 
 

 

 

6. Loan Commitments

    Loan commitments are agreements to lend to customers		as long as there is no violation of any conditions of the contracts.		Loan commitments generally have interest at current market rates, fixed		expiration dates, and may require payment of a fee. Letters of credit		are commitments issued to guarantee the performance of a customer to a		third party.		    Loan commitments and letters of credit are made on		the same terms, including collateral, as outstanding loans. The		Company's exposure to loss in the event of nonperformance by the		borrower is represented by the contract amount of the commitment.		    Outstanding loan commitments, lines of credit, and		letters of credit at December 31, are as follows:
					2010					2009					2008					Loan commitments and lines of credit   					  Construction and land development					 $           8,569,169 					 $         10,231,711 					 $         15,218,812 					  Other					            21,164,229 					            19,038,506 					            22,245,089  					 $         29,733,398 					 $         29,270,217 					 $         37,463,901     					Standby letters of credit					 $           1,590,367 					 $           1,907,736 					 $           1,921,878 
 

 

 

 

17

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

7. Premises and Equipment and Computer Software

            A summary of premises and equipment and the relateddepreciation is as follows:
				Estimated useful life				2010				2009				2008    				Land 				 $           2,087,011 				 $           2,104,061 				 $           2,092,717 				Premises				5 - 50 years				              7,210,852 				              7,196,851 				              6,745,668 				Furniture and equipment				3 - 20 years				              3,599,478 				              3,778,111 				              3,619,752  				            12,897,341 				            13,079,023 				            12,458,137 				Accumulated depreciation 				              6,577,487 				              6,484,266 				              6,131,825 				Net premises and equipment 				 $           6,319,854 				 $           6,594,757 				 $           6,326,312      				Depreciation expense 				 $              475,848 				 $              490,776 				 $              496,742 
            A summary of capitalized computer software and the relatedamortization is as follows:
				Estimated useful life				2010				2009				2008    				Computer software				3 - 5 years				 $              850,989 				 $              890,360 				 $              839,007 				Accumulated amortization 				                 761,468  								                 754,529  								                 682,635  								Net computer software 				 $                89,521 				 $              135,831 				 $              156,372      				Amortization expense 				 $                68,924 				 $                71,894 				 $                78,364 
8. Lease Commitments

    The Company leases the land on which the Route 50		branch in East Berlin is located. Rent expense was $20,417, $17,083, and		$16,250 for the years ended December 31, 2010, 2009, and 2008,		respectively. The lease obligation, which expires August 31, 2014,		requires payments as follows: 
		Period		 		Minimum rents		2011 		 $        21,333 		2012 		           22,333 		2013 		           23,333 		2014 		           16,000   		 $        82,999 
9. Other real estate owned

    Transactions in other real estate owned were as		follows:
				2010				2009  				Beginning balance				 $           1,433,000 				 $                        -   				Net realizable value of foreclosed properties				                           -   				              1,448,000 				              1,433,000 				              1,448,000 				Proceeds of sales, net of expenses				                (452,596)				                  (14,510)				Gain (loss) on sale				                   11,096 				                       (490)				Valuation reduction				                (212,000)				                           -   				Ending balance				 $              779,500 				 $           1,433,000 
    There was no other real estate owned during 2008.

18

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

10. Interest-bearing deposits
				Major classifications of interest-bearing deposits are as				follows:  				2010				2009				2008   				NOW				 $         59,410,096 				 $         58,328,093 				 $         48,043,193 				Money market				            43,030,285 				            36,559,471 				            32,039,678 				Savings				            48,417,028 				            46,958,194 				            43,064,214 				Time deposits of $100,000 or more				            43,913,536 				            41,858,162 				            37,375,216 				Time deposits of less than $100,000				            55,243,123 				            56,511,968 				            61,284,880  				 $       250,014,068 				 $       240,215,888 				 $       221,807,181    				The rate repricing distribution of time deposits follows:      				Three months or less				 $         41,108,741 				 $         41,762,134 				 $         47,025,262 				Over three through twelve months				            46,450,339 				            42,268,474 				            41,529,109 				Over one through two years				            11,597,579 				            14,339,522 				            10,105,725  				 $         99,156,659 				 $         98,370,130 				 $         98,660,096 
11. Securities Sold Under Agreements to Repurchase

    Securities sold under agreements to repurchase		represent overnight borrowings from customers. The U.S. government		securities that collateralize these agreements are owned by the Company		but maintained in the custody of an unaffiliated bank designated by the		Company. Additional information follows:
				2010				2009				2008   				Maximum month-end amount outstanding				 $           7,406,820 				 $           7,941,508 				 $           7,112,354 				Average amount outstanding				 $           6,255,811 				 $           6,527,440 				 $           4,792,158 				Average rate paid during the year				 .50% 				 .50% 				 1.11% 				Investment securities underlying the agreements   				  at year end   				    Carrying value				 $         16,260,171 				 $         16,098,916 				 $         13,991,966 				    Estimated fair value				 $         16,472,393 				 $         16,200,995 				 $         14,548,125 
12. Note Payable

    In 1999, the Company purchased real estate in Berlin,		financing 100% of the purchase price. In 2003, an operations center was		constructed on this site. This 6% unsecured note was paid in full in		2010.

13. Profit Sharing Plan

    In 1999, the Company adopted a defined contribution		profit sharing plan under Section 401(k) of the Internal Revenue Code.		The plan covers substantially all of the employees and allows		discretionary Company contributions. Annually, the Board of Directors		approves a discretionary contribution in addition to matching 50% of		employee contributions to a maximum of 6% of the employee wages.		    The total cost of the profit sharing plan for 2010,		2009, and 2008, was $165,027, $207,353, and $215,571.

 

 

19

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
14. Noninterest Expenses

        The components of noninterest other operating expensesfollow:
				2010				2009				2008				Advertising				 $              180,336 				 $              190,461 				 $              211,056 				Armored car service				                   73,985 				                   75,446 				                   66,003 				Business and product development				                   71,482 				                   77,319 				                   78,757 				Computer software amortization				                   68,924 				                   71,895 				                   78,364 				Computer software maintenance contracts				                 159,797  								                 151,927  								                 148,098  								Correspondent bank fees				                   65,488 				                   79,677 				                   60,666 				Courier service				                   45,360 				                   41,472 				                   34,776 				Director fees				                 183,350  								                 147,650  								                 151,900  								Dues, donations, and subscriptions				                   74,337 				                   81,634 				                   84,872 				Liability insurance				                   26,049 				                   26,018 				                   29,358 				Postage				                 155,168  								                 154,065  								                 165,249  								Professional fees				                 171,580  								                 158,668  								                   81,648 				Stationery and supplies				                   58,628 				                   76,896 				                   95,945 				Telephone				                 165,464  								                 173,792  								                 159,065  								Miscellaneous				                 352,339  								                 344,166  								                 269,473  				 				 $           1,852,287 				 $           1,851,086 				 $           1,715,230 
 

15. Related Party Transactions

    The executive officers and directors of the Company		enter into loan transactions with the Bank in the ordinary course of		business. The terms of these transactions are similar to the terms		provided to other borrowers entering into similar loan transactions.		Executive officers and directors make deposits in the Bank, and invest		in uninsured non-deposit investment products. They receive the same		rates and terms on insured deposit accounts and securities sold under		agreements to repurchase as other customers with similar accounts.
					2010					2009					2008					Related party loan activity   					Beginning balance					 $         22,602,554 					 $         22,097,589 					 $         21,633,466 					Advances					              4,838,578 					              5,542,120 					              8,971,905 					            27,441,132 					            27,639,709 					            30,605,371 					Repayments					              6,217,958 					              5,037,155 					              8,507,782 					Ending balance					 $         21,223,174 					 $         22,602,554 					 $         22,097,589     					Unfunded loan commitments					 $           1,492,448 					 $           2,047,886 					 $           1,868,664    					Deposit and non-deposit investment balances					 $           5,304,025 					 $           6,097,670 					 $           5,231,390 
    The Company obtains legal services from a law firm in		which one of the principal attorneys is also a member of the Board of		Directors. Fees charged for these services are at similar rates charged		by unrelated law firms for similar legal work. Amounts paid to this		related party totaled $74,471, $83,348, and $9,950 during the years		ended December 31, 2010, 2009, and 2008, respectively. Increased legal		fees in 2010 and 2009 relate to loan collections.

 

20

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
16.  Income Taxes

            The components of income tax expense are as follows:
 				2010				2009				2008				Current   				  Federal				 $         2,672,328 				 $         2,400,641 				 $         2,989,883 				  State				               595,026 				               485,257 				               594,118  				            3,267,354 				            2,885,898 				            3,584,001 				Deferred				             (303,854)				               (10,898)				             (197,433) 				 $         2,963,500 				 $         2,875,000 				 $         3,386,568     				The components of the deferred taxes are as follows:   				Nonaccrual loan interest				 $            (51,858)				 $              (7,369)				 $              (2,029)				Provision for loan losses				             (136,361)				                 26,749 				             (201,340)				Other real estate owned				               (84,356)				               (23,859)				                         -   				Employee benefit 				                   4,250  								                   3,653  								                   3,266  								Depreciation				               (28,384)				                 (6,027)				                 (2,214)				Discount accretion				                 (7,145)				                 (4,045)				                   4,884  				 				 $          (303,854)				 $            (10,898)				 $          (197,433)    				The components of the net deferred tax liability are as follows:   				Deferred tax assets   				  Nonaccrual loan interest				 $              61,852 				 $                9,994 				 $                2,625 				  Allowance for loan losses				               139,111 				                   2,750  								                 29,499 				  Other real estate owned				               108,215 				                 23,859 				                         -   				  Employee benefit				                 20,904 				                 25,154 				                 28,807  				               330,082 				                 61,757 				                 60,931 				Deferred tax liabilities   				  Depreciation				               132,937 				               161,321 				               167,348 				  Discount accretion				                   5,380  								                 12,525 				                 16,570 				  Unrealized gain on securities available for sale				               575,091 				               914,697 				            1,314,826  				               713,408 				            1,088,543 				            1,498,744 				     Net deferred tax liability				 $          (383,326)				 $       (1,026,786)				 $       (1,437,813)    				A reconciliation of the provision for taxes on income from the				statutory federal income tax rates				to the effective income tax rates follows:       				Statutory federal income tax rate				             34.00 				%				             34.00 				%				             34.00 				%				Increase (decrease) in tax rate resulting from				    				    				    				  Tax-exempt income				             (2.01) 				             (2.23) 				             (1.99) 				  Non-deductible expenses				               0.04  				               0.04  				               0.04  				  State income taxes net of federal income tax benefit				               4.29  				               4.22  				               3.80   				             36.32 				%				             36.03 				%				             35.85 				%
 

 

21

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
 

17. Fair Value Measures

    The Company values investment securities classified		as available for sale and other real estate acquired through foreclosure		at fair value 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,		equity investments in community banks, and other real estate owned 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 December		31, 2010, values for available for sale investment securities and other		real estate owned measured at fair value on a recurring basis were		established as follows:
 				Total				Level 1 Inputs				Level 2 Inputs				Investment securities available for sale				 $      59,801,920 				 $      57,459,323 				 $        2,342,597  				Other real estate owned				              779,500 				                         - 				              779,500   				 $      60,581,420 				 $      57,459,323 				 $        3,122,097 
    The Company does not have the intent to sell any of		these securities and deems that it is more likely than not that it will		not have to sell any of these securities before recovery of their		individual cost bases. The Company is actively marketing other real		estate owned and reviews market value of each property quarterly.		    The estimated fair values of the Company's financial		instruments are summarized below. The fair values of a significant		portion of these financial instruments are estimates derived using		present value techniques prescribed by the Financial Accounting		Standards Board and may not be indicative of the net realizable or		liquidation values. The calculation of estimated fair values is based on		market conditions at a specific point in time and may not reflect		current or future fair values. 
 				      December 31, 2010				      December 31, 2009				      December 31, 2008 				Carrying				Fair				Carrying				Fair				Carrying				Fair 				amount				value				amount				value				amount				value				Financial assets      				  Cash and due from banks				    14,319,142 				    14,319,142 				    15,117,190 				    15,352,536 				      8,769,784 				      9,216,290 				  Interest-bearing deposits				    11,650,849 				    11,652,846 				    12,494,003 				    12,504,729 				    15,517,115 				    15,593,003 				  Investment securities				    92,105,492 				    92,293,739 				    81,365,520 				    81,664,660 				    66,597,068 				    67,498,693 				  Loans, net				  237,001,219 				  236,918,959 				  240,061,869 				  240,026,291 				  241,430,914 				  241,473,232 				Financial liabilities      				  Interest-bearing deposits				  250,014,068 				  250,225,814 				  240,215,888 				  240,331,613 				  221,807,181 				  222,208,321 				  Note payable				                   -   				                   -   				           48,519 				           48,091 				           74,046 				           73,339 
    The fair value of federal funds sold,		noninterest-bearing deposits, and securities sold under agreements to		repurchase equals their carrying value. These financial instruments are		excluded from the table above.		    The fair value of collectible coin included with cash		as of December 31, 2009, was determined based on extrapolation of the		value of the remaining coin inventory relative to similar inventory		liquidated in 2009. The collectible coin was liquidated in 2010.            The fair value of interest-bearing deposits with		other financial institutions is estimated based on quoted interest rates		for certificates of deposit with similar remaining terms.		    The fair values of equity securities are determined		using market quotations. The fair values of readily marketable debt		securities are provided by an independent third party and are based on		quoted market price. Debt securities that are not readily marketable are		assigned values based on prices from multiple sources, mostly from		dealers’ bids and offers.		    The fair value of fixed-rate loans is estimated to be		the present value of scheduled payments discounted using interest rates		currently in effect for loans of the same class and term. The fair value		of variable-rate loans, including loans with a demand feature, is		estimated to equal the carrying amount. The valuation of loans is net of		the allowance for loan losses. It is not practicable to estimate the		fair value of outstanding loan commitments, unused lines, and letters of		credit.		    The fair value of interest-bearing checking, savings,		and money market deposit accounts is equal to the carrying amount. The		fair value of fixed-rate time deposits is estimated based on interest		rates currently offered for deposits of similar remaining maturities.

22

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
18. Capital Standards

    The Federal Reserve Board and the Federal Deposit		Insurance Corporation have adopted risk-based capital standards for		banking organizations. These standards require ratios of capital to		assets for minimum capital adequacy and to be classified as well		capitalized under prompt corrective action provisions. The capital		ratios and minimum capital adequacy requirements of the Company and the		Bank are as follows:
 				Company 				Bank 				To be well 				Minimum  				Actual 				Actual 				capitalized 				adequacy				(in thousands)				Amount				Ratio 				Amount				Ratio 				Ratio 				Ratio          				December 31, 2010         				Total risk-based capital				 $   74,449 				33.6% 				 $   70,181 				32.1% 				10.0% 				8.0%				  (to risk weighted assets)         				Tier 1 capital				 $   73,176 				33.0% 				 $   69,198 				31.7% 				6.0% 				4.0%				  (to risk-weighted assets)         				Tier 1 capital				 $   73,176 				17.5% 				 $   69,198 				16.9% 				5.0% 				4.0%				  (to average fourth quarter assets)                   				December 31, 2009         				Total risk-based capital				 $   72,034 				32.1% 				 $   67,462 				30.6% 				10.0% 				8.0%				  (to risk weighted assets)         				Tier 1 capital				 $   70,709 				31.6% 				 $   66,824 				30.3% 				6.0% 				4.0%				  (to risk-weighted assets)         				Tier 1 capital				 $   70,709 				17.7% 				 $   66,824 				16.9% 				5.0% 				4.0%				  (to average fourth quarter assets)                   				December 31, 2008         				Total risk-based capital				 $   71,703 				32.5% 				 $   66,608 				30.8% 				10.0% 				8.0%				  (to risk weighted assets)         				Tier 1 capital				 $   70,025 				31.8% 				 $   65,901 				30.4% 				6.0% 				4.0%				  (to risk-weighted assets)         				Tier 1 capital				 $   70,025 				18.7% 				 $   65,901 				17.8% 				5.0% 				4.0%				  (to average fourth quarter assets)         
    Tier 1 capital consists of common stock, additional		paid-in capital, and retained earnings. Total risk-based capital		includes a limited amount of the allowance for loan losses. In		calculating risk-weighted assets, specific risk percentages are applied		to each category of asset and off-balance sheet items.		    Failure to meet the capital requirements could affect		the Company's ability to pay dividends and accept deposits, and may		significantly affect the operations of the Company.		    In the most recent regulatory report, the Company was		determined to be well capitalized. Management has no plans that should		change the classification of the capital adequacy.

 

 

 

23

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
19. Parent Company Financial Information
		Balance Sheets		December 31, 		2010		2009		2008    		Assets		Cash and due from banks		 $                37,127 		 $                26,125 		 $              262,013 		Interest-bearing deposits		              1,054,929 		                 896,757  				                 871,247  				Investment securities available for sale		              2,336,335 		              3,219,056 		              3,852,024 		Investment in subsidiary bank		            69,825,066 		            67,454,505 		            66,834,104 		Premises and equipment		              1,132,347 		              1,176,488 		              1,203,579  		Other assets		                        968 		                     2,794 		                     5,934  		      Total assets		 $         74,386,772 		 $         72,775,725 		 $         73,028,901     		Liabilities and Stockholders' Equity		Deferred income taxes		 $              151,694 		 $              491,294 		 $              737,676  		Other liabilities		                   40,526 		                     7,138 		                     7,731   		                 192,220  				                 498,432  				                 745,407  				Stockholders' equity   		  Common stock		              3,000,508 		              3,000,508 		              3,048,397 		  Additional paid-in capital		              8,733,438 		              8,733,438 		            10,406,403 		  Retained earnings		            61,441,595 		            58,975,278 		            56,569,913  		  Accumulated other comprehensive income		              1,019,011 		              1,568,069 		              2,258,781 		      Total stockholders' equity		            74,194,552 		            72,277,293 		            72,283,494  		      Total liabilities and stockholders' equity		 $         74,386,772 		 $         72,775,725 		 $         73,028,901     		Statements of Income		Years Ended December 31, 		2010		2009		2008    		Interest revenue		 $                18,748 		 $                29,179 		 $                44,875 		Dividend revenue		                   45,154 		                   63,457 		                   74,894 		Dividends from subsidiary		              2,730,462 		              4,131,359 		              8,594,887 		Other revenue		                 100,050  				                           -   		                           -    		Equity in undistributed income of subsidiary		              2,374,484 		                 922,597  				             (2,597,703)  		              5,268,898 		              5,146,592 		              6,116,953 		Expenses   		  Occupancy		                    (5,155)		                    (3,921)		                    (1,415) 		  Other		                   37,774 		                   34,904 		                   52,551   		                   32,619 		                   30,983 		                   51,136     		Income before income taxes		              5,236,279 		              5,115,609 		              6,065,817  		Income taxes		                   39,500 		                     6,000 		                     6,600  		Net income		 $           5,196,779 		 $           5,109,609 		 $           6,059,217 
 

 

24

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
19. Parent Company Financial Information (Continued)
 		Years Ended December 31,		Statements of Cash Flows		2010		2009		2008		Cash flows from operating activities   		  Interest and dividends received		 $           2,795,127 		 $           4,227,650 		 $           8,715,697 		  Rental payments and fees received		                   82,200 		                   37,200 		                   37,200 		  Cash paid for operating expenses		                  (42,728)		                  (41,092)		                  (58,400) 		  Income taxes paid		                    (7,064)		                    (9,038)		                  (10,163)  		              2,827,535 		              4,214,720 		              8,684,334     		Cash flows from investing activities   		  Certificates of deposit purchased, net of maturities		                (177,748)		                   84,561 		                 172,613  				  Proceeds from sale of real property & easement		                   72,100 		                           -   		                           -    		  Purchase of equipment		                           -   		                           -   		                    (3,085)  		                (105,648)		                   84,561 		                 169,528  		    		Cash flows from financing activities   		  Common shares repurchased		                           -   		             (1,720,854)		             (2,029,123) 		  Dividends paid		             (2,730,462)		             (2,704,244)		             (6,565,764)  		             (2,730,462)		             (4,425,098)		             (8,594,887)     		Net increase (decrease) in cash and cash equivalents		                    (8,575)		                (125,817)		                 258,975  		 		Cash and cash equivalents at beginning of year		                 176,235  				                 302,052  				                   43,077  		Cash and cash equivalents at end of year		 $              167,660 		 $              176,235 		 $              302,052     		Reconciliation of net income to net cash provided   		   by operating activities   		   Net income		 $           5,196,779 		 $           5,109,609 		 $           6,059,217 		   Adjustments to reconcile net income to net cash   		     used in operating activities   		      Undistributed net income of subsidiary		             (2,374,484)		                (922,597)		              2,597,703 		      Depreciation		                   27,091 		                   27,091 		                   29,936 		      Gain on sale of real property		                  (55,050)		                           -   		                           -   		      Decrease (increase) in other assets		                     1,825 		                     3,140 		                        262 		      Increase (decrease) in    		         Deferred income taxes and other liabilities		                   31,374 		                    (2,523)		                    (2,784)  		 $           2,827,535 		 $           4,214,720 		 $           8,684,334     		Composition of cash and cash equivalents   		Cash and due from banks		 $                37,127 		 $                26,125 		 $              262,013  		Interest-bearing deposits, except for time deposits		                 130,533  				                 150,110  				                   40,039   		 $              167,660 		 $              176,235 		 $              302,052 
 

 

 

 

 

 

25

Calvin B. Taylor Bankshares, Inc. and subsidiary**Notes to Consolidated Financial Statements**
20.  Quarterly Results of Operations (Unaudited)
  		Three months ended 		December 31, 		September 30, 		 		June 30,		 		 		March 31,            		2010           		Interest and dividend revenue 		 $     4,154,519   		 $     4,332,718   		 $     4,464,726   		 $     4,367,843 		Interest expense 		           455,990   		           484,741   		           493,669   		           508,706 		Net interest income  		        3,698,529   		        3,847,977   		        3,971,057   		        3,859,137 		Provision for loan losses 		           358,500   		             52,500   		           180,000   		           421,000 		Net income 		           958,654   		        1,449,360   		        1,523,386   		        1,265,379 		Comprehensive income 		           601,038   		        1,586,452   		        1,172,570   		        1,287,661 		Earnings per share 		 $              0.32   		 $              0.48   		 $              0.51   		 $              0.42             		2009           		Interest and dividend revenue 		 $     4,390,696   		 $     4,437,310   		 $     4,430,529   		 $     4,643,658 		Interest expense 		           564,844   		           602,423   		           649,903   		           725,468 		Net interest income  		        3,825,852   		        3,834,887   		        3,780,626   		        3,918,190 		Provision for loan losses 		           352,950   		          (132,550)  		           296,500   		           333,100 		Net income 		        1,108,094   		        1,511,649   		        1,151,176   		        1,338,690 		Comprehensive income 		        1,029,224   		        1,171,734   		        1,062,765   		        1,155,174 		Earnings per share 		 $              0.37   		 $              0.50   		 $              0.38   		 $              0.44             		2008           		Interest and dividend revenue 		 $     4,829,154   		 $     5,016,573   		 $     4,984,430   		 $     5,170,486 		Interest expense 		           926,709   		           930,549   		           993,761   		        1,171,235 		Net interest income  		        3,902,445   		        4,086,024   		        3,990,669   		        3,999,251 		Provision for loan losses 		           542,511   		              (1,478)  		               5,284   		             71,209 		Net income 		        1,087,939   		        1,706,142   		        1,642,937   		        1,622,199 		Comprehensive income 		        1,358,415   		        1,936,154   		        1,448,612   		        1,659,438 		Earnings per share 		 $              0.36   		 $              0.56   		 $              0.53   		 $              0.52 
 

 

 

 

 

 

 

26