The Berlin office is the centralized location for the Company
and the Bank. Executive offices, loan processing, proof, bookkeeping, and the
computer department are housed there. Most branches have a manager who also
serves as a loan officer. All offices participate in normal day-to-day banking
operations. The Company operates automated teller machines in all branches and
at one non-branch location in a local hospital.
(a) There are no material pending legal proceedings to
which the Company or the Bank or any of their properties are subject.
(b)
No proceedings were terminated during the fourth
quarter of the fiscal year covered by this report.
There were no matters submitted to a vote of the stockholders
of the Company during the fourth quarter of the fiscal year covered by this
report.
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
The Company's Articles of Incorporation, as amended,
authorize it to issue up to 10,000,000 shares of common stock.
As of February 29, 2008 there were approximately 1,027
stockholders of record and 3,096,072 shares of Common Stock issued and
outstanding. There is no established public trading market in the stock, and
there is no likelihood that a trading market will develop in the near future.
Transactions in the common stock are infrequent and are frequently negotiated
privately between the persons involved in those transactions.
All outstanding shares of common stock of the Company are
entitled to share equally in dividends from funds legally available, when, as,
and if declared by the Board of Directors. The Company paid or declared
dividends of $.80 per share in 2007, $.75 per share in 2006, and $2.10 per share
in 2005. Included in 2005 is a special cash dividend of $1.40 per share which is
not expected to be an annual event.
The following table presents information about the Company’s
repurchase of its equity securities during the calendar quarter ended on the
date of this Form 10-K.
|
|
(a) Total Number of shares
|
(b) Average Price Paid per Share
|
(c ) Total Number of Shares Purchased as Part of a Publicly Announced
Program
|
(d) Maximum Number of Shares that may yet be Purchased Under the Program
|
|
Period
|
|
|
|
|
|
|
October
|
-0-
|
N/A
|
|
-0-
|
280,220
|
|
November
|
2,912
|
$39.00
|
|
2,912
|
277,308
|
|
December
|
1,448
|
$38.80
|
|
1,448
|
275,860
|
|
Totals
|
4,360
|
$38.93
|
|
4,360
|
|
The Company publicly announced on August 14, 2003, that it
would repurchase up to 10% of its outstanding equity stock at that time, which
equated to a total of 324,000 common shares available for repurchase. As of
January 1, 2005, and again on May 18, 2007, this plan was renewed by public
announcement, making up to 10% of the Company’s outstanding equity stock
available for repurchase at the time of each renewal. This equated to a total of
314,072 common shares available for repurchase as of May 18, 2007.
There is no expiration date for this program. No other stock
repurchase plan or program existed or exists simultaneously, nor has any other
plan or program expired during the period covered by this table. Common shares
repurchased under this plan are retired.
- 10 -
Item 6. Selected Financial Data
The following table presents selected financial data for the
five years ended December 31, 2007, including restated balances and other data
for the years ended December 31, 2006, 2005, 2004, and 2003. The Company has
determined that the allowance for loan losses was overstated as a result of
provisions charged to earnings in years prior to 2003. The Company has
experienced minimal loan losses, including in recent years and, as a result, has
not recorded provisions for loan losses since prior to 2003. Management
determined that the balance in the allowance for loan losses could not be
supported given the Company’s loan loss history combined with an analysis of
probable losses in the current loan portfolio. A prior period adjustment to
re-value the allowance for loan losses has been recorded, resulting in the
restatement of balances previously reported for years prior to 2007.
No restatement has been made to the Consolidated Statements
of Income for the years ended December 31, 2006, 2005, 2004 or 2003. In
accordance with Paragraph 3 of Financial Accounting Standard No. 16,
Prior
Period Adjustments
, no adjustment has been made to the estimate of loan
losses in prior periods. In management’s opinion, had adjustments been made to
prior period Consolidated Statements of Income, they would have been immaterial.
Please see Note 2 to the audited financial statements for
additional information.
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
Restated
|
Restated
|
Restated
|
Restated
|
|
|
(Dollars in thousands, except for per share data)
|
|
At Year End
|
|
|
|
|
|
*
|
Total assets
|
$369,146
|
$369,512
|
$391,054
|
$395,312
|
$388,465
|
|
Total deposits
|
$288,944
|
$290,325
|
$310,858
|
$319,772
|
$317,946
|
*
|
Total loans, net of unearned income and
|
|
|
|
|
|
|
allowance for loan losses
|
$238,076
|
$233,231
|
$206,421
|
$163,489
|
$164,222
|
*
|
Total stockholders’ equity
|
$74,476
|
$71,381
|
$67,530
|
$67,909
|
$64,847
|
|
Common shares issued and outstanding
|
3,102,510
|
3,149,356
|
3,187,556
|
3,208,478
|
3,227,966
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
|
|
*
|
Average total assets
|
$372,006
|
$377,211
|
$399,345
|
$396,695
|
$383,074
|
*
|
Average stockholders' equity
|
$72,569
|
$69,268
|
$69,138
|
$66,160
|
$62,986
|
|
Net interest income
|
$17,032
|
$16,963
|
$15,912
|
$13,698
|
$13,647
|
|
Net income
|
$7,297
|
$7,400
|
$6,798
|
$5,613
|
$5,540
|
|
Cash dividend
|
$2,485
|
$2,368
|
$6,694
|
$2,087
|
$1,937
|
|
|
|
|
|
|
|
|
Per share data
|
|
|
|
|
|
*
|
Book value
|
$24.01
|
$22.67
|
$21.19
|
$21.17
|
$20.09
|
|
Net income
|
$2.33
|
$2.33
|
$2.13
|
$1.74
|
$1.71
|
|
Cash dividends declared
|
$0.80
|
$0.75
|
$2.10
|
$0.65
|
$0.60
|
|
|
|
|
|
|
|
|
Other ratios
|
|
|
|
|
|
*
|
Return on average assets
|
1.96%
|
1.96%
|
1.70%
|
1.41%
|
1.45%
|
*
|
Return on average equity
|
10.06%
|
10.68%
|
9.83%
|
8.48%
|
8.80%
|
|
Dividend payout ratio
|
34.33%
|
32.19%
|
98.59%
|
37.36%
|
35.09%
|
*
|
Average equity to average assets ratio
|
19.51%
|
18.36%
|
17.31%
|
16.68%
|
16.44%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Denotes items restated for years 2006, 2005, 2004, and 2003.
|
|
|
|
- 11 -
The following tables detail the accounts and balances that
are affected by the restatement for the quarterly and annual periods ranging
from December 31, 2003 through September 30, 2007 as previously reported in
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
|
|
As Originally
|
|
|
|
|
Reported
|
Adjustment
|
Restated
|
|
Restatement of September 30, 2007 balances
|
|
|
|
|
Allowance for loan losses
|
2,174,631
|
(1,979,335)
|
195,296
|
|
Loans, less allowance for loan losses
|
226,929,094
|
1,979,335
|
228,908,429
|
|
Total assets
|
383,927,933
|
1,979,335
|
385,907,268
|
|
Deferred income taxes
|
778,296
|
767,950
|
1,546,246
|
|
Total liabilities
|
309,631,960
|
767,950
|
310,399,910
|
|
Retained earnings
|
56,699,156
|
1,211,385
|
57,910,541
|
|
Total stockholders' equity
|
74,295,973
|
1,211,385
|
75,507,358
|
|
Total liabilities and stockholders' equity
|
383,927,933
|
1,979,335
|
385,907,268
|
|
|
|
|
|
|
Restatement of June 30, 2007 balances
|
|
|
|
|
Allowance for loan losses
|
2,180,894
|
(1,979,335)
|
201,559
|
|
Loans, less allowance for loan losses
|
231,522,497
|
1,979,335
|
233,501,832
|
|
Total assets
|
378,757,758
|
1,979,335
|
380,737,093
|
|
Deferred income taxes
|
760,995
|
767,950
|
1,528,945
|
|
Total liabilities
|
305,463,744
|
767,950
|
306,231,694
|
|
Retained earnings
|
54,738,012
|
1,211,385
|
55,949,397
|
|
Total stockholders' equity
|
73,294,014
|
1,211,385
|
74,505,399
|
|
Total liabilities and stockholders' equity
|
378,757,758
|
1,979,335
|
380,737,093
|
|
|
|
|
|
|
Restatement of March 31, 2007 balances
|
|
|
|
|
Allowance for loan losses
|
2,180,894
|
(1,979,335)
|
201,559
|
|
Loans, less allowance for loan losses
|
238,523,197
|
1,979,335
|
240,502,532
|
|
Total assets
|
365,300,387
|
1,979,335
|
367,279,722
|
|
Deferred income taxes
|
841,996
|
767,950
|
1,609,946
|
|
Total liabilities
|
293,292,532
|
767,950
|
294,060,482
|
|
Retained earnings
|
52,843,357
|
1,211,385
|
54,054,742
|
|
Total stockholders' equity
|
72,007,855
|
1,211,385
|
73,219,240
|
|
Total liabilities and stockholders' equity
|
365,300,387
|
1,979,335
|
367,279,722
|
- 12 -
|
|
As Originally
|
|
|
|
|
Reported
|
Adjustment
|
Restated
|
|
Restatement of December 31, 2006 balances
|
|
|
|
|
Allowance for loan losses
|
2,175,418
|
(1,979,335)
|
196,083
|
|
Loans, less allowance for loan losses
|
231,251,783
|
1,979,335
|
233,231,118
|
|
Total assets
|
367,532,166
|
1,979,335
|
369,511,501
|
|
Deferred income taxes
|
719,714
|
767,950
|
1,487,664
|
|
Total liabilities
|
297,362,610
|
767,950
|
298,130,560
|
|
Retained earnings
|
51,053,985
|
1,211,385
|
52,265,370
|
|
Total stockholders' equity
|
70,169,556
|
1,211,385
|
71,380,941
|
|
Total liabilities and stockholders' equity
|
367,532,166
|
1,979,335
|
369,511,501
|
|
|
|
|
|
|
Restatement of September 30, 2006 balances
|
|
|
|
|
Allowance for loan losses
|
2,190,778
|
(1,979,335)
|
211,443
|
|
Loans, less allowance for loan losses
|
228,845,965
|
1,979,335
|
230,825,300
|
|
Total assets
|
389,864,010
|
1,979,335
|
391,843,345
|
|
Deferred income taxes
|
796,293
|
767,950
|
1,564,243
|
|
Total liabilities
|
318,837,086
|
767,950
|
319,605,036
|
|
Retained earnings
|
51,590,238
|
1,211,385
|
52,801,623
|
|
Total stockholders' equity
|
71,026,924
|
1,211,385
|
72,238,309
|
|
Total liabilities and stockholders' equity
|
389,864,010
|
1,979,335
|
391,843,345
|
|
|
|
|
|
|
Restatement of June 30, 2006 balances
|
|
|
|
|
Allowance for loan losses
|
2,190,778
|
(1,979,335)
|
211,443
|
|
Loans, less allowance for loan losses
|
233,648,286
|
1,979,335
|
235,627,621
|
|
Total assets
|
381,334,496
|
1,979,335
|
383,313,831
|
|
Deferred income taxes
|
738,829
|
767,950
|
1,506,779
|
|
Total liabilities
|
311,350,141
|
767,950
|
312,118,091
|
|
Retained earnings
|
49,602,690
|
1,211,385
|
50,814,075
|
|
Total stockholders' equity
|
69,984,355
|
1,211,385
|
71,195,740
|
|
Total liabilities and stockholders' equity
|
381,334,496
|
1,979,335
|
383,313,831
|
|
|
|
|
|
|
Restatement of March 31, 2006 balances
|
|
|
|
|
Allowance for loan losses
|
2,190,734
|
(1,979,335)
|
211,399
|
|
Loans, less allowance for loan losses
|
219,875,078
|
1,979,335
|
221,854,413
|
|
Total assets
|
374,920,157
|
1,979,335
|
376,899,492
|
|
Deferred income taxes
|
720,462
|
767,950
|
1,488,412
|
|
Total liabilities
|
306,828,948
|
767,950
|
307,596,898
|
|
Retained earnings
|
47,784,529
|
1,211,385
|
48,995,914
|
|
Total stockholders' equity
|
68,091,209
|
1,211,385
|
69,302,594
|
|
Total liabilities and stockholders' equity
|
374,920,157
|
1,979,335
|
376,899,492
|
- 13 -
|
|
As Originally
|
|
|
|
|
Reported
|
Adjustment
|
Restated
|
|
Restatement of December 31, 2005 balances
|
|
|
|
|
Allowance for loan losses
|
2,190,709
|
(1,979,335)
|
211,374
|
|
Loans, less allowance for loan losses
|
204,441,957
|
1,979,335
|
206,421,292
|
|
Total assets
|
389,074,624
|
1,979,335
|
391,053,959
|
|
Deferred income taxes
|
635,336
|
767,950
|
1,403,286
|
|
Total liabilities
|
322,756,240
|
767,950
|
323,524,190
|
|
Retained earnings
|
46,021,128
|
1,211,385
|
47,232,513
|
|
Total stockholders' equity
|
66,318,384
|
1,211,385
|
67,529,769
|
|
Total liabilities and stockholders' equity
|
389,074,624
|
1,979,335
|
391,053,959
|
|
|
|
|
|
|
Restatement of September 30, 2005 balances
|
|
|
|
|
Allowance for loan losses
|
2,193,108
|
(1,979,335)
|
213,773
|
|
Loans, less allowance for loan losses
|
195,943,991
|
1,979,335
|
197,923,326
|
|
Total assets
|
411,853,354
|
1,979,335
|
413,832,689
|
|
Deferred income taxes
|
725,531
|
767,950
|
1,493,481
|
|
Total liabilities
|
340,524,075
|
767,950
|
341,292,025
|
|
Retained earnings
|
51,011,122
|
1,211,385
|
52,222,507
|
|
Total stockholders' equity
|
71,329,279
|
1,211,385
|
72,540,664
|
|
Total liabilities and stockholders' equity
|
411,853,354
|
1,979,335
|
413,832,689
|
|
|
|
|
|
|
Restatement of June 30, 2005 balances
|
|
|
|
|
Allowance for loan losses
|
2,192,258
|
(1,979,335)
|
212,923
|
|
Loans, less allowance for loan losses
|
189,264,687
|
1,979,335
|
191,244,022
|
|
Total assets
|
409,898,941
|
1,979,335
|
411,878,276
|
|
Deferred income taxes
|
730,971
|
767,950
|
1,498,921
|
|
Total liabilities
|
340,453,487
|
767,950
|
341,221,437
|
|
Retained earnings
|
49,105,752
|
1,211,385
|
50,317,137
|
|
Total stockholders' equity
|
69,445,454
|
1,211,385
|
70,656,839
|
|
Total liabilities and stockholders' equity
|
409,898,941
|
1,979,335
|
411,878,276
|
|
|
|
|
|
|
Restatement of March 31, 2005 balances
|
|
|
|
|
Allowance for loan losses
|
2,192,552
|
(1,979,335)
|
213,217
|
|
Loans, less allowance for loan losses
|
171,607,950
|
1,979,335
|
173,587,285
|
|
Total assets
|
399,767,645
|
1,979,335
|
401,746,980
|
|
Deferred income taxes
|
612,153
|
767,950
|
1,380,103
|
|
Total liabilities
|
331,651,975
|
767,950
|
332,419,925
|
|
Retained earnings
|
47,417,886
|
1,211,385
|
48,629,271
|
|
Total stockholders' equity
|
68,115,670
|
1,211,385
|
69,327,055
|
|
Total liabilities and stockholders' equity
|
399,767,645
|
1,979,335
|
401,746,980
|
- 14 -
|
|
As Originally
|
|
|
|
|
Reported
|
Adjustment
|
Restated
|
|
Restatement of December 31, 2004 balances
|
|
|
|
|
Allowance for loan losses
|
2,177,926
|
(1,979,335)
|
198,591
|
|
Loans, less allowance for loan losses
|
161,510,157
|
1,979,335
|
163,489,492
|
|
Total assets
|
393,332,982
|
1,979,335
|
395,312,317
|
|
Deferred income taxes
|
549,070
|
767,950
|
1,317,020
|
|
Total liabilities
|
326,635,414
|
767,950
|
327,403,364
|
|
Retained earnings
|
45,917,427
|
1,211,385
|
47,128,812
|
|
Total stockholders' equity
|
66,697,568
|
1,211,385
|
67,908,953
|
|
Total liabilities and stockholders' equity
|
393,332,982
|
1,979,335
|
395,312,317
|
|
|
|
|
|
|
Restatement of September 30, 2004 balances
|
|
|
|
|
Allowance for loan losses
|
2,184,884
|
(1,979,335)
|
205,549
|
|
Loans, less allowance for loan losses
|
158,288,994
|
1,979,335
|
160,268,329
|
|
Total assets
|
412,155,404
|
1,979,335
|
414,134,739
|
|
Deferred income taxes
|
431,724
|
767,950
|
1,199,674
|
|
Total liabilities
|
344,824,253
|
767,950
|
345,592,203
|
|
Retained earnings
|
46,553,204
|
1,211,385
|
47,764,589
|
|
Total stockholders' equity
|
67,331,151
|
1,211,385
|
68,542,536
|
|
Total liabilities and stockholders' equity
|
412,155,404
|
1,979,335
|
414,134,739
|
|
|
|
|
|
|
Restatement of June 30, 2004 balances
|
|
|
|
|
Allowance for loan losses
|
2,190,706
|
(1,979,335)
|
211,371
|
|
Loans, less allowance for loan losses
|
163,097,097
|
1,979,335
|
165,076,432
|
|
Total assets
|
395,458,255
|
1,979,335
|
397,437,590
|
|
Deferred income taxes
|
308,577
|
767,950
|
1,076,527
|
|
Total liabilities
|
329,459,535
|
767,950
|
330,227,485
|
|
Retained earnings
|
45,105,240
|
1,211,385
|
46,316,625
|
|
Total stockholders' equity
|
65,998,720
|
1,211,385
|
67,210,105
|
|
Total liabilities and stockholders' equity
|
395,458,255
|
1,979,335
|
397,437,590
|
|
|
|
|
|
|
Restatement of March 31, 2004 balances
|
|
|
|
|
Allowance for loan losses
|
2,187,860
|
(1,979,335)
|
208,525
|
|
Loans, less allowance for loan losses
|
163,040,952
|
1,979,335
|
165,020,287
|
|
Total assets
|
383,075,508
|
1,979,335
|
385,054,843
|
|
Deferred income taxes
|
378,324
|
767,950
|
1,146,274
|
|
Total liabilities
|
318,163,092
|
767,950
|
318,931,042
|
|
Retained earnings
|
43,734,147
|
1,211,385
|
44,945,532
|
|
Total stockholders' equity
|
64,912,416
|
1,211,385
|
66,123,801
|
|
Total liabilities and stockholders' equity
|
383,075,508
|
1,979,335
|
385,054,843
|
- 15 -
|
|
As Originally
|
|
|
|
|
Reported
|
Adjustment
|
Restated
|
|
Restatement of December 31, 2003 balances
|
|
|
|
|
Allowance for loan losses
|
2,187,277
|
(1,979,335)
|
207,942
|
|
Loans, less allowance for loan losses
|
162,243,008
|
1,979,335
|
164,222,343
|
|
Total assets
|
386,486,401
|
1,979,335
|
388,465,736
|
|
Deferred income taxes
|
355,632
|
767,950
|
1,123,582
|
|
Total liabilities
|
322,850,369
|
767,950
|
323,618,319
|
|
Retained earnings
|
42,391,363
|
1,211,385
|
43,602,748
|
|
Total stockholders' equity
|
63,636,032
|
1,211,385
|
64,847,417
|
|
Total liabilities and stockholders' equity
|
386,486,401
|
1,979,335
|
388,465,736
|
|
|
|
|
|
|
Restatement of September 30, 2003 balances
|
|
|
|
|
Allowance for loan losses
|
2,185,520
|
(1,979,335)
|
206,185
|
|
Loans, less allowance for loan losses
|
163,816,310
|
1,979,335
|
165,795,645
|
|
Total assets
|
418,966,108
|
1,979,335
|
420,945,443
|
|
Other liabilities
|
277,767
|
767,950
|
1,045,717
|
|
Total liabilities
|
354,755,076
|
767,950
|
355,523,026
|
|
Retained earnings
|
43,019,687
|
1,211,385
|
44,231,072
|
|
Total stockholders' equity
|
64,211,032
|
1,211,385
|
65,422,417
|
|
Total liabilities and stockholders' equity
|
418,966,108
|
1,979,335
|
420,945,443
|
|
|
|
|
|
|
Restatement of June 30, 2003 balances
|
|
|
|
|
Allowance for loan losses
|
2,183,265
|
(1,979,335)
|
203,930
|
|
Loans, less allowance for loan losses
|
170,139,580
|
1,979,335
|
172,118,915
|
|
Total assets
|
383,824,280
|
1,979,335
|
385,803,615
|
|
Other liabilities
|
347,756
|
767,950
|
1,115,706
|
|
Total liabilities
|
320,479,269
|
767,950
|
321,247,219
|
|
Retained earnings
|
41,590,563
|
1,211,385
|
42,801,948
|
|
Total stockholders' equity
|
63,345,011
|
1,211,385
|
64,556,396
|
|
Total liabilities and stockholders' equity
|
383,824,280
|
1,979,335
|
385,803,615
|
|
|
|
|
|
|
Restatement of March 31, 2003 balances
|
|
|
|
|
Allowance for loan losses
|
2,182,665
|
(1,979,335)
|
203,330
|
|
Loans, less allowance for loan losses
|
167,819,932
|
1,979,335
|
169,799,267
|
|
Total assets
|
363,997,795
|
1,979,335
|
365,977,130
|
|
Other liabilities
|
59,746
|
767,950
|
827,696
|
|
Total liabilities
|
302,647,335
|
767,950
|
303,415,285
|
|
Retained earnings
|
40,140,523
|
1,211,385
|
41,351,908
|
|
Total stockholders' equity
|
61,350,460
|
1,211,385
|
62,561,845
|
|
Total liabilities and stockholders' equity
|
363,997,795
|
1,979,335
|
365,977,130
|
- 16 -
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
The following discussion of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and related notes and other statistical information
included in this report.
Critical Accounting Policies
The Company’s financial condition and results of operations
are sensitive to accounting measurements and estimates of inherently uncertain
matters. When applying accounting policies in areas that are subjective in
nature, management uses its best judgment to arrive at the carrying value of
certain assets. One of the most critical accounting policies applied is related
to the valuation of the loan portfolio.
The allowance for loan losses (ALLL) represents management’s
best estimate of inherent probable losses in the loan portfolio as of the
balance sheet date. It is one of the most difficult and subjective judgments.
The adequacy of the allowance for loan losses is evaluated no less than
quarterly. The determination of the balance of the allowance for loan losses is
based on management’s judgments about the credit quality of the loan portfolio
as of the review date. It should be sufficient to absorb losses in the loan
portfolio as determined by management’s consideration of factors including an
analysis of historical losses, specific reserves for non-performing or past due
loans, delinquency trends, portfolio composition (including segment growth or
shifting of balances between segments, products and processes, and
concentrations of credit, both regional and by relationship), lending staff
experience and changes, critical documentation and policy exceptions, risk
rating analysis, interest rates and the competitive environment, economic
conditions in the Bank’s service area, and results of independent reviews,
including audits and regulatory examinations.
Prior Period Adjustment
In 2007, the Company determined that the allowance for loan
losses was overstated as a result of provisions charged to earnings in years
prior to 2003. A prior period adjustment to revalue the ALLL has been recorded,
resulting in the restatement of balances, variances, and ratios previously
reported for years ended December 31, 2006, 2005, 2004, and 2003, and for all
quarter ends in years 2007, 2006, 2005, 2004, and 2003. No provision for loan
loss was charged to earnings in 2003 or any year after, therefore the prior
period adjustment has no impact on previously reported earnings. Item 6,
Selected Financial Data, provides details of the accounts and balances that have
been restated for each of the affected periods.
The origin of the overstatement of the Bank’s allowance for
loan loss is in the practice of federal and state financial institution
regulatory agencies which for many decades strongly recommended that commercial
banks establish a reserve for loan losses as a percentage of gross loans. The
target percentage increased through the real estate market downturn of the
1980s. It was common practice for banking regulators to recommend that a bank
reserve a percentage of gross loans comparable to the average of its peers. Peer
groups for this purpose might be determined by size or geography. A bank with
higher than peer losses might be required to reserve at a higher rate, but banks
with lower than peer losses were requested to reserve based on peer experience,
not their own. The result was that banks like ours with conservative lending
practices and lower loan losses recorded reserves, through gradual provisions
charged to earnings over many years, which exceeded their identifiable or likely
losses. Therefore, throughout the 1990s the Bank maintained an ALLL of
approximately 1.35% of loans. Although the Bank did not make additional
provisions to the ALLL after 2002, its ALLL did not decrease in the ensuing
years due to its low level of net charge-offs. However, based on its
conservative practices and uncertainty as to the proper method to determine the
ALLL, as further discussed below, management determined to keep the ALLL at the
then-current level until 2007.
In recent years, bank regulatory agencies have shifted their
focus to the methodology, or thought process, underlying the balance in the
ALLL. They recommend that banks, like other industries, estimate their reserve
for uncollectible receivables (loans), in accordance with generally accepted
accounting principles. In December 1993, the
Interagency Policy Statement on
the Allowance for Loan and Lease Losses
focused on the responsibilities of
financial institution management and boards of directors regarding the ALLL. In
July 1999, guidance jointly issued by banking regulators and the Securities and
Exchange Commission (SEC) marked the beginning of the regulatory shift to GAAP,
from what had become known in the banking industry as regulatory accounting
principles (RAP). In July 2001, banking regulators issued the
Policy
Statement on Allowance for Loan and Lease Losses Methodology and Documentation
for Banks and Savings Institutions
, which instructed banking boards of
directors to ensure that their ALLL is determined consistent with "the
institutions’ stated policies and procedures, generally accepted accounting
principles (GAAP), and ALLL supervisory guidance." Throughout the 2001
statement, the regulators acknowledge that variables such as the size of an
institution and the complexity of its lending products and activities will
result in policies and procedures "appropriately tailored" to the institution.
Parallel guidance to registrants that are creditors in lending transactions was
released in July 2001 by SEC as Staff Accounting Bulletin 102,
Selected Loan
Loss Allowance and Documentation Issues
. The 2001 guidance, which reinforced
the regulatory shift toward GAAP, recommended that reserves be based on
historical and identified losses in the loan portfolio. As a result, the Company
ceased to build its ALLL through charges to income until it was confident that
the current guidance was widely applied by its regulators and implemented by the
industry.
- 17 -
In December 2006, federal financial institution examiners
released the
Interagency Policy Statement on the Allowance for Loan and Lease
Losses
(2006 Statement). The stated purpose of this policy statement was to
revise the prior policy statement issued in 1993 and to "ensure consistency with
generally accepted accounting principals (GAAP) and more recent supervisory
guidance." Management believes that guidance issued from 1999 up to the issuance
of the 2006 Statement was not universally applied by the regulatory agencies. As
a result, the Bank continued to apply its previous methodology to the
calculation of the ALLL. Management’s position that guidance issued from 1999
until the 2006 Statement was not universally implemented is further supported by
the issuance of the 2006 Statement, which banking regulators felt necessary to
ensure consistent implementation. In a cover letter accompanying the release of
the 2006 Statement, Federal Reserve further evidenced the existing lack of full
compliance with prior guidance for the ALLL. An extract from Federal Reserve’s
SR 06-17 dated December 13, 2006 follows:
Although the revised policy statement reiterates key
concepts and requirements in GAAP and existing supervisory guidance on
the ALLL, the agencies recognize that institutions may not have
sufficient time to complete any enhancements needed to bring their ALLL
processes and documentation into full compliance with the revised
guidance for year-end 2006 reporting purposes. Nevertheless, these
enhancements should be completed in the near term.
In response to the definitive guidance provided in the 2006
Statement, which management believes, unlike the prior statements, was accepted
in the industry as definitive guidance, management determined that a revaluation
of the ALLL was necessary. Management and the boards of directors of the Bank
and the Company agreed that the accounting adjustment required to bring the ALLL
to its appropriate level, based on the application of current methodology, would
materially distort earnings if adjusted in the prescribed manner, through
current earnings. With the concurrence of its independent auditors, management
has elected to record the revaluation of the ALLL as a prior period adjustment.
The result of the restatement of prior years is to increase net loans, total
assets, the net credit for deferred income taxes, and retained earnings in each
restated year. The restatement of these balances results in restated variances
between years and relationship ratios within a single year, such as loans to
deposits and capital ratios. These restatements are referenced throughout the
following Management’s Discussion and Analysis. It is the belief of management
that the restatements of balances, variances and ratios support the position
that this adjustment will not alter conclusions drawn by those who relied on the
Company’s originally filed statements for the restated periods, or those who
rely on the Company’s current financial reports including the restatements for
quarterly and annual reports from March 2003, through September 2007.
See "Loan Quality and the Allowance for Loan Losses" for
additional related disclosure and discussion.
Overview
Consolidated income of the Company is derived primarily from
operations of the Bank. Net income for 2007 was $7,296,587 compared to
$7,400,369 for 2006 and $6,797,638 for 2005. The Company had a return on average
equity of 10.06% and return on average assets of 1.96% for 2007, compared to
returns on average equity of 10.68% and 9.83%, and returns on average assets of
1.96% and 1.70%, for 2006 (restated) and 2005 (restated), respectively. The
effect of restatement is to reduce returns on average equity by .19% and .18%
and returns on average assets by .01% and .01%, for 2006 and 2005, respectively.
Results of Operations
The Company’s net income of $7,296,587, or $2.33 per share,
for the year ended December 31, 2007, was a decrease of $103,782 (1.40%) from
net income of 7,400,369, or $2.33 per share, for the year ended December 31,
2006. Contributing to this decrease were a $69,810 (0.41%) increase in net
interest income, a $15,808 (0.81%) decrease in noninterest revenue, and a
$207,404 (2.82%) increase in noninterest expense.
The Company’s net income of $7,400,369, or $2.33 per share,
for the year ended December 31, 2006, was an increase of $602,731 (8.87%) from
net income of $6,797,638, or $2.13 per share, for the year ended December 31,
2005. Contributing to this increase was a $1,050,666 (6.60%) increase in net
interest income. Noninterest revenue increased $149,370 (8.30%) from 2005 to
2006, while noninterest expense increased $195,005 (2.72%) during the same
period.
The Company’s net income of $1,651,416 or $.53 per share, for
the quarter ended December 31, 2007, was a decrease of $179,843 (9.82%) from the
net income of $1,831,259 or $.58 per share, for the quarter ended December 31,
2006. Lower net interest income, the primary reason for the decrease, resulted
from the repricing of deposit accounts initiated in mid-2006. Deposit rate
increases were targeted at deposit retention in a highly competitive
environment.
The Company’s net income of $1,831,259
or $.58 per share, for the quarter ended December 31, 2006, was an increase of
$127,316 (7.47%) from the net income of $1,703,943 or $.53 per share, for the
quarter ended December 31, 2005. Increased net interest income, the primary
reason for the increase, was due to a second year of continued growth in the
Bank’s loan portfolio and higher earnings rates on the Bank’s investments.
Deposit interest expense increased due to rate increases targeted at deposit
retention.
- 18 -
Net Interest Income
The primary source of income for the Company is net interest
income, which is the difference between revenue on interest-earning assets, such
as investment securities and loans, and interest expense incurred on
interest-bearing sources of funds, such as deposits and borrowings. The level of
net interest income is determined primarily by the average balances of
interest-earning assets and the Company’s funding sources, and the rate spreads
between interest-earning assets and funding sources. Changes in net interest
income from period to period result from increases or decreases in the volume of
interest-earning assets and interest-bearing liabilities, and increases or
decreases in the average rates earned and paid on such assets and liabilities.
The volume of interest-earning assets and interest-bearing liabilities is
affected by the ability to manage the earning-asset portfolio, which includes
loans, and the availability of particular sources of funds, such as
noninterest-bearing deposits.
The key performance measure for net interest income is the
"net margin on interest-earning assets," or net interest income divided by
average interest-earning assets. The Company's net interest margin for 2007 on a
non-GAAP tax-equivalent basis was 5.07%, compared to 5.00% and 4.43% for 2006
(restated) and 2005 (restated), respectively. The effect of restatement was to
lower the net interest margin from the originally reported levels of 5.02% and
4.45% for 2006 and 2005, respectively. Because most of the Bank’s loans are
written with a demand feature, the income of the Bank should not change
dramatically as interest rates change. Management of the Company expects to
maintain the net margin on interest-earning assets. The net margin may decline,
however, if competition increases, loan demand decreases, or the cost of funds
rises faster than the return on loans and securities. Although such expectations
are based on management's judgment, actual results will depend on a number of
factors that cannot be predicted with certainty, and fulfillment of management's
expectations cannot be assured.
The following tables present information including average
balances of interest-earning assets and interest-bearing liabilities, the amount
of related interest income and interest expense, and the resulting yields by
category of interest-earning asset and interest-bearing liability. In these
tables, dividends and interest on tax-exempt securities and loans are reported
on a fully taxable equivalent basis, which is a non-GAAP measure as defined in
SEC Regulation G and Item 10 of SEC Regulation S-K. Management believes that
these measures provide better yield comparability as a tool for managing net
interest income.
- 19 -
|
Average Balances, Interest, and Yields
|
|
(Dollars stated in thousands)
|
|
For the Year Ended
|
For the Year Ended
|
For the Year Ended
|
|
December 31, 2007
|
December 31, 2006 Restated
|
December 31, 2005 Restated
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Balance
|
Interest
|
Yield
|
Balance
|
Interest
|
Yield
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
$ 37,826
|
$ 1,919
|
5.07%
|
$ 22,547
|
$ 1,137
|
5.04%
|
$ 34,233
|
$ 1,078
|
3.15%
|
Interest-bearing deposits
|
3,494
|
168
|
4.82%
|
2,173
|
79
|
3.64%
|
2,175
|
56
|
2.56%
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
U. S. Treasury
|
55,061
|
2,636
|
4.79%
|
71,441
|
2,614
|
3.66%
|
105,456
|
2,881
|
2.73%
|
U. S. Government Agency
|
6,568
|
310
|
4.73%
|
13,378
|
398
|
2.98%
|
19,666
|
525
|
2.67%
|
State and municipal
|
2,397
|
95
|
3.97%
|
7,443
|
219
|
2.94%
|
16,618
|
388
|
2.34%
|
Other
|
1,927
|
101
|
5.27%
|
1,900
|
102
|
5.37%
|
1,882
|
90
|
4.80%
|
Total investment securities
|
65,953
|
3,142
|
4.77%
|
94,162
|
3,333
|
3.54%
|
143,622
|
3,884
|
2.70%
|
Loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
23,812
|
1,691
|
7.10%
|
23,804
|
1,711
|
7.19%
|
19,134
|
1,322
|
6.91%
|
Mortgage
|
208,936
|
14,870
|
7.12%
|
200,588
|
14,020
|
6.99%
|
165,415
|
11,485
|
6.94%
|
Consumer
|
2,465
|
206
|
8.37%
|
2,491
|
206
|
8.27%
|
2,083
|
178
|
8.53%
|
Total loans
|
235,213
|
16,767
|
7.13%
|
226,883
|
15,937
|
7.02%
|
186,632
|
12,985
|
6.96%
|
Allowance for loan losses
|
199
|
|
|
211
|
|
|
214
|
|
|
Total loans, net of allowance
|
235,014
|
16,767
|
7.13%
|
226,672
|
15,937
|
7.03%
|
186,418
|
12,985
|
6.97%
|
Total interest-earning assets
|
342,287
|
21,996
|
6.43%
|
345,554
|
20,486
|
5.93%
|
366,448
|
18,003
|
4.91%
|
Noninterest-bearing cash
|
16,179
|
|
|
17,694
|
|
|
19,946
|
|
|
Premises and equipment
|
6,548
|
|
|
6,605
|
|
|
6,757
|
|
|
Other assets
|
6,992
|
|
|
7,358
|
|
|
6,194
|
|
|
Total assets
|
$372,006
|
|
|
$377,211
|
|
|
$399,345
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
NOW
|
$ 51,297
|
183
|
0.36%
|
$ 57,052
|
141
|
0.25%
|
$ 67,452
|
101
|
0.15%
|
Money market
|
33,590
|
317
|
0.94%
|
41,810
|
335
|
0.80%
|
50,537
|
218
|
0.43%
|
Savings
|
44,137
|
327
|
0.74%
|
47,812
|
285
|
0.60%
|
54,988
|
218
|
0.40%
|
Other time
|
84,867
|
3,789
|
4.46%
|
68,359
|
2,414
|
3.53%
|
63,710
|
1,202
|
1.89%
|
Total interest-bearing deposits
|
213,891
|
4,616
|
2.16%
|
215,033
|
3,175
|
1.48%
|
236,687
|
1,739
|
0.73%
|
Securities sold under agreements
|
|
|
|
|
|
|
|
|
|
to repurchase
|
4,248
|
29
|
0.69%
|
5,878
|
40
|
0.68%
|
6,325
|
22
|
0.34%
|
Borrowed funds
|
109
|
7
|
6.10%
|
145
|
8
|
5.52%
|
151
|
9
|
6.07%
|
Total interest-bearing liabilities
|
218,248
|
4,652
|
2.13%
|
221,056
|
3,223
|
1.46%
|
243,163
|
1,770
|
0.73%
|
Noninterest-bearing deposits
|
79,807
|
-
|
|
84,380
|
-
|
|
85,526
|
-
|
|
|
298,055
|
4,652
|
1.56%
|
305,436
|
3,223
|
1.06%
|
328,689
|
1,770
|
0.54%
|
Other liabilities
|
1,382
|
|
|
2,507
|
|
|
1,518
|
|
|
Stockholders' equity
|
72,569
|
|
|
69,268
|
|
|
69,138
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
stockholders' equity
|
$372,006
|
|
|
$377,211
|
|
|
$399,345
|
|
|
Net interest spread
|
|
|
4.30%
|
|
|
4.47%
|
|
|
4.18%
|
Net interest income
|
|
$ 17,344
|
|
|
$ 17,263
|
|
|
$ 16,233
|
|
Net margin on interest-earning assets
|
|
5.07%
|
|
|
5.00%
|
|
|
4.43%
|
|
|
|
|
|
|
|
|
|
Tax equivalent adjustment included in:
|
|
|
|
|
|
|
|
|
Investment income
|
|
$ 191
|
|
|
$ 231
|
|
|
$ 291
|
|
Loan income
|
|
$ 121
|
|
|
$ 69
|
|
|
$ 27
|
|
- 20 -
|
Average Balances, Interest, and Yields
|
|
(Dollars stated in thousands)
|
|
For the Year Ended
|
For the Year Ended
|
|
December 31, 2004 Restated
|
December 31, 2003 Restated
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
Interest
|
Yield
|
Balance
|
Interest
|
Yield
|
Assets
|
|
|
|
|
|
|
Federal funds sold
|
$ 41,762
|
$ 547
|
1.31%
|
$ 53,715
|
$ 541
|
1.01%
|
Interest-bearing deposits
|
2,201
|
48
|
2.16%
|
1,706
|
42
|
2.48%
|
Investment securities:
|
|
|
|
|
|
|
U. S. Treasury
|
116,537
|
2,442
|
2.10%
|
99,711
|
2,411
|
2.42%
|
U. S. Government Agency
|
18,844
|
503
|
2.67%
|
18,172
|
531
|
2.92%
|
State and municipal
|
19,004
|
407
|
2.14%
|
12,119
|
332
|
2.74%
|
Other
|
1,786
|
79
|
4.43%
|
1,600
|
70
|
4.40%
|
Total investment securities
|
156,171
|
3,431
|
2.20%
|
131,602
|
3,344
|
2.54%
|
Loans:
|
|
|
|
|
|
|
Commercial
|
15,243
|
1,053
|
6.91%
|
13,780
|
987
|
7.16%
|
Mortgage
|
146,121
|
10,289
|
7.04%
|
150,491
|
10,879
|
7.23%
|
Consumer
|
2,305
|
201
|
8.73%
|
3,108
|
284
|
9.15%
|
Total loans
|
163,669
|
11,543
|
7.05%
|
167,379
|
12,150
|
7.26%
|
Allowance for loan losses
|
209
|
|
|
206
|
|
|
Total loans, net of allowance
|
163,460
|
11,543
|
7.06%
|
167,173
|
12,150
|
7.28%
|
Total interest-earning assets
|
363,594
|
15,569
|
4.28%
|
354,196
|
16,077
|
4.54%
|
Noninterest-bearing cash
|
19,705
|
|
|
19,091
|
|
|
Premises and equipment
|
6,968
|
|
|
6,567
|
|
|
Other assets
|
6,428
|
|
|
3,220
|
|
|
Total assets
|
$396,695
|
|
|
$383,074
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
Savings and NOW
|
$117,733
|
310
|
0.26%
|
$110,638
|
422
|
0.38%
|
Money market
|
49,733
|
198
|
0.40%
|
50,141
|
305
|
0.61%
|
Other time
|
72,621
|
1,028
|
1.42%
|
77,668
|
1,384
|
1.78%
|
Total interest-bearing deposits
|
240,087
|
1,536
|
0.64%
|
238,447
|
2,111
|
0.89%
|
Securities sold under agreements
|
|
|
|
|
|
|
to repurchase
|
5,021
|
8
|
0.16%
|
4,135
|
10
|
0.24%
|
Borrowed funds
|
171
|
10
|
6.06%
|
189
|
11
|
6.05%
|
Total interest-bearing liabilities
|
245,279
|
1,554
|
0.63%
|
242,771
|
2,132
|
0.88%
|
Noninterest-bearing deposits
|
83,498
|
-
|
|
75,898
|
-
|
|
|
328,777
|
1,554
|
0.47%
|
318,669
|
2,132
|
0.67%
|
Other liabilities
|
1,758
|
|
|
1,419
|
|
|
Stockholders' equity
|
66,160
|
|
|
62,986
|
|
|
Total liabilities and
|
|
|
|
|
|
|
stockholders' equity
|
$396,695
|
|
|
$383,074
|
|
|
Net interest spread
|
|
|
3.65%
|
|
|
3.66%
|
Net interest income
|
|
$ 14,015
|
|
|
$ 13,945
|
|
Net margin on interest-earning assets
|
|
3.85%
|
|
|
3.94%
|
|
|
|
|
|
|
Tax equivalent adjustment included in:
|
|
|
|
|
|
Investment income
|
|
$ 286
|
|
|
$ 263
|
|
Loan income
|
|
$ 31
|
|
|
$ 35
|
|
- 21 -
Analysis of Changes in Net Interest Income
|
(Dollars stated in thousands)
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
Year ended December 31,
|
|
2007 compared with 2006
|
2006 compared with 2005
|
|
variance due to
|
variance due to
|
|
Total
|
Rate
|
Volume
|
Total
|
Rate
|
Volume
|
Interest-earning assets
|
|
|
|
|
|
|
Federal funds sold
|
782
|
12
|
770
|
59
|
427
|
(368)
|
Interest-bearing deposits
|
89
|
41
|
48
|
23
|
23
|
-
|
Investment securities:
|
|
|
|
|
|
|
U. S. Treasury
|
22
|
621
|
(599)
|
(267)
|
662
|
(929)
|
U. S. Government Agency
|
(88)
|
115
|
(203)
|
(127)
|
41
|
(168)
|
State and municipals
|
(124)
|
25
|
(149)
|
(169)
|
45
|
(214)
|
Other
|
(1)
|
(2)
|
1
|
12
|
11
|
1
|
Loans:
|
|
|
|
|
|
|
Commercial
|
(20)
|
(21)
|
1
|
389
|
66
|
323
|
Mortgage
|
850
|
267
|
583
|
2,535
|
93
|
2,442
|
Consumer
|
-
|
2
|
(2)
|
28
|
(7)
|
35
|
Total interest revenue
|
1,510
|
1,060
|
450
|
2,483
|
1,361
|
1,122
|
Interest-bearing liabilities
|
|
|
|
|
|
|
NOW
|
42
|
56
|
(14)
|
40
|
56
|
(16)
|
Money market
|
(18)
|
48
|
(66)
|
117
|
155
|
(38)
|
Savings
|
42
|
64
|
(22)
|
67
|
95
|
(28)
|
Other time deposits
|
1,375
|
792
|
583
|
1,212
|
1,124
|
88
|
Other borrowed funds
|
(12)
|
-
|
(12)
|
17
|
19
|
(2)
|
Total interest expense
|
1,429
|
960
|
469
|
1,453
|
1,449
|
4
|
Net interest income
|
81
|
100
|
(19)
|
1,030
|
(88)
|
1,118
|
In the preceding table, the variance that is both rate and
volume related is reported with the rate variance.
Composition of Loan Portfolio
Because loans are expected to produce higher yields than
investment securities and other interest-earning assets (assuming that loan
losses are not excessive), the absolute volume of loans and the volume as a
percentage of total earning assets is an important determinant of net interest
margin. Average loans, net of the allowance for loan losses, were $235,014,000,
$226,672,000, and $186,418,000 during 2007, 2006 (restated), and 2005
(restated), respectively, which constituted 68.66%, 65.60%, and 50.87%, of
average interest-earning assets for the periods. The Company’s ratio of net
loans to deposits was 82.40%, 80.33%, and 66.40% at December 31, 2007, 2006
(restated), and 2005 (restated), respectively. Average net loans to average
deposits were 80.02%, 75.71%, and 57.86% for 2007, 2006 (restated), and 2005
(restated). The increase in the loan to deposit ratio from 2006 to 2007 is
attributable to 3.68% growth in the average loan portfolio accompanied by a
modest 1.91% reduction in average deposits during 2007. The increase in the loan
to deposit ratio from 2005 to 2006 is attributable to 21.59% growth in the
average loan portfolio accompanied by a 7.08% reduction in average deposits
during 2006. Throughout 2005, 2006 and 2007, the Bank continued to enjoy
increased loan opportunity due to steady demand and competitive pricing. The
effect of restatement of the ratios in this section is to increase each restated
2006 and 2005 ratio by less than 1.00%.
- 22 -
The Company extends loans primarily to customers located in
and near Worcester County, Maryland and Sussex County, Delaware. There are no
industry concentrations in the Company’s loan portfolio. The Company does,
however, have a substantial portion of its loans in real estate and performance
will be influenced by the real estate market in the region.
During 2004 through 2006, the Bank experienced rapid growth
in construction, land development and land loans as a result of a robust real
estate market and favorable competitive conditions. While this type of loan may
generally be considered to be more risky than other real estate secured loans,
the Bank did not deviate from its conservative underwriting practices relative
to these transactions. While increasing the outstanding balances in this type of
credit, management did not incur any more than its historically low level of
risk. This is consistent with the Company’s philosophy that safe and sound
practice, coupled with high earnings, are higher priorities than asset growth.
The Bank has not engaged in risky lending practices such as subprime mortgages,
high loan-to-value lending, or high volume of loans on condominiums. Although
the economy has caused a general decline in real estate values and an increase
in time to market many properties, the Bank’s conservative underwriting
practices have sheltered it from the adverse portfolio effects that are
currently receiving public attention. Further, management monitors fluctuations
in the value of real estate held as collateral and, if deemed necessary, obtains
additional collateral to limit the Bank’s loss exposure.
The following table sets forth the composition of the
Company's loan portfolio for each of the five most recent year ends.
Composition of the Loan Portfolio Stated in Dollars and Percentages
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
|
Restated
|
Restated
|
Restated
|
Restated
|
Real estate mortgages
|
|
|
|
|
|
Construction, land development,
|
|
|
|
|
|
and land
|
$ 38,230,033
|
$ 37,331,256
|
$ 23,430,345
|
$ 14,304,860
|
$ 17,467,578
|
Residential 1 to 4 family
|
87,327,448
|
88,599,071
|
81,327,154
|
74,211,899
|
79,624,476
|
Second mortgages
|
3,287,734
|
2,395,178
|
2,094,749
|
1,900,559
|
1,353,800
|
Commercial properties
|
84,568,665
|
79,484,039
|
76,103,526
|
57,252,929
|
50,153,929
|
Commercial
|
22,283,007
|
23,264,997
|
21,461,593
|
14,007,430
|
13,199,879
|
Consumer
|
2,574,916
|
2,352,660
|
2,215,299
|
2,010,406
|
2,630,623
|
Total loans
|
238,271,803
|
233,427,201
|
206,632,666
|
163,688,083
|
164,430,285
|
Less allowance for loan losses
|
195,525
|
196,083
|
211,374
|
198,591
|
207,942
|
Loans, net
|
$ 238,076,278
|
$ 233,231,118
|
$ 206,421,292
|
$ 163,489,492
|
$ 164,222,343
|
|
|
|
|
|
|
Real estate mortgages
|
|
|
|
|
|
Construction, land development,
|
|
|
|
|
|
and land
|
16.04%
|
15.99%
|
11.34%
|
8.74%
|
10.62%
|
Residential 1 to 4 family
|
36.66%
|
37.95%
|
39.36%
|
45.33%
|
48.43%
|
Second mortgages
|
1.38%
|
1.03%
|
1.01%
|
1.16%
|
0.82%
|
Commercial properties
|
35.49%
|
34.05%
|
36.83%
|
34.98%
|
30.50%
|
Commercial
|
9.35%
|
9.97%
|
10.39%
|
8.56%
|
8.03%
|
Consumer
|
1.08%
|
1.01%
|
1.07%
|
1.23%
|
1.60%
|
Total loans
|
100.00%
|
100.00%
|
100.00%
|
100.00%
|
100.00%
|
- 23 -
The following table sets forth the maturity distribution,
classified according to sensitivity to changes in interest rates, for selected
components of the Company's loan portfolio as of December 31, 2007.
Loan Maturity Schedule and Sensitivity to Changes in Interest Rates
|
December 31, 2007
|
|
|
Over one
|
|
|
|
One year
|
through
|
Over five
|
|
|
or less
|
five years
|
years
|
Total
|
Real estate mortgages
|
|
|
|
|
Construction, land development,
|
|
|
|
|
and land
|
$ 38,122,358
|
$ 67,633
|
$ 40,042
|
$ 38,230,033
|
Residential 1 to 4 family
|
87,100,033
|
44,167
|
183,248
|
87,327,448
|
Second mortgages
|
3,287,734
|
-
|
-
|
3,287,734
|
Commercial properties
|
84,261,953
|
57,106
|
249,606
|
84,568,665
|
Commercial
|
20,417,709
|
1,250,710
|
614,588
|
22,283,007
|
Consumer
|
1,207,444
|
1,202,106
|
165,366
|
2,574,916
|
|
$ 234,397,231
|
$ 2,621,722
|
$ 1,252,850
|
$ 238,271,803
|
|
|
|
|
|
Fixed interest rate
|
$ 1,937,600
|
$ 2,621,722
|
$ 1,252,850
|
$ 5,812,172
|
Variable interest rate (or demand)
|
232,459,631
|
-
|
-
|
232,459,631
|
Total
|
$ 234,397,231
|
$ 2,621,722
|
$ 1,252,850
|
$ 238,271,803
|
As of December 31, 2007, $232,459,631 or 97.56%, of the total
loans were either variable rate loans or loans written on demand.
The Company has the following commitments, lines of credit,
and letters of credit outstanding as of December 31, 2007, 2006, and 2005,
respectively.
|
2007
|
2006
|
2005
|
Construction and land development loans
|
$ 12,582,162
|
$ 18,866,083
|
$ 21,845,161
|
Other loan commitments
|
20,941,323
|
21,557,185
|
24,252,637
|
Standby letters of credit
|
1,582,050
|
1,682,942
|
1,272,000
|
Total
|
$ 35,105,535
|
$ 42,106,210
|
$ 47,369,798
|
Loan commitments are agreements to lend to a customer as long
as there is no violation of any condition to the contract. Loan commitments
generally have interest at current market rates, fixed expiration dates, and may
require the 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.
Loan Quality and the Allowance for Loan Losses
The allowance for loan losses
represents an amount which management believes to be adequate to absorb
identified and inherent losses in the loan portfolio as of the balance sheet
date. Valuation of the allowance is completed no less than quarterly. The
determination of the allowance is inherently subjective as it relies on
estimates of potential loss related to specific loans, the effects of portfolio
trends, and other internal and external factors.
The ALLL consists of (i) formula-based reserves comprised of
potential losses in the balance of the loan portfolio segmented into homogeneous
pools, (ii) specific reserves comprised of potential losses on loans that
management has identified as impaired, and (iii) unallocated reserves.
Unallocated reserves are not associated with a specific portfolio segment or a
specific loan, but may be appropriate if properly supported and in accordance
with GAAP. Management anticipates having low levels of unallocated reserves in
future years, as discussed in conjunction with the table titled Allocation of
the Allowance for Loan losses, below.
- 24 -
The Company evaluates loan portfolio risk for the purpose of
establishing an adequate allowance for loan losses. In determining an adequate
level for the formula-based portion of the ALLL, management considers historical
loss experience for major types of loans. Homogenous categories of loans are
evaluated based on loss experience in the most recent five years, applied to the
current portfolio. This formulation gives weight to portfolio size and loss
experience for categories of real-estate secured loans (i.e. real estate –
construction and real estate – mortgage), other loans to commercial borrowers,
and other consumer loans. However, historical data may not be an accurate
predictor of loss potential in the current loan portfolio. Management also
evaluates trends in delinquencies, the composition of the portfolio,
concentrations of credit, and changes in lending products, processes, or
staffing. Management further considers external factors such as the interest
rate environment, competition, current local and national economic trends, and
the results of recent independent reviews by auditors and banking regulators.
The recent slow-down in the real-estate market has affected both the price and
time to market residential and commercial properties. Management closely
monitors such trends and the potential effect on the Company, but to date they
have not impacted the quality of the Bank’s loan portfolio. For all periods
presented, there were no specific adjustments made to the ALLL in connection
with management’s evaluation of these trends as management determined that they
have not impacted the quality of the loan portfolio.
Management has also adopted a risk rating system which gives
weight to collateral status (secured vs. unsecured), and to the absence or
improper execution of critical contract or collateral documents. Unsecured loans
and those loans with critical documentation exceptions, as defined by
management, are considered to have greater loss exposure. Management
incorporates these factors in the formula-based portion of the ALLL.
Additionally, consideration is given to those segments of the loan portfolio
which management deems to pose the greatest likelihood of loss. In an economic
downturn, such as the region is experiencing in late 2007, management believes
the Bank’s greatest likelihood of loss is in unsecured loans - commercial and
consumer, and in secured consumer loans. Reserves for these segments of the
portfolio are included in the formula-based portion of the ALLL at December 31,
2007. Although the real estate market is less robust than in recent years,
management does not expect losses in the real estate portfolio due to the Bank’s
conservative underwriting practices. Management closely monitors conditions that
might indicate deterioration of collateral value on significant loans and
obtains additional collateral as required to protect the Bank from exposure.
In determining an adequate level for the specific reserve
portion of the ALLL, management reviews the current portfolio giving
consideration to problem loans. The allowance may include reserves for specific
loans identified as impaired during management's loan review or the Company’s
independent loan review or internal audit functions. For significant problem
loans, management's review consists of evaluation of the financial strengths of
the borrowers and guarantors, the related collateral, and the effects of
economic conditions.
The provision for loan losses is a charge to earnings in the
current period to replenish the allowance and maintain it at a level management
has determined to be adequate. The allowance is increased by current period
provisions 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. Adjustments 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. No provision
for loan losses was made in 2007, 2006, 2005, 2004 or 2003 as discussed in the
section above titled Prior Period Adjustment.
In 2007, the Company determined that the allowance for loan
losses was overstated as a result of provisions charged to earnings in years
prior to 2003 combined with the Bank’s history of low loan losses. A prior
period adjustment to revalue the allowance for loan losses (ALLL) has been
recorded, resulting in the restatement of balances, variances, and ratios
previously reported for years ended December 31, 2006, 2005, 2004, and 2003, and
for all quarter ends in years 2007, 2006, 2005, 2004, and 2003. No provision for
loan loss was charged to earnings in 2003 or any year after, therefore the prior
period adjustment has no impact on previously reported earnings. Item 6,
Selected Financial Data, provides details of the accounts and balances that have
been restated for each of the affected periods.
Management considers the December 31, 2007 allowance
appropriate and adequate to absorb identified and inherent losses in the loan
portfolio. As of December 31, 2007, management has identified one loan with a
balance of $1,060 which is anticipated to be charged-off within the next 12
months. However, there can be no assurance that charge-offs in future periods
will not exceed the allowance for loan loss or that additional increases in the
loan loss allowance will not be required.
The following is a schedule of transactions in the allowance
for loan losses for each of the five most recent years ended December 31. The
Bank experienced net recoveries in two of these years and net charge-offs in
three years. Management does not detect any meaningful trend in the year-to-year
relationship of net recoveries to net charge-offs. Rather, these are natural
swings of activity in a loan portfolio that experiences minimal losses.
- 25 -
Allowance for Loan Losses
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|
|
Restated
|
Restated
|
Restated
|
Restated
|
Balance at beginning of year
|
$ 196,083
|
$ 211,374
|
$ 198,591
|
$ 207,942
|
$ 201,800
|
Loans charged-off:
|
|
|
|
|
|
Commercial
|
-
|
5,357
|
-
|
-
|
-
|
Real estate - construction
|
-
|
-
|
-
|
-
|
-
|
Real estate - mortgage
|
-
|
-
|
-
|
-
|
-
|
Consumer
|
6,263
|
10,029
|
8,131
|
13,874
|
3,423
|
Total loan losses
|
6,263
|
15,386
|
8,131
|
13,874
|
3,423
|
Recoveries on loans previously charged off:
|
|
|
|
|
|
Commercial
|
-
|
-
|
-
|
2,577
|
533
|
Real estate - construction
|
-
|
-
|
-
|
-
|
-
|
Real estate - mortgage
|
-
|
-
|
15,263
|
-
|
-
|
Consumer
|
5,705
|
95
|
5,651
|
1,946
|
9,032
|
Total loan recoveries
|
5,705
|
95
|
20,914
|
4,523
|
9,565
|
|
|
|
|
|
|
Net loan charge-offs (recoveries)
|
558
|
15,291
|
(12,783)
|
9,351
|
(6,142)
|
Provision for loan losses charged to expense
|
-
|
-
|
-
|
-
|
-
|
Balance at end of year
|
$ 195,525
|
$ 196,083
|
$ 211,374
|
$ 198,591
|
$ 207,942
|
|
|
|
|
|
|
Allowance for loan losses to loans
|
|
|
|
|
outstanding at end of year
|
0.08%
|
0.08%
|
0.10%
|
0.12%
|
0.13%
|
|
|
|
|
|
|
Net charge-offs to average gross loans
|
0.00%
|
0.01%
|
-0.01%
|
0.01%
|
0.00%
|
The following table details the allocation of the allowance
for loan losses to major categories of loans and the percentage of loans in each
category relative to total loans at the five most recent year-ends. This table
restates the allocation for years ended December 31, 2006, 2005, 2004 and 2003,
as presented in previously filed Forms 10-K for years then ended. In 2007,
management revised its methodology for valuing the ALLL. The current methodology
conforms to the requirements of the federal banking regulators’ "Interagency
Policy Statement on the Allowance for Loan and Lease Losses (ALLL)," released in
December 2006. Prior to 2007, the Bank’s methodology gave weight to industry
loss percentages in the allocation of the ALLL to major categories of loans.
This resulted in an overstatement in the allocations to individual loan
categories. The current methodology more accurately reflects the Bank’s
historical loss experience and current portfolio quality. Management believes
that the current methodology provides the flexibility necessary to reflect
changing estimates of loss in a timely manner and that it will be appropriate
for future valuations.
The prior period adjustment recorded in 2007, results in
restated total ALLL balances as of December 31, 2006, 2005, 2004, and 2003, as
detailed in Item 6, Selected Financial Data. The following table presents the
allocation of the ALLL after application of the prior period adjustment and
current methodology. Management believes that this presentation provides a
meaningful comparison, as the formula-based components are stated on comparable
terms in all years presented.
The loan portfolio is divided into homogeneous categories of
loans for the purpose of calculating formula-based reserves. The categories of
real estate – construction and real estate – mortgage loans share similar risks
of potential collateral deterioration or devaluation. However, these loans tend
to be more adequately secured than those commercial and consumer loans that are
not real estate secured. The Bank has not incurred a mortgage loan loss since
1997, and therefore no reserves are allocated to the real estate – construction
or real estate – mortgage portions of the loan portfolio in determining the
ALLL. Non-real estate secured loans, commercial and consumer, pose a greater
risk of loss due to erosion of the borrower’s ability to repay the loan in a
timely manner. Collateral on these loans is generally, although not always, less
reliable than real estate as a source of recovery if default occurs. The Bank’s
recent loan losses have been either consumer loans or unsecured commercial
loans.
- 26 -
Allocation of Allowance for Loan Losses
|
|
|
|
December 31, 2006
|
|
December 31, 2005
|
|
|
December 31, 2007
|
|
Restated
|
|
Restated
|
|
|
Amount
|
% of Loans
|
Amount
|
% of Loans
|
Amount
|
% of Loans
|
Commercial
|
|
|
|
|
|
|
|
|
|
Formula-based
|
$ 34,952
|
|
|
$ 10,556
|
|
|
$ 9,738
|
|
|
Specific reserves
|
109,200
|
|
|
-
|
|
|
-
|
|
|
Total commercial
|
144,152
|
9.35
|
%
|
10,556
|
9.97
|
%
|
9,738
|
10.39
|
%
|
Real estate - construction
|
|
|
|
|
|
|
|
|
|
Total real estate - construction
|
-
|
16.04
|
%
|
-
|
15.99
|
%
|
-
|
11.34
|
%
|
Real estate - mortgage
|
|
|
|
|
|
|
|
|
|
Total real estate - mortgage
|
-
|
73.53
|
%
|
-
|
73.03
|
%
|
-
|
77.20
|
%
|
Consumer
|
|
|
|
|
|
|
|
|
|
Formula-based
|
21,636
|
|
|
24,347
|
|
|
22,926
|
|
|
Specific reserves
|
29,314
|
|
|
-
|
|
|
-
|
|
|
Total consumer
|
50,950
|
1.08
|
|
24,347
|
1.01
|
|
22,926
|
1.07
|
|
Subtotal
|
195,102
|
100.00
|
%
|
34,903
|
100.00
|
%
|
32,664
|
100.00
|
%
|
Unallocated
|
423
|
|
|
161,180
|
|
|
178,710
|
|
|
Total
|
$ 195,525
|
|
|
$ 196,083
|
|
|
$ 211,374
|
|
|
|
December 31, 2004
|
|
December 31, 2003
|
|
|
Restated
|
|
Restated
|
|
|
Amount
|
% of Loans
|
Amount
|
% of Loans
|
Commercial
|
|
|
|
|
|
|
Formula-based
|
$ 47,218
|
|
|
$ 52,549
|
|
|
Specific reserves
|
-
|
|
|
-
|
|
|
Total commercial
|
47,218
|
8.56
|
%
|
52,549
|
8.03
|
%
|
Real estate - construction
|
|
|
|
|
|
|
Total real estate - construction
|
-
|
8.74
|
|
-
|
10.62
|
|
Real estate - mortgage
|
|
|
|
|
|
|
Total real estate - mortgage
|
-
|
81.47
|
|
-
|
79.75
|
|
Consumer
|
|
|
|
|
|
|
Formula-based
|
20,805
|
|
|
53,459
|
|
|
Specific reserves
|
-
|
|
|
-
|
|
|
Total consumer
|
20,805
|
1.23
|
|
53,459
|
1.60
|
|
Subtotal
|
68,023
|
100.00
|
%
|
106,008
|
100.00
|
%
|
Unallocated
|
130,568
|
|
|
101,934
|
|
|
Total
|
$ 198,591
|
|
|
$ 207,942
|
|
|
Unallocated reserves are not associated with a specific
portfolio segment or a specific loan, but may be appropriate if properly
supported and in accordance with GAAP. Because no portion of the ALLL is
calculated on a total loan portfolio basis, management anticipates having low
levels of unallocated reserves in future periods. The unallocated portion in the
preceding table appears higher in years prior to 2007, because management had
not adopted this methodology at those year-ends. The unallocated reserves in
years prior to 2007 cannot be allocated as specific reserves due to application
of FAS 16
Prior Period Adjustments
, paragraph 3, which prohibits the
retrospective valuation of aged accounts receivable (past due loans) because the
passage of time has revealed their ultimate resolution. Management believes that
the ALLL reflected in this table for years prior to 2007 does not materially
differ from the balance that would have been calculated at each of those
year-ends had current methodology been applied then.
- 27 -
The accrual of interest on a loan is discontinued when
principal or interest is ninety days past due or when the loan is determined to
be impaired, unless collateral is sufficient to discharge the debt in full and
the loan is in process of collection. When a loan is placed in nonaccruing
status, any interest previously accrued but unpaid, is reversed from interest
income. Interest payments received on nonaccrual loans may be recorded as cash
basis income, or as a reduction of principal, depending on management’s judgment
on a loan by loan basis. Accrual of interest may be restored when all principal
and interest are current and management believes that future payments will be
received in accordance with the loan agreement.
Nonperforming loans are loans past due 90 or more days and
still accruing plus nonaccrual loans. Nonperforming assets are comprised of
nonperforming loans combined with real estate acquired in foreclosure and held
for sale. There were no nonperforming assets other than nonperforming loans as
of December 31, 2007, 2006, 2005, 2004, or 2003, as shown in the following
table.
|
2007
|
2006
|
2005
|
2004
|
2003
|
Loans 90 days or more past due and still accruing
|
$ 9,100
|
$ 239,620
|
$ 131,717
|
$ 391,676
|
$ 315,395
|
Nonaccruing loans
|
40,916
|
-
|
-
|
-
|
-
|
Total nonperforming loans
|
$ 50,016
|
$ 239,620
|
$ 131,717
|
$ 391,676
|
$ 315,395
|
|
|
|
|
|
|
Interest not accrued on nonaccruing loans
|
$ 1,509
|
$ -
|
$ -
|
$ -
|
$ -
|
Interest included in net income on
|
|
|
|
|
|
nonaccruing loans
|
$ -
|
$ -
|
$ -
|
$ -
|
$ -
|
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, or valuation allowances, allocated to
them in the ALLL. Estimates of loss reserves on impaired loans are determined
based on two of the measurement methods described in Financial Accounting
Standard 114 (FAS 114): (1) the loan’s observable fair price, or (2) the fair
value of collateral, if repayment of the loan is expected to be provided by
underlying collateral. Loans determined to be impaired, but for which no
specific valuation allowance is made because management believes the loan is
secured with adequate collateral or the Bank will not take a loss on such loan,
are grouped with other homogeneous loans for evaluation under formula-based
criteria described previously.
The following table sets forth principal balances of impaired
loans and the related valuation allowances as of December 31, 2007. Included in
principal balances of impaired loans as of December 31, 2007, is $436,802 which
is guaranteed by a government agency. Management had identified no impaired
loans as of December 31, 2006, 2005, 2004, and 2003.
|
2007
|
Impaired loans with valuation allowances,
|
|
including nonaccruing loans
|
$ 554,858
|
Valuation allowances on impaired loans
|
$ 118,056
|
|
|
Impaired loans with no valuation allowances
|
$ -
|
- 28 -
Liquidity and Interest Rate Sensitivity
The primary objective of asset/liability management is to
ensure the steady growth of the Company's primary source of earnings, net
interest income. Net interest income can fluctuate with significant interest
rate movements. To lessen the impact of these margin swings, the balance sheet
should be structured so that repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity.
Liquidity represents the ability to provide steady sources of
funds for loan commitments and investment activities, as well as to provide
sufficient funds to cover deposit withdrawals and payment of debt and operating
obligations. These funds can be obtained by converting assets to cash or by
attracting new deposits. Average liquid assets (cash and amounts due from banks,
interest-bearing deposits in other banks, federal funds sold, and investment
securities) were 42.03% of average deposits for 2007, compared to 45.61% and
62.06% for 2006 and 2005, respectively.
Average net loans to average deposits were 80.12%, 75.71%,
and 57.86% for 2007, 2006 (restated), and 2005 (restated). The increase in the
loan to deposit ratio from 2006 to 2007 is attributable to 3.68% growth in the
average loan portfolio accompanied by a 1.91% reduction in average deposits
during 2007. The increase in the loan to deposit ratio from 2005 to 2006 is
attributable to 21.59% growth in the average net loan portfolio accompanied by a
7.08% reduction in average deposits during 2006. Funding for loan growth was
provided by reduction of the investment portfolio. As loans earn at higher
average rates than investments, this shift has a positive effect on earnings.
The increase in loans does not negatively impact the Company’s ability to meet
liquidity demands. Restatement of loan to deposit ratios for 2006 and 2005
resulted in increases of 67 and 62 basis points, respectively.
As of December 31, 2007, $33,390,316 (50.15%) of total debt
securities mature in one year or less, of which, $16,935,694 are classified as
"available-for-sale." Federal funds sold provide additional liquidity. Other
sources of liquidity include letters of credit, overnight federal funds, and
reverse repurchase agreements available from correspondent banks. The total
lines and letters of credit available from correspondent banks were $21,000,000
as of December 31, 2007 and 2006, and $19,000,000 as of December 31, 2005.
Investment Securities Maturity Distribution and Yields
|
|
December 31, 2007
|
December 31, 2006
|
December 31, 2005
|
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
U. S. Treasury
|
|
|
|
|
|
|
One year or less
|
$ 32,430,184
|
4.51%
|
$ 37,408,625
|
4.04%
|
$ 57,192,124
|
2.66%
|
Over one through five years
|
19,979,251
|
4.60%
|
18,479,455
|
4.69%
|
27,462,872
|
3.48%
|
Over ten years
|
2,567,812
|
7.28%
|
2,524,375
|
7.28%
|
2,587,187
|
7.28%
|
Total U.S. Treasury securities
|
54,977,247
|
4.67%
|
58,412,455
|
4.38%
|
87,242,183
|
3.05%
|
|
|
|
|
|
|
|
U.S. Government Agencies
|
|
|
|
|
|
|
One year or less
|
-
|
0.00%
|
8,749,280
|
3.11%
|
9,999,514
|
2.31%
|
Over one through five years
|
10,000,000
|
5.07%
|
-
|
-
|
7,746,483
|
3.13%
|
Total U. S. Government Agencies
|
10,000,000
|
5.07%
|
8,749,280
|
3.11%
|
17,745,997
|
2.67%
|
|
|
|
|
|
|
|
State, county, and municipal
|
|
|
|
|
|
|
One year or less
|
960,132
|
2.76%
|
2,788,056
|
2.43%
|
6,822,528
|
1.59%
|
Over one through five years
|
647,294
|
3.68%
|
1,062,744
|
2.82%
|
3,551,782
|
2.32%
|
Total state, county, and municipal
|
1,607,426
|
3.13%
|
3,850,800
|
2.54%
|
10,374,310
|
1.84%
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
|
|
|
|
One year or less
|
33,390,316
|
4.46%
|
48,945,961
|
3.78%
|
74,014,166
|
2.51%
|
Over one through five years
|
30,626,545
|
4.73%
|
19,542,199
|
4.59%
|
38,761,137
|
3.30%
|
Over ten years
|
2,567,812
|
7.28%
|
2,524,375
|
7.28%
|
2,587,187
|
7.28%
|
Total debt securities
|
66,584,673
|
4.69%
|
71,012,535
|
4.13%
|
115,362,490
|
2.89%
|
|
|
|
|
|
|
|
Equity securities
|
4,177,279
|
3.64%
|
4,113,288
|
3.72%
|
3,721,950
|
2.95%
|
|
|
|
|
|
|
|
Total securities
|
$ 70,761,952
|
4.63%
|
$ 75,125,823
|
4.11%
|
$ 119,084,440
|
2.89%
|
- 29 -
Interest rate sensitivity refers to the responsiveness of
interest-bearing assets and liabilities to changes in market interest rates. The
rate-sensitive position, or gap, is the difference in the volume of
rate-sensitive assets and liabilities at a given time interval. The general
objective of gap management is to actively manage rate-sensitive assets and
liabilities to reduce the impact of interest rate fluctuations on the net
interest margin. Management generally attempts to maintain a balance between
rate-sensitive assets and liabilities as the exposure period is lengthened to
minimize the overall interest rate risk to the Company.
Interest rate sensitivity may be controlled on either side of
the balance sheet. On the asset side, management exercises some control over
maturities. Also, loans are written to provide repricing opportunities on fixed
rate notes. The Company's investment portfolio, including federal funds sold,
provides the most flexible and fastest control over rate sensitivity since it
can generally be restructured more quickly than the loan portfolio.
On the liability side, deposit products are structured to
offer incentives to attain the maturity distribution desired. Competitive
factors sometimes make control over deposits more difficult and, therefore, less
effective as an interest rate sensitivity management tool.
The asset mix of the balance sheet is continually evaluated
in terms of several variables: yield, credit quality, appropriate funding
sources, and liquidity. Management of the liability mix of the balance sheet
focuses on expanding the various funding sources.
As of December 31, 2007, the Company was cumulatively
asset-sensitive for all time horizons. For asset-sensitive institutions, if
interest rates should decrease, the net interest margins should decline. Since
all interest rates and yields do not adjust at the same velocity, the gap is
only a general indicator of rate sensitivity.
Interest Sensitivity Analysis
|
|
|
|
|
|
|
December 31, 2007
|
|
|
After three
|
|
|
|
|
Within
|
but within
|
After one
|
|
|
|
three
|
twelve
|
but within
|
After
|
|
|
months
|
months
|
five years
|
five years
|
Total
|
Assets
|
|
|
|
|
|
Earning assets
|
|
|
|
|
|
Federal funds sold
|
$ 23,121,256
|
$ -
|
$ -
|
$ -
|
$ 23,121,256
|
Interest-bearing deposits
|
4,441,661
|
1,470,241
|
100,580
|
-
|
6,012,482
|
Investment debt securities
|
23,728,833
|
18,644,304
|
21,625,128
|
1,995,775
|
65,994,040
|
Loans
|
232,850,357
|
1,546,873
|
2,622,311
|
1,252,262
|
238,271,803
|
Total earning assets
|
$ 284,142,107
|
$ 21,661,418
|
$ 24,348,019
|
$ 3,248,037
|
$ 333,399,581
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
NOW
|
$ 51,218,087
|
$ -
|
$ -
|
$ -
|
$ 51,218,087
|
Money market
|
31,719,473
|
-
|
-
|
-
|
31,719,473
|
Savings
|
41,698,409
|
-
|
-
|
-
|
41,698,409
|
Certificates $100,000 and over
|
11,845,761
|
22,101,027
|
1,914,159
|
-
|
35,860,947
|
Certificates under $100,000
|
19,485,629
|
28,984,010
|
6,619,414
|
-
|
55,089,053
|
Securities sold under agreements
|
|
|
|
|
-
|
to repurchase
|
3,426,173
|
-
|
-
|
-
|
3,426,173
|
Note payable
|
5,877
|
18,167
|
74,046
|
-
|
98,090
|
Total interest-bearing liabilities
|
$ 159,399,409
|
$ 51,103,204
|
$ 8,607,619
|
$ -
|
$ 219,110,232
|
|
|
|
|
|
|
Period gap
|
$ 124,742,698
|
$ (29,441,786)
|
$ 15,740,400
|
$ 3,248,037
|
$ 114,289,349
|
Cumulative gap
|
$ 124,742,698
|
$ 95,300,912
|
$ 111,041,312
|
$ 114,289,349
|
|
Ratio of cumulative gap to
|
|
|
|
|
|
total earning assets
|
37.42%
|
28.58%
|
33.31%
|
34.28%
|
|
- 30 -
Deposits and Other Interest-Bearing Liabilities
Average interest-bearing liabilities decreased $2,808,000
(1.27%) to $218,248,000 in 2007, from $221,056,000 in 2006. Average
interest-bearing deposits decreased $1,142,000 (.53%) to $213,891,000 in 2007
from $215,033,000 in 2006, while average noninterest-bearing demand deposits
decreased $4,573,000 (5.42%) to $79,807,000 in 2007 from $84,380,000 in 2006. At
December 31, 2007, total deposits were $288,943,547, compared to $290,324,760 at
December 31, 2006, a decrease of .48%.
Average interest-bearing liabilities decreased $22,107,000
(9.09%) to $221,056,000 in 2006, from $243,163,000 in 2005. Average
interest-bearing deposits decreased $21,654,000 (9.15%) to $215,033,000 in 2006
from $236,687,000 in 2005, while average noninterest-bearing demand deposits
decreased $1,146,000 (1.34%) to $84,380,000 in 2006 from $85,526,000 in 2005. At
December 31, 2006, total deposits were $290,324,760, compared to $310,857,607 at
December 31, 2005, a decrease of 6.61%.
Management believes that decreasing deposit volume in 2006
resulted from a return by investors to non-deposit investment products and
strong competition for deposits in the local market. Deposit balances stabilized
in 2007 with only modest balance reductions relative to the previous year.
During 2007, non-deposit investment products became less attractive as the stock
market experienced a downturn. Competition for deposits continued although banks
began to lower the high rates on time deposits that were offered in 2006.
Management monitors deposit decreases closely and implements counter-measures as
needed, including but not limited to rate increases on existing products and the
development of new products.
The following table sets forth the deposits of the Company by
category as of December 31, 2007, 2006, and 2005, respectively.
|
December 31,
|
|
2007
|
2006
|
2005
|
|
|
Percent of
|
|
Percent of
|
|
Percent of
|
|
Amount
|
deposits
|
Amount
|
deposits
|
Amount
|
deposits
|
|
|
|
|
|
|
|
Non-interest bearing
|
$ 73,357,578
|
25.38%
|
$ 79,625,853
|
27.43%
|
$ 88,236,133
|
28.39%
|
NOW
|
51,218,087
|
17.73%
|
54,458,814
|
18.76%
|
62,601,973
|
20.14%
|
Money market
|
31,719,473
|
10.98%
|
36,413,676
|
12.54%
|
46,464,340
|
14.95%
|
Savings
|
41,698,409
|
14.43%
|
45,844,558
|
15.79%
|
51,648,088
|
16.61%
|
Time deposits less than $100,000
|
55,089,053
|
19.07%
|
46,020,077
|
15.85%
|
44,028,847
|
14.16%
|
Core deposits
|
253,082,600
|
|
262,362,978
|
|
292,979,381
|
|
Time deposits of $100,000 or more
|
35,860,947
|
12.41%
|
27,961,782
|
9.63%
|
17,878,226
|
5.75%
|
Total deposits
|
$ 288,943,547
|
100.00%
|
$ 290,324,760
|
100.00%
|
$ 310,857,607
|
100.00%
|
Core deposits, which exclude certificates of deposit of
$100,000 or more, provide a relatively stable funding source for the Company's
loan portfolio and other earning assets. The Company's core deposits decreased
$9,280,378 during 2007, $30,616,403 during 2006 and $8,168,720 during 2005.
Management attributes the variance from 2005 to 2006 to aggressive competition
for time deposits in a rising rate environment. Rate increases implemented in
2006 to retain deposits caused a shift of funds from core deposits into time
deposits of $100,000 or more. From December 31, 2005 to 2006, time deposits of
$100,000 or more increased $10,083,556 (56.40%). During 2006, as in 2005,
management believes that market conditions lead to a reversal of some of the
deposit influx that occurred in 2001 through 2004 as funds migrated from the
stock market into insured deposits. During 2007, deposits continued to shift
from more liquid demand and savings products to higher rate time deposits. Over
year ended December 31, 2007, time deposits of $100,000 or more increased
$7,899,165 (28.25%).
- 31 -
Deposits, and particularly core deposits, have been the
Company's primary source of funding and have enabled the Company to meet both
its short-term and long-term liquidity needs. Management anticipates that while
such deposits will continue to be the Company's primary source of funding in the
future, continued reductions in deposit levels, if coupled with growth in the
Company’s loan portfolio, could require periodic borrowing of funds. In this
event, it is likely that Management would liquidate investment securities from
the available for sale portfolio or purchase overnight federal funds as needed.
The maturity distribution of the Company's time deposits of
$100,000 or more at December 31, 2007, is shown in the following table.
Maturities of Certificates of Deposit of $100,000 or
More
|
December 31, 2007
|
|
|
|
After six
|
|
|
|
|
After three
|
through
|
|
|
|
Within three
|
through
|
twelve
|
After twelve
|
|
|
months
|
six months
|
months
|
months
|
Total
|
|
|
|
|
|
|
Time deposits of
$100,000 or more
|
$ 11,845,761
|
$ 9,729,493
|
$ 12,371,534
|
$ 1.914.159
|
$ 35,860,947
|
Large certificate of deposit customers tend to be extremely
sensitive to interest rate levels, making these deposits less reliable sources
of funding for liquidity planning purposes than core deposits. Some financial
institutions partially fund their balance sheets using large certificates of
deposit obtained through brokers. These brokered deposits are generally
expensive and are unreliable as long-term funding sources. Accordingly, the
Company does not accept brokered deposits under these conditions. During 2007,
the Bank joined the Certificate of Deposit Account Registry Service (CDARS).
This service allows the Bank to offer depositors up to $50 million in FDIC
insurance through a network of member banks. While CDARS deposits are considered
to be brokered deposits for regulatory reporting, they are not considered
volatile as they typically remain in the program until maturity.
Noninterest revenue
Noninterest revenue for 2007 decreased
$15,808 (.81%) from the previous year. Service charges on deposit accounts
dropped by $96,686 (8.64%) due to reduced volume of fees for items presented
against insufficient funds and overdrafts. ATM and debit card revenue increased
$56,944 (12.70%) due to increased card usage. Miscellaneous revenues exceed the
previous year by $23,934 (6.28%) which includes an increase of $27,997 (17.23%)
in the annual increase in cash surrender value of bank owned life insurance.
Noninterest revenue for 2006 increased
$149,370 (8.30%) from the previous year. Service charges on deposit accounts
increased $65,715 (6.24%) due to fee increases effective in early January 2006.
ATM and debit card revenue increased $75,776 (20.35%) due to a combination of
fee increases and card usage.
The following table presents the principal components of
noninterest revenue for the years ended December 31, 2007, 2006, and 2005,
respectively.
|
Noninterest revenue
|
|
|
|
|
2007
|
2006
|
2005
|
|
Service charges on deposit accounts
|
|
$ 1,022,472
|
$ 1,119,158
|
$ 1,053,443
|
|
ATM and debit card revenue
|
|
505,146
|
448,202
|
372,426
|
|
Miscellaneous revenue
|
|
405,318
|
381,384
|
373,505
|
|
Total noninterest revenue
|
|
$ 1,932,936
|
$ 1,948,744
|
$ 1,799,374
|
|
|
|
|
|
|
|
Noninterest revenue as a percentage
|
|
|
|
|
|
of average total assets (restated)
|
|
0.52%
|
0.52%
|
0.45%
|
- 32 -
Noninterest Expense
Noninterest expense increased $207,404 (2.82%) from 2006 to
2007. Increased personnel costs of $275,975 include a $102,262 (28.96%) increase
in group insurance expense. Occupancy expense decreased $9,527, including a
$32,313 (30.69%) decrease in building maintenance related to non-recurring
repairs to branches in 2006. Furniture and equipment expense is down $14,969,
which is attributable to lower service contract costs. Other operating expense
decreased $44,075, which includes a $50,367 (46.22%) reduction in courier costs
resulting from the Bank’s implementation of branch-based electronic image
capture. .
Noninterest expense increased $195,005 (2.72%) from 2005 to
2006. Increased personnel costs of $159,652 include a $48,300 cash bonus paid in
February 2006, and a $28,197 increase in expense related to the Bank’s employee
retirement plan. Occupancy expense increased $69,284 which includes a $29,430
(24.93%) increase in utility costs. Furniture and equipment expense are down
$12,404, which is largely attributable to lower depreciation expense. Other
operating expense decreased $21,527, as the net result of several increases and
decreases. Increased directors’ fees resulted from a fee increase, an additional
Board seat, and one additional meeting in 2006 as compared to 2005. Postage
costs are down by $30,200 due to the timing of as-needed meter replenishment,
and the Company’s efforts to reduce unnecessary mailings. Professional fees in
2005 included non-recurring consulting fees of $19,052.
The following table presents the principal components of
noninterest expense for the years ended December 31, 2007, 2006, and 2005,
respectively.
|
|
|
2007
|
2006
|
2005
|
|
Salaries and employee benefits
|
|
$ 4,533,160
|
$ 4,257,185
|
$ 4,097,533
|
|
Occupancy expense
|
|
700,092
|
709,619
|
640,335
|
|
Furniture and equipment expense
|
|
463,582
|
478,551
|
490,955
|
|
Advertising
|
|
177,567
|
166,441
|
147,541
|
|
Armored car service
|
|
64,710
|
52,513
|
76,068
|
|
ATM and debit card
|
|
272,479
|
234,409
|
234,732
|
|
Business and product development
|
|
78,703
|
79,623
|
78,399
|
|
Computer software amortization
|
|
79,768
|
111,765
|
121,982
|
|
Computer software maintenance
|
|
127,959
|
111,777
|
101,875
|
|
Courier service
|
|
58,594
|
108,961
|
105,148
|
|
Deposit insurance
|
|
33,831
|
36,275
|
42,098
|
|
Director fees
|
|
149,400
|
140,200
|
99,900
|
|
Dues, donations, and subscriptions
|
|
85,179
|
88,255
|
94,385
|
|
Liability insurance
|
|
36,294
|
39,402
|
40,380
|
|
Postage
|
|
161,595
|
149,262
|
179,462
|
|
Professional fees
|
|
47,206
|
41,337
|
65,090
|
|
Stationery and supplies
|
|
95,854
|
123,652
|
111,593
|
|
Telephone
|
|
152,855
|
170,960
|
152,464
|
|
Miscellaneous
|
|
243,263
|
254,500
|
279,742
|
|
Total noninterest expense
|
|
$ 7,562,091
|
$ 7,354,687
|
$ 7,159,682
|
|
|
|
|
|
|
|
Noninterest expense as a percentage of
|
|
|
|
|
average total assets (restated)
|
2.03%
|
1.95%
|
1.79%
|
- 33 -
Capital
Under capital guidelines adopted by the Federal Reserve Board
and the FDIC, the Company and the Bank are currently required to maintain a
minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1
capital. Tier 1 capital consists of common stockholders’ equity, qualifying
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, less certain intangibles. In addition, the Company
and the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to
total assets) of at least 4%, but this minimum ratio is increased by 100 to 200
basis points for other than the highest-rated institutions.
At December 31, 2007, 2006, and 2005, the Company and the
Bank were well-capitalized, exceeding all minimum requirements, as set forth in
the following table.
|
|
|
Analysis of Capital
|
|
|
|
|
Consolidated
|
|
To be well
|
Required
|
|
|
Company
|
Bank
|
capitalized
|
minimums
|
|
2007
|
|
|
|
|
|
Total risk-based capital ratio
|
33.7%
|
32.0%
|
10.0%
|
8.0%
|
|
Tier 1 risk-based capital ratio
|
33.1%
|
31.9%
|
6.0%
|
4.0%
|
|
Tier 1 leverage ratio
|
19.5%
|
18.6%
|
5.0%
|
4.0%
|
|
|
|
|
|
|
|
2006 Restated
|
|
|
|
|
|
Total risk-based capital ratio
|
33.4%
|
31.7%
|
10.0%
|
8.0%
|
|
Tier 1 risk-based capital ratio
|
32.8%
|
31.6%
|
6.0%
|
4.0%
|
|
Tier 1 leverage ratio
|
18.6%
|
17.8%
|
5.0%
|
4.0%
|
|
|
|
|
|
|
|
2005 Restated
|
|
|
|
|
|
Total risk-based capital ratio
|
34.8%
|
32.8%
|
10.0%
|
8.0%
|
|
Tier 1 risk-based capital ratio
|
34.2%
|
32.7%
|
6.0%
|
4.0%
|
|
Tier 1 leverage ratio
|
16.5%
|
15.6%
|
5.0%
|
4.0%
|
The effect of the restatement of prior years is to increase the total
risk-based capital ratios for both the Company and the Bank, with no increase
greater than 1.0%, and to lower the Tier 1 risk-based capital ratios and the
Tier 1 leverage capital ratios for both the Company and the Bank, with no
reduction greater than .4%.
Website Access to Securities and Exchange Commission Reports
The Bank maintains an Internet website at
www.taylorbank.com
.
The Company’s periodic SEC reports, including annual reports on Form 10-K,
quarterly reports on Form 10-Q, and current reports on Form 8-K, are accessible
through this website. Access to these filings is free of charge. The reports are
available as soon as practicable after they are filed electronically with the
SEC.
Accounting Rule Changes
The following accounting pronouncements have been approved by
the Financial Accounting Standards Board but have not become effective as of
December 31, 2007. These pronouncements would apply to the Company if the
Company or the Bank entered into an applicable activity.
FASB Statement No. 157, "Fair Value Measurements" defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS No. 157 will be applied
prospectively and is effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Management does not
expect SFAS No. 157 to have a material impact on the Company’s consolidated
financial statements. It will require additional disclosure as to ranking of
valuation methods in deriving fair value.
FASB Statement No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. Management does not expect
SFAS No. 159 to have a material impact on the Company’s consolidated financial
statements.
- 34 -
FASB Statement No. 141R, "Business Combinations" establishes
principals and requirements for how an acquirer a) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree, b) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase, and c) determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R will be applied prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first fiscal year beginning on or after December 15, 2007.
Management does not expect SFAS No. 141R to have a material impact on the
Company’s consolidated financial statements.
FASB Statement No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" improves the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements by establishing accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal
years beginning on or after December 15, 2008, and interim periods within those
fiscal years. Management does not expect SFAS No. 160 to have a material
impact on the Company’s consolidated financial statements.
In September 2006, the FASB ratified the consensus reached by
the EITF on Issue No. 06-4,
Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements
. EITF 06-4 requires the recognition of a liability and related
compensation costs for endorsement split-dollar life insurance policies that
provide a benefit to an employee that extends to postretirement periods as
defined in SFAS No. 106,
Employers’ Accounting for Postretirement Benefits
Other Than Pensions
. The EITF reached a consensus that Bank Owned Life
Insurance policies purchased for this purpose do not effectively settle the
entity’s obligation to the employee in this regard and, thus, the entity must
record compensation costs and a related liability. Entities should recognize the
effects of applying this Issue through either, (a) a change in accounting
principle through a cumulative-effective adjustment to retained earnings or to
other components of equity or net assets in the balance sheet as of the
beginning of the year of adoption, or (b) a change in accounting principle
through retrospective application to all prior periods. This Issue is effective
for fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 is
not expected to have a material effect on the Bank’s financial statements.
The accounting policies adopted by management are consistent
with accounting principles generally accepted in the United States of America
and are consistent with those followed by peer Banks.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
Impact of Inflation
Unlike most industrial companies, the assets and liabilities
of financial institutions such as the Company and the Bank are primarily
monetary in nature. Therefore, interest rates have a more significant effect on
the Company's performance than do the effects of changes in the general rate of
inflation and change in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation. See
"Liquidity and Interest Rate Sensitivity" above.
Item 8. Financial Statements and Supplementary Data
In response to this Item, the information included on pages 1
through 22 of the Company's Annual Report to Stockholders for the year ended
December 31, 2007, is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
There have been no changes in or disagreements with accountants on accounting
or financial disclosure during the fiscal year covered by this report.
- 35 -
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures
Disclosure controls and procedures are designed and
maintained by the Company to ensure that information required to be disclosed in
the Company’s publicly filed reports is recorded, processed, summarized and
reported in a timely manner. Such information must be available to management,
including the Chief Executive Officer (CEO) and Treasurer, to allow them to make
timely decisions about required disclosures. Even a well-designed and maintained
control system can provide only reasonable, not absolute, assurance that its
objectives are achieved. Inherent limitations in any system of controls include
flawed judgment, errors, omissions, or intentional circumvention of controls.
The Company’s management, including the CEO and Treasurer,
performed an evaluation of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures as of December 31, 2007. Based on
that evaluation, the Company’s management, including the CEO and Treasurer, has
concluded that the Company’s disclosure controls and procedures are effective.
The projection of an evaluation of controls to future periods is subject to the
risk that procedures may become inadequate due to changes in conditions
including the degree of compliance with procedures.
Internal Control Over Financial Reporting
Management Report on Internal Control over Financial Reporting
Calvin B. Taylor Bankshares, Inc. maintains a system of
internal control over financial reporting, which is designed to provide
reasonable assurance to the Company’s management and board of directors
regarding the preparation of reliable published financial statements. The system
includes an organizational structure and division of responsibility, established
policies and procedures including a code of conduct to foster a strong ethical
climate, and the careful selection, training and development of our staff. The
system contains self-monitoring mechanisms, and an internal auditor monitors the
operation of the internal control system and reports findings and
recommendations to management and the board of directors. Corrective actions are
taken to address control deficiencies and other opportunities for improving the
system as they are identified. The board, operating through its audit committee,
which is composed entirely of directors who are not officers or employees of the
Company, provides oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any
system of internal controls, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even an effective internal
control system can provide only reasonable assurance with respect to financial
statement preparation. Furthermore, the effectiveness of an internal control
system may vary over time and with circumstances.
The Company assessed its internal control system as of
December 31, 2007 in relation to criteria for effective internal control over
financial reporting as described in
Internal Control – Integrated Framework
,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on its assessment, the Company believes that, as of December 31, 2007, its
system of internal control over financial reporting met those criteria.
Calvin B. Taylor Bankshares, Inc.
Registrant
Date:
March 12, 2008
By:
/s/ Raymond M. Thompson
Raymond M. Thompson, Director
President and Chief Executive Officer
Date:
March 11, 2008
By:
/s/Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer / Principal Financial Officer
- 36 -
Attestation Report of the Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Calvin B. Taylor Bankshares, Inc.
Berlin, Maryland
We have audited management’s assessment, included in the
accompanying Management Report on Internal Control Over Financial Reporting,
that Calvin B. Taylor Bankshares, Inc. and Subsidiary maintained effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in
Internal Control – Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Calvin B. Taylor
Bankshares, Inc. and Subsidiary maintained effective internal control over
financial reporting as of December 31, 2007, is fairly stated, in all material
respects, based on criteria established in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, Calvin B. Taylor Bankshares,
Inc. and Subsidiary maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria
established in
Internal Control – Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have audited, in accordance with the standards of the
Public Company Accounting Oversight Board in the United States of America, the
balance sheets and the related statements of income, changes in stockholders’
equity and cash flows of Calvin B. Taylor Bankshares, Inc. and Subsidiary, and
our report dated March 12, 2008, expressed an unqualified opinion.
/s/ Rowles & Company, LLP
Baltimore, Maryland
March 12, 2008
- 37 -
Changes in Internal Controls
During the quarter ended on the date of this report, there
were no significant changes in the Company’s internal controls over financial
reporting that have had or are reasonably likely to have a material affect on
the Company’s internal control over financial reporting. As of December 31,
2007, the Company’s management, including the CEO and Treasurer, has concluded
that the Company’s internal controls over financial reporting are effective.
Audit Committee and Financial Expert
The Board of Directors has adopted a written Audit Policy,
which serves as a charter for the Audit Committee. The Audit Committee is
comprised of seven independent directors, including Chairman James R. Bergey,
Jr. who serves as the financial expert. The Audit Committee is scheduled to meet
quarterly and held six meetings in 2007.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CALVIN B. TAYLOR BANKSHARES, INC.
(Registrant)
Date:
March 12, 2008
By:
/s/ Raymond M. Thompson
Raymond M. Thompson, Director
President and Chief Executive Officer
Date:
March 11, 2008
By:
/s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer / Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Date:
March 12, 2008
By:
/s/ James R. Bergey, Jr.
James R. Bergey, Jr., Director
Date:
March 12, 2008
By:
/s/ John H. Burbage, Jr.
John H. Burbage, Jr., Director
Date:
March 12, 2008
By:
/s/ Todd E. Burbage
Todd E. Burbage, Director
Date:
March 12, 2008
By:
/s/ Charlotte K. Cathell
Charlotte K. Cathell, Director
Date:
March 12, 2008
By:
/s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chairman of the Board of Directors
Date:
March 12, 2008
By:
/s/ Reese F. Cropper, III
Reese F. Cropper, III, Director
Date:
March 12, 2008
By:
/s/ Hale Harrison
Hale Harrison, Director
Date:
March 12, 2008
By:
/s/ Gerald T. Mason
Gerald T. Mason, Director
Date:
March 12, 2008
By:
/s/ William H. Mitchell
William H. Mitchell, Director
Vice President
Date:
March 12, 2008
By:
/s/ Joseph E. Moore
Joseph E. Moore, Director
Date:
March 12, 2008
By:
/s/ Michael L. Quillin, Sr.
Michael L. Quillin, Sr., Director
Date:
March 12, 2008
By:
/s/ Raymond M. Thompson
Raymond M. Thompson, Director
President and Chief Executive Officer
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