UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**Form 10-K**
Annual Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934For the fiscal year ended December 31, 2009Commission File No. 000-50047
Calvin B. Taylor Bankshares, Inc.(Exact name of registrant as specified in its Charter)

Maryland(State of incorporation or organization)

52-1948274(I.R.S. Employer Identification No.)

24 North Main Street, Berlin, Maryland 21811(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (410)641-1700
Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:Common Stock, par value $1.00 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, asdefined in Rule 405 of the Securities Act.  Yes ____ No [ X ]

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.  Yes ____ No [ X ]

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes [ X ] No ____

Indicate by check mark whether the registrant has submitted electronicallyand posted on its Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes ____ No ____ Notrequired [X]

Indicate by check mark if disclosure of delinquent filers in response to Item405 of Regulation S-K (§229.405 of this chapter) is not contained herein, andwill not be contained, to the best of the registrant's knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. [ X ]

Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of "large accelerated filer," "accelerated filer" and"smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____ Accelerated filer [ X ] 

Non- accelerated filer ____ (Do not check if a smallerreporting company) Smaller reporting company ____

Indicate by check mark whether the registrant is a shell company (as definedin Rule 12b-2 of the Act). Yes ____ No [ X ] 

 

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The aggregate market value of the Common Stock, all of which has votingrights, held by non-affiliates of the registrant on December 31, 2009, was$82,863,323. This calculation is based upon the last price known to theregistrant at which its Common Stock was sold as of the last business day of theregistrant’s most recently completed second fiscal quarter. As of June 30, 2009,the last known sale price was $33.25 per share. There is not an active tradingmarket for the Common Stock and it is not possible to identify precisely themarket value of the Common Stock. On February 28, 2010, 3,000,508 shares of theregistrant's common stock were issued and outstanding.
**DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement for Annual Meeting of Stockholders to be heldon May 12, 2010, is incorporated by reference in this Form 10-K in Part III,Item 10, Item 11, Item 12, Item 13, and Item 14.

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*This Report contains statements which constitute forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 and theSecurities Exchange Act of 1934. These statements appear in a number of placesin this Report and include all statements regarding the intent, belief orcurrent expectations of the Company, its directors, or its officers with respectto, among other things: (i) the Company's financing plans; (ii) trends affectingthe Company's financial condition or results of operations; (iii) the Company'sgrowth strategy and operating strategy; and (iv) the declaration and payment ofdividends. Investors are cautioned that any such forward-looking statements arenot guarantees of future performance and involve risks and uncertainties, andthat actual results may differ materially from those projected in theforward-looking statements as a result of various factors discussed herein andthose factors discussed in detail in the Company's filings with the Securitiesand Exchange Commission.***PART I

Item 1. Business

General   Calvin B. Taylor Bankshares, Inc. (Company) was incorporated as a Marylandcorporation on October 31, 1995. The Company owns all of the stock of Calvin B.Taylor Banking Company of Berlin, Maryland (Bank). The Bank, which commencedoperation in 1890, is a commercial bank incorporated under the laws of the Stateof Maryland on December 17, 1907, with a main office located in Berlin,Maryland. 
**Location and Service Area   The Company, through the Bank, is engaged in a general commercial and retailbanking business serving individuals, small- to medium-sized businesses,professional organizations, and governmental units. The Bank operates ninebranches located throughout Worcester County, Maryland and one branch located inSussex County, Delaware. The Bank draws most of its customer deposits andconducts most of its lending transactions within the communities in which thesebranches are located.    Much of the Bank’s service area is located along the shores of the AtlanticOcean and has grown as both a resort and a retirement community. The principalcomponents of the economy are tourism and agriculture. Berlin has a strongcomponent of health-care related businesses. The tourist businesses of OceanCity, Maryland and Bethany, Delaware and the health-care facilities in Berlin,Maryland (including Berlin Nursing Home and Atlantic General Hospital) are amongthe largest employers in the counties.
**Banking Products and Services   The Bank offers a full range of deposit services including checking, NOW,Money Market, and savings accounts, and time deposits including certificates ofdeposit. The transaction, savings, and certificate of deposit accounts aretailored to the Bank’s principal market areas at rates competitive to thoseoffered in the area. The Bank also offers Individual Retirement Accounts (IRA),Health Savings Accounts, and Education Savings Accounts. All deposits areinsured by the Federal Deposit Insurance Corporation (FDIC) up to the maximumamount allowed by law. The Bank solicits these accounts from individuals,businesses, associations and organizations, and governmental authorities. TheBank offers individual customers up to $50 million in FDIC insured depositsthrough the Certificate of Deposit Account Registry Services® (CDARS).   The Bank also offers a full range of short- to medium-term commercial andpersonal loans. Commercial loans include both secured and unsecured loans forworking capital (including inventory and receivables), business expansion(including acquisition of real estate and improvements), and purchase ofequipment and machinery. Consumer loans include secured and unsecured loans forfinancing automobiles, home improvements, education, and personal investments.The Bank originates commercial and residential mortgage loans and real estateconstruction and acquisition loans. These lending activities are subject to avariety of lending limits imposed by state and federal law. The Bank lends todirectors and officers of the Company and the Bank under terms comparable tothose offered to other borrowers entering into similar loan transactions. TheBoard of Directors approves all loans to officers and directors and reviewsthese loans every six months.   Other bank services include cash management services, 24-hour ATM’s, debitcards, safe deposit boxes, travelers’ checks, direct deposit of payroll andsocial security funds, and automatic drafts for various accounts. The Bankoffers bank-by-phone and Internet banking services, including electronicbill-payment, as well as electronic statement delivery to both commercial andretail customers. The Bank’s commercial customers can subscribe to a remotecapture service that enables them to electronically capture check images andmake on-line deposits. The Bank also offers non-deposit products includingretail repurchase agreements. 

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**Competition    The Company and the Bank face strong competition in all areas of operations.The competition comes from entities operating in Worcester County, Maryland andSussex County, Delaware and neighboring counties and includes branches of someof the largest banks in Maryland, Delaware, and Virginia. Its most directcompetition for deposits historically has come from other commercial banks,savings banks, savings and loan associations, and credit unions operating in itsservice areas. The Bank also competes for deposits with money market mutualfunds and corporate and government securities. The Bank competes for loans withthe same banking entities, as well as mortgage banking companies and otherinstitutional lenders. The competition for loans varies from time to timedepending on certain factors. These factors include, among others, the generalavailability of lendable funds and credit, general and local economicconditions, current interest rate levels, conditions in the mortgage market, andother factors which are not readily predictable.   The Bank employs traditional marketing media including local newspapers andradio, to attract new customers. Bank officers, directors, and employees areactive in numerous community organizations and participate in community-basedevents. These activities and referrals by satisfied customers result in newbusiness. 
**Employees   As of December 31, 2009, the Bank employed 88 full-time equivalentemployees. The Company's operations are conducted through the Bank.Consequently, the Company does not have separate employees. None of theemployees of the Bank are represented by any collective bargaining unit. TheBank considers its relations with its employees to be good.

 
**SUPERVISION AND REGULATION**
    The Company and the Bank are subject to state and federal banking laws andregulations which impose specific requirements or restrictions on, and providefor general regulatory oversight with respect to, virtually all aspects ofoperations. These laws and regulations are generally intended to protectdepositors, not stockholders. The following is a summary of certain statutes,rules, and regulations affecting the Company and the Bank. To the extent thatthe following summary describes statutory or regulatory provisions, it isqualified in its entirety by reference to the particular statutory andregulatory provisions.Proposed legislative changes and the policies of various regulatory authoritiesmay affect the operations of the Company and the Bank and those effects may bematerial. The Company is unable to predict the nature or the extent of theeffect on its business and earnings that fiscal or monetary policies, economiccontrols, or new federal or state legislation may have in the future.
**The CompanyBank Holding Company Act of 1956   The Company is a bank holding company within the meaning of the federal BankHolding Company Act of 1956 ( BHCA). Under the BHCA, the Company is subject toperiodic examination by the Federal Reserve and is required to file periodicreports of its operations and such additional information as the Federal Reservemay require. The Company's and the Bank’s activities are limited to banking,managing or controlling banks, furnishing services to or performing services forits Subsidiary, or engaging in any other activity that the Federal Reservedetermines to be so closely related to banking or managing and controlling banksas to be a proper incident thereto.*    Investments, Control, and Activities.* With certain limited exceptions,the BHCA requires a bank holding company to obtain the prior approval of theFederal Reserve before (i) acquiring substantially all the assets of any bank,(ii) acquiring direct or indirect ownership or control of any voting shares ofany bank if after such acquisition it would own or control more than 5% of thevoting shares of such bank (unless it already owns or controls the majority ofsuch shares), or (iii) merging or consolidating with another bank holdingcompany.   In addition, and subject to certain exceptions, the BHCA and the Change in BankControl Act, together with regulations thereunder, require Federal Reserveapproval (or, depending on the circumstances, no notice of disapproval) prior toany person or company acquiring "control" of a bank holding company, such as theCompany. Control is conclusively presumed to exist if an individual or companyacquires 25% or more of any class of voting securities of the bank holdingcompany. Because the Company's Common Stock is registered under the SecuritiesExchange Act of 1934, under Federal Reserve regulations, control will berebuttably presumed to exist if a person acquires at least 10% of theoutstanding shares of any class of voting securities of the Company. Theregulations provide a procedure for challenge of the rebuttable controlpresumption.   Under the BHCA, the Company is generally prohibited from engaging in, oracquiring direct or indirect control of more than 5% of the voting shares of anycompany engaged in non-banking activities, unless the Federal Reserve, by orderor regulation, has found those activities to be so closely related to banking ormanaging or controlling banks as to be a proper incident thereto. 

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*    Source of Strength; Cross-Guarantee.* Under Federal Reserve policy, theCompany is expected to act as a source of financial strength to the Bank and tocommit resources to support the Bank in circumstances in which the Company mightnot otherwise do so. The Federal Reserve may require a bank holding company toterminate an activity or relinquish control of a nonbank subsidiary if theFederal Reserve determines that such activity or control poses serious risk tothe financial soundness or stability of a subsidiary bank. Further, federal bankregulatory authorities have discretion to require a bank holding company todivest itself of any bank or nonbank subsidiary if the agency determines thatdivestiture may aid the depository institution's financial condition. The Bankmay be required to indemnify, or cross-guarantee, the FDIC against losses itincurs with respect to any other bank controlled by the Company, which in effectmakes the Company's equity investments in healthy bank subsidiaries available tothe FDIC to assist any failing or failed bank subsidiary of the Company.

Gramm-Leach-Bliley Act    In November 1999, the Gramm-Leach-Bliley Act was signed into law. Amongother things, the Act repeals the restriction, contained in the Glass-SteagallAct, on banks affiliating with securities firms. The Act permits bank holdingcompanies to engage in a statutorily provided list of financial activities,including insurance and securities underwriting and agency activities, merchantbanking, and insurance company portfolio investment activities. The Act alsoauthorizes activities that are "complementary" to financial activities. The Actis intended to grant certain powers to community banks that larger institutionshave accumulated on an ad hoc basis. While it is not possible to determine thefull effect that the Act has had on the Company and the Bank, one possibleconsequence of the Act may be increased competition from larger institutions andother types of companies. 

Securities Exchange Act of 1934    The Company’s common stock is registered with the Securities and ExchangeCommission (SEC) under Section 12(g) of the Securities Exchange Act of 1934 (theAct). The Company is, therefore, subject to periodic and ad hoc informationreporting, proxy solicitation rules, restrictions on insider trading, and otherrequirements of the Act. 

Sarbanes-Oxley Act    The Sarbanes-Oxley Act (SOX) of 2002 imposed additional disclosurerequirements in the Company’s reports filed with the SEC. SOX defines newstandards of independence for insiders, provides guidance for certain Boardcommittees including the composition of those committees, and establishescorporate governance requirements.
**The Bank*    General.* The Bank operates as a state nonmember banking associationincorporated under the laws of the State of Maryland. It is subject toexamination by the FDIC and the state department of banking regulation for eachstate in which it has a branch. The States and the FDIC regulate or monitor allareas of the Bank’s operations, including security devices and procedures,adequacy of capitalization and loss reserves, loans, investments, borrowings,deposits, mergers, issuances of securities, payment of dividends, interest ratespayable on deposits, interest rates or fees on loans, establishment or closureof branches, corporate reorganizations, maintenance of books and records, andadequacy of staff training to carry on safe lending and deposit gatheringpractices. The FDIC requires the Bank to maintain certain capital ratios andimposes limitations on the Bank’s aggregate investment in real estate, bankpremises, and furniture and fixtures. The Bank is required by the FDIC toprepare quarterly reports on the Bank’s financial condition.   Under provisions of the Federal Deposit Insurance Corporation Improvement Act of1991 (FDICIA), all insured institutions must undergo periodic on-siteexamination by the appropriate banking agency. The cost of examinations ofinsured depository institutions and any affiliates may be assessed by the agencyagainst each institution or affiliate, as it deems necessary or appropriate.Insured institutions are required to submit annual reports to the FDIC and theappropriate agency (and state supervisor when applicable). FDICIA also directsthe FDIC to develop with other appropriate agencies a method for insureddepository institutions to provide supplemental disclosure of the estimated fairmarket value of assets and liabilities, to the extent feasible and practicable,in any balance sheet, financial statement, report of condition, or other reportof any insured depository institution. FDICIA also requires the federal bankingregulatory agencies to prescribe, by regulation, standards for all insureddepository institutions and depository institution holding companies relating,among other things, to: (i) internal controls, information systems, and auditsystems; (ii) loan documentation; (iii) credit underwriting; (iv) interest raterisk exposure; and (v) asset quality.

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Transactions With Affiliates and Insiders    The Bank is subject to Section 23A of the Federal Reserve Act, which placeslimits on the amount of loans or extensions of credit to, or investment in, orcertain other transactions with, affiliates and on the amount of advances tothird parties collateralized by the securities or obligations of affiliates. Theaggregate of all covered transactions is limited in amount, as to any oneaffiliate, to 10% of the Bank’s capital and surplus and, as to all affiliatescombined, to 20% of the Bank’s capital and surplus. In addition, each coveredtransaction must meet specific collateral requirements. The Bank is also subjectto Section 23B of the Federal Reserve Act which, among other things, prohibitsan institution from engaging in certain transactions with certain affiliatesunless the transactions are on terms substantially the same, or at least asfavorable to such institution or its subsidiaries, as those prevailing at thetime for comparable transactions with nonaffiliated companies. The Bank issubject to certain restrictions on extensions of credit to executive officers,directors, certain principal stockholders, and their related interests. Suchextensions of credit (i) must be made on substantially the same terms, includinginterest rates and collateral, as those prevailing at the time for comparabletransactions with third parties, and (ii) must not involve more than the normalrisk of repayment or present other unfavorable features.

Community Reinvestment Act    The Community Reinvestment Act requires that the Bank shall be evaluated byits primary federal regulator with respect to its record in meeting the creditneeds of its local community, including low and moderate income neighborhoods,consistent with safe and sound operations. These factors are also considered inevaluating mergers, acquisitions, and applications to open a branch or facility.The Bank received a satisfactory rating in its most recent evaluation.

The Bank Secrecy Act and USA Patriot Act   The Bank Secrecy Act of 1970 (BSA) requires financial institutions to assistfederal agencies to detect and prevent money laundering by filing and/ormaintaining reports of large cash transactions or other suspicious transactionsinvolving cash. BSA is also referred to as anti-money laundering law as it isdesigned to detect money laundering, tax evasion, or other criminal activities.   In response to the terrorist attacks on September 11, 2001, Congress passed thePatriot Act. The Patriot Act requires that Banks prepare and retain additionalrecords designed to assist the government in an effort to combat terrorism. TheAct includes anti-money laundering and financial transparency provisions, andguidelines for verifying customer identification during account opening. The Actpromotes cooperation between law enforcement, financial institutions, andfinancial regulators in identifying persons involved in illegal acts such asmoney laundering and terrorism.

Other Regulations    Interest and certain other charges collected or contracted for by the Bankare subject to state and federal laws concerning interest rates. The Bank’s loanoperations are also subject to certain federal laws applicable to credittransactions, such as the federal Truth-In-Lending Act governing disclosures ofcredit terms to consumer borrowers, the Real Estate Settlement Procedures Actrequiring lenders to provide disclosures to consumers at various times during anapplicable transaction and which outlaws kickbacks that increase the cost ofsettlement services, the Home Mortgage Disclosure Act of 1975 requiringfinancial institutions in metropolitan statistical areas to provide informationto enable the public and public officials to determine whether a financialinstitution is fulfilling its obligation to help meet the housing needs of thecommunity it serves, the Equal Credit Opportunity Act prohibiting discriminationon the basis of race, creed, or other prohibited bases in extending credit, theFair Credit Reporting Act of 1978 governing the use and provision of informationto credit reporting agencies, the Fair Debt Collection Act governing the mannerin which consumer debts may be collected by collection agencies, and the rulesand regulations of the various federal agencies charged with the responsibilityof implementing such federal laws. The deposit operations of the Bank aresubject to the Truth in Savings Act which governs disclosures of rate and feeinformation to consumer deposit customers, the Right to Financial Privacy Actwhich imposes a duty to maintain confidentiality of customers’ financial recordsand prescribes procedures for complying with administrative subpoenas offinancial records, and the Electronic Fund Transfers Act as implemented by theFederal Reserve Board’s Regulation E which governs automatic deposits to andwithdrawals from deposit accounts and customers' rights and liabilities arisingfrom the use of automated teller machines and other electronic banking services.

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Deposit Insurance    The FDIC establishes rates for the payment of deposit insurance premiums byfederally insured banks and thrifts. The Deposit Insurance Fund (DIF) ismaintained for commercial banks and thrifts, with insurance premiums from theindustry used to offset losses from insurance payouts when banks and thriftsfail. Since 1993, insured depository institutions like the Bank have paid fordeposit insurance under a risk-based premium system. The Federal DepositInsurance Reform Act of 2005 creates a revised deposit insurance assessment ratestructure, effective January 1, 2007. Under this system, assessment rates arebased on Risk Categories as determined by a combination of CAMELS componentratings and financial ratios. In addition to the amount paid for depositinsurance, banks are assessed an additional amount to service the interest onthe bond obligations of the Financial Corporation (FICO). Any increase indeposit insurance premiums for the Bank will increase the Bank’s operatingexpenses, and there can be no assurance that such costs can be passed on to theBank’s customers.   During 2009, as a consequence of recent bank and thrift failures, the DIFfell below target levels. FDIC replenished the fund in mid-2009 by levying aspecial assessment on insured depository institutions. This special assessmentwas expensed in the second quarter of 2009. Late in 2009, additional DIFreplenishment was achieved by FDIC collecting prepaid insurance premiums frominsured depository institutions in an amount calculated to cover premiums for2010 through 2012. The prepaid amount was paid in December 2009 and will beexpensed in the future periods to which it applies.
**Dividends    The principal source of the Company's cash revenues comes from dividendsreceived from the Bank. The amount of dividends that may be paid by the Bank tothe Company depends on the Bank's earnings and capital position and is limitedby federal and state laws, regulations, and policies. The Federal Reserve hasstated that bank holding companies should refrain from or limit dividendincreases or reduce or eliminate dividends under circumstances in which the bankholding company fails to meet minimum capital requirements or in which earningsare impaired.   The Company's ability to pay any cash dividends to its stockholders in thefuture will depend primarily on the Bank's ability to pay dividends to theCompany. In order to pay dividends to the Company, the Bank must comply with therequirements of all applicable laws and regulations. Under Maryland law, theBank must pay a cash dividend only from the following, after providing for dueor accrued expenses, losses, interest, and taxes: (i) its undivided profits, or(ii) with the prior approval of the Department of Financial Regulation, itssurplus in excess of 100% of its required capital stock. Under FDICIA, the Bankmay not pay a dividend if, after paying the dividend, the Bank would beundercapitalized. See "Capital Regulations" below. See Item 5 for a discussionof dividends paid by the Company in the past three years.   In addition to the availability of funds from the Bank, the future dividendpolicy of the Company is subject to the discretion of the Board of Directors andwill depend upon a number of factors, including future earnings, financialcondition, cash needs, and general business conditions. The amount of dividendsthat might be declared in the future presently cannot be estimated and it cannotbe known whether such dividends would continue for future periods.
**Capital Regulations    The federal bank regulatory authorities have adopted risk-based capitalguidelines for banks and bank holding companies that are designed to makeregulatory capital requirements more sensitive to differences in risk profileamong banks and bank holding companies, account for off-balance sheet exposure,and minimize disincentives for holding liquid assets. The resulting capitalratios represent qualifying capital as a percentage of total risk-weightedassets and off-balance sheet items. The guidelines are minimums, and theregulators have noted that banks and bank holding companies contemplatingsignificant expansion programs should not allow expansion to diminish theircapital ratios and should maintain ratios well in excess of the minimums.   Current guidelines require bank holding companies and federally regulatedbanks to maintain a minimum ratio of total risk-based capital to risk-weightedassets equal to 8%, of which at least 4% must be Tier 1 capital. Tier 1 capitalincludes common stockholders' equity before the unrealized gains and losses onsecurities available for sale, qualifying perpetual preferred stock, andminority interests in equity accounts of consolidated subsidiaries, but excludesgoodwill and most other intangibles, and excludes the allowance for loan losses.Tier 2 capital includes the excess of any preferred stock not included in Tier 1capital, mandatory convertible securities, hybrid capital instruments,subordinated debt and intermediate term-preferred stock, and general reservesfor loan losses up to 1.25% of risk-weighted assets. Total capital is the sum ofTier 1 plus Tier 2 capital. The federal bank regulatory authorities have alsoimplemented a leverage ratio, which is Tier 1 capital as a percentage of averagetotal assets less intangibles, to be used as a supplement to the risk-basedguidelines. The principal objective of the leverage ratio is to place aconstraint on the maximum degree to which a bank holding company may leverageits equity capital base. The minimum required leverage ratio for top-ratedinstitutions is 4%, but most institutions are required to maintain an additionalcushion of at least 100 to 200 basis points.

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    FDICIA established a new capital-based regulatory scheme designed to promoteearly intervention for troubled banks and requires the FDIC to choose the leastexpensive resolution of bank failures. The new capital-based regulatoryframework contains five categories for compliance with regulatory capitalrequirements, including "well capitalized," "adequately capitalized,""undercapitalized," "significantly undercapitalized," and "criticallyundercapitalized." To qualify as a "well capitalized" institution, a bank musthave a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no lessthan 6%, and a total risk-based capital ratio of no less than 10%, and the bankmust not be under any order or directive from the appropriate regulatory agencyto meet and maintain a specific capital level. As of December 31, 2008, theCompany and the Bank were qualified as "well capitalized." For furtherdiscussions, see "Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operation - Capital."
**Recent Economic and Legislative Developments    Bank and thrift failures that began making news in late 2008, continuedthroughout 2009, and are expected to continue in 2010. Securitization ofsubprime, adjustable rate mortgage loans originated in the United States hasbeen cited as contributing to a global economic recession. Other contributoryfactors include a pool of investors willing to tolerate the risks attached tohigh yield mortgage backed securities, complex investment products that were notunderstood by investors or auditors/examiners, and inadequate oversight.Although neither the Company nor the Bank originated or invested in subprimeloans, the economic downturn has affected their ability to invest profitably andthe ability of some customers to repay their loans.   The Federal Reserve Open Market Committee reduced the federal funds rate from4.25% at the beginning of 2008 to a range of 0.00% to 0.25% at the end of 2008.This low rate remained through 2009. Other short-term investments haveexperienced similar declines. These rate reductions have not yet accomplishedtheir goal of stimulating borrowing and lending activity. The impact on theCompany is reduced interest revenues and yields on federal funds sold, debtsecurities, and certificates of deposit in other banks.   Late in 2008, the Troubled Asset Relief Program (TARP) empoweredU. S. Department of the Treasury topurchase or insure up to $700 billion of "troubled" mortgages and any securitiesbased on those mortgages. These purchases are subject to the Secretary ofTreasury’s determination that the action will promote financial marketstability. TARP gives Treasury the authority to purchase non-liquid,difficult-to-value assets from banks and other financial institutions. TARP isintended to improve the liquidity of these assets by purchasing them usingsecondary market mechanisms, thus allowing participating institutions tostabilize their balance sheets and avoid further losses.     Within weeks of the establishment of TARP, Treasury determined that direct assetpurchase might not be the most effective use of TARP funds, and announced thatsome of the funds would be used in the Capital Purchase Program (CaPP). UnderCaPP, up to $250 billion in preferred securities could be purchased from majorfinancial institutions on the assumption that stronger equity positions wouldbetter equip financial institutions to withstand the impact of troubled assetholdings and would encourage lending. Alternate means for deploying TARP fundsand monitoring effectiveness of their distribution are the subject of ongoingdebate by policy makers and analysts. The Company and the Bank did not seek thisassistance and did not benefit directly from TARP funds.    Late in 2008, to bolster public confidence in the financial system and reducepotential investor losses, deposit insurance levels were raised from $100,000 to$250,000 per depositor in accounts other than certain retirement accounts whichare already insured to $250,000. Additional insurance of all noninterest bearingtransaction account balances is available to depositors in participatingfinancial institutions. The Company and the Bank elected to participate in theTemporary Liquidity Guarantee Program (TLG), providing this additionalinsurance. These actions contributed to growth in deposit balances which beganin fourth quarter 2008 and continued through 2009, as investors seek the safetyof insured deposits in community banks. Deposit insurance premiums increase as aresult of higher deposit balances, higher insurance limits, participation inTLG, and higher insurance rates. Management does not expect to pass all of theadditional insurance premium costs on to customers.    In the most stable economic times, the Company cannot reliably predict theeffect of changing government policies on earnings, or loan and deposit levels.The impact on future results of operation of the Company and the Bank due toturbulent economic times are uncertain. Management expects 2010 to continue thepattern of lower net interest income and higher fees associated with loancollection established in 2009.
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** 

Item 1A. Risk Factors    The Company and the Bank are subject to various types of risk during thenormal conduct of business. There has been no material increase in any level ofrisk incurred by the Company or the Bank during the period covered by thisreport. Following are descriptions of the significant categories of risk mostrelevant to the Company.

Credit risk    Credit risk is the risk to the bank’s earnings or capital from the potentialof an obligor to fulfill its contractual commitment to the bank. Credit risk ismost closely associated with a bank’s lending. It encompasses the potential losson a particular loan as well as the potential for loss from a group of relatedloans, i.e., a credit concentration. Credit risk also extends to lesstraditional bank activities. It includes the credit behind the bank’s investmentportfolio.    A primary source of revenue for the Bank is lending, which is also the area ofgreatest credit risk. To ameliorate credit risk, the Board and management haveadopted conservative lending practices. Board approved policies provideunderwriting guidance. During the sustained economic downturn which continuedthrough 2009, the Company has suffered historically high levels of delinquenciesand loan losses. Management believes that delinquencies and loan losses wouldhave been greater if past lending practices had been less conservative.     Individual loan authorities are low with no individual officer having asecured loan authority over $200,000 or unsecured authority over $100,000. Oneresult of the low individual limits is that the Executive Committee or the fullBoard approves most mortgage loans and many commercial non-mortgages. The Bank’sproduct offerings are non-complex and no new loan products have been introducedthis year.   Credit risk attributable to concentrations include the coastal geography inwhich the Bank operates and the hospitality industry associated with the localresorts. There are no significant concentrations related to an individualborrowing relationship.

Interest-rate risk    Interest rate risk is the risk to earnings or capital from the potentialmovement in interest rates. It is the sensitivity of the bank’s future earningsto interest rate changes. Interest rate risk is generally measured on the basisof duration analysis or gap analysis. Duration analysis measures the degree ofrisk in a particular instrument or portfolio and gap analysis defines the timingwhen loss may occur. In a community bank, an adequate interest rate riskmeasurement can be fairly simplistic.     The Bank controls interest rate risk bykeeping both interest-bearing assets and liabilities short-term. As ofDecember 31, 2009, approximately 96.3% of the Bank’s loans are either variablerate or written on demand, and investment securities generally mature withinthree years. The longest term offered on a customer certificate of deposit is 24months. This strategy has carried the Bank through rate cycles successfully inthe past.

Liquidity Risk    Liquidity risk is the risk to earnings or capital from a bank’s inability tomeet its obligations when they come due without incurring unacceptable losses orcosts. An example would be: Depositors withdrawing their deposits when the bankdoes not have the liquid assets to fund the withdrawals while meetingloan-funding obligations.    The Company’s consolidated liquidity ratio was 42.6% in 2009, 40.0% in 2008, and42.0% in 2007. Based on these liquidity ratios and other available sources offunds, the Company anticipates that it will be able to fund loan demand and meetdeposit withdrawal requests through the reduction of overnight investment infederal funds sold, maturity of investment securities, and, if necessary,borrowing against lines of credit with correspondent banks.

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Market Risk: Moderate    Market risk is the risk to earnings or capital from changes in the value ofportfolios of financial instruments. For most banks market risk is the risk of adecline in market value of its securities portfolio. Because the value of banksecurities is driven primarily by interest rates, market risk and interest-raterisk frequently go hand in hand.   The Bank generally invests in short term investment securities of high quality.Market rates influence the fair market value of the portfolio and, therefore,the carrying value of securities classified as available for sale. The impact onthe Bank’s earnings relates to interest-rates and related risk. Management hasnot identified any investment securities as being other than temporarilyimpaired.   The regional, national, and international economic recession which deepenedthroughout 2008 appears to have bottomed in 2009. It has caused borrowershardships that effect their ability to repay loans, resulting in the Bankexperiencing upward moving delinquencies, higher than usual charge-offs,collateral repossessions, and mortgage foreclosures. Additionally, historicallylow market rates have reduced earnings on investments, including federal fundssold. Due to conservative investment practices, neither the Company nor the Bankhas experienced portfolio value declines of significance. The Company and Bankexpect the current adverse market conditions to continue to depress earnings forat least another year resulting in slower than usual growth in capital. TheCompany and the Bank have capital well in excess of the regulatory definition ofwell-capitalized which management expects to remain at that level.

Transaction Risk    Transaction risk is the risk to earnings or capital arising from problemswith service or product delivery. Transaction risk is the risk of a failure in abank’s operating processes. It is a risk of failure in a bank’s automation, itsemployee integrity, or its internal controls.    The Company and the Bank are subject to transaction risk. Management believesthat a sound system of internal controls along with management and auditoversight control this risk at an acceptable level. 

Compliance risk    Compliance risk is the risk to earnings or capital from noncompliance withlaws, rules, and regulations. Compliance risk is often the greatest risk a bankfaces. Compliance risk weighs heavily in every bank regardless of its size orproducts.   The Company and the Bank devote significant resources to meeting the challengeof complying with all applicable laws and regulations. Management employs aqualified compliance officer and uses supplementary legal or complianceresources as needed. Additionally, compliance is subject to examination byfederal and state bank regulators.

Reputation risk    Reputation risk is the risk to earnings or capital from negative publicopinion. Community and customer relations are critical to a bank’s success. Abank’s reputation is extremely important and anything that would impair thatreputation is a significant risk.   Management and the Board consider the Bank’s reputation to be one of its mostvaluable non-financial assets. The Bank has earned a reputation for providinggood customer service, exercising safe and sound banking practices, dealingfairly with customers, employees and vendors, and participating as a goodneighbor in the community. The maintenance of these qualities requires continuedcommitment and effort.

Strategic Risk    Strategic risk is the risk to earnings or capital arising from adversebusiness decisions or improper implementation of those decisions. A bank'sstrategic plan is the route it is going to follow based on management’sperception of the future. If the plan is wrong or improperly implemented, thebank is at risk.   The Company’s Strategic Plan is general in nature, emphasizing customer serviceand profitability as its mission and profitability as its primary objective. ThePlan mentions basic loan underwriting criteria as a foundation for assetquality. It includes sections on management succession and communityinvolvement. The Plan does not include specific measurable goals or timeframesfor goal achievement.

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** 

 

Item 1B. Unresolved Staff Comments**
    None.** 

Item 2. Properties**
    The Company has ten branch locations, all of which are owned by the Companyor the Bank. The Bank leases the land on which the East Berlin branch islocated. The locations are described as follows:
OfficeLocationSquare FootageMain Office, Berlin24 North Main Street,		Berlin, Maryland 2181124,229East Berlin Office10524 Old Ocean City		Boulevard, Berlin, Maryland 218111,50020th Street		Office100 20th Street,		Ocean City, Maryland 218423,100Ocean Pines Office11103 Cathell Road, Berlin,		Maryland 218112,420Mid-Ocean City Office9105 Coastal Highway, Ocean		City, Maryland 218421,984North Ocean City Office14200 Coastal Highway, Ocean		City, Maryland 218422,545West Ocean City Office9923 Golf Course Road, Ocean		City, Maryland 218422,496Pocomoke Office2140 Old Snow Hill Road,		Pocomoke, Maryland 218512,624Snow Hill Office108 West Market Street, Snow		Hill, Maryland 218633,773Ocean View, Delaware Office50 Atlantic Avenue, Ocean		View, Delaware 199704,900
    The Berlin office is the centralized location for the Company and the Bank.Executive offices, loan processing, proof, bookkeeping, and the computerdepartment are housed there. Most branches have a manager who also serves as aloan officer. All offices participate in normal day-to-day banking operations.The Company operates automated teller machines in all branches and at onenon-branch location in a local hospital.

 
**Item 3. Legal Proceedings**
(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.
** 

Item 4. Submission of Matters to a Vote of Security Holders**
    There were no matters submitted to a vote of the stockholders of the Companyduring the fourth quarter of the fiscal year covered by this report.

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** 

PART II****Item 5. Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities**
    The Company's Articles of Incorporation, as amended, authorize it to issue upto 10,000,000 shares of common stock.     As of February 28, 2010 there were approximately 1,012 stockholders of recordand 3,000,508 shares of Common Stock issued and outstanding. There is noestablished public trading market in the stock, and there is no likelihood thata trading market will develop in the near future. Transactions in the commonstock are infrequent and are frequently negotiated privately between the personsinvolved in those transactions.    All outstanding shares of common stock of the Company are entitled to shareequally in dividends from funds legally available, when, as, and if declared bythe Board of Directors. The Company paid or declared dividends of $.90 per sharein 2009, $2.15 per share in 2008, and $.80 per share in 2007. Included in 2008was a special cash dividend of $1.30 per share which is not expected to be anannual event.    The following table presents information about the Company’s repurchase of itsequity securities during the calendar quarter ended on the date of this Form10-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		             1,200 		$34.65  		             1,200 		292,483		  November		             1,345 		$33.07  		             1,345 		291,138		  December		             2,863 		$32.94  		             2,863 		288,275		Totals		             5,408 		$33.35  		             5,408  
    The Company publicly announced on August 14, 2003, that itwould repurchase up to 10% of its outstanding equity stock at that time, whichequated to a total of 324,000 common shares available for repurchase. As ofJanuary 1, 2005, and again on May 18, 2007, this plan was renewed by publicannouncement, making up to 10% of the Company’s outstanding equity stockavailable for repurchase at the time of each renewal. On January 13, 2010, aspart of its capital planning, the Board of Directors voted to suspend until June30, 2010, the stock buy-back program.    There is no expiration date for this program. No other stockrepurchase plan or program existed or exists simultaneously, nor has any otherplan or program expired during the period covered by this table. Common sharesrepurchased under this plan are retired. Through December 31, 2009, 239,492shares have been retired under this program.

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** 

Item 6. Selected Financial Data**
    The following table presents selected financial data for thefive years ended December 31, 2009. 
 		2009		2008		2007		2006		2005 		(Dollars in thousands, except for per share data)		At Year End     		Total assets		$393,528 		$372,603 		$369,146 		$369,512 		$391,054 		Total deposits		$312,648 		$292,459 		$288,944 		$290,325 		$310,858 		Total loans, net of unearned income and     		   allowance for loan losses		$240,062 		$241,431 		$238,076 		$233,231 		$206,421 		Total stockholders' equity		$72,278 		$72,283 		$74,476 		$71,381 		$67,530 		Common shares issued and outstanding		      3,000,508 		      3,048,397 		      3,102,510 		      3,149,356 		      3,187,556       		For the Year     		Average total assets		$386,038 		$366,900 		$372,006 		$377,211 		$399,345 		Average stockholders' equity		$71,898 		$73,726 		$72,569 		$69,268 		$69,138 		Net interest income		$15,360 		$15,978 		$17,032 		$16,963 		$15,912 		Net income		$5,110 		$6,059 		$7,297 		$7,400 		$6,798 		Cash dividend		$2,704 		$6,566 		$2,485 		$2,368 		$6,694       		Per share data     		Book value		$24.09 		$23.71 		$24.01 		$22.67 		$21.19 		Net income		$1.69 		$1.97 		$2.33 		$2.33 		$2.13 		Cash dividends declared		$0.90 		$2.15 		$0.80 		$0.75 		$2.10       		Other ratios     		Return on average assets		1.32%		1.65%		1.96%		1.96%		1.70%		Return on average equity		7.11%		8.22%		10.05%		10.68%		9.83%		Dividend payout ratio		53.25%		109.14%		34.33%		32.19%		98.59%		Average equity to average assets ratio		18.62%		20.09%		19.51%		18.36%		17.31%
 

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**Item 7. Management's Discussion and Analysis of Financial Condition andResults of Operation    The following discussion of the Company's financial condition andresults of operations should be read in conjunction with the Company's financialstatements and related notes and other statistical information included in thisreport.
**Critical Accounting Policies   The Company’s financial condition and results of operations are sensitive toaccounting measurements and estimates of inherently uncertain matters. Whenapplying accounting policies in areas that are subjective in nature, managementuses its best judgment to arrive at the carrying value of certain assets. One ofthe most critical accounting policies applied is related to the valuation of theloan portfolio.     The allowance for loan losses (ALLL) represents management’s best estimate ofinherent probable losses in the loan portfolio as of the balance sheet date. Itis one of the most difficult and subjective judgments. The adequacy of theallowance for loan losses is evaluated no less than quarterly. The determinationof the balance of the allowance for loan losses is based on management’sjudgments 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 bymanagement’s consideration of factors including an analysis of historicallosses, specific reserves for non-performing or past due loans, delinquencytrends, portfolio composition (including segment growth or shifting of balancesbetween segments, products and processes, and concentrations of credit, bothregional and by relationship), lending staff experience and changes, criticaldocumentation and policy exceptions, risk rating analysis, interest rates andthe competitive environment, economic conditions in the Bank’s service area, andresults of independent reviews, including audits and regulatory examinations.
**Overview    Consolidated income of the Company is derived primarily from operations ofthe Bank. Net income for 2009 was $5,109,609 compared to $6,059,217 for 2008,and $7,296,587 for 2007. The Company had a return on average equity of 7.11% andreturn on average assets of 1.32% for 2009, compared to returns on averageequity of 8.22% and 10.05%, and returns on average assets of 1.65% and 1.96%,for 2008 and 2007, respectively. 
**Results of Operations**   **The Company’s net income of $5,109,609, or $1.69 per share, for the year endedDecember 31, 2009, was a decrease of $949,608 (15.67%) from net income of$6,059,217, or $1.97 per share, for the year ended December 31, 2008.Contributing to this decrease was a $618,834 (3.87%) decrease in net interestincome, a $232,474 (37.65%) increase in the provision for loan losses, a $48,564(2.38%) decrease in noninterest revenue, and a $561,304 (7.06%) increase innoninterest expense, offset by a $511,568 (15.11%) reduction in income taxexpense. These factors are discussed further in the following pages.   The Company’s net income of $6,059,217, or $1.97 per share, for the year endedDecember 31, 2008, was a decrease of $1,237,370 (16.96%) from net income of7,296,587, or $2.33 per share, for the year ended December 31, 2007.Contributing to this decrease was a $1,053,933 (6.19%) decrease in net interestincome, a $617,526 increase in the provision for loan losses, a $390,177 (5.16%)increase in noninterest expense, offset by a $720,012 reduction in income taxexpense.   The Company’s net income of $1,108,094 or $.37 per share, for the quarterended December 31, 2009, was a modest increase of $20,155 (1.85%) from the netincome of $1,087,939 or $.36 per share, for the quarter ended December 31, 2008.A lower quarterly provision for loan loss, the primary reason for the decrease,resulted from management’s assessment of the quality of the loan portfolio atthe reporting date. See "Loan Quality and the Allowance for Loan Losses" foradditional related disclosure and discussion.   The Company’s net income of $1,087,939 or $.36 per share, for the quarter endedDecember 31, 2008, was a decrease of $563,477 (34.12%) from the net income of$1,651,416 or $.53 per share, for the quarter ended December 31, 2007. Anincreased provision for loan loss, the primary reason for the decrease, resultedfrom management’s assessment of the quality of the loan portfolio at thereporting date. See "Loan Quality and the Allowance for Loan Losses" foradditional related disclosure and discussion.

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** 

Net Interest Income**   **The primary source of income for the Company is net interest income, which isthe difference between revenue on interest-earning assets, such as investmentsecurities and loans, and interest expense incurred on interest-bearing sourcesof funds, such as deposits and borrowings. The level of net interest income isdetermined primarily by the average balances of interest-earning assets and theCompany’s funding sources, and the rate spreads between interest-earning assetsand funding sources. Changes in net interest income from period to period resultfrom increases or decreases in the volume of interest-earning assets andinterest-bearing liabilities, and increases or decreases in the average ratesearned and paid on such assets and liabilities. The volume of interest-earningassets and interest-bearing liabilities is affected by the ability to manage theearning-asset portfolio, which includes loans, and the availability ofparticular sources of funds, such as noninterest-bearing deposits.   The key performance measure for net interest income is the "net margin oninterest-earning assets," or net interest income divided by averageinterest-earning assets. The Company's net interest margin for 2009 on anon-GAAP tax-equivalent basis was 4.38%, compared to 4.77% and 5.07% for 2008and 2007, respectively. Because most of the Bank’s loans are written with ademand feature, the income of the Bank should not change dramatically asinterest rates change. Management of the Company expects to maintain the netmargin on interest-earning assets. The net margin may decline, however, ifcompetition increases, loan demand decreases, or the cost of funds rises fasterthan the return on loans and securities. Although such expectations are based onmanagement's judgment, actual results will depend on a number of factors thatcannot be predicted with certainty, and fulfillment of management's expectationscannot be assured.    The following tables present information including averagebalances of interest-earning assets and interest-bearing liabilities, the amountof related interest income and interest expense, and the resulting yields bycategory of interest-earning asset and interest-bearing liability. In thesetables, dividends and interest on tax-exempt securities and loans are reportedon a fully taxable equivalent basis, which is a non-GAAP measure as defined inSEC Regulation G and Item 10 of SEC Regulation S-K. Management believes thatthese measures provide better yield comparability as a tool for managing netinterest income.

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** **		Average Balances, Interest, and Yields		(Dollars stated in thousands)		For the Year Ended		For the Year Ended		For the Year Ended		December 31, 2009		December 31, 2008		December 31, 2007		Average  		Average  		Average  		Balance		Interest		Yield		Balance		Interest		Yield		Balance		Interest		Yield		Assets         		Federal funds sold		 $  33,355 		 $        67 		0.20%		 $  36,328 		 $      732 		2.02%		 $  37,826 		 $   1,919 		5.07%		Interest-bearing deposits		12,227		158		1.30%		9,659		325		3.37%		3,494		168		4.82%		Investment securities:         		  U. S. Treasury		56,949		1,498		2.63%		44,359		1,902		4.29%		55,061		2,636		4.79%		  U. S. Government Agency		9,926		199		2.00%		10,330		468		4.53%		6,568		310		4.73%		  State and municipal		2,541		72		2.83%		1,359		65		4.82%		2,397		95		3.97%		  Other		       1,934 		           92 		4.77%		       1,934 		         109 		5.64%		       1,927 		         101 		5.27%		   Total investment securities		     71,350 		      1,861 		2.61%		     57,982 		      2,544 		4.39%		     65,953 		      3,142 		4.77%		Loans:         		  Commercial		21,104		1,338		6.34%		24,272		1,628		6.71%		23,812		1,691		7.10%		  Mortgage		218,800		14,617		6.68%		212,104		14,917		7.03%		208,936		14,870		7.12%		  Consumer		       2,191 		         181 		8.24%		       2,497 		         206 		8.23%		       2,465 		         206 		8.37%		   Total loans		242,095		16,136		6.67%		238,873		16,751		7.01%		235,213		16,767		7.13%		Allowance for loan losses		          725   		          237   		          199   		   Total loans, net of allowance		   241,370 		    16,136 		6.69%		   238,636 		    16,751 		7.02%		   235,014 		    16,767 		7.13%		Total interest-earning assets		358,302		    18,222 		5.09%		342,605		    20,352 		5.94%		342,287		    21,996 		6.43%		Noninterest-bearing cash		13,634  		10,906  		16,179  		Premises and equipment		6,546  		6,391  		6,548  		Other assets		       7,556   		       6,998   		       6,992   		        Total assets		 $386,038   		 $366,900   		 $372,006   		Interest-bearing deposits         		  NOW 		 $  50,932 		         138 		0.27%		 $  48,624 		         201 		0.41%		 $  51,297 		         183 		0.36%		  Money market		34,946		189		0.54%		32,070		305		0.95%		33,590		317		0.94%		  Savings		44,648		221		0.50%		41,667		309		0.74%		44,137		327		0.74%		  Other time		     99,614 		      1,958 		1.97%		     90,596 		      3,149 		3.48%		     84,867 		      3,789 		4.46%		Total interest-bearing deposits		230,140		2,506		1.09%		212,957		3,964		1.86%		213,891		4,616		2.16%		Securities sold under agreements         		  to repurchase		6,527		32		0.50%		4,792		53		1.11%		4,248		29		0.69%		Borrowed funds		            60 		             4 		6.21%		            85 		             5 		6.14%		          109 		             7 		6.10%		Total interest-bearing liabilities		236,727		2,542		1.07%		217,834		4,022		1.85%		218,248		4,652		2.13%		Noninterest-bearing deposits		     76,666 		              -  		     74,262 		              -  		     79,807 		              -  		313,393		      2,542 		0.81%		292,096		      4,022 		1.38%		298,055		      4,652 		1.56%		Other liabilities		          747   		       1,078   		       1,382   		Stockholders' equity		     71,898   		     73,726   		     72,569   		        Total liabilities and         		        stockholders' equity		 $386,038   		 $366,900   		 $372,006   		Net interest spread  		4.01%  		4.09%  		4.30%		Net interest income 		 $ 15,680   		 $ 16,330   		 $ 17,344  		Net margin on interest-earning assets 		4.38%  		4.77%  		5.07%        		Tax equivalent adjustment included in:        		    Investment income 		 $      147   		 $      183   		 $      191  		    Loan income 		 $      173   		 $      169   		 $      121  
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		Average Balances, Interest, and Yields		(Dollars stated in thousands)		For the Year Ended		For the Year Ended		December 31, 2006		December 31, 2005		Average  		Average  		Balance		Interest		Yield		Balance		Interest		Yield		Assets      		Federal funds sold		 $  22,547 		 $   1,137 		5.04%		 $  34,233 		 $   1,078 		3.15%		Interest-bearing deposits		2,173		79		3.62%		2,175		56		2.55%		Investment securities:      		  U. S. Treasury		71,441		2,614		3.66%		105,456		2,881		2.73%		  U. S. Government Agency		13,378		398		2.98%		19,666		525		2.67%		  State and municipal		7,443		219		2.94%		16,618		388		2.33%		  Other		       1,900 		         102 		5.38%		       1,882 		           90 		4.79%		   Total investment securities		     94,162 		      3,333 		3.54%		   143,622 		      3,884 		2.70%		Loans:      		  Commercial		23,804		1,711		7.19%		19,134		1,322		6.91%		  Mortgage		200,588		14,020		6.99%		165,415		11,485		6.94%		  Consumer		       2,491 		         206 		8.28%		       2,083 		         178 		8.56%		   Total loans		226,883		15,937		7.02%		186,632		12,985		6.96%		Allowance for loan losses		          211   		          214   		   Total loans, net of allowance		   226,672 		    15,937 		7.03%		   186,418 		    12,985 		6.97%		Total interest-earning assets		345,554		    20,486 		5.93%		366,448		    18,003 		4.91%		Noninterest-bearing cash		17,694  		19,946  		Premises and equipment		6,605  		6,757  		Other assets		       7,358   		       6,194   		        Total assets		 $377,211   		 $399,345   		Interest-bearing deposits      		  Savings and NOW 		 $104,864 		         426 		0.41%		 $122,440 		         319 		0.26%		  Money market		41,810		335		0.80%		50,537		218		0.43%		  Other time		     68,359 		      2,414 		3.53%		     63,710 		      1,202 		1.89%		Total interest-bearing deposits		215,033		3,175		1.48%		236,687		1,739		0.73%		Securities sold under agreements      		  to repurchase		5,878		40		0.68%		6,325		22		0.35%		Borrowed funds		          145 		             8 		5.73%		          151 		             9 		6.17%		Total interest-bearing liabilities		221,056		3,223		1.46%		243,163		1,770		0.73%		Noninterest-bearing deposits		     84,380 		              -  		     85,526 		              -  		305,436		      3,223 		1.06%		328,689		      1,770 		0.54%		Other liabilities		       2,507   		       1,518   		Stockholders' equity		     69,268   		     69,138   		        Total liabilities and      		        stockholders' equity		 $377,211   		 $399,345   		Net interest spread  		4.47%  		4.18%		Net interest income 		 $ 17,263   		 $ 16,233  		Net margin on interest-earning assets 		5.00%  		4.43%     		Tax equivalent adjustment included in:     		    Investment income 		 $      231   		 $      294  		    Loan income 		 $        69   		 $        27  
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		Analysis of Changes in Net Interest Income		(Dollars stated in thousands)       		Year ended December 31,		Year ended December 31, 		2009 compared with 2008		2008 compared with 2007 		variance due to		variance due to 		Total		Rate		Volume		Total		Rate		Volume		Interest-earning assets      		  Federal funds sold		           (665)		           (605)		             (60)		        (1,187)		        (1,111)		             (76)		  Interest-bearing deposits		           (167)		           (254)		              87 		            157 		           (140)		            297 		  Investment securities:      		    U. S. Treasury		           (404)		           (944)		            540 		           (734)		           (222)		           (512)		    U. S. Government Agency		           (269)		           (251)		             (18)		            158 		             (20)		            178 		    State and municipals		                7 		             (50)		              57 		             (30)		              11 		             (41)		    Other		             (17)		             (17)		                 - 		                8 		                8 		                 - 		  Loans:      		    Commercial		           (290)		             (77)		           (213)		             (63)		             (96)		              33 		    Mortgage		           (300)		           (771)		            471 		              47 		           (178)		            225 		    Consumer		             (25)		                 - 		             (25)		                 - 		               (3)		                3 		        Total interest revenue		        (2,130)		        (2,969)		            839 		        (1,644)		        (1,751)		            107        		Interest-bearing liabilities      		  NOW		             (63)		             (73)		              10 		              18 		              28 		             (10)		  Money market		           (116)		           (143)		              27 		             (12)		                2 		             (14)		  Savings		             (88)		           (110)		              22 		             (18)		                 - 		             (18)		  Other time deposits		        (1,191)		        (1,504)		            313 		           (640)		           (896)		            256 		  Other borrowed funds		             (22)		             (39)		              17 		              22 		              19 		                3 		        Total interest expense		        (1,480)		        (1,869)		            389 		           (630)		           (847)		            217        		Net interest income		           (650)		        (1,100)		            450 		        (1,014)		           (904)		           (110)
    In the preceding table, the variance that is both rate and volume related isreported with the rate variance.
**Composition of Loan Portfolio    Because loans are expected to produce higher yields than investmentsecurities and other interest-earning assets (assuming that loan losses are notexcessive), the absolute volume of loans and the volume as a percentage of totalearning assets is an important determinant of net interest margin. Averageloans, net of the allowance for loan losses, were $241,370,000, $238,636,000,and $235,014,000, during 2009, 2008, and 2007, respectively, which constituted67.36%, 69.65%, and 68.66%, of average interest-earning assets for the periods.The Company’s ratio of net loans to deposits was 76.78%, 82.55%, and 82.40%, atDecember 31, 2009, 2008, and 2007, respectively. Average net loans to averagedeposits were 78.67%, 83.09%, and 80.02%, for 2009, 2008, and 2007. The decreasein the average loan to deposit ratio from 2008 to 2009 is attributable to 1.15%growth in the average loan portfolio relative to 6.82% growth in averagedeposits during 2009. The increase in the average loan to deposit ratio from2007 to 2008 is attributable to 1.54% growth in the average loan portfoliomeasure against a 2.21% reduction in average deposits during 2008. 

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    The Company extends loans primarily to customers located in and nearWorcester County, Maryland and Sussex County, Delaware. Although the portfoliois diversified, its performance may be influenced by regional economicconditions. The Company has a substantial portion of its loans in real estateand performance will be influenced by the real estate market in the region.Additionally, the coastal geography is subject to catastrophic storms. The localagricultural and fishing community is subject to adverse weather conditionsthroughout their productive seasons. There is no adverse weather condition atthe time of the valuation.     As of December 31, 2009, the Bank had approximately $39.8 million in securedand unsecured loans and unfunded lines to borrowers in the hospitality industry,including hotels, motels, and other rentals. Ocean City MD, the state’s onlyocean resort, is located in the Bank’s market area. During summer months, OceanCity becomes Maryland’s second largest city through a seasonal population growthaveraging 250,000. If tourism in the resort area falls off due to the currentrecession, this industry may encounter cash flow challenges. Management ismonitoring this situation.     Through 2006, the Bank experienced rapid growth in construction, landdevelopment and land loans as a result of a robust real estate market andfavorable competitive conditions. While this type of loan may generally beconsidered to be more risky than other real estate secured loans, the Bank didnot deviate from its conservative underwriting practices relative to thesetransactions. While increasing the outstanding balances in this type of credit,the Bank did not incur any more than its historically low level of risk. This isconsistent with the Company’s philosophy that safe and sound practice, coupledwith high earnings, are higher priorities than asset growth. The Bank has notengaged in risky lending practices such as subprime mortgages, highloan-to-value lending, teaser rate lending, or a high volume of loans oncondominiums.   From mid-2007 through 2009, general economic conditions have caused a widespreaddecline in real estate values and an increase in time to market many properties.The Bank’s conservative underwriting practices have somewhat insulated it fromthe adverse portfolio effects in the banking industry that are currentlyreceiving public attention. Further, management monitors fluctuations in thevalue of real estate held as collateral and, if deemed necessary, obtainsadditional collateral to limit the Bank’s loss exposure. As economic conditionscontinued to deteriorate through 2009, the adverse effects on many of the Bank’scustomers have become apparent in increased loan delinquencies. The Bankexperienced higher than usual loan losses and nonaccrual classifications ofloans during 2008 and 2009. Management believes that loan delinquency and lossesare trailing indicators of economic weakness. As of December 31, 2009, theeconomy has not strengthened significantly leading management to expectcontinued challenges to borrowers and, subsequently, delinquencies and losses tothe Bank.   The following table sets forth the composition of the Company's loan portfoliofor each of the five most recent year ends.
		Composition of the Loan Portfolio Stated in Dollars and Percentages		2009		2008		2007		2006		2005		     Real estate mortgages     		       Construction, land development,     		          and land		 $      21,952,873 		 $      30,330,261 		 $      38,230,033 		 $      37,331,256 		 $      23,430,345 		       Residential 1 to 4 family		         94,757,873 		         95,203,258 		         87,327,448 		         88,599,071 		         81,327,154 		       Second mortgages		           2,460,550 		           2,952,418 		           3,287,734 		           2,395,178 		           2,094,749 		       Commercial properties		       102,476,713 		         89,302,549 		         84,568,665 		         79,484,039 		         76,103,526 		     Commercial		         16,915,476 		         21,990,067 		         22,283,007 		         23,264,997 		         21,461,593 		     Consumer		           2,136,145 		           2,359,513 		           2,574,916 		           2,352,660 		           2,215,299 		           Total loans		240,699,630		242,138,066		238,271,803		233,427,201		206,632,666		     Less allowance for loan losses		              637,761 		              707,152 		              195,525 		              196,083 		              211,374 		           Loans, net		 $    240,061,869 		 $    241,430,914 		 $    238,076,278 		 $    233,231,118 		 $    206,421,292      		     Real estate mortgages     		       Construction, land development,     		          and land		9.12%		12.53%		16.04%		15.99%		11.34%		       Residential 1 to 4 family		39.37%		39.32%		36.66%		37.95%		39.36%		       Second mortgages		1.02%		1.22%		1.38%		1.03%		1.01%		       Commercial properties		42.57%		36.88%		35.49%		34.05%		36.83%		     Commercial		7.03%		9.08%		9.35%		9.97%		10.39%		     Consumer		0.89%		0.97%		1.08%		1.01%		1.07%		           Total loans		100.00%		100.00%		100.00%		100.00%		100.00%
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    The following table sets forth the maturity distribution, classifiedaccording to sensitivity to changes in interest rates, for selected componentsof the Company's loan portfolio as of December 31, 2009.
		Loan Maturity Schedule and Sensitivity to Changes in Interest Rates		December 31, 2009  		Over one   		One year		through		Over five  		or less		five years		years		Total		     Real estate mortgages    		       Construction, land development,    		          and land		 $      21,915,384 		 $             37,489 		 $                    -   		 $      21,952,873 		       Residential 1 to 4 family		         94,550,334 		                50,174 		              157,365 		         94,757,873 		       Second mortgages		           2,460,550 		                         - 		                         - 		           2,460,550 		       Commercial properties		       102,196,705 		                65,835 		              214,173 		       102,476,713 		     Commercial		         14,302,015 		           1,528,065 		           1,085,396 		         16,915,476 		     Consumer		           1,071,308 		              952,736 		              112,101 		           2,136,145  		 $    236,496,296 		 $        2,634,299 		 $        1,569,035 		 $    240,699,630      		     Fixed interest rate		 $        4,834,114 		 $        2,634,299 		 $        1,569,035 		 $        9,037,448 		     Variable interest rate (or demand)		       231,662,182 		                    -    		                    -    		       231,662,182 		           Total 		 $    236,496,296 		 $        2,634,299 		 $        1,569,035 		 $    240,699,630         
As of December 31, 2009, $231,662,182 or 96.25% of total loans were eithervariable rate loans or loans written on demand. 

    The Company has the following commitments, lines of credit, and letters ofcredit outstanding as of December 31, 2009, 2008, and 2007, respectively.
 		2009		2008		2007		       Construction and land development loans		 $   10,231,711 		 $   15,218,812 		 $   12,582,162 		       Other loan commitments		      19,038,506 		      22,245,089 		      20,941,323 		       Standby letters of credit		        1,907,736 		        1,921,878 		        1,582,050 		                Total		 $   31,177,953 		 $   39,385,779 		 $   35,105,535 
    Loan commitments are agreements to lend to customers as long as there is noviolation of any conditions to the contracts. Loan commitments generally haveinterest at current market rates, fixed expiration dates, and may require thepayment of a fee. Letters of credit are commitments issued to guarantee theperformance of a customer to a third party. Loan commitments and letters ofcredit 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 isrepresented 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 tobe adequate to absorb identified and inherent losses in the loan portfolio as ofthe balance sheet date. Valuation of the allowance is completed no less thanquarterly. The determination of the allowance is inherently subjective as itrelies on estimates of potential loss related to specific loans, the effects ofportfolio trends, and other internal and external factors.    The ALLL consists of (i) formula-based reserves comprised of potential losses inthe balance of the loan portfolio segmented into homogeneous pools, (ii)specific reserves comprised of potential losses on loans that management hasidentified as impaired, and (iii) unallocated reserves. Unallocated reserves arenot associated with a specific portfolio segment or a specific loan, but may beappropriate if properly supported and in accordance with GAAP. Managementanticipates having low levels of unallocated reserves in future years, asdiscussed in conjunction with the table titled Allocation of the Allowance forLoan losses, below.

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    The Company evaluates loan portfolio risk for the purpose of establishing anadequate allowance for loan losses. In determining an adequate level for theformula-based portion of the ALLL, management considers historical lossexperience for major types of loans. Homogenous categories of loans wereevaluated based on loss experience in the most recent five years, applied to thecurrent portfolio. This formulation gives weight to portfolio size and lossexperience 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 accuratepredictor of loss potential in the current loan portfolio.
    Management also evaluates trends in delinquencies, the composition of theportfolio, concentrations of credit, and changes in lending products, processes,or staffing. Management further considers external factors such as the interestrate environment, competition, current local and national economic trends, andthe results of recent independent reviews by auditors and banking regulators.The continuing protracted slow-down in the real-estate market has affected boththe price and time to market residential and commercial properties. Managementclosely monitors such trends and the potential effect on the Company. The impactof the current adverse economic conditions is reflected in historically highlosses and provisions for loan loss in 2008 and 2009.    Management has also adopted a risk rating system which gives weight tocollateral status (secured vs. unsecured), and to the absence or improperexecution of critical contract or collateral documents. Unsecured loans andthose loans with critical documentation exceptions, as defined by management,are considered to have greater loss exposure. Management incorporates thesefactors in the formula-based portion of the ALLL. Additionally, consideration isgiven to those segments of the loan portfolio which management deems to pose thegreatest likelihood of loss. In an economic downturn, such as the region hasexperienced from late 2007 through 2009, management believes there is increasedlikelihood of loss in unsecured loans - commercial and consumer, and in securedconsumer loans. Reserves for these segments of the portfolio are included in theformula-based portion of the ALLL.     As the real estate market continues to languish, management continuallyevaluates the adequacy of collateral on loans where it appears the borrower ishaving difficulty servicing their debt, taking additional available collateralif prudent. The Bank foreclosed on mortgages during 2009 and expects moreforeclosures in 2010. Foreclosure may result in loan losses, costs to hold realestate acquired in foreclosure, and losses on the sale of real estate acquiredin foreclosure. Management is unable to estimate the financial consequence offuture foreclosure activity.     In determining an adequate level for the specific reserve portion of theALLL, management reviews the current portfolio giving consideration to problemloans. The allowance may include reserves for specific loans identified asimpaired during management's loan review or the Company’s independent loanreview or internal audit functions. For significant problem loans, management'sreview consists of evaluation of the financial strengths of the borrowers andguarantors, the related collateral, and the effects of economic conditions.Management prepares a Watch List of troubled loans for review by the Board ofDirectors at their monthly meeting.     The provision for loan losses is a charge to earnings in the current periodto replenish the allowance and maintain it at a level management has determinedto be adequate. The allowance is increased by current period provisions and byrecoveries of amounts previously charged-off. The allowance is decreased whenloans are charged-off as losses, which occurs when they are deemed to beuncollectible. Adjustments are made to bring the balance in the allowance to thelevel established by application of management’s allowance methodology, and mayresult in an increase or decrease to expense. A provision for loan losses of$850,000 was recorded in 2009, and $617,526 was recorded in 2008. No provisionfor loan losses was made in 2007, 2006, or 2005.     Management considers the December 31, 2009 allowance appropriate and adequateto absorb identified and inherent losses in the loan portfolio. As of December31, 2009, management has identified one loan with balance of $447,214 which isanticipated to be charged-off within the next 12 months. The loan is still incollection, however, with substantial principal reduction anticipated.Management has provided for a loss of 50% of the outstanding balance in the ALLLas of year end. There can be no assurance that charge-offs in future periodswill not exceed the allowance for loan loss or that additional increases in theloan loss allowance will not be required.    The following is a schedule of transactions in the allowance for loan lossesfor each of the five most recent years ended December 31. The Bank experiencednet recoveries in 2005 and net charge-offs in the other four years presented.Management did not detect any meaningful trend in the year-to-year relationshipof net recoveries to net charge-offs from 2005 through 2007. Rather, these werenatural swings of activity in a loan portfolio that had historically experiencedminimal losses. The increased losses in 2008 and 2009 and the increased level ofthe ALLL as a percentage of the gross loan portfolio, reflect the impact on theBank’s borrowers, of local, regional, national and global economies troubled byjob losses, higher energy prices, lower real estate values, and prolongedrecessionary conditions. 

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		Allowance for Loan Losses		2009		2008		2007		2006		2005		Balance at beginning of year		 $        707,152 		 $        195,525 		 $        196,083 		 $        211,374 		 $        198,591 		Loans charged-off:     		  Real estate - construction and land		             75,000 		                       - 		                       - 		                       - 		                       - 		  Real estate - mortgage		           656,191 		                       - 		                       - 		                       - 		                       - 		  Commercial		           200,357 		             76,383 		                       - 		               5,357 		                       - 		  Consumer		             47,321 		             34,532 		               6,263 		             10,029 		               8,131 		        Total loan losses		           110,915 		               6,263 		             15,386 		               8,131 		Recoveries on loans previously charged off:     		  Real estate - construction and land		                       - 		                       - 		                       - 		                       - 		                       - 		  Real estate - mortgage		                  669 		                       - 		                       - 		                       - 		             15,263 		  Commercial		             40,364 		               3,785 		                       - 		                       - 		                       - 		  Consumer		             18,445 		               1,231 		               5,705 		                    95 		               5,651 		        Total loan recoveries		             59,478 		               5,016 		               5,705 		                    95 		             20,914      		Net loan charge-offs (recoveries)		           919,391 		           105,899 		                  558 		             15,291 		            (12,783)		Provision for loan losses charged to expense		           850,000 		           617,526 		                       - 		                       - 		                       - 		Balance at end of year		 $        637,761 		 $        707,152 		 $        195,525 		 $        196,083 		 $        211,374      		Gross loans outstanding at year end		 $ 240,699,630 		 $ 242,138,066 		 $ 238,271,803 		 $ 233,427,201 		 $ 206,632,666 		Allowance for loan losses to loans     		  outstanding at end of year		0.26%		0.29%		0.08%		0.08%		0.10%     		Average gross loans		 $ 242,095,000 		 $ 238,873,000 		 $ 235,213,000 		 $ 226,883,000 		 $ 186,632,000 		Net charge-offs to average gross loans		0.38%		0.04%		0.00%		0.01%		-0.01%
    The following table details the allocation of the allowance for loan lossesto major categories of loans and the percentage of loans in each categoryrelative to total loans at the five most recent year-ends. The loan portfolio isdivided into homogeneous categories of loans for the purpose of calculatingformula-based reserves. The categories of real estate – construction and realestate – mortgage loans share similar risks of potential collateraldeterioration or devaluation. However, these loans tend to be more adequatelysecured than those commercial and consumer loans that are not real estatesecured. Prior to 2009, the Bank had not incurred a mortgage loan loss since1997, and therefore no reserves were allocated to the real estate – constructionor real estate – mortgage portions of the loan portfolio in determining the ALLLfor 2007, 2006, or 2005. In 2008, reserves of $475,098 were provided related toimpaired real estate loans. Non-real estate secured loans, commercial andconsumer, generally pose a greater risk of loss due to erosion of the borrower’sability to repay the loan in a timely manner. Collateral on these loans isgenerally, although not always, less reliable than real estate as a source ofrecovery if default occurs. The Bank’s loan losses in the 2008, 2007, 2006, and2005 were consumer and commercial loans which were unsecured or secured withcollateral other than real estate. In 2009, $731,191 or 74.70% of total loanlosses, were real estate secured. Management attributes this historically highlevel of loss to the current economic downturn and an accompanying erosion ofreal estate values.

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		Allocation of Allowance for Loan Losses        		December 31, 2009 		December 31, 2008 		December 31, 2007  		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Real estate - construction and land         		Formula-based		 $        15,400   		 $                -     		 $                -     		Specific reserves		           35,262   		         370,000   		                   -     		Total real estate -         		   construction and land		           50,662 		 9.12 		%		         370,000 		12.53 		%		                   -   		16.85 		%		Real estate - mortgage         		Formula-based		 $      134,600   		                125   		                   -     		Specific reserves		                   -     		         104,973   		                   -     		Total real estate - mortgage		         134,600 		82.96 		%		         105,098 		77.42 		%		                   -   		73.52 		%		Commercial         		Formula-based		         156,554   		           73,694   		           34,952   		Specific reserves		         223,607   		         128,521   		         109,200   		Total commercial		         380,161 		 7.03 		%		         202,215 		 9.08 		%		         144,152 		 8.55 		%		Consumer         		Formula-based		           53,638   		           27,929   		           21,636   		Specific reserves		                   -     		             1,910   		           29,314   		Total consumer		           53,638 		 0.89 		%		           29,839 		 0.97 		%		           50,950 		 1.08 		%		Subtotal		         619,061 		100.00 		%		         707,152 		100.00 		%		         195,102 		100.00 		%		Unallocated		           18,700   		                   -     		                423   		Total		 $      637,761   		 $      707,152   		 $      195,525   
 		December 31, 2006 		December 31, 2005  		Amount		% of Loans		Amount		% of Loans		Real estate - construction and land      		Total real estate -       		   construction and land		 $                -   		15.99 		%		 $                -   		11.34 		%		Real estate - mortgage      		Total real estate - mortgage		                   -   		73.03 		%		                   -   		77.20  				%		Commercial      		Formula-based		           10,556   		             9,738   		Specific reserves		                   -     		                   -     		Total commercial		           10,556 		 9.97 		%		             9,738 		10.39 		%		Consumer      		Formula-based		           24,347   		           22,926   		Specific reserves		                   -     		                   -     		Total consumer		           24,347 		 1.01 		%		           22,926 		 1.07 		%		Subtotal		           34,903 		100.00 		%		           32,664 		100.00 		%		Unallocated		         161,180   		         178,710   		Total		 $      196,083   		 $      211,374   
    Unallocated reserves are not associated with a specific portfolio segment ora specific loan, but may be appropriate if properly supported and in accordancewith GAAP. Because no portion of the ALLL is calculated on a total loanportfolio basis, management anticipates having low levels of unallocatedreserves in future periods. The unallocated portion in the preceding tableappears higher in years prior to 2007, the year in which management adopted arevised methodology. Management believes that the ALLL reflected in this tablefor years prior to 2007 does not materially differ from the balance that wouldhave been calculated at each of those year-ends had current methodology beenapplied then.

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    The accrual of interest on a loan is discontinued when principal or interestis ninety days past due or when the loan is determined to be impaired, unlesscollateral is sufficient to discharge the debt in full and the loan is inprocess of collection. When a loan is placed in nonaccruing status, any interestpreviously accrued but unpaid, is reversed from interest income. Interestpayments received on nonaccrual loans may be recorded as cash basis income, oras a reduction of principal, depending on management’s judgment on a loan byloan basis. Accrual of interest may be restored when all principal and interestare current and management believes that future payments will be received inaccordance with the loan agreement.    Nonperforming loans are loans past due 90 or more days and still accruingplus nonaccrual loans. Nonperforming assets are comprised of nonperforming loanscombined with other real estate owned, which is real estate acquired inforeclosure and held for sale. The composition of nonperforming assets ispresented in following table.
		2009		2008		2007		2006		2005		Loans 90 days or more past due and still accruing		 $      787,580 		 $   4,647,792 		 $        9,100 		 $    239,620 		 $    131,717 		Nonaccruing loans		      1,023,083 		         199,724 		         40,916 		                -   		                -   		        Total nonperforming loans		      1,810,663 		      4,847,516 		         50,016 		       239,620 		       131,717 		Other real estate owned		      1,433,000 		                  -   		                -   		                -   		                -   		        Total nonperforming assets		 $   3,243,663 		 $   4,847,516 		 $      50,016 		 $    239,620 		 $    131,717  		Interest not accrued on nonaccruing loans		 $        46,467 		 $          6,797 		 $        1,509 		 $             -   		 $             -   		Interest included in net income on     		        nonaccruing loans 		 $        30,492 		 $        12,275 		 $        2,746 		 $             -   		 $             -   
    Included in amounts past due 90 days or more and still accruing at December31, 2008, was a loan with a principal balance of $4,500,000. As of December 31,2009, this loan was 53 days past due and still accruing as the Bank continuedcollection efforts. Late in 2008, the Bank was notified that there is a lien onthe property securing this loan that is superior to the Bank’s liens. The Bankwas not aware of the lien at the time the loan was originated, and the Bank’ssettlement agent did not discover the lien during the title examination process.The Bank has filed a claim with the title company that insured its title andlien priority. The Bank believes the title company will indemnify the Bank forany loss resulting from the superior lien, although there is no guarantee thatthis will be the case. Management reviews the accrual status of this loanquarterly. As of December 31, 2009, there is $33,438 of accrued interest on thisloan that was included in interest income in 2009.    Loans are considered impaired when, based on current information, managementconsiders it unlikely that collection of principal and interest payments will bemade according to contractual terms. Generally, loans are not reviewed forimpairment until the accrual of interest has been discontinued, althoughmanagement may categorize a performing loan as impaired based on knowledge ofthe borrower’s financial condition, devaluation of collateral, or othercircumstances that are deemed relevant to loan collection. Impaired loans mayhave specific reserves, or valuation allowances, allocated to them in the ALLL.Estimates of loss reserves on impaired loans are determined based one of twomeasurement methods: (1) the loan’s observable fair price, or (2) the fair valueof collateral, if repayment of the loan is expected to be provided by underlyingcollateral. Loans determined to be impaired, but for which no specific valuationallowance is made because management believes the loan is secured with adequatecollateral or the Bank will not take a loss on such loan, are grouped with otherhomogeneous loans for evaluation under formula-based criteria describedpreviously.    The following table sets forth principal balances of impaired loans and therelated valuation allowances as of December 31, 2009, 2008, and 2007. Managementhad identified no impaired loans as of December 31, 2006, or 2005.
 		2009		2008		2007		Impaired loans with valuation allowances,    		including nonaccruing loans		 $      799,834 		 $   4,328,618 		 $      595,774 		Valuation allowances on impaired loans		 $      258,869 		 $      605,405 		 $      138,514     		Impaired loans with no valuation allowances		 $   2,102,025 		 $   4,559,582 		 $                -   
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** 

Liquidity and Interest Rate Sensitivity    The primary objective of asset/liability management is to ensure the steadygrowth of the Company's primary source of earnings, net interest income. Netinterest income can fluctuate with significant interest rate movements. Tolessen the impact of these margin swings, the balance sheet should be structuredso that repricing opportunities exist for both assets and liabilities in roughlyequivalent amounts at approximately the same time intervals. Imbalances in theserepricing opportunities at any point in time constitute interest ratesensitivity.    Liquidity represents the ability to provide steady sources of funds for loancommitments and investment activities, as well as to provide sufficient funds tocover deposit withdrawals and payment of debt and operating obligations. Thesefunds can be obtained by converting assets to cash or by attracting newdeposits. Average liquid assets (cash and amounts due from banks,interest-bearing deposits in other banks, federal funds sold, and investmentsecurities) were 42.56% of average deposits for 2009, compared to 40.00% and42.03% for 2008 and 2007, respectively.     Average net loans to average deposits were 78.67%, 83.09%, and 80.02%% for2009, 2008, and 2007. The decrease in the loan to deposit ratio from 2008 to2009 is attributable to $2,734,000 (1.35%) growth in the average loan portfoliooffset by $20,123,000 (7.02%) growth in average deposits during 2009. Theincrease in the loan to deposit ratio from 2007 to 2008 is attributable to 1.54%growth in the average loan portfolio accompanied by a 2.21% reduction in averagedeposits during 2008. Funding for loan growth in 2009 was provided by increaseddeposit balances. This shift has a positive effect on earnings. The increase inloans does not negatively impact the Company’s ability to meet liquiditydemands.    As of December 31, 2009, $31,178,540 (39.90%) of total debt securities maturein one year or less, of which, $15,136,254 is classified as"available-for-sale." Federal funds sold provide additional liquidity. Othersources of liquidity include letters of credit, overnight federal funds, andreverse repurchase agreements available from correspondent banks. The totallines and letters of credit available from correspondent banks were $28,000,000as of December 31, 2009, $27,000,000 as of December 31, 2008, and $21,000,000 asof December 31, 2007.    The following table shows a distribution of investment securities by theircontractual maturities and their yields for the various maturity timeframes. Inthis schedule, investment securities classified as available for sale arepresented at fair value and investments classified as held to maturity arepresented at amortized cost.
		Investment Securities Maturity Distribution and Yields		December 31, 2009		December 31, 2008		December 31, 2007		Amount		  Yield		Amount		  Yield		Amount		  Yield		U. S. Treasury      		  One year or less		 $   27,022,810 		2.02%		 $   28,997,415 		3.03%		 $   32,430,184 		4.51%		  Over one through five years		      35,034,605 		1.66%		      22,278,930 		3.30%		      19,979,251 		4.60%		  Over ten years		        2,589,375 		7.28%		        2,961,875 		7.28%		        2,567,812 		7.28%		Total U.S. Treasury securities		      64,646,790 		2.04%		      54,238,220 		3.37%		      54,977,247 		4.67%      		U.S. Government Agencies      		  One year or less 		        3,000,000 		1.10%		        1,000,000 		3.00%		                       - 		0.00%		  Over one through five years		        7,000,000 		2.04%		        5,999,443 		3.13%		      10,000,000 		5.07%		Total U. S. Government Agencies		      10,000,000  				1.76%		        6,999,443 		3.11%		      10,000,000  				5.07%      		State, county, and municipal      		  One year or less		        1,155,730 		1.27%		           970,355 		2.71%		           960,132 		2.76%		  Over one through five years		        2,343,944 		1.50%		           537,026 		3.34%		           647,294 		3.68%		Total state, county, and municipal		        3,499,674 		1.42%		        1,507,381 		2.93%		        1,607,426 		3.13%      		Total debt securities      		  One year or less		      31,178,540 		1.91%		      30,967,770 		3.02%		      33,390,316 		4.46%		  Over one through five years		      44,378,549 		1.71%		      28,815,399 		3.27%		      30,626,545 		4.73%		  Over ten years		        2,589,375 		7.28%		        2,961,875 		7.28%		        2,567,812 		7.28%		Total debt securities		      78,146,464  				1.97%		      62,745,044  				3.33%		      66,584,673  				4.69%      		Equity securities		        3,219,056 		3.28%		        3,852,024 		3.87%		        4,177,279 		3.64%      		Total securities		 $   81,365,520 		2.03%		 $   66,597,068 		3.36%		 $   70,761,952 		4.63%
 

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    Interest rate sensitivity refers to the responsiveness of interest-bearingassets and liabilities to changes in market interest rates. The rate-sensitiveposition, or gap, is the difference in the volume of rate-sensitive assets andliabilities at a given time interval. The general objective of gap management isto actively manage rate-sensitive assets and liabilities to reduce the impact ofinterest rate fluctuations on the net interest margin. Management generallyattempts to maintain a balance between rate-sensitive assets and liabilities asthe exposure period is lengthened to minimize the overall interest rate risk tothe Company.    Interest rate sensitivity may be controlled on either side of the balancesheet. 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 themost flexible and fastest control over rate sensitivity since it can generallybe restructured more quickly than the loan portfolio.    On the liability side, deposit products are structured to offer incentives toattain the maturity distribution desired. Competitive factors sometimes makecontrol over deposits more difficult and, therefore, less effective as aninterest rate sensitivity management tool.    The asset mix of the balance sheet is continually evaluated in terms ofseveral variables: yield, credit quality, appropriate funding sources, andliquidity. Management of the liability mix of the balance sheet focuses onexpanding the various funding sources.    As of December 31, 2009, the Company was cumulatively asset-sensitive for alltime horizons. For asset-sensitive institutions, if interest rates shoulddecrease, the net interest margins should decline. Since all interest rates andyields do not adjust at the same velocity, the gap is only a general indicatorof rate sensitivity.
		Interest Sensitivity Analysis     		December 31, 2009 		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 		 $      28,222,472 		  $                -    		  $                -    		  $                -    		 $      28,222,472 		  Interest-bearing deposits		           7,245,110 		           4,998,893 		              250,000 		                    -    		         12,494,003 		  Investment debt securities 		         10,189,831 		         20,988,709 		         44,378,549 		           2,589,375 		         78,146,464 		  Loans		       235,500,380 		              995,916 		           2,634,299 		           1,569,035 		       240,699,630 		Total earning assets		 $    281,157,793 		 $      26,983,518 		 $      47,262,848 		 $        4,158,410 		 $    359,562,569      		Liabilities     		Interest-bearing deposits     		   NOW 		 $      58,328,093 		  $                -    		  $                -    		  $                -    		 $      58,328,093 		   Money market 		         36,559,471 		                     -    		                    -    		                     -    		         36,559,471 		   Savings		         46,958,194 		                     -    		                    -    		                     -    		         46,958,194 		   Certificates $100,000 and over		         19,226,094 		         16,833,347 		           5,798,721 		                     - 		         41,858,162 		   Certificates under $100,000		         22,536,040 		         25,435,127 		           8,540,801 		                     - 		         56,511,968 		Securities sold under agreements     		   to repurchase		           7,048,176 		                     -    		                    -    		                     -    		           7,048,176 		Note payable		                  6,624 		                20,478 		                21,417 		                     -    		                48,519 		Total interest-bearing liabilities		 $    190,662,692 		 $      42,288,952 		 $      14,360,939 		 $                      - 		 $    247,312,583      		Period gap		 $      90,495,101 		 $    (15,305,434)		 $      32,901,909 		 $        4,158,410 		 $    112,249,986 		Cumulative gap		 $      90,495,101 		 $      75,189,667 		 $    108,091,576 		 $    112,249,986 		   		Ratio of cumulative gap to     		   total earning assets		25.17%		20.91%		30.06%		31.22% 
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**Deposits and Other Interest-Bearing Liabilities   Average interest-bearing liabilities increased $18,893,000 (8.67%) to$236,727,000 in 2009, from $217,834,000 in 2008. Average interest-bearingdeposits increased $17,183,000 (8.07%) to $230,140,000 in 2009 from $212,957,000in 2008, while average noninterest-bearing demand deposits increased $2,404,000(3.24%) to $76,666,000 in 2009 from $74,262,000 in 2008. At December 31, 2009,total deposits were $312,647,619, compared to $292,459,213 at December 31, 2008,an increase of $20,188,406 (6.90%). Throughout 2009, deposit levels haveexceeded those of the previous two years during comparable periods. Managementattributes this deposit influx to a flight of investors from the troubled stockmarket to the safety of insured bank deposits, similar to the events of late2001 through 2004. Higher levels of deposit insurance and the reputation of theCompany and the Bank for safe and sound operation are key factors in the depositincreases during 2009.   Average interest-bearing liabilities decreased $414,000 (0.19%) from$218,248,000 in 2007, to $217,834,000 in 2008. Average interest-bearing depositsdecreased $934,000 (0.44%) from $213,891,000 in 2007 to $212,957,000 in 2008,while average noninterest-bearing demand deposits decreased $5,545,000 (6.95%)from $79,807,000 in 2007 to $74,262,000 in 2008. At December 31, 2008, totaldeposits were $292,459,213, compared to $288,943,547 at December 31, 2007, anincrease of 1.22%. While annual average deposits were lower in 2008 than in2007, the Bank experienced an increase in deposits during the last quarter ofthe year. Based in a summer resort area, it is atypical for the Bank’s depositsto increase in the fourth quarter of the year. Management attributes the depositinflux to a flight of investors from the troubled stock market to the safety ofinsured bank deposits. 

   The following table sets forth the deposits of the Company by category as ofDecember 31, 2009, 2008, and 2007, respectively.
		December 31,		2009		2008		2007  		Percent of 		Percent of 		Percent of		Amount		deposits		Amount		deposits		Amount		deposits      		Non-interest bearing		 $       72,431,731 		23.16%		 $       70,652,032 		24.15%		 $       73,357,578 		25.38%		NOW		          58,328,093 		18.66%		          48,043,193 		16.43%		          51,218,087 		17.73%		Money market		          36,559,471 		11.69%		          32,039,678 		10.96%		          31,719,473 		10.98%		Savings		          46,958,194 		15.02%		          43,064,214 		14.72%		          41,698,409 		14.43%		Time deposits less than $100,000		          56,511,968 		18.08%		          61,284,880 		20.96%		          55,089,053 		19.07%		     Core deposits		        270,789,457  		        255,083,997  		        253,082,600  		Time deposits of $100,000 or more		          41,858,162 		13.39%		          37,375,216 		12.78%		          35,860,947 		12.41%		     Total deposits		 $     312,647,619 		100.00%		 $     292,459,213 		100.00%		 $     288,943,547 		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 andother earning assets. The Company's core deposits increased $15,705,460 during2009 and $2,001,397 during 2008. Deposits, and particularly core deposits, havebeen the Company's primary source of funding and have enabled the Company tomeet both its short-term and long-term liquidity needs. Management anticipatesthat while such deposits will continue to be the Company's primary source offunding in the future, continued reductions in deposit levels, if coupled withgrowth in the Company’s loan portfolio, could require periodic borrowing offunds. In this event, it is likely that Management would liquidate investmentsecurities from the available for sale portfolio or purchase overnight federalfunds as needed.

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    The maturity distribution of the Company's time deposits of $100,000 or moreat December 31, 2009, is shown in the following table.
After sixAfter threethroughAfterWithin threethroughtwelvetwelvemonthssix monthsmonthsmonthsTotalTime deposits of		$100,000 or more$		19,226,094$		7,212,434$		9,620,913 $		5,798,721 $		41,858,162 
    Large certificate of deposit customers tend to be extremely sensitive tointerest rate levels, making these deposits less reliable sources of funding forliquidity planning purposes than core deposits. Some financial institutionspartially fund their balance sheets using large certificates of deposit obtainedthrough brokers. These brokered deposits are generally expensive and areunreliable as long-term funding sources. Accordingly, the Company does notaccept brokered deposits under these conditions. Since 2007, the Bank has been amember of the Certificate of Deposit Account Registry Service (CDARS). Thisservice allows the Bank to offer depositors up to $50 million in FDIC insurancethrough a network of member banks. While CDARS deposits are considered to bebrokered deposits for regulatory reporting, they are not considered volatile asthey typically remain in the program until maturity. At December 31, 2009, therewere no time deposits issued to customers of other CDARS member banks under thereciprocal program.

 
**Noninterest revenue    Noninterest revenue for 2009 decreased $48,564 (2.38%)from the previous year. Service charges on deposit accounts decreased by$105,730 (9.67%) due to lower volume of fees for items presented againstinsufficient funds. ATM and debit card revenue increased $14,963 (2.88%) due toincreased card usage. Miscellaneous revenues exceed the previous year by $61,775(26.70%) which includes a gain of $33,410 on the sale of collectible coins.    Noninterest revenue for 2008 increased $104,254 (5.39%)from the previous year. Service charges on deposit accounts increased by $70,427(6.89%) due to a mid-year increase in the fee for items presented againstinsufficient funds, coupled with reductions in fee waivers. ATM and debit cardrevenue increased $13,713 (2.71%) due to increased card usage. Miscellaneousrevenues exceed the previous year by $16,585 (7.72%) which includes an increaseof $8,651 (35.98%) in wire transfer fees.    The following table presents the principal components of noninterest revenuefor the years ended December 31, 2009, 2008, and 2007, respectively.		Noninterest revenue  		2009		2008		2007		Service charges on deposit accounts 		 $        987,169 		 $     1,092,899 		 $     1,022,472 		ATM and debit card revenue 		           533,822 		           518,859 		           505,146 		Increase in cash surrender value of    		   bank owned life insurance 		           174,468 		           194,040 		           190,511  		Miscellaneous revenue 		           293,167 		           231,392 		           214,807  		Total noninterest revenue 		 $     1,988,626 		 $     2,037,190 		 $     1,932,936      		Noninterest revenue as a percentage     		of average total assets 		0.52%		0.56%		0.52%
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**Noninterest Expense   Noninterest expense increased $561,304 (7.06%) from 2008 to 2009. A depositinsurance increase of 452,220 resulted from a special assessment to replenishthe Deposit Insurance Funds, depleted by bank failures, plus an increase ininsured deposit levels and the expiration of a credit which benefited the Bankin recent years. Expense related to ATM and debit card activities decreased$48,887 (16.04%) based on a contract renegotiation with the Bank’s serviceprovider. Professional fees increased $77,020 (94.33%) as the Bank engaged legalrepresentation for loan collection.    Noninterest expense increased $390,177 (5.16%) from 2007 to 2008. Increasedpersonnel costs of $137,791(3.04%) are attributable to salary increases andrelated payroll taxes. Occupancy expense increased $53,513 (7.64%), including a$28,404 (20.17%) increase in utilities and a $26,000 (16.36%) increase in realestate taxes. Other operating expense increased $197,896 (10.61%). Significantvariances occurred in several areas. Advertising increased $33,489 (18.86%) asthe Bank conveyed to the public through the media its safety and soundness in atime of economic turmoil. Expense related to ATM and debit card activitiesincreased $32,258 (11.84%) due to a growing volume of card transactions and theaddition of a fraud monitoring system implemented in mid-2008. Annualmaintenance contracts for computer software systems increased $20,139 (15.74%)as the Bank offered more products to customers and continued with an equipmentreplacement program designed to support increasing demands on our processingsystems. Correspondent bank fees increased $42,498 (233.92%) due to carryinglower balances at Federal Reserve which results in lower earnings credits.Courier service declined by $23,818 (40.65%) as a result of the conversion inMay 2007, to branch-based electronic image capture. Professional fees increased$34,442 (72.96%) as the Bank engaged legal representation for loan collectionand to assist with Securities and Exchange Commission compliance.    The following table presents the principal components of noninterest expensefor the years ended December 31, 2009, 2008, and 2007, respectively.
**Noninterest expense   		2009		2008		2007 		Salaries and employee benefits 		 $        4,670,997 		 $        4,670,951 		 $        4,533,160  		Occupancy expense 		              763,715 		              753,605 		              700,092  		Furniture and equipment expense 		              476,518 		              464,559 		              463,582  		Deposit insurance 		              495,406 		                43,186 		                33,831  		Advertising 		              190,461 		              211,056 		              177,567  		Armored car service 		                75,446 		                66,003 		                64,710  		ATM and debit card 		              255,850 		              304,737 		              272,479  		Business and product development 		                77,319 		                78,757 		                78,703  		Computer software amortization 		                71,895 		                78,364 		                79,768  		Computer software maintenance 		              151,927 		              148,098 		              127,959  		Correspondent bank fees 		                79,677 		                60,666 		                18,168  		Courier service 		                41,472 		                34,776 		                58,594  		Director fees 		              147,650 		              151,900 		              149,400  		Dues, donations, and subscriptions 		                81,634 		                84,872 		                85,179  		Liability insurance 		                26,018 		                29,358 		                36,294  		Postage 		              154,065 		              165,249 		              161,595  		Professional fees 		              158,668 		                81,648 		                47,206  		Stationery and supplies 		                76,896 		                95,945 		                95,854  		Telephone  		              173,792 		              159,065 		              152,855  		Miscellaneous 		              344,166 		              269,473 		              225,095  		  Total noninterest expense 		 $        8,513,572 		 $        7,952,268 		 $        7,562,091        		Noninterest expense as a percentage of   		    average total assets		2.21%		2.17%		2.03%**
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** 

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-basedtotal capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capitalconsists of common stockholders’ equity, qualifying perpetual preferred stock,and minority interests in equity accounts of consolidated subsidiaries, lesscertain intangibles. In addition, the Company and the Bank must maintain aminimum 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 thanthe highest-rated institutions.    At December 31, 2009, 2008, and 2007, the Company and the Bank werewell-capitalized, exceeding all minimum requirements, as set forth in thefollowing table.
  		Analysis of Capital   		Consolidated 		To be well		Required 		Company		Bank		capitalized		minimums		2009    		Total risk-based capital ratio		32.1%		30.6%		10.0%		8.0%		Tier 1 risk-based capital ratio		31.6%		30.3%		6.0%		4.0%		Tier 1 leverage ratio		17.7%		16.9%		5.0%		4.0%      		2008    		Total risk-based capital ratio		32.5%		30.8%		10.0%		8.0%		Tier 1 risk-based capital ratio		31.8%		30.4%		6.0%		4.0%		Tier 1 leverage ratio		18.7%		17.8%		5.0%		4.0%      		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%
 
**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 accessiblethrough this website. Access to these filings is free of charge. The reports areavailable as soon as practicable after they are filed electronically with theSEC. **Accounting Rule Changes   On July 1, 2009, the Accounting Standards Codification (ASC) became theFinancial Accounting Standards Board’s (FASB) officially recognized source ofauthoritative U.S. generally accepted accounting principles applicable to allpublic and non-public non-governmental entities, superseding existing FASB,AICPA, EITF and related literature. Rules and interpretive releases of the SECunder the authority of federal securities laws are also sources of authoritativeGAAP for SEC registrants. All other accounting literature is considerednon-authoritative. The switch to the ASC affects the way companies refer to U.S.GAAP in financial statements and accounting policies.    The following accounting guidance has been approved by the FinancialAccounting Standards Board and would apply to the Company if the Company or theBank entered into an applicable activity.*   FASB ASC Topic 715, "Compensation - Retirement Benefits"* providesguidance related to an employer’s disclosures about plan assets of definedbenefit pension or other post-retirement benefit plans. Under ASC Topic 715,disclosures should provide users of financial statements with an understandingof how investment allocation decisions are made, the factors that are pertinentto an understanding of investment policies and strategies, the major categoriesof plan assets, the inputs and valuation techniques used to measure the fairvalue of plan assets, the effect of fair value measurements using significantunobservable inputs on changes in plan assets for the period and significantconcentrations of risk within plan assets. Adoption of the disclosurerequirements of ASC topic 715 was effective beginning with the financialstatements for the year-ended December 31, 2009 and did not have a significantimpact on the Company’s financial statements. 

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*    Accounting Standards Update No. 2009-5, under FASB ASC Topic 820, "Fair ValueMeasurement and Disclosures," provides authoritative guidance for measuringthe fair value of a liability in circumstances in which a quoted price in anactive market for the identical liability is not available. In such a case, thereporting company must measure fair value utilizing a valuation technique thatuses (i) the quoted price of the identical liability when traded as an asset,(ii) quoted prices for similar liabilities or similar liabilities when traded asassets, or (iii) another valuation technique that is consistent with theexisting principles of ASC Topic 820, such as an income approach or marketapproach. The new authoritative accounting guidance also clarifies that whenestimating the fair value of a liability, a reporting entity is not required toinclude a separate input or adjustment to other inputs relating to the existenceof a restriction that prevents the transfer of the liability. The newauthoritative accounting guidance under ASC Topic 820 was effective for theCompany’s financial statements beginning October 31, 2009, and did not have asignificant impact on the Company’s financial statements *   FASB ASC Topic 855, "Subsequent Events"*establishes general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before financial statements are issued or available to be issued. ASC Topic855 defines (i) the period after the balance sheet date during which a reportingentity’s management should evaluate events or transactions that may occur forpotential recognition or disclosure in the financial statements (ii) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements, and(iii) the disclosures an entity should make about events or transactions thatoccurred after the balance sheet date. ASC Topic 855 became effective forperiods ending after June 15, 2009, and did not have a significant impact on theCompany’s financial statements. *   FASB ASC Topic 860, "Transfers and Servicing"* enhances reporting abouttransfers of financial assets, including securitizations, and where companieshave continuing exposure to the risks related to transferred financial assets.This new guidance eliminates the concept of a "qualifying special-purposeentity" and changes the requirements for derecognizing financial assets. It alsorequires additional disclosures about all continuing involvements withtransferred financial assets including information about gains and lossesresulting from transfers during the period. ASC Topic 860 is effective January1, 2010 and has not had a significant impact on the Company’s financialstatements.    The accounting policies adopted by management are consistent withauthoritative U.S. generally accepted accounting principles and are consistentwith 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 financialinstitutions such as the Company and the Bank are primarily monetary in nature.Therefore, interest rates have a more significant effect on the Company'sperformance than do the effects of changes in the general rate of inflation andchange in prices. In addition, interest rates do not necessarily move in thesame direction or in the same magnitude as the prices of goods and services. Asdiscussed previously, management seeks to manage the relationships betweeninterest sensitive assets and liabilities in order to protect against wideinterest 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 ofthe Company's Annual Report to Stockholders for the year ended December 31,2009, is incorporated herein by reference.
**Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosures**
    There have been no changes in or disagreements with accountants on accountingor financial disclosure during the fiscal year covered by this report.

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** 

Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures   Disclosure controls and procedures are designed and maintained by the Companyto ensure that information required to be disclosed in the Company’s publiclyfiled reports is recorded, processed, summarized and reported in a timelymanner. Such information must be available to management, including the ChiefExecutive Officer (CEO) and Treasurer, to allow them to make timely decisionsabout required disclosures. Even a well-designed and maintained control systemcan provide only reasonable, not absolute, assurance that its objectives areachieved. Inherent limitations in any system of controls include flawedjudgment, errors, omissions, or intentional circumvention of controls.   The Company’s management, including the CEO and Treasurer, performed anevaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of December 31, 2009. Based on thatevaluation, the Company’s management, including the CEO and Treasurer, hasconcluded that the Company’s disclosure controls and procedures are effective.The projection of an evaluation of controls to future periods is subject to therisk that procedures may become inadequate due to changes in conditionsincluding the degree of compliance with procedures.
**Internal Control Over Financial ReportingManagement Report on Internal Control over Financial Reporting   Calvin B. Taylor Bankshares, Inc. maintains a system of internal control overfinancial reporting, which is designed to provide reasonable assurance to theCompany’s management and board of directors regarding the preparation ofreliable published financial statements. The system includes an organizationalstructure and division of responsibility, established policies and proceduresincluding a code of conduct to foster a strong ethical climate, and the carefulselection, training and development of our staff. The system containsself-monitoring mechanisms, and an internal auditor monitors the operation ofthe internal control system and reports findings and recommendations tomanagement and the board of directors. Corrective actions are taken to addresscontrol deficiencies and other opportunities for improving the system as theyare identified. The board, operating through its audit committee, which iscomposed 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 internalcontrols, including the possibility of human error and the circumvention oroverriding of controls. Accordingly, even an effective internal control systemcan provide only reasonable assurance with respect to financial statementpreparation. Furthermore, the effectiveness of an internal control system mayvary over time and with circumstances.   The Company assessed its internal control system as of December 31, 2009 inrelation to criteria for effective internal control over financial reporting asdescribed in *Internal Control – Integrated Framework*, issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on itsassessment, the Company believes that, as of December 31, 2009, its system ofinternal control over financial reporting met those criteria.

                                                                               CALVIN B. TAYLOR BANKSHARES, INC.                                                                               (Registrant)

Date: March 10, 2010                                          												By:  /s/ Raymond M.												Thompson                                                                                        Raymond M. Thompson                                                                                       Chief Executive Officer

Date: March 10, 2010                                          By:  /s/ Jennifer G.												Hawkins                                                                                       Jennifer G. Hawkins                                                                                      Treasurer / Principal Financial Officer

 

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Attestation Report of theIndependent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

 

 

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

    We have audited Calvin B. Taylor Bankshares, Inc. andSubsidiary’s internal control over financial reporting as of December 31, 2009,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 effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in theaccompanying Management Report on Internal Control Over Financial Reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the Company’s internal control over financial reporting based on ouraudit.

    We conducted our audit in accordance with the standards ofthe Public Company Accounting Oversight Board in the United States of America.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit of internal control overfinancial reporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audit also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

    A company’s internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

    Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

    In our opinion, Calvin B. Taylor Bankshares, Inc. andSubsidiary maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2009, based on criteria established in *Internal Control – Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). 

    We have also audited, in accordance with the standards of thePublic Company Accounting Oversight Board in the United States of America, thebalance sheets and the related statements of income, changes in stockholders’equity and cash flows of Calvin B. Taylor Bankshares, Inc. and Subsidiary, andour report dated March 5, 2010, expressed an unqualified opinion.

/s/ Rowles & Company, LLP

 

Baltimore, MarylandMarch 5, 2010

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** 

Changes in Internal Controls**
    During the quarter ended on the date of this report, there were nosignificant changes in the Company’s internal controls over financial reportingthat have had or are reasonably likely to have a material affect on theCompany’s internal control over financial reporting. As of December 31, 2009,the Company’s management, including the CEO and Treasurer, has concluded thatthe 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 acharter for the Audit Committee. The Audit Committee is comprised of sevenindependent directors, including Chairman James R. Bergey, Jr., CPA who servesas the financial expert. The Audit Committee is scheduled to meet quarterly andheld four meetings in 2009.
**PART III

Item 10. Directors and Executive Officers and Corporate Governance**
    The information required by this item is included in the Company's ProxyStatement to be filed in connection with the 2010 Annual Meeting ofStockholders, and is incorporated herein by reference.
**Item 11. Executive Compensation

    The information required by this item is included in the Company's ProxyStatement to be filed in connection with the 2010 Annual Meeting ofStockholders, and is incorporated herein by reference.
**Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**
    The information required by this item is included in the Company's ProxyStatement to be filed in connection with the 2010 Annual Meeting ofStockholders, and is incorporated herein by reference.
**Item 13. Certain Relationships and Related Transactions, and DirectorIndependence**
    The information required by this item is included in the Company's ProxyStatement to be filed in connection with the 2010 Annual Meeting ofStockholders, and is incorporated herein by reference.
**Item 14. Principal Accounting Fees and Services**
    The information required by this item is included in the Company's ProxyStatement to be filed in connection with the 2010 Annual Meeting ofStockholders, and is incorporated herein by reference.

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**PART IV

Item 15. Exhibits, Financial Statement Schedules**
(a)     Exhibits       (a)(1), (2) Annual Report to Stockholders for the year ended December 31,2009.       3.1 Articles of Incorporation of the Company, incorporated by reference toExhibit 3.1 of Registration Statement FormS-4, File No. 33-99762.       3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 ofRegistration Statement Form S-4, File No. 33-99762.

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SIGNATURESPursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

                                                                               CALVIN B. TAYLOR BANKSHARES, INC.                                                                               (Registrant)

Date: March 10, 2010                                          												By:  /s/ Raymond M.												Thompson                                                                                        Raymond M. Thompson                                                                                       Chief Executive Officer

Date: March 10, 2010                                          By:  /s/ Jennifer G.												Hawkins                                                                                       Jennifer G. Hawkins                                                                                      Treasurer / Principal Financial Officer

 

    Pursuant to the requirements of the Securities Exchange Actof 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

												Date: March 10, 2010                                          By:  /s/ James R. Bergey, Jr.                                                                                      James R. Bergey, Jr., Director 												Date: March 10, 2010                                          By:  /s/ John H. Burbage, Jr.                                                                                      John H. Burbage, Jr., Director
												Date: March 10, 2010                                          By:  /s/ Todd E. Burbage                                                                                      Todd E. Burbage, Director 												Date: March 10, 2010                                          By:  /s/ Charlotte K. Cathell                                                                                      Charlotte K. Cathell, Director 												Date: March 10, 2010                                          By:  /s/ Reese F. Cropper, Jr.                                                                                      Reese F. Cropper, Jr.                                                                                      Chairman of the Board of Directors
Date: March 10, 2010                                          By:  /s/ Reese F. Cropper, III                                                                                      Reese F. Cropper, III, Director 												Date: March 10, 2010                                          By:  /s/ Hale Harrison                                                                                      Hale Harrison, Director

												Date: March 10, 2010                                          By:  /s/ Gerald T. Mason                                                                                      Gerald T. Mason, Director 												Date: March 10, 2010                                          By:  /s/ William H. Mitchell                                                                                      William H. Mitchell, Director                                                                                      Vice President

												Date: March 10, 2010                                          By:  /s/ Joseph E. Moore                                                                                      Joseph E. Moore, Director  												Date: March 10, 2010                                          By:  /s/ Michael L. Quillin, Sr.                                                                                      Michael L. Quillin, Sr., Director

												Date: March 10, 2010                                          By:  /s/ Raymond M. Thompson                                                                                      Raymond M. Thompson, Director                                                                                      President and Chief Executive Officer

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Certification - Pursuant to 18 U.S.C. 1350Section 906 of the Sarbanes-Oxley Act of 2002

We, the undersigned, certify that to the best of our knowledge, based upon areview of the Annual Report on Form 10-K for the period ended December 31, 2009of the Registrant (the "Report"):

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d)	of the Securities Exchange Act of 1934, as amended; and

(2)  The information contained in the Report fairly presents, in all material	respects, the financial condition and results of operations of the	Registrant.

 

 

                                                                               CALVIN B. TAYLOR BANKSHARES, INC.                                                                               (Registrant)

Date: March 10, 2010                                          												By:  /s/ Raymond M.												Thompson                                                                                        Raymond M. Thompson                                                                                       Chief Executive Officer

Date: March 10, 2010                                          By:  /s/ Jennifer G.												Hawkins                                                                                       Jennifer G. Hawkins                                                                                      Treasurer / Principal Financial Officer

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Certification of Principal Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Raymond M. Thompson, certify that:

I have reviewed this annual report on Form 10-K of Calvin B. TaylorBankshares, Inc.;

Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;

Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for theregistrant and have:

a)  designed such disclosure controls and procedures, or caused such			disclosure controls and procedures to be designed under our			supervision, to ensure that material information relating to the			registrant, including its consolidated subsidiary, is made known to			us by others within those entities, particularly during the period			in which this report is being prepared;

b)  designed such internal control over financial reporting, or			caused such internal control over financial reporting to be designed			under our supervision, 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;

c)  evaluated the effectiveness of the registrant’s disclosure			controls and procedures and presented in this report our conclusions			about the effectiveness of the disclosure controls and procedures,			as of the end of the period covered by this report based on such			evaluations; and

d)  disclosed in this report any change in the registrant’s internal			control over financial reporting that occurred during the			registrant’s most recent fiscal quarter that has materially			affected, or is reasonably likely to materially affect, the			registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on ourmost recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board ofdirectors:

a)  all significant deficiencies and material weaknesses in the			design or operation of internal control over financial reporting			which are reasonably likely to adversely affect the registrant’s			ability to record, process, summarize and report financial			information; and 

b)  any fraud, whether or not material, that involves management or			other employees who have a significant role in the registrant’s			internal control over financial reporting.

 

                                                                               CALVIN B. TAYLOR BANKSHARES, INC.                                                                               (Registrant)

Date: March 10, 2010                                          												By:  /s/ Raymond M.												Thompson                                                                                        Raymond M. Thompson                                                                                       Chief Executive Officer

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Certification of Principal Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jennifer G. Hawkins, certify that:

I have reviewed this annual report on Form 10-K of Calvin B. TaylorBankshares, Inc.;

Based on my knowledge, this annual report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this annualreport;

Based on my knowledge, the financial statements, and other financialinformation included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for theregistrant and have:

a)  designed such disclosure controls and procedures, or caused such			disclosure controls and procedures to be designed under our			supervision, to ensure that material information relating to the			registrant, including its consolidated subsidiary, is made known to			us by others within those entities, particularly during the period			in which this report is being prepared;

b)  designed such internal control over financial reporting, or			caused such internal control over financial reporting to be designed			under our supervision, 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;

c)  evaluated the effectiveness of the registrant’s disclosure			controls and procedures and presented in this report our conclusions			about the effectiveness of the disclosure controls and procedures,			as of the end of the period covered by this report based on such			evaluations; and

d)  disclosed in this report any change in the registrant’s internal			control over financial reporting that occurred during the			registrant’s most recent fiscal quarter that has materially			affected, or is reasonably likely to materially affect, the			registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on ourmost recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board ofdirectors:

a)  all significant deficiencies and material weaknesses in the			design or operation of internal control over financial reporting			which are reasonably likely to adversely affect the registrant’s			ability to record, process, summarize and report financial			information; and 

b)  any fraud, whether or not material, that involves management or			other employees who have a significant role in the registrant’s			internal control over financial reporting.

 

                                                                               CALVIN B. TAYLOR BANKSHARES, INC.                                                                               (Registrant)

Date: March 10, 2010                                          By:  /s/ Jennifer G.												Hawkins                                                                                       Jennifer G. Hawkins                                                                                      Treasurer / Principal Financial Officer

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