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, 2008Commission 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:NoneSecurities 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) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days. Yes [ X ] No __    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 ]     The aggregate market value of the Common Stock, all of which has votingrights, held by non-affiliates of the registrant on December 31, 2008, was$92,800,447. 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, 2008,the last known sale price was $36.50 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, 2009, 3,036,754 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 13, 2009, 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 Retirements 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, to both commercial and retail customers. Early in 2008, the Bankbegan offering a remote capture service that enables commercial customers toelectronically capture check images and make on-line deposits. Also in 2008, theBank began offering electronic statement delivery to consumer and commercialcustomers. The Bank also offers non-deposit products including retail repurchaseagreements and discount brokerage services through a correspondent bank. 

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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, 2008, the Bank employed 94 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. One possible consequence of the Act may beincreased competition that the Company and the Bank face from largerinstitutions and other types of companies. It is not possible to determine thefull effect that the Act has had on the Company and the Bank. 

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.

Deposit Insurance    The FDIC establishes rates for the payment of deposit insurance premiums byfederally insured banks and thrifts. The Deposit Insurance Fund is maintainedfor commercial banks and thrifts, with insurance premiums from the industry usedto offset losses from insurance payouts when banks and thrifts fail. Since 1993,insured depository institutions like the Bank have paid for deposit insuranceunder a risk-based premium system. The Federal Deposit Insurance Reform Act of2005 creates a revised deposit insurance assessment rate structure, effectiveJanuary 1, 2007. Under this system, assessment rates are based on RiskCategories as determined by a combination of CAMELS component ratings andfinancial ratios. Banks in Risk Category I, the lowest risk profile, will beassessed at a rate of 5 to 7 basis points. A One-time Assessment Credit forbanks that were in existence on December 31, 1996, will be applied to offsetassessments dollar-for-dollar until full benefit of the credit is received. Inaddition to the amount paid for deposit insurance, banks are assessed anadditional amount to service the interest on the bond obligations of theFinancial Corporation (FICO). Any increase in deposit insurance premiums for theBank will increase the Bank’s operating expenses, and there can be no assurancethat such costs can be passed on to the Bank’s customers. 

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**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.   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."

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**Recent Economic and Legislative Developments   During the fourth quarter of 2008, bank failures and near failures wereprominent in the news. Securitization of subprime, adjustable rate mortgageloans originated in the United States has been cited as contributing to a globaleconomic recession. Other contributory factors include a pool of investorswilling to tolerate the risks attached to high yield mortgage backed securities,complex investment products that were not understood by investors orauditors/examiners, and inadequate oversight. Although neither the Company northe Bank originated or invested in subprime loans, the economic downturn hasaffected their ability to invest profitably and the ability of some customers torepay 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 year-end. Othershort-term investments have experienced similar declines. These rate reductionshave not accomplished their goal of stimulating borrowing and lending activity.The impact on the Company is reduced interest revenues and yields on federalfunds sold, debt securities, 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 will 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. On January 1, 2010, the standardcoverage limit will return to $100,000 for all deposit categories except IRAsand certain other retirement accounts, which will continue to be insured up to$250,000 per owner.  These actions have contributed to a fourthquarter 2008 increase in deposits in the Bank as investors seek the safety ofinsured deposits in community banks. Deposit insurance premiums will increase asa result of the higher deposit balances, the higher insurance limits,participation in TLG, and higher insurance rates. Management does not expect topass all of the additional 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, of thedramatic developments of 2008 are uncertain. Management expects 2009 to bringlower interest revenues and higher fees associated with loan collection. 
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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. Individual loan authorities are low with no individualofficer having a secured loan authority over $200,000. One result of the lowindividual limits is that the Executive Committee or the full Board approvesmost mortgage loans and many commercial non-mortgages. The Bank’s productofferings are non-complex and no new loan products have been introduced thisyear.   Credit risk attributable to concentrations relates to the geography in which theBank operates. There are no other significant concentrations related to anindividual borrowing relationship or industry.

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, 2008, approximately 97.5% 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 40.0% in 2008, down from 42.0% in2007 and 45.6% in 2006. Although this ratio has declined slightly, the Companyanticipates that it will be able to fund loan demand and meet deposit withdrawalrequests through the reduction of overnight investment in federal funds sold,maturity of investment securities, and, if necessary, borrowing against lines ofcredit with correspondent banks.

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 has deepenedthroughout 2008, has caused borrowers hardships that effect their ability torepay loans, resulting in the Bank experiencing upward moving delinquencies,higher than usual charge-offs, and the prospect of repossession of collateral.Additionally, historically low market rates have reduced earnings oninvestments, including federal funds sold. Due to conservative investmentpractices, neither the Company nor the Bank has experienced portfolio valuedeclines of significance. The Company and Bank expect the current adverse marketconditions to continue to depress earnings for at least another year and likelylonger, causing slower than usual growth in capital. The Company and the Bankhave capital well in excess of the regulatory definition of well-capitalizedwhich 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. 
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   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 banksstrategic 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.
**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.

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**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, 2009 there were approximately 1,011 stockholders of recordand 3,036,754 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 $2.15 pershare in 2008, $.80 per share in 2007, and $.75 per share in 2006. Included in2008 is a special cash dividend of $1.30 per share which is not expected to bean annual 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		             2,590 		$36.85  		             2,590 		226,050		  November		             2,230 		$36.75  		             2,230 		223,820		  December		             2,073 		$36.75  		             2,073 		221,747		Totals		             6,893 		$36.79  		             6,893  
    The Company publicly announced on August 14, 2003, that it would repurchaseup to 10% of its outstanding equity stock at that time, which equated to a totalof 324,000 common shares available for repurchase. As of January 1, 2005, andagain on May 18, 2007, this plan was renewed by public announcement, making upto 10% of the Company’s outstanding equity stock available for repurchase at thetime of each renewal. This equated to a total of 314,072 common shares availablefor repurchase as of May 18, 2007.     There is no expiration date for this program. No other stock repurchase planor program existed or exists simultaneously, nor has any other plan or programexpired during the period covered by this table. Common shares repurchased underthis plan are retired. 

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**Item 6. Selected Financial Data**
    The following table presents selected financial data for thefive years ended December 31, 2008. 
 		2008		2007		2006		2005		2004 		(Dollars in thousands, except for per share data)		At Year End     		Total assets		$372,603 		$369,146 		$369,512 		$391,054 		$395,312 		Total deposits		$292,459 		$288,944 		$290,325 		$310,858 		$319,772 		Total loans, net of unearned income and     		   allowance for loan losses		$241,431 		$238,076 		$233,231 		$206,421 		$163,489 		Total stockholders' equity		$72,283 		$74,476 		$71,381 		$67,530 		$67,909 		Common shares issued and outstanding		      3,048,397 		      3,102,510 		      3,149,356 		      3,187,556 		      3,208,478       		For the Year     		Average total assets		$366,900 		$372,006 		$377,211 		$399,345 		$396,695 		Average stockholders' equity		$73,726 		$72,569 		$69,268 		$69,138 		$66,160  				Net interest income		$15,978 		$17,032 		$16,963 		$15,912 		$13,698 		Net income		$6,059 		$7,297 		$7,400 		$6,798 		$5,613 		Cash dividend		$6,566 		$2,485 		$2,368 		$6,694 		$2,087       		Per share data     		Book value		$23.71 		$24.01 		$22.67 		$21.19 		$21.17 		Net income		$1.97 		$2.33 		$2.33 		$2.13 		$1.74 		Cash dividends declared		$2.15 		$0.80 		$0.75 		$2.10 		$0.65       		Other ratios     		Return on average assets		1.65%		1.96%		1.96%		1.70%		1.41%		Return on average equity		8.22%		10.05%		10.68%		9.83%		8.48%		Dividend payout ratio		109.14%		34.33%		32.19%		98.59%		37.36%		Average equity to average assets ratio		20.09%		19.51%		18.36%		17.31%		16.68%
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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 2008 was $6,059,217 compared to $7,296,587 for 2007,and $7,400,369 for 2006. The Company had a return on average equity of 8.22% andreturn on average assets of 1.65% for 2008, compared to returns on averageequity of 10.05% and 10.68%, and returns on average assets of 1.96% and 1.96%,for 2007 and 2006, respectively. 
**Results of Operations   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. These factors are discussed further in the following pages.   The Company’s net income of $7,296,587, or $2.33 per share, for the year endedDecember 31, 2007, was a decrease of $103,782 (1.40%) from net income of7,400,369, or $2.33 per share, for the year ended December 31, 2006.Contributing to this decrease were a $69,810 (0.41%) increase in net interestincome, a $15,808 (0.81%) decrease in noninterest revenue, and a $207,404(2.82%) increase in noninterest expense.    The Company’s net income of $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.   The Company’s net income of $1,651,416 or $.53 per share, for the quarter endedDecember 31, 2007, was a decrease of $179,843 (9.82%) from the net income of$1,831,259 or $.58 per share, for the quarter ended December 31, 2006. Lower netinterest income, the primary reason for the decrease, resulted from therepricing of deposit accounts initiated in mid-2006. Deposit rate increases weretargeted at deposit retention in a highly competitive environment.

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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 2008 on anon-GAAP tax-equivalent basis was 4.77%, compared to 5.07% and 5.00% for 2007and 2006, 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, 2008		December 31, 2007		December 31, 2006		Average  		Average  		Average  		Balance		Interest		Yield		Balance		Interest		Yield		Balance		Interest		Yield		Assets         		Federal funds sold		 $  36,328 		 $      732 		2.02%		 $  37,826 		 $   1,919 		5.07%		 $  22,547 		 $   1,137 		5.04%		Interest-bearing deposits		9,659		325		3.37%		3,494		168		4.82%		2,173		79		3.64%		Investment securities:         		  U. S. Treasury		44,359		1,902		4.29%		55,061		2,636		4.79%		71,441		2,614		3.66%		  U. S. Government Agency		10,330		468		4.53%		6,568		310		4.73%		13,378		398		2.98%		  State and municipal		1,359		65		4.82%		2,397		95		3.97%		7,443		219		2.94%		  Other		       1,934 		         109 		5.64%		       1,927 		         101 		5.27%		       1,900 		         102 		5.37%		   Total investment securities		     57,982 		      2,544 		4.39%		     65,953 		      3,142 		4.77%		     94,162 		      3,333 		3.54%		Loans:         		  Commercial		24,272		1,628		6.71%		23,812		1,691		7.10%		23,804		1,711		7.19%		  Mortgage		212,104		14,917		7.03%		208,936		14,870		7.12%		200,588		14,020		6.99%		  Consumer		       2,497 		         206 		8.23%		       2,465 		         206 		8.37%		       2,491 		         206 		8.27%		   Total loans		238,873		16,751		7.01%		235,213		16,767		7.13%		226,883		15,937		7.02%		Allowance for loan losses		          237   		          199   		          211   		   Total loans, net of allowance		   238,636 		    16,751 		7.02%		   235,014 		    16,767 		7.13%		   226,672 		    15,937 		7.03%		Total interest-earning assets		342,605		    20,352 		5.94%		342,287		    21,996 		6.43%		345,554		    20,486 		5.93%		Noninterest-bearing cash		10,906  		16,179  		17,694  		Premises and equipment		6,391  		6,548  		6,605  		Other assets		       6,998   		       6,992   		       7,358   		        Total assets		 $366,900   		 $372,006   		 $377,211   		Interest-bearing deposits         		  NOW 		 $  48,624 		         201 		0.41%		 $  51,297 		         183 		0.36%		 $  57,052 		         141 		0.25%		  Money market		32,070		305		0.95%		33,590		317		0.94%		41,810		335		0.80%		  Savings		41,667		309		0.74%		44,137		327		0.74%		47,812		285		0.60%		  Other time		     90,596 		      3,149 		3.48%		     84,867 		      3,789 		4.46%		     68,359 		      2,414 		3.53%		Total interest-bearing deposits		212,957		3,964		1.86%		213,891		4,616		2.16%		215,033		3,175		1.48%		Securities sold under agreements         		  to repurchase		4,792		53		1.11%		4,248		29		0.69%		5,878		40		0.68%		Borrowed funds		            85 		             5 		6.14%		          109 		             7 		6.10%		          145 		             8 		5.52%		Total interest-bearing liabilities		217,834		4,022		1.85%		218,248		4,652		2.13%		221,056		3,223		1.46%		Noninterest-bearing deposits		     74,262 		              -  		     79,807 		              -  		     84,380 		              -  		292,096		      4,022 		1.38%		298,055		      4,652 		1.56%		305,436		      3,223 		1.06%		Other liabilities		       1,078   		       1,382   		       2,507   		Stockholders' equity		     73,726   		     72,569   		     69,268   		        Total liabilities and         		        stockholders' equity		 $366,900   		 $372,006   		 $377,211   		Net interest spread  		4.09%  		4.30%  		4.47%		Net interest income 		 $ 16,330   		 $ 17,344   		 $ 17,263  		Net margin on interest-earning assets 		4.77%  		5.07%  		5.00%        		Tax equivalent adjustment included in:        		    Investment income 		 $      183   		 $      191   		 $      231  		    Loan income 		 $      169   		 $      121   		 $        69   		   		   		   		   		   		  
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		Average Balances, Interest, and Yields		(Dollars stated in thousands)		For the Year Ended		For the Year Ended		December 31, 2005		December 31, 2004		Average  		Average  		Balance		Interest		Yield		Balance		Interest		Yield		Assets      		Federal funds sold		 $  34,233 		 $   1,078 		3.15%		 $  41,762 		 $      547 		1.31%		Interest-bearing deposits		2,175		56		2.55%		2,201		48		2.16%		Investment securities:      		  U. S. Treasury		105,456		2,881		2.73%		116,537		2,442		2.10%		  U. S. Government Agency		19,666		525		2.67%		18,844		503		2.67%		  State and municipal		16,618		388		2.33%		19,004		407		2.14%		  Other		       1,882 		           90 		4.79%		       1,786 		           79 		4.43%		   Total investment securities		   143,622 		      3,884 		2.70%		   156,171 		      3,431 		2.20%		Loans:      		  Commercial		19,134		1,322		6.91%		15,243		1,053		6.91%		  Mortgage		165,415		11,485		6.94%		146,121		10,289		7.04%		  Consumer		       2,083 		         178 		8.56%		       2,305 		         201 		8.73%		   Total loans		186,632		12,985		6.96%		163,669		11,543		7.05%		Allowance for loan losses		          214   		          209   		   Total loans, net of allowance		   186,418 		    12,985 		6.97%		   163,460 		    11,543 		7.06%		Total interest-earning assets		366,448		    18,003 		4.91%		363,594		    15,569 		4.28%		Noninterest-bearing cash		19,946  		19,705  		Premises and equipment		6,757  		6,968  		Other assets		       6,194   		       6,428   		        Total assets		 $399,345   		 $396,695   		Interest-bearing deposits      		  Savings and NOW 		 $122,440 		         319 		0.26%		 $117,733 		         310 		0.26%		  Money market		50,537		218		0.43%		49,733		198		0.40%		  Other time		     63,710 		      1,202 		1.89%		     72,621 		      1,028 		1.42%		Total interest-bearing deposits		236,687		1,739		0.73%		240,087		1,536		0.64%		Securities sold under agreements      		  to repurchase		6,325		22		0.35%		5,021		8		0.16%		Borrowed funds		          151 		             9 		6.17%		          171 		           10 		6.06%		Total interest-bearing liabilities		243,163		1,770		0.73%		245,279		1,554		0.63%		Noninterest-bearing deposits		     85,526 		              -  		     83,498 		              -  		328,689		      1,770 		0.54%		328,777		      1,554 		0.47%		Other liabilities		       1,518   		       1,758   		Stockholders' equity		     69,138   		     66,160   		        Total liabilities and      		        stockholders' equity		 $399,345   		 $396,695   		Net interest spread  		4.18%  		3.65%		Net interest income 		 $ 16,233   		 $ 14,015  		Net margin on interest-earning assets 		4.43%  		3.85%     		Tax equivalent adjustment included in:     		    Investment income 		 $      294   		 $      286  		    Loan income 		 $        27   		 $        31  
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		Analysis of Changes in Net Interest Income		(Dollars stated in thousands) 		Year ended December 31,		Year ended December 31, 		2008 compared with 2007		2007 compared with 2006 		variance due to		variance due to 		Total		Rate		Volume		Total		Rate		Volume		Interest-earning assets      		  Federal funds sold		        (1,187)		        (1,111)		            (76)		            782 		              12 		            770 		  Interest-bearing deposits		            157 		           (140)		            297 		              89 		              41 		              48 		  Investment securities:      		    U. S. Treasury		           (734)		           (222)		          (512)		              22 		            621 		           (599)		    U. S. Government Agency		            158 		             (20)		            178 		            (88)		            115 		           (203)		    State and municipals		             (30)		              11 		            (41)		          (124)		              25 		           (149)		    Other		                8 		                8 		                 - 		              (1)		              (2)		                1 		  Loans:      		    Commercial		             (63)		             (96)		              33 		            (20)		            (21)		                1 		    Mortgage		              47 		           (178)		            225 		            850 		            267 		            583 		    Consumer		              - 		            (3)		             3 		  -  		            2 		           (2)		        Total interest revenue		     1,644)		     (1,751)		         107 		      1,510 		      1,060 		          450 		Interest-bearing liabilities		  NOW		              18 		              28 		            (10)		              42 		              56 		             (14)		  Money market		             (12)		                2 		            (14)		            (18)		              48 		             (66)		  Savings		             (18)		                 - 		            (18)		              42 		              64 		             (22)		  Other time deposits		           (640)		           (896)		            256 		         1,375 		            792 		            583 		  Other borrowed funds		            22 		             19 		             3 		          (12)		              - 		         (12)		        Total interest expense		        (630)		        (847)		         217 		        1,429 		         960 		         469 		Net interest income		       (1,014)		        (904)		       (110)		           81 		         100 		          (19)**
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 $238,636,000, $235,014,000,and $226,672,000, during 2008, 2007, and 2006, respectively, which constituted69.65%, 68.66%, and 65.60%, of average interest-earning assets for the periods.The Company’s ratio of net loans to deposits was 82.55%, 82.40%, and 80.33%, atDecember 31, 2008, 2007, and 2006, respectively. Average net loans to averagedeposits were 83.09%, 80.02%, and 75.71% for 2008, 2007, and 2006. The slightincrease 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. The increase in the loan to deposit ratio from 2006 to2007 is attributable to 3.68% growth in the average loan portfolio accompaniedby a 1.91% reduction in average deposits during 2007.     The Company extends loans primarily to customers located in and nearWorcester County, Maryland and Sussex County, Delaware. There are no industryconcentrations in the Company’s loan portfolio. The Company does, however, havea substantial portion of its loans in real estate and performance will beinfluenced by the real estate market in the region. 

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    During 2004 through 2006, the Bank experienced rapid growth in construction,land development and land loans as a result of a robust real estate market 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,management did not incur any more than its historically low level of risk. Thisis consistent with the Company’s philosophy that safe and sound practice,coupled with high earnings, are higher priorities than asset growth. The Bankhas not engaged in risky lending practices such as subprime mortgages, highloan-to-value lending, or high volume of loans on condominiums.   Throughout 2007 and 2008, 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 that are currently receiving public attention.Further, management monitors fluctuations in the value of real estate held ascollateral and, if deemed necessary, obtains additional collateral to limit theBank’s loss exposure. As economic conditions continued to deteriorate through2008, the adverse effects on many of the Bank’s customers have become apparentin increased loan delinquencies. The Bank has experienced higher than usuallosses and nonaccrual classifications of loans during 2008 and expects thistrend to continue through 2009.   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		2008		2007		2006		2005		2004		     Real estate mortgages     		       Construction, land development,     		          and land		 $     30,330,261 		 $     38,230,033 		 $     37,331,256 		 $     23,430,345 		 $     14,304,860 		       Residential 1 to 4 family		         95,203,258 		         87,327,448 		         88,599,071 		         81,327,154 		         74,211,899 		       Second mortgages		           2,952,418 		           3,287,734 		           2,395,178 		           2,094,749 		           1,900,559 		       Commercial properties		         89,302,549 		         84,568,665 		         79,484,039 		         76,103,526 		         57,252,929 		     Commercial		         21,990,067 		         22,283,007 		         23,264,997 		         21,461,593 		         14,007,430 		     Consumer		         2,359,513 		         2,574,916 		         2,352,660 		         2,215,299 		         2,010,406 		           Total loans		242,138,066		238,271,803		233,427,201		206,632,666		163,688,083		     Less allowance for loan losses		            707,152 		            195,525 		            196,083 		            211,374 		            198,591 		           Loans, net		 $  241,430,914 		 $  238,076,278 		 $  233,231,118 		 $  206,421,292 		 $  163,489,492      		     Real estate mortgages     		       Construction, land development,     		          and land		12.53%		16.04%		15.99%		11.34%		8.74%		       Residential 1 to 4 family		39.32%		36.66%		37.95%		39.36%		45.33%		       Second mortgages		1.22%		1.38%		1.03%		1.01%		1.16%		       Commercial properties		36.88%		35.49%		34.05%		36.83%		34.98%		     Commercial		9.08%		9.35%		9.97%		10.39%		8.56%		     Consumer		0.97%		1.08%		1.01%		1.07%		1.23%		           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, 2008.
		Loan Maturity Schedule and Sensitivity to Changes in Interest Rates		December 31, 2008  		Over one   		One year		through		Over five  		or less		five years		years		Total		     Real estate mortgages    		       Construction, land development,    		          and land		 $    30,274,660 		 $           55,601 		 $                  -   		 $    30,330,261 		       Residential 1 to 4 family		         94,985,833 		                47,192 		              170,233 		         95,203,258 		       Second mortgages		           2,952,418   		           2,952,418 		       Commercial properties		         89,008,680 		                61,297 		              232,572 		         89,302,549 		     Commercial		         19,581,492 		           1,435,082 		              973,493 		         21,990,067 		     Consumer		        1,192,137 		        1,009,029 		         158,347 		        2,359,513  		 $  237,995,220 		 $      2,608,201 		 $      1,534,645 		 $  242,138,066      		     Fixed interest rate		 $      1,967,273 		 $      2,608,201 		 $      1,534,645 		 $      6,110,119 		     Variable interest rate (or demand)		    236,027,947 		                 -    		                 -    		    236,027,947 		           Total 		 $  237,995,220 		 $      2,608,201 		 $      1,534,645 		 $  242,138,066 
    As of December 31, 2008, $236,027,947 or 97.48%, of the total loans wereeither variable rate loans or loans written on demand. 

    The Company has the following commitments, lines of credit, and letters ofcredit outstanding as of December 31, 2008, 2007, and 2006, respectively.
 		2008		2007		2006		       Construction and land development loans		 $   15,218,812 		 $   12,582,162 		 $   18,866,083 		       Other loan commitments		      22,245,089 		      20,941,323 		      21,557,185 		       Standby letters of credit		        1,921,878 		        1,582,050 		        1,682,942 		                Total		 $   39,385,779 		 $   35,105,535 		 $   42,106,210 
    Loan commitments are agreements to lend to a customer as long as there is noviolation of any condition to the contract. 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 areevaluated 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 alsoevaluates trends in delinquencies, the composition of the portfolio,concentrations of credit, and changes in lending products, processes, orstaffing. 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 ongoing protracted slow-down in the real-estate market has affected both theprice 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 increases to both theprovision for loan loss and the ALLL during 2008.   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 in late 2007 and throughout 2008, management believes the Bank’sgreatest likelihood of loss is in unsecured loans - commercial and consumer, andin secured consumer loans. Reserves for these segments of the portfolio areincluded in the formula-based portion of the ALLL at December 31, 2008. As thereal estate market continues to languish, management continually evaluates theadequacy of collateral on loans where is appears the borrower is havingdifficulty servicing their debt. The Bank expects to initiate foreclosureproceedings on some mortgages during 2009. Foreclosure may result in loanlosses, costs to hold real estate acquired in foreclosure, and losses on thesale of real estate acquired in foreclosure. Management is unable to estimatethe financial consequence of future 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.Amounts of nonaccruing loans and loans past due 90 days or more and stillaccruing have increased from December 31, 2007 to 2008. Management prepares aWatch List of troubled loans for review by the Board of Directors at theirmonthly 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$617,526 was recorded in 2008. No provision for loan losses was made in 2007,2006, 2005, or 2004.     Management considers the December 31, 2008 allowance appropriate and adequateto absorb identified and inherent losses in the loan portfolio. As of December31, 2008, management has identified one loan with balance of $23,579 which isanticipated to be charged-off within the next 12 months. Management has providedfor this loss in the ALLL. However, there can be no assurance that charge-offsin future periods will not exceed the allowance for loan loss or that additionalincreases in the loan 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 does not detect any meaningful trend in the year-to-year relationshipof net recoveries to net charge-offs from 2004 through 2007. Rather, these arenatural swings of activity in a loan portfolio that has historically experiencedminimal losses. The increased losses in 2008 and the increase in the 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 a generallyrecognized period of economic recession. 

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		Allowance for Loan Losses		2008		2007		2006		2005		2004		Balance at beginning of year		 $      195,525 		 $      196,083 		 $      211,374 		 $      198,591 		 $      207,942 		Loans charged-off:     		  Real estate - construction and land		                     - 		                     - 		                     - 		                     - 		                     - 		  Real estate - mortgage		                     - 		                     - 		                     - 		                     - 		                     - 		  Commercial		           76,383 		                     - 		             5,357 		                     - 		                     - 		  Consumer		           34,532 		             6,263 		           10,029 		             8,131 		           13,874 		        Total loan losses		         110,915 		             6,263 		           15,386 		             8,131 		           13,874 		Recoveries on loans previously charged off:     		  Real estate - construction and land		                     - 		                     - 		                     - 		                     - 		                     - 		  Real estate - mortgage		                     - 		                     - 		                     - 		           15,263 		                     - 		  Commercial		             3,785 		                     - 		                     - 		                     - 		             2,577 		  Consumer		             1,231 		             5,705 		                  95 		             5,651 		             1,946 		        Total loan recoveries		             5,016 		             5,705 		                  95 		           20,914 		             4,523      		Net loan charge-offs (recoveries)		         105,899 		                558 		           15,291 		         (12,783)		             9,351 		Provision for loan losses charged to expense		         617,526 		                     - 		                     - 		                     - 		                     - 		Balance at end of year		 $      707,152 		 $      195,525 		 $      196,083 		 $      211,374 		 $      198,591      		Allowance for loan losses to loans     		 outstanding at end of year		0.29%		0.08%		0.08%		0.10%		0.12%     		Net charge-offs to average gross loans		0.04%		0.00%		0.01%		-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. The Bank has not incurred a mortgage loan loss since 1997, andtherefore no reserves were allocated to the real estate – construction or realestate – mortgage portions of the loan portfolio in determining the ALLL for2007, 2006, 2005 or 2004. In 2008, reserves of $475,098 have been providedrelated to impaired real estate loans. Non-real estate secured loans, commercialand consumer, 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 five years endedDecember 31, 2008, have been consumer and commercial loans which were unsecuredor secured with collateral other than real estate.

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		Allocation of Allowance for Loan Losses 		December 31, 2008 		December 31, 2007 		December 31, 2006  		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Real estate - construction and land         		Formula-based		 $                -     		 $                -     		 $                -     		Specific reserves		         370,000   		                   -     		                   -     		Total real estate -         		   construction and land		         370,000 		      12.53 		%		                   -   		      16.04 		%		                   -   		      15.99 		%		Real estate - mortgage         		Formula-based		                125   		                   -     		                   -     		Specific reserves		         104,973   		                   -     		                   -     		Total real estate - mortgage		         105,098 		      77.42 		%		                   -   		      73.53 		%		                   -   		      73.03 		%		Commercial         		Formula-based		           73,694   		           34,952   		           10,556   		Specific reserves		         128,521   		         109,200   		                   -     		Total commercial		         202,215 		        9.08 		%		         144,152 		        9.35 		%		           10,556 		        9.97 		%		Consumer         		Formula-based		           27,929   		           21,636   		           24,347   		Specific reserves		             1,910   		           29,314   		                   -     		Total consumer		           29,839 		        0.97  		           50,950 		        1.08  		           24,347 		        1.01  		Subtotal		         707,152 		    100.00 		%		         195,102 		    100.00 		%		           34,903 		    100.00 		%		Unallocated		                   -     		                423   		         161,180   		Total		 $      707,152   		 $      195,525   		 $      196,083   		 		   		   		   		 		   		   		    		December 31, 2005 		December 31, 2004  		Amount		% of Loans		Amount		% of Loans		Real estate - construction and land      		Total real estate -       		   construction and land		 $                -   		      11.34  		 $                -   		        8.74  		Real estate - mortgage      		Total real estate - mortgage		                   -   		      77.20  		 		                   -   		      81.47  		Commercial      		Formula-based		             9,738   		           47,218   		Specific reserves		                   -     		                   -     		Total commercial		             9,738 		      10.39 		%		           47,218 		        8.56 		%		Consumer      		Formula-based		           22,926   		           20,805   		Specific reserves		                   -     		                   -     		Total consumer		           22,926 		        1.07  		           20,805 		        1.23  		Subtotal		           32,664 		    100.00 		%		           68,023 		    100.00 		%		Unallocated		         178,710   		         130,568   		Total		 $      211,374   		 $      198,591   
    Unallocated reserves are not associated with a specificportfolio segment or a specific loan, but may be appropriate if properlysupported and in accordance with GAAP. Because no portion of the ALLL iscalculated on a total loan portfolio basis, management anticipates having lowlevels of unallocated reserves in future periods. The unallocated portion in thepreceding table appears higher in years prior to 2007, the year in whichmanagement adopted a revised methodology. Management believes that the ALLLreflected in this table for years prior to 2007 does not materially differ fromthe balance that would have been calculated at each of those year-ends hadcurrent methodology been applied then.

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    The accrual of interest on a loan is discontinued whenprincipal or interest is ninety days past due or when the loan is determined tobe impaired, unless collateral is sufficient to discharge the debt in full andthe loan is in process of collection. When a loan is placed in nonaccruingstatus, any interest previously accrued but unpaid, is reversed from interestincome. Interest payments received on nonaccrual loans may be recorded as cashbasis income, or as a reduction of principal, depending on management’s judgmenton a loan by loan basis. Accrual of interest may be restored when all principaland interest are current and management believes that future payments will bereceived in accordance with the loan agreement.    Nonperforming loans are loans past due 90 or more days andstill accruing plus nonaccrual loans. Nonperforming assets are comprised ofnonperforming loans combined with real estate acquired in foreclosure and heldfor sale. There were no nonperforming assets other than nonperforming loans asof December 31, 2008, 2007, 2006, 2005, or 2004, as shown in the followingtable.
		2008		2007		2006		2005		2004		Loans 90 days or more past due and still accruing		 $   4,647,792 		 $        9,100 		 $    239,620 		 $    131,717 		 $    391,676 		Nonaccruing loans		         199,724 		         40,916 		                -   		                -   		                -   		        Total nonperforming loans		 $   4,847,516 		 $      50,016 		 $    239,620 		 $    131,717 		 $    391,676      		Interest not accrued on nonaccruing loans		 $          6,797 		 $        1,509 		 $             -   		 $             -   		 $             -   		Interest included in net income on     		       nonaccruing loans		 $                -   		 $             -   		 $             -   		 $             -   		 $             -   
    Included in amounts past due 90 days or more and stillaccruing at December 31, 2008, is a loan with a principal balance of $4,500,000.The Bank has been notified that there is a lien on the property securing thisloan that is superior to the Bank’s liens. The Bank was not aware of the lien atthe time the loan was originated, and the Bank’s settlement agent did notdiscover the lien during the title examination process. The Bank has filed aclaim with the title company that has insured its liens. The Bank believes thetitle company will indemnify the Bank for any losses resulting from the superiorlien, although there is no guarantee that this will be the case. The Bank willreview the accrual status of this loan as it learns more information regardingits claim. As of December 31, 2008, there is $86,103 of accrued interest on thisloan that was included in interest income in 2008.    Loans are considered impaired when, based on currentinformation, management considers it unlikely that collection of principal andinterest payments will be made according to contractual terms. Generally, loansare not reviewed for impairment until the accrual of interest has beendiscontinued, although management may categorize a performing loan as impairedbased on knowledge of the borrower’s financial condition, devaluation ofcollateral, or other circumstances that are deemed relevant to loan collection.Impaired loans may have specific reserves, or valuation allowances, allocated tothem in the ALLL. Estimates of loss reserves on impaired loans are determinedbased on two of the measurement methods described in Financial AccountingStandard 114 (FAS 114): (1) the loan’s observable fair price, or (2) the fairvalue of collateral, if repayment of the loan is expected to be provided byunderlying collateral. Loans determined to be impaired, but for which nospecific valuation allowance is made because management believes the loan issecured with adequate collateral or the Bank will not take a loss on such loan,are grouped with other homogeneous loans for evaluation under formula-basedcriteria described previously.    The following table sets forth principal balances of impairedloans and the related valuation allowances as of December 31, 2008. Included inprincipal balances of impaired loans as of December 31, 2008 and 2007, was$419,770 and $436,802 which was guaranteed by a government agency. Managementhad identified no impaired loans as of December 31, 2006, 2005, or 2004.
 		2008		2007		 		 		 		Impaired loans with valuation allowances,      		including nonaccruing loans		 $   4,328,618 		 $      595,774    		Valuation allowances on impaired loans		 $      605,405 		 $      138,514          		Impaired loans with no valuation allowances		 $   4,559,582 		 $                -      
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** 

Liquidity and Interest Rate Sensitivity    The primary objective of asset/liability management is toensure the steady growth of the Company's primary source of earnings, netinterest income. Net interest income can fluctuate with significant interestrate movements. To lessen the impact of these margin swings, the balance sheetshould be structured so that repricing opportunities exist for both assets andliabilities in roughly equivalent amounts at approximately the same timeintervals. Imbalances in these repricing opportunities at any point in timeconstitute interest rate sensitivity.    Liquidity represents the ability to provide steady sources offunds for loan commitments and investment activities, as well as to providesufficient funds to cover deposit withdrawals and payment of debt and operatingobligations. These funds can be obtained by converting assets to cash or byattracting new deposits. Average liquid assets (cash and amounts due from banks,interest-bearing deposits in other banks, federal funds sold, and investmentsecurities) were 40.00% of average deposits for 2008, compared to 42.03% and45.61% for 2007 and 2006, respectively.     Average net loans to average deposits were 83.09%, 80.02%,and 75.71% for 2008, 2007, and 2006. The increase in the loan to deposit ratiofrom 2007 to 2008 is attributable to 1.54% growth in the average loan portfolioaccompanied by a 2.21% reduction in average deposits during 2008. Funding forloan growth in 2008 was provided by reduction of noninterest-bearing cash. Thisshift has a positive effect on earnings. The increase in the loan to depositratio from 2006 to 2007 is attributable to 3.68% growth in the average loanportfolio accompanied by a 1.91% reduction in average deposits during 2007. Theincrease in loans does not negatively impact the Company’s ability to meetliquidity demands.    As of December 31, 2008, $30,967,770 (49.35%) of total debtsecurities mature in one year or less, of which, $17,201,296 are 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 $27,000,000as of December 31, 2008, and $21,000,000 as of December 31, 2007 and 2006.    The following table shows a distribution of investmentsecurities by their contractual maturities and their yields for the variousmaturity timeframes. In this schedule, investment securities classified asavailable for sale are presented at fair value and investments classified asheld to maturity are presented at amortized cost.
		Investment Securities Maturity Distribution and Yields		December 31, 2008		December 31, 2007		December 31, 2006		Amount		  Yield		Amount		  Yield		Amount		  Yield		U. S. Treasury      		  One year or less		 $   28,997,415 		3.03%		 $   32,430,184 		4.51%		 $   37,408,625 		4.04%		  Over one through five years		      22,278,930 		3.30%		      19,979,251 		4.60%		      18,479,455 		4.69%		  Over ten years		        2,961,875 		7.28%		        2,567,812 		7.28%		        2,524,375 		7.28%		Total U.S. Treasury securities		      54,238,220 		3.37%		      54,977,247 		4.67%		      58,412,455 		4.38%      		U.S. Government Agencies      		  One year or less 		        1,000,000 		3.00%		                       - 		0.00%		        8,749,280 		3.11%		  Over one through five years		        5,999,443 		3.13%		      10,000,000 		5.07%		                       - 		              - 		Total U. S. Government Agencies		        6,999,443 		3.11%		      10,000,000  				5.07%		        8,749,280 		3.11%      		State, county, and municipal      		  One year or less		           970,355 		2.71%		           960,132 		2.76%		        2,788,056 		2.43%		  Over one through five years		           537,026 		3.34%		           647,294 		3.68%		        1,062,744 		2.82%		Total state, county, and municipal		        1,507,381 		2.93%		        1,607,426 		3.13%		        3,850,800 		2.54%      		Total debt securities      		  One year or less		      30,967,770 		3.02%		      33,390,316 		4.46%		      48,945,961 		3.78%		  Over one through five years		      28,815,399 		3.27%		      30,626,545 		4.73%		      19,542,199 		4.59%		  Over ten years		        2,961,875 		7.28%		        2,567,812 		7.28%		        2,524,375 		7.28%		Total debt securities		      62,745,044  				3.33%		      66,584,673  				4.69%		      71,012,535  				4.13%      		Equity securities		        3,852,024 		3.87%		        4,177,279 		3.64%		        4,113,288 		3.72%      		Total securities		 $   66,597,068 		3.36%		 $   70,761,952 		4.63%		 $   75,125,823 		4.11%
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    Interest rate sensitivity refers to the responsiveness ofinterest-bearing assets and liabilities to changes in market interest rates. Therate-sensitive position, or gap, is the difference in the volume ofrate-sensitive assets and liabilities at a given time interval. The generalobjective of gap management is to actively manage rate-sensitive assets andliabilities to reduce the impact of interest rate fluctuations on the netinterest margin. Management generally attempts to maintain a balance betweenrate-sensitive assets and liabilities as the exposure period is lengthened tominimize the overall interest rate risk to the Company.    Interest rate sensitivity may be controlled on either side ofthe balance sheet. On the asset side, management exercises some control overmaturities. Also, loans are written to provide repricing opportunities on fixedrate notes. The Company's investment portfolio, including federal funds sold,provides the most flexible and fastest control over rate sensitivity since itcan generally be restructured more quickly than the loan portfolio.    On the liability side, deposit products are structured tooffer incentives to attain the maturity distribution desired. Competitivefactors sometimes make control over deposits more difficult and, therefore, lesseffective as an interest rate sensitivity management tool.    The asset mix of the balance sheet is continually evaluatedin terms of several variables: yield, credit quality, appropriate fundingsources, and liquidity. Management of the liability mix of the balance sheetfocuses on expanding the various funding sources.    As of December 31, 2008, the Company was cumulativelyasset-sensitive for all time horizons. For asset-sensitive institutions, ifinterest rates should decrease, the net interest margins should decline. Sinceall interest rates and yields do not adjust at the same velocity, the gap isonly a general indicator of rate sensitivity.
		Interest Sensitivity Analysis     		December 31, 2008 		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 		 $      26,460,842 		  $                -    		  $                -    		  $                -    		 $      26,460,842 		  Interest-bearing deposits		         12,840,039 		           2,125,000 		              552,076 		                    -    		         15,517,115 		  Investment debt securities 		         13,999,913 		         16,967,857 		         28,815,399 		           2,961,875 		         62,745,044 		  Loans		       236,376,775 		           1,618,444 		           2,608,202 		           1,534,645 		       242,138,066 		Total earning assets		 $    289,677,569 		 $      20,711,301 		 $      31,975,677 		 $        4,496,520 		 $    346,861,067      		Liabilities     		Interest-bearing deposits     		   NOW 		 $      48,043,193 		  $                -    		  $                -    		  $                -    		 $      48,043,193 		   Money market 		         32,039,678 		                     -    		                    -    		                     -    		         32,039,678 		   Savings		         43,064,214 		                     -    		                    -    		                     -    		         43,064,214 		   Certificates $100,000 and over		         17,948,047 		         16,465,925 		           2,961,244 		                     - 		         37,375,216 		   Certificates under $100,000		         29,077,215 		         25,063,184 		           7,144,481 		                     - 		         61,284,880 		Securities sold under agreements    		                         - 		   to repurchase		           5,742,765 		                     -    		                    -    		                     -    		           5,742,765 		Note payable		                  6,239 		                19,288 		                48,519 		                         - 		                74,046 		Total interest-bearing liabilities		 $    175,921,351 		 $      41,548,397 		 $      10,154,244 		 $                      - 		 $    227,623,992      		Period gap		 $    113,756,218 		 $    (20,837,096)		 $      21,821,433 		 $        4,496,520 		 $    119,237,075 		Cumulative gap		 $    113,756,218 		 $      92,919,122 		 $    114,740,555 		 $    119,237,075 		   		Ratio of cumulative gap to     		   total earning assets		32.80%		26.79%		33.08%		34.38% 
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**Deposits and Other Interest-Bearing Liabilities**
    Average interest-bearing liabilities decreased $414,000(0.19%) from $218,248,000 in 2007, to $217,834,000 in 2008. Averageinterest-bearing deposits decreased $934,000 (0.44%) from $213,891,000 in 2007to $212,957,000 in 2008, while average noninterest-bearing demand depositsdecreased $5,545,000 (6.95%) from $79,807,000 in 2007 to $74,262,000 in 2008. AtDecember 31, 2008, total deposits were $292,459,213, compared to $288,943,547 atDecember 31, 2007, an increase of 1.22%. While annual average deposits werelower in 2008 than in 2007, the Bank experienced an increase in deposits duringthe last quarter of the year. Based in a summer resort area, it is atypical forthe Bank’s deposits to increase in the fourth quarter of the year. Managementattributes the deposit influx to a flight of investors from the troubled stockmarket to the safety of insured bank deposits. 

    Average interest-bearing liabilities decreased $2,808,000(1.27%) to $218,248,000 in 2007, from $221,056,000 in 2006. Averageinterest-bearing deposits decreased $1,142,000 (.53%) to $213,891,000 in 2007from $215,033,000 in 2006, while average noninterest-bearing demand depositsdecreased $4,573,000 (5.42%) to $79,807,000 in 2007 from $84,380,000 in 2006. AtDecember 31, 2007, total deposits were $288,943,547, compared to $290,324,760 atDecember 31, 2006, a decrease of .48%. Deposit balances were stable in 2007 withonly modest balance reductions relative to the previous year. During 2007,non-deposit investment products became less attractive as the stock marketexperienced a downturn. Competition for deposits continued although banks beganto lower the high rates on time deposits that were offered in 2006.    The following table sets forth the deposits of the Company bycategory as of December 31, 2008, 2007, and 2006, respectively.
		December 31,		2008		2007		2006  		Percent of 		Percent of 		Percent of		Amount		deposits		Amount		deposits		Amount		deposits      		Non-interest bearing		 $     70,652,032 		24.15%		 $     73,357,578 		25.38%		 $     79,625,853 		27.43%		NOW		        48,043,193 		16.43%		        51,218,087 		17.73%		        54,458,814 		18.76%		Money market		        32,039,678 		10.96%		        31,719,473 		10.98%		        36,413,676 		12.54%		Savings		        43,064,214 		14.72%		        41,698,409 		14.43%		        45,844,558 		15.79%		Time deposits less than $100,000		        61,284,880 		20.96%		        55,089,053 		19.07%		        46,020,077 		15.85%		     Core deposits		      255,083,997  		      253,082,600  		      262,362,978  		Time deposits of $100,000 or more		        37,375,216 		12.78%		        35,860,947 		12.41%		        27,961,782 		9.63%		     Total deposits		 $   292,459,213 		100.00%		 $   288,943,547 		100.00%		 $   290,324,760 		100.00%
    Core deposits, which exclude certificates of deposit of$100,000 or more, provide a relatively stable funding source for the Company'sloan portfolio and other earning assets. The Company's core deposits increased$2,001,397 during 2008 following core deposit decreases of $9,280,378 during2007, and $30,616,403 during 2006. During 2005 and 2006, management believesthat market conditions lead to a reversal of some of the deposit influx thatoccurred in 2001 through 2004 as funds migrated from the stock market intoinsured deposits. During 2007, deposits continued to shift from more liquiddemand and savings products to higher rate time deposits. This shift continuedthrough 2008, as investors again fled the stock market and sought to preservetheir invested funds in insured bank deposits.

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    Deposits, and particularly core deposits, have been theCompany's primary source of funding and have enabled the Company to meet bothits short-term and long-term liquidity needs. Management anticipates that whilesuch deposits will continue to be the Company's primary source of funding in thefuture, continued reductions in deposit levels, if coupled with growth in theCompany’s loan portfolio, could require periodic borrowing of funds. In thisevent, it is likely that Management would liquidate investment securities fromthe available for sale portfolio or purchase overnight federal funds as needed.    The maturity distribution of the Company's time deposits of$100,000 or more at December 31, 2008, is shown in the following table.

Maturities of Certificates of Deposit of $100,000 or		More
December 31, 2008
After six
After three
through
Within three
through
twelve
After twelve
months
six months
months
months
TotalTime deposits of		$100,000 or more
$ 17,948,047
$ 6,444,091
$ 10,021,834 
$ 2,961,244 
$ 37,375,216 
    Large certificate of deposit customers tend to be extremelysensitive to interest rate levels, making these deposits less reliable sourcesof funding for liquidity planning purposes than core deposits. Some financialinstitutions partially fund their balance sheets using large certificates ofdeposit obtained through brokers. These brokered deposits are generallyexpensive and are unreliable as long-term funding sources. Accordingly, theCompany does not accept brokered deposits under these conditions. Since 2007,the Bank has been a member of the Certificate of Deposit Account RegistryService (CDARS). This service allows the Bank to offer depositors up to $50million in FDIC insurance through a network of member banks. While CDARSdeposits are considered to be brokered deposits for regulatory reporting, theyare not considered volatile as they typically remain in the program untilmaturity. Included in time deposits less than $100,000 at December 31, 2008, arebalances of $2,625,410 issued to customers of other CDARS member banks under thereciprocal program. 
**Noninterest revenue    Noninterest revenue for 2008 increased$104,254 (5.39%) from the previous year. Service charges on deposit accountsincreased by $70,427 (6.89%) due to a mid-year increase in the fee for itemspresented against insufficient funds, coupled with reductions in fee waivers.ATM and debit card revenue increased $13,713 (2.71%) due to increased cardusage. Miscellaneous revenues exceed the previous year by $16,585 (7.72%) whichincludes an increase of $8,651 (35.98%) in wire transfer fees.   Noninterest revenue for 2007 decreased$15,808 (.81%) from the previous year. Service charges on deposit accountsdropped by $96,686 (8.64%) due to reduced volume of fees for items presentedagainst insufficient funds and overdrafts. ATM and debit card revenue increased$56,944 (12.70%) due to increased card usage. Cash surrender value of bank ownedlife insurance increased $27,996 (17.23%).     The following table presents the principal components ofnoninterest revenue for the years ended December 31, 2008, 2007, and 2006,respectively.****		Noninterest revenue  		2008		2007		2006		Service charges on deposit accounts 		 $     1,092,899 		 $     1,022,472 		 $     1,119,158 		ATM and debit card revenue 		           518,859 		           505,146 		           448,202 		Increase in cash surrender value of    		   bank owned life insurance 		           194,040 		           190,511 		           162,515  		Miscellaneous revenue 		           231,392 		           214,807 		           218,869  		Total noninterest revenue 		 $     2,037,190 		 $     1,932,936 		 $     1,948,744      		Noninterest revenue as a percentage     		of average total assets 		0.56%		0.52%		0.52%
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**Noninterest Expense   Noninterest expense increased $390,177 (5.16%) from 2007 to2008. Increased personnel costs of $137,791(3.04%) are attributable to salaryincreases and related 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 real estate taxes. Other operating expense increased$197,896 (10.61%). Significant variances occurred in several areas. Advertisingincreased $33,489 (18.86%) as the Bank conveyed to the public through the mediaits safety and soundness in a time of economic turmoil. Expense related to ATMand debit card activities increased $32,258 (11.84%) due to a growing volume ofcard transactions and the addition of a fraud monitoring system implemented inmid-2008. Annual maintenance contracts for computer software systems increased$20,139 (15.74%) as the Bank offered more products to customers and continuedwith an equipment replacement program designed to support increasing demands onour processing systems. Correspondent bank fees are up $42,498 (233.92%) due tocarrying lower balances at Federal Reserve which results in lower earningscredits. Courier service declined by $23,818 (40.65%) as a result of theconversion in May 2007, to branch-based electronic image capture. Professionalfees increased $34,442 (72.96%) as the Bank engaged legal representation forloan collection and to assist with Securities and Exchange Commissioncompliance.    Noninterest expense increased $207,404 (2.82%) from 2006 to2007. Increased personnel costs of $275,975 include a $102,262 (28.96%) increasein group insurance expense. Occupancy expense decreased $9,527, including a$32,313 (30.69%) decrease in building maintenance related to non-recurringrepairs to branches in 2006. Furniture and equipment expense is down $14,969,which is attributable to lower service contract costs. Other operating expensedecreased $44,075, which includes a $50,367 (46.22%) reduction in courier costsresulting from the Bank’s implementation of branch-based electronic imagecapture.    The following table presents the principal components ofnoninterest expense for the years ended December 31, 2008, 2007, and 2006,respectively.
**Noninterest expense   		2008		2007		2006 		Salaries and employee benefits 		 $        4,670,951 		 $        4,533,160 		 $        4,257,185  		Occupancy expense 		              753,605 		              700,092 		              709,619  		Furniture and equipment expense 		              464,559 		              463,582 		              478,551  		Advertising 		              211,056 		              177,567 		              166,441  		Armored car service 		                66,003 		                64,710 		                52,513  		ATM and debit card 		              304,737 		              272,479 		              234,409  		Business and product development 		                78,757 		                78,703 		                79,623  		Computer software amortization 		                78,364 		                79,768 		              111,765  		Computer software maintenance 		              148,098 		              127,959 		              111,777  		Correspondent bank fees 		                60,666 		                18,168 		                19,195  		Courier service 		                34,776 		                58,594 		              108,961  		Deposit insurance 		                43,186 		                33,831 		                36,275  		Director fees 		              151,900 		              149,400 		              140,200  		Dues, donations, and subscriptions 		                84,872 		                85,179 		                88,255  		Liability insurance 		                29,358 		                36,294 		                39,402  		Postage 		              165,249 		              161,595 		              149,262  		Professional fees 		                81,648 		                47,206 		                41,337  		Stationery and supplies 		                95,945 		                95,854 		              123,652  		Telephone  		              159,065 		              152,855 		              170,960  		Miscellaneous 		              269,473 		              225,095 		              235,305  		  Total noninterest expense 		 $        7,952,268 		 $        7,562,091 		 $        7,354,687        		Noninterest expense as a percentage of   		    average total assets		2.17%		2.03%		1.95%**
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** 

Capital   Under capital guidelines adopted by the Federal Reserve Boardand the FDIC, the Company and the Bank are currently required to maintain aminimum risk-based total capital ratio of 8%, with at least 4% being Tier 1capital. Tier 1 capital consists of common stockholders’ equity, qualifyingperpetual preferred stock, and minority interests in equity accounts ofconsolidated subsidiaries, less certain intangibles. In addition, the Companyand the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital tototal assets) of at least 4%, but this minimum ratio is increased by 100 to 200basis points for other than the highest-rated institutions.    At December 31, 2008, 2007, and 2006, the Company and theBank were well-capitalized, exceeding all minimum requirements, as set forth inthe following table.
  		Analysis of Capital   		Consolidated 		To be well		Required 		Company		Bank		capitalized		minimums		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%      		2006 Restated    		Total risk-based capital ratio		33.4%		31.7%		10.0%		8.0%		Tier 1 risk-based capital ratio		32.8%		31.6%		6.0%		4.0%		Tier 1 leverage ratio		18.6%		17.8%		5.0%		4.0%**Website Access to Securities and Exchange Commission Reports   The Bank maintains an Internet website atwww.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    The following accounting pronouncements have been approved bythe Financial Accounting Standards Board but have not become effective as ofDecember 31, 2008. These pronouncements would apply to the Company if theCompany or the Bank entered into an applicable activity.    In December 2007, the FASB issued SFAS 141, Revised 2007(SFAS 141R), *Business Combinations.* SFAS 141R's objective is to improvethe relevance, representational faithfulness, and comparability of theinformation that a reporting entity provides in its financial reports about abusiness combination and its effects. SFAS 141R applies prospectively tobusiness combinations for which the acquisition date is on or after December 31,2008. The Company does not expect the implementation of SFAS 141R to have amaterial impact on its consolidated financial statements.    FASB Statement No. 160, *Noncontrolling Interests inConsolidated Financial Statements* improves the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements by establishing accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  SFAS No. 160 is effective for fiscalyears beginning on or after December 15, 2008, and interim periods within thosefiscal years.  Management does not expect SFAS No. 160 to have a materialimpact on the Company’s consolidated financial statements.    FASB Statement No. 161, *Disclosures About DerivativeInstruments and Hedging Activities, an Amendment of FASB Statement No. 133*expands disclosure requirements to provide greater transparency about how andwhy an entity uses derivative instruments, and the accounting for thoseinstruments and related hedge items. SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November15, 2008, with early application encouraged.   Management does notexpect SFAS No. 161 to have a material impact on the Company’s consolidatedfinancial statements.
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    In May 2008, the FASB issued SFAS 162, *The Hierarchy ofGenerally Accepted Accounting Principles*. SFAS 162 identifies the sources ofaccounting principles and the framework for selecting the principles used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles in theUnited States. The implementation of SFAS 162 did not have a material impact onits consolidated financial statements.    FASB Statement No. 163, *Accounting for Financial GuaranteeInsurance Contracts an interpretation of FASB Statement No. 60* clarifies howStatement 60 applies to financial guarantee insurance contracts, including therecognition and measurement of premium revenue and claim liabilities. ThisStatement also requires expanded disclosures about financial guarantee insurancecontracts. SFAS No. 163 is effective for financial statements issued for fiscalyears beginning after December 15, 2008, and interim periods within those fiscalyears. Management does not expect SFAS No. 160 to have a material impact on theCompany’s consolidated financial statements.    The accounting policies adopted by management are consistentwith accounting principles generally accepted in the United States of Americaand are consistent with those followed by peer Banks.
**Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk

Impact of Inflation    Unlike most industrial companies, the assets and liabilitiesof financial institutions such as the Company and the Bank are primarilymonetary in nature. Therefore, interest rates have a more significant effect onthe Company's performance than do the effects of changes in the general rate ofinflation and change in prices. In addition, interest rates do not necessarilymove in the same direction or in the same magnitude as the prices of goods andservices. As discussed previously, management seeks to manage the relationshipsbetween interest sensitive assets and liabilities in order to protect againstwide interest rate fluctuations, including those resulting from inflation. See"Liquidity and Interest Rate Sensitivity" above. 
**Item 8. Financial Statements and Supplementary Data**
    In response to this Item, the information included on pages 1through 22 of the Company's Annual Report to Stockholders for the year endedDecember 31, 2008, 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 andmaintained by the Company to ensure that information required to be disclosed inthe Company’s publicly filed reports is recorded, processed, summarized andreported in a timely manner. Such information must be available to management,including the Chief Executive Officer (CEO) and Treasurer, to allow them to maketimely decisions about required disclosures. Even a well-designed and maintainedcontrol system can provide only reasonable, not absolute, assurance that itsobjectives are achieved. Inherent limitations in any system of controls includeflawed judgment, errors, omissions, or intentional circumvention of controls.    The Company’s management, including the CEO and Treasurer,performed an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of December 31, 2008. Based onthat evaluation, 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 Reporting**
Management Report on Internal Control over Financial Reporting   Calvin B. Taylor Bankshares, Inc. maintains a system ofinternal control over financial reporting, which is designed to providereasonable assurance to the Company’s management and board of directorsregarding the preparation of reliable published financial statements. The systemincludes an organizational structure and division of responsibility, establishedpolicies and procedures including a code of conduct to foster a strong ethicalclimate, and the careful selection, training and development of our staff. Thesystem contains self-monitoring mechanisms, and an internal auditor monitors theoperation of the internal control system and reports findings andrecommendations to management and the board of directors. Corrective actions aretaken to address control deficiencies and other opportunities for improving thesystem as they are identified. The board, operating through its audit committee,which is composed entirely of directors who are not officers or employees of theCompany, provides oversight to the financial reporting process.    There are inherent limitations in the effectiveness of anysystem of internal controls, including the possibility of human error and thecircumvention or overriding of controls. Accordingly, even an effective internalcontrol system can provide only reasonable assurance with respect to financialstatement preparation. Furthermore, the effectiveness of an internal controlsystem may vary over time and with circumstances.    The Company assessed its internal control system as ofDecember 31, 2008 in relation to criteria for effective internal control overfinancial reporting as described in *Internal Control – Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on its assessment, the Company believes that, as of December 31, 2008, itssystem of internal control over financial reporting met those criteria.

                                                                                                    CALVIN B. TAYLOR BANKSHARES, INC.                                                                                                   (Registrant)

Date: 												March 11, 2009                                                               By:												/s/ Raymond M. Thompson                                                                                                                Chief Executive Officer
Date: 												March 11, 2009                                                               By:												/s/ Jennifer G. Hawkins                                                                                                                Treasurer / Principal Financial Officer
 

- 31 -

 

Attestation Report of the Independent 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, 2008,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, 2008, 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 11, 2009, expressed an unqualified opinion.

/s/ Rowles & Company, LLP

Baltimore, MarylandMarch 11, 2009

- 32 -

 
** 

Changes in Internal Controls**
    During the quarter ended on the date of this report, therewere no significant changes in the Company’s internal controls over financialreporting that have had or are reasonably likely to have a material affect onthe Company’s internal control over financial reporting. As of December 31,2008, the Company’s management, including the CEO and Treasurer, has concludedthat the Company’s internal controls over financial reporting are effective.
**Audit Committee and Financial Expert**
    The Board of Directors has adopted a written Audit Policy,which serves as a charter for the Audit Committee. The Audit Committee iscomprised of seven independent directors, including Chairman James R. Bergey,Jr. who serves as the financial expert. The Audit Committee is scheduled to meetquarterly and held four meetings in 2008.
**PART III

Item 10. Directors and Executive Officers of the Registrant**
    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2009 Annual Meetingof Stockholders, and is incorporated herein by reference.
**Item 11. Executive Compensation

    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2009 Annual Meetingof Stockholders, 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 theCompany's Proxy Statement to be filed in connection with the 2009 Annual Meetingof Stockholders, and is incorporated herein by reference.
**Item 13. Certain Relationships and Related Transactions**
    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2009 Annual Meetingof Stockholders, and is incorporated herein by reference.
**Item 14. Principal Accounting Fees and Services**
    The information required by this item is included in theCompany's Proxy Statement to be filed in connection with the 2009 Annual Meetingof Stockholders, 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 endedDecember 31, 20083.1 Articles of Incorporation of the Company, incorporated byreference to Exhibit 3.1 of Registration Statement Form S-4, File No. 33-99762.3.2 Bylaws of the Company, incorporated by reference toExhibit 3.2 of Registration Statement Form S-4, File No. 33-99762.

.

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SIGNATURES

Pursuant 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 11, 2009                                                               By:												/s/ Raymond M. Thompson                                                                                                                Chief Executive Officer
Date: 												March 11, 2009                                                               By:												/s/ 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 11, 2009                                                             By: /s/ James R. Bergey, Jr., Director

Date: March 11, 2009                                                             By:/s/ John H. Burbage, Jr., Director

Date: March 11, 2009                                                             By: /s/ Todd E. Burbage, Director

Date: March 11, 2009                                                             By: /s/ Charlotte K. Cathell, Director

Date: March 11, 2009                                                             By: /s/ Reese F. Cropper, Jr.                                                                                                               Chairman of the Board of Directors

Date: March 11, 2009                                                             By: /s/ Reese F. Cropper, III, Director

Date: March 11, 2009                                                             By: /s/ Hale Harrison, Director

Date: March 11, 2009                                                             By: /s/ Gerald T. Mason, Director

Date: March 11, 2009                                                             By: /s/ William H. Mitchell, Director                                                                                                               Vice President

Date: March 11, 2009                                                             By: /s/ Joseph E. Moore, Director

Date: March 11, 2009                                                             By: /s/ Michael L. Quillin, Sr., Director

Date: March 11, 2009                                                             By: /s/ 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, 2008of 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 11, 2009                                                               By:												/s/ Raymond M. Thompson                                                                                                                Chief Executive Officer
Date: 												March 11, 2009                                                               By:												/s/ 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 11, 2009                                                               By:												/s/ 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 11, 2009                                                               By:												/s/ Jennifer G. Hawkins                                                                                                                Treasurer / Principal Financial Officer
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