Calvin B. Taylor Bankshares, Inc.and Subsidiary**Table of Contents**
 

 
PageReport of		Independent Registered Public Accounting Firm1Consolidated		Financial StatementsConsolidated		Balance Sheets2Consolidated		Statements of Income3Consolidated		Statements of Changes in Stockholders' Equity4Consolidated		Statements of Cash Flows5-6Notes to		Consolidated Financial Statements7-23
 

 

 

 

 

 

 
**Report of Independent Registered Public Accounting Firm

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

    We have audited the accompanying consolidated balance sheets of Calvin B.	Taylor Bankshares, Inc. and Subsidiary (the Company) as of December 31,	2008, 2007, and 2006, and the related consolidated statements of income,	changes in stockholders' equity, and cash flows for each of the years in the	three-year period ended December 31, 2008. These consolidated financial	statements are the responsibility of the Company's management. Our	responsibility is to express an opinion on these consolidated financial	statements based on our audits.

    We conducted our audits in accordance with the standards of the Public	Company Accounting Oversight Board in the United States of America. Those	standards require that we plan and perform the audit to obtain reasonable	assurance about whether the consolidated financial statements are free of	material misstatement. An audit includes examining, on a test basis,	evidence supporting the amounts and disclosures in the consolidated	financial statements. An audit also includes assessing the accounting	principles used and significant estimates made by management, as well as	evaluating the overall financial statement presentation. We believe that our	audits provide a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above	present fairly, in all material respects, the financial position of Calvin	B. Taylor Bankshares, Inc. and Subsidiary as of December 31, 2008, 2007, and	2006, and the results of its operations and its cash flows for each of the	years in the three-year period ended December 31, 2008, in conformity with	accounting principles generally accepted in the United States of America.

    We have also audited, in accordance with the standards of the Public	Company Accounting Oversight Board in the United States of America, the	Company's internal control over financial reporting as of December 31, 2008,	based on criteria established in *Internal Control - Integrated Framework*	issued by the Committee of Sponsoring Organizations of the Treadway	Commission (COSO) and our report dated March 11, 2009, expressed an	unqualified opinion on management's assessment of internal control over	financial reporting and an unqualified opinion.

 

/s/ Rowles & Company, LLP

Baltimore, Maryland	March 11, 2009

 
		Calvin B. Taylor Bankshares, Inc.		and subsidiary		Consolidated Balance Sheets 		December 31, 		2008		2007		2006		Assets		Cash and due from banks		 $    8,769,784 		 $  17,428,347 		 $  21,138,799 		Federal funds sold		     26,460,842 		     23,121,256 		     24,616,735 		Interest-bearing deposits		     15,517,115 		       6,012,482 		       2,055,689 		Investment securities available for sale		     33,975,271 		     24,082,202 		     18,854,192 		Investment securities held to maturity (approximate fair   		   value of $33,523,422, $47,302,194, and $56,031,190)		     32,621,797 		     46,679,750 		     56,271,631 		Loans, less allowance for loan losses of $707,152,   		   $195,525, and $196,083		   241,430,914 		   238,076,278 		   233,231,118 		Premises and equipment		       6,326,312 		       6,536,469 		       6,562,837 		Accrued interest receivable		       1,704,260 		       1,693,173 		       1,692,622 		Computer software		         156,372 		         156,629 		         175,383 		Bank owned life insurance		       4,914,810 		       4,720,770 		       4,530,259 		Other assets		         725,034 		         638,317 		         382,236  		 $ 372,602,511 		 $ 369,145,673 		 $ 369,511,501 		Liabilities and Stockholders' Equity		Deposits   		  Noninterest-bearing		 $  70,652,032 		 $  73,357,578 		 $  79,625,853 		  Interest-bearing		   221,807,181 		   215,585,969 		   210,698,907  		   292,459,213 		   288,943,547 		   290,324,760 		Securities sold under agreements to repurchase		       5,742,765 		       3,426,173 		       5,624,048 		Note payable		           74,046 		           98,090 		         120,737 		Accrued interest payable		         359,673 		         501,909 		         340,155 		Deferred income taxes		       1,437,813 		       1,481,111 		       1,487,664 		Other liabilities		         245,507 		         219,080 		         233,196  		   300,319,017 		   294,669,910 		   298,130,560 		Stockholders' equity   		  Common stock, par value $1 per share;   		    authorized 10,000,000 shares; issued and outstanding   		    3,048,397 shares at December 31, 2008,   		    3,102,510 shares at December 31, 2007, and   		    3,149,356 shares at December 31, 2006		       3,048,397 		       3,102,510 		       3,149,356 		  Additional paid-in capital		     10,406,403 		     12,381,413 		     14,117,732 		  Retained earnings		     56,569,913 		     57,076,461 		     52,265,370  		     70,024,713 		     72,560,384 		     69,532,458 		  Accumulated other comprehensive income		       2,258,781 		       1,915,379 		       1,848,483  		     72,283,494 		     74,475,763 		     71,380,941  		 $ 372,602,511 		 $ 369,145,673 		 $ 369,511,501 
The accompanying notes are an integral part of these financialstatements.2

 
		Calvin B. Taylor Bankshares, Inc.		and subsidiary		Consolidated Statements of Income 		               Years Ended December 31,              		2008		2007		2006		Interest and dividend revenue   		  Loans, including fees		 $  16,582,428 		 $  16,645,904 		 $  15,868,454 		  U. S. Treasury and government agency securities		       2,243,413 		       2,811,829 		       2,875,040 		  State and municipal securities		           42,336 		           68,445 		         155,620 		  Federal funds sold 		         732,227 		       1,919,020 		       1,136,460 		  Interest-bearing deposits		         325,396 		         168,485 		           78,944 		  Equity securities		           74,843 		           70,479 		           70,752 		          Total interest and dividend revenue		     20,000,643 		     21,684,162 		     20,185,270 		Interest expense   		  Deposits		       3,963,962 		       4,616,037 		       3,174,670 		  Borrowings		           58,292 		           35,803 		           48,088 		          Total interest expense		       4,022,254 		       4,651,840 		       3,222,758 		          Net interest income		     15,978,389 		     17,032,322 		     16,962,512 		Provision for loan losses		         617,526 		                 -   		                 -   		          Net interest income after provision for loan losses		     15,360,863 		     17,032,322 		     16,962,512 		Noninterest revenue   		  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 expenses   		  Salaries		       3,681,469 		       3,563,855 		       3,407,224 		  Employee benefits		         989,482 		         969,305 		         849,961 		  Occupancy 		         753,605 		         700,092 		         709,619 		  Furniture and equipment 		         464,559 		         463,582 		         478,551 		  Other operating		       2,063,153 		       1,865,257 		       1,909,332 		          Total noninterest expenses		       7,952,268 		       7,562,091 		       7,354,687 		          Income before income taxes 		       9,445,785 		     11,403,167 		     11,556,569 		Income taxes		       3,386,568 		       4,106,580 		       4,156,200 		Net income		 $    6,059,217 		 $    7,296,587 		 $    7,400,369     		Earnings per common share - basic and diluted		 $            1.97 		 $            2.33 		 $            2.33 
The accompanying notes are an integral part of these financialstatements.3

 
		calvin b. taylor bankshares, inc.		and subsidiary         		Consolidated Statements of Changes in Stockholders' Equity              		Accumulated       		other   		Common stock		Additional		Retained		comprehensive		 Comprehensive  		Shares 		Par value 		paid-in capital		earnings		income		 income          		Balance, December 31, 2005		 3,187,556 		 $3,187,556 		 $ 15,454,735 		 $ 47,232,513 		 $ 1,654,965    		Net income		            -   		              -   		                -   		     7,400,369 		               -     		 $ 7,400,369 		Unrealized gain on investment        		  securities available for sale net        		  of income taxes of $127,088		            -   		              -   		                -   		                -   		      193,518   		      193,518 		Comprehensive income       		 $ 7,593,887 		Common shares repurchased 		    (38,200)		      (38,200)		    (1,337,003)		                -   		               -      		Cash dividend, $.75 per share		            -   		              -   		                -   		    (2,367,512)		               -               		Balance, December 31, 2006		 3,149,356 		   3,149,356 		    14,117,732 		    52,265,370 		    1,848,483    		Net income		            -   		              -   		                -   		     7,296,587 		               -     		 $ 7,296,587 		Unrealized gain on investment        		  securities available for sale net        		  of income taxes of $36,578		            -   		              -   		                -   		                -   		        66,896   		        66,896 		Comprehensive income       		 $ 7,363,483 		Common shares repurchased 		    (46,846)		      (46,846)		    (1,736,319)		                -   		               -      		Cash dividend, $.80 per share		            -   		              -   		                -   		    (2,485,496)		               -               		Balance, December 31, 2007		 3,102,510 		   3,102,510 		    12,381,413 		    57,076,461 		    1,915,379    		Net income		            -   		              -   		                -   		     6,059,217 		               -     		 $ 6,059,217 		Unrealized gain on investment        		  securities available for sale net        		  of income taxes of $154,135		            -   		              -   		                -   		                -   		      343,402   		      343,402 		Comprehensive income       		 $ 6,402,619 		Common shares repurchased 		    (54,113)		      (54,113)		    (1,975,010)		                -   		               -      		Cash dividend, $2.15 per share		            -   		              -   		                -   		    (6,565,765)		               -               		Balance, December 31, 2008		 3,048,397 		 $3,048,397 		 $ 10,406,403 		 $ 56,569,913 		 $ 2,258,781    
 

The accompanying notes are an integral part of these financialstatements.

4
		calvin b. taylor bankshares, inc.		and subsidiary   		Consolidated Statements of Cash Flows    		Years Ended December 31,  		2008		2007		2006    		Cash flows from operating activities   		  Interest and dividends received		 $  19,804,313 		 $  20,969,946 		 $  19,672,392 		  Fees and commissions received		       1,499,929 		       1,735,778 		       1,786,980 		  Interest paid		     (4,164,490)		     (4,490,056)		     (3,059,960)		  Cash paid to suppliers and employees		     (7,016,197)		     (7,005,983)		     (6,857,365)		  Income taxes paid		     (3,657,415)		     (4,396,848)		     (4,350,114) 		       6,466,140 		       6,812,837 		       7,191,933     		Cash flows from investing activities   		  Certificates of deposit purchased, net of maturities		     (9,483,255)		     (3,954,410)		           94,295 		  Proceeds from maturities of investments available for sale		     19,000,000 		     29,000,000 		       2,000,000 		  Purchase of investments available for sale		    (28,237,469)		    (33,387,809)		    (13,750,206)		  Proceeds from maturities of investments held to maturity		     29,360,000 		     37,025,000 		     73,050,000 		  Purchase of investments held to maturity		    (15,274,817)		    (27,456,181)		    (16,695,344)		  Loans made, net of principal collected		     (3,972,162)		     (4,845,160)		    (26,809,826)		  Proceeds from sale of equipment		                 -   		             7,549 		             2,500 		  Purchases of premises, equipment, and computer software		        (369,363)		        (534,978)		        (452,448) 		     (8,977,066)		     (4,145,989)		     17,438,971     		Cash flows from financing activities   		  Net increase (decrease) in   		     Time deposits		       7,710,096 		     16,968,141 		     12,074,786 		     Other deposits		     (4,194,430)		    (18,349,354)		    (32,607,633)		     Securities sold under agreements to repurchase		       2,316,592 		     (2,197,875)		        (525,215)		  Payments on note payable		          (24,044)		          (22,647)		          (21,332)		  Common shares repurchased 		     (2,029,123)		     (1,783,165)		     (1,375,203)		  Dividends paid		     (6,565,765)		     (2,485,496)		     (6,830,090) 		     (2,786,674)		     (7,870,396)		    (29,284,687)    		Net increase (decrease) in cash and cash equivalents		     (5,297,600)		     (5,203,548)		     (4,653,783)    		Cash and cash equivalents at beginning of year		     40,568,264 		     45,771,812 		     50,425,595 		Cash and cash equivalents at end of year		 $  35,270,664 		 $  40,568,264 		 $  45,771,812 

The accompanying notes are an integral part of these financialstatements.

5

 
		calvin b. taylor bankshares, inc.		and subsidiary   		Consolidated Statements of Cash Flows		Continued     		Years Ended December 31, 		2008		2007		2006    		Reconciliation of net income to net cash provided by   		   operating activities   		    Net income		 $    6,059,217 		 $    7,296,587 		 $    7,400,369     		   Adjustments to reconcile net income to net cash    		      provided by operating activities   		        Provision for loan losses		         617,526 		                 -   		                 -   		        Depreciation and amortization		         575,106 		         570,369 		         602,441 		        Deferred income taxes		        (197,433)		          (43,131)		          (42,710)		        Premium amortization and discount accretion 		        (185,294)		        (713,664)		        (325,227)		        Loss on disposition of assets		             4,671 		             2,172 		             1,351 		        Decrease (increase) in   		           Accrued interest receivable		          (11,087)		              (551)		        (187,677)		           Cash surrender value of bank owned life insurance		        (194,040)		        (190,511)		        (162,515)		           Other assets		          (86,717)		           (8,718)		        (158,063)		        Increase (decrease) in   		           Accrued interest payable		        (142,236)		         161,754 		         162,798 		           Accrued income taxes		                 -   		        (247,353)		          (96,730)		           Other liabilities		           26,427 		          (14,117)		           (2,104) 		 $    6,466,140 		 $    6,812,837 		 $    7,191,933             		Composition of cash and cash equivalents   		        Cash and due from banks		 $    8,769,784 		 $  17,428,347 		 $  21,138,799 		        Federal funds sold		     26,460,842 		     23,121,256 		     24,616,735 		        Interest-bearing deposits, except for time deposits		           40,038 		           18,661 		           16,278  		 $  35,270,664 		 $  40,568,264 		 $  45,771,812 

 

The accompanying notes are an integral part of these financialstatements.

6

Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**
1. Summary of Significant Accounting Policies		    The consolidated financial statements of Calvin B.		Taylor Bankshares, Inc. include the accounts of its wholly owned		subsidiary, Calvin B. Taylor Banking Company. All significant		intercompany balances and transactions have been eliminated in		consolidation. The accounting and reporting policies reflected in these		financial statements conform to accounting principles generally accepted		in the United States of America and to general practices within the		banking industry. 

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

Use of estimates		    The preparation of financial statements in conformity		with accounting principles generally accepted in the United States of		America requires management to make estimates and assumptions that		affect the reported amounts of assets and liabilities and disclosure of		contingent assets and liabilities at the date of the financial		statements. These estimates and assumptions may affect the reported		amounts of revenues and expenses during the reporting period. Actual		results could differ from these estimates.

Cash equivalents		    For purposes of reporting cash flows, cash and cash		equivalents include cash on hand, amounts due from banks, federal funds		sold and interest-bearing deposits except for time deposits. Federal		funds are purchased and sold for one-day periods.

Investment securities		    As securities are purchased, management determines if		the securities should be classified as held to maturity or available for		sale. Securities which management has the intent and ability to hold to		maturity are recorded at amortized cost which is cost adjusted for		amortization of premiums and accretion of discounts to maturity.		Securities classified as available-for-sale are recorded at fair value.

    Purchase premiums and discounts are recognized in		income revenue using the straight line method over the terms of the		securities. Gains and losses on disposal are determined using the		specific-identification method.

Loans    Loans are stated at their outstanding principal		amounts less the allowance for loan losses. Interest on loans is accrued		and credited to income based on contractual interest rates applied to		principal amounts outstanding. The accrual of interest is discontinued		when principal or interest is ninety days past due or when the loan is		determined to be impaired, unless collateral is sufficient to discharge		the debt in full and the loan is in process of collection. When a loan		is placed in nonaccruing status, any interest previously accrued but		unpaid is reversed from interest revenue. Interest payments received on		nonaccrual loans may be recorded as cash basis income, or as a reduction		of principal, depending on management's judgment on a loan by loan		basis. Accrual of interest may be restored when all principal and		interest are current and management believes that future payments will		be received in accordance with the loan agreement. The Company does not		defer loan origination costs which management has determined to be		immaterial.

7

Calvin B. Taylor Bankshares, Inc.and Subsidiary  **Notes to Consolidated Financial Statements**
1. Summary of Significant Accounting Policies (Continued)Loans (continued)		    Loans are considered impaired when, based on current		information, management considers it unlikely that collection of		principal and interest payments will be made according to contractual		terms. Generally, loans are not reviewed for impairment until the		accrual of interest has been discontinued, although management may		categorize a performing loan as impaired based on knowledge of the		borrower's financial condition, devaluation of collateral, or other		circumstances that are deemed relevant to loan collection. Impaired		loans may have specific reserves allocated to them in the allowance for		loan losses.

Allowance for loan losses		    The allowance for loan losses represents an amount		which management judges to be adequate to absorb identified and inherent		losses in the loan portfolio as of the balance sheet date. Valuation of		the allowance is completed no less than quarterly. The determination of		the allowance is inherently subjective as it relies on estimates of		potential loss related to specific loans, the effects of portfolio		trends, and other internal and external factors.		    In determining an adequate level for the allowance,		management considers historical loss experience for major types of		loans. However, historical data may not be an accurate predictor of loss		potential in the current loan portfolio. Management reviews the current		portfolio giving consideration to problem loans, delinquencies, the		composition of the portfolio, concentrations of credit, and changes in		lending products, processes, or staffing. Management considers external		factors such as the interest rate environment, competition, current		local and national economic trends, and the results of recent		independent reviews by auditors and banking regulators. 		    The allowance is increased by current period		provisions recorded as expense and by recoveries of amounts previously		charged-off. The allowance is decreased when loans are charged-off as		losses, which occurs when they are deemed to be uncollectible.		Provisions for loan losses are made to bring the balance in the		allowance to the level established by application of management's		allowance methodology, and may result in an increase or decrease to		expense.

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

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

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

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

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

8

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

1. Summary of Significant Accounting Policies (Continued)

Per share data		   		Earnings per common share are determined by dividing		net income by the weighted average number of common shares outstanding		for the period, which was 3,076,278, 3,125,761, and 3,176,092 for the		years ended December 31, 2008, 2007, and 2006, respectively. 

 

2. Cash and Due From Banks

    The Company normally carries balances with other		banks that exceed the federally insured limit. Average balances carried		in excess of the limit, including unsecured federal funds sold to the		same banks, were $36,500,123 for 2008, $38,104,224 for 2007, and		$22,867,864 for 2006.		    Banks are required to carry noninterest-bearing cash		reserves at specified percentages of deposit balances. The Company's		normal amount of cash on hand and on deposit with other banks is		sufficient to satisfy the reserve requirements.

 

3. Lines of Credit

    The Company has available lines of credit, including		overnight federal funds, reverse repurchase agreements and letters of		credit, totaling $27,000,000 as of December 31, 2008.

 

 

 

 

 

 

 

 

9

Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**
4. Investment SecuritiesInvestment securities are summarized as follows:
 		Amortized 		Unrealized		Unrealized		Fair 		cost		gains		losses		value		December 31, 2008    		Available for sale    		  U.S. Treasury		 $    28,309,823 		 $   1,408,794 		 $            -   		 $    29,718,617 		  State and municipal		           400,000 		            5,220 		             590 		           404,630 		  Equity		         1,691,841 		      2,160,183 		               -   		         3,852,024  		 $    30,401,664 		 $   3,574,197 		 $          590 		 $    33,975,271 		Held to maturity    		  U.S. Treasury		 $    24,519,603 		 $     861,569 		 $            -   		 $    25,381,172 		  U.S. Government agency		         6,999,443 		          32,657 		          1,016 		         7,031,084 		  State and municipal		         1,102,751 		            8,415 		               -   		         1,111,166  		 $    32,621,797 		 $     902,641 		 $       1,016 		 $    33,523,422      		December 31, 2007    		Available for sale    		  U.S. Treasury		 $    18,914,290 		 $     590,315 		 $       1,099 		 $    19,503,506 		  State and municipal		           400,000 		            2,329 		             912 		           401,417 		  Equity		         1,691,841 		      2,485,438 		               -   		         4,177,279  		 $    21,006,131 		 $   3,078,082 		 $       2,011 		 $    24,082,202 		Held to maturity    		  U.S. Treasury		 $    35,473,741 		 $     587,431 		 $            -   		 $    36,061,172 		  U.S. Government agency		       10,000,000 		          33,226 		             209 		       10,033,017 		  State and municipal		         1,206,009 		            2,206 		             210 		         1,208,005  		 $    46,679,750 		 $     622,863 		 $          419 		 $    47,302,194      		December 31, 2006    		Available for sale    		  U.S. Treasury		 $    13,923,505 		 $     528,889 		 $       8,049 		 $    14,444,345 		  State and municipal		           300,000 		                -   		          3,441 		           296,559 		  Equity		         1,658,091 		      2,455,197 		               -   		         4,113,288  		 $    15,881,596 		 $   2,984,086 		 $      11,490 		 $    18,854,192 		Held to maturity    		  U.S. Treasury		 $    43,968,110 		 $       54,368 		 $    226,931 		 $    43,795,547 		  U.S. Government agency		         8,749,280 		                -   		        47,330 		         8,701,950 		  State and municipal		         3,554,241 		              107 		        20,655 		         3,533,693  		 $    56,271,631 		 $       54,475 		 $    294,916 		 $    56,031,190 
10

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

4. Investment Securities (Continued)

    The table below shows the gross unrealized losses and		fair value of securities that are in an unrealized loss position as of		December 31, 2008, aggregated by length of time that individual		securities have been in a continuous unrealized loss position. 
 				Less than 12 months				12 months or more				Total 				Fair				Unrealized				Fair				Unrealized				Fair				Unrealized 				value				losses				value				losses				value				losses       				U. S. Government Agency				 $         998,984 				 $        1,016 				 $                   -   				 $             -   				 $         998,984 				 $        1,016 				State and municipal				              99,410 				              590 				                      -   				                -   				              99,410 				              590  				 $      1,098,394 				 $        1,606 				 $                   -   				 $             -   				 $      1,098,394 				 $        1,606 
    The debt securities for which an unrealized loss is		recorded are issues of the Federal Home Loan Bank (a U. S. government		agency), and general and highly rated revenue obligations of states and		municipalities. The Company has the ability and the intent to hold these		securities until they are called or mature at face value. Fluctuations		in fair value reflect market conditions, and are not indicative of an		other-than-temporary impairment of the investment.

    The amortized cost and estimated fair value of debt		securities, by contractual maturity and the amount of pledged		securities, follow. Actual maturities may differ from contractual		maturities because issuers may have the right to call or prepay		obligations with or without call or prepayment penalties.
 				December 31, 2008				December 31, 2007				December 31, 2006 				Amortized				Fair				Amortized				Fair				Amortized				Fair 				cost				value				cost				value				cost				value       				Available for sale      				  Within one year				 $    17,159,259 				 $    17,201,296 				 $    16,918,515 				 $    16,935,694 				 $    11,928,019 				 $    11,919,970 				  After one year      				   through five years				         9,554,499 				         9,960,076 				            400,000 				            401,417 				            300,000 				            296,559 				  After ten years				         1,996,065 				         2,961,875 				         1,995,775 				         2,567,812 				         1,995,486 				         2,524,375  				 $    28,709,823 				 $    30,123,247 				 $    19,314,290 				 $    19,904,923 				 $    14,223,505 				 $    14,740,904        				Held to maturity      				  Within one year				 $    13,766,474 				 $    14,027,311 				 $    16,454,622 				 $    16,552,091 				 $    37,025,991 				 $    36,795,410 				  After one year      				   through five years				       18,855,323 				       19,496,111 				       30,225,128 				       30,750,103 				       19,245,640 				       19,235,780  				 $    32,621,797 				 $    33,523,422 				 $    46,679,750 				 $    47,302,194 				 $    56,271,631 				 $    56,031,190        				Pledged securities				 $    25,023,730 				 $    26,891,914 				 $    25,231,084 				 $    25,682,422 				 $    29,579,859 				 $    29,487,094 
    Investments are pledged to secure deposits of federal		and local governments. Pledged securities also serve as collateral for		securities sold under agreements to repurchase.

11

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

5. Loans and Allowance for Loan Losses

    Major classifications of loans are as follows:
  		2008		2007		2006 		Real estate mortgages    		Construction, land development, and land		 $    30,330,261 		 $    38,230,033 		 $    37,331,256  		Residential 1 to 4 family		       95,203,258 		       87,327,448 		       88,599,071  		Second mortgages		         2,952,418 		         3,287,734 		         2,395,178  		Commercial properties		       89,302,549 		       84,568,665 		       79,484,039  		Commercial 		       21,990,067 		       22,283,007 		       23,264,997  		Consumer		         2,359,513 		         2,574,916 		         2,352,660   		     242,138,066 		     238,271,803 		     233,427,201  		Allowance for loan losses		           707,152 		           195,525 		           196,083  		Loans, net		 $  241,430,914 		 $  238,076,278 		 $  233,231,118 

    The rate repricing distribution of the loan portfoliofollows:
 		Immediately		 $  236,027,947 		 $  232,518,768 		 $  227,174,910  		Within one year		         1,967,273 		         1,878,462 		         1,432,234  		Over one to five years		         2,608,201 		         2,622,311 		         3,496,707  		Over five years		         1,534,645 		         1,252,262 		         1,323,350   		 $  242,138,066 		 $  238,271,803 		 $  233,427,201 
****
    The Company makes loans to customers located		primarily in the Delmarva region. Although the loan portfolio is		diversified, its performance will be influenced by the economy of the		region.

    Transactions in the allowance for loan losses were asfollows:
  		2008		2007		2006      		Beginning balance		 $        195,525 		 $        196,083 		 $        211,374  		Provision charged to operations		           617,526 		                   -   		                   -    		Recoveries		               5,016 		               5,705 		                   95   		           818,067 		           201,788 		           211,469  		Loans charged off		           110,915 		               6,263 		             15,386  		Ending balance		 $        707,152 		 $        195,525 		 $        196,083 

 

 

12

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

5. Loans and Allowance for Loan Losses (Continued)

    Amounts past due 90 days or more, and still accruing interestat December 31, are as follows:
  		2008		2007		2006      		Real estate		 $      4,602,365 		 $                -   		 $        190,289  		Commercial		             40,000 		               9,100 		             49,331  		Consumer		               5,427 		                   -   		                   -     		 $      4,647,792 		 $            9,100 		 $        239,620 

    Included in amounts past due 90 days or more and		still accruing 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 this loan that is superior to the Bank's liens. The		Bank was not aware of this lien at the time the loan was originated, and		the Bank's settlement agent did not discover the lien during the title		examination process. The Bank has filed a claim with the title company		that has insured its liens. The Bank believes the title company will		indemnify the Bank for any losses resulting from the superior lien,		although there is no guarantee that this will be the case. The Bank will		review the accrual status of this loan as it learns more information		regarding its claim. As of December 31, 2008, there is $86,103 of		accrued interest on this loan that was included in interest income in		2008.

 

    Loans on which accrual of interest had been		discontinued as of December 31, are as follows: 
  				2008				2007				2006      				Nonaccruing loans				 $        199,724 				 $          40,916 				 $                -    				Interest not accrued on nonaccruing loans				 $            6,797 				 $            1,509 				 $                -   

    Management has identified impaired loans with		outstanding principal balances totaling $8,888,200 as of December 31,		2008, for which $605,405 was allocated in the allowance for loan losses.		Included in principal balances of impaired loans is $419,770 which is		guaranteed by a government agency. 		    As of December 31, 2007, management had identified		impaired loans with outstanding principal balances totaling $595,774,		for which $138,514 was allocated in the allowance for loan losses.		Included in principal balances of impaired loans was $436,802 which was		guaranteed by a government agency. Management had identified no impaired		loans as of December 31, 2006. 

 

 

13

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

6. Loan Commitments

    Loan commitments are agreements to lend to customers		as long as there is no violation of any conditions of the contracts.		Loan commitments generally have interest at current market rates, fixed		expiration dates, and may require payment of a fee. Letters of credit		are commitments issued to guarantee the performance of a customer to a		third party.		    Loan commitments and letters of credit are made on		the same terms, including collateral, as outstanding loans. The		Company's exposure to loss in the event of nonperformance by the		borrower is represented by the contract amount of the commitment.		    Outstanding loan commitments, lines of credit, and		letters of credit at December 31, are as follows:
  				2008				2007				2006 				Loan commitments and lines of credit    				  Construction and land development				 $    15,218,812 				 $    12,582,162 				 $    18,866,083  				  Other				       22,245,089 				       20,941,323 				       21,557,185   				 $    37,463,901 				 $    33,523,485 				 $    40,423,268       				Standby letters of credit				 $      1,921,878 				 $      1,582,050 				 $      1,682,942 
 

7. Lease Commitments

    The Company leases the land on which the Route 50		branch in East Berlin is located. Rent expense for the year ended		December 31, 2008 was $16,250 and for each of the years ended December		31, 2007 and 2006, was $15,000. The lease obligation, which expires		August 31, 2014, requires payments as follows: 
 		Period		 		Minimum rents		  		2009 		 $    16,667   		2010 		       20,333   		2011 		       21,333   		2012 		       22,333   		2013 		       23,333   		2014 		       16,000     		 $  119,999  
 

 

14

Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**
8. Premises and Equipment and Computer Software

    A summary of premises and equipment and the relateddepreciation is as follows:
  		Estimated useful life		2008		2007		2006       		Land 		 $      2,092,717 		 $      2,092,717 		 $      2,092,717  		Premises		5 - 50 years		         6,745,668 		         6,642,872 		         6,539,781  		Furniture and equipment		3 - 20 years		         3,619,752 		         3,505,080 		         3,632,597    		       12,458,137 		       12,240,669 		       12,265,095  		Accumulated depreciation 		         6,131,825 		         5,704,200 		         5,702,258  		Net premises and equipment 		 $      6,326,312 		 $      6,536,469 		 $      6,562,837        		Depreciation expense 		 $        496,742 		 $        490,601 		 $        490,676 
    A summary of capitalized computer software and the relatedamortization is as follows:
  		Estimated useful life		2008		2007		2006       		Computer software		3 - 5 years		 $        839,007 		 $        760,900 		 $        701,086  		Accumulated amortization 		           682,635 		           604,271 		           525,703  		Net computer sofware 		 $        156,372 		 $        156,629 		 $        175,383        		Amortization expense 		 $          78,364 		 $          79,768 		 $        111,765 
9. Interest-bearing deposits
 		Major classifications of interest-bearing deposits are as follows:    		2008		2007		2006 		NOW		 $    48,043,193 		 $    51,218,087 		 $    54,458,814  		Money market		       32,039,678 		       31,719,473 		       36,413,676  		Savings		       43,064,214 		       41,698,409 		       45,844,558  		Time deposits of $100,000 or more		       37,375,216 		       35,860,947 		       27,961,782  		Other time deposits		       61,284,880 		       55,089,053 		       46,020,077   		 $  221,807,181 		 $  215,585,969 		 $  210,698,907       		The rate repricing distribution of other time deposits follows:   		Three months or less		 $    47,025,262 		 $    31,340,615 		 $    27,264,435  		Over three through twelve months		       41,529,109 		       51,075,812 		       40,508,905  		Over one through two years		       10,105,725 		         8,533,573 		         6,208,519   		 $    98,660,096 		 $    90,950,000 		 $    73,981,859 
15

Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**
10. Securities Sold Under Agreements to Repurchase

    Securities sold under agreements to repurchase		represent overnight borrowings from customers. The government agency		securities that collateralize these agreements are owned by the Company		but maintained in the custody of an unaffiliated bank designated by the		Company. Additional information follows:
  		2008		2007		2006      		Maximum month-end amount outstanding		 $      7,112,354 		 $      5,740,493 		 $      7,605,046  		Average amount outstanding		 $      4,792,158 		 $      4,248,315 		 $      5,878,171  		Average rate paid during the year		 1.11% 		 .69% 		 .68%  		Investment securities underlying the agreements    		  at year end    		    Carrying value		 $    13,991,966 		 $    13,988,225 		 $    18,988,534  		    Estimated fair value		 $    14,548,125 		 $    14,318,281 		 $    18,968,000 
11. Related Party Transactions

    The executive officers and directors of the Company		enter into loan transactions with the Bank in the ordinary course of		business. The terms of these transactions are similar to the terms		provided to other borrowers entering into similar loan transactions.		Executive officers and directors make deposits in the Bank, and invest		in uninsured non-deposit investment products. They receive the same		rates and terms on insured deposit accounts and securities sold under		agreements to repurchase as other customers with similar accounts.
  				2008				2007				2006 				Related party loan activity    				Beginning balance				 $    21,633,466 				 $    24,719,784 				 $    20,530,646  				Advances				         8,971,905 				       13,266,800 				       12,883,577  				Other increases				                   -   				                   -   				         1,376,525   				       30,605,371 				       37,986,584 				       34,790,748  				Repayments				         8,507,782 				       15,438,533 				       10,070,964  				Other decreases				                   -   				           914,585 				                   -    				Ending balance				 $    22,097,589 				 $    21,633,466 				 $    24,719,784       				Unfunded loan commitments				 $      1,868,664 				 $      1,703,469 				 $      3,596,956       				Deposit and non-deposit investment balances				 $      5,231,390 				 $      5,258,542 				 $      4,601,253 
    The Company obtains legal services from a law firm in		which one of the principal attorneys is also a member of the Board of		Directors. Fees charged for these services are at similar rates charged		by unrelated law firms for similar legal work. Amounts paid to this		related party totaled $9,950, $6,700, and $5,800 during the years ended		December 31, 2008, 2007, and 2006, respectively. 

16

Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**
12. Note Payable

    In 1999, the Company purchased real estate in Berlin,		financing 100% of the purchase price. In 2003, an operations center was		constructed on this site. This 6% unsecured note has a final maturity of		September, 2011. The note requires principal payments as follows:
  				2009  				 $          25,527   				2010  				             27,102   				2011  				             21,417      				 $          74,046 
13. Profit Sharing Plan

    In 1999, the Company adopted a defined contribution		profit sharing plan under Section 401(k) of the Internal Revenue Code.		The plan covers substantially all of the employees and allows		discretionary Company contributions. Annually, the Board of Directors		approves a discretionary contribution in addition to matching 50% of		employee contributions to a maximum of 6% of the employee wages.    The total cost of the profit sharing plan for 2008,		2007, and 2006, was $215,571, $214,557, and $214,864, respectively.

14. Noninterest Expenses

    The components of noninterest other operating expensesfollow:  		2008		2007		2006 		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 contracts		           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   		 $      2,063,153 		 $      1,865,257 		 $      1,909,332 
17

Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**	15.    Income Taxes    The components ofincome tax expense are as follows:  200820072006 				Current    				  Federal				 $    2,989,883 				 $    3,579,068 				 $    3,606,800  				  State				         594,118 				         570,643 				         592,110   				       3,584,001 				       4,149,711 				       4,198,910  				Deferred				        (197,433)				          (43,131)				          (42,710)  				 $    3,386,568 				 $    4,106,580 				 $    4,156,200       				The components of the deferred taxes are as follows:   				Nonaccrual loan interest				 $         (2,029)				 $           (596)				 $               -    				Provision for loan losses				        (201,340)				               434 				             5,906  				Employee benefit 				             3,266 				           (3,805)				             8,966  				Depreciation				           (2,214)				          (31,395)				          (55,162) 				Discount accretion				             4,884 				           (7,769)				           (2,420)  				 $     (197,433)				 $       (43,131)				 $       (42,710)      				The components of the net deferred tax liability are as follows:   				Deferred tax assets    				  Nonaccrual loan interest				 $          2,625 				 $             596 				 $               -    				  Allowance for loan losses				           29,499 				                 -   				                 -    				  Employee benefit				           28,807 				           32,073 				           28,268   				           60,931 				           32,669 				           28,268  				Deferred tax liabilities    				  Allowance for loan losses				                 -   				         171,841 				         171,407  				  Depreciation				         167,348 				         169,562 				         200,957  				  Discount accretion				           16,570 				           11,686 				           19,455  				  Unrealized gain on securities available for sale				       1,314,826 				       1,160,691 				       1,124,113   				       1,498,744 				       1,513,780 				       1,515,932  				     Net deferred tax liability				 $   (1,437,813)				 $   (1,481,111)				 $   (1,487,664)      				A reconciliation of the provision for taxes on income from the				statutory federal income tax rates 				to the effective income tax rates follows:         				Statutory federal income tax rate				        34.00  								%				        34.04 				%				        34.00  								% 				Increase (decrease) in tax rate resulting from				    				    				     				  Tax-exempt income				        (1.99) 				        (1.34) 				        (1.38)  				  Non-deductible expenses				          0.04  				          0.03  				          0.03   				  State income taxes net of federal income tax benefit				          3.80  				          3.28  				          3.31    				        35.85 				%				        36.01 				%				        35.96 				%
18

Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**
16. Fair Value of Financial Instruments		    The Company values investment securities classified		as available for sale at fair value on a recurring basis. The fair value		hierarchy established in Statement of Financial Accounting Standards No.		157, *Fair Value Measurements,* defines three input levels for fair		value measurement. Level 1 is based on quoted market prices in active		markets for identical assets. Level 2 is based on significant observable		inputs other than those in Level 1. Level 3 is based on significant		unobservable inputs. The Company values US Treasury and government		agency securities under Level 1, and municipal debt securities and		equity investments under Level 2. The Company has no assets measured at		fair value on a recurring basis that are valued under Level 3 criteria.		At December 31, 2008, values for available for sale investment		securities measured at fair value on a recurring basis were established		under the following levels of valuation inputs:
 				Total				Level 1 Inputs				Level 2 Inputs				Investment securities available for sale				 $      33,975,271 				 $      29,718,617 				 $        4,256,654 
    The estimated fair values of the Company's financial		instruments are summarized below. The fair values of a significant		portion of these financial instruments are estimates derived using		present value techniques prescribed by the Financial Accounting		Standards Board and may not be indicative of the net realizable or		liquidation values. The calculation of estimated fair values is based on		market conditions at a specific point in time and may not reflect		current or future fair values. 
 				      December 31, 2008				      December 31, 2007      				      December 31, 2006 				Carrying				Fair				Carrying				Fair				Carrying				Fair 				amount				value				amount				value				amount				value				Financial assets      				  Cash and due from banks				      8,769,784 				      9,216,290 				    17,428,347 				    18,042,845 				    21,138,799 				    21,665,764 				  Interest-bearing deposits				    15,517,115 				    15,593,003 				      6,012,482 				      6,056,125 				      2,055,689 				      2,068,114 				  Investment securities				    66,597,068 				    67,498,693 				    70,761,952 				    71,384,396 				    75,125,823 				    74,885,382 				  Loans, net				  241,430,914 				  241,473,232 				  238,076,278 				  238,096,729 				  233,231,118 				  233,162,386 				Financial liabilities      				  Interest-bearing deposits				  221,807,181 				  222,208,321 				  215,585,969 				  215,962,746 				  210,698,907 				  210,968,428 				  Note payable				           74,046 				           73,339 				           98,090 				           96,201 				         120,737 				         115,815 
	    The fair value of federal funds sold,		noninterest-bearing deposits, and securities sold under agreements to		repurchase equals their carrying value.    The fair value of silver coin included with cash isdetermined based on quoted market prices.    The fair value of interest-bearing deposits with		other financial institutions is estimated based on quoted interest rates		for certificates of deposit with similar remaining terms.    The fair values of equity securities are determined		using market quotations. The fair values of readily marketable debt		securities are provided by an independent third party and are based on		quoted market price. Debt securities that are not readily marketable are		assigned values based on prices from multiple sources, mostly from		dealers' bids and offers.    The fair value of fixed-rate loans is estimated to be		the present value of scheduled payments discounted using interest rates		currently in effect for loans of the same class and term. The fair value		of variable-rate loans, including loans with a demand feature, is		estimated to equal the carrying amount. The valuation of loans is net of		the allowance for loan losses. It is not practicable to estimate the		fair value of outstanding loan commitments, unused lines, and letters of		credit.		    The fair value of interest-bearing checking, savings,		and money market deposit accounts is equal to the carrying amount. The		fair value of fixed-rate time deposits is estimated based on interest		rates currently offered for deposits of similar remaining maturities.

19
Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**
 

17. Capital Standards

    The Federal Reserve Board and the Federal Deposit		Insurance Corporation have adopted risk-based capital standards for		banking organizations. These standards require ratios of capital to		assets for minimum capital adequacy and to be classified as well		capitalized under prompt corrective action provisions. The capital		ratios and minimum capital adequacy requirements of the Company and the		Bank are as follows:
 				Company 				Bank 				To be well 				Minimum  				Actual 				Actual 				capitalized 				adequacy				(in thousands)				Amount				Ratio 				Amount				Ratio 				Ratio 				Ratio          				December 31, 2008         				Total risk-based capital				 $   71,703 				32.5% 				 $   66,608 				30.8% 				10.0% 				8.0%				  (to risk weighted assets)         				Tier 1 capital				 $   70,025 				31.8% 				 $   65,901 				30.4% 				6.0% 				4.0%				  (to risk-weighted assets)         				Tier 1 capital				 $   70,025 				18.7% 				 $   65,901 				17.8% 				5.0% 				4.0%				  (to average fourth quarter assets)                   				December 31, 2007         				Total risk-based capital				 $   73,765 				33.7% 				 $   68,695 				32.0% 				10.0% 				8.0%				  (to risk weighted assets)         				Tier 1 capital				 $   72,560 				33.1% 				 $   68,499 				31.9% 				6.0% 				4.0%				  (to risk-weighted assets)         				Tier 1 capital				 $   72,560 				19.5% 				 $   68,499 				18.6% 				5.0% 				4.0%				  (to average fourth quarter assets)                   				December 31, 2006         				Total risk-based capital				 $   70,833 				33.4% 				 $   65,926 				31.7% 				10.0% 				8.0%				  (to risk weighted assets)         				Tier 1 capital				 $   69,532 				32.8% 				 $   65,730 				31.6% 				6.0% 				4.0%				  (to risk-weighted assets)         				Tier 1 capital				 $   69,532 				18.6% 				 $   65,730 				17.8% 				5.0% 				4.0%				  (to average fourth quarter assets)                   
    Tier 1 capital consists of common stock, additional		paid-in capital, and retained earnings. Total risk-based capital		includes a limited amount of the allowance for loan losses. In		calculating risk-weighted assets, specific risk percentages are applied		to each category of asset and off-balance sheet items.

    Failure to meet the capital requirements could affect		the Company's ability to pay dividends and accept deposits, and may		significantly affect the operations of the Company.

    In the most recent regulatory report, the Company was		determined to be well capitalized. Management has no plans that should		change the classification of the capital adequacy.

20

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

18. Parent Company Financial Information
		Balance Sheets		December 31, 		2008		2007		2006		Assets		Cash and due from banks		 $              262,013 		 $                24,416 		 $                21,342 		Interest-bearing deposits		                 871,247 		              1,022,482 		                 523,484 		Investment securities available for sale		              3,852,024 		              4,177,279 		              4,113,288 		Investment securities held to maturity		                           -   		                           -   		                 250,875 		Investment in subsidiary bank		            66,834,104 		            68,888,764 		            66,072,320 		Premises and equipment		              1,203,579 		              1,230,431 		              1,260,895 		Other assets		                     5,934 		                     6,975 		                     5,995 		      Total assets		 $         73,028,901 		 $         75,350,347 		 $         72,248,199 		Liabilities and Stockholders' Equity		Deferred income taxes		 $              737,676 		 $              866,074 		 $              857,174 		Other liabilities		                     7,731 		                     8,510 		                   10,084  		                 745,407 		                 874,584 		                 867,258 		Stockholders' equity   		  Common stock		              3,048,397 		              3,102,510 		              3,149,356 		  Additional paid-in capital		            10,406,403 		            12,381,413 		            14,117,732 		  Retained earnings		            56,569,913 		            57,076,461 		            52,265,370 		  Accumulated other comprehensive income		              2,258,781 		              1,915,379 		              1,848,483 		      Total stockholders' equity		            72,283,494 		            74,475,763 		            71,380,941 		      Total liabilities and stockholders' equity		 $         73,028,901 		 $         75,350,347 		 $         72,248,199     		Statements of Income		Years Ended December 31, 		2008		2007		2006		Interest revenue		 $                44,875 		 $                35,222 		 $                30,657 		Dividend revenue		                   74,894 		                   70,479 		                   70,752 		Dividends from subsidiary		              8,594,887 		              4,462,728 		              3,374,143 		Equity in undistributed income of subsidiary		             (2,597,703)		              2,768,109 		              3,961,775  		              6,116,953 		              7,336,538 		              7,437,327 		Expenses   		  Occupancy		                    (1,415)		                        925 		                     2,421 		  Other		                   52,551 		                   33,026 		                   28,337  		                   51,136 		                   33,951 		                   30,758     		Income before income taxes		              6,065,817 		              7,302,587 		              7,406,569 		Income taxes		                     6,600 		                     6,000 		                     6,200 		Net income		 $           6,059,217 		 $           7,296,587 		 $           7,400,369 
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Calvin B. Taylor Bankshares, Inc.and Subsidiary**Notes to Consolidated Financial Statements**
18. Parent Company Financial Information (Continued)
 		Years Ended December 31,		Statements of Cash Flows		2008		2007		2006		Cash flows from operating activities   		  Interest and dividends received		 $       8,715,697 		 $       4,568,324 		 $       7,938,431 		  Rental payments and fees received		                   37,200 		                   35,400 		                   33,600 		  Cash paid for operating expenses		                  (58,400)		                  (38,887)		                  (32,435)		  Income taxes refunded (paid)		            (10,163)		            (10,353)		              (9,266) 		          8,684,334 		          4,554,484 		          7,930,330 		Cash flows from investing activities   		  Certificates of deposit purchased, net of maturities		                 172,613 		                (496,616)		                    (4,704)		  Proceeds from maturities of investments   		    held to maturity		                    -   		                 250,000 		                 250,000 		  Purchase of investments held to maturity		                    -   		                  (33,750)		                    -   		  Purchase of equipment		              (3,085)		                       -   		             (9,950) 		            169,528 		          (280,366)		           235,346 		Cash flows from financing activities   		  Common shares repurchased		             (2,029,123)		             (1,783,165)		             (1,375,203)		  Dividends paid		       (6,565,764)		        (2,485,496)		       (6,830,090) 		       (8,594,887)		         (4,268,661)		       (8,205,293)		Net increase (decrease) in cash and cash equivalents		                 258,975 		                     5,457 		                  (39,617)		Cash and cash equivalents at beginning of year		             43,077 		             37,620 		             77,237 		Cash and cash equivalents at end of year		 $          302,052 		 $          43,077 		 $          37,620     		Reconciliation of net income to net cash provided   		   by operating activities   		   Net income		 $       6,059,217 		 $       7,296,587 		 $       7,400,369 		   Adjustments to reconcile net income to net cash   		     used in operating activities   		      Undistributed net income of subsidiary		              2,597,703 		             (2,768,109)		             (3,961,775)		      Premium amortization and discount accretion 		                    -   		                        875 		                     1,189 		      Depreciation		                   29,936 		                   30,464 		                   30,121 		      Decrease (increase) in other assets		                        262 		                    (2,554)		              4,461,690 		      Increase (decrease) in   		      Deferred income taxes and other liabilities		             (2,784)		              (2,779)		              (1,264) 		 $       8,684,334 		 $       4,554,484 		 $       7,930,330     		Composition of cash and cash equivalents   		Cash and due from banks		 $          262,013 		 $            24,416 		 $            21,342 		Interest-bearing deposits, except for time deposits		               40,039 		               18,661 		               16,278  		 $          302,052 		 $            43,077 		 $            37,620 
22

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

19.    Quarterly Results of Operations (Unaudited)
   		Three months ended  		December 31, 		September 30, 		 		June 30,		 		 		March 31,              		2008            		Interest and dividend revenue 		 $ 4,829,154   		 $ 5,016,573   		 $ 4,984,430   		 $ 5,170,486  		Interest expense 		       926,709   		       930,549   		       993,761   		    1,171,235  		Net interest income  		    3,902,445   		    4,086,024   		    3,990,669   		    3,999,251  		Provision for loan losses 		       542,511   		         (1,478)  		          5,284   		        71,209  		Net income 		    1,087,939   		    1,706,142   		    1,642,937   		    1,622,199  		Comprehensive income 		    1,358,415   		    1,936,154   		    1,448,612   		    1,659,438  		Earnings per share 		 $         0.36   		 $         0.56   		 $         0.53   		 $         0.52               		2007            		Interest and dividend revenue 		 $ 5,459,878   		 $ 5,641,225   		 $ 5,376,493   		 $ 5,206,566  		Interest expense 		    1,254,843   		    1,233,383   		    1,132,670   		    1,030,944  		Net interest income  		    4,205,035   		    4,407,842   		    4,243,823   		    4,175,622  		Provision for loan losses 		               -     		               -     		               -     		               -    		Net income 		    1,651,416   		    1,961,144   		    1,894,655   		    1,789,372  		Comprehensive income 		    1,623,653   		    2,004,398   		    1,751,909   		    1,983,523  		Earnings per share 		 $         0.53   		 $         0.63   		 $         0.60   		 $         0.57               		2006            		Interest and dividend revenue 		 $ 5,309,067   		 $ 5,344,078   		 $ 4,858,168   		 $ 4,673,957  		Interest expense 		       975,665   		       846,111   		       750,292   		       650,690  		Net interest income  		    4,333,402   		    4,497,967   		    4,107,876   		    4,023,267  		Provision for loan losses 		               -     		               -     		               -     		               -    		Net income 		    1,831,259   		    1,987,548   		    1,818,161   		    1,763,401  		Comprehensive income 		    1,773,916   		    2,098,488   		    1,893,146   		    1,828,337  		Earnings per share 		 $         0.58   		 $         0.63   		 $         0.57   		 $         0.55 

 

 

 

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