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, 2010Commission File No. 000-50047
Calvin B. Taylor Bankshares, Inc.(Exact name of registrant as specified in its Charter)

Maryland(State of incorporation or organization)

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

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

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

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

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer,an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of "large accelerated filer," "accelerated filer" and"smaller reporting company" in Rule 12b-2 of the Exchange Act.Large accelerated filer ____                                                                                     Accelerated filer [ X ] Non- accelerated filer ____ (Do not check if a smallerreporting company)     Smaller reporting company ____

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

 

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The aggregate market value of the Common Stock, all of which has votingrights, held by non-affiliates of the registrant on December 31, 2010, was$71,940,793. 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, 2010,the last known sale price was $29.00 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, 2011, 3,000,508 shares of the registrant's common stock wereissued and outstanding.
**DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement for Annual Meeting of Stockholders to be heldon May 11, 2011, is incorporated by reference in this Form 10-K in Part III,Item 10, Item 11, Item 12, Item 13, and Item 14. The Company's Annual Report toStockholders for the year ended December 31, 2010, pages 1 through 26, areincorporated by reference in this Form 10-K in Part II~~,~~Item 8.Financial Statements and Supplementary Data.

 

 

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

Item 1. Business

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

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** 

Competition    The Company and the Bank face strong competition in all areas of operations.The competition comes from entities operating in Worcester County, Maryland andSussex County, Delaware and neighboring counties and includes branches of someof the largest banks in Maryland, Delaware, and Virginia. Its most directcompetition for deposits historically has come from other commercial banks,savings banks, savings and loan associations, and credit unions operating in itsservice areas. The Bank also competes for deposits with money market mutualfunds and corporate and government securities. The Bank competes for loans withthe same banking entities, as well as mortgage banking companies and otherinstitutional lenders. The competition for loans varies from time to timedepending on certain factors. These factors include, among others, the generalavailability of lendable funds and credit, general and local economicconditions, current interest rate levels, conditions in the mortgage market, andother factors which are not readily predictable.   The Bank employs traditional marketing media including local newspapers andradio, to attract new customers. Bank officers, directors, and employees areactive in numerous community organizations and participate in community-basedevents. These activities and referrals by satisfied customers result in newbusiness. 
**Employees   As of December 31, 2010, the Bank employed 89 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 significantlaws and regulations affecting the Company and the Bank. To the extent that thefollowing summary describes statutory or regulatory provisions, it is qualifiedin its entirety by reference to the particular statutory and regulatoryprovisions.   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.
**Recent Economic and Legislative Developments   The wave of bank and thrift failures that began in late 2008 has continuedthroughout 2009 and 2010. 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 the end of 2008.This low rate has remained through 2010. Other short-term investments haveexperienced similar declines. The impact on the Company is reduced interestrevenues and yields on federal funds sold, debt securities, and certificates ofdeposit in other banks. This generally low rate environment has also driven downyields on loans.   In the most stable economic times, the Company cannot reliably predict theeffect of changing government policies on earnings, or loan and deposit levels.The impact on future results of operation of the Company and the Bank due toturbulent economic times are uncertain. Management expects this pattern of lowernet interest income and higher fees associated with loan collection to continuethrough 2011.

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The Dodd-Frank Act   On July 21, 2010, financial regulatory reform legislation entitled The"Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Dodd-FrankAct") was signed into law in July 2010. It implements changes in financialinstitution regulations that include:    .. Creation of the Consumer Financial Protection Bureau with responsibilityfor implementing, examining and enforcing compliance with federal consumerfinancial laws.   .. Changes to the assessment base for federal deposit insurance from theamount of insured deposits to consolidated assets less tangible capital,elimination of the cap on the size of the Deposit Insurance Fund ("DIF") and anincrease to the lowest level permissible for the DIF.   .. Provision of unlimited federal deposit insurance for non-interest bearingdemand transaction accounts in insured depository institutions untilDecember 31, 2012.   .. Repeal the federal regulations prohibiting the payment of interest ondemand deposit accounts of businesses depositors.   .. Amendment of the Electronic Fund Transfer Act ("EFTA") to authorize theFederal Reserve to issue rules governing interchange fees charged for debit cardtransactions for card issuers having assets over $10 billion, and giving FederalReserve enforcement power over a new requirement that these fees be reasonableand proportional to the actual cost of the transaction to the issuer.  The full impact of the Dodd-Frank Act to the Company and the Bank isnot known at this time. Due to the complexity of this legislation, variousprovisions will be effective over the coming years. Management does anticipatethat revenues will be adversely impacted by the limitation of interchange fees.Although the Bank does not have assets over $10 billion, it is anticipated thatsmaller community banks will be forced to match the fee reductions of largerinstitutions with which they compete.
**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    The Gramm-Leach-Bliley Act was signed into law in 1999. Among other things,the Act repeals the restriction, contained in the Glass-Steagall Act, on banksaffiliating with securities firms. The Act permits bank holding companies toengage in a statutorily provided list of financial activities, includinginsurance and securities underwriting and agency activities, merchant banking,and insurance company portfolio investment activities. The Act also authorizesactivities that are "complementary" to financial activities. The Act is intendedto grant certain powers to community banks that larger institutions haveaccumulated on an ad hoc basis. While it is not possible to determine the fulleffect that the Act has had on the Company and the Bank, one possibleconsequence of the Act may be increased competition from larger institutions andother types of companies. 

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

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

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

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

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

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

 

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Deposit Insurance    The FDIC establishes rates for the payment of deposit insurance premiums byfederally insured banks and thrifts. The Deposit Insurance Fund (DIF) ismaintained for commercial banks and thrifts, with insurance premiums from theindustry used to offset losses from insurance payouts when banks and thriftsfail. Since 1993, insured depository institutions like the Bank have paid fordeposit insurance under a risk-based premium system. The Federal DepositInsurance Reform Act of 2005 creates a revised deposit insurance assessment ratestructure, effective January 1, 2007. Under this system, assessment rates arebased on Risk Categories as determined by a combination of CAMELS componentratings and financial ratios. In addition to the amount paid for depositinsurance, banks are assessed an additional amount to service the interest onthe bond obligations of the Financial Corporation (FICO). Any increase indeposit insurance premiums for the Bank will increase the Bank’s operatingexpenses, and there can be no assurance that such costs can be passed on to theBank’s customers.   During 2009, as a consequence of recent bank and thrift failures, the DIFfell below target levels. FDIC replenished the fund in mid-2009 by levying aspecial assessment on insured depository institutions. This special assessmentwas expensed in the second quarter of 2009. Late in 2009, additional DIFreplenishment was achieved by FDIC collecting prepaid insurance premiums frominsured depository institutions in an amount calculated to cover premiums for2010 through 2012. The prepaid amount was paid in December 2009 and is beingexpensed in the periods to which it applies.   The Dodd-Frank Act changes the assessment base for federal deposit insurancefrom the amount of insured deposits to consolidated assets less tangiblecapital, elimination of the cap on the size of the Deposit Insurance Fund("DIF") and an increase to the lowest level permissible for the DIF. Managementdoes not anticipate that the change of assessment base will have a materialimpact on earnings.
**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.

 

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**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, 2010, 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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** 

Item 1A. Risk Factors   The Company and the Bank are subject to various types of risk during thenormal conduct of business. Investors should consider these risks and theirpossible consequences when making a decision to invest in the stock of theCompany. Any of these risks could adversely affect the Company’s results ofoperation and financial condition causing the market price of the Company’sstock to decline.    Following are descriptions of the significant categories of risk mostrelevant to the Company. The risks described below are not the only ones thatapply to the Company. Management may not be aware of some risks and may judgeothers to be unlikely to have a material effect on the Company or the Bank. Inthe opinion of management, there has been no material increase in any level ofrisk incurred by the Company or the Bank during the period covered by thisreport.

The Company may be adversely affected by conditions in the economy andfinancial markets.   The Company’s asset quality and earnings are affected by general economicconditions. The Company relies on loan demand to generate earning assets thatare the source of most of its revenues. While the regional and national economicrecession which deepened throughout 2008 appears to have bottomed in 2009, thebanking industry continues to endure adverse consequences. Borrowing customershave experienced both loss of income and declines in the value of their homesand businesses. As borrowers experience hardships that affect their ability torepay loans, the Bank experiences atypically high delinquencies, loancharge-offs, collateral repossessions, and mortgage foreclosures.    Management expects unfavorable market conditions to continue to depressearnings for at least another year resulting in slower than usual growth incapital. 

The Company is exposed to lending risks including those related to assetquality and regulatory compliance.    The primary source of revenue for the Company and the Bank is lending. Duringthe ongoing economic downturn which began in 2008, the Company has sufferedhistorically high levels of delinquencies, troubled debt restructuring, and loanlosses. Management expects high levels of delinquencies and loan losses tocontinue through 2011. For further discussion, see the section of Management'sDiscussion and Analysis of Financial Condition and Results of Operation titledComposition of the Loan Portfolio.   The banking regulations governing disclosures on loan originations,collections, and foreclosures are complex and change frequently. Failure tocomply with applicable laws and regulations could result in penalties or otherenforcement actions against the Company.

The Company’s allowance for loan losses may be underestimated.     The Company’s earnings may suffer from the failure of borrowers to fulfilltheir contractual commitment to the Bank. This risk encompasses the potentialloss on a particular loan as well as the potential for loss from a group ofrelated loans. The Bank provides for loan losses through an allowance for loanloss, which represents management’s estimate of inherent and specificallyidentified losses in the Bank’s loan portfolio. If the allowance for loan lossesis not adequate, loan losses will reduce earnings and capital. For furtherdiscussion, see the section of Management's Discussion and Analysis of FinancialCondition and Results of Operation titled Loan Quality and the Allowance forLoan Losses.

The Company may have reduced earnings due to interest-rate risk caused bymarket conditions.   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. Monetary policy and actions of theBoard of Governors of the Federal Reserve System exert strong influence over therates the Company can earn on loans or investment securities. Competitivepressures also factor into the rates the company pays on deposits or otherborrowings. If the rates on interest-bearing deposits and other borrowingsincrease faster than the rates on loans and investments, the result could be adecline in earnings. The same result could occur if rates on loans andinvestments fell faster than rates on deposits and other borrowings. For furtherdiscussion, see the Net Interest Income section of Management's Discussion andAnalysis of Financial Condition and Results of Operation. 

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The Company’s internal controls or transactional procedures may fail or becircumvented.     Management maintains a system of policies, procedures, checks and balancesknown as "internal controls." Internal controls are designed to ensure thelikelihood of meeting corporate goals of accuracy, efficiency and legalcompliance. A failure of internal controls could have an adverse effect on theCompany’s reputation, results of operations, and financial condition.    The Company’s procedures for completion of various transactions and operatingprocesses include system automation, employee training and integrity, andprocedural instructions. Problems with service or product delivery may adverselyimpact the Company’s reputation, results of operations, and financial condition.

The Company and the Bank could fail to comply with complex laws, regulations,and supervisory guidance.     Compliance risk is the risk to earnings or capital from noncompliance withfederal and state laws, rules, and regulations. Compliance risk is often thegreatest risk a bank faces regardless of its size or products. Compliance issubject to examination by federal and state bank regulators. A significantfailure of compliance could result in monetary fines or penalties, restrictionof banking or corporate activities, and damage to the Company’s reputation.

The Company’s reputation could be damaged.    As a community bank, community and customer relations are critical to theBank’s success. Anything that would impair that reputation poses a significantrisk and could have an adverse effect on earnings as well as the ability togenerate business. 

The Company’s failure to make sound business decisions or to plan for futureevents could impair earnings or capital.    The Company’s Strategic Plan is general in nature, emphasizing customerservice and profitability as its mission and profitability as its primaryobjective. The Plan mentions basic loan underwriting criteria as a foundationfor asset quality. It includes sections on management succession and communityinvolvement. If the plan is wrong or improperly implemented, the Company’searnings or capital may be adversely affected. 

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** 

 

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

Item 2. Properties**
    The Company has ten branch locations, all of which are owned by the Companyor the Bank. The Bank leases the land on which the East Berlin branch islocated. The locations are described as follows:
OfficeLocationSquare FootageMain Office, Berlin24 North Main Street,		Berlin, Maryland 2181124,229East Berlin Office10524 Old Ocean City		Boulevard, Berlin, Maryland 218111,50020th Street		Office100 20th Street,		Ocean City, Maryland 218423,100Ocean Pines Office11103 Cathell Road, Berlin,		Maryland 218112,420Mid-Ocean City Office9105 Coastal Highway, Ocean		City, Maryland 218421,984North Ocean City Office14200 Coastal Highway, Ocean		City, Maryland 218422,545West Ocean City Office9923 Golf Course Road, Ocean		City, Maryland 218422,496Pocomoke Office2140 Old Snow Hill Road,		Pocomoke, Maryland 218512,624Snow Hill Office108 West Market Street, Snow		Hill, Maryland 218633,773Ocean View, Delaware Office50 Atlantic Avenue, Ocean		View, Delaware 199704,900
    The Berlin office is the centralized location for the Company and the Bank.Executive offices, loan processing, proof, bookkeeping, and the computerdepartment are housed there. Most branches have a manager who also serves as aloan officer. All offices participate in normal day-to-day banking operations.The Company operates automated teller machines in all branches and at onenon-branch location in a local hospital.
**Item 3. Legal Proceedings**
(a)  There are no material pending legal proceedings to which the Company		or the Bank or any of their properties are subject.		(b)  No proceedings were terminated during the fourth quarter of the		fiscal year covered by this report.
**Item 4. (Removed and Reserved).**
 

 

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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, 2011 there were approximately 1,025 stockholders of recordand 3,000,508 shares of Common Stock issued and outstanding. All outstandingshares of common stock of the Company are entitled to share equally in dividendsfrom funds legally available, when, as, and if declared by the Board ofDirectors. The Company paid or declared dividends of $.91 per share in 2010,$.90 per share in 2009, and $2.15 per share in 2008. Included in 2008 was aspecial cash dividend of $1.30 per share which is not expected to be an annualevent. 

    The following table presents high and low bid information obtained from theOver the Counter Bulletin Board and from other trades known to management of theCompany. Because transactions in the Company’s common stock are infrequent andare often negotiated privately between the persons involved in thosetransactions, actual prices may be higher or lower than those included in thistable. Additionally, the number of shares traded at high or low prices may varysignificantly. There is no established public trading market in the stock, andthere is no likelihood that a trading market will develop in the near future.
 		2010 		2009		Sales price per share		High		Low 		High		Low		First quarter		 $          36.00 		 $          32.00  		 $          39.00 		 $          35.50 		Second quarter		 $          42.00 		 $          29.00  		 $          42.00 		 $          32.25 		Third quarter		 $          42.00 		 $          29.00  		 $          36.00 		 $          32.00 		Fourth quarter		 $          40.00 		 $          26.00  		 $          36.00 		 $          32.00 
   The Company publicly announced on August 14, 2003, that it would repurchase upto 10% of its outstanding equity stock at that time. 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. On January 13, 2010, as part of its capital planning, theBoard of Directors voted to temporarily suspend the stock buy-back program. OnFebruary 9, 2011, the Board of Directors voted to suspend this programindefinitely.   There is no set expiration date for this program. No otherstock repurchase plan or program existed or exists simultaneously, nor has anyother plan or program expired during the period covered by this table. Commonshares repurchased under this plan are retired. From its inception throughDecember 31, 2009, 239,492 shares were retired under this program. No shareswere retired during 2010.

 

 

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** 

Item 6. Selected Financial Data**
    The following table presents selected financial data for thefive years ended December 31, 2010. 
 		2010		2009		2008		2007		2006 		(Dollars in thousands, except for per share data)		At Year End     		Total assets		$406,148 		$393,528 		$372,603 		$369,146 		$369,512 		Total deposits		$326,778 		$312,648 		$292,459 		$288,944 		$290,325 		Total loans, net of unearned income and     		   allowance for loan losses		$237,001 		$240,062 		$241,431 		$238,076 		$233,231 		Total stockholders' equity		$74,195 		$72,278 		$72,283 		$74,476 		$71,381 		Common shares issued and outstanding		      3,000,508 		      3,000,508 		      3,048,397 		      3,102,510 		      3,149,356       		For the Year     		Average total assets		$401,060 		$386,038 		$366,900 		$372,006 		$377,211 		Average stockholders' equity		$73,733 		$71,898 		$73,726 		$72,569 		$69,268 		Net interest income		$15,377 		$15,360 		$15,978 		$17,032 		$16,963 		Net income		$5,197 		$5,110 		$6,059 		$7,297 		$7,400 		Cash dividend		$2,730 		$2,704 		$6,566 		$2,485 		$2,368       		Per share data     		Book value		$24.73 		$24.09 		$23.71 		$24.01 		$22.67 		Net income		$1.73 		$1.69 		$1.97 		$2.33 		$2.33 		Cash dividends declared		$0.91 		$0.90 		$2.15 		$0.80 		$0.75       		Other ratios     		Return on average assets		1.30%		1.32%		1.65%		1.96%		1.96%		Return on average equity		7.05%		7.11%		8.22%		10.05%		10.68%		Dividend payout ratio		52.60%		53.25%		109.14%		34.33%		32.19%		Average equity to average assets ratio		18.38%		18.62%		20.09%		19.51%		18.36%
 

 

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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 2010 was $5,196,779 compared to $5,109,609 for 2009,and $6,059,217 for 2008. The Company had a return on average equity of 7.05% andreturn on average assets of 1.30% for 2010, compared to returns on averageequity of 7.11% and 8.22%, and returns on average assets of 1.32% and 1.65%, for2009 and 2008, respectively. 
**Results of Operations   The Company’s net income of $5,196,779, or $1.73 per share, for the year endedDecember 31, 2010, was an increase of $87,170 (1.71%) from net income of$5,109,609, or $1.69 per share, for the year ended December 31, 2009.Contributing to this increase was increased noninterest revenue of $88,827 and a$231,698 reduction of noninterest expense, partially offset by an increase of$162,000 in the provision for loan losses. These factors are discussed furtherin the following pages.   The Company’s net income of $5,109,609, or $1.69 per share, for the year endedDecember 31, 2009, was a decrease of $949,608 (15.67%) from net income of$6,059,217, or $1.97 per share, for the year ended December 31, 2008.Contributing to this decrease was a $618,834 (3.87%) decrease in net interestincome, a $232,474 (37.65%) increase in the provision for loan losses, a $48,564(2.38%) decrease in noninterest revenue, and a $561,304 (7.06%) increase innoninterest expense, offset by a $511,568 (15.11%) reduction in income taxexpense. These factors are discussed further in the following pages.   The Company’s net income of $958,654 or $.32 per share, for the quarter endedDecember 31, 2010, decreased by $149,440 (13.49%) from the net income of$1,108,094 or $.37 per share, for the quarter ended December 31, 2009. Theprimary reason for the decrease was lower net interest income, which decreased$127,323 from fourth quarter 2009 to 2010.    The Company’s net income of $1,108,094 or $.37 per share, for the quarter endedDecember 31, 2009, was a modest increase of $20,155 (1.85%) from the net incomeof $1,087,939 or $.36 per share, for the quarter ended December 31, 2008. Alower quarterly provision for loan loss, the primary reason for the decrease,resulted from management’s assessment of the quality of the loan portfolio atthe reporting date. See "Loan Quality and the Allowance for Loan Losses" foradditional related disclosure and discussion.

 

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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, such as deposits and securities sold under agreementsto repurchase, and the rate spreads between interest-earning assets and fundingsources. Changes in net interest income from period to period result fromincreases 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 2010 on anon-GAAP tax-equivalent basis was 4.26%, compared to 4.38% and 4.77% for 2009and 2008, 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, the volume of nonaccruing loansincreases, or the cost of funds rises faster than the return on loans andsecurities. Although such expectations are based on management's judgment,actual results will depend on a number of factors that cannot be predicted withcertainty, and fulfillment of management's expectations cannot be assured. Inrecent years, nonaccruing loan volume has increased as the Bank feels theconsequences of a prolonged economic downturn during which many borrowers haveexperienced financial distress.   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, 2010		December 31, 2009		December 31, 2008		Average  		Average  		Average  		Balance		Interest		Yield		Balance		Interest		Yield		Balance		Interest		Yield		Assets         		Federal funds sold		 $  35,853 		 $        66 		0.18%		 $  33,355 		 $        67 		0.20%		 $  36,328 		 $      732 		2.02%		Interest-bearing deposits		9,582		49		0.52%		12,227		158		1.30%		9,659		325		3.37%		Investment securities:         		  U. S. Treasury		63,485		1,134		1.80%		56,949		1,498		2.63%		44,359		1,902		4.29%		  U. S. Government Agency		8,497		100		1.18%		9,926		199		2.00%		10,330		468		4.53%		  State and municipal		4,425		81		1.83%		2,541		72		2.83%		1,359		65		4.82%		  Other		       1,934 		           66 		3.40%		       1,934 		           92 		4.77%		       1,934 		         109 		5.64%		   Total investment securities		     78,341 		      1,381 		1.76%		     71,350 		      1,861 		2.61%		     57,982 		      2,544 		4.39%		Loans:         		  Commercial		18,241		1,208		6.62%		21,104		1,338		6.34%		24,272		1,628		6.71%		  Mortgage		223,980		14,719		6.57%		218,800		14,617		6.68%		212,104		14,917		7.03%		  Consumer		       1,968 		         161 		8.16%		       2,191 		         181 		8.24%		       2,497 		         206 		8.23%		   Total loans		244,189		16,088		6.59%		242,095		16,136		6.67%		238,873		16,751		7.01%		Allowance for loan losses		          739   		          725   		          237   		   Total loans, net of allowance		   243,450 		    16,088 		6.61%		   241,370 		    16,136 		6.69%		   238,636 		    16,751 		7.02%		Total interest-earning assets		367,226		    17,584 		4.79%		358,302		    18,222 		5.09%		342,605		    20,352 		5.94%		Noninterest-bearing cash		18,157  		13,634  		10,906  		Premises and equipment		6,421  		6,546  		6,391  		Other assets		       9,256   		       7,556   		       6,998   		        Total assets		 $401,060   		 $386,038   		 $366,900   		Interest-bearing deposits         		  NOW 		 $  57,230 		         223 		0.39%		 $  50,932 		         138 		0.27%		 $  48,624 		         201 		0.41%		  Money market		38,434		191		0.50%		34,946		189		0.54%		32,070		305		0.95%		  Savings		48,178		219		0.45%		44,648		221		0.50%		41,667		309		0.74%		  Other time		     99,531 		      1,277 		1.28%		     99,614 		      1,958 		1.97%		     90,596 		      3,149 		3.48%		Total interest-bearing deposits		243,373		1,910		0.78%		230,140		2,506		1.09%		212,957		3,964		1.86%		Securities sold under agreements         		  to repurchase		6,256		31		0.50%		6,527		32		0.50%		4,792		53		1.11%		Borrowed funds		            34 		             2 		6.71%		            60 		             4 		6.21%		            85 		             5 		6.14%		Total interest-bearing liabilities		249,663		1,943		0.78%		236,727		2,542		1.07%		217,834		4,022		1.85%		Noninterest-bearing deposits		     77,085 		              -  		     76,666 		              -  		     74,262 		              -  		326,748		      1,943 		0.59%		313,393		      2,542 		0.81%		292,096		      4,022 		1.38%		Other liabilities		          579   		          747   		       1,078   		Stockholders' equity		     73,733   		     71,898   		     73,726   		        Total liabilities and         		        stockholders' equity		 $401,060   		 $386,038   		 $366,900   		Net interest spread  		4.01%  		4.01%  		4.09%		Net interest income 		 $ 15,641   		 $ 15,680   		 $ 16,330  		Net margin on interest-earning assets 		4.26%  		4.38%  		4.77%        		Tax equivalent adjustment included in:        		    Investment income 		 $      116   		 $      147   		 $      183  		    Loan income 		 $      158   		 $      173   		 $      169  
 

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   		Average Balances, Interest, and Yields		(Dollars stated in thousands)		For the Year Ended		For the Year Ended		December 31, 2007		December 31, 2006		Average  		Average  		Balance		Interest		Yield		Balance		Interest		Yield		Assets      		Federal funds sold		 $  37,826 		 $   1,919 		5.07%		 $  22,547 		 $   1,137 		5.04%		Interest-bearing deposits		3,494		168		4.82%		2,173		79		3.62%		Investment securities:      		  U. S. Treasury		55,061		2,636		4.79%		71,441		2,614		3.66%		  U. S. Government Agency		6,568		310		4.73%		13,378		398		2.98%		  State and municipal		2,397		95		3.97%		7,443		219		2.94%		  Other		       1,927 		         101 		5.27%		       1,900 		         102 		5.38%		   Total investment securities		     65,953 		      3,142 		4.77%		     94,162 		      3,333 		3.54%		Loans:      		  Commercial		23,812		1,691		7.10%		23,804		1,711		7.19%		  Mortgage		208,936		14,870		7.12%		200,588		14,020		6.99%		  Consumer		       2,465 		         206 		8.37%		       2,491 		         206 		8.28%		   Total loans		235,213		16,767		7.13%		226,883		15,937		7.02%		Allowance for loan losses		          199   		          211   		   Total loans, net of allowance		   235,014 		    16,767 		7.13%		   226,672 		    15,937 		7.03%		Total interest-earning assets		342,287		    21,996 		6.43%		345,554		    20,486 		5.93%		Noninterest-bearing cash		16,179  		17,694  		Premises and equipment		6,548  		6,605  		Other assets		       6,992   		       7,358   		        Total assets		 $372,006   		 $377,211   		Interest-bearing deposits      		  NOW 		 $  51,297 		         183 		0.36%		 $  57,052 		         141 		0.25%		  Money market		33,590		317		0.94%		     41,810 		         335 		0.80%		  Savings		44,137		327		0.74%		47,812		285		0.60%		  Other time		     84,867 		      3,789 		4.46%		     68,359 		      2,414 		3.53%		Total interest-bearing deposits		213,891		4,616		2.16%		215,033		3,175		1.48%		Securities sold under agreements      		  to repurchase		4,248		29		0.69%		5,878		40		0.68%		Borrowed funds		          109 		             7 		6.10%		          145 		             8 		5.73%		Total interest-bearing liabilities		218,248		4,652		2.13%		221,056		3,223		1.46%		Noninterest-bearing deposits		     79,807 		              -  		     84,380 		              -  		298,055		      4,652 		1.56%		305,436		      3,223 		1.06%		Other liabilities		       1,382   		       2,507   		Stockholders' equity		     72,569   		     69,268   		        Total liabilities and      		        stockholders' equity		 $372,006  		 		 $377,211  		 		Net interest spread  		4.30%  		4.47%		Net interest income		 $ 17,344   		 $ 17,263  		Net margin on interest-earning assets 		5.07%  		5.00%     		Tax equivalent adjustment included in:     		    Investment income 		 $      191   		 $      231  		    Loan income 		 $      121   		 $        69  
 

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		Analysis of Changes in Net Interest Income		(Dollars stated in thousands)       		Year ended December 31,		Year ended December 31, 		2010 compared with 2009		2009 compared with 2008 		variance due to		variance due to 		Total		Rate		Volume		Total		Rate		Volume		Interest-earning assets      		  Federal funds sold		              (1)		              (6)		               5 		          (665)		          (605)		            (60)		  Interest-bearing deposits		          (109)		            (75)		            (34)		          (167)		          (254)		             87 		  Investment securities:      		    U. S. Treasury		          (364)		          (536)		           172 		          (404)		          (944)		           540 		    U. S. Government Agency		             (99)		            (70)		            (29)		          (269)		          (251)		            (18)		    State and municipals		               9 		            (44)		              53 		               7 		            (50)		             57 		    Other		            (26)		            (26)		                - 		            (17)		            (17)		                - 		  Loans:      		    Commercial		          (130)		             52 		         (182)		         (290)		           (77)		         (213)		    Mortgage		           102 		          (244)		          346 		        (300)		         (771)		          471 		    Consumer		            (20)		              (2)		           (18)		           (25)		               - 		           (25)		        Total interest revenue		          (638)		          (951)		          313 		      (2,130)		      (2,969)		          839        		Interest-bearing liabilities      		  NOW		             85 		             68 		             17 		            (63)		            (73)		             10 		  Money market		               2 		            (17)		             19 		          (116)		          (143)		             27 		  Savings		              (2)		            (19)		             17 		            (88)		          (110)		             22 		  Other time deposits		          (681)		          (679)		              (2)		       (1,191)		       (1,504)		           313 		  Other borrowed funds		              (3)		                - 		              (3)		            (22)		            (39)		             17 		        Total interest expense		          (599)		          (647)		             48 		       (1,480)		       (1,869)		           389        		Net interest income		            (39)		          (304)		           265 		          (650)		       (1,100)		           450 ****
In the preceding table, the variance that is both rate and volume related isreported with the rate variance.
**Composition of the 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 $243,450,000, $241,370,000,and $238,636,000, during 2010, 2009, and 2008, respectively, which constituted66.29%, 67.36%, and 69.65% of average interest-earning assets for the periods.The Company’s ratio of net loans to deposits was 72.53, 76.78%, 82.55%, atDecember 31, 2010, 2009, and 2008, respectively. Average net loans to averagedeposits were 75.97%, 78.67%, and 83.09%, for 2010, 2009, and 2008. The decreasein the average loan to deposit ratio from 2009 to 2010 is attributable tocontinued deposit growth which is relatively greater than loan growth in thesame period. The decrease in the average loan to deposit ratio from 2008 to 2009is attributable to 1.15% growth in the average loan portfolio relative to 6.82%growth in average deposits during 2009.    The average balance table above reveals a 5-year pattern of growth in loanbalances. Despite the challenges posed by general economic conditions since2008, the Bank has continued to fund loans in a manner consistent with theCompany’s philosophy of safe and sound practice. The Bank does not engage inrisky lending practices such as subprime mortgages, high loan-to-value lending,or teaser rate lending. 

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    The Bank extends loans primarily to customers located in and near WorcesterCounty, Maryland and Sussex County, Delaware. Although the portfolio isdiversified, its performance may be influenced by regional economic conditions.The Company has a substantial portion of its loans in real estate andperformance will be influenced by the real estate market in the region.Additionally, the coastal geography is subject to catastrophic storms. The localagricultural and fishing community is subject to adverse weather conditionsthroughout their productive seasons. There is no adverse weather condition atthe time of the valuation.     As of December 31, 2010, the Bank had approximately $43.9 million in securedand unsecured loans and unfunded lines to borrowers in the hospitality industry,including hotels, motels, and other rentals. Ocean City MD, the state’s onlyocean resort, is located in the Bank’s market area. During summer months, OceanCity becomes Maryland’s second largest city through a seasonal population growthaveraging 250,000. If tourism in the resort area falls off due to the currentrecession, this industry may encounter cash flow challenges. Management closelymonitors this situation and works with customers to assure timely repayment ofseasonal working capital lines. As of December 31, 2010, none of the 51 accountscomprising this concentration are past due 30 days or more.    Since mid-2007, general economic conditions have caused a widespread declinein real estate values and an increase in time to market many properties.Conservative underwriting practices have somewhat insulated the Bank from theadverse consequences such as loan losses and foreclosures. Management monitorsfluctuations in the value of real estate held as collateral and, if deemednecessary, obtains additional collateral to limit the Bank’s loss exposure;still the adverse effects on many of the Bank’s customers have become apparentin increased loan delinquencies. The Bank experienced higher than usual loanlosses and nonaccrual classifications of loans from 2008 through 2010.Management believes that loan delinquency and losses are trailing indicators ofeconomic weakness and expects 2011 to bring continued challenges to borrowersresulting in delinquencies and losses to the Bank.    The following table sets forth the composition of the Company's loan portfoliofor each of the five most recent year ends.

 
		Composition of the Loan Portfolio Stated in Dollars and Percentages		2010		2009		2008		2007		2006 		     Real estate mortgages      		       Construction, land development,      		          and land		 $     21,792,060 		 $     21,952,873 		 $     30,330,261 		 $     38,230,033 		 $     37,331,256  		       Residential 1 to 4 family		        92,592,277 		        94,757,873 		        95,203,258 		        87,327,448 		        88,599,071  		       Second mortgages		          1,660,805 		          2,460,550 		          2,952,418 		          3,287,734 		          2,395,178  		       Commercial properties		      104,560,765 		      102,476,713 		        89,302,549 		        84,568,665 		        79,484,039  		     Commercial		        15,662,957 		        16,915,476 		        21,990,067 		        22,283,007 		        23,264,997  		     Consumer		          1,715,533 		          2,136,145 		          2,359,513 		          2,574,916 		          2,352,660  		           Total loans		237,984,397		240,699,630		242,138,066		238,271,803		233,427,201 		     Less allowance for loan losses		             983,178 		             637,761 		             707,152 		             195,525 		             196,083  		           Loans, net		 $   237,001,219 		 $   240,061,869 		 $   241,430,914 		 $   238,076,278 		 $   233,231,118        		     Real estate mortgages      		       Construction, land development,      		          and land		9.16%		9.12%		12.53%		16.04%		15.99% 		       Residential 1 to 4 family		38.91%		39.37%		39.32%		36.66%		37.95% 		       Second mortgages		0.70%		1.02%		1.22%		1.38%		1.03% 		       Commercial properties		43.93%		42.57%		36.88%		35.49%		34.05% 		     Commercial		6.58%		7.03%		9.08%		9.35%		9.97% 		     Consumer		0.72%		0.89%		0.97%		1.08%		1.01% 		           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, 2010.
		Loan Maturity Schedule and Sensitivity to Changes in Interest Rates		December 31, 2010  		Over one   		One year		through		Over five  		or less		five years		years		Total		     Real estate mortgages    		       Construction, land development,    		          and land		 $     21,792,060 		 $                    -   		 $                    -   		 $     21,792,060 		       Residential 1 to 4 family		        92,635,944 		                         - 		                         - 		        92,635,944 		       Second mortgages		          1,660,805 		                         - 		                         - 		          1,660,805 		       Commercial properties		      102,578,171 		                         - 		                         - 		      102,578,171 		     Commercial		        14,968,956 		          1,614,971 		          1,012,524 		        17,596,451 		     Consumer		             724,887 		             785,211 		             210,868 		          1,720,966  		 $   234,360,823 		 $       2,400,182 		 $       1,223,392 		 $   237,984,397      		     Fixed interest rate		 $       5,067,729 		 $       2,400,182 		 $       1,223,392 		 $       8,691,303 		     Variable interest rate (or demand)		      229,293,094 		                   -    		                   -    		      229,293,094 		           Total 		 $   234,360,823 		 $       2,400,182 		 $       1,223,392 		 $   237,984,397 
 

As of December 31, 2010, $229,293,094 or 96.35% of total loans were eithervariable rate loans or loans written on demand. 

    The Company has the following commitments, lines of credit, and letters ofcredit outstanding as of December 31, 2010, 2009, and 2008, respectively.
 		2010		2009		2008		       Construction and land development loans		 $     8,569,169 		 $   10,231,711 		 $   15,218,812 		       Other loan commitments		      21,164,229 		      19,038,506 		      22,245,089 		       Standby letters of credit		        1,590,367 		        1,907,736 		        1,921,878 		                Total		 $   31,323,765 		 $   31,177,953 		 $   39,385,779 
 

    Loan commitments are agreements to lend to customers as long as there is noviolation of any conditions to the contracts. Loan commitments generally haveinterest at current market rates, fixed expiration dates, and may require thepayment of a fee. Letters of credit are commitments issued to guarantee theperformance of a customer to a third party. Loan commitments and letters ofcredit are made on the same terms, including collateral, as outstanding loans.The Company's exposure to loss in the event of nonperformance by the borrower isrepresented by the contract amount of the commitment. 
**Loan Quality and the Allowance for Loan Losses   The allowance for loan losses represents an amount which management believes tobe adequate to absorb identified and inherent losses in the loan portfolio as ofthe balance sheet date. Valuation of the allowance is completed no less thanquarterly. The determination of the allowance is inherently subjective as itrelies on estimates of potential loss related to specific loans, the effects ofportfolio trends, and other internal and external factors.    The ALLL consists of (i) formula-based reserves comprised of potential losses inthe balance of the loan portfolio segmented into homogeneous pools, (ii)specific reserves comprised of potential losses on loans that management hasidentified as impaired and (iii) unallocated reserves. Unallocated reserves arenot associated with a specific portfolio segment or a specific loan, but may beappropriate if properly supported and in accordance with GAAP. Managementanticipates having low levels of unallocated reserves in future years, asdiscussed in conjunction with the table titled Allocation of the Allowance forLoan Losses, below.

 

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    The Company evaluates loan portfolio risk for the purpose of establishing anadequate allowance for loan losses. In determining an adequate level for theformula-based portion of the ALLL, management considers historical lossexperience for major types of loans. Homogenous categories of loans wereevaluated based on loss experience in recent years, applied to the currentportfolio. This formulation gives weight to portfolio size and loss experiencefor categories of real-estate secured loans (i.e. real estate – construction andreal estate – mortgage), other loans to commercial borrowers, and other consumerloans. However, historical data may not be an accurate predictor of losspotential in the current loan portfolio.     Management also evaluates trends in delinquencies, the composition of theportfolio, concentrations of credit, and changes in lending products, processes,or staffing. Management further considers external factors such as the interestrate environment, competition, current local and national economic trends, andthe results of recent independent reviews by auditors and banking regulators.The protracted slow-down in the real-estate market has affected both the priceand time to market residential and commercial properties. Management closelymonitors such trends and the potential effect on the Company. The impact of thecurrent adverse economic conditions is reflected in historically high losses andprovisions for loan loss in 2008, 2009 and 2010.    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 since late 2007, management believes there is increased likelihoodof loss in unsecured loans - commercial and consumer, and in secured consumerloans. Reserves for these segments of the portfolio are included in theformula-based portion of the ALLL.     As the real estate market continues to languish, management continuallyevaluates the adequacy of collateral on loans where it appears the borrower ishaving difficulty servicing their debt, taking additional available collateralif prudent. The Bank foreclosed on mortgages during 2009 and 2010, and expectsmore foreclosures in 2011. Foreclosure may result in loan losses, costs to holdreal estate acquired in foreclosure, and losses on the sale of real estateacquired in foreclosure. Management is unable to estimate the financialconsequence of future foreclosure activity.     In determining an adequate level for the specific reserve portion of theALLL, management reviews the current portfolio giving particular considerationto problem loans. The allowance may include reserves for specific loansidentified as impaired during management's loan review or the Company’sindependent loan review or internal audit functions. For significant problemloans, management's review consists of evaluation of the financial strengths ofthe borrowers and guarantors, the related collateral, and the effects ofeconomic conditions. Management prepares a Watch List of troubled loans forreview by the Board of Directors at their monthly meeting.    The provision for loan losses is a charge to earnings in the current periodto replenish the allowance and maintain it at a level management has determinedto be adequate. The allowance is increased by current period provisions and byrecoveries of amounts previously charged-off. The allowance is decreased whenloans are charged-off as losses, which occurs when they are deemed to beuncollectible. Adjustments are made to bring the balance in the allowance to thelevel established by application of management’s allowance methodology, and mayresult in an increase or decrease to expense. Provisions for loan losses of$1,012,000, $850,000, and $617,526 were recorded in 2010, 2009, and 2008,respectively. No provision for loan losses was made in 2007 or 2006.     Management considers the December 31, 2010 allowance appropriate and adequateto absorb identified and inherent losses in the loan portfolio. As of December31, 2010, management had not identified any loans which were anticipated to befully charged-off within the next 12 months. There can be no assurance thatcharge-offs in future periods will not exceed the allowance for loan loss orthat additional increases 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 experienced alow level of charge-offs in 2006 and 2007, which was consistent with itshistorical performance. Increased losses in 2008 and years thereafter and theincreased level of the ALLL as a percentage of the gross loan portfolio, reflectthe impact of recessionary conditions on the Bank’s borrowers, who are troubledby job losses, higher energy prices, and lower real estate values. 

 

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		Allowance for Loan Losses		2010		2009		2008		2007		2006		Balance at beginning of year		 $        637,761 		 $        707,152 		 $        195,525 		 $        196,083 		 $        211,374 		Loans charged-off:     		  Real estate - construction and land		           100,000 		             75,000 		                       - 		                       - 		                       - 		  Real estate - mortgage		           190,093 		           656,191 		                       - 		                       - 		                       - 		  Commercial		           354,854 		           200,357 		             76,383 		                       - 		               5,357 		  Consumer		             52,935 		             47,321 		             34,532 		               6,263 		             10,029 		        Total loan losses		           697,882 		           978,869 		           110,915 		               6,263 		             15,386 		Recoveries on loans previously charged off:     		  Real estate - construction and land		                       - 		                       - 		                       - 		                       - 		                       - 		  Real estate - mortgage		               1,100 		                  669 		                       - 		                       - 		                       - 		  Commercial		               1,073 		             40,364 		               3,785 		                       - 		                       - 		  Consumer		             29,126 		             18,445 		               1,231 		               5,705 		                    95 		        Total loan recoveries		             31,299 		             59,478 		               5,016 		               5,705 		                    95      		Net loan charge-offs (recoveries)		           666,583 		           919,391 		           105,899 		                  558 		             15,291 		Provision for loan losses charged to expense		        1,012,000 		           850,000 		           617,526 		                       - 		                       - 		Balance at end of year		 $        983,178 		 $        637,761 		 $        707,152 		 $        195,525 		 $        196,083      		Gross loans outstanding at year end		 $ 237,984,397 		 $ 240,699,630 		 $ 242,138,066 		 $ 238,271,803 		 $ 233,427,201 		Allowance for loan losses to loans     		  outstanding at end of year		0.41%		0.26%		0.29%		0.08%		0.08%     		Average gross loans		 $ 244,189,000 		 $ 242,095,000 		 $ 238,873,000 		 $ 235,213,000 		 $ 226,883,000 		Net charge-offs to average gross loans		0.27%		0.38%		0.04%		0.00%		0.01%
 

    The following table details the allocation of the allowance for loan lossesto major categories of loans and the percentage of loans in each categoryrelative to total loans at the five most recent year-ends. The loan portfolio isdivided into homogeneous categories of loans for the purpose of calculatingformula-based reserves. The categories of real estate – construction and realestate – mortgage loans share similar risks of potential collateraldeterioration or devaluation. However, these loans tend to be more adequatelysecured than those commercial and consumer loans that are not real estatesecured. Prior to 2009, the Bank had not incurred a mortgage loan loss since1997, and therefore no reserves were allocated to the real estate securedportions of the loan portfolio in determining the ALLL for 2007, or 2006. During2010, 2009, and 2008, the Company made provisions for loss on real estatesecured loans of $734,538, $450,911, and $475,099, respectively. Non-real estatesecured loans, commercial and consumer, generally pose a greater risk of lossdue to erosion of the borrower’s ability to repay the loan in a timely manner.Collateral on these loans is generally, although not always, less reliable thanreal estate as a source of recovery if default occurs. The Bank’s loan losses in2008, 2007, and 2006 were consumer and commercial loans which were unsecured orsecured with collateral other than real estate. In 2010, $290,093 or 41.57% oftotal loan losses were real estate secured. In 2009, $731,191 or 74.70% of totalloan losses were real estate secured. Management attributes the high level ofreal estate secured loan loss in 2010 and 2009 to the current economic downturnand an accompanying erosion of real estate values. Management expects additionallosses on real estate secured loans in 2011, and those losses may besignificant.

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		Allocation of Allowance for Loan Losses        		December 31, 2010 		December 31, 2009 		December 31, 2008  		Amount		% of Loans		Amount		% of Loans		Amount		% of Loans		Real estate - construction and land         		Formula-based		 $      233,438   		 $        15,400   		 $                -     		Specific reserves		                   -     		           35,262   		         370,000   		Total real estate -         		   construction and land		         233,438 		        9.16 		%		           50,662 		        9.12 		%		         370,000 		      12.53 		%		Real estate - mortgage         		Formula-based		           76,836   		         134,600   		                125   		Specific reserves		         330,759   		                   -     		         104,973   		Total real estate - mortgage		         407,595 		      83.54 		%		         134,600 		      82.96 		%		         105,098 		      77.42 		%		Commercial         		Formula-based		         196,946   		         156,554   		           73,694   		Specific reserves		                   -     		         223,607   		         128,521   		Total commercial		         196,946 		        6.58 		%		         380,161 		        7.03 		%		         202,215 		        9.08 		%		Consumer         		Formula-based		         119,228   		           53,638   		           27,929   		Specific reserves		                   -     		                   -     		             1,910   		Total consumer		         119,228 		        0.72  		           53,638 		        0.89  		           29,839 		        0.97  		Subtotal		         957,207 		    100.00 		%		         619,061 		    100.00 		%		         707,152 		    100.00 		%		Unallocated		           25,971   		           18,700   		                   -     		Total		 $      983,178   		 $      637,761   		 $      707,152   
 		December 31, 2007 		December 31, 2006  		Amount		% of Loans		Amount		% of Loans		Real estate - construction and land      		Total real estate -       		   construction and land		 $                -   		      16.85  		 $                -   		      15.99  		Real estate - mortgage      		Total real estate - mortgage		                   -   		      73.52  		                   -   		      73.03  		Commercial      		Formula-based		           34,952   		           10,556   		Specific reserves		         109,200   		                   -     		Total commercial		         144,152 		        8.55 		%		           10,556 		        9.97 		%		Consumer      		Formula-based		           21,636   		           24,347   		Specific reserves		           29,314   		                   -     		Total consumer		           50,950 		        1.08  		           24,347 		        1.01  		Subtotal		         195,102 		    100.00 		%		           34,903 		    100.00 		%		Unallocated		                423   		         161,180   		Total		 $      195,525   		 $      196,083   
    Unallocated reserves are not associated with a specific portfolio segment ora specific loan, but may be appropriate if properly supported and in accordancewith GAAP. Because no portion of the ALLL is calculated on a total loanportfolio basis, management anticipates having low levels of unallocatedreserves in future periods. The unallocated portion in the preceding tableappears higher prior to 2007, the year in which management adopted a revisedmethodology. Management believes that the ALLL reflected in this table prior to2007 does not materially differ from the balance that would have been calculatedas of December 31, 2006 had current methodology been applied then.

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    The accrual of interest on a loan is discontinued when principal or interestis ninety days past due or when the loan is determined to be impaired, unlesscollateral is sufficient to discharge the debt in full and the loan is inprocess of collection. When a loan is placed in nonaccruing status, any interestpreviously accrued but unpaid, is reversed from interest income. Interestpayments received on nonaccrual loans may be recorded as cash basis income, oras a reduction of principal, depending on management’s judgment on a loan byloan basis. Accrual of interest may be restored when all principal and interestare current and management believes that future payments will be received inaccordance with the loan agreement.    Nonperforming loans are loans past due 90 or more days and still accruingplus nonaccrual loans. Nonperforming assets are comprised of nonperforming loanscombined with other real estate owned, which is real estate acquired inforeclosure and held for sale. The composition of nonperforming assets ispresented in following table.
		2010		2009		2008		2007		2006		Loans 90 days or more past due and still accruing		 $      684,422 		 $      787,580 		 $   4,647,792 		 $        9,100 		 $    239,620 		Nonaccruing loans     		Current		      1,185,435 		         423,227 		                   -   		                -   		                -   		Past due 30 days or more		      2,921,086 		         599,856 		         199,724 		         40,916 		                -    		      4,106,521 		      1,023,083 		         199,724 		                -   		                -   		        Total nonperforming loans		         684,422 		         787,580 		      4,647,792 		           9,100 		       239,620 		Other real estate owned		         779,500 		      1,433,000 		                   -   		                -   		                -   		        Total nonperforming assets		 $   1,463,922 		 $   2,220,580 		 $   4,647,792 		 $        9,100 		 $    239,620 
 

    Included in amounts past due 90 days or more and still accruing at December31, 2008, was a loan with a principal balance of $4,500,000. Late in 2008, theBank was notified that there was a lien on the property securing this loan thatwas superior to the Bank’s liens, and which the settlement agent did notdiscover during the title examination process. As of December 31, 2010, the Bankhas been restored to first lien position and interest is current. Managementanticipates that the property securing the loan will be sold during 2011 with noloss to the Bank.    Loans are considered impaired when, based on current information, managementconsiders it unlikely that collection of principal and interest payments will bemade according to contractual terms. Generally, loans are not reviewed forimpairment until the accrual of interest has been discontinued, althoughmanagement may categorize a performing loan as impaired based on knowledge ofthe borrower’s financial condition, devaluation of collateral, or othercircumstances that are deemed relevant to loan collection. Impaired loans mayhave specific reserves, or valuation allowances, allocated to them in the ALLL.Estimates of loss reserves on impaired loans are determined based on one of twomeasurement methods: (1) the loan’s observable fair price, or (2) the fair valueof collateral, if repayment of the loan is expected to be provided by underlyingcollateral. Loans determined to be impaired, but for which no specific valuationallowance is made because management believes the loan is secured with adequatecollateral or the Bank will not take a loss on such loan, are grouped with otherhomogeneous loans for evaluation under formula-based criteria describedpreviously.    The following table sets forth principal balances of impaired loans and therelated valuation allowances as of December 31, 2010, 2009, 2008, and 2007.Management had identified no impaired loans as of December 31, 2006.
 		2010		2009		2008		2007		Impaired loans with valuation allowances,     		including nonaccruing loans		 $   2,478,049 		 $      799,834 		 $   4,328,618 		 $      595,774 		Valuation allowances on impaired loans		 $      330,759 		 $      258,869 		 $      605,405 		 $      138,514      		Impaired loans with no valuation allowances		 $   1,628,472 		 $   2,102,025 		 $   4,559,582 		 $                -   
 

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** 

Liquidity and Interest Rate Sensitivity   The primary objective of asset/liability management is to ensure the steadygrowth of the Company's primary source of earnings, net interest income. Netinterest income can fluctuate with significant interest rate movements. Tolessen the impact of these margin swings, the balance sheet should be structuredso that repricing opportunities exist for both assets and liabilities in roughlyequivalent amounts at approximately the same time intervals. Imbalances in theserepricing opportunities at any point in time constitute interest ratesensitivity.    Liquidity represents the ability to provide steady sources of funds for loancommitments and investment activities, as well as to provide sufficient funds tocover deposit withdrawals and payment of debt and operating obligations. Thesefunds can be obtained by converting assets to cash or by attracting newdeposits. Average liquid assets (cash and amounts due from banks,interest-bearing deposits in other banks, federal funds sold, and investmentsecurities) were 44.29% of average deposits for 2010, compared to 42.56 and40.00% for 2009 and 2008, respectively.     Average net loans to average deposits were 75.97%, 78.67%, and 83.09% for2010, 2009, and 2008. The decrease in the loan to deposit ratio from 2009 to2010 is attributable to $2,080,000 (.86%) growth in the average net loanportfolio offset by $13,652,000 (4.45%) growth in average deposits during 2010.The decrease in the loan to deposit ratio from 2008 to 2009 is attributable to$2,734,000 (1.35%) growth in the average loan portfolio offset by $19,587,000(6.82%) growth in average deposits during 2009. Funding for loan growth in 2009and 2010 was provided by increased deposit balances. This shift has a positiveeffect on earnings as loan rate exceed rates paid on deposits. The increase inloans does not negatively impact the Company’s ability to meet liquiditydemands.    As of December 31, 2010, $41,851,103 (46.62%) of total debt securities maturein one year or less, of which, $35,292,775 is classified as"available-for-sale." Federal funds sold provide additional liquidity. Othersources of liquidity include letters of credit, overnight federal funds, andreverse repurchase agreements available from correspondent banks. The totallines and letters of credit available from correspondent banks were $28,000,000as of December 31, 2010 and 2009, and $27,000,000 as of December 31, 2008.    The following table shows a distribution of investment securities by theircontractual maturities and their yields for the various maturity timeframes. Inthis schedule, investment securities classified as available for sale arepresented at fair value and investments classified as held to maturity arepresented at amortized cost.
		Investment Securities Maturity Distribution and Yields		December 31, 2010		December 31, 2009		December 31, 2008		Amount		  Yield		Amount		  Yield		Amount		  Yield		U. S. Treasury      		  One year or less		 $   37,720,874 		0.89%		 $   27,022,810 		2.02%		 $   28,997,415 		3.03%		  Over one through five years		      36,174,343 		1.15%		      35,034,605 		1.66%		      22,278,930 		3.30%		  Over ten years		        2,691,562 		7.28%		        2,589,375 		7.28%		        2,961,875 		7.28%		Total U.S. Treasury securities		      76,586,779 		1.24%		      64,646,790 		2.04%		      54,238,220 		3.37%      		U.S. Government Agencies      		  One year or less 		        2,002,278 		0.93%		        3,000,000 		1.10%		        1,000,000 		3.00%		  Over one through five years		        5,000,170 		0.78%		        7,000,000 		2.04%		        5,999,443 		3.13%		Total U. S. Government Agencies		        7,002,448 		0.82%		      10,000,000 		1.76%		        6,999,443 		3.11%      		State, county, and municipal      		  One year or less		        2,127,951 		0.84%		        1,155,730 		1.27%		           970,355 		2.71%		  Over one through five years		        4,051,980 		1.07%		        2,343,944 		1.50%		           537,026 		3.34%		Total state, county, and municipal		        6,179,931 		0.99%		        3,499,674 		1.42%		        1,507,381 		2.93%      		Total debt securities      		  One year or less		      41,851,103 		0.89%		      31,178,540 		1.91%		      30,967,770 		3.02%		  Over one through five years		      45,226,493 		1.11%		      44,378,549 		1.71%		      28,815,399 		3.27%		  Over ten years		        2,691,562 		7.28%		        2,589,375 		7.28%		        2,961,875 		7.28%		Total debt securities		      89,769,158 		1.19%		      78,146,464 		1.97%		      62,745,044 		3.33%      		Equity securities		        2,336,334 		2.33%		        3,219,056 		3.28%		        3,852,024 		3.87%      		Total securities		 $   92,105,492 		1.22%		 $   81,365,520 		2.03%		 $   66,597,068 		3.36%
 

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    Interest rate sensitivity refers to the responsiveness of interest-bearingassets and liabilities to changes in market interest rates. The rate-sensitiveposition, or gap, is the difference in the volume of rate-sensitive assets andliabilities at a given time interval. The general objective of gap management isto actively manage rate-sensitive assets and liabilities to reduce the impact ofinterest rate fluctuations on the net interest margin. Management generallyattempts to maintain a balance between rate-sensitive assets and liabilities asthe exposure period is lengthened to minimize the overall interest rate risk tothe Company.    Interest rate sensitivity may be controlled on either side of the balancesheet. On the asset side, management exercises some control over maturities.Also, loans are written to provide repricing opportunities on fixed rate notes.The Company's investment portfolio, including federal funds sold, provides themost flexible and fastest control over rate sensitivity since it can generallybe restructured more quickly than the loan portfolio.    On the liability side, deposit products are structured to offer incentives toattain the maturity distribution desired. Competitive factors sometimes makecontrol over deposits more difficult and, therefore, less effective as aninterest rate sensitivity management tool.    The asset mix of the balance sheet is continually evaluated in terms ofseveral variables: yield, credit quality, appropriate funding sources, andliquidity. Management of the liability mix of the balance sheet focuses onexpanding the various funding sources.    As of December 31, 2010, the Company was cumulatively asset-sensitive for alltime horizons. For asset-sensitive institutions, if interest rates shoulddecrease, the net interest margins should decline. Since all interest rates andyields do not adjust at the same velocity, the gap is only a general indicatorof rate sensitivity.

 
		Interest Sensitivity Analysis     		December 31, 2010 		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 		 $      36,081,862 		  $                -    		  $                -    		  $                -    		 $      36,081,862 		  Interest-bearing deposits		           7,297,405 		           4,353,444 		                         - 		                    -    		         11,650,849 		  Investment debt securities 		         23,648,086 		         20,403,228 		         43,026,280 		           2,691,563 		         89,769,157 		  Loans		       233,514,965 		              845,859 		           2,400,182 		           1,223,392 		       237,984,398 		Total earning assets		 $    300,542,318 		 $      25,602,531 		 $      45,426,462 		 $        3,914,955 		 $    375,486,266      		Liabilities     		Interest-bearing deposits     		   NOW 		 $      59,410,096 		  $                -    		  $                -    		  $                -    		 $      59,410,096 		   Money market 		         43,030,285 		                     -    		                    -    		                     -    		         43,030,285 		   Savings		         48,417,028 		                     -    		                    -    		                     -    		         48,417,028 		   Certificates $100,000 and over		         19,885,556 		         19,975,640 		           4,528,464 		                     - 		         44,389,660 		   Certificates under $100,000		         21,223,186 		         25,998,576 		           7,069,115 		                     - 		         54,290,877 		Securities sold under agreements     		   to repurchase		           4,490,512 		                     -    		                    -    		                     -    		           4,490,512 		Total interest-bearing liabilities		 $    196,456,663 		 $      45,974,216 		 $      11,597,579 		 $                      - 		 $    254,028,458      		Period gap		 $    104,085,655 		 $    (20,371,685)		 $      33,828,883 		 $        3,914,955 		 $    121,457,808 		Cumulative gap		 $    104,085,655 		 $      83,713,970 		 $    117,542,853 		 $    121,457,808  		Ratio of cumulative gap to     		   total earning assets		27.72%		22.29%		31.30%		32.35% 
 

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**Deposits and Other Interest-Bearing Liabilities    Average interest-bearing liabilities increased $12,936,000 (5.46%) to$249,663,000 in 2010, from $236,727,000 in 2009. Management deployed thoseadditional funds into investment securities on which yields have been decreasingduring the past two years. In order to maintain a reasonable net interestspread, management has lowered rates on deposits to offset reductions ofinterest revenue. Average interest-bearing deposits increased $13,233,000(5.75%) to $243,373,000 in 2010 from $230,140,000 in 2009, while averagenoninterest-bearing demand deposits increased by a modest $419,000 (.55%) to$77,085,000 in 2010 from $76,666,000 in 2009.    At December 31, 2010, total deposits were $326,777,754, compared to$312,647,619 at December 31, 2009, an increase of $14,130,135 (4.52%).Management believes that this multi-year period with high levels of depositgrowth relates to investors’ loss of confidence in the stock market, coupledwith higher deposit insurance limits. Management expects deposit levels tostabilize as investors regain confidence in stocks as an investment.    Average interest-bearing liabilities increased $18,893,000 (8.67%) to$236,727,000 in 2009, from $217,834,000 in 2008. Average interest-bearingdeposits increased $17,183,000 (8.07%) to $230,140,000 in 2009 from $212,957,000in 2008, while average noninterest-bearing demand deposits increased $2,404,000(3.24%) to $76,666,000 in 2009 from $74,262,000 in 2008.     At December 31, 2009, total deposits were $312,647,619, compared to$292,459,213 at December 31, 2008, an increase of $20,188,406 (6.90%).Throughout 2009, deposit levels exceeded those of the previous two years duringcomparable periods. Management attributes this deposit influx to a flight ofinvestors from the troubled stock market to the safety of insured bank deposits,similar to the events of late 2001 through 2004. Higher levels of depositinsurance and the reputation of the Company and the Bank for safe and soundoperation are key factors in the deposit increases during 2009.    The following table sets forth the deposits of the Company by category as ofDecember 31, 2010, 2009, and 2008, respectively.
		December 31,		2010		2009		2008 		Percent of 		Percent of 		Percent of		Amount		deposits		Amount		deposits		Amount		deposits      		Non-interest bearing		 $       76,763,686 		23.48%		 $       72,431,731 		23.16%		 $       70,652,032 		24.15%		NOW		          59,410,096 		18.18%		          58,328,093 		18.66%		          48,043,193 		16.43%		Money market		          43,030,285 		13.17%		          36,559,471 		11.69%		          32,039,678 		10.96%		Savings		          48,417,028 		14.82%		          46,958,194 		15.02%		          43,064,214 		14.72%		Time deposits less than $100,000		          55,243,123 		16.91%		          56,511,968 		18.08%		          61,284,880 		20.96%		     Core deposits		        282,864,218  		        270,789,457  		        255,083,997  		Time deposits of $100,000 or more		          43,913,536 		13.44%		          41,858,162 		13.39%		          37,375,216 		12.78%		     Total deposits		 $     326,777,754 		100.00%		 $     312,647,619 		100.00%		 $     292,459,213 		100.00%
 

    Core deposits, which exclude certificates of deposit of $100,000 or more,provide a relatively stable funding source for the Company's loan portfolio andother earning assets. The Company's core deposits increased $12,074,761 during2010 and $15,705,460 during 2009. Deposits, and particularly core deposits, havebeen the Company's primary source of funding and have enabled the Company tomeet both its short-term and long-term liquidity needs. Management anticipatesthat while such deposits will continue to be the Company's primary source offunding in the future, continued reductions in deposit levels, if coupled withgrowth in the Company’s loan portfolio, could require periodic borrowing offunds. In this event, it is likely that Management would liquidate investmentsecurities from the available for sale portfolio or purchase overnight federalfunds as needed.

 

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    The maturity distribution of the Company's time deposits of $100,000 or moreat December 31, 2010, is shown in the following table.
  		After six   		After three		through		After 		Within three		through		twelve		twelve 		Months		six months		months		months		Total		Time deposits of $100,000 or more		 $       19,885,555 		 $        7,218,824 		 $       12,280,693 		 $    4,528,464 		 $  43,913,536 
    Customers who invest in large certificates of deposit tend to be highlysensitive 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. At December 31, 2010, there were no time deposits issued to customersof other CDARS member banks under the reciprocal program.
**Noninterest revenue   Noninterest revenue for 2010 increased $88,827 (4.47%)from the previous year. The most significant contributions to this increase area gain of $195,939 on the sale of collectible coin and a gain of $55,050 fromthe sale of real property to the Department of Transportation in Delaware for aroad improvement project. Additionally, proceeds from the grant of a right ofway related to the road improvement project resulted in an increase inmiscellaneous revenue of $45,000. These revenue increases are offset in part bylosses totaling $200,904 from the sale and revaluation of other real estateowned.    Service charges on deposit accounts decreased by $37,792 (3.83%). Thisdecrease results from a banking regulation, effective in August 2010, whichprohibits banks from collecting a fee for processing consumer non-recurringdebit card charges which present against insufficient funds. Management expectsfurther loss of service charge revenue in 2011 as a result of this regulation.The Bank prevents authorization of debit card transactions against insufficientfunds, but a combination of customers’ inattention to their account balances andoutstanding transactions, and merchants’ failure to process card transactions ina manner that assures that adequate funds are in the deposit account, result inpoint of sale transactions posting to accounts that do not have sufficientfunds. ATM and debit card revenue increased $36,560 (6.85%) due to increasedcard usage.    Noninterest revenue for 2009 decreased $48,564 (2.38%)from the previous year. Service charges on deposit accounts decreased by$105,730 (9.67%) due to lower volume of fees for items presented againstinsufficient funds. ATM and debit card revenue increased $14,963 (2.88%) due toincreased card usage. In 2009, the Bank had a gain of $33,410 on the sale ofcollectible coins.    The following table presents the principal components of noninterest revenuefor the years ended December 31, 2010, 2009, and 2008, respectively.
		Noninterest revenue  		2010		2009		2008		Service charges on deposit accounts 		 $        949,377 		 $        987,169 		 $     1,092,899 		ATM and debit card revenue 		           570,382 		           533,822 		           518,859 		Increase in cash surrender value of    		   bank owned life insurance 		           171,261 		           174,468 		           194,040 		Gain (loss) on sale of assets 		           252,703 		             38,403 		              (4,671)		Loss on other real estate owned 		          (200,904)		                 (490)		                     -    		Miscellaneous revenue 		           334,634 		           255,254 		           236,063  		Total noninterest revenue 		 $     2,077,453 		 $     1,988,626 		 $     2,037,190      		Noninterest revenue as a percentage     		of average total assets 		0.52%		0.52%		0.56%
 

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** 

Noninterest Expense    Noninterest expense decreased $231,698 (2.72%) from 2009 to 2010. A reductionin deposit insurance premiums of $199,288 comprises most of the variance.Expense related to ATM and debit card activities decreased $73,968 due to acontract renegotiation with the Bank’s service provider which took effect inlate 2009. Professional fees continued at a high level due to loan collectionexpense.     Noninterest expense increased $561,304 (7.06%) from 2008 to 2009. A depositinsurance increase of $452,220 resulted from a special assessment to replenishthe Deposit Insurance Funds, depleted by bank failures, plus an increase ininsured deposit levels and the expiration of a credit which benefited the Bankin recent years. Expense related to ATM and debit card activities decreased$48,887 based on a contract renegotiation with the Bank’s service provider.Professional fees increased $77,020 as the Bank engaged legal representation forloan collection.     The following table presents the principal components of noninterest expensefor the years ended December 31, 2010, 2009, 2008, respectively.
**Noninterest expense   		2010		2009		2008 		Salaries and employee benefits 		 $        4,698,755 		 $        4,670,997 		 $        4,670,951  		Occupancy expense 		              811,373 		              763,715 		              753,605  		Furniture and equipment expense 		              441,459 		              476,518 		              464,559  		Deposit insurance 		              296,118 		              495,406 		                43,186  		Advertising 		              180,336 		              190,461 		              211,056  		Armored car service 		                73,985 		                75,446 		                66,003  		ATM and debit card 		              181,882 		              255,850 		              304,737  		Business and product development 		                71,482 		                77,319 		                78,757  		Computer software amortization 		                68,924 		                71,895 		                78,364  		Computer software maintenance 		              159,797 		              151,927 		              148,098  		Correspondent bank fees 		                65,488 		                79,677 		                60,666  		Courier service 		                45,360 		                41,472 		                34,776  		Director fees 		              183,350 		              147,650 		              151,900  		Dues, donations, and subscriptions 		                74,337 		                81,634 		                84,872  		Liability insurance 		                26,049 		                26,018 		                29,358  		Postage 		              155,168 		              154,065 		              165,249  		Professional fees 		              171,580 		              158,668 		                81,648  		Stationery and supplies 		                58,628 		                76,896 		                95,945  		Telephone  		              165,464 		              173,792 		              159,065  		Miscellaneous 		              352,339 		              344,166 		              269,473  		  Total noninterest expense 		 $        8,281,874 		 $        8,513,572 		 $        7,952,268        		Noninterest expense as a percentage of   		    average total assets		2.06%		2.21%		2.17%
 **
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**Capital    Under capital guidelines adopted by the Federal Reserve Board and the FDIC,the Company and the Bank are currently required to maintain a minimum risk-basedtotal capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capitalconsists of common stockholders’ equity, qualifying perpetual preferred stock,and minority interests in equity accounts of consolidated subsidiaries, lesscertain intangibles. In addition, the Company and the Bank must maintain aminimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 4%,but this minimum ratio is increased by 100 to 200 basis points for other thanthe highest-rated institutions.     At December 31, 2010, 2009, and 2008, the Company and the Bank werewell-capitalized, exceeding all minimum requirements, as set forth in thefollowing table.
  		Analysis of Capital   		Consolidated 		To be well		Required 		Company		Bank		capitalized		minimums		2010    		Total risk-based capital ratio		33.6%		32.1%		10.0%		8.0%		Tier 1 risk-based capital ratio		33.0%		31.7%		6.0%		4.0%		Tier 1 leverage ratio		17.5%		16.9%		5.0%		4.0%      		2009    		Total risk-based capital ratio		32.1%		30.6%		10.0%		8.0%		Tier 1 risk-based capital ratio		31.6%		30.3%		6.0%		4.0%		Tier 1 leverage ratio		17.7%		16.9%		5.0%		4.0%      		2008    		Total risk-based capital ratio		32.5%		30.8%		10.0%		8.0%		Tier 1 risk-based capital ratio		31.8%		30.4%		6.0%		4.0%		Tier 1 leverage ratio		18.7%		17.8%		5.0%		4.0%
 

 
**Website Access to Securities and Exchange Commission Reports    The Bank maintains an Internet website at www.taylorbank.com.The Company’s periodic SEC reports, including annual reports on Form 10-K,quarterly reports on Form 10-Q, and current reports on Form 8-K, are accessiblethrough this website. Access to these filings is free of charge. The reports areavailable as soon as practicable after they are filed electronically with theSEC. **Accounting Rule Changes    On July 1, 2009, the Accounting Standards Codification (ASC) became theFinancial Accounting Standards Board’s (FASB) officially recognized source ofauthoritative U.S. generally accepted accounting principles applicable to allpublic and non-public non-governmental entities, superseding existing FASB,AICPA, EITF and related literature. Rules and interpretive releases of the SECunder the authority of federal securities laws are also sources of authoritativeGAAP for SEC registrants. All other accounting literature is considerednon-authoritative. The switch to the ASC affects the way companies refer to U.S.GAAP in financial statements and accounting policies.     The following accounting guidance has been approved by the FinancialAccounting Standards Board and would apply to the Company if the Company or theBank entered into an applicable activity.*    Accounting Standards Update (ASU) No. 2010-06*, *"Fair ValueMeasurements and Disclosures (Topic 820)—Improving Disclosures About Fair ValueMeasurement."*requires expanded disclosures related to fair valuemeasurements including (i) the amounts of significant transfers of assets orliabilities between Levels 1 and 2 of the fair value hierarchy and the reasonsfor the transfers, (ii) the reasons for transfers of assets or liabilities in orout of Level 3, and (iii) the policy for determining when transfers betweenlevels of the fair value hierarchy are recognized. ASU 2010-06 further definesthe detail in which classes of assets and liabilities (rather than majorcategory) should be disclosed, and that companies should provide disclosuresabout the valuation techniques and inputs used to measure fair value for bothrecurring and nonrecurring fair value measurements for each class of assets andliabilities in Levels 2 and 3. All disclosure requirements and clarificationswere effective January 1, 2010 and have not had a significant impact on theCompany’s financial statements. 

 

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*    ASU No.2009-16, "Transfers and Servicing (Topic 860) – Accounting forTransfers of financial Assets"t;* enhances reporting about transfers offinancial assets, including securitizations, and where companies have continuingexposure to the risks related to transferred financial assets. This new guidanceeliminates the concept of a "qualifying special-purpose entity" and changes therequirements for derecognizing financial assets. It also requires additionaldisclosures about all continuing involvements with transferred financial assetsincluding information about gains and losses resulting from transfers during theperiod. ASC Topic 860 was effective January 1, 2010 and has not had asignificant impact on the Company’s financial statements.     The accounting policies adopted by management are consistent withauthoritative U.S. generally accepted accounting principles and are consistentwith those followed by peer Banks.**Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Impact of Inflation    Unlike most industrial companies, the assets and liabilities of financialinstitutions such as the Company and the Bank are primarily monetary in nature.Therefore, interest rates have a more significant effect on the Company'sperformance than do the effects of changes in the general rate of inflation andchange in prices. In addition, interest rates do not necessarily move in thesame direction or in the same magnitude as the prices of goods and services. Asdiscussed previously, management seeks to manage the relationships betweeninterest sensitive assets and liabilities in order to protect against wideinterest rate fluctuations, including those resulting from inflation. See"Liquidity and Interest Rate Sensitivity" above. 
**Item 8. Financial Statements and Supplementary Data**
    In response to this Item, the information included on pages 1 through 26 ofthe Company's Annual Report to Stockholders for the year ended December 31,2010, is incorporated herein by reference.
**Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosures**
    There have been no changes in or disagreements with accountants on accountingor financial disclosure during the fiscal year covered by this report.
** **
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**Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures    Disclosure controls and procedures are designed and maintained by the Companyto ensure that information required to be disclosed in the Company’s publiclyfiled reports is recorded, processed, summarized and reported in a timelymanner. Such information must be available to management, including the ChiefExecutive Officer (CEO) and Treasurer, to allow them to make timely decisionsabout required disclosures. Even a well-designed and maintained control systemcan provide only reasonable, not absolute, assurance that its objectives areachieved. Inherent limitations in any system of controls include flawedjudgment, errors, omissions, or intentional circumvention of controls.    The Company’s management, including the CEO and Treasurer, performed anevaluation of the effectiveness of the design and operation of the Company’sdisclosure controls and procedures as of December 31, 2010. Based on thatevaluation, the Company’s management, including the CEO and Treasurer, hasconcluded that the Company’s disclosure controls and procedures are effective.The projection of an evaluation of controls to future periods is subject to therisk that procedures may become inadequate due to changes in conditionsincluding the degree of compliance with procedures.
**Internal Control Over Financial ReportingManagement Report on Internal Control over Financial Reporting    Calvin B. Taylor Bankshares, Inc. maintains a system of internal control overfinancial reporting, which is designed to provide reasonable assurance to theCompany’s management and board of directors regarding the preparation ofreliable published financial statements. The system includes an organizationalstructure and division of responsibility, established policies and proceduresincluding a code of conduct to foster a strong ethical climate, and the carefulselection, training and development of our staff. The system containsself-monitoring mechanisms, and an internal auditor monitors the operation ofthe internal control system and reports findings and recommendations tomanagement and the board of directors. Corrective actions are taken to addresscontrol deficiencies and other opportunities for improving the system as theyare identified. The board, operating through its audit committee, which iscomposed entirely of directors who are not officers or employees of the Company,provides oversight to the financial reporting process.    There are inherent limitations in the effectiveness of any system of internalcontrols, including the possibility of human error and the circumvention oroverriding of controls. Accordingly, even an effective internal control systemcan provide only reasonable assurance with respect to financial statementpreparation. Furthermore, the effectiveness of an internal control system mayvary over time and with circumstances.    The Company assessed its internal control system as of December 31, 2010 inrelation to criteria for effective internal control over financial reporting asdescribed in *Internal Control – Integrated Framework*, issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on itsassessment, the Company believes that, as of December 31, 2010, its system ofinternal control over financial reporting met those criteria.

CALVIN B. TAYLOR BANKSHARES, INC.(Registrant)

Date: March 9, 2011                                           By:  /s/ Raymond M. Thompson                                                                                       Raymond M. Thompson                                                                                       Chief Executive Officer

Date: March 9, 2011                                          By: /s/ Jennifer G. Hawkins                                                                                      Jennifer G. Hawkins, Treasurer                                                                                      Principal Accounting Officer                                                                                      Principal Financial Officer

- 33 -

 

 

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, 2010,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, 2010, based on criteria established in *Internal Control – Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). 

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

/s/ Rowles & Company, LLP

 

Baltimore, MarylandMarch 9, 2011

 

- 34 -
** 

Changes in Internal Controls**
    During the quarter ended on the date of this report, there were nosignificant changes in the Company’s internal controls over financial reportingthat have had or are reasonably likely to have a material effect on theCompany’s internal control over financial reporting. As of December 31, 2010,the Company’s management, including the CEO and Treasurer, has concluded thatthe Company’s internal controls over financial reporting are effective.
**Audit Committee and Financial Expert**
    The Board of Directors has adopted a written Audit Policy, which serves as acharter for the Audit Committee. The Audit Committee is comprised of sevenindependent directors, including Chairman James R. Bergey, Jr., CPA who servesas the financial expert. The Audit Committee is scheduled to meet quarterly andheld four meetings in 2010.

 
**Item 9B. Other Information**
    There is no information required to be disclosed on Form 8-K which has notbeen reported.

 
** 

PART III

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

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

- 35 -
**PART IV

Item 15. Exhibits, Financial Statement Schedules**
(a) Exhibits
(a)(1), (2) Annual Report to Stockholders for the year ended December 31,2010

3.1 Articles of Incorporation of the Company, incorporated by reference toExhibit 3.1 of Registration Statement Form

S-4, File No. 33-99762.

3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 ofRegistration Statement Form S-4, File No. 

33-99762.

- 36 -

 

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

                                                                               CALVIN B. TAYLOR BANKSHARES, INC.                                                                               ((Registrant)

Date: March 9, 2011                                           By:  /s/ Raymond M. Thompson                                                                                       Raymond M. Thompson                                                                                       Chief Executive Officer

Date: March 9, 2011                                          By: /s/ Jennifer G. Hawkins                                                                                      Jennifer G. Hawkins, Treasurer                                                                                      Principal Accounting Officer /Principal Financial Officer

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

Date: March 9, 2011                                          By: /s/ James R. Bergey, Jr.                                                                                      James R. Bergey, Jr., Director Date: March 9, 2011                                          By:  /s/John H. Burbage, Jr.                                                                                      John H. Burbage, Jr., Director
Date: March 9, 2011                                          By:  /s/Todd E. Burbage                                                                                      Todd E. Burbage, Director Date: March 9, 2011                                          By:  /s/Charlotte K. Cathell                                                                                      Charlotte K. Cathell, Director Date: March 9, 2011                                          By:  /s/Reese F. Cropper, Jr.                                                                                      Reese F. Cropper, Jr.                                                                                      Chairman of the Board of Directors 

Date: March 9, 2011                                          By: /s/ Reese F. Cropper, III                                                                                      Reese F. Cropper, III, Director Date: March 9, 2011                                          By:  /s/Hale Harrison                                                                                      Hale Harrison, Director

Date: March 9, 2011                                          By: /s/ Gerald T. Mason                                                                                      Gerald T. Mason, Director Date: March 9, 2011                                          By:  /s/William H. Mitchell                                                                                      William H. Mitchell, Director                                                                                      Vice President

Date: March 9, 2011                                          By: /s/ Joseph E. Moore                                                                                      Joseph E. Moore, Director  Date: March 9, 2011                                          By:  /s/Michael L. Quillin, Sr.                                                                                      Michael L. Quillin, Sr., Director

Date: March 9, 2011                                          By: /s/ Raymond M. Thompson                                                                                      Raymond M. Thompson, Director                                                                                      President and Chief Executive Officer

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

We, the undersigned, certify that to the best of our knowledge, based upon areview of the Annual Report on Form 10-K for the period ended December 31, 2010of 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)t)

Date: March 9, 2011                                           By:  /s/ Raymond M. Thompson                                                                                       Raymond M. Thompson                                                                                       Chief Executive Officer

Date: March 9, 2011                                          By: /s/ Jennifer G. Hawkins                                                                                      Jennifer G. Hawkins, Treasurer                                                                                      Principal Accounting Officer                                                                                      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)t)

Date: March 9, 2011                                           By:  /s/ Raymond M. Thompson                                                                                       Raymond M. Thompson                                                                                       Chief Executive Officer

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

I, Jennifer G. Hawkins, certify that:

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

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

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

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

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

b)  designed such internal control over financial reporting, or caused	such internal control over financial reporting to be designed under our	supervision, to provide reasonable assurance regarding the reliability of	financial reporting and the preparation of financial statements for external	purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

 

                                                                               CALVIN B. TAYLOR BANKSHARES, INC.                                                                               (Registrant)

Date: March 9, 2011                                          By: /s/ Jennifer G. Hawkins                                                                                      Jennifer G. Hawkins, Treasurer                                                                                      Principal Accounting Officer                                                                                      Principal Financial Officer

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