UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**Form 10-Q**
Quarterly Report Pursuant to Section 13 or 15(d)			of the Securities Exchange Act of 1934For the quarterly period ended March 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
Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days. Yes [X] No ____

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files).N/A (not required at this time)

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company. See the definitions of "large accelerated filer,""accelerated filer" and "smaller reporting company" in Rule 12b-2 of theExchange 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 shellcompany (as defined in Rule 12b-2 of the Exchange Act). Yes ____ No [X] 

On April 30, 2010, 3,000,508 shares of the registrant'scommon stock were issued and outstanding.

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******Calvin B. Taylor Bankshares, Inc. and Subsidiary

Form 10-Q

Index**Part I - Financial		InformationPageItem 1Consolidated		Financial StatementsConsolidated		Balance Sheets as of March 31, 2010 and December 31, 20093 Consolidated		Statements of Income for the three months ended March		31, 2010 and 20094Consolidated		Statements of Cash Flows for the three months ended March		31, 2010 and 20095-6Notes to		Consolidated Financial Statements7-10Item 2Management’s		Discussion and Analysis of Financial Conditionand Results		of Operations11-20Item 3Quantitative		and Qualitative Disclosures About Market Risks 21Item 4Controls and		Procedures21Part II - Other		InformationItem 1Legal		Proceedings22Item 1ARisk Factors22Item 2Unregistered		Sales of Equity Securities and Use of Proceeds23Item 3Defaults Upon		Senior Securities23Item 5Other		Information23Item 6Exhibits23-26Signatures27
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		Part I - Financial Information, Item 1 Financial Statements 		Calvin B. Taylor Bankshares, Inc. and Subsidiary 		Consolidated Balance Sheets   		(unaudited)  		March 31,		December 31, 		2010		2009		Assets		Cash and due from banks		 $             17,549,372 		 $             15,117,190 		Federal funds sold		                31,988,106 		                28,222,472 		Interest-bearing deposits		                  8,639,741 		                12,494,003 		Investment securities available for sale		                29,771,513 		                42,767,578 		Investment securities held to maturity (approximate   		  fair value of $39,358,455 and $38,897,082)		                39,166,248 		                38,597,942 		Loans, less allowance for loan losses  		  of $688,350 and $637,761		              247,312,213 		              240,061,869 		Premises and equipment		                  6,495,964 		                  6,594,757 		Other real estate owned		                  1,378,500 		                  1,433,000 		Accrued interest receivable		                  1,345,788 		                  1,292,604 		Computer software		                     124,175 		                     135,831 		Bank owned life insurance		                  5,131,166 		                  5,089,278  		Other assets		                  1,314,920 		                  1,721,772  		 $           390,217,706 		 $           393,528,296 		Liabilities and Stockholders' Equity		Deposits  		  Noninterest-bearing		 $             68,206,655 		 $             72,431,731 		  Interest-bearing		              240,850,526 		              240,215,888  		              309,057,181 		              312,647,619 		Securities sold under agreements to repurchase		                  6,235,265 		                  7,048,176 		Note payable		                       41,894 		                       48,519 		Accrued interest payable 		                     176,419 		                     192,621 		Deferred income taxes		                  1,041,864 		                  1,026,786 		Other liabilities		                     100,129 		                     287,282  		              316,652,752 		              321,251,003 		Stockholders' equity  		  Common stock, par value $1 per share   		   authorized 10,000,000 shares, issued and outstanding  		   3,000,508 shares at March 31, 2010 and December 31, 2009		                  3,000,508 		                  3,000,508 		  Additional paid-in capital		                  8,733,438 		                  8,733,438 		  Retained earnings		                60,240,657 		                58,975,278  		                71,974,603 		                70,709,224 		  Accumulated other comprehensive income		                  1,590,351 		                  1,568,069  		                73,564,954 		                72,277,293  		 $           390,217,706 		 $           393,528,296       		See accompanying Notes to Consolidated Financial Statements
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		Calvin B. Taylor Bankshares, Inc. and Subsidiary 		Consolidated Statements of Income (unaudited)   		For the three months ended 		March 31, 		2010		2009		Interest and dividend revenue  		  Loans, including fees		 $               3,960,170 		 $               4,063,046 		  U.S. Treasury and government agency securities		                     345,052 		                     449,164 		  State and municipal securities		                       12,325 		                       10,313 		  Federal funds sold 		                       11,956 		                       16,231 		  Interest-bearing deposits		                       19,496 		                       78,764 		  Equity securities		                       18,844 		                       26,140 		          Total interest and dividend revenue		                  4,367,843 		                  4,643,658    		Interest expense  		  Deposits		                     499,860 		                     717,546 		  Borrowings		                         8,846 		                         7,922 		    Total interest expense		                     508,706 		                     725,468 		    Net interest income		                  3,859,137 		                  3,918,190  		Provision for loan losses		                     421,000 		                     333,100  		    Net interest income after provision for loan losses		                  3,438,137 		                  3,585,090    		Noninterest revenue  		  Service charges on deposit accounts		                     224,735 		                     248,062 		  ATM and debit card		                     121,647 		                     117,679 		  Bank owned life insurance		                       41,888 		                       43,164 		  Gain (loss) on sale of assets		                     148,236 		                       (1,275)		  Miscellaneous revenue		                     101,686 		                       53,190 		    Total noninterest revenue		                     638,192 		                     460,820    		Noninterest expenses  		  Salaries		                     866,847 		                     895,730 		  Employee benefits		                     250,829 		                     219,203 		  Occupancy		                     228,842 		                     197,704 		  Furniture and equipment		                     124,670 		                     125,645 		  Data proccessing		                       73,226 		                       71,807 		  ATM and debit card		                       63,647 		                       78,702 		  Deposit insurance premiums		                       78,455 		                       12,554 		  Other operating		                     406,934 		                     361,875 		    Total noninterest expenses		                  2,093,450 		                  1,963,220 		    Income before income taxes		                  1,982,879 		                  2,082,690 		Income taxes		                     717,500 		                     744,000    		Net income		 $               1,265,379 		 $               1,338,690    		Earnings per common share - basic and diluted		 $                        0.42 		 $                        0.44    		See accompanying Notes to Consolidated Financial Statements
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		Calvin B. Taylor Bankshares, Inc. and Subsidiary 		Consolidated Statements of Cash Flows (unaudited)   		For the three months ended 		March 31, 		2010		2009		Cash flows from operating activities  		  Interest and dividends received		 $                4,354,052 		 $                4,704,538 		  Fees and commissions received		                      525,329 		                      400,203 		  Interest paid		                    (524,908)		                    (817,478)		  Cash paid to suppliers and employees		                 (1,999,269)		                 (1,761,175)		  Income taxes paid		                    (435,956)		                        (3,728) 		                   1,919,248 		                   2,522,360 		Cash flows from investing activities  		  Certificates of deposit purchased, net of maturities		                   3,830,680 		                   7,296,255 		  Proceeds from maturities of investments available  		     for sale		                 13,005,000 		                 14,000,000 		  Purchase of investments available for sale		                                -   		                 (4,997,075)		  Proceeds from maturities of investments held to   		     maturity		                   5,190,000 		                   6,100,000 		  Purchase of investments held to maturity		                 (5,769,273)		                 (8,037,148)		  Loans made, net of principal reductions		                 (7,671,344)		                 (3,506,412)		  Proceeds from sale of repossessed loan collateral, net of  		    cost of sale		                        59,420 		                        12,500 		  Purchases of premises, equipment,  		    and computer software		                      (51,625)		                    (252,835)		  Proceeds from sale of premises		                        72,100 		                                -    		                   8,664,958 		                 10,615,285   		   		Cash flows from financing activities  		  Net increase (decrease) in  		    Time deposits		                   1,452,960 		                   3,004,895 		    Other deposits		                 (5,043,398)		                   1,653,171 		    Securities sold under agreements to repurchase		                    (812,911)		                    (514,268)		  Payments on note payable		                        (6,625)		                        (6,240) 		  Common shares repurchased		                                -   		                    (720,276) 		                 (4,409,974)		                   3,417,282    		Net increase in cash and cash equivalents		                   6,174,232 		                 16,554,927 		Cash and cash equivalents at beginning of period		                 43,489,772 		                 35,270,664 		Cash and cash equivalents at end of period		 $              49,664,004 		 $              51,825,591                      		See accompanying Notes to Consolidated Financial Statements
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		Calvin B. Taylor Bankshares, Inc. and Subsidiary 		Consolidated Statements of Cash Flows (unaudited)   		For the three months ended 		March 31, 		2010		2009		Reconciliation of net income to net cash provided  		  by operating activities  		  Net income		 $               1,265,379 		 $               1,338,690 		  Adjustments to reconcile net income to net cash  		    provided by operating activities  		Provision for loan losses		                     421,000 		                     333,100 		    (Gain) loss on sale of repossessed loan collateral		                       (4,920)		                         1,275 		    Amortization of premiums and accretion of  		      discount, net		                       39,392 		                       (2,824)		    Depreciation and amortization		                     145,034 		                     138,273 		    Gain on sale of real property		                     (55,061)		                              -   		    Decrease (increase) in  		      Accrued interest receivable		                     (53,184)		                       63,637 		      Cash surrender value of bank owned life insurance		                     (41,888)		                     (43,164)		      Other assets		                     406,851 		                     491,084 		    Increase (decrease) in  		      Accrued interest payable		                     (16,202)		                     (92,010)		      Accrued income taxes		                       34,374 		                     365,032 		      Other liabilities		                   (221,527)		                     (70,733) 		 $               1,919,248 		 $               2,522,360       		  Composition of cash and cash equivalents  		    Cash and due from banks		 $             17,549,372 		 $             13,657,389 		    Federal funds sold 		                31,988,106 		                38,151,879 		    Interest-bearing deposits, except for time deposits		                     126,528 		                       16,323  		 $             49,664,006 		 $             51,825,591                                        		See accompanying Notes to Consolidated Financial Statements
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**Calvin B. Taylor Bankshares, Inc. and SubsidiaryNotes to Consolidated Financial Statements (unaudited)**
 

1. Basis of Presentation	   	The accompanying unaudited consolidated financial	statements conform with accounting principles generally accepted in the	United States of America and with the instructions to Form 10-Q. Interim	financial statements do not include all the information and footnotes	required for complete financial statements. In the opinion of management,	all adjustments considered necessary for a fair presentation of financial	position and results of operations for these interim periods have been made.	These adjustments are of a normal recurring nature. Results of operations	for the three months ended March 31, 2010 are not necessarily indicative of	the results that may be expected in any other interim period or for the year	ending December 31, 2010. For further information, refer to the audited	consolidated financial statements and related footnotes included in the	Company's Form 10-K for the year ended December 31, 2009.	   	Consolidation has resulted in the elimination of all	significant intercompany accounts and transactions.

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

Per share data	    Earnings per common share are determined by dividing net	income by the weighted average number of common shares outstanding for the	period, as follows:
 		2010		2009		Three months ended March 31		                    3,000,508 		                    3,039,978 
 

2. Comprehensive Income
    Comprehensive income consists of:
 		For the three months ended 		March 31, 		2010		2009		Net income		 $                 1,265,379 		 $                 1,338,690 		Unrealized gain (loss) on investment securities  		  available for sale, net of income taxes		                         22,282 		                     (183,516)		Comprehensive income		 $                 1,287,661 		 $                 1,155,174 
 

 

 

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Calvin B. Taylor Bankshares, Inc. and SubsidiaryNotes to Consolidated Financial Statements (unaudited) (continued)**
 

3. Investment Securities   Investment securities are summarized as follows:
  		Amortized 		Unrealized		Unrealized		Fair  		cost		gains		losses		value 		March 31, 2010     		Available for sale     		  U.S. Treasury		 $         25,169,546 		 $          935,454 		 $                  -   		 $         26,105,000  		  State and municipal		                 390,000 		                 6,043 		                      4 		                 396,039  		  Equity		              1,691,841 		          1,657,667 		             79,034 		              3,270,474   		 $         27,251,387 		 $       2,599,164 		 $          79,038 		 $         29,771,513  		Held to maturity     		  U.S. Treasury		 $         27,495,164 		 $          174,465 		 $          18,692 		 $         27,650,937  		  U.S. Government agency		              8,001,290 		               21,177 		               2,240 		              8,020,227  		  State and municipal		              3,669,794 		               18,443 		                  946 		              3,687,291   		 $         39,166,248 		 $          214,085 		 $          21,878 		 $         39,358,455        		December 31, 2009     		Available for sale     		  U.S. Treasury		 $         38,197,971 		 $          950,429 		 $                  -   		 $         39,148,400  		  State and municipal		                 395,000 		                 5,392 		                  270 		                 400,122  		  Equity		              1,691,841 		          1,571,962 		             44,747 		              3,219,056   		 $         40,284,812 		 $       2,527,783 		 $          45,017 		 $         42,767,578  		Held to maturity     		  U.S. Treasury		 $         25,498,390 		 $          254,672 		 $            8,999 		 $         25,744,063  		  U.S. Government agency		            10,000,000 		               30,808 		                  650 		            10,030,158  		  State and municipal		              3,099,552 		               23,309 		                     -   		              3,122,861   		 $         38,597,942 		 $          308,789 		 $            9,649 		 $         38,897,082 
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**Calvin B. Taylor Bankshares, Inc. and SubsidiaryNotes to Consolidated Financial Statements (unaudited) (continued)**
 

3. Investment Securities (Continued)   The table below shows the gross unrealized losses and	fair value of securities that are in an unrealized loss position as of March	31, 2010, aggregated by length of time that individual securities have been	in a continuous unrealized loss position. 
 		Less than 12 months		12 months or more		Total 		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized 		value		losses		value		losses		value		losses       		U. S. Treasury		 $  3,976,250 		 $    18,692 		 $             -   		 $             -   		 $  3,976,250 		 $    18,692 		U. S. Government Agency		     2,999,050 		         2,240 		                -   		                -   		     2,999,050 		         2,240 		State and municipal		        624,321 		            950 		                -   		                -   		        624,321 		            950  		Equity securities		        586,001 		       79,034 		                -   		                -   		        586,001 		       79,034   		 $  8,185,622 		 $  100,916 		 $             -   		 $             -   		 $  8,185,622 		 $  100,916 
    The debt securities for which an unrealized loss is	recorded are issues of the U. S. Treasury, the Federal Home Loan Bank (a U.	S. government agency), and general and highly rated revenue obligations of	states and municipalities. The Company has the ability and the intent to	hold these securities until they are called or mature at face value. Equity	securities for which an unrealized loss is recorded are issued by local	community bank holding companies. Management believes that these	fluctuations in fair value reflect market conditions, and are not indicative	of other-than-temporary impairment of the investments.	    The amortized cost and estimated fair value of debt	securities, by contractual maturity, and the amount of pledged securities	follow. Actual maturities may differ from contractual maturities because	issuers may have the right to call or prepay obligations with or without	call or prepayment penalties.
 		March 31, 2010		December 31, 2009 		Amortized		Fair		Amortized		Fair 		cost		value		cost		value     		Available for sale    		  Within one year		 $            7,203,500 		 $            7,244,693 		 $          15,106,388 		 $          15,136,254 		  After one year    		   through five years		             16,359,621 		             16,672,596 		             21,490,230 		             21,822,893  		  After ten years		               1,996,425 		               2,583,750 		               1,996,353 		               2,589,375  		 $          25,559,546 		 $          26,501,039 		 $          38,592,971 		 $          39,548,522      		Held to maturity    		  Within one year		 $          17,918,951 		 $          18,045,468 		 $          16,042,286 		 $          16,273,130 		  After one year     		   through five years		             21,247,297 		             21,312,987 		             22,555,656 		             22,623,952   		 $          39,166,248 		 $          39,358,455 		 $          38,597,942 		 $          38,897,082      		Pledged securities		 $          26,244,888 		 $          27,130,239 		 $          26,269,854 		 $          27,142,948 
    Investments are pledged to secure deposits of federal and	local governments. Pledged securities also serve as collateral for	securities sold under agreements to repurchase.

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**Calvin B. Taylor Bankshares, Inc. and SubsidiaryNotes to Consolidated Financial Statements (unaudited) (continued)**
4. Loan commitments   Loan commitments are agreements to lend to customers as	long as there is no violation of any conditions of the contracts.	Outstanding loan commitments and letters of credit consist of:
 		March 31, 2010		December 31, 2009		Loan commitments		 $               29,973,065 		 $               29,270,217 		Standby letters of credit		 $                 1,901,531 		 $                 1,907,736 
5. Assets Measured at Fair Value on a Recurring Basis    The Company values investment securities classified as	available for sale on a recurring basis and other real estate acquired	through foreclosure at fair value on a non-recurring basis. The fair value	hierarchy established in the Financial Accounting Standards Board	Codification Topic 820 titled *Fair Value Measurements* defines three	input levels for fair value measurement. Level 1 is based on quoted market	prices in active markets for identical assets. Level 2 is based on	significant observable inputs other than those in Level 1. Level 3 is based	on significant unobservable inputs. The Company values US Treasury	securities, government agency securities, and an equity investment in an	actively traded public utility under Level 1. Municipal debt securities,	equity investments in community banks, and other real estate acquired	through foreclosure are valued under Level 2. The Company has no assets	measured at fair value on a recurring or non-recurring basis that are valued	under Level 3 criteria. At March 31, 2010, values for available for sale	investment securities and other real estate owned were established as	follows:
 		Total		Level 1 Inputs		Level 2 Inputs		Investment securities available for sale (recurring)		 $      29,771,513 		 $      26,437,288 		 $        3,334,225  		Other real estate owned (non-recurring)		           1,378,500 		                       -   		           1,378,500   		 $      31,150,013 		 $      26,437,288 		 $        4,712,725 
    The fair value of financial assets and financial	liabilities, including those financial assets and financial liabilities that	are not measured and reported at fair value on a recurring basis or	non-recurring basis, and the valuation methods used in estimating the fair	value of financial instruments is disclosed in the Company’s Annual Report	on Form 10-K. It is not practicable to report quarterly the fair value of	financial assets and liabilities measured on a non-recurring basis.

 

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Calvin B. Taylor Bankshares, Inc. and SubsidiaryNotes to Consolidated Financial Statements (unaudited) (continued)**
New accounting standards

The following accounting pronouncements have been	approved by the Financial Accounting Standards Board but had not become	effective as of March 31, 2010. These pronouncements would apply to the	Company if the Company or the Bank entered into an applicable activity. 
*ASU No. 2010-06, "Fair Value Measurements and Disclosures	(Topic 820) - Improving Disclosures About Fair Value Measurements." 	ASU 2010-06 requires expanded disclosures related to fair value measurements	including (i) the amounts of significant transfers of assets or liabilities	between Levels 1 and 2 of the fair value hierarchy and the reasons for the	transfers, (ii) the reasons for transfers of assets or liabilities in or out	of Level 3 of the fair value hierarchy, with significant transfers disclosed	separately, (iii) the policy for determining when transfers between levels	of the fair value hierarchy are recognized and (iv) for recurring fair value	measurements of assets and liabilities in Level 3 of the fair value	hierarchy, a gross presentation of information about purchases, sales,	issuances and settlements. ASU 2010-06 further clarifies that (i) fair value	measurement disclosures should be provided for each class of assets and	liabilities (rather than major category), which would generally be a subset	of assets or liabilities within a line item in the statement of financial	position and (ii) company’s should provide disclosures about the valuation	techniques and inputs used to measure fair value for both recurring and	nonrecurring fair value measurements for each class of assets and	liabilities included in Levels 2 and 3 of the fair value hierarchy.	Disclosures related to the gross presentation of Level 3 purchases, sales,	issuances and settlements of assets and liabilities will be required for the	Corporation beginning January 1, 2011.*ASU No. 2010-11, "Derivatives and Hedging (Topic 815) -	Scope Exception Related to Embedded Credit Derivatives." ASU 2010-11	clarifies that the only form of an embedded credit derivative that is exempt	from embedded derivative bifurcation requirements are those that relate to	the subordination of one financial instrument to another. Entities that have	contracts containing an embedded credit derivative feature in a form other	than such subordination may need to separately account for the embedded	credit derivative feature. The provisions of ASU 2010-11 will be effective	for the Company on July 1, 2010 and are not expected to have a significant	impact on the Corporation’s financial statements. 

The accounting policies adopted by management are	consistent with accounting principles generally accepted in the United	States of America and are consistent with those followed by peer Banks.
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Calvin B. Taylor Bankshares, Inc. and SubsidiaryPart I. Financial Information

Item 2. Management's Discussion and Analysis of Financial Condition andResults of Operations
*    This Report contains statements which constituteforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and the Securities Exchange Act of 1934. These statements appear ina number of places in this Report and include all statements regarding theintent, belief or current expectations of the Company, its directors, or itsofficers with respect to, among other things: (i) the Company's financing plans;(ii) trends affecting the Company's financial condition or results ofoperations; (iii) the Company's growth strategy and operating strategy; and (iv)the declaration and payment of dividends. Investors are cautioned that any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties, and that actual results may differ materially fromthose projected in the forward-looking statements as a result of various factorsdiscussed herein and those factors discussed in detail in the Company's filingswith the Securities and Exchange Commission.*
    The following discussion of the financial condition andresults of operations of the Company should be read in conjunction with theCompany's financial statements and related notes and other statisticalinformation included elsewhere herein.

General   Calvin B. Taylor Bankshares, Inc. (Company) was incorporatedas a Maryland corporation on October 31, 1995. The Company owns all of the stockof Calvin B. Taylor Banking Company (Bank), a commercial bank that wasestablished in 1890 and incorporated under the laws of the State of Maryland onDecember 17, 1907. The Bank operates nine banking offices in Worcester County,Maryland and one banking office in Ocean View, Delaware. The Bank'sadministrative office is located in Berlin, Maryland. The Bank is engaged in ageneral commercial and retail banking business serving individuals, businesses,and governmental units in Worcester County, Maryland, Ocean View, Delaware, andneighboring counties.    The Company currently engages in no business other thanowning and managing the Bank. The Bank employed 92 full time equivalentemployees as of March 31, 2010. The Bank hires seasonal employees during thesummer. The Company has no employees other than those hired by the Bank.

Use of estimates   The preparation of financial statements in conformity withaccounting principles generally accepted in the United State of America requiresmanagement to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements. These estimates and assumptions may affectthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from these estimates. 

Critical Accounting Policies   The Company’s financial condition and results of operationsare sensitive to accounting measurements and estimates of inherently uncertainmatters. When applying accounting policies in areas that are subjective innature, management uses its best judgment to arrive at the carrying value ofcertain assets. One of the most critical accounting policies applied is relatedto the valuation of the loan portfolio.    The allowance for loan losses (ALLL) represents management’sbest estimate of inherent probable losses in the loan portfolio as of thebalance sheet date. It is one of the most difficult and subjective judgments.The adequacy of the allowance for loan losses is evaluated no less thanquarterly. The determination of the balance of the allowance for loan losses isbased on management’s judgments about the credit quality of the loan portfolioas of the review date. It should be sufficient to absorb losses in the loanportfolio as determined by management’s consideration of factors including ananalysis of historical losses, specific reserves for non-performing or past dueloans, delinquency trends, portfolio composition (including segment growth orshifting of balances between segments, products and processes, andconcentrations of credit, both regional and by relationship), lending staffexperience and changes, critical documentation and policy exceptions, riskrating analysis, interest rates and the competitive environment, economicconditions in the Bank’s service area, and results of independent reviews,including audits and regulatory examinations.

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Financial Condition   Total assets of the Company decreased $3.3 million (.084%)from December 31, 2009 to March 31, 2010. Combined deposits and customerrepurchase agreements decreased $4.4 million during the same period. Averagetotal assets and average total deposits increased $17.1 million and $15.4million, respectively, from first quarter 2009 to first quarter 2010. Throughout2009, deposits and total assets grew as a result of market instability that waspart of a continuing general economic recession. At such times, many consumersseek the safety of conservatively run community banks. The first quarter of 2010conforms more to the historical pattern in which the Bank sees a decrease indeposits during the first quarter of the year as business customers in theresort area purchase inventory for the upcoming summer season. For furtherdiscussion of seasonal activity that affects deposit levels, see the sectiontitled Liquidity.

Loan Portfolio

    From December 31, 2009 to March 31, 2010 the gross loanportfolio has grown $7.3 million (3.03%). Growth in the loan portfolio has beenfunded by reductions in the investment portfolio. Because loans earn at higheraverage rates than investments, this shift has a positive effect on earnings.There is no adverse impact on the Company’s ability to meet liquidity demandsresulting from recent increases in the loan portfolio.    The Company makes loans to customers located primarily in theDelmarva region. Although the loan portfolio is diversified, its performancewill be influenced by the economy of the region. 

Loan Quality and the Allowance for Loan Losses    The allowance for loan losses (ALLL) represents an amountwhich management believes to be adequate to absorb identified and inherentlosses in the loan portfolio as of the balance sheet date. Valuation of theallowance is completed no less than quarterly. The determination of theallowance is inherently subjective as it relies on estimates of potential lossrelated to specific loans, the effects of portfolio trends, and other internaland external factors.     The ALLL consists of (i) formula-based reserves comprised ofpotential losses in the balance of the loan portfolio segmented into homogeneouspools, (ii) specific reserves comprised of potential losses on loans thatmanagement has identified as impaired and (iii) unallocated reserves.Unallocated reserves are not associated with a specific portfolio segment or aspecific loan, but may be appropriate if properly supported and in accordancewith GAAP.    The Company evaluates loan portfolio risk for the purpose ofestablishing an adequate allowance for loan losses. In determining an adequatelevel for the formula-based portion of the ALLL, management considers historicalloss experience for major types of loans. Homogenous categories of loans areevaluated based on loss experience in the most recent five years. Based on thisevaluation, management applies a formula to the current portfolio which givesweight to portfolio size and loss experience for categories of real estateconstruction loans, other real estate secured loans, other loans to commercialborrowers, and other consumer loans. However, historical data may not be anaccurate predictor of loss potential in the current loan portfolio.     Management also evaluates trends in delinquencies, thecomposition of the portfolio, concentrations of credit, and changes in lendingproducts, processes, or staffing. Management further considers external factorssuch as the interest rate environment, competition, current local and nationaleconomic trends, and the results of recent independent reviews by auditors andbanking regulators. The protracted slow-down in the real-estate market hasaffected both the price and time to market residential and commercialproperties. Management closely monitors such trends and the potential effect onthe Company. The impact of the current adverse economic conditions is reflectedin historically high loan losses and provisions for loan losses in 2008, 2009,and the current year.

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Management employs 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.

Management believes that in a general economic downturn, suchas the region has experienced since mid-2008, the Bank’s greatest likelihood ofloss is 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 of March 31, 2010, management reserved 110bp against unsecured loans, and consumer loans secured by other than realestate. Both of these reserves were increased during the first quarter of thisyear in recognition of the prolonged economic challenges to regional, national,and global economies. Additionally, management reserved 10% against overdrawnchecking accounts which are a distinct high risk category of unsecured loan. 

Borrowers whose cash flow is impaired as a result ofprevailing economic conditions have also experienced depressed real estatevalues. Management recognizes that the combination of these circumstances –reduced revenue and depressed collateral values, may increase the likelihood ofloss in the Bank’s real estate secured loan portfolio. Management closelymonitors conditions that might indicate deterioration of collateral value onsignificant loans and, when possible, obtains additional collateral as requiredto limit the Bank’s loss exposure. The Bank foreclosed on commercial andconsumer mortgage loans during 2009 and expects more foreclosures in 2010.Foreclosures may result in loan losses, costs to hold real estate acquired inforeclosure, and losses on the sale of real estate acquired in foreclosure.While management is unable to predict the financial consequences of futureforeclosure activity, provision for loss on likely loan foreclosures is includedin specific reserves in the ALLL.

Historically, the absence or improper execution of a documenthas not resulted in a loss to the Bank, however, management recognizes that theBank’s loss exposure is increased until a critical contract or collateraldocumentation exception is cured. At March 31, 2010, management reserved 10 bpagainst the outstanding balances of loans identified as having criticaldocumentation exceptions.

The provision for loan losses is a charge to earnings in thecurrent period to maintain the allowance at a level management has determined tobe appropriate. 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 made to bring the balance in the allowance to thelevel established by management may result in an increase or decrease toexpense. A provision of $421,000 was made in the first quarter of 2010. Aprovision of $333,100 was made in the comparable period in 2009. Theyear-to-year increase in the level of the ALLL and the provision for loan lossreflects the consequences of the current economy. As the recession continues andborrowers’ suffer personal and professional financial hardship, the likelihoodof loss on previously performing loans has increased. As Management identifiesloans with heightened loss potential, a provision for those losses is recorded.

Management considers the March 31, 2010 allowance appropriateand adequate to absorb identified and inherent losses in the loan portfolio. Asof March 31, 2010, management has not identified any loans which are anticipatedto be wholly charged-off within the next 12 months. However, there can be noassurance that charge-offs in future periods will not exceed the allowance forloan losses or that additional increases in the loan loss allowance will not berequired.

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The following is a schedule of transactions in the allowancefor loan losses. The Bank experienced net charge-offs of $73,499 in the firstquarter of 2009 and $370,411 in the current year to date. A loss of $347,214 wasattributable to a single unsecured commercial line of credit. Managementattributes the increased loan losses to the effects of the current economicrecession on some of the Bank’s customers and, subsequently, on the Bank.
		Allowance for Loan Losses   		For three months ended 		For the year ended 		March 31 		December 31 		2010		2009 		2009		Balance at beginning of year		 $        637,761 		 $        707,152  		 $        707,152 		Loans charged-off:    		  Real estate - construction and land		                       - 		                       -  		             75,000 		  Real estate - mortgage		                       - 		                       -  		           656,191 		  Commercial		           347,872 		             64,226  		           200,357 		  Consumer		             27,981 		             20,311  		             47,321 		        Total loan losses		           375,853 		             84,537  		           978,869 		Recoveries on loans previously charged off:    		  Real estate - construction		                       - 		                       -  		                       - 		  Real estate - mortgage		                       - 		                       -  		                  669 		  Commercial		                    78 		             10,850  		             40,364 		  Consumer		               5,364 		                  188  		             18,445 		        Total loan recoveries		               5,442 		             11,038  		             59,478      		Net loan charge-offs (recoveries)		           370,411 		             73,499  		           919,391 		Provision for loan losses charged to expense		           421,000 		           333,100  		           850,000 		Balance at end of period		 $        688,350 		 $        966,753  		 $        637,761       		Gross loans outstanding at the end of the period		 $ 248,000,563 		 $ 245,561,947  		 $ 240,699,630 		Allowance for loan loses to gross loans    		outstanding at the end of the period		0.28%		0.39% 		0.26%     		Average loans outstanding during the period		 $ 243,850,884 		 $ 245,525,433  		 $ 242,095,000 		Annualized net charge-offs as a percentage of    		average loans outstanding during the period		0.62%		0.12% 		0.38%
 

The accrual of interest on a loan is discontinued whenprincipal or interest is ninety days past due or when the loan is determined tobe impaired, unless collateral is sufficient to discharge the debt in full andthe loan is in process of collection. When a loan is placed in nonaccruingstatus, any interest previously accrued but unpaid, is reversed from interestincome. Interest payments received on nonaccrual loans may be recorded as cashbasis income, or as a reduction of principal, depending on management’s judgmenton a loan by loan basis. Accrual of interest may be restored when all principaland interest are current and management believes that future payments will bereceived in accordance with the loan agreement.

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Nonperforming loans are loans past due 90 or more days andstill accruing plus nonaccrual loans. Nonperforming assets are comprised ofnonperforming loans combined with real estate acquired in foreclosure and heldfor sale. The following table details the composition of nonperforming assets:
 		March 31,		March 31,		December 31, 		2010		2009		2009		Loans 90 days or more past due and still accruing   		Real estate		 $        1,170,391 		 $        8,127,230 		 $           787,580 		Commercial		                24,032 		                       -   		                       -   		Consumer		                     883 		                       -   		                       -    		           1,195,306 		           8,127,230 		              787,580 		Nonaccruing loans		              974,083 		           1,046,952 		           1,023,083 		Total nonperforming loans		           2,169,389 		           9,174,182 		           1,810,663 		Other real estate owned		           1,378,500 		                       -   		           1,433,000 		Total nonperforming assets		 $        3,547,889 		 $        9,174,182 		 $        3,243,663     		Interest not accrued on nonaccruing loans		 $             38,552 		 $             57,667 		 $             46,467     		Interest included in net income on nonaccruing loans,   		year-to-date		 $               4,517 		 $                    61 		 $             30,492 
Included in amounts past due 90 days or more and stillaccruing at March 31, 2009 was a loan with a principal balance of $4,500,000. Asof March 31, 2010 and December 31, 2009, this loan was 51 and 53 days past due,respectively. It continues to accrue as the Bank continues collection efforts.Late in 2008, the Bank was notified that there is a lien on the propertysecuring this loan that is superior to the Bank’s liens. The Bank was not awareof this lien at the time the loan was originated, and the Bank’s settlementagent did not discover the lien during the title examination process. The Bankhas filed a claim with the title company that has insured its title and lienpriority. The Bank believes the title company will indemnify the Bank for anylosses resulting from the superior lien, although there is no guarantee thatthis will be the case. Management reviews the accrual status of this loanquarterly. As of March 31, 2010, there is $33,915 of accrued interest on thisloan. 

Also included in amounts past due 90 days or more and stillaccruing at March 31, 2009, was a loan with a principal balance of $2,755,000.In May 2009, interest was brought current and a principal reduction occurred. Byagreement with the borrower, Management restructured the remaining balance ofthis loan which is current at March 31, 2010 and December 31, 2009.

Loans are considered impaired when, based on currentinformation, management considers it unlikely that collection of principal andinterest payments will be made according to contractual terms. Generally, loansare not reviewed for impairment until the accrual of interest has beendiscontinued, although management may categorize a performing loan as impairedbased on knowledge of the borrower’s financial condition, devaluation ofcollateral, or other circumstances that are deemed relevant to loan collection.Impaired loans may have specific reserves, or valuation allowances, allocated tothem in the ALLL. Estimates of loss reserves on impaired loans may be determinedbased on any of the three following measurement methods which conform toauthoritative accounting guidance: (1) the present value of future cash flows,(2) the fair value of collateral, if repayment of the loan is expected to beprovided by underlying collateral, or (3) the loan’s observable fair value. TheBank selects and applies, on a loan-by-loan basis, the appropriate valuationmethod. 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. 

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Impaired loans including nonaccruing loans totaled $2,881,097and $2,901,859, at March 31, 2010, and December 31, 2009, respectively. 
 						March 31, 2010						December 31, 2009						Impaired loans with valuation allowances,   						including nonaccruing loans						 $               637,803 						 $                  799,834 						Valuation allowances on impaired loans						 $               127,561 						 $                  258,869    						Impaired loans with no valuation allowances						 $            2,244,104 						 $               2,102,025    						Total impaired loans						 $            2,881,907 						 $               2,901,859 
 

Liquidity

Liquidity represents the ability to provide steady sources offunds for loan commitments and investment activities, as well as to providesufficient funds to cover deposit withdrawals and payment of debt and operatingobligations. These funds can be obtained by converting assets to cash or byattracting new deposits. The Company’s major sources of liquidity are loanrepayments, maturities of short-term investments including federal funds sold,and increases in core deposits. Funds from seasonal deposits are generallyinvested in short-term U.S. Treasury Bills and overnight federal funds. 

Due to its location in a seasonal resort area, the Banktypically experiences a decline in deposits, federal funds sold and investmentsecurities throughout the first quarter of the year when business customers areusing their deposits to meet cash flow needs. Beginning late in the secondquarter and throughout the third quarter, additional sources of liquidity becomemore readily available as business borrowers start repaying loans, and the Bankreceives deposits from seasonal business customers, summer residents andtourists. 

Average liquid assets (cash and amounts due from banks,interest-bearing deposits in other banks, federal funds sold, and investmentsecurities) compared to average deposits and retail repurchase agreements were40.21% for the first quarter of 2010 compared to 36.92% for the same quarter of2009.

The Company has available lines of credit, includingovernight federal funds and reverse repurchase agreements, totaling $28,000,000as of March 31, 2010.

Average net loans to average deposits were 79.47% versus84.21% as of March 31, 2010 and 2009, respectively. Average net loans decreasedby .64% while average deposits grew by 5.30%. Deposit increases were generallyreinvested in overnight federal funds sold and investment securities. Mostaverage deposit balance increases occurred in interest-bearing transaction andsavings accounts. Resulting changes in deposit portfolio composition do not havea negative impact on the Company’s ability to meet liquidity demands.

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Interest Rate Sensitivity

    The primary objective of asset/liability management is toensure the steady growth of the Company's primary source of earnings, netinterest income. Net interest income can fluctuate with significant interestrate movements. To lessen the impact of these margin swings, the balance sheetshould be structured so that repricing opportunities exist for both assets andliabilities in roughly equivalent amounts at approximately the same timeintervals. Imbalances in these repricing opportunities at any point in timeconstitute interest rate sensitivity.    Interest rate sensitivity refers to the responsiveness ofinterest-bearing assets and liabilities to changes in market interest rates. Therate-sensitive position, or gap, is the difference in the volume ofrate-sensitive assets and liabilities at a given time interval. The generalobjective of gap management is to actively manage rate-sensitive assets andliabilities to reduce the impact of interest rate fluctuations on the netinterest margin. Management generally attempts to maintain a balance betweenrate-sensitive assets and liabilities as the exposure period is lengthened tominimize the overall interest rate risk to the Company.    Interest rate sensitivity may be controlled on either side ofthe balance sheet. On the asset side, management exercises some control overmaturities. Also, loans are written to provide repricing opportunities on fixedrate notes. The Company's investment portfolio, including federal funds sold,provides the most flexible and fastest control over rate sensitivity since itcan generally be restructured more quickly than the loan portfolio.    On the liability side, deposit products are structured tooffer incentives to attain the maturity distribution desired. Competitivefactors sometimes make control over deposits more difficult and, therefore, lesseffective as an interest rate sensitivity management tool.    The asset mix of the balance sheet is continually evaluatedin terms of several variables: yield, credit quality, appropriate fundingsources, and liquidity. Management of the liability mix of the balance sheetfocuses on expanding the various funding sources.    As of March 31, 2010, the Company was cumulativelyasset-sensitive for all time horizons. For asset-sensitive institutions, ifinterest rates should decrease, the net interest margins should decline. Sinceall interest rates and yields do not adjust at the same velocity, the gap isonly a general indicator of rate sensitivity.

Results of Operations

    Net income for the three months ended March 31, 2010***,***was $1,265,379 or $.42 per share, compared to $1,338,690 or $.44 pershare for the first quarter of 2009. This represents a decrease of $73,311 or5.48% from the prior year. The key components of net income are discussed in thefollowing paragraphs.     For the first quarter of 2010 compared to 2009, net interestincome decreased $59,053 (1.51%). The decrease in interest and dividend revenueis primarily attributable to market rate reductions which continue to causegradual downward repricing of interest-bearing balances in banks and investmentsecurities. The impact of lower rates on federal funds sold, which repriceimmediately, was felt in 2009. Interest expense was $216,762 (29.88%) less thanin the comparable period last year primarily due to lower rates on timedeposits. Most of the Bank’s time deposits have fixed rates resulting in moregradual repricing than the Bank’s other deposit products which are immediatelyrepricable.    The Company’s net interest income is one of the mostimportant factors in evaluating its financial performance. Management usesinterest rate sensitivity analysis to determine the effect of rate changes. Netinterest income is projected over a one-year period to determine the effect ofan increase or decrease in the prime rate of 100 basis points. If prime were todecrease one hundred basis points, and all assets and liabilities maturingwithin that period were fully adjusted for the rate change, the Company wouldexperience a decrease of approximately 5.3% in net interest income. Conversely,if prime were to increase one hundred basis points, and all assets andliabilities maturing within that period were fully adjusted for the rate change,the Company would experience an increase in net interest income of the samepercentage. The sensitivity analysis does not consider the likelihood of theserate changes nor whether management’s reaction to this rate change would be toreprice its loans or deposits or both.     The tax-equivalent quarterly yield on interest-earning assetsdecreased by 48 basis points from 5.57% for first quarter 2009 to 5.09% in 2010.The quarterly yield on interest-bearing liabilities decreased by 44 basis pointsfrom 1.28% in 2009 to .84% in 2010. In combination, these shifts contribute to adecrease in net margin on interest-earning assets of 22 basis points.

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The following table presents 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 thistable, dividends and interest on tax-exempt securities and loans are reported ona fully taxable equivalent basis, which is a non-GAAP measure as defined in SECRegulation G and Item 10 of SEC Regulation S-K. Management believes that thesemeasures provide better yield comparability as a tool for managing net interestincome.
		Average Balances, Interest, and Yields		For the quarter ended		For the quarter ended		March 31, 2010		March 31, 2009		Average  		Average  		balance		Interest		Yield		balance		Interest		Yield      		Assets      		  Federal funds sold		 $   29,389,496 		 $        11,956 		0.16%		 $   27,175,261 		 $        16,231 		0.24%		  Interest-bearing deposits		        9,956,179 		           19,496 		0.79%		      13,461,275 		           78,764 		2.37%		  Investment securities		      71,006,973 		         411,297 		2.35%		      58,933,601 		         529,043  				3.64%		  Loans, net of allowance		    243,207,854 		      3,992,843 		6.66%		    244,771,789 		      4,107,055  				6.80%		    Total interest-earning assets		    353,560,502 		      4,435,592 		5.09%		    344,341,926 		      4,731,093 		5.57%		Noninterest-bearing cash		      15,383,108   		        9,795,677   		Other assets		      15,924,931   		      13,581,611   		        Total assets		 $ 384,868,541   		 $ 367,719,214         		Liabilities and Stockholders' Equity      		Interest-bearing deposits      		  NOW 		 $   54,539,056 		           49,383 		0.37%		 $   47,094,101 		           27,298 		0.24%		  Money market		      36,294,849 		           44,647 		0.50%		      32,873,887 		           55,338 		0.68%		  Savings		      47,316,166 		           57,861 		0.50%		      42,965,104 		           52,487 		0.50%		  Other time		      99,652,437 		         347,969 		1.42%		    100,387,945 		         582,423 		2.35%		    Total interest-bearing deposits		    237,802,508 		         499,860  				0.85%		    223,321,037 		         717,546  				1.30%		Securities sold under agreements to repurchase & federal funds purchased		        6,652,091 		             8,152 		0.50%		        5,584,752 		             6,843 		0.50%		Borrowed funds		             44,159 		                695 		6.38%		             69,962 		             1,079 		6.25%		    Total interest-bearing liabilities		    244,498,758 		         508,707  				0.84%		    228,975,751 		         725,468  				1.28%		Noninterest-bearing deposits		      68,253,940   		      67,334,614   		    312,752,698 		         508,707 		0.66%		    296,310,365 		         725,468 		0.99%		Other liabilities		           504,585   		           675,759   		Stockholders' equity		      71,611,258   		      70,733,090   		        Total liabilities and      		        stockholders' equity		 $ 384,868,541   		 $ 367,719,214   		Net interest spread  		4.25%  		4.29%		Net interest income 		 $   3,926,885   		 $   4,005,625  		Net margin on interest-earning assets  		4.50%  		4.72%      		Tax equivalent adjustment in:      		    Investment income 		 $        35,075   		 $        43,425  		    Loan income 		 $        32,673   		 $        44,010  
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Provisions for loan losses of $421,000 and $333,100 wererecorded during the three months ended March 31, 2010 and 2009, respectively.Net loans charged-off were $370,411 and $73,499 during the first quarters of2010 and 2009, respectively. Management attributes the increased loan losses tothe generally poor state of the economy which has had an adverse effect oncertain borrowing customers. See Loan Quality and the Allowance for Loan Lossesfor a discussion of the provision for loan losses.

Noninterest revenue for the first quarter of 2010 is $177,372(38.49%) higher than the comparable period last year. Gains on sale of assetsaccount for most of this increase. The Bank is in the process of liquidating aninventory of old coin much of which has high precious metal content. Also, inthe first quarter of 2010, the Delaware Department of Transportation purchased aportion of the Company’s property in Ocean View for expansion of the adjacenthighway. Gains on these two transactions comprise $143,315 of that increase.Included in miscellaneous revenue in 2010 are proceeds totaling $45,000 from thegranting of easements related to the Ocean View roadway expansion. Servicecharges on deposit accounts are down primarily due to lower assessment of fundsfor insufficient items. 

Noninterest expense for the first quarter of 2010 is $130,230(6.63%), more than last year. Although salaries are down due to staff attrition,employee benefits are higher due to a higher unemployment tax rate and highermedical claims under the group insurance program. The increase in occupancyexpense reflects the consequences of an extremely harsh winter – higher utilitycosts and the costs of clearing snow. ATM and debit card expenses have droppeddue to the favorable renegotiation of a debit card processing contract. Depositinsurance premiums are higher primarily due to the expiration of the one-timeinsurance premium credit in 2009. For the year of 2010, management expectsdeposit insurance premiums to be lower than those assessed in 2009, assumingthere is no need for another special assessment like the one paid in 2009 torestore the deposit insurance fund. Other operating expenses include increasedlegal fees related to loan collections and costs to maintain other real estateowned. 

Income taxes for the quarter ended March 31, 2010 are $26,500lower than the same period last year, on a pre-tax income decrease of $99,811.This is consistent with the Company’s effective tax rate of approximately 36.0%.

Plans of Operation

The Bank offers a full range of deposit services includingchecking, NOW, Money Market, and savings accounts, and time deposits includingcertificates of deposit. The transaction, savings, and certificate of depositaccounts are tailored to the Bank’s principal market areas at rates competitiveto those offered in the area. The Bank also offers Individual RetirementAccounts (IRA), Health Savings Accounts, and Education Savings Accounts. Alldeposits are insured by the Federal Deposit Insurance Corporation (FDIC) up tothe maximum amount allowed by law. The Bank solicits these accounts fromindividuals, businesses, associations and organizations, and governmentalauthorities. The Bank offers individual customers up to $50 million in FDICinsured deposits through the Certificate of Deposit Account Registry Services®network. 

The Bank also offers a full range of short- to medium-termcommercial and personal loans. Commercial loans include both secured andunsecured loans for working capital (including inventory and receivables),business expansion (including acquisition of real estate and improvements), andpurchase of equipment and machinery. Consumer loans include secured andunsecured loans for financing automobiles, home improvements, education, andpersonal investments. The Bank originates commercial and residential mortgageloans and real estate construction and acquisition loans. These lendingactivities are subject to a variety of lending limits imposed by state andfederal law. The Bank lends to directors and officers of the Company and theBank under terms comparable to those offered to other borrowers entering intosimilar loan transactions. The Board of Directors approves all loans to officersand directors and reviews these loans every six months.

Other bank services include cash management services, 24-hourATMs, debit cards, safe deposit boxes, travelers’ checks, direct deposit ofpayroll and social security funds, and automatic drafts for various accounts.The Bank offers bank-by-phone and Internet banking services, includingelectronic bill-payment, to both commercial and retail customers. The Bankoffers a remote capture service that enables commercial customers toelectronically capture check images and make on-line deposits. The Bank alsooffers non-deposit investment products including retail repurchase agreements.

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Capital Resources and Adequacy

Total stockholders’ equity increased $1,287,661 from December31, 2009 to March 31, 2010. This increase is attributable to comprehensiveincome recorded during the period, as detailed in Note 2 of the Notes toFinancial Statements. 

Under the capital guidelines of the Federal Reserve Board andthe FDIC, the Company and Bank are currently required to maintain a minimumrisk-based total capital ratio of 8%, with at least 4% being Tier 1 capital.Tier 1 capital consists of stockholders' equity less accumulated othercomprehensive income. 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.

Tier one risk-based capital ratios of the Company as of March31, 2010 and December 31, 2009 were 31.4% and 31.6%, respectively. Both aresubstantially in excess of regulatory minimum requirements. 

The Company and the Bank did not seek assistance under thefederally funded Troubled Asset Relief Program (TARP)developed in the last quarter of 2008. Neither the Company nor the Bank willbenefit directly from TARP funds. The Bank has not engaged in subprimemortgage lending, and has no investments in mortgage backed securities.

Late in 2008, the Company and the Bank elected to participatein the Temporary Liquidity Guarantee Program (TLG). A component of TLG, theTransaction Account Guarantee Program (TAG), provides additional insuranceprotection to holders of transaction accounts with rates not exceeding .50%. TheCompany’s participation in this program may have contributed to an increase indeposits in the Bank as investors seek the safety of insured deposits incommunity banks. Deposit insurance premiums have increased as a result of thehigher deposit balances, the higher insurance limits, participation in TAG, andhigher insurance rates. Management does not expect to pass all of the additionalinsurance premium costs on to customers. Effective July 1, 2010, the Bank willno longer participate in TAG due to the rate limitations (maximum .25%) imposedon banks that do extend their participation and the term (up to 18 months) overwhich rate restrictions might apply. Deposits will continue to be insured up tothe limits provided under standard FDIC deposit insurance rules. Management doesnot expect withdrawal from the TAG program to have a significant effect ondeposit balances.

In the most stable economic times, the Company cannotreliably predict the effect of changing government policies on earnings, or loanand deposit levels. Management expects 2010 to see a continuation of higher thanusual fees associated with loan collection, and additional loan defaults. Thefull impact of the dramatic developments of 2008 and 2009 on future results ofoperation of the Company and the Bank, are uncertain. Although some key economicindicators are stabilizing or improving in early 2010, management recognizesthat loan defaults may continue into the early months of a recovery as customersstruggle to stabilize business or personal finances and property values remainat levels well below the market peak in mid-2008. 

Website Access to SEC Reports

The Bank maintains an Internet website at www.taylorbank.com. The Company’s periodic SEC reports, includingannual reports on Form 10-K, quarterly reports on Form 10-Q, and current reportson Form 8-K, are accessible through this website. Access to these filings isfree of charge. The reports are available as soon as practicable after they arefiled electronically with the SEC. 
 

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** 

Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk
The Company’s principal market risk exposure relates tointerest rates on interest-earning assets and interest-bearing liabilities.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 monitors and seeks to manage the relationshipsbetween interest sensitive assets and liabilities in order to protect againstwide interest rate fluctuations, including those resulting from inflation. 

At March 31, 2010, the Company’s interest rate sensitivity,as measured by gap analysis, showed the Company was asset-sensitive with aone-year cumulative gap of 21.20%, as a percentage of interest-earning assets.Generally asset-sensitivity indicates that assets reprice more quickly thanliabilities and in a rising rate environment net interest income typicallyincreases. Conversely, if interest rates decrease, net interest income woulddecline. The Bank has classified its demand mortgage and commercial loans asimmediately repriceable. Unlike loans tied to prime, these rates do notnecessarily change as prime changes since the decision to call the loans orchange the rates rests with management. 

 
**Item 4. Controls and procedures
Disclosure controls and procedures are designed andmaintained by the Company to ensure that information required to be disclosed inthe Company’s publicly filed reports is recorded, processed, summarized andreported in a timely manner. Such information must be available to management,including the Chief Executive Officer (CEO) and Treasurer, to allow them to maketimely decisions about required disclosures. Even a well-designed and maintainedcontrol system can provide only reasonable, not absolute, assurance that itsobjectives are achieved. Inherent limitations in any system of controls includeflawed judgment, errors, omissions, or intentional circumvention of controls.

The Company’s management, including the CEO and Treasurer,performed an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of March 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.
**Changes in Internal Controls**
During the quarter ended on the date of this report, therewere no significant changes in the Company’s internal control over financialreporting that have had or are reasonably likely to have a material effect onthe Company’s internal control over financial reporting. As of March 31, 2010,the Company’s management, including the CEO and Treasurer, has concluded thatthe Company’s internal controls over financial reporting are effective. 

 

 

 

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**Calvin B. Taylor Bankshares, Inc. and SubsidiaryPart II. Other Information**
 

Item 1 Legal Proceedings   		Not applicable

Item 1A Risk Factors
The Company and the Bank are subject to various types		of risk during the normal conduct of business. There has been no		material increase in any level of risk incurred by the Company or the		Bank during the quarter covered by this report. Following are		descriptions of the significant categories of risk most relevant to the		Company.

Credit risk is the risk to the Company’s		earnings or capital from the potential of an obligor failing to fulfill		its contractual commitment to the Company. Credit risk is most closely		associated with the Company’s lending activities.

Interest rate risk is the risk to earnings or		capital from the potential movement in interest rates. It is the		sensitivity of the Company’s future earnings to interest rate changes.

Liquidity risk is the risk to earnings or		capital from the Company’s inability to meet its obligations when they		come due without incurring unacceptable losses or costs.

Market risk is the risk to earnings or capital		from changes in the value of portfolios of financial instruments. For		the Company, market risk is the risk of a decline in market value of its		securities portfolio.

Transaction risk is the risk to earnings or		capital arising from problems with service or product delivery.		Transaction risk is the risk of a failure in the Company’s operating		processes, such as automation, employee integrity, or internal controls.

Compliance risk is the risk to earnings or		capital from noncompliance with laws, rules, and regulations. Compliance		risk is one of the greatest risks the Company faces.

Reputation risk is the risk to earnings or		capital from negative public opinion. Customer and public relations are		critical to the Company’s success. Accordingly, the Company’s reputation		is extremely important and anything that would impair that reputation is		a significant risk.

Strategic risk is the risk to earnings or		capital arising from adverse business decisions or improper		implementation of those decisions.

 

 

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Item 2 Unregistered Sales of Equity Securities and Use ofProceeds   		The Company publicly announced on August 14, 2003,		that it would repurchase up to 10% of its outstanding equity stock at		that time, which equated to a total of 324,000 common shares available		for repurchase. As of January 1, 2005, and again on May 18, 2007, this		plan was renewed by public announcement, making up to 10% of the		Company’s outstanding equity stock available for repurchase at the time		of each renewal. On January 13, 2010, as part of its capital planning,		the Board of Directors voted to suspend until June 30, 2010, the stock		repurchase program.   		There is no final expiration date for this program.		No other stock repurchase plan or program existed or exists		simultaneously, nor has any other plan or program expired during the		duration of this program. Common shares repurchased under this plan have		been retired. 

Item 3 Defaults Upon Senior SecuritiesNot applicable

Item 4 (Removed and Reserved)

Item 5 Other information		   		There is no information required to be disclosed in a		report on Form 8-K during the period covered by this report, which has		not been reported.

Item 6 Exhibits and Reports on Form 8-K		   		a) Exhibits					       					31. Certifications of Principal Executive					Officer and Principal Financial Officer pursuant to Section					302 of the Sarbanes-Oxley Act of 2002.					       					32. Certification of Principal Executive					Officer and Principal Financial Officer pursuant to Section					906 of the Sarbanes-Oxley Act of 2002.

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Exhibit 31.1Rule 13a-14(a) Certification of the Chief Executive OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Raymond M. Thompson, certify that:

I have reviewed this quarterly report on Form 10-Q of Calvin B. TaylorBankshares, Inc.;   	1. Based on my knowledge, this report does not contain any untrue	statement of a material fact or omit to state a material fact necessary to	make the statements made, in light of the circumstances under which such	statements were made, not misleading with respect to the period covered by	this report;   	2. Based on my knowledge, the financial statements, and other financial	information included in this report, fairly present in all material respects	the financial condition, results of operations and cash flows of the	registrant as of, and for, the periods presented in this report;   	3. The registrant’s other certifying officer and I are responsible for	establishing and maintaining disclosure controls and procedures (as defined	in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over	financial reporting (as defined in Exchange Act Rules 13a-15(f) and	15d-15(f)) for the registrant and we 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			evaluation; and

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

4. The registrant’s other certifying officer and I have disclosed, based	on our most recent evaluation of internal control over financial reporting,	to the registrant’s auditors and the audit committee of the registrant’s	board of directors (or persons performing the equivalent function):

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.**
Date: May 5, 2010
By: /s/ Raymond M. Thompson 			Raymond M. Thompson			Chief Executive Officer
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Exhibit 31.2Rule 13a-14(a) Certification of the Chief Financial OfficerPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jennifer G. Hawkins, certify that:

I have reviewed this quarterly report on Form 10-Qof Calvin B. Taylor Bankshares, Inc.;	   	1. Based on my knowledge, this report does not	contain any untrue statement of a material fact or omit to state a material	fact necessary to make the statements made, in light of the circumstances	under which such statements were made, not misleading with respect to the	period covered by this report;	   	2. Based on my knowledge, the financial	statements, and other financial information included in this report, fairly	present in all material respects the financial condition, results of	operations and cash flows of the registrant as of, and for, the periods	presented in this report;	   	3. The registrant's other certifying officers	and I are responsible for establishing and maintaining disclosure controls	and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))	and internal control over financial reporting (as defined in Exchange Act	Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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 evaluation; and

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

4. The registrant's other certifying officers	and I have disclosed, based on our most recent evaluation of internal	control over financial reporting, to the registrant's auditors and the audit	committee of the registrant's board of directors (or persons performing the	equivalent function):

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.**
Date: May 5, 2010
By: /s/ Jennifer G. Hawkins 			Jennifer G. Hawkins			Treasurer (Principal Financial Officer)
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Exhibit 32Certification - Pursuant to 18 U.S.C. 1350(Section 906 of the Sarbanes-Oxley Act of 2002)

We, the undersigned, certify that to the best of our knowledge, based upon areview of the Quarterly Report on Form 10-Q for the period ended March 31, 2010,of Calvin B. Taylor Bankshares, Inc:

(1) The referenced 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.**
Date: May 5, 2010
By: /s/ Raymond M. Thompson 			Raymond M. Thompson			Chief Executive Officer
By: /s/ Jennifer G. Hawkins 			Jennifer G. Hawkins			Treasurer (Principal Financial Officer)
 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
** 

Calvin B. Taylor Bankshares, Inc.

Date: May 5, 2010
By: /s/ Raymond M. Thompson 			Raymond M. Thompson			Chief Executive Officer
By: /s/ Jennifer G. Hawkins 			Jennifer G. Hawkins			Treasurer (Principal Financial Officer)
 

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