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 September 30, 2009Commission File No. 000-50047
Calvin B. Taylor Bankshares, Inc.(Exact name of registrant as specified in its Charter)

Maryland(State of incorporation or organization)

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

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

Registrant's telephone number, including area code: (410)641-1700
 

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]

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 Act). No [X] 

On October 31, 2009, 3,004,716 shares of the registrant'scommon stock were issued and outstanding.
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**Calvin B. Taylor Bankshares, Inc. and SubsidiaryForm 10-QIndex**Part I - Financial		InformationPageItem 1Consolidated		Financial StatementsConsolidated		Balance Sheets as of September 30, 2009 and December 31, 20083 Consolidated		Statements of Income for the three months ended		September 30, 2009 and 20084Consolidated		Statements of Income for the nine monthsended		September 30, 2009 and 20085Consolidated		Statements of Cash Flows for the nine months ended		September 30, 2009 and 20086-7Notes to		Consolidated Financial Statements8-12Item 2Management’s		Discussion and Analysis of Financial Conditionand Results		of Operations13-22Item 3Quantitative		and Qualitative Disclosures About Market Risks 23Item 4Controls and		Procedures23Part II - Other		InformationItem 1Legal		Proceedings24Item 1ARisk Factors24Item 2Unregistered		Sales of Equity Securities and Use of Proceeds25Item 3Defaults Upon		Senior Securities25Item 4Submission of		Matters to a Vote of Security Holders25Item 5Other		Information25Item 6Exhibits25-28Signatures29
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		Part I - Financial Information, Item 1 Financial Statements 		Calvin B. Taylor Bankshares, Inc. and Subsidiary 		Consolidated Balance Sheets   		(unaudited)  		September 30		December 31, 		2009		2008		Assets		Cash and due from banks		 $             19,438,917 		 $               8,769,784 		Federal funds sold		                34,442,376 		                26,460,842 		Interest-bearing deposits		                12,310,219 		                15,517,115 		Investment securities available for sale		                49,905,705 		                33,975,271 		Investment securities held to maturity (approximate   		  fair value of $40,031,510 and $33,523,422)		                39,616,443 		                32,621,797 		Loans, less allowance for loan losses  		  of $625,604 and $707,152		              235,193,981 		              241,430,914 		Premises and equipment		                  6,655,172 		                  6,326,312 		Other real estate owned		                     829,500 		                              -   		Accrued interest receivable		                  1,244,480 		                  1,704,260 		Computer software		                     146,567 		                     156,372 		Bank owned life insurance		                  5,044,862 		                  4,914,810  		Other assets		                     389,408 		                     725,034  		 $           405,217,630 		 $           372,602,511 		Liabilities and Stockholders' Equity		Deposits  		  Noninterest-bearing		 $             88,284,486 		 $             70,652,032 		  Interest-bearing		              233,733,590 		              221,807,181  		              322,018,076 		              292,459,213 		Securities sold under agreements to repurchase		                  7,545,718 		                  5,742,765 		Note payable		                       55,044 		                       74,046 		Accrued interest payable 		                     205,286 		                     359,673 		Deferred income taxes		                  1,075,423 		                  1,437,813 		Other liabilities		                     185,416 		                     245,507  		              331,084,963 		              300,319,017 		Stockholders' equity  		  Common stock, par value $1 per share   		   authorized 10,000,000 shares, issued and outstanding  		   3,005,916 shares at September 30, 2009, and  		   3,048,397 shares at December 31, 2008		                  3,005,916 		                  3,048,397 		  Additional paid-in capital		                  8,908,384 		                10,406,403 		  Retained earnings		                60,571,428 		                56,569,913  		                72,485,728 		                70,024,713 		  Accumulated other comprehensive income		                  1,646,939 		                  2,258,781  		                74,132,667 		                72,283,494  		 $           405,217,630 		 $           372,602,511    		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 		September 30 		2009		2008		Interest and dividend revenue  		  Loans, including fees		 $               3,978,452 		 $               4,140,888 		  U.S. Treasury and government agency securities		                     391,920 		                     545,844 		  State and municipal securities		                       12,672 		                       10,857 		  Federal funds sold 		                       18,085 		                     221,938 		  Interest-bearing deposits		                       26,100 		                       87,138 		  Equity securities		                       10,081 		                         9,908 		          Total interest and dividend revenue		                  4,437,310 		                  5,016,573    		Interest expense  		  Deposits		                     591,775 		                     905,011 		  Borrowings		                       10,648 		                       25,538 		    Total interest expense		                     602,423 		                     930,549    		    Net interest income		                  3,834,887 		                  4,086,024  		Provision for loan losses		                   (132,550)		                       (1,478) 		    Net interest income after provision for loan losses		                  3,967,437 		                  4,087,502    		Noninterest revenue  		  Service charges on deposit accounts		                     243,108 		                     280,280 		  ATM and debit card		                     147,965 		                     146,784 		  Bank owned life insurance		                       43,962 		                       51,510 		  Miscellaneous revenue		                       77,776 		                       47,062 		    Total noninterest revenue		                     512,811 		                     525,636    		Noninterest expenses  		  Salaries		                     902,057 		                     878,244 		  Employee benefits		                     201,225 		                     200,211 		  Occupancy		                     182,149 		                     188,860 		  Furniture and equipment		                     103,669 		                     111,778 		  Data proccessing		                       73,915 		                       67,847 		  ATM and debit card		                       43,820 		                       81,713 		  Deposit insurance premiums		                     151,637 		                              -   		  Other operating		                     413,627 		                     395,843 		    Total noninterest expenses		                  2,072,099 		                  1,924,496    		    Income before income taxes		                  2,408,149 		                  2,688,642 		Income taxes		                     896,500 		                     982,500 		Net income		 $               1,511,649 		 $               1,706,142    		Earnings per common share – basic and diluted		 $                        0.50 		 $                        0.56 		Dividend per common share		 $                           -   		 $                        1.30    		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 nine months ended 		September 30 		2009		2008		Interest and dividend revenue  		  Loans, including fees		 $             12,005,793 		 $             12,520,143 		  U.S. Treasury and government agency securities		                  1,237,332 		                  1,683,837 		  State and municipal securities		                       34,070 		                       31,657 		  Federal funds sold 		                       51,272 		                     669,832 		  Interest-bearing deposits		                     132,880 		                     209,076 		  Equity securities		                       50,150 		                       56,944 		          Total interest and dividend revenue		                13,511,497 		                15,171,489    		Interest expense  		  Deposits		                  1,951,112 		                  3,054,918 		  Borrowings		                       26,682 		                       40,627 		    Total interest expense		                  1,977,794 		                  3,095,545    		    Net interest income		                11,533,703 		                12,075,944  		Provision for loan losses		                     497,050 		                       75,015  		    Net interest income after provision for loan losses		                11,036,653 		                12,000,929    		Noninterest revenue  		  Service charges on deposit accounts		                     743,186 		                     803,242 		  ATM and debit card		                     400,557 		                     395,601 		  Bank owned life insurance		                     130,052 		                     150,059 		  Miscellaneous revenue		                     200,051 		                     181,251 		    Total noninterest revenue		                  1,473,846 		                  1,530,153    		Noninterest expenses  		  Salaries		                  2,705,716 		                  2,637,949 		  Employee benefits		                     631,275 		                     644,978 		  Occupancy		                     560,586 		                     560,180 		  Furniture and equipment		                     340,636 		                     352,240 		  Data proccessing		                     215,049 		                     207,865 		  ATM and debit card		                     192,472 		                     221,891 		  Deposit insurance premiums		                     417,034 		                       30,731 		  Other operating		                  1,172,716 		                  1,066,470 		    Total noninterest expenses		                  6,235,484 		                  5,722,304    		    Income before income taxes		                  6,275,015 		                  7,808,778 		Income taxes		                  2,273,500 		                  2,837,500 		Net income		 $               4,001,515 		 $               4,971,278    		Earnings per common share – basic and diluted		 $                        1.32 		 $                        1.61 		Dividend per common share		 $                           -   		 $                        1.30    		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 nine months ended 		September 30, 		2009		2008		Cash flows from operating activities  		  Interest and dividends received		 $              14,029,927 		 $              15,369,050 		  Fees and commissions received		                   1,344,516 		                   1,383,262 		  Interest paid		                 (2,132,182)		                 (3,246,537)		  Cash paid to suppliers and employees		                 (5,894,557)		                 (5,439,087)		  Income taxes paid		                 (1,944,434)		                 (2,748,015) 		                   5,403,270 		                   5,318,673 		Cash flows from investing activities  		  Certificates of deposit purchased, net of maturities		                   3,315,503 		                 (9,910,482)		  Proceeds from maturities of investments available  		     for sale		                 17,200,000 		                 23,360,000 		  Purchase of investments available for sale		               (34,149,247)		               (13,438,682)		  Proceeds from maturities of investments held to   		     maturity		                 23,765,000 		                 17,000,000 		  Purchase of investments held to maturity		               (30,773,647)		               (25,000,000)		  Loans made, net of principal reductions		                   4,885,851 		                   2,881,941 		  Proceeds from sale of repossessed loan collateral		                        39,510 		                                -   		  Purchases of premises, equipment,  		    and computer software		                    (750,181)		                    (239,230)		  Proceeds from sale of equipment		                        20,900 		                                -    		               (16,446,311)		                 (5,346,453)  		   		Cash flows from financing activities  		  Net increase (decrease) in  		    Time deposits		                    (795,649)		                   5,355,891 		    Other deposits		                 30,354,512 		                   9,093,559 		    Securities sold under agreements to repurchase		                   1,802,953 		                   2,619,801 		  Payments on note payable		                      (19,002)		                      (17,898)		  Common shares repurchased		                 (1,540,500)		                 (1,775,540) 		  Dividends Paid		                                -   		                 (3,972,268) 		                 29,802,314 		                 11,303,545    		Net increase in cash and cash equivalents		                 18,759,273 		                 11,275,765 		Cash and cash equivalents at beginning of period		                 35,270,664 		                 40,568,264 		Cash and cash equivalents at end of period		 $              54,029,937 		 $              51,844,029                   		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 nine months ended 		September 30, 		2009		2008		Reconciliation of net income to net cash provided  		  by operating activities  		  Net income		 $               4,001,515 		 $               4,971,278 		  Adjustments to reconcile net income to net cash  		    provided by operating activities  		Provision for loan losses		                     497,050 		                       75,015 		    (Gain) loss on sale of repossessed loan collateral		                       (1,203)		                              -   		    (Gain) loss on sale of equipment and computer software		                       (3,593)		                              -   		    Amortization of premiums and accretion of  		      discount, net		                       58,582 		                   (115,289)		    Depreciation and amortization		                     413,818 		                     431,401 		    Decrease (increase) in  		      Accrued interest receivable		                     459,780 		                     312,799 		      Cash surrender value of bank owned life insurance		                   (130,052)		                   (150,060)		      Other assets		                     321,851 		                       72,547 		    Increase (decrease) in  		      Accrued interest payable		                   (154,387)		                   (150,992)		      Accrued income taxes		                         2,708 		                              -   		      Other liabilities		                     (62,799)		                   (128,026) 		 $               5,403,270 		 $               5,318,673       		  Composition of cash and cash equivalents  		    Cash and due from banks		 $             19,438,917 		 $             12,103,008 		    Federal funds sold 		                34,442,376 		                39,722,207 		    Interest-bearing deposits, except for time deposits		                     148,644 		                       18,814  		 $             54,029,937 		 $             51,844,029       		Supplemental cash flows information:  		    Non-cash transfers from loans to other real estate owned		 $                  845,000 		 $                           -                                    		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 statementsconform with accounting principles generally accepted inthe United States of America and to the instructions to Form 10-Q. Interimfinancial statements do not include all the information and footnotes requiredfor complete financial statements. In the opinion of management, all adjustmentsconsidered necessary for a fair presentation of financial position and resultsof operations for these interim periods have been made. These adjustments are ofa normal recurring nature. Results of operations for the nine months endedSeptember 30, 2009 are not necessarily indicative of the results that may beexpected in any other interim period or for the year ending December 31, 2009.For further information, refer to the audited consolidated financial statementsand related footnotes included in the Company's Form 10-K for the year endedDecember 31, 2008.    Consolidation has resulted in the elimination of allsignificant intercompany accounts and transactions.

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

Per share data    Earnings per common share are determined by dividing netincome by the weighted average number of common shares outstanding for theperiod, as follows:
 		2009		2008		Three months ended September 30		                    3,011,098 		                    3,063,966 		Nine months ended September 30		                    3,025,271 		                    3,084,485 
2. Comprehensive Income   Comprehensive income consists of:
 		For the nine months ended 		September 30, 		2009		2008		Net income		 $                 4,001,515 		 $                 4,971,278 		Unrealized gain (loss) on investment securities  		  available for sale, net of income taxes		                     (611,842)		                         72,926 		Comprehensive income		 $                 3,389,673 		 $                 5,044,204 
 

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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 		September 30, 2009     		Available for sale     		  U.S. Treasury		 $         45,219,489 		 $       1,109,541 		 $                  -   		 $         46,329,030  		  State and municipal		                 395,000 		                 5,811 		               1,878 		                 398,933  		  Equity		              1,691,841 		          1,500,143 		             14,242 		              3,177,742   		 $         47,306,330 		 $       2,615,495 		 $          16,120 		 $         49,905,705  		Held to maturity     		  U.S. Treasury		 $         23,499,804 		 $          360,743 		 $                  -   		 $         23,860,547  		  U.S. Government agency		            13,000,269 		               41,664 		                  640 		            13,041,293  		  State and municipal		              3,116,370 		               13,368 		                    68 		              3,129,670   		 $         39,616,443 		 $          415,775 		 $               708 		 $         40,031,510        		December 31, 2008     		Available for sale     		  U.S. Treasury		 $         28,309,823 		 $       1,408,794 		 $                  -   		 $         29,718,617  		  State and municipal		                 400,000 		                 5,220 		                  590 		                 404,630  		  Equity		              1,691,841 		          2,160,183 		                     -   		              3,852,024   		 $         30,401,664 		 $       3,574,197 		 $               590 		 $         33,975,271  		Held to maturity     		  U.S. Treasury		 $         24,519,603 		 $          861,569 		 $                  -   		 $         25,381,172  		  U.S. Government agency		              6,999,443 		               32,657 		               1,016 		              7,031,084  		  State and municipal		              1,102,751 		                 8,415 		                     -   		              1,111,166   		 $         32,621,797 		 $          902,641 		 $            1,016 		 $         33,523,422 
 

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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	September 30, 2009, aggregated by length of time that individual securities	have been in a continuous unrealized loss position. 
 		Less than 12 months		12 months or more		Total 		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized 		value		losses		value		losses		value		losses       		U. S. Government Agency		 $        99,360 		 $           640 		$                -   		 $             -   		 $        99,360 		 $           640 		State and municipal		         328,123 		           1,946 		                   -   		                -   		         328,123 		           1,946  		Equity		         294,962 		         14,242 		                   -   		                -   		         294,962 		         14,242  		 $      722,445 		 $      16,828 		$                -   		 $             -   		 $      722,445 		 $      16,828 
    The debt securities for which an unrealized loss is	recorded are issues of the Federal Home Loan Bank (a U. S. government	agency), and general and highly rated revenue obligations of states and	municipalities. The Company has the ability and the intent to hold these	securities until they are called or mature at face value. Equity security	for which an unrealized loss is recorded is issued by a local community bank	holding company. 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.
 		September 30, 2009		December 31, 2008 		Amortized		Fair		Amortized		Fair 		cost		value		cost		value     		Available for sale    		  Within one year		 $    22,095,198 		 $    22,138,688 		 $    17,159,259 		 $    17,201,296 		  After one year    		   through five years		       21,523,010 		       21,898,650 		         9,554,499 		         9,960,076 		  After ten years		         1,996,281 		         2,690,625 		         1,996,065 		         2,961,875  		 $    45,614,489 		 $    46,727,963 		 $    28,709,823 		 $    30,123,247      		Held to maturity    		  Within one year		 $    21,041,568 		 $    21,382,307 		 $    13,766,474 		 $    14,027,311 		  After one year    		   through five years		       18,574,875 		       18,649,203 		       18,855,323 		       19,496,111  		 $    39,616,443 		 $    40,031,510 		 $    32,621,797 		 $    33,523,422      		Pledged securities		 $    25,747,735 		 $    26,758,790 		 $    25,023,730 		 $    26,891,914 
    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:
 		September 30, 2009		December 31, 2008		Loan commitments and lines of credit  		  Construction and land development		 $               10,453,391 		 $               15,218,812  		  Other		                  21,810,385 		                  22,245,089   		 $               32,263,776 		 $               37,463,901     		Standby letters of credit		 $                 2,172,566 		 $                 1,921,878 
5. Assets Measured at Fair Value	    The Company values investment securities classified as	available for sale and other real estate acquired through foreclosure at	fair value on a recurring basis. The fair value hierarchy established in the	financial accounting standards board accounting standards codification topic	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 basis that are valued under Level 3 criteria. At September 30,	2009, values for available for sale investment securities were established	as follows:
 		Total		Level 1 Inputs		Level 2 Inputs		Investment securities available for sale
 $      49,905,705		 $      46,638,438 		 $        3,267,267  		Other real estate owned		              829,500 		              829,500 		                       -     		 $      50,735,205 		 $      47,467,938 		 $        3,267,267 
The Company does not have the intent to sell any of these	securities; and deems that it is more likely than not, that it will not have	to sell any of these securities before recovery of their individual cost	basis.	   	Estimated fair values of the Company’s financial	instruments, including cash, interest-bearing deposits, investment	securities, loans, and interest-bearing deposit liabilities are detailed in	the Company’s 2008 Form 10-K. It is not practicable for the Company to	disclose this information for interim periods.

 

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

    On July 1, 2009, the Accounting Standards Codification	(ASC) became the Financial Accounting Standards Board’s (FASB) officially	recognized source of authoritative U.S. generally accepted accounting	principles applicable to all public and non-public non-governmental	entities, superseding existing FASB, AICPA, EITF and related literature.	Rules and interpretive releases of the SEC under the authority of federal	securities laws are also sources of authoritative GAAP for SEC registrants.	All other accounting literature is considered non-authoritative. The switch	to the ASC affects the away companies refer to U.S. GAAP in financial	statements and accounting policies. 	   	The following accounting guidance has been approved by	the Financial Accounting Standards Board and would apply to the Company if	the Company or the Bank entered into an applicable activity.*    FASB ASC Topic 715, "Compensation - Retirement Benefits"*	provides guidance related to an employer’s disclosures about plan assets of	defined benefit pension or other post-retirement benefit plans. Under ASC	Topic 715, disclosures should provide users of financial statements with an	understanding of how investment allocation decisions are made, the factors	that are pertinent to an understanding of investment policies and	strategies, the major categories of plan assets, the inputs and valuation	techniques used to measure the fair value of plan assets, the effect of fair	value measurements using significant unobservable inputs on changes in plan	assets for the period and significant concentrations of risk within plan	assets. Adoption of the disclosure requirements of ASC topic 715 will be	effective beginning with the financial statements for the year-ended	December 31, 2009 and is not expected to have a significant impact on the	Company’s financial statements. *    Accounting Standards Update No. 2009-5, under FASB ASC	Topic 820, "Fair Value Measurement and Disclosures,"ot;* provides	authoritative guidance for measuring the fair value of a liability in	circumstances in which a quoted price in an active market for the identical	liability is not available. In such a case, the reporting company must	measure must measure fair value utilizing a valuation technique that uses	(i) the quoted price of the identical liability when traded as an asset,	(ii) quoted prices for similar liabilities or similar liabilities when	traded as assets, or (iii) another valuation technique that is consistent	with the existing principles of ASC Topic 820, such as an income approach or	market approach. The new authoritative accounting guidance also clarifies	that when estimating the fair value of a liability, a reporting entity is	not required to include a separate input or adjustment to other inputs	relating to the existence of a restriction that prevents the transfer of the	liability. The new authoritative accounting guidance under ASC Topic 820	will be effective for the Company’s financial statements beginning October	31, 2009, and is not expected to have a significant impact on the Company’s	financial statements.*    FASB ASC Topic 855, "Subsequent Events"*establishes	general standards of accounting for and disclosure of events that occur	after the balance sheet date but before financial statements are issued or	available to be issued. ASC Topic 855 defines (i) the period after the	balance sheet date during which a reporting entity’s management should	evaluate events or transactions that may occur for potential recognition or	disclosure in the financial statements (ii) the circumstances under which an	entity should recognize events or transactions occurring after the balance	sheet date in its financial statements, and (iii) the disclosures an entity	should make about events or transactions that occurred after the balance	sheet date. ASC Topic 855 became effective for periods ending after June 15,	2009, and did not have a significant impact on the Company’s financial	statements. *    FASB ASC Topic 860, "Transfers and Servicing"*	enhances reporting about transfers of financial assets, including	securitizations, and where companies have continuing exposure to the risks	related to transferred financial assets. This new guidance eliminates the	concept of a "qualifying special-purpose entity" and changes the	requirements for derecognizing financial assets. It also requires additional	disclosures about all continuing involvements with transferred financial	assets including information about gains and losses resulting from transfers	during the period. ASC Topic 860 will be effective January 1, 2010 and is	not expected to have a significant impact on the Company’s financial	statements. 	    The accounting policies adopted by management are	consistent with authoritative U.S. generally accepted accounting principles	and are consistent with those followed by peer Banks.

 

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**Calvin B. Taylor Bankshares, Inc. and SubsidiaryPart I. Financial InformationItem 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 Registrant (the Company) should be read inconjunction with the Company's financial statements and related notes and otherstatistical information 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 89 full time equivalentemployees as of September 30, 2009. The Bank hires seasonal employees during thesummer. The Company has no employees other than those hired by the Bank.

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 increased $32.6 million (8.75%)from December 31, 2008 to September 30, 2009. Combined deposits and customerrepurchase agreements increased $31.4 million (10.52%) during the same period.Management believes that some of the recent growth in deposit balances resultsfrom market instability that is part of a continuing general economic recession.Consumers often seek the safety of conservatively run community banks when thestock market has a significant and prolonged downturn. For further discussion ofseasonal activity that affects deposit levels, see the section titled Liquidity.    Average total assets and average total deposits increased$23.3 million and $24.6 million, respectively, from third quarter 2008 to thirdquarter 2009. Management carefully monitors deposit increases and reductions andthe resulting effect on liquidity. Funds generated by recent deposit growth havebeen invested in interest-bearing deposits in banks and in debt securities.

Loan Portfolio    During the first three quarters of 2009, the Bank’s grossloan portfolio decreased $6.3 million (2.61%). This decrease in loans, coupledwith increased deposits has resulted in the Bank investing higher balances indebt securities. This shift from higher earning loans to lower yielding debtsecurities has a negative effect on earnings. There is no adverse impact on theCompany’s ability to meet liquidity demands resulting from decreases in the loanportfolio or increased investment in short-term debt instruments, most of whichare classified as available for sale.    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. Throughout 2008 and 2009, thelocal and regional economies have been adversely affected by a recession ofnational and international reach.

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, applied to thecurrent portfolio. This formulation gives weight to portfolio size and lossexperience for categories of real estate construction loans, other real estatesecured loans, other loans to commercial borrowers, and other consumer loans.However, historical data may not be an accurate predictor of loss potential inthe current loan portfolio. Management also evaluates trends in delinquencies,the composition of the portfolio, concentrations of credit, and changes inlending products, processes, or staffing. Management further considers externalfactors such as the interest rate environment, competition, current local andnational economic trends, and the results of recent independent reviews byauditors and banking regulators.     The ongoing slow-down in the real-estate market has affectedboth the price and time to market residential and commercial properties.Management closely monitors such trends and the potential effect on the Company.In recent months, 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.

 

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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 through 2008 and 2009, the Bank has increasedlikelihood of loss is in unsecured loans - commercial and consumer, and insecured consumer loans. Reserves for these segments of the portfolio areincluded in the formula-based portion of the ALLL. As of September 30, 2009,management reserved 85 bp against unsecured loans, and consumer loans secured byother than real estate. Both of these reserves were increased during the first,second and third quarters of this year in recognition of the prolonged economicchallenges to regional, national, and global economies. Additionally, managementreserved 10.0% against overdrawn checking accounts which are a distinct highrisk category of unsecured loan.     The depth and length of the current recession has resulted inunusual stress to the Bank’s real estate secured portfolio as well. Risingdelinquencies and falling collateral values have caused the Bank to sufferhistorically high losses in real estate secured loans. The Bank continuallyevaluates loss potential in the mortgage portfolio and provides specificreserves at the time a potential loss is identified.     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 September 30, 2009, management reserved 10bp against 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. Provisions for loan losses of ($132,550) and $497,050 were made for thethird quarter of 2009 and year-to-date, respectively. This compares toprovisions for loan losses of ($1,478) and $75,015 for the comparable periods in2008. The increased year-to-date provision for loan loss reflects theconsequences of the current economy. As the recession continues and borrowerssuffer personal and professional financial hardship, the likelihood of loss onpreviously performing loans increases. As Management identifies loans withheightened loss potential, a provision for those losses is recorded. Managementbelieves that loan losses are a lagging indicator of economic distress and thatlosses may continue after improvement is noted in the economy at large.    Year-to-date the level of the ALLL has fallen slightly from$707,152 at December 31, 2008 to $625,604 at September 30, 2009. This resultsfrom increases due to additional loss provisions and decreases as troubled loansare charged off. Management considers the September 30, 2009 allowanceappropriate and adequate to absorb identified and inherent losses in the loanportfolio. However, there can be no assurance that charge-offs in future periodswill not exceed the allowance for loan losses or that additional increases inthe loan loss allowance will not be required. As of September 30, 2009,management has identified two loans with balances totaling $539,637 which areanticipated to be wholly charged-off within the next 12 months. One of theseloans is 80% guaranteed by a US government agency. The anticipated loss on theseloans totals $119,877 and has been fully reserved in the ALLL.
 

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    The following is a schedule of transactions in the allowancefor loan losses. The Bank experienced net charge-offs of $121,101 in the thirdquarter of 2009 and $578,599 in the current year to date. As described earlier,management attributes the increased loan losses to the effects of the currenteconomic recession on some of the Bank’s customers and, subsequently, on theBank.
		Allowance for Loan Losses    		For nine months ended 		For the year ended  		September 30 		December 31  		2009		2008 		2008 		Balance at beginning of year		 $        707,152 		 $        195,525  		 $        195,525  		Loans charged-off:     		  Real estate - construction and land		             75,000 		                       -  		                       -  		  Real estate - mortgage		           399,704 		                       -  		                       -  		  Commercial		             83,105 		             59,199  		             76,383  		  Consumer		             38,120 		             12,216  		             34,532  		        Total loan losses		           595,929 		             71,415  		           110,915  		Recoveries on loans previously charged off:     		  Real estate - construction		                       - 		                       -  		                       -  		  Real estate - mortgage		                  669 		                       -  		                       -  		  Commercial		                  276 		                       -  		               3,785  		  Consumer		             16,386 		                  350  		               1,231  		        Total loan recoveries		             17,331 		                  350  		               5,016        		Net loan charge-offs (recoveries)		           578,598 		             71,065  		           105,899  		Provision for loan losses charged to expense		           497,050 		             75,015  		           617,526  		Balance at end of period		 $        625,604 		 $        199,475  		 $        707,152        		Average loans outstanding during the period		 $ 239,930,765 		 $ 238,446,661  		 $ 238,873,590  		Annualized net charge-offs as a percentage of     		average loans outstanding during the period		0.32%		0.04% 		0.04%       		Gross loans outstanding at the end of the period		 $ 235,819,585 		 $ 235,318,797  		 $ 242,138,066  		Allowance for loan losses to gross loans     		outstanding at the end of the period		0.27%		0.08% 		0.29% 
    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 (other real estate owned). The following table details the compositionof nonperforming assets as of September 30, 2009 or December 31, 2008.
 		September 30,		December 31, 		2009		2008		Loans 90 days or more past due and still accruing  		Real estate		 $           990,869 		 $        4,602,365 		Commercial		                       -   		                40,000 		Consumer		                  4,420 		                  5,427  		              995,289 		           4,647,792 		Nonaccruing loans		           1,450,876 		              199,724 		Total nonperforming loans		           2,446,165 		           4,847,516    		Other real estate owned		              829,500 		                   - 		Total nonperforming assets		 $        3,275,665 		 $        4,847,516    		Interest not accrued on nonaccruing loans		 $             55,698 		 $               6,797    		Interest included in net income on nonaccruing loans,  		year-to-date		 $             24,307 		 $                    -   
    A loan with a principal balance of $4,500,000 is included inamounts past due 90 days or more and still accruing at December 31, 2008. Latein 2008, the Bank was notified that there is a lien on the property securingthis loan that is superior to the Bank’s liens. The Bank was not aware of thislien at the time the loan was originated, and the Bank’s settlement agent didnot discover the lien during the title examination process. The Bank has filed aclaim with the title company that has insured its lien. The Bank believes thetitle company will indemnify the Bank for any losses resulting from the superiorlien, although there is no guarantee that this will be the case. As of September30, 2009, interest on this loan was current. The Bank’s claim with the titlecompany has not yet been settled.   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 $3,853,923and $8,888,200, at September 30, 2009, and December 31, 2008, respectively.Principal balances of impaired loans include $419,770 which is guaranteed by agovernment agency at both September 30, 2009, and December 31, 2008. 
 						September 30, 2009						December 31, 2008						Impaired loans with valuation allowances,   						including nonaccruing loans						 $              1,755,304 						 $              4,328,618 						Valuation allowances on impaired loans						 $                 432,721 						 $                 605,405    						Impaired loans with no valuation allowances						 $              2,098,619 						 $              4,559,582    						Total impaired loans						 $              3,853,923 						 $              8,888,200 
Liquidity	September 30, 2009	December 31, 2008Impaired loans with valuation allowances,including nonaccruing loans	 $1,755,304 	 $4,328,618Valuation allowances on impaired loans	 $432,721 	 $605,405Impaired loans with no valuation allowances	 $2,098,619 	 $4,559,582Total impaired loans	 $3,853,923 	 $8,888,200	September 30, 2009	December 31, 2008Impaired loans with valuation allowances,including nonaccruing loans	 $1,755,304 	 $4,328,618Valuation allowances on impaired loans	 $432,721 	 $605,405Impaired loans with no valuation allowances	 $2,098,619 	 $4,559,582Total impaired loans	 $3,853,923 	 $8,888,200 retail repurchase agreements were45.16% for the third quarter of 2009 compared to 41.92% for the same quarter of2008.    The Company has available lines of credit, includingovernight federal funds and reverse repurchase agreements, totaling $28,000,000as of September 30, 2009.    Average net loans to average deposits were 74.36% versus80.19% as of September 30, 2009 and 2008, respectively. Average net loansincreased by a modest .41% while average deposits grew by 8.28%. Funding forloan growth was provided by deposit increases. Because loans earn higher averagerates than the Bank’s cost of funds, this results in a positive effect onearnings. Average deposit balance increases occurred in all categories ofdeposits, but were particularly notable in time deposits. Neither changes indeposit portfolio composition nor the increase in outstanding loan balances hasa 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 desired maturity distribution. 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 September 30, 2009, 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 September 30, 2009***,***was $1,511,649 or $.50 per share, compared to $1,706,142 or $.56 pershare for the third quarter of 2008. This represents a decrease of $194,493 or11.40% from the prior year. Year to date net income has decreased $969,763 or$.29 per share from $4,971,278 ($1.61 per share) in 2008 to $4,001,515 ($1.32per share) in 2009. The key components of net income are discussed in thefollowing paragraphs.     For the first nine months of 2009 compared to 2008, netinterest income decreased $542,241 (4.49%). Net interest income decreased$251,137 (6.15%) in the third quarter of 2009 compared to the same period of2008. The decrease in interest and dividend revenue is primarily attributable tomarket rate reductions which have resulted in the dramatic downward repricing ofovernight federal funds and slower but steady downward repricing ofinterest-bearing deposits in banks and debt securities. Interest expensedecreased in the third quarter of 2009 by $328,126 (35.26%) relative to thecomparable period last year due to lower rates on all deposits, but particularlytime deposits. For the year to date, interest expense is down $1,117,751(36.11%) relative to the previous year to date.     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 92 basis points from 5.75% for third quarter 2008 to 4.83% in 2009.The quarterly yield on interest-bearing liabilities decreased by 70 basis pointsfrom 1.70% in 2008 to 1.00% in 2009. In combination, these shifts contribute toa decrease in net margin on interest-earning assets of 51 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		September 30, 2009		September 30, 2008		Average  		Average  		balance		Interest		Yield		balance		Interest		Yield      		Assets      		  Federal funds sold		 $   37,585,106 		 $        18,085 		0.19%		 $   43,752,965 		 $      221,938 		2.02%		  Interest-bearing deposits		      12,284,308 		           26,100 		0.84%		      10,899,809 		           87,138 		3.18%		  Investment securities		      81,079,391 		         446,496 		2.18%		      60,345,351 		         608,017 		4.01%		  Loans, net of allowance		    239,223,663 		      4,019,226 		6.67%		    238,243,801 		      4,186,781 		6.99%		    Total interest-earning assets		    370,172,468 		      4,509,907 		4.83%		    353,241,926 		      5,103,874 		5.75%		Noninterest-bearing cash		      17,849,768   		      12,096,712   		Other assets		      14,254,239   		      13,641,588   		        Total assets		 $ 402,276,475   		 $ 378,980,226         		Liabilities and Stockholders' Equity      		Interest-bearing deposits      		  NOW 		 $   51,424,450 		           37,201 		0.29%		 $   48,928,744 		           56,726 		0.46%		  Money market		      36,663,323 		           45,981 		0.50%		      32,345,651 		           77,261 		0.95%		  Savings		      45,026,198 		           56,096 		0.49%		      41,724,294 		           77,858 		0.74%		  Other time		      98,448,988 		         452,497 		1.82%		      88,782,767 		         693,166 		3.11%		    Total interest-bearing deposits		    231,562,959 		         591,775  				1.01%		    211,781,456 		         905,011  				1.70%		Securities sold under agreements to repurchase & federal funds purchased		        7,777,915 		             9,758 		0.50%		        6,102,057 		           24,274 		1.58%		Borrowed funds		             57,311 		                890 		6.16%		             82,283 		             1,264 		6.11%		    Total interest-bearing liabilities		    239,398,185 		         602,423  				1.00%		    217,965,796 		         930,549  				1.70%		Noninterest-bearing deposits		      90,127,491   		      85,319,024   		    329,525,676 		         602,423 		0.73%		    303,284,820 		         930,549 		1.22%		Other liabilities		        1,304,113   		        1,509,882   		Stockholders' equity		      71,446,686   		      74,185,524   		        Total liabilities and      		        stockholders' equity		 $ 402,276,475   		 $ 378,980,226   		Net interest spread  		3.83%  		4.05%		Net interest income 		 $   3,907,484   		 $   4,173,325  		Net margin on interest-earning assets  		4.19%  		4.70%      		Tax equivalent adjustment in:      		    Investment income 		 $        31,823   		 $        41,408  		    Loan income 		 $        40,774   		 $        45,893  
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    Provisions for loan losses of ($132,550) and $497,050 wererecorded during the three and nine months periods ended September 2009,respectively. Net loans charged-off were $578,598 and $71,065 during the firstthree quarters of 2009 and 2008, respectively. Management attributes theincreased loan losses to the generally poor state of the economy which has hadan adverse effect on certain borrowing customers. See Loan Quality and theAllowance for Loan Losses for a discussion of the provision for loan losses.    Noninterest revenue for the third quarter of 2009 is $12,825(2.44%) lower than the comparable period last year. Noninterest revenue for theyear-to-date is $56,307 (3.68%) less than last year. For both the quarter andthe year-to-date, results are largely due to decreased service charges ondeposit accounts and the reduced rate of growth in cash surrender value of bankowned life insurance abated by increased miscellaneous revenues. Most of theincrease is miscellaneous revenues is attributable to increased fees forplacement of brokered certificates of deposit in the Certificate of DepositAccount Registry Services® network.    Noninterest expense for the third quarter of 2009 is $147,603(7.67%) more than last year of which $151,637 is due to increased FDIC premiums.Noninterest expense year-to-date is $513,180 (8.97%) more than last year ofwhich $386,303 is due to FDIC premium increases. FDIC insurance premiums havejumped dramatically due to increased rates and assessable balances, theexpiration of the one-time insurance premium credit, and the accrual of aspecial assessment to restore the deposit insurance fund to target levels.    Income taxes for the nine months ended September 30, 2009 are$564,000 (19.88%) lower than the same period last year, on a pre-tax incomedecrease of $1,533,763 (19.64%). This is consistent with the Company’s effectivetax 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. TheBank solicits these accounts from individuals, businesses, associations andorganizations, and governmental authorities.     All deposits are insured by the Federal Deposit InsuranceCorporation (FDIC) up to the maximum amount allowed by law. FDIC depositinsurance has been temporarily increased from $100,000 to $250,000 per depositorthrough December 31, 2013. The Bank offers individual customers up to $50million in FDIC insured deposits through the Certificate of Deposit AccountRegistry 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-hourATM’s, 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 products including retail repurchase agreements and discountbrokerage services through a correspondent bank. 

 

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**Capital Resources and Adequacy    Total stockholders’ equity increased $1,849,173 from December31, 2008 to September 30, 2009. This increase is attributable to comprehensiveincome recorded during the period, as detailed in Note 2 of the Notes toFinancial Statements, reduced by $1,540,500 used to repurchase and retire 42,481shares of common stock.     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 ofSeptember 30, 2009 and December 31, 2008 were 32.95% and 31.8%, respectively.Both are substantially 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), which, in combination withtemporary deposit insurance limit increases, provide the security of additionalinsurance to depositors. These actions have contributed to an increase indeposits in the Bank as investors seek the safety of insured deposits incommunity banks. Deposit insurance premiums will increase as a result of thehigher deposit balances, the higher insurance limits, participation in TLG, andhigher insurance rates. Management does not expect to pass all of the additionalinsurance premium costs on to customers.   In the most stable economic times, the Company cannotreliably predict the effect of changing government policies on earnings, or loanand deposit levels. Management expects 2009 to bring lower interest revenues andhigher fees associated with loan collection and increased deposit insurancepremiums. The full impact of the dramatic developments of 2008 on future resultsof operation of the Company and the Bank, are uncertain. 

Website Access to SEC Reports    The Bank maintains an Internet website atwww.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. This can be clearly seen in the table of Average Balances,Interest, and Yields presented in the section Results of Operation. In addition,interest rates do not necessarily move in the same direction or in the samemagnitude as the prices of goods and services. As discussed previously,management monitors and seeks to manage the relationships between interestsensitive assets and liabilities in order to protect against wide interest ratefluctuations, including those resulting from inflation.    At September 30, 2009, the Company’s interest ratesensitivity, as measured by gap analysis, showed the Company was asset-sensitivewith a one-year cumulative gap of 24.38%, as a percentage of interest-earningassets. Generally asset-sensitivity indicates that assets reprice more quicklythan liabilities 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 andchange 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 September 30, 2009. Based onthat evaluation, the Company’s management, including the CEO and Treasurer, hasconcluded that the Company’s disclosure controls and procedures are effective.The projection of an evaluation of controls to future periods is subject to therisk that procedures may become inadequate due to changes in conditionsincluding the degree of compliance with procedures.
**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 September 30,2009, the Company’s management, including the CEO and Treasurer, has concludedthat the 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 ProceedingsNot applicable

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

Credit risk is the risk to the Company’s earnings orcapital from the potential of an obligor failing to fulfill its contractualcommitment to the Company. Credit risk is most closely associated with theCompany’s lending activities.

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

Liquidity risk is the risk to earnings or capital fromthe Company’s inability to meet its obligations when they come due withoutincurring unacceptable losses or costs.

Market risk is the risk to earnings or capital fromchanges in the value of portfolios of financial instruments. For the Company,market risk is the risk of a decline in market value of its securitiesportfolio.

Transaction risk is the risk to earnings or capitalarising from problems with service or product delivery. Transaction risk is therisk 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 capitalfrom noncompliance with laws, rules, and regulations. Compliance risk is one ofthe greatest risks the Company faces.

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

Strategic risk is the risk to earnings or capitalarising from adverse business decisions or improper implementation of thosedecisions.

 

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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds( c ) The following table presents information about the Company’s repurchaseof its equity securities during the calendar quarter ended on the date of thisreport.
    		(c) Total number		(d) Maximum number  		(a) Total		(b) Average		of Shares Purchased		of Shares that may 		Number		Price Paid		as Part of a Publicly		yet be Purchased		Period		of Shares		per Share		Announced Program		Under the Program		July		               7,772 		               35.00 		                                7,772 		187,222		August		               7,756 		               35.15 		                                7,756 		179,466		August**   		293,883 		September		                  200 		               35.00 		                                   200 		293,683		Totals		             15,728 		               35.07 		                              15,728       		**  Additional shares made available by Board resolution. 
    The Company publicly announced on August 14, 2003, that itwould repurchase up to 10% of its outstanding equity stock at that time, whichequated to a total of 324,000 common shares available for repurchase. This planhas been renewed by public announcement as of January 1, 2005, May 18, 2007, andAugust 13, 2009. As of August 13, 2009, a total of 301,539 common shares wereavailable for repurchase.     There is no expiration date for this program. No other stockrepurchase plan or program existed or exists simultaneously, nor has any otherplan or program expired during the period covered by this table. Common sharesrepurchased under this plan are retired. 

Item 3 Defaults Upon Senior Securities   Not applicable

Item 4 Submission of Matters to a Vote of Security Holders		   		There have been no matters submitted to a vote of security holders		during the period covered by this report.

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       				31.1 Certification of Principal Executive Officer pursuant to				Section 302 of the Sarbanes-Oxley Act of 2002.       				31.2 Certification of 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 31.1**********