TAYLOR CALVIN B BANKSHARES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
Form 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

Commission File No. 33-99762

CALVIN B. TAYLOR BANKSHARES, INC.
(Exact name of registrant as specified in its Charter)

Maryland

(State or other jurisdiction of incorporation or
organization)

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

24 North Main Street, Berlin, Maryland 21811
(Address of principal executive offices)(Zip Code)

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

Securities registered under Section 12(b) of the
Exchange Act:
None

Securities registered under Section 12(g) of the
Exchange Act:
Common Stock Par Value $1.00

Check whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90
days. Yes X No ____

Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in
this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]

The aggregate market value of the Common Stock held by
non-affiliates of the registrant on December 31, 2001,
was $101,380,125. This calculation is based upon
estimation by the Company's Board of Directors of fair
market value of the Common Stock of $35.00 per share.
There is not an active trading market for the Common
Stock and it is not possible to identify precisely the
market value of the Common Stock.

On February 28, 2002, 3,240,000 shares of the
registrant's common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for Annual Meeting of
Shareholders to be held on May 8, 2002, is incorporated
by reference in this Form 10-K in Part III, Item 9,
Item 10, Item 11, and Item 12.

This Report contains statements which constitute
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and the
Securities Exchange Act of 1934. These statements
appear in a number of places in this Report and include
all statements regarding the intent, belief or current
expectations of the Company, its directors, or its
officers with respect to, among other things: (i) the
Company's financing plans; (ii) trends affecting the
Company's financial condition or results of operations;
(iii) the Company's growth strategy and operating
strategy; and (iv) the declaration and payment of
dividends. Investors are cautioned that any such
forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and
that actual results may differ materially from those
projected in the forward-looking statements as a result
of various factors discussed herein and those factors
discussed in detail in the Company's filings with the
Securities and Exchange Commission.

PART I

Item 1. Description of Business

General

Calvin B. Taylor Bankshares, Inc. (the "Company")
was incorporated as a Maryland corporation on October 31,
1995. The Company owns all of the stock of two banks.
The Maryland bank is a commercial bank incorporated under
the laws of the State of Maryland on December 17, 1907.
This bank operates nine banking offices in Worcester
County with the Bank's main office located in Berlin,
Maryland. It is engaged in a general commercial and
retail banking business serving individuals, businesses,
and governmental units in Worcester County, Maryland and
neighboring counties. The second bank was incorporated in
Delaware in 1997 but opened late in the second quarter of
1998. This one-branch Delaware bank offers the same
services as the Maryland bank.

The Company's holding company structure can assist
the banks in maintaining their required capital ratios
because the Company may, subject to compliance with debt
guidelines implemented by the Board of Governors of the
Federal Reserve System (the "Board of Governors" or the
"Federal Reserve"), borrow money and contribute the
proceeds to the banks as primary capital. The holding
company structure also permits greater flexibility in
issuing stock for cash, property, or services and in
reorganization transactions. Moreover, subject to certain
regulatory limitations, a holding company can purchase
shares of its own stock, which the banks may not do
without regulatory approval. A holding company may also
engage in certain non-banking activities which the Board
of Governors has deemed to be closely related to banking
and proper incidents to the business of a bank holding
company. These activities include making or servicing
loans and certain types of leases; performing certain data
processing services; acting as a fiduciary or investment
or financial advisor; acting as a management consultant
for other depository institutions; providing courier,
appraisal, and consumer financial counseling services;
providing tax planning and preparation services; providing
check guaranty and collection agency services; engaging in
limited real estate investment activities; underwriting,
brokering, and selling credit life and disability
insurance; engaging in certain other limited insurance
activities; providing discount brokerage services;
underwriting and dealing in certain government obligations
and money market instruments and providing portfolio
investment advice; acting as a futures commission merchant
with respect to certain financial instrument transactions;
providing foreign exchange advisory and transactional
services; making investments in certain corporations for
projects designed primarily to promote community welfare;
and owning and operating certain healthy savings and loan
associations. Although the Company has no present
intention of engaging in any of these services, if
circumstances should lead the Company's management to
believe that there is a need for these services in the
banks' marketing areas and that such activities could be
profitably conducted, the management of the Company would
have the flexibility of commencing these activities upon
filing notice thereof with the Board of Governors.

Location and Service Area

The Company conducts general commercial banking in
its primary service areas, emphasizing the banking needs
of individuals and small- to medium-sized businesses and
professional concerns. The Maryland bank operates from
nine branches located throughout Worcester County,
Maryland while the Delaware bank operates from one branch
located in Sussex County, Delaware. The Banks draw most
of their customer deposits and conduct most of their
lending transactions from within their primary service
areas, which encompass Worcester County, Maryland, Sussex
County, Delaware and neighboring counties.

Both Sussex County, Delaware and Worcester County,
Maryland are located along the shores of the Atlantic
Ocean and have experienced population growth in recent
years. The area is growing as both a resort and a
retirement community.

The principal components of the economy of the
counties are tourism and agriculture. Berlin has a strong
component of health-care related businesses. The tourist
businesses of Ocean City, Maryland and Bethany, Delaware
and the health-care facilities in Berlin, Maryland
(including Berlin Nursing Home and Atlantic General
Hospital) are the largest employers in the counties. The
largest industrial employers are Perdue Farms and Hudson
Farms.

Banking Services

The banks offer a full range of deposit services
including checking, NOW and Money Market accounts, savings
and time deposits including certificates of deposit. The
transaction accounts and time certificates are tailored to
the banks' principal market areas at rates competitive to
those offered in the area. In addition, the banks offer
certain retirement account services, such as Individual
Retirements Accounts ("IRAs"). All deposits are insured
by the Federal Deposit Insurance Corporation (the "FDIC")
up to the maximum amount allowed by law (generally,
$100,000 per depositor subject to aggregation rules). The
banks solicit these accounts from individuals, businesses,
associations and organizations, and governmental
authorities.

The Company, through its banks, also offers a full
range of short- to medium-term commercial and personal
loans. Commercial loans include both secured and
unsecured loans for working capital (including inventory
and receivables), business expansion (including
acquisition of real estate and improvements), and purchase
of equipment and machinery. Consumer loans include
secured and unsecured loans for financing automobiles,
home improvements, education, and personal investments.
The Company originates commercial and residential mortgage
loans and real estate construction and acquisition loans.
These lending activities are subject to a variety of
lending limits imposed by state and federal law. Neither
bank may make any loans to any director, officer, or
employee (except for commercial loans to directors who are
not officers or employees) unless the loans are approved
by the Board of Directors of the lending bank. The Board
of Directors must review any such loans every six months.

Other bank services include cash management
services, 24-hour ATM's, credit cards, debit cards, safe
deposit boxes, travelers' checks, direct deposit of
payroll and social security checks, and automatic drafts
for various accounts. In 2002, the banks plan to offer
Internet banking including electronic bill-payment
services to both commercial and retail customers.

Competition

The Company faces strong competition in all areas of
its operations. The competition comes from entities
operating in Worcester County, Maryland and Sussex County,
Delaware and neighboring counties and includes branches of
some of the largest banks in Maryland, Delaware, and
Virginia. Its most direct competition for deposits
historically has come from other commercial banks, savings
banks, savings and loan associations, and credit unions
operating in its service areas. The banks also compete
for deposits with money market mutual funds and corporate
and government securities. The banks compete for loans
with the same banking entities, as well as mortgage
banking companies and other institutional lenders. The
competition for loans varies from time to time depending
on certain factors. These factors include, among others,
the general availability of lendable funds and credit,
general and local economic conditions, current interest
rate levels, conditions in the mortgage market, and other
factors which are not readily predictable.

The banks' employ traditional marketing media
including local newspapers and radio, to attract new
customers. Bank officers, directors and employees are
active in numerous community organizations and participate
in community-based events. These activities and referrals
of satisfied customers result in new business.

Employees

As of December 31, 2001, the banks employed 97 full-
time equivalent employees. The Company's operations are
conducted through the banks. Consequently, the Company
does not have separate employees. None of the employees
of the banks are represented by any collective bargaining
unit. The banks consider their relations with their
employees to be good.

SUPERVISION AND REGULATION

The Company and the banks are subject to state and
federal banking laws and regulations which impose specific
requirements or restrictions on, and provide for general
regulatory oversight with respect to, virtually all
aspects of operations. These laws and regulations are
generally intended to protect depositors, not
shareholders. The following is a brief summary of certain
statutes, rules, and regulations affecting the Company and
the banks. To the extent that the following summary
describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular
statutory and regulatory provisions. Beginning with the
enactment of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (FIRREA) and following with
the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA), numerous additional regulatory
requirements have been placed on the banking industry, and
additional changes have been proposed. Legislative
changes and the policies of various regulatory authorities
may affect the operations of the Company and the banks and
those effects may be material. The Company is unable to
predict the nature or the extent of the effect on its
business and earnings that fiscal or monetary policies,
economic controls, or new federal or state legislation may
have in the future.

Gramm-Leach-Bliley Act

On November 12, 1999, the Gramm-Leach-Bliley Act was
signed into law. Among other things, the Act repeals the
restriction, contained in the Glass-Steagall Act, on banks
affiliating with securities firms. The Act permits bank
holding companies to engage in a statutorily provided list
of financial activities, including insurance and
securities underwriting and agency activities, merchant
banking, and insurance company portfolio investment
activities. The Act also authorizes activities that are
"complementary" to financial activities. The Act is
intended to grant certain powers to community banks that
larger institutions have accumulated on an ad hoc basis.
The Act may have the result of increasing competition that
the Company and the banks face from larger institutions
and other types of companies. In fact, it is not possible
to predict the full effect that the Act will have on the
Company and the banks.

The Company

Because it owns the outstanding common stock of the
banks, the Company is a bank holding company within the
meaning of the federal Bank Holding Company Act of 1956
(the "BHCA"). Under the BHCA, the Company is subject to
periodic examination by the Federal Reserve and is
required to file periodic reports of its operations and
such additional information as the Federal Reserve may
require. The Company's and the banks' activities are
limited to banking, managing or controlling banks,
furnishing services to or performing services for its
subsidiaries, or engaging in any other activity that the
Federal Reserve determines to be so closely related to
banking or managing and controlling banks as to be a
proper incident thereto.

Investments, Control, and Activities. With certain
limited exceptions, the BHCA requires every bank holding
company to obtain the prior approval of the Federal
Reserve before (i) acquiring substantially all the assets
of any bank, (ii) acquiring direct or indirect ownership
or control of any voting shares of any bank if after such
acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or
controls the majority of such shares), or (iii) merging or
consolidating with another bank holding company.

In addition, and subject to certain exceptions, the
BHCA and the Change in Bank Control Act, together with
regulations thereunder, require Federal Reserve approval
(or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring
"control" of a bank holding company, such as the Company.
Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of
voting securities of the bank holding company. Because
the Company's Common Stock is registered under the
Securities Exchange Act of 1934, under Federal Reserve
regulations, control will be rebuttably presumed to exist
if a person acquires at least 10% of the outstanding
shares of any class of voting securities of the Company.
The regulations provide a procedure for challenge of the
rebuttable control presumption.

Under the BHCA, the Company is generally prohibited
from engaging in, or acquiring direct or indirect control
of more than 5% of the voting shares of any company
engaged in non-banking activities, unless the Federal
Reserve, by order or regulation, has found those
activities to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto.
Some of the activities that the Federal Reserve has
determined by regulation to be proper incidents to the
business of banking include making or servicing loans and
certain types of leases, engaging in certain insurance and
discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a
fiduciary or investment or financial advisor, owning
savings and loan associations, and making investments in
certain corporations or projects designed primarily to
promote community welfare.

Source of Strength; Cross-Guarantee. In accordance
with Federal Reserve policy, the Company is expected to
act as a source of financial strength to its banks and to
commit resources to support the banks in circumstances in
which the Company might not otherwise do so. Under the
BHCA, the Federal Reserve may require a bank holding
company to terminate any activity or relinquish control of
a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve's determination that such
activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary
depository institution of the bank holding company.
Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to
divest itself of any bank or nonbank subsidiary if the
agency determines that divestiture may aid the depository
institution's financial condition. The banks may be
required to indemnify, or cross-guarantee, the FDIC
against losses it incurs with respect to any other bank
controlled by the Company, which in effect makes the
Company's equity investments in healthy bank subsidiaries
available to the FDIC to assist any failing or failed bank
subsidiary of the Company.

The Banks

General. The banks operate as state nonmember
banking associations incorporated under the laws of the
State of Maryland and the State of Delaware. They are
subject to examination by the FDIC and each state's
department of banking regulation. Deposits in the banks
are insured by the FDIC up to a maximum amount (generally
$100,000 per depositor, subject to aggregation rules).
The States and FDIC regulate or monitor all areas of the
banks' operations, including security devices and
procedures, adequacy of capitalization and loss reserves,
loans, investments, borrowings, deposits, mergers,
issuances of securities, payment of dividends, interest
rates payable on deposits, interest rates or fees
chargeable on loans, establishment of branches, corporate
reorganizations, maintenance of books and records, and
adequacy of staff training to carry on safe lending and
deposit gathering practices. The FDIC requires the banks
to maintain certain capital ratios and imposes limitations
on each of the banks' aggregate investment in real estate,
bank premises, and furniture and fixtures. The banks are
required by the FDIC to prepare quarterly reports on the
banks' financial condition.

Under provisions of the FDICIA, all insured
institutions must undergo periodic on-site examination by
the appropriate banking agency. The cost of examinations
of insured depository institutions and any affiliates may
be assessed by the agency against each institution or
affiliate, as it deems necessary or appropriate. Insured
institutions are required to submit annual reports to the
FDIC and the appropriate agency (and state supervisor when
applicable). FDICIA also directs the FDIC to develop with
other appropriate agencies a method for insured depository
institutions to provide supplemental disclosure of the
estimated fair market value of assets and liabilities, to
the extent feasible and practicable, in any balance sheet,
financial statement, report of condition, or other report
of any insured depository institution. FDICIA also
requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured
depository institutions and depository institution holding
companies relating, among other things, to: (i) internal
controls, information systems, and audit systems; (ii)
loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; and (v) asset quality.

Transactions With Affiliates and Insiders. The
banks are subject to Section 23A of the Federal Reserve
Act, which places limits on the amount of loans or
extensions of credit to, or investment in, or certain
other transactions with, affiliates and on the amount of
advances to third parties collateralized by the securities
or obligations of affiliates. The aggregate of all
covered transactions is limited in amount, as to any one
affiliate, to 10% of each bank's capital and surplus and,
as to all affiliates combined, to 20% of each bank's
capital and surplus. In addition, each covered
transaction must meet specific collateral requirements.
The banks are also subject to Section 23B of the Federal
Reserve Act which, among other things, prohibits an
institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such
institution or its subsidiaries, as those prevailing at
the time for comparable transactions with nonaffiliated
companies. The banks are subject to certain restrictions
on extensions of credit to executive officers, directors,
certain principal shareholders, and their related
interests. Such extensions of credit (i) must be made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with third parties, and (ii) must not involve
more than the normal risk of repayment or present other
unfavorable features.

Branching. Under Maryland law, the Maryland bank
may open branches statewide, subject to the prior approval
of the State Department of Financial Regulation and the
FDIC. Maryland law permits banking organizations in other
states to acquire Maryland banking organizations, as long
as such states grant similar privileges to banking
organizations in Maryland to acquire banking organizations
in their states, by opening a de novo branch, by acquiring
an existing branch from a Maryland depository institution,
or as a result of an interstate merger with a Maryland
banking organization. Delaware law also allows branches
statewide with prior approval of the Office of the State
Bank Commissioner and the FDIC. Delaware law is more
restrictive allowing other state banking organizations to
branch to Delaware only through opening a de novo bank, or
as the result of an interstate merger.

Community Reinvestment Act. The Community
Reinvestment Act requires that each insured depository
institution shall be evaluated by its primary federal
regulator with respect to its record in meeting the credit
needs of its local community, including low and moderate
income neighborhoods, consistent with the safe and sound
operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. Failure to
adequately meet these criteria would impose additional
requirements and limitations on the banks. The banks
received satisfactory ratings in their most recent
evaluations.

Other Regulations. Interest and certain other
charges collected or contracted for by the banks are
subject to state and federal laws concerning interest
rates. The banks' loan operations are also subject to
certain federal laws applicable to credit transactions,
such as the federal Truth-In-Lending Act governing
disclosures of credit terms to consumer borrowers, the
Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public
and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the
housing needs of the community it serves, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of
race, creed, or other prohibited bases in extending
credit, the Fair Credit Reporting Act of 1978 governing
the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the
manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the
various federal agencies charged with the responsibility
of implementing such federal laws. The deposit operations
of the banks are also subject to the Right to Financial
Privacy Act which imposes a duty to maintain
confidentiality of customers' financial records and
prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds
Transfer Act as implemented by the Federal Reserve Board's
Regulation E which governs automatic deposits to and
withdrawals from deposit accounts and customers' rights
and liabilities arising from the use of automated teller
machines and other electronic banking services.

Deposit Insurance

The FDIC establishes rates for the payment of
premiums by federally insured banks and thrifts for
deposit insurance. Separate insurance funds are
maintained for commercial banks (BIF) and thrifts (SAIF),
with insurance premiums from the industry used to offset
losses from insurance payouts when banks and thrifts fail.
Since 1993, insured depository institutions like the
banks have paid for deposit insurance under a risk-based
premium system. Under this system, until mid-1995
depository institutions paid to BIF or SAIF from $0.23 to
$0.31 per $100 of insured deposits depending on the
capital levels and risk profile of the institution, as
determined by its primary federal regulator on a semi-
annual basis. When BIF reached its legally mandated
reserve ratio in mid-1995, the FDIC lowered premiums for
well-capitalized banks, eventually to a level of $.00 per
$100 of insured deposits, with a minimum semiannual
assessment of $1,000. In 1996, congress enacted the
Deposit Insurance Funds Act of 1996, which eliminated this
minimum assessment. The BIF insurance assessment rate for
the first semiannual assessment period of 2002 is proposed
to remain at $.00 to $.27 per $100 in deposits. In
addition to the amount paid for deposit insurance, banks
are assessed an additional amount to service the interest
on the bond obligations of the Financial Corporation
(FICO). Any increase in deposit insurance premiums for
the banks will increase the banks' cost of funds, and
there can be no assurance that such costs can be passed on
to the banks' customers.

Dividends

The principal source of the Company's cash revenues
comes from dividends received from the Maryland bank. The
amount of dividends that may be paid by the bank to the
Company depends on the bank's earnings and capital
position and is limited by federal and state laws,
regulations, and policies. The Federal Reserve has stated
that bank holding companies should refrain from or limit
dividend increases or reduce or eliminate dividends under
circumstances in which the bank holding company fails to
meet minimum capital requirements or in which earnings are
impaired.

The Company's ability to pay any cash dividends to
its shareholders in the future will depend primarily on
the Maryland bank's ability to pay dividends to the
Company. In order to pay dividends to the Company, the
bank must comply with the requirements of all applicable
laws and regulations. Under Maryland law, the bank must
pay a cash dividend only from the following, after
providing for due or accrued expenses, losses, interest,
and taxes: (i) its undivided profits, or (ii) with the
prior approval of the Department of Financial Regulation,
its surplus in excess of 100% of its required capital
stock. Under FDICIA, the bank may not pay a dividend if,
after paying the dividend, the bank would be
undercapitalized. See "Capital Regulations" below. See
Item 5 for a discussion of dividends paid by the bank in
the past two years.

In addition to the availability of funds from the
Maryland bank, the future dividend policy of the Company
is subject to the discretion of the Board of Directors and
will depend upon a number of factors, including future
earnings, financial condition, cash needs, and general
business conditions. The amount of dividends that might
be declared in the future presently cannot be estimated
and it cannot be known whether such dividends would
continue for future periods.

Capital Regulations

The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding
companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-
balance sheet exposure, and minimize disincentives for
holding liquid assets. The resulting capital ratios
represent qualifying capital as a percentage of total
risk-weighted assets and off-balance sheet items. The
guidelines are minimums, and the regulators have noted
that banks and bank holding companies contemplating
significant expansion programs should not allow expansion
to diminish their capital ratios and should maintain
ratios well in excess of the minimums.

Current guidelines require bank holding companies
and federally regulated banks to maintain a minimum ratio
of total capital to risk-based assets equal to 8%, of
which at least 4% must be Tier 1 capital. Tier 1 capital
includes common shareholders' equity before the unrealized
gains and losses on securities available for sale,
qualifying perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries,
but excludes goodwill and most other intangibles, and
excludes the allowance for loan and lease losses. Tier 2
capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt
and intermediate term-preferred stock, and general
reserves for loan and lease losses up to 1.25% of risk-
weighted assets. Total capital is the sum of Tier 1 plus
Tier 2 capital.

Under the guidelines, banks' and bank holding
companies' assets are given risk-weights of 0%, 20%, 50%,
and 100%. In addition, certain off-balance sheet items
are given credit conversion factors to convert them to
asset equivalent amounts to which an appropriate risk-
weight will apply. These computations result in the total
risk-weighted assets.

The federal bank regulatory authorities have also
implemented a leverage ratio, which is Tier 1 capital as a
percentage of average total assets less intangibles, to be
used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding
company may leverage its equity capital base. The minimum
required leverage ratio for top-rated institutions is 3%,
but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points.

FDICIA established a new capital-based regulatory
scheme designed to promote early intervention for troubled
banks and requires the FDIC to choose the least expensive
resolution of bank failures. The new capital-based
regulatory framework contains five categories for
compliance with regulatory capital requirements, including
"well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." To qualify as a "well
capitalized" institution, a bank must have a leverage
ratio of no less than 5%, a Tier 1 risk-based ratio of no
less than 6%, and a total risk-based capital ratio of no
less than 10%, and the bank must not be under any order or
directive from the appropriate regulatory agency to meet
and maintain a specific capital level. As of December 31,
2001, the Company and its banks were qualified as "well
capitalized." For further discussions, see "Item 7.
Management's Discussion and Analysis or Plan of Operation
- - Capital."

Recent Legislative Developments

Periodically, the federal and state legislatures
consider bills with respect to the regulation of financial
institutions. Some of these proposals could significantly
change the regulation of banks and the financial services
industry. The Company cannot predict if such proposals
will be adopted or the affect to the Company.

Item 2. Description of Property

The Company has ten branch locations, all of which
are owned by the Company or the banks. The locations are
described as follows:

Office Location Square Footage
Main Office, Maryland
24 North Main Street, Berlin, Maryland 21811
6,500
East Berlin Office
10524 Old Ocean City Blvd, Berlin, MD 21811
1,500
20th Street Office
100 20th Street, Ocean City, Maryland 21842
3,100
Ocean Pines Office
11003 Cathell Road, Berlin, Maryland 21811
2,420
Mid-Ocean City Office
9105 Coastal Highway, Ocean City, Maryland 21842
1,984
North Ocean City Office
14200 Coastal Highway, Ocean City, Maryland 21842
2,545
West Ocean City Office
9923 Golf Course Road, Ocean City, Maryland 21842
2,496
Pocomoke Office
2140 Old Snow Hill Road, Pocomoke, Maryland 21851
2,624
Snow Hill Office
108 West Market Street, Snow Hill, Maryland 21863
3,773
Main Office, Delaware
50 Atlantic Avenue, Ocean View, Delaware 19970
4,900

The Berlin office is the centralized location for
the Company and for all the Maryland branches; that is to
say that all proof and bookkeeping is performed there.
The Delaware office has its own proof and bookkeeping
functions. Each branch has a manager that also serves as
its loan officer, with exception of the East Berlin office
which does not have a loan officer. All offices
participate in normal day-to-day banking operations.
Eight Maryland offices offer automated teller
machines; all locations except the East Berlin office.
The Delaware bank has an automated teller machine on-
premise. The Company operates one automated teller machine
which is located at a local hospital.

Item 3. Legal Proceedings

There are no material pending legal proceedings to
which the Company or the banks or any of their properties
are subject.

Item 4. Submission of Matters to a Vote of Security
Holders

There were no matters submitted to a vote of the
shareholders of the Company during the fourth quarter of
2001.

PART II

Item 5. Market for Common Equity and Related Stockholder
Matters

The Company's Articles of Incorporation, as
amended, authorize it to issue up to 10,000,000 shares
of common stock.

As of February 28, 2001, there were approximately
905 holders of record of the common stock and 3,240,000
shares of Common Stock issued and outstanding. There is
no established public trading market in the stock, and
there is no likelihood that a trading market will
develop in the near future. Transactions in the common
stock are infrequent and are negotiated privately
between the persons involved in those transactions.

All outstanding shares of common stock of the
Company are entitled to share equally in dividends from
funds legally available, when, as, and if declared by
the Board of Directors. The Company paid dividends of
$.37 per share in 2001 and $.61 per share in 2000 which
includes a special cash dividend of $.25 per share
which is not expected to be an annual event.
Per share data for 2000 is restated to give retroactive
effect to the 2000 stock split effected in the form
of a 100% stock dividend.

Item 6. Selected Financial Data
The following table presents selected financial
data for the five years ended December 31, 2001. Prior
period per share data is restated to reflect 100% stock
dividends paid in 1998 and 2000.

Item 7. Management's Discussion and Analysis or Plan of
Operation

BUSINESS OF THE COMPANY

Calvin B. Taylor Bankshares, Inc. (the "Company")
is a bank holding company which was incorporated in
the State of Maryland on October 31, 1995. Calvin B.
Taylor Banking Company (the "Maryland Bank"), which
commenced operation in 1890, was incorporated under the
laws of the State of Maryland on December 17, 1907 and
is a state nonmember bank under the laws of the State
of Maryland. Calvin B. Taylor Bank of Delaware (the
"Delaware Bank") was incorporated under the laws of
the State of Delaware on September 18, 1997, and is a
state nonmember bank under the laws of the State of
Delaware. Both banks are engaged in a general
commercial banking business, emphasizing in their
marketing the Company's local management and ownership,
from their main offices located in their primary
service areas of Worcester County, Maryland and Sussex
County, Delaware, and their neighboring counties. The
banks offer a full range of deposit services, including
checking accounts, NOW accounts, savings accounts and
other time deposits of various types, ranging from
daily money market accounts to longer-term certificates
of deposit. In addition, the banks offer certain
retirement account services, such as Individual
Retirement Accounts. The banks also offer a full range
of short- to medium-term commercial and personal loans.
The banks originate fixed rate mortgage loans and real
estate construction and acquisition loans. These loans
generally have a demand feature. Other bank services
include cash management services, safe deposit boxes,
travelers' checks, direct deposit of payroll and social
security checks, debit cards, and automatic drafts for
various accounts.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the Company's
financial condition and results of operations should be
read in conjunction with the Company's financial
statements and related notes and other statistical
information included elsewhere herein.

Overview

Consolidated income of the Company is derived
primarily from operations of the banks. The 2001 net
income was $5,414,404, compared to $5,624,558 for 2000,
and $5,019,660 for 1999. The Company continued its
history of above average earnings with a return on
average equity of 9.54% and return on average assets of
1.75% for 2001, compared to returns on average equity
of 10.84% and 10.47%, and returns on average assets of
1.94% and 1.78%, for 2000 and 1999, respectively.

Results of Operations

The Company reported net income of $5,414,404, or
$1.67 per share, for the year ended December 31, 2001,
which was a decrease of $210,154, or 3.74%, from the
net income of $5,624,558, or $1.74 per share, for the
year ended December 31, 2000. Primarily responsible
for this decrease was the decline in net interest
income and increased personnel costs. Net income for
2000 increased by $604,898, or 12.05%, over the net
income of $5,019,660, or $1.55 per share for the year
ended December 31, 1999. Per share data for 1999 is
restated for the effect of the 100% stock dividend
distributed 2000. Primarily responsible for this
increase was the growth in net interest income.

Net interest income decreased $283,039, or 2.08%,
to $13,296,966 in 2001, from $13,580,005 in 2000. This
decrease was the result of a lower net interest spread
between the rates on interest-earning assets and
interest-bearing liabilities. Interest expense
increased $388,357 while interest income increased by
$105,318. The yield on interest-earning assets
decreased to 6.91% in 2001, from 7.39% in 2000, while
the combined yield on deposits and borrowed funds was
stable at 2.48% for the same periods.

Net interest income increased $1,359,187, or
11.12%, to $13,580,005 in 2000, from $12,220,818 in
1999. This increase was the result of an increase in
interest revenue of $1,440,460 while interest expense
increased by $81,273. Net interest income increased
primarily due to growth of $18,090,114 in the mortgage
loan portfolio funded largely by a decrease of
$13,648,377 in the amortized cost of investment
securities held to maturity. Decreasing deposit
balances offset increased rates, resulting in an
increase of $47,198 of deposit interest expense.
Interest expense on retail repurchase agreements, which
were first offered by the Bank in 2000, was $23,427.
The yield on interest-earning assets increased to 7.39%
in 2000, from 6.97% in 1999, while the combined yield
on deposits and borrowed funds increased to 2.48% from
2.47% for the same periods.

Noninterest income and noninterest expense
increased by 17.83% and 5.45%, respectively, during
2001 compared to 2000. Noninterest income and
noninterest expense increased by 5.60% and 4.54%,
respectively, during 2000 compared to 1999.

The Company reproted net income of $1,165,144 or
$.36 per share for the quarter ended December 31, 2001,
which was a decrease of $273,045, or 18.99% from the net
income of $1,438,189, or $.44 epr share, for the quarter
ended December 31, 2000. Primarily responsible was the
decrease in quarterly net income from $3,532,645 in
fourth quarter 2000 to $3,253,986 in fourth quarter 2001.
Management attributes this $278,657 or 7.89% decline in
net interest income to several factors related to the
national economic environment. Decreased yields on
federa; funds sold and investment securities, coupled
with the banks' loan rate reductions caused interest
income to lag by $255,829 or 5.06% behind the comparable
quarter last year. Throughout the year, the banks'
lowered the rate they pay on time deposit. In mid-
fourth quarter, they lowered rated on interest-bearing
checking and savings deposits.

Net Interest Income

The primary source of income for the Company is
net interest income, which is the difference between
revenue on interest-earning assets, such as investment
securities and loans, and interest incurred on
interest-bearing sources of funds, such as deposits and
borrowings. The level of net interest income is
determined primarily by the average balance of
interest-earning assets and funding sources and the
various rate spreads between the interest-earning
assets and the Company's funding sources. Changes in
net interest income from period to period result from
increases or decreases in the volume of interest-
earning assets and interest-bearing liabilities, and
increases or decreases in the average rates earned and
paid on such assets and liabilities. The volume of
interest-earning assets and interest-bearing
liabilities is affected by the ability to manage the
earning-asset portfolio, which includes loans, and the
availability of particular sources of funds, such as
noninterest bearing deposits.

The key performance measure for net interest
income is the "net margin on interest-earning assets,"
or net interest income divided by average interest-
earning assets. The Company's net interest margin for
2001 was 4.74% compared to 5.21% for 2000 and 4.77% for
1999. Because most of the loans of the banks are
written with a demand feature, the income of the banks
should not change dramatically as interest rates
change. Management of the Company expects to maintain
the net margin on interest-earning assets. The net
margin may decline, however, if competition increases,
loan demand decreases, or the cost of funds rises
faster than the return on loans and securities.
Although such expectations are based on management's
judgment, actual results will depend on a number of
factors that cannot be predicted with certainty, and
fulfillment of management's expectations cannot be
assured.

Analysis of Changes in Net Interest Income
(Dollars stated in thousands)

Dividends and interest on tax-exempt securities and loans
are reported on fully taxable equivalent basis. The
variance that is both rate/volume related is reported with the rate
variance.

Composition of Loan Portfolio

Because loans are expected to produce higher yields
than investment securities and other interest-earning
assets (assuming that loan losses are not excessive),
the absolute volume of loans and the volume as a
percentage of total earning assets is an important
determinant of net interest margin. Average loans, net
of the allowance for loan losses, were $170,116,213,
$161,796,946 and $145,219,090 during 2001, 2000 and
1999, respectively, which constituted 59.04%, 60.22%
and 55.36% of average interest-earning assets for the
periods. The Company's loan to deposit ratio was
60.73%, 72.68%, and 63.67% at December 31, 2001, 2000,
and 1999, respectively. Average loans to average
deposits were 68.70%, 68.94%, and 62.08% for the same
periods. The decrease in the loan to deposit ratio as
of year-end 2001 versus year-end 2000 is attributable to
a dramatic increase in deposits.

The Company extends loans primarily to customers
located in and near Worcester County, Maryland and
Sussex County, Delaware. There are no industry
concentrations in the Company's loan portfolio. The
Company does, however, have a substantial portion of
its loans in real estate and performance of the will be
influenced by the real estate market in the region.

The following table sets forth the composition of
the Company's loan portfolio as of December 31, 2001,
2000 and 1999, respectively.

The following table sets forth the maturity
distribution, classified according to sensitivity to
changes in interest rates, for selected components of
the Company's loan portfolio as of December 31, 2001.

Loan Maturity Schedule and Sensitivity to Changes in
Interest Rates

As of December 31, 2001, $163,717,356 or 97.05%, of
the total loans were either variable rate loans or
loans written on demand.

The Company has the following commitments, lines of
credit, and letters of credit outstanding as of
December 31, 2001, 2000 and 1999, respectively.

2001 2000 1999

Construction loans 6,456,910 2,964,536 9,486,899
Other loan
commitments 8,639,337 3,192,350 4,843,120
Standby letters
of credit 3,243,063 1,412,552 1,504,241
Total 18,339,310 7,569,438 15,834,260

Loan commitments are agreements to lend to a
customer as long as there is no violation of any
condition to the contract. Loan commitments may have
interest fixed at current rates, fixed expiration
dates, and may require the payment of a fee. Letters of
credit are commitments issued to guarantee the
performance of a customer to a third party. Loan
commitments and letters of credit are made on the same
terms, including collateral, as outstanding loans. The
Company's exposure to credit loss in the event of
nonperformance by the borrower is represented by the
contract amount of the commitment.

Loan Quality

The allowance for loan losses represents a reserve
for potential losses in the loan portfolio. The
adequacy of the allowance for loan losses is evaluated
periodically based on a review of all significant
loans, with a particular emphasis on non-accruing, past
due, and other loans that management believes require
attention. The determination of the reserve level
rests upon management's judgment about factors
affecting loan quality and assumptions about the
economy. Management considers the year-end allowance
appropriate and adequate to cover possible losses in
the loan portfolio; however, management's judgment is
based upon a number of assumptions about future events,
which are believed to be reasonable, but which may or
may not prove valid. Thus, there can be no assurance
that charge-offs in future periods will not exceed the
allowance for credit loss or that additional increases
in the credit loss allowance will not be required. The
Company has a history of low loan charge-offs.

For significant problem loans, management's review
consists of evaluation of the financial strengths of
the borrowers and guarantors, the related collateral,
and the effects of economic conditions. The overall
evaluation of the adequacy of the total allowance for
loan losses is based on an analysis of historical loan
loss ratios, loan charge-offs, delinquency trends, and
previous collection experience, along with an
assessment of the effects of external economic
conditions. It is the Company's policy to have each
bank evaluate loan portfolio risk for the purpose of
establishing an adequate allowance. The banks' target
levels for their allowances as a percentage of gross
loans range from approximately 1.00% to 1.35%. This
allowance may be increased for reserves for specific
loans identified as substandard during management's
loan review. Generally, the Company will not require a
negative provision to reduce the allowance as a result
of either net recoveries or a decrease in loans, even
though this may cause the allowance as a percentage of
gross loans to exceed the Company's target.

The provision for loan losses is a charge to
earnings in the current period to replenish the
allowance and maintain it at a level management has
determined to be adequate. As of December 31, 2001,
2000 and 1999, the respective allowances for loan
losses were 1.30%, 1.28% and 1.35% of outstanding
loans.

The provision for loan losses was $22,985 in 2001,
a decrease of $151,095 from the $174,080 provision in
2000. This decrease is due to the stable size and
delinquency status of the loan portfolio, and the low
level of net charge-offs in 2001. The provision for
loan losses was $174,080 in 2000, an increase of
$168,335 from the $5,745 provision in 1999. The
increased provision is the result of a $56,295 increase
in net charge-offs for 2000, which totaled $63,356.
Outstanding loans increased 10.83% during the same
period.

2001 2000 1999

Commercial 218,414 9.95% 167,626 7.64% 213,549 10.26%
Real estate, including
construction 913,449 41.60 810,790 36.98 656,104 31.51
Consumer 174,671 7.94 174,003 7.93 152,313 7.31
General 889,388 40.51 1,040,336 47.45 1,060,155 50.92
Total 2,195,922 100.00% 2,192,755 100.00% 2,082,031 100.00%

Allowance for Loan Losses
2001 2000 1999

Balance at beginning of year 2,192,755 2,082,031 2,080,358

Loan losses:
Commercial 3,741 56,193 13,628
Mortgages - - -
Consumer 20,983 10,907 8,256
Total loan losses 24,724 67,100 21,884

Recoveries on loans previously
charged off
Commercial 4,056 2,386 6,504
Consumer 850 1,358 8,319
Total loan recoveries 4,906 3,744 14,823

Net loan losses 19,818 63,356 7,061
Provision for loan losses
charged to expense 22,985 174,080 5,745
Provision related to commitments - - 2,989

Balance at end of year 2,195,922 2,192,755 2,082,031

Allowance for loan losses to loans
outstanding at end of year 1.30% 1.28% 1.35%

Net charge-offs to average loans 0.00% 0.04% 0.00%

As a result of management's ongoing review of the
loan portfolio, loans are classified as nonaccrual when
it is not reasonable to expect collection of interest
under the original terms. These loans are classified
as nonaccrual even though the presence of collateral or
the borrower's financial strength may be sufficient to
provide for ultimate repayment. Interest on nonaccrual
loans is recognized only when received. A delinquent
loan is generally placed in nonaccrual status when it
becomes 90 days or more past due. When a loan is
placed in nonaccrual status, all interest that has been
accrued on the loan but remains unpaid is reversed and
deducted from earnings as a reduction of reported
interest income. No additional interest is accrued on
the loan balance until the collection of both principal
and interest becomes reasonably certain. The Company
had no nonperforming loans at December 31, 2001, 2000
or 1999.

Where real estate acquired by foreclosure and held
for sale is included with nonperforming loans, the
result comprises nonperforming assets. There were no
nonperforming assets at December 31, 2001, 2000 or
1999. Loans are classified as impaired when the
collection of contractual obligations, including
principal and interest, is doubtful. Management has
identified no significant impaired loans as of December
31, 2001, 2000 or 1999.

Liquidity and Interest Rate Sensitivity

The primary objective of asset/liability management
is to ensure the steady growth of the Company's primary
source of earnings, net interest income. Net interest
income can fluctuate with significant interest rate
movements. To lessen the impact of these margin
swings, the balance sheet should be structured so that
repricing opportunities exist for both assets and
liabilities in roughly equivalent amounts at
approximately the same time intervals. Imbalances in
these repricing opportunities at any point in time
constitute interest rate sensitivity.

Liquidity represents the ability to provide steady
sources of funds for loan commitments and investment
activities, as well as to provide sufficient funds to
cover deposit withdrawals and payment of debt and
operating obligations. These funds can be obtained by
converting assets to cash or by attracting new
deposits.

Average liquid assets (cash and amounts due from
banks, interest bearing deposits in other banks,
federal funds sold, and investment securities) were
53.08% of average deposits for 2001, compared to 50.93%
and 55.60% for 2000 and 1999, respectively.

As of December 31, 2001, $41,521,902, or 47.87% of
the investment debt securities mature in one year or
less. Funds invested in federal funds sold provide
liquidity so the banks do not need a large portfolio of
securities classified as "available-for-sale." Other
sources of liquidity include letters of credit,
overnight federal funds, and reverse repurchase
agreements available from correspondent banks. The
total lines of credit available from correspondent
banks at December 31, 2001 were $39,000,000. At
December 31, 2000 and 1999, they were $19,000,000.

Interest rate sensitivity refers to the
responsiveness of interest-bearing assets and
liabilities to changes in market interest rates. The
rate-sensitive position, or gap, is the difference in
the volume of rate-sensitive assets and liabilities at
a given time interval. The general objective of gap
management is to actively manage rate-sensitive assets
and liabilities to reduce the impact of interest rate
fluctuations on the net interest margin. Management
generally attempts to maintain a balance between rate-
sensitive assets and liabilities as the exposure period
is lengthened to minimize the overall interest rate
risk to the Company.

Interest rate sensitivity may be controlled on
either side of the balance sheet. On the asset side,
management exercises some control over maturities.
Also, loans are written to provide repricing
opportunities on fixed rate notes. The Company's
investment portfolio, including federal funds sold,
provides the most flexible and fastest control over
rate sensitivity since it can generally be restructured
more quickly than the loan portfolio.

On the liability side, deposit products are
structured to offer incentives to attain the maturity
distribution desired. Competitive factors sometimes
make control over deposits more difficult and,
therefore, less effective as an interest rate
sensitivity management tool.

The asset mix of the balance sheet is continually
evaluated in terms of several variables; yield, credit
quality, appropriate funding sources, and liquidity.
Management of the liability mix of the balance sheet
focuses on expanding the various funding sources.

The Company was asset-sensitive for all time
horizons. For asset-sensitive institutions, if interest
rates should decrease, the net interest margins should
decline. Since all interest rates and yields do not
adjust at the same velocity, the gap is only a general
indicator of rate sensitivity.

Interest Sensitivity Analysis
December 31, 2001

After three
Within but within After one
Three twelve but within After
Months months five years five years Total

Assets
Earning assets
Federal funds sold 54,389,656 - - - 54,389,656
Interest-bearing deposits 99,000 590,000 190,000 - 879,000
Investment debt securities12,833,044 28,688,858 42,876,250 2,336,880 86,735,032
Loans 159,744,976 6,081,467 2,648,073 222,918 168,697,434
Total earning assets 227,066,676 35,360,325 45,714,323 2,559,798 310,701,122

Liabilities
Interest-bearing deposits
Money market and NOW 86,379,359 - - - 86,379,359
Savings 38,306,292 - - - 38,306,292
Certificates =>$100,000 5,437,744 13,206,842 2,097,332 - 20,741,917
Certificates <$100,000 22,618,597 36,548,676 9,045,676 - 68,212,949
Securities sold under
agreements to repurchase 4,555,323 - - - 4,555,323
Note payable 4,198 12,593 78,175 120,737 215,702
Total interest-bearing
liabilities 157,301,513 49,768,110 11,221,183 120,737 218,411,542

Period gap 69,765,163 (14,407,785) 34,493,140 2,439,061 92,289,579
Cumulative gap 69,765,163 55,357,378 89,850,518 92,289,579 92,289,580
Ratio of cumulative
gap to total earning assets 22.45% 17.82% 28.92% 29.70% 29.70%

Investment Securities Maturity Distribution and Yields

December 31, 2001 December 31, 2000 December 31, 1999
Amount Percent Amount Percent Amount Percent

U. S. Treasury securities
One year or less 31,483,510 4.81% 29,941,815 5.34% 43,479,940 5.29%
Over one through five years 26,563,088 3.96% 17,480,762 6.36% 22,986,692 5.11%
Over ten years 2,336,880 7.28% 2,428,120 7.28% 2,108,760 7.29%
Total U.S. Treasury securities 60,383,478 4.52% 49,850,697 5.78% 68,575,392 5.29%

U.S. Government Agencies
One year or less 5,900,000 5.68% 8,750,177 6.35%
Over one through five years 13,505,013 4.84% 9,900,000 6.46% 10,649,787 6.08%
Total U. S. Government Agencies 19,405,013 5.09% 18,650,177 6.41% 10,649,787 6.08%

State, county, and municipal securities
One year or less 4,138,392 5.54% 6,641,744 5.67% 5,267,528 3.56%
Over one through five years 2,808,149 5.23% 3,559,060 6.12% 7,064,654 3.61%
Over five through ten years - - 100,671 3.71%
Over ten years - - 372,663 3.45%
Total state, county, and
municipal securities 6,946,541 5.43% 10,200,804 5.83% 12,805,516 3.59%

Total debt securities
One year or less 41,521,902 5.01% 45,333,736 5.59% 48,747,468 5.10%
Over one through five years 42,876,250 4.32% 30,939,822 6.36% 40,701,133 5.10%
Over five through ten years - - 100,671 3.71%
Over ten years 2,336,880 7.28% 2,428,120 7.28% 2,481,423 6.71%
Total debt securities 86,735,032 4.73% 78,701,678 5.94% 92,030,695 5.15%

Equity securities 1,637,219 3.03% 1,624,814 2.38% 1,293,336 3.72%

Total securities 88,372,251 4.70% 80,326,492 5.87% 93,324,031 5.13%

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities increased
$4,680,417, or 2.45%, to $196,079,693 in 2001, from
$191,399,276 in 2000. Average interest-bearing deposits
increased $2,180,688, or 1.15%, to $191,730,858 in
2001, from $189,550,170 in 2000, while average demand
deposits increased $10,735,100, or 23,78% to
$55,879,394 in 2000, from $45,144,294 in 2000. At
December 31, 2001, total deposits were $274,149,181,
compared to $231,926,192 at December 31, 2000, an
increase of 18.21%.

Average interest-bearing liabilities decreased
$5,340,895, or 2.71%, to $191,399,276 in 2000, from
$196,740,171 in 1999. Average interest-bearing deposits
decreased $7,067,017, or 3.59%, to $189,550,170 in
2000, from $196,617,187 in 1999, while average demand
deposits increased $7,853,381, or 21.06% to $45,144,294
in 2000, from $37,290,913 in 1999. At December 31,
2000, total deposits were $231,926,192, compared to
$238,725,852 at December 31, 1999, a decrease of 2.85%.

The following table sets forth the deposits of the
Company by category as of December 31, 2001, 2000 and 1999,
respectively.

December 31,
2001 2000 1999
Percent of Percent of Percent of
Amount deposits Amount deposits Amount deposits

Demand deposit accounts 60,508,663 22.07% 49,674,943 21.42% 39,151,702 16.40%
NOW accounts 45,639,869 16.65% 39,910,464 17.21% 41,203,474 17.26%
Money market 40,739,491 14.86% 34,896,077 15.04% 52,985,409 22.19%
Savings accounts 38,306,292 13.97% 34,057,361 14.68% 35,254,807 14.77%
Time deposits <$100,000 68,212,949 24.88% 58,206,911 25.10% 57,312,394 24.01%
Time deposits =>$100,000 20,741,917 7.57% 15,180,436 6.55% 12,818,066 5.37%
Total deposits 274,149,181 100.00% 231,926,192 100.00% 238,725,852 100.00%

Core deposits, which exclude certificates of
deposit of $100,000 or more, provide a relatively
stable funding source for the Company's loan portfolio
and other earning assets. The Company's core deposits
increased $36,661,508 during 2001. Management believes
that this increase is largely attributable to a
migration of funds from the stock market into insured
deposits. Deposits, and particularly core deposits,
have been the Company's primary source of funding and
have enabled the Company to meet both its short-term
and long-term liquidity needs. Management anticipates
that such deposits will continue to be the Company's
primary source of funding in the future.

The maturity distribution of the Company's time
deposits over $100,000 at December 31, 2001, is shown
in the following table.

Maturities of Certificates of Deposit
and Other Time Deposits of $100,000 or More

December 31, 2001

Within After three After six After
three through six through twelve twelve
months months months months Total

Certificates of deposit
of $100,000 or more 5,437,743 4,701,656 8,505,186 2,097,332 20,741,917

Large certificate of deposit customers tend to be
extremely sensitive to interest rate levels, making
these deposits less reliable sources of funding for
liquidity planning purposes than core deposits. Some
financial institutions partially fund their balance
sheets using large certificates of deposit obtained
through brokers. These brokered deposits are generally
expensive and are unreliable as long-term funding
sources. Accordingly, the Company does not accept
brokered deposits.

Noninterest Income

Noninterest income for 2001 increased $196,777, or
17.83% over the previous year. Service charges on
deposit accounts, which contributed $128,262 of this
increase, were due to the growth of deposits. VISA
Check Card fees increased by $29,761 due to increased
use. Noninterest income for 2000 increased $58,531, or
5.60% over the previous year. Additional revenues from
Credit Card and VISA Check Card fees contributed
$49,710 of this increase.

The following table presents the principal
components of noninterest income for the years ended
December 31, 2001, 2000, and 1999, respectively.

Noninterest Income

2001 2000 1999

Service charges on
deposit accounts 853,107 724,845 724,067
Other noninterest
revenue 447,528 379,013 321,260
Total noninterest
income 1,300,635 1,103,858 1,045,327

Noninterest income as a percentage of
average total assets
0.42% 0.38% 0.37%

Noninterest Expense

Noninterest expense increased by $321,782, or
5.45%, from 2000 to 2001. Increased personnel costs of
$297,807 were due to annual raises, increased 401(k)
expense, and increased costs of group insurance.
Occupancy expense decreased due to the bank's adoption
of accrual basis accounting for real property taxes,
which were previously recorded on the cash basis. Of
the $53,987 increase in other operating expense,
$30,891 was attributable to increased fees related to
ATM operation.

Noninterest expense increased by $256,594, or
4.54%, from 1999 to 2000. Increased personnel costs of
$162,545 were due to annual raises and the addition of
a fulltime audit position. Furniture and equipment
expense increased $160,003 of which approximately
$110,000 was attributable to costs associated with the
Check Imaging system installed in 1999. Included in
noninterest expense in 1999 was property with a book
value of $128,806, which was donated to a Worcester
County municipality. In 1999, costs of stationery and
supplies were above normal due to a branch relocation
and costs associated with potential year 2000 computer
problems; in 2000, stationery and supplies costs
decreased $47,994, returning to a pre-1999 level.

The following table presents the principal
components of noninterest expense for the years ended
December 31, 2001, 2000 and 1999, respectively.

Noninterest Expense

2001 2000 1999

Compensation and
related expenses 3,536,660 3,238,854 3,076,309
Occupancy expense 392,499 425,767 413,073
Furniture and
equipment expense 674,296 671,040 511,037
Amortization of
intangible assets 68,503 62,005 19,721
Advertising 144,983 132,784 146,341
Business and
product development 60,189 57,055 57,649
Courier service 96,726 99,466 93,968
Deposit insurance 43,413 35,157 37,917
Director fees 83,025 72,575 64,120
Dues, donations,
and subscriptions 80,024 107,114 83,105
Donated real property - - 128,806
Freight 57,806 62,411 57,879
Liability insurance 44,608 61,649 64,686
Postage 155,002 145,325 155,092
Professional fees 52,400 62,660 61,538
Stationery and
supplies 252,686 261,733 309,727
Telephone 100,455 82,256 82,466
Teller machine fees 154,289 123,398 110,791
Miscellaneous 228,423 202,957 173,387
Total noninterest
expense 6,225,987 5,904,206 5,647,612

Noninterest expense as a percentage of
average total assets
2.01% 2.04% 2.00%

Capital

Under the capital guidelines of the Federal Reserve
Board and the FDIC, the Company and its banks are
currently required to maintain a minimum risk-based
total capital ratio of 8%, with at least 4% being Tier
1 capital. Tier 1 capital consists of common
shareholders' equity, qualifying perpetual preferred
stock, and minority interests in equity accounts of
consolidated subsidiaries, less certain intangibles.
In addition, the Company and the banks must maintain a
minimum Tier 1 leverage ratio (Tier 1 capital to total
assets) of at least 3%, but this minimum ratio is
increased by 100 to 200 basis points for other than the
highest-rated institutions.

At December 31, 2001, the Company and the banks
exceeded their regulatory capital ratios, as set forth
in the following table.

Analysis of Capital

Required Consolidated Maryland Delaware
Minimums Company Bank Bank
2001

Total risk-based capital ratio 8.0% 36.8% 33.2% 60.9%
Tier I risk-based capital ratio 4.0% 35.6% 31.9% 59.7%
Tier I leverage ratio 3.0% 17.1% 15.5% 22.4%

2000
Total risk-based capital ratio 8.0% 36.6% 34.5% 53.0%
Tier I risk-based capital ratio 4.0% 35.4% 33.3% 52.0%
Tier I leverage ratio 3.0% 18.2% 16.6% 29.6%

1999
Total risk-based capital ratio 8.0% 38.4% 35.0% 99.6%
Tier I risk-based capital ratio 4.0% 37.1% 33.8% 99.3%
Tier I leverage ratio 3.0% 17.5% 15.4% 30.8%

Accounting Rule Changes

FASB Statement No. 141, Business combination requires
that business combinations be accounted for using the
purchase method. The pooling-of-interest method is
no longer permitted. This Statement applies to business
combinations initiated after June 30, 2001.

FASB Statement No. 142 Goodwill and Other Intangible
Assets changes the accounting for acquired goodwill and
other intangibles. Annually, management should review
these items to determine if they should be reduced due to
impairment. Systematic amortization is no longer permitted.
The effective date of the Statement is for fiscal years
beginning after December 31, 2001. Core deposit
intangibles are not goodwill and are still amortizable.

FASB Statement No. 143 Accounting for Asset Retirement
obligations applies to legal obligtaions associated
with the retirement of a tangible long-lived asset.
The statement requires that management recognize the fair
value of an asset retirement obligation in the period
incurred, adding capitalization of this cost to the cost
of the asset. Annually the asset, including the capitalized
cost, should be reviewed for impairment. The effective
date of the Statement is for years beginning after June 15,
2002.

Impact of Inflation

Unlike most industrial companies, the assets and
liabilities of financial institutions such as the
Company and the banks are primarily monetary in nature.
Therefore, interest rates have a more significant
effect on the Company's performance than do the effects
of changes in the general rate of inflation and change
in prices. In addition, interest rates do not
necessarily move in the same direction or in the same
magnitude as the prices of goods and services. As
discussed previously, management seeks to manage the
relationships between interest sensitive assets and
liabilities in order to protect against wide interest
rate fluctuations, including those resulting from
inflation. See "Liquidity and Interest Rate
Sensitivity" above.

Item 8. Financial Statements

In response to this Item, the information included
on pages 1 through 22 of the Company's Annual Report to
Shareholders for the year ended December 31, 2001, is
incorporated herein by reference.

PART III

Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures

Not applicable.

Item 10. Directors and Executive Officers; Compliance
with Section 16(a) of the Exchange Act

In response to this item, the information included
on pages 2 through 3 of the Company's Proxy Statement
for Annual Meeting of Shareholders To Be Held on May 8,
2002, is incorporated herein by reference.

Item 11. Executive Compensation

In response to this item, the information included
on page 4 of the Company's Proxy Statement for Annual
Meeting of Shareholders To Be Held on May 8, 2002, is
incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial
Owners and Management

In response to this item, the information included
on pages 4 through 5 of the Company's Proxy Statement
for Annual Meeting of Shareholders to be held May 8,
2002, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

In response to this item, the information included
on page 6 of the Company's Proxy Statement for Annual
Meeting of Shareholders to be held May 8, 2002, is
incorporated herein by reference.

Item 14. Exhibits and Reports on Form 8-K

(a) Exhibits
3.1 Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of
Registration Statement Form S-4, File No. 33-99762).
3.2 Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of Registration Statement Form S-4, File
No. 33-99762).
13 Annual Report to Shareholders for the year ended
December 31, 2001.
21 Subsidiaries of the Company.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the
fourth quarter of the year ended December 31, 2001.

SIGNATURES
In accordance with Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

CALVIN B. TAYLOR BANKSHARES, INC.
(Registrant)

Date: By: /s/ Reese F. Cropper, Jr.
President and Chief Executive Officer

Date: By: /s/ William H. Mitchell
Vice President and Chief Financial Officer

In accordance with the Securities Exchange Act of
1934, this report has been signed below by the
following persons on behalf of the registrant and in
the capacities and on the dates indicated.

Date: By: /s/ James R. Bergey, Jr.,
Director

Date: By: /s/ James R. Bergey, Sr.,
Director

Date: By: /s/ George H. Bunting, Jr.,
Director

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

Date: By: /s/ Reese F. Cropper, Jr.
President, Chief Executive Officer
and Director

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

Date: By: /s/ Hale Harrison,
Director

Date: By: /s/ Gerald T. Mason,
Director

Date: By: /s/ William H. Mitchell,
Vice President and Director

Date: By: /s/ Joseph E. Moore,
Director

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

Date: By: /s/ D. Bruce Rogers,
Director

EXHIBIT 13

ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2001

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Financial Statements

December 31, 2001

Calvin B. Taylor Bankshares, Inc.
and subsidiaries

Table of Contents

Page

Report of independent auditors 1

Consolidated financial statements

Consolidated balance sheets 2

Consolidated statements of income 3

Consolidated statements of changes in
stockholders' equity 4

Consolidated statements of cash flows 5-6

Notes to consolidated financial statements 7-21

Report of Independent Auditors
The Board of Directors and Stockholders
Calvin B. Taylor Bankshares, Inc. and Subsidiaries
Berlin, Maryland

We have audited the accompanying consolidated
balance sheets of Calvin B. Taylor Bankshares, Inc. and
Subsidiaries as of December 31, 2001, 2000, and 1999,
and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the
years then ended. These consolidated financial
statements are the responsibility of the Company's
management. Our responsibility is to express an
opinion on these financial statements based on our
audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all
material respects, the financial position of Calvin B.
Taylor Bankshares, Inc. and Subsidiaries as of December
31, 2001, 2000, and 1999, and the results of their
operations and their cash flows for the years then
ended in conformity with accounting principles
generally accepted in the Untied States.

/s/ Rowles & Company, LLP

Salisbury, Maryland
January 8, 2002

Calvin B. Taylor Bankshares, Inc.
and subsidiaries
Consolidated Balance Sheets

December 31,
2001 2000 1999

Assets
Cash and due from banks 18,397,266 13,332,279 18,546,576
Federal funds sold 54,389,656 18,167,527 15,877,383
Interest-bearing deposits 879,000 784,000 983,000
Investment securities available
for sale 3,974,099 4,052,934 3,402,096
Investment securities held to maturity
(approximate market value of
$85,604,080, $76,610,933, and
$89,352,513) 84,398,152 76,273,558 89,921,935
Loans, less allowance for loan losses
of $2,195,922, $2,192,755,
and $2,082,031 166,501,512 168,571,199 152,000,504
Premises and equipment 5,895,275 5,620,478 5,858,928
Accrued interest income 1,753,816 1,948,199 1,928,735
Intangible assets 355,549 99,574 161,579
Deferred income taxes 134,639 107,227 222,986
Other assets 145,603 91,036 17,076

336,824,567 289,048,011 288,920,798

Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing 60,508,663 49,674,943 39,151,702
Interest-bearing 213,640,518 182,251,249 199,574,150
274,149,181 231,926,192 238,725,852
Securities sold under agreements
to repurchase 4,555,323 3,113,671 -
Accrued interest payable 529,348 503,519 424,042
Accrued income taxes 2,298 103,818 56,490
Note payable 215,702 231,517 246,413
Other liabilities 130,145 84,085 247,667

279,581,997 235,962,802 239,700,464
Stockholders' equity
Common stock, par value $1 per
share; authorized 10,000,000 shares;
issued and outstanding 3,240,000
shares in 2001 and 2000, 1,620,000
shares in 1999 3,240,000 3,240,000 1,620,000
Additional paid-in capital 17,290,000 17,290,000 17,290,000
Retained earnings 36,274,102 32,058,498 30,030,340
56,804,102 52,588,498 48,940,340
Accumulated other comprehensive
income 438,468 496,711 279,994
57,242,570 53,085,209 49,220,334

336,824,567 289,048,011 288,920,798

The accompanying notes are an integral part of these financial
statements.

2

Calvin B. Taylor Bankshares, Inc.
and subsidiaries
Consolidated Statements of Income

Years Ended December 31,
2001 2000 1999

Interest and dividend revenue
Loans, including fees 14,179,181 13,480,035 12,070,649
U. S. Treasury and government
agency securities 3,540,767 3,761,021 4,056,031
State and municipal securities 332,035 410,891 531,857
Federal funds sold 1,412,927 1,716,303 1,261,883
Time certificates of deposit 46,354 46,110 59,892
Equity securities 34,090 25,676 19,264
Total interest and dividend
revenue 19,545,354 19,440,036 17,999,576

Interest expense
Deposit interest 6,173,101 5,822,224 5,775,026
Other 75,287 37,807 3,732
Total interest expense 6,248,388 5,860,031 5,778,758
Net interest income 13,296,966 13,580,005 12,220,818

Provision for loan losses 22,985 174,080 5,745
Net interest income after
provision for loan losses 13,273,981 13,405,925 12,215,073

Other operating revenue
Service charges on deposit
accounts 853,107 724,845 724,067
Other noninterest revenue 447,528 379,013 321,260
Total other operating revenue 1,300,635 1,103,858 1,045,327

Other expenses
Salaries 2,943,241 2,723,713 2,554,963
Employee benefits 593,419 515,141 521,346
Occupancy 392,499 425,767 413,073
Furniture and equipment 674,296 671,040 511,037
Other operating 1,622,532 1,568,545 1,647,193
Total other expenses 6,225,987 5,904,206 5,647,612

Income before income taxes 8,348,629 8,605,577 7,612,788
Income taxes 2,934,225 2,981,019 2,593,128

Net income 5,414,404 5,624,558 5,019,660

Earnings per common share 1.67 1.74 1.55

The accompanying notes are an integral part of these financial
statements.

3

Calvin B. Taylor Bankshares, Inc.
and subsidiaries

Consolidated Statements of Changes in Stockholders' Equity
Accumulated
other
Common stock Additional Retained comprehensive Comprehensive
Shares Par value paid-in capital earnings income income

Balance, December 31,1998 1,620,000 1,620,000 17,290,000 26,954,680 478,519

Net income - - - 5,019,660 - 5,019,660
Unrealized gain on
investment securities
available for sale
net of income taxes - - - - (198,525) (198,525)
Comprehensive income - - - - - 4,821,135
Cash dividend,$.60 per share - - - (1,944,000) -

Balance, December 31,1999 1,620,000 1,620,000 17,290,000 30,030,340 279,994

Net income - - - 5,624,558 - 5,624,558
Stock split effected
in the form of
a 100% stock
dividend 1,620,000 1,620,000 - (1,620,000) -
Unrealized gain on
investment securities
available for sale
net of income taxes - - - - 216,717 216,717
Comprehensive income - - - - - 5,841,275
Cash dividend, $.61 per share - - - (1,976,400) -

Balance, December 31,2000 3,240,000 3,240,000 17,290,000 32,058,498 496,711

Net income - - - 5,414,404 - 5,414,404
Unrealized gain on
investment securities
available for sale
net of income taxes - - - - (58,243) (58,243)
Comprehensive income - - - - - 5,356,161
Cash dividend, $.37 per share - - - (1,198,800) -

Balance, December 31,2001 3,240,000 3,240,000 17,290,000 36,274,102 438,468

The accompanying notes are an integral part of these financial
statements.
4

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31,
2001 2000 1999

Cash flows from operating activities
Interest received 19,541,166 19,291,291 17,649,136
Fees and commissions received 1,361,593 1,080,633 1,029,416
Interest paid (6,222,559) (5,780,554) (5,810,849)
Cash paid to suppliers and
employees (5,731,055) (5,371,499) (4,864,057)
Income taxes paid (3,075,025) (2,954,290) (2,413,486)
5,874,120 6,265,581 5,590,160

Cash flows from investing activities
Proceeds from maturities of
investment securities 57,857,000 49,458,000 39,025,000
Purchase of investment securities held
to maturity (65,799,078) (35,978,105) (49,108,227)
Certificates of deposits purchased,
net of maturities (95,000) 199,000 245,000
Loans made, net of principal
collected 2,046,702 (16,744,775) (12,248,786)
Sale (purchase) of foreclosed real
estate - - 39,000
Purchases of and deposits on
premises, equipment, software,
and other intangibles (1,063,655) (443,405) (776,547)
Proceeds from sale of equipment 17,000 423 2,400
(7,037,031) (3,508,862) (22,822,160)

Cash flows from financing activities
Net increase (decrease) in
Time deposits 15,567,519 3,256,887 452,474
Other deposits 26,655,470 (10,056,547) 7,655,693
Securities sold under agreements
to repurchase 1,441,652 3,113,671 -
Payments on capital lease and
mortgage obligations (15,814) (18,483) (3,587)
Dividends paid (1,198,800) (1,976,400) (1,944,000)
42,450,027 (5,680,872) 6,160,580

Net increase (decrease) in cash and
cash equivalents 41,287,116 (2,924,153) (11,071,420)

Cash and cash equivalents at
beginning of year 31,499,806 34,423,959 45,495,379
Cash and cash equivalents at
end of year 72,786,922 31,499,806 34,423,959

The accompanying notes are an integral part of these financial
statements.
5

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Consolidated Statements of Cash Flows
(Continued)

Years Ended December 31,
2001 2000 1999

Reconciliation of net income to net
cash provided by operating activities
Net income 5,414,404 5,624,558 5,019,660
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 528,247 498,612 418,403
Provision for loan losses 22,985 174,080 5,745
Deferred income taxes 9,234 (20,599) (30,721)
Amortization of premiums and
accretion of discounts, net (198,571) (129,281) (291,392)
Charitable donation of property - - 128,806
(Gain) loss on disposition of
assets 12,365 1,564 (2,400)
Decrease (increase) in
Accrued interest receivable(194,383) (19,464) (19,464)
Other assets (54,566) (73,960) 135,690
Increase (decrease) in
Accrued interest payable 25,829 79,477 (32,091)
Accrued income taxes (101,520) 47,328 56,490
Other liabilities 46,060 83,266 201,434
5,874,120 6,265,581 5,590,160

Noncash Activity
Property acquired by issuance
of debt - - 250,000

The accompanying notes are an integral part of these financial
statements.
6

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

The accounting and reporting policies reflected
in the financial statements conform to generally
accepted accounting principles and to general
practices within the banking industry.

Calvin B. Taylor Bankshares, Inc. is a bank
holding company. Its principal subsidiary, Calvin
B. Taylor Banking Company, is a financial
institution operating primarily in Worcester
County, Maryland. The other subsidiary, Calvin B.
Taylor Bank of Delaware, is a financial institution
operating primarily in Sussex County, Delaware.
The Banks offer deposit services and loans to
individuals, small businesses, associations and
government entities. Other services include direct
deposit of payroll and social security checks,
automatic drafts from accounts, automated teller
machine services, safe deposit boxes, money orders
and travelers cheques. The Banks also offer credit
card services and discount brokerage services
through correspondents.

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

Principles of consolidation
The consolidated financial statements of Calvin
B. Taylor Bankshares, Inc. include the accounts of
its wholly owned subsidiaries, Calvin B. Taylor
Banking Company and Calvin B. Taylor Bank of
Delaware. All significant intercompany balances
and transactions have been eliminated in
consolidation.

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

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

Gains and losses on disposal are determined
using the specific-identification method.

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

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

7

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies
(Continued)

Loans and allowance for loan losses
Loans are stated at face value less the
allowance for loan losses. Interest on loans is
credited to income based on the principal amounts
outstanding. The accrual of interest is
discontinued when any portion of the principal or
interest is ninety days past due and collateral is
insufficient to discharge the debt in full.

The allowance for loan losses is maintained at a
level deemed appropriate by management to provide
adequately for known and inherent risks in the loan
portfolio. The minimum range of the allowance for
loan losses is calculated by applying risk-weighted
percentages to loans based on their delinquency and
underlying collateral. The portion of the
allowance that is a result of geographic and
industry concentrations and current economic
conditions is not allocated to specific loans. At
December 31, 2001, the allowance included
approximately $850,186 that was not allocated to
specific loans. Management has historically
maintained the allowance at a level of
approximately 1.30% to 1.35% of gross loans.

If the current economy or real estate market
were to suffer a severe downturn, the estimate for
uncollectible accounts would need to be increased.
Loans which are deemed to be uncollectible are
charged off and deducted from the allowance. The
provision for loan losses and recoveries on loans
previously charged off are added to the allowance.

Loans are considered impaired when, based on
current information, management considers it
unlikely that collection of principal and interest
payments will be made according to contractual
terms. Generally, loans are not reviewed for
impairment until the accrual of interest has been
discontinued.

Advertising
Advertising costs are expensed as incurred.

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

Per share data
Earnings per common share and dividends per
common share are determined by dividing net income
and dividends by the 3,240,000 shares outstanding,
giving retroactive effect to the stock dividends
distributed.

2. Cash and Due From Banks

The Company normally carries balances with other
banks that exceed the federally insured limit. The
average balances carried in excess of the limit,
including unsecured federal funds sold to the same
banks, were $53,138,449 for 2001, $27,192,359 for
2000, and $25,041,212 for 1999.

Banks are required to carry noninterest-bearing
cash reserves at specified percentages of deposit
balances. The Company's normal amount of cash on
hand and on deposit with other banks is sufficient
to satisfy the reserve requirements.

8

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

3. Investment Securities

Investment securities are summarized as follows:

Amortized Unrealized Unrealized Market
cost gains losses value

December 31, 2001
Available for sale
U.S. Treasury 1,994,041 342,839 - 2,336,880
Equity 1,265,708 455,713 84,202 1,637,219
3,259,749 798,552 84,202 3,974,099

Held to maturity
U.S. Treasury 58,046,598 920,257 5,952 58,960,903
U.S. Government agency19,405,013 230,276 12,389 19,622,900
State and municipal 6,946,541 73,832 96 7,020,277
84,398,152 1,224,365 18,437 85,604,080

December 31, 2000
Available for sale
U.S. Treasury 1,993,753 434,367 - 2,428,120
Equity 1,249,941 374,873 - 1,624,814
3,243,694 809,240 - 4,052,934

Held to maturity
U.S. Treasury 47,422,577 285,916 37,823 47,670,670
U.S. Government agency18,650,177 97,563 1,412 18,746,328
State and municipal 10,200,804 16,051 22,920 10,193,935
76,273,558 399,530 62,155 76,610,933

December 31, 1999
Available for sale
U.S. Treasury 1,993,463 115,297 - 2,108,760
Equity 952,467 346,869 6,000 1,293,336
2,945,930 462,166 6,000 3,402,096

Held to maturity
U.S. Treasury 66,466,632 7,153 386,382 66,087,403
U.S. Government agency10,649,787 - 119,085 10,530,702
State and municipal 12,805,516 785 71,893 12,734,408
89,921,935 7,938 577,360 89,352,513

9

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

3. Investment Securities (Continued)

The amortized cost and estimated market value of
debt securities, by contractual maturity and the
amount of pledged securities, follow. Actual
maturities may differ from contractual maturities
because borrowers may have the right to call or
prepay obligations with or without call or
prepayment penalties.

December 31, 2001 December 31, 2000 December 31, 1999
Amortized Market Amortized Market Amortized Market
cost value cost value cost value

Available for sale due
After ten years 1,994,041 2,336,880 1,993,753 2,428,120 1,993,463 2,108,760

Held to maturity due
In one year or less 41,521,902 42,125,457 45,333,736 45,313,048 49,004,373 48,908,330
After one year
through five years 42,876,250 43,478,623 30,939,822 31,297,885 40,917,562 40,444,183
84,398,152 85,604,080 76,273,558 76,610,933 89,921,935 89,352,513

Pledged securities 21,058,134 21,517,135 19,985,861 20,097,350 4,592,597 4,562,493

Investments are pledged to secure deposits of
federal and local governments. Pledged securities
also serve as collateral for securities sold under
agreements to repurchase.

4. Lines of Credit

The Company has available lines of credit,
including overnight federal funds, reverse
repurchase agreements and letters of credit,
totaling $ 39,000,000 as of December 31, 2001, and
$19,000,000 as of December 31, 2000 and 1999.

5. Loans and Allowance for Loan losses

Major classifications of loans are as follows:

2001 2000 1999

Commercial 15,341,122 15,588,946 17,825,019
Mortgage 146,258,549 148,468,890 130,378,776
Construction 2,117,685 1,540,376 824,071
Consumer 4,980,078 5,165,742 5,054,669
168,697,434 170,763,954 154,082,535

Allowance for loan losses 2,195,922 2,192,755 2,082,031

Loans, net 166,501,512 168,571,199 152,000,504

10

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

5. Loans and Allowance for Loan losses (Continued)

The rate repricing distribution of the loan
portfolio follows:

2001 2000 1999

Immediately 164,098,147 165,596,389 149,036,842
Within one year 1,728,296 425,689 302,886
Over one to five years 2,648,073 4,114,779 4,258,632
Over five years 222,918 627,097 484,175
168,697,434 170,763,954 154,082,535

Outstanding loan commitments and letters of credit
are as follows:

Loan commitments
Construction and land
development 6,456,910 2,964,536 9,486,899
Other 8,639,337 3,192,350 4,843,120
15,096,247 6,156,886 14,330,019

Standby letters of credit
Secured by deposits 1,404,069 1,229,669 1,380,593
Other 1,838,994 182,883 123,648
3,243,063 1,412,552 1,504,241

Loan commitments are agreements to lend to
customers as long as there is no violation of any
conditions of the contracts. Loan commitments
generally have interest at current market rates,
fixed expiration dates, and may require payment of
a fee.

Letters of credit are commitments issued to
guarantee the performance of a customer to a third
party.

Loan commitments and letters of credit are made
on the same terms, including collateral, as
outstanding loans. The Company's exposure to
credit loss in the event of nonperformance by the
borrower is represented by the contract amount of
the commitment.

The Company makes loans to customers located
primarily in the Delmarva region. Although the
loan portfolio is diversified, its performance will
be influenced by the economy of the region.

11

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

5. Loans and Allowance for Loan losses (Continued)

Transactions in the allowance for loan losses
were as follows:

2001 2000 1999

Beginning balance 2,192,755 2,082,031 2,080,358
Provision charged to
operations 22,985 174,080 5,745
Recoveries 4,906 3,744 14,823
2,220,646 2,259,855 2,100,926

Loans charged off 24,724 67,100 21,884
2,195,922 2,192,755 2,079,042
Change in allowance related
to loan commitments - - (2,989)
Ending balance 2,195,922 2,192,755 2,082,031

Amounts past due 90 days or more, and still
accruing interest, are as follows:

December 31,
2001 2000 1999

Commercial 122,420 39,576 50,371
Mortgage 343,136 263,237 -
Consumer 50,883 18,296 1,346
516,439 321,109 51,717

Management has identified no impaired or
nonaccrual loans at December 31, 2001, 2000, and 1999.

6. Premises and Equipment

A summary of premises and equipment and the
related depreciation is as follows:

Estimated useful life 2001 2000 1999

Land 1,891,950 1,891,950 1,891,950
Premises 5 - 50 years 4,826,954 4,645,138 4,602,879
Furniture and equipment 5 - 40 years 3,652,244 3,742,681 3,678,167
10,371,148 10,279,769 10,172,996
Accumulated depreciation 4,475,873 4,659,291 4,314,068
Net premises and equipment 5,895,275 5,620,478 5,858,928

Depreciation expense 459,744 436,608 398,682

12

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

7. Deposits

Major classifications of interest-bearing
deposits are as follows:

2001 2000 1999

Money market 40,739,491 34,896,077 52,985,409
Savings and NOW 83,946,161 73,967,825 76,458,281
Other time 88,954,866 73,387,347 70,130,460
213,640,518 182,251,249 199,574,150

Included in other time deposits are certificates
of deposit of $100,000 or more with the following
maturities:

Three months or less 5,437,743 4,423,581 1,394,088
Over three through
twelve months 13,206,842 6,795,644 9,356,422
Over one through five
years 2,097,332 3,961,211 2,067,556
20,741,917 15,180,436 12,818,066

Interest expense 987,329 680,474 550,206

8. Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase
represent overnight borrowings from customers. The
government agency securities that collateralize
these agreements are owned by the company but
maintained in the custody of an unaffiliated bank
designated by the Company. Additional information
follows.

2001 2000

Maximum month-end amount outstanding 5,383,038 4,557,860
Average amount outstanding 4,125,782 1,610,688
Average rate paid during the year 1.50% 1.45%

Investment securities underlying the
agreements at year end
Carrying value 13,991,479 13,988,545
Estimated fair value 14,327,220 14,105,150

9. Note Payable

The Company purchased real estate, financing
100% of the purchase price. The 6% unsecured note
has a final maturity of September, 2011.
Maturities of this note are as follows:

2002 16,790
2003 17,826
2004 18,925
2005 20,092
2006 21,332
Remaining years 120,737
215,702

13

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

10. Profit Sharing and Pension Plans

In 1999, the Company adopted a defined
contribution profit sharing plan under Section
401(k) of the Internal Revenue Code. The plan
covers substantially all of the employees and
allows discretionary Company contributions.
Annually, the Board of Directors approves a
discretionary contribution in addition to matching
50% of employee contributions to a maximum of 6% of
the employee wages.

The Company terminated its defined benefit
pension plan during 1999. The plan covered
substantially all of the employees. Benefits were
based on years of service and the employee's
average rate of earnings for the final five full
years before retirement. The total cost of the
pension and profit sharing plans for 2001, 2000,
and 1999, were $140 620, $119,307, and $155,869,
respectively.

11. Other Operating Expenses

The components of other operating expenses
follow:

2001 2000 1999

Amortization of intangible
assets 68,503 62,005 19,721
Advertising 144,983 132,784 146,341
Business and product development 60,189 57,055 57,649
Courier service 96,726 99,466 93,968
Deposit insurance 43,413 35,157 37,917
Director fees 83,025 72,575 64,120
Dues, donations and subscriptions80,024 107,114 83,105
Donated real property
- - 128,806
Freight 57,806 62,411 57,879
Liability insurance 44,608 61,649 64,686
Postage 155,002 145,325 155,092
Professional fees 52,400 62,660 61,538
Stationery and supplies 252,686 261,733 309,727
Telephone 100,455 82,256 82,466
ATM fees 154,289 123,398 110,791
Miscellaneous 296,926 202,957 173,387
1,622,532 1,568,545 1,647,193

12. Income Taxes

The components of income tax expense, including
taxes related to the change in accounting method
for organization costs, are as follows:

2001 2000 1999

Current
Federal 2,598,069 2,674,450 2,369,389
State 326,922 327,168 254,460
2,924,991 3,001,618 2,623,849
Deferred 9,234 (20,599) (30,721)
2,934,225 2,981,019 2,593,128

14

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

12. Income Taxes (continued)

The components of the deferred tax (benefit) are
as follows:

2001 2000 1999

Provision for loan losses (754) (40,495) 243
Pension expense - - (13,973)
Depreciation 5,317 13,987 (35,808)
Discount accretion 412 (1,656) 2,795
Health insurance premium deposits - 27 8,486
Organization costs 4,259 7,538 7,536

9,234 (20,599) (30,721)

The components of the net deferred tax assets
are as follows:

2001 2000 1999

Deferred tax asset
Allowance for loan losses 603,779 603,025 562,530
Health insurance premium
deposits - - 27
Organization costs 5,341 9,600 17,138
609,120 612,625 579,695

Deferred tax liabilities
Depreciation 188,267 182,950 168,963
Discount accretion 10,332 9,920 11,576
Unrealized gain on securities
available for sale 275,882 312,528 176,170
474,481 505,398 356,709

134,639 107,227 222,986

A reconciliation of the provision for taxes on
income from the statutory federal income tax rates
to the effective income tax rates follows:

Statutory federal income tax rate 34.0% 34.0% 34.0%

Increase (decrease) in tax rate
resulting from
Tax-exempt income (1.5) (1.9) (2.0)
State income taxes net of
federal income tax benefit 2.6 2.5 2.1
35.1% 34.6% 34.1%

15

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

13. Related Party Transactions

The executive officers and directors of the
Company enter into loan transactions with the Banks
in the ordinary course of business. The terms of
these transactions are similar to the terms
provided to other borrowers entering into similar
loan transactions.

2001 2000 1999

Beginning balance 12,293,244 9,231,028 8,641,536
Advances 4,833,136 5,356,617 3,095,000
17,126,380 14,587,645 11,736,536
Repayments 5,911,658 3,567,151 1,624,714
Other changes 135,557 (1,272,750) 880,794
Ending balance 11,079,165 12,293,244 9,231,028

The Company obtains legal services from a law
firm in which one of the principal attorneys is
also a member of the Board of Directors. Fees
charged for these services are at similar rates
charged by unrelated law firms for similar legal
work. Amounts paid to this related party totaled
$2,003, $1,805 and $3,746 during the years ended
December 31, 2001, 2000 and 1999.

14. Lease Commitments

The Company leases the land on which the Route
50 branch is located. The lease obligation, which
expires August 31, 2009, requires payments as
follows:

Minimum
Period rentals

2002 15,000
2003 15,000
2004 15,000
2005 15,000
2006 15,000
Remaining years 40,000
115,000

16

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

15. Fair Value of Financial Instruments

The estimated fair values of the Company's
financial instruments are summarized below. The
fair values of a significant portion of these
financial instruments are estimates derived using
present value techniques prescribed by the FASB and
may not be indicative of the net realizable or
liquidation values. The calculation of estimated
fair values is based on market conditions at a
specific point in time and may not reflect current
or future fair values. The fair value of financial
instruments equals the carrying value of the
instruments except as follows.

December 31, 2001 December 31, 2000 December 31, 1999
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value

Financial assets
Cash and due from
banks 18,397,266 18,510,175 13,332,279 13,479,427 18,546,576 18,660,884
Interest-bearing
deposits 879,000 906,928 784,000 784,116 983,000 979,200
Investment
securities 88,372,251 89,578,179 80,326,492 80,663,867 93,324,031 92,754,609
Loans, net 166,501,512 166,595,116 168,571,199 168,610,107 152,000,504 151,961,767

Financial liabilities
Interest-bearing
deposits 213,640,518 214,497,142 182,251,249 182,263,290 199,574,150 199,607,450
Note payable 215,702 206,453 231,517 210,648 246,413 246,413

The fair value of silver coin included with cash
is determined based on quoted market prices.

The fair value of interest-bearing deposits with
other financial institutions is estimated based on
quoted interest rates for certificates of deposit
with similar remaining terms.

The fair values of equity securities are
determined using market quotations. The fair
values of debt securities are estimated using a
matrix that considers yield to maturity, credit
quality, and marketability.

The fair value of fixed-rate loans is estimated
to be the present value of scheduled payments
discounted using interest rates currently in effect
for loans of the same class and term. The fair
value of variable-rate loans, including loans with
a demand feature, is estimated to equal the
carrying amount. The valuation of loans is
adjusted for possible loan losses.

The fair value of interest-bearing checking,
savings, and money market deposit accounts is equal
to the carrying amount. The fair value of fixed-
rate time deposits is estimated based on interest
rates currently offered for deposits of similar
remaining maturities.

It is not practicable to estimate the fair value
of outstanding loan commitments, unused lines, and
letters of credit.

17

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

16. Capital Standards

The Federal Reserve Board and the Federal
Deposit Insurance Corporation have adopted risk-
based capital standards for banking organizations.
These standards require ratios of capital to
assets for minimum capital adequacy and to be
classified as well capitalized under prompt
corrective action provisions. The capital ratios
and minimum capital requirements of the Company are
as follows:

Minimum To be well
Actual capital adequacy capitalized
(in thousands) Amount Ratio Amount Ratio Amount Ratio

December 31, 2001
Total capital
(to risk weighted assets) 58,800 36.8% 12,791 8.0% 15,989 10.0%
Tier 1 capital
(to risk-weighted assets) 56,804 35.6% 6,396 4.0% 9,593 6.0%
Tier 1 capital
(to average fourth
quarter assets) 56,804 17.1% 13,329 4.0% 16,661 5.0%

December 31, 2000
Total capital
(to risk weighted assets) 54,451 36.6% 11,897 8.0% 14,871 10.0%
Tier 1 capital
(to risk-weighted assets) 52,588 35.4% 5,948 4.0% 8,923 6.0%
Tier 1 capital
(to average fourth
quarter assets) 52,588 18.2% 11,806 4.0% 14,757 5.0%

December 31, 1999
Total capital
(to risk weighted assets) 50,589 38.4% 10,520 8.0% 13,150 10.0%
Tier 1 capital
(to risk-weighted assets) 48,940 37.1% 5,260 4.0% 7,890 6.0%
Tier 1 capital
(to average fourth
quarter assets) 48,940 17.5% 11,691 4.0% 14,614 5.0%

Tier 1 capital consists of capital stock,
additional paid in capital, and retained earnings.
Total capital includes a limited amount of the
allowance for loan losses. In calculating risk-
weighted assets, specific risk percentages are
applied to each category of asset and off-balance
sheet items.

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

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

18

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

17. Parent Company Financial Information

December 31,
Balance Sheets 2001 2000 1999
Assets

Cash and due from banks 57,513 9,110 151,751
Interest-bearing deposits 1,512,125 75,505 100,000
Securities available for sale 1,637,219 1,624,814 1,293,336
Investment in subsidiary banks52,445,405 49,806,120 46,061,690
Premises and equipment 1,640,946 1,609,939 1,639,139
Other assets 55,688 22,445 18,241
Total assets 57,348,896 53,147,933 49,264,157

Liabilities and Stockholders' Equity
Liabilities
Deferred income taxes 61,492 62,724 43,823
Other liabilities 44,834 - -
106,326 62,724 43,823

Stockholders' equity
Common stock 3,240,000 3,240,000 1,620,000
Additional paid-in capital 17,290,000 17,290,000 17,290,000
Retained earnings 36,274,102 32,058,498 30,030,340
Accumulated other
comprehensive income 438,468 496,711 279,994
Total stockholders' equity 57,242,570 53,085,209 49,220,334
Total liabilities and
stockholders' equity 57,348,896 53,147,933 49,264,157

Years Ended December 31,
Statements of Income 2001 2000 1999
Interest revenue 25,816 3,690 10,240
Dividend revenue 34,090 25,676 19,264
Dividends from subsidiaries 2,698,800 2,076,400 2,344,000
Equity in undistributed income
of subsidiaries 2,695,465 3,548,585 2,680,964
Rental income 2,700 2,700 2,925
5,456,871 5,657,051 5,057,393

Expenses
Occupancy 6,115 24,898 31,570
Furniture and equipment 1,968 1,904 3,423
Other 36,044 15,168 12,418
44,127 41,970 47,411

Income before income taxes 5,412,744 5,615,081 5,009,982
Income taxes (benefit) (1,660) (9,477) (9,678)
Net income 5,414,404 5,624,558 5,019,660

19

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

17. Parent Company Financial Information (Continued)

Years Ended December 31,
2001 2000 1999
Statements of Cash Flows

Cash flows from operating
activities
Interest and dividends
received 2,749,579 2,105,906 2,375,011
Rental payments received 9,900 2,700 2,925
Cash paid for operating
expenses 33,827 (19,969) (18,211)
Income taxes refunded (29,590) 18,101 7,074
2,763,716 2,106,738 2,366,799

Cash flows from investing
activities
Purchase of premises and
equipment (64,126) - -
Purchase of equity securities (15,767) (297,474) (728,104)
Purchase of certificates of
deposit, net of redemptions(1,500,000) 100,000 400,000
(1,579,893) (197,474) (328,104)

Cash flows from financing
activities
Dividends paid (1,198,800) (1,976,400) (1,944,000)

Net increase (decrease) in cash (14,977) (67,136) 94,695

Cash at beginning of year 85,615 151,751 57,056

Cash at end of year 69,638 84,615 151,751

Reconciliation of net income to net
cash provided by operating activities
Net income 5,414,404 5,624,558 5,019,660
Adjustments to reconcile net
income to net cash used in
operating activities
Undistributed net income
of subsidiary (2,695,465) (3,548,585) (2,680,964)
Amortization and
depreciation 33,120 29,200 29,200
Increase (decrease) in
deferred income taxes
and other liabilities 44,900 5,769 8,423
Decrease (increase) in
other assets (33,243) (4,204) (9,520)
2,763,716 2,106,738 2,366,799

20

Calvin B. Taylor Bankshares, Inc.
and Subsidiaries

Notes to Consolidated Financial Statements

18. Quarterly Results of Operations (Unaudited)

Three months ended
December 31, September 30, June 30, March 31,

2001
Interest revenue 4,804,117 5,003,872 4,882,457 4,854,908
Interest expense 1,550,131 1,626,675 1,542,283 1,529,299
Net interest income 3,253,986 3,377,197 3,340,174 3,325,609
Provision for
loan losses 22,985 - - -
Net income 1,165,144 1,400,912 1,491,492 1,356,856
Comprehensive
income 1,126,589 1,416,605 1,453,466 1,359,501
Earnings per share 0.36 0.43 0.46 0.42

2000
Interest revenue 5,059,947 5,056,443 4,678,198 4,645,448
Interest expense 1,527,302 1,498,739 1,400,906 1,433,084
Net interest income 3,532,645 3,557,704 3,277,292 3,212,364
Provision for
loan losses 68,000 23,000 41,000 42,080
Net income 1,438,189 1,583,917 1,306,325 1,296,127
Comprehensive
income 1,502,283 1,665,605 1,308,822 1,364,565
Earnings per share 0.44 0.49 0.40 0.40

1999
Interest revenue 4,607,224 4,669,910 4,410,901 4,311,541
Interest expense 1,439,769 1,439,279 1,407,424 1,492,286
Net interest income 3,167,455 3,230,631 3,003,477 2,819,255
Provision for
loan losses (7,980) 8,670 4,355 700
Net income
1,273,784 1,402,034 1,299,830 1,044,012
Comprehensive
income 1,611,696 1,200,713 1,111,686 897,040
Earnings per share 0.39 0.43 0.40 0.32

21