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, 2002

Commission File No. 000-50047

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

Maryland (State of incorporation or organization)
52-1948274 (I.R.S. Employer Identification No.)

24 North Main Street, Berlin, Maryland 21811
(Address of principal executive offices) (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, 2002, was
$109,044,154. This calculation is based upon estimation by the
Company's Board of Directors of fair market value of the Common
Stock of $38.00 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, 2003, 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 7, 2003, is incorporated by reference in this Form
10-K in Part III, Item 10, Item 11, Item 12, and Item 13.

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 Calvin B. Taylor Banking Company of
Berlin, Maryland (the "Bank"). The Bank is a commercial bank
incorporated under the laws of the State of Maryland on December 17,
1907, which operates nine banking offices in Worcester County,
Maryland and one banking office in Ocean View, Delaware. The Bank's
main office is 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,
Sussex County, Delaware, and neighboring counties.

The Company's holding company structure can assist the bank in
maintaining its 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 bank 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 bank 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 bank's 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
Bank operates from nine branches located throughout Worcester County,
Maryland and one branch located in Sussex County, Delaware. The Bank
draws most of its customer deposits and conducts most of its lending
transactions from within its primary service area, which encompasses
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 Tyson Foods.

Banking Services

The Bank offers a full range of deposit services including
checking, NOW, Money Market, and savings accounts, and other time
deposits including certificates of deposit. The transaction accounts
and time certificates are tailored to the Bank's principal market
areas at rates competitive to those offered in the area. In
addition, the Bank offers 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 Bank solicits these
accounts from individuals, businesses, associations and
organizations, and governmental authorities.

The Company, through the Bank, 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. The Bank may not make any loans to any director or officer
except for commercial loans to directors who are not officers
or employees) unless the Board of Directors of the Bank
approves the loans. 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. The Bank offers bank-by-
phone and Internet banking services, including electronic bill-
payment, 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 Bank also competes for
deposits with money market mutual funds and corporate and government
securities. The Bank competes 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 Bank employs 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, 2002, the Bank employed 94 full-time
equivalent employees. The Company's operations are conducted through
the Bank. Consequently, the Company does not have separate
employees. None of the employees of the Bank are represented by any
collective bargaining unit. The Bank considers its relations with
its employees to be good.

SUPERVISION AND REGULATION

The Company and the Bank are subject to state and federal
banking laws 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 Bank. 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 Bank 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 Bank 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 Bank.

The Company

Because it owns the outstanding common stock of the bank, 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 Bank's activities are limited to banking, managing
or controlling banks, furnishing services to or performing services
for its Subsidiary, 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 the Bank and to commit resources to support
the Bank 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 Bank
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 Bank

General. The Bank operates as a state nonmember banking
association incorporated under the laws of the State of Maryland.
It is subject to examination by the FDIC and the state department of
banking regulation for each state in which is has a branch. Deposits
in the Bank 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 Bank's operations,
including security devices and procedures, adequacy of capitalization
and loss reserves, loans, investments, borrowings, deposits, mergers,
issuances of securities, payment of dividends, interest 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 Bank
to maintain certain capital ratios and imposes limitations on the
Bank's aggregate investment in real estate, bank premises, and
furniture and fixtures. The Bank is required by the FDIC to prepare
quarterly reports on the Bank's 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 Bank is 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 the Bank's
capital and surplus and, as to all affiliates combined, to 20% of the
Bank's capital and surplus. In addition, each covered transaction
must meet specific collateral requirements. The Bank is 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 Bank is 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 Bank. The Bank
received a satisfactory rating in its most recent evaluation.

Other Regulations. Interest and certain other charges
collected or contracted for by the Bank are subject to state and
federal laws concerning interest rates. The Bank's 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 Bank 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 Bank 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 2003 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 Bank will
increase the Bank's cost of funds, and there can be no assurance that
such costs can be passed on to the Bank's customers.

Dividends

The principal source of the Company's cash revenues comes from
dividends received from the 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 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 three years.

In addition to the availability of funds from the 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, 2002, the Company and
the Bank 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 Bank. 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 Boulevard, Berlin, Maryland 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
Ocean View, Delaware Office
50 Atlantic Avenue, Ocean View, Delaware 19970 4,900

The Berlin office is the centralized location for the Company
and the Bank; that is to say that all proof and bookkeeping is
performed there. 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. The Company operates automated teller
machines in all branches except the East Berlin office, and at one
non-branch location in a local hospital.

Item 3. Legal Proceedings

There are no material pending legal proceedings to which the
Company or the Bank 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 2002.

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, 2003, there were approximately 996
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 $1.00 per share in 2002, $.37 per
share in 2001 and $.61 per share in 2000. Included are special
cash dividends of $.60 per share in 2002 and $.25 per share in
2000, which are 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, 2002. 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 that was incorporated in the State of Maryland on
October 31, 1995. Calvin B. Taylor Banking Company (the " 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. The Bank
is engaged in a general commercial banking business, emphasizing in
its marketing the Company's local management and ownership, from
its main office and branches located in its primary service area of
Worcester County, Maryland and Sussex County, Delaware, and
neighboring counties. The Bank offers a full range of deposit
services, including checking accounts, NOW, Money Market, and
savings accounts and other time deposits, including certificates of
deposit. In addition, the Bank offers certain retirement account
services, such as Individual Retirement Accounts. The Bank also
offers a full range of short- to medium-term commercial and
personal loans. The Bank originates 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. The Bank also offers bank-
by-phone and Internet banking services, including electronic bill
payment.

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 2002 net income was $5,753,916,
compared to $5,414,404 for 2001, and $5,624,558 for 2000. The
Company had a return on average equity of 9.83% and return on
average assets of 1.65% for 2002, compared to returns on average
equity of 9.54% and 10.84%, and returns on average assets of 1.75%
and 1.94%, for 2001 and 2000, respectively.

Results of Operations

The Company reported net income of $5,753,916, or $1.78 per
share, for the year ended December 31, 2002, which was an increase
of $339,512, or 6.27%, from the net income of $5,414,404, or $1.67
per share, for the year ended December 31, 2001. Primarily
responsible for this increase was the increase in net interest
income and a gain on sale of real estate. Net interest
income increased $444,322, or 3.34%, to $13,741,288 in 2002, from
$13,296,966 in 2001. This increase was the result of a decrease in
interest revenue of $1,766,469, which was exceeded, by the decrease
in interest expense of $2,210,791. Average interest-earning assets
of $325,721,244 yielded 5.56%, while average interest-bearing
liabilities of $225,183,449 paid 1.79% for an overall net interest
spread of 3.76%. A $267,844 gain on the sale of unimproved real
estate in Ocean View, Delaware contributed $164,403 net of tax, to
net income.

The Company's net income of $5,414,404, or $1.67 per share,
for the year ended December 31, 2001, 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 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 interest-bearing deposits and borrowed funds increased
from 3.06% to 3.19% for the same periods.

Noninterest income and noninterest expense increased by
33.04% and 4.40%, respectively, during 2002 compared to 2001.
Included in noninterest income for 2002 is a $267,844 gain on the
sale of an unimproved property in Ocean View, Delaware. Without
that gain, the increase in noninterest income from 2001 to 2002
would be 12.44%. Noninterest income and noninterest expense
increased by 17.83% and 5.45%, respectively, during 2001 compared
to 2000.

The Company reported net income of $1,441,829 or $.45 per
share, for the quarter ended December 31, 2002, which was an
increase of $276,658, or 23.75%, from the net income of $1,165,144,
or $.36 per share, for the quarter ended December 31, 2001.
Primarily responsible was the increase in quarterly net interest
income to $3,392,428 in fourth quarter 2002 from $3,253,986 in
fourth quarter 2001. Management attributes this $138,442 or 4.25%
increase in net interest income to the Company's focus on
maintaining a profitable net interest spread. Throughout 2002,
Management responded to market conditions by lowering deposit
rates, while attempting to control rate reductions in the loan
portfolio. Increased volume of federal funds sold and investment
securities also contributed to the increase in net income.

The Company's net income of $1,165,144 or $.36 per share, for
the quarter ended December 31, 2001, was a decrease of $273,045, or
18.99%, from the net income of $1,438,189, or $.44 per share, for
the quarter ended December 31, 2000. Primarily responsible was the
decrease in quarterly net interest income from $3,532,645 in fourth
quarter 2000 to $3,253,986 in fourth quarter 2001. Management
attributes this $278,659 or 7.89% decline in net interest income to
several factors related to the national economic environment.
Decreased yields on federal 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 deposits. In mid-fourth quarter, they lowered rates 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 2002 was 4.32% compared to 4.74% for 2001 and
5.21% for 2000. Because most of the Bank's loans are written with
a demand feature, the income of the Bank 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.

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 $165,293,144, $170,116,213,
and $161,796,946 during 2002, 2001, and 2000, respectively, which
constituted 50.75%, 59.04%, and 60.22% of average interest-earning
assets for the periods. The Company's loan to deposit ratio was
53.67%, 60.73%, and 72.68% at December 31, 2002, 2001, and 2000,
respectively. Average loans to average deposits were 58.01%,
68.70%, and 68.94% for the same periods. The decrease in the loan
to deposit ratio over the periods presented is primarily
attributable to dramatic increases in deposit volume.

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 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, 2002, 2001 and 2000,
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, 2002.

As of December 31, 2002, $160,567,318 or 97.90%, 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, 2002, 2001,
and 2000, respectively.

2002 2001 2000

Construction loans 4,746,954 6,456,910 2,964,536
Other loan commitments 12,041,437 8,639,337 3,192,350
Standby letters of credit 1,726,127 3,243,063 1,412,552
Total 18,514,518 18,339,310 7,569,438

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 evaluate loan portfolio risk for the purpose of
establishing an adequate allowance. The Bank's target level for
its allowance as a percentage of gross loans is between 1.30% and
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,
2002, 2001, and 2000, the respective allowances for loan losses
were 1.33%, 1.30%, and 1.28% of outstanding loans.

The provision for loan losses was $25,000 in 2002, an
increase of $2,015 from the $22,985 provision in 2001. After the
current year's provision, the Bank's allowance for loan loss
remained within its target range. The 2001 provision represented 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.

Allocation of Allowance for Loan Losses
2002 2001 2000

Commercial 139,005 6.37% 218,414 9.95% 167,626 7.64%
Real estate, including
construction 864,111 39.62 913,449 41.60 810,790 36.98
Consumer 112,875 5.17 174,671 7.94 174,003 7.94
General 1,065,144 48.84 889,388 40.51 1,040,336 47.44
Total 2,181,135 100.00% 2,195,922 100.00% 2,192,755 100.00%

Allowance for Loan Losses
2002 2001 2000

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

Loan losses:
Commercial 6,816 3,741 56,193
Mortgages - - -
Consumer 41,954 20,983 10,907
Total loan losses 48,770 24,724 67,100

Recoveries on loans previously
charged off
Commercial 1,000 4,056 2,386
Consumer 7,983 850 1,358
Total loan recoveries 8,983 4,906 3,744

Net loan losses 39,787 19,818 63,356
Provision for loan losses
charged to expense 25,000 22,985 174,080

Provision related to
commitments - - -
Balance at end
of year 2,181,135 2,195,922 2,192,755

Allowance for loan losses to loans
outstanding at end of year 1.33% 1.30% 1.28%

Net charge-offs to average loans 0.02% 0.01% 0.04%

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 one loan with a balance of
$2,222 on which the accrual of interest had been discontinued as of
December 31, 2002. The Company had no nonperforming loans at
December 31, 2001, or 2000.

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, 2002, 2001, or 2000. 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, 2002, 2001, or 2000.

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 61.71% of average deposits for 2002,
compared to 53.08% and 50.93% for 2001 and 2000, respectively.

As of December 31, 2002, $55,013,475, or 45.55% 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, 2002 were
$18,000,000. At December 31, 2001, and 2000, 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, 2002

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 54,821,617 - - - 54,821,617
Interest-bearing
deposits - 591,518 840,687 - 1,432,205
Investment debt
securities 20,886,355 34,127,120 63,172,024 2,603,120 120,788,619
Loans 160,200,410 1,180,586 2,197,969 426,847 164,005,812
Total earning assets 235,908,382 35,899,224 66,210,680 3,029,967 341,048,253

Liabilities
Interest-bearing
deposits
Money market 46,942,638 - - - 46,942,638
Savings and NOW 102,524,118 - - - 102,524,118
Certificates
100,000 and over 4,905,349 6,902,006 4,034,731 - 15,842,086
Certificates under
100,000 23,328,068 29,107,455 10,461,560 - 62,897,083
Securities sold under
agreements to
repurchase 4,029,100 - - - 4,029,100
Note payable 4,358 13,468 82,996 98,090 198,912
Total interest-bearing
liabilities 181,733,631 36,022,929 14,579,287 98,090 232,433,937

Period gap 54,174,751 (123,705) 51,631,393 2,931,877 108,614,316
Cumulative gap 54,174,751 54,051,046 105,682,439 108,614,316

Ratio of cumulative gap
to total earning assets 15.88% 15.85% 30.99% 31.85%

Investment Securities Maturity Distribution and Yields

December 31, 2002 December 31, 2001 December 31, 2000
Amount Percent Amount Percent Amount Percent

US Treasury
One year or less 50,003,569 2.87% 31,483,510 4.81% 29,941,815 5.34%
Over one through
five years 40,065,506 2.58% 26,563,088 3.96% 17,480,762 6.36%
Over ten years 2,603,120 7.28% 2,336,880 7.28% 2,428,120 7.28%
Total U.S. Treasury 92,672,195 2.87% 60,383,478 4.52% 49,850,697 5.78%

U.S. Government Agencies
One year or less 1,000,000 4.49% 5,900,000 5.68% 8,750,177 6.35%
Over one through
five years 18,902,908 3.30% 13,505,013 4.84% 9,900,000 6.46%
Total U. S. Government
Agencies 19,902,908 3.35% 19,405,013 5.09% 18,650,177 6.41%

State, county, and municipal
One year or less 4,009,906 2.45% 4,138,392 5.54% 6,641,744 5.67%
Over one through
five years 4,203,610 2.34% 2,808,149 5.23% 3,559,060 6.12%
Over five through
ten years - - -
Over ten years - - -
Total state, county,
and municipal 8,213,516 2.39% 6,946,541 5.43% 10,200,804 5.83%
Total debt securities
One year or less 55,013,475 2.87% 41,521,902 5.01% 45,333,736 5.59%
Over one through
five years 63,172,024 2.78% 42,876,250 4.32% 30,939,822 6.36%
Over five through
ten years - - -
Over ten years 2,603,120 7.28% 2,336,880 7.28% 2,428,120 7.28%
Total debt securities120,788,619 2.92% 86,735,032 4.73% 78,701,678 5.94%

Equity securities 1,783,680 2.51% 1,637,219 3.03% 1,624,814 2.38%

Total securities 122,572,299 2.91% 88,372,251 4.70% 80,326,492 5.87%

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities increased $29,103,756,
or 14.84%, from $196,079,693 in 2001, to $225,183,449 in 2002.
Average interest-bearing deposits increased $28,291,212, or 14.76%,
from $191,730,858 in 2001, to $220,022,070 in 2002, while average
demand deposits increased $9,036,119, or 16.17% from $55,879,394 in
2001, to $64,915,513 in 2002. At December 31, 2002, total deposits
were $301,495,466, compared to $274,149,181 at December 31, 2001,
an increase of 9.97%.

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%.

The following table sets forth the deposits of the Company by
category as of December 31, 2002, 2001, and 2000,
respectively.

December 31,
2002 2001 2000
Percent of Percent of Percent of
Amount deposits Amount deposits Amount deposits

Demand deposits 73,289,541 24.31% 60,508,663 22.07% 49,674,943 21.42%
NOW accounts 57,009,892 18.91% 45,639,869 16.65% 39,910,464 17.21%
Money market 46,942,638 15.57% 40,739,491 14.86% 34,896,077 15.04%
Savings accounts 45,514,226 15.10% 38,306,292 13.97% 34,057,361 14.68%
Time deposits less
than $100,000 62,897,083 20.86% 68,212,949 24.88% 58,206,911 25.10%
Time deposits of
$100,000 or more 15,842,086 5.25% 20,741,917 7.57% 15,180,436 6.55%
Total deposits 301,495,466 100.00% 274,149,181 100.00% 231,926,192 100.00%

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 $32,246,166 and $36,661,508
during 2002 and 2001, respectively. 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, 2002, is shown in the following
table.

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

Certificates of deposit
of $100,000 or more 4,905,349 2,020,648 4,881,358 4,034,731 15,842,086

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 2002 increased $429,671, or 33.04%
over the previous year. Of this, $267,844 was the gain on the sale
of unimproved real estate in Ocean View, Delaware. Service charges
on deposit accounts contributed $140,195 of the increase due to fee
increases implemented in May and the growth of deposits.
Noninterest income for 2001 increased $196,777, or 17.83% over the
previous year. Of this, a $128,262 increase in service charges on
deposit accounts resulted from the growth of deposit accounts.
VISA Check Card fees increased by $29,761 due to increased use.

The following table presents the principal components of
noninterest income for the years ended December 31, 2002, 2001, and
2000, respectively.

Noninterest Income
2002 2001 2000

Service charges on deposit accounts 993,302 853,107 724,845
Other noninterest revenue 469,160 447,528 379,013
Gain on sale of real estate 267,844 ____-___ ____-___
Total noninterest income 1,730,306 1,300,635 1,103,858

Noninterest income as a
percentage of average
total assets 0.50% 0.42% 0.38%

Noninterest Expense

Noninterest expense increased by $274,193, or 4.40%, from
2001 to 2002. Increased personnel costs of $86,181 were due to
annual raises, increased 401(k) expense, and increased costs of
group insurance. Occupancy expense increased by $63,152 due to the
Bank's adoption in 2001 of accrual basis accounting for real
property taxes, which were previously recorded on the cash basis.
Furniture and equipment expense decreased $95,517 largely due to
improved accounting classification of software maintenance costs.
Of the $220,377 increase in other operating expense, $138,091 was
attributable to increased amortization expense resulting from the
Bank's 2001 data processing system upgrades, and improved
accounting for software maintenance costs.

Noninterest expense increased by $321,781, or 5.45%, from
2000 to 2001. Increased personnel costs of $297,806 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.

The following table presents the principal components of
noninterest expense for the years ended December 31, 2002, 2001 and
2000, respectively.

Noninterest Expense
2002 2001 2000

Compensation and related expenses 3,622,841 3,536,660 3,238,854
Occupancy expense 455,651 392,499 425,767
Furniture and equipment expense 578,779 674,296 671,040
Advertising 154,382 144,983 132,784
Business and product development 64,448 60,189 57,055
Computer software amortization 115,453 68,503 62,005
Computer software maintenance 91,141 - -
Courier service 96,120 96,726 99,466
Deposit insurance 47,800 43,413 35,157
Director fees 80,600 83,025 72,575
Dues, donations, and subscriptions 81,171 80,024 107,114
Freight 62,294 57,806 62,411
Liability insurance 60,042 44,608 61,649
Postage 181,567 155,002 145,325
Professional fees 72,399 52,400 62,660
Stationery and supplies 158,965 252,686 261,733
Telephone 130,172 100,455 82,256
Teller machine fees 182,487 154,289 123,398
Miscellaneous 263,868 228,423 202,957
Total noninterest expense 6,500,180 6,225,987 5,904,206

Noninterest expense as a percentage
of average total assets 1.86% 2.01% 2.04%

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, 2002, the Company and the Bank exceeded
their regulatory capital ratios, as set forth in the following
table.

Analysis of Capital
Required Consolidated
Maryland Delaware
Minimums Company Bank Bank

2002
Total risk-based capital ratio 8.0% 40.7% 38.9%
Tier I risk-based capital ratio 4.0% 39.4% 37.7%
Tier I leverage ratio 3.0% 15.9% 15.1%

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%

Accounting Rule Changes

FASB Statement No. 143, Accounting for Asset Retirement
Obligations applies to legal obligations associated with 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.

FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The
statement amends various earlier pronouncements addressing
accounting for impairment of long-lived assets or disposal of long-
lived assets or a business segment. It clarifies that a business
segment treated as a discontinued operation should be evaluated for
recognition of an impairment loss. The statement also amends
Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The
provisions of this Statement were effective for years beginning
after December 15, 2001.

FASB Statement No. 145, Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections rescinds the pronouncements referred to in the title
and amends FASB Statement No. 13, Accounting for Leases, to
eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Statement also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of this statement have
various effective dates but the latest effective date is for fiscal
years beginning after May 15, 2002.

FASB Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs incurred
in a Restructuring)." This Statement requires that a liability
for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when a
liability is incurred, recognizing that a company's commitment to
an exit plan may not create a liability. The provisions of this
statement are effective for exit or disposal activities initiated
after December 31, 2002.

FASB Statement No. 147, Acquisitions of Certain Financial
Institutions addresses guidance on accounting for the acquisition
of a financial institution and applies to all acquisitions except
those between two or more mutual enterprises. The Statement
requires that the excess of fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets
acquired in a business combination represents goodwill that should
be accounted for under FASB Statement No. 142, Goodwill and Other
Intangible Assets. The effective date for the provisions of this
statement is October 1, 2002.

FASB Statement No. 148, Accounting for Stock-based Compensation
- - Transition and Disclosure amends FASB Statement No. 123,
Accounting for Stock-based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation.
In addition, this Statement amends the disclosure requirements
of Statement 123 to require prominent disclosure in both annual
and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method
used on reported results. The effective dates of parts of the
Statement are for years ending after December 15, 2002 and
parts for years beginning after December 15, 2002.

Impact of Inflation

Unlike most industrial companies, the assets and liabilities
of financial institutions such as the Company and Bank 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 21 of the Company's Annual Report to Shareholders for the
year ended December 31, 2002, 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 page 4 of
the Company's Proxy Statement for Annual Meeting of Shareholders To
Be Held on May 7, 2003, 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 7, 2003, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and
Management

In response to this item, the information included on page 5 of
the Company's Proxy Statement for Annual Meeting of Shareholders
to be held May 7, 2003, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

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 May 7, 2003, is incorporated herein by reference.

Item 14. Controls and Procedures

Evaluation of disclosure controls and procedures
Within the ninety days prior to the date of this report, the
Company's management performed an evaluation of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures and its internal controls and procedures for financial
reporting. Disclosure Controls are procedures that are designed to
ensure that information required to be disclosed in the Company's
publicly filed reports is reported in a timely manner. As part of
these controls, Management reviews information gathered through
systems developed for that purpose to determine the nature of
required disclosure.

Internal controls are procedures designed to provide management
with reasonable assurance that assets are safeguarded, and that
transactions are properly authorized, executed, and recorded to
permit the preparation of financial statements in accordance with
generally accepted accounting principles. Because of inherent
limitations in any internal controls, errors or irregularities may
occur and not be detected. The projection of an evaluation of
controls to future periods is subject to the risk that procedures
may become inadequate due to changes in conditions including the
degree of compliance with procedures.

The Chief Executive Officer and the Treasurer of the Company
have concluded, based on the evaluation of disclosure controls and
internal controls that the financial information and disclosures
included in periodic SEC filings and the Company's financial
statements are fairly presented in conformity with generally
accepted accounting principles.

Changes in Internal Controls
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
internal controls, including corrective actions with regard to
significant deficiencies and material weaknesses.

PART IV

Item 15. 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, 2002.

(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter
of the year ended December 31, 2002.

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.
Reese F. Cropper, Jr.
Chief Executive Officer
Chairman of the Board of Directors

Date: By:/s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer

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.
James R. Bergey, Jr., Director

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

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

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

Date: By:/s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chief Executive Officer
Chairman of the Board of Directors

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

Date: By:/s/ Hale Harrison
Hale Harrison, Director

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

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

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

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

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

Date: By:/s/ Raymond M. Thompson
Raymond M. Thompson, President and Director

Certification of Principal Executive Officer and Principal
Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)

We, the undersigned, certify that to the best of our knowledge,
based upon a review of the Annual Report on Form 10-K for the
period ended December 31, 2002 of the Registrant (the "Report"):

(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and

(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Registrant.

CALVIN B. TAYLOR BANKSHARES, INC.
(Registrant)

Date: By:/s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)

Date: By:/s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)

Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Reese F. Cropper, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Calvin B.
Taylor Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the quarterly period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of the annual report
(the "Evaluation Date"); and
a. presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in the annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.

CALVIN B. TAYLOR BANKSHARES, INC.
(Registrant)

Date: By:/s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)

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

I, Jennifer G. Hawkins, certify that:

1. I have reviewed this annual report on Form 10-K of
Calvin B. Taylor Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the quarterly period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of the annual report
(the "Evaluation Date"); and
c. presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in the annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies
and material weaknesses.

CALVIN B. TAYLOR BANKSHARES, INC.
(Registrant)

Date: By:/s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)

EXHIBIT 13

ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2002

Calvin B. Taylor Bankshares, Inc.
and Subsidiary

Financial Statements

December 31, 2002

Calvin B. Taylor Bankshares, Inc.
and Subsidiary

Table of Contents

Page

Report of Independent Auditor 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 Subsidiary
Berlin, Maryland

We have audited the accompanying consolidated balance sheets
of Calvin B. Taylor Bankshares, Inc. and Subsidiary as of December
31, 2002, 2001, and 2000, 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
Subsidiary as of December 31, 2002, 2001, and 2000, and the
results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally
accepted in the United States of America.

/s/ Rowles & Company, LLP

Salisbury, Maryland
January 16, 2003

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

December 31,
2002 2001 2000
Assets

Cash and due from banks 21,051,412 18,397,266 13,332,279
Federal funds sold 54,821,617 54,389,656 18,167,527
Interest-bearing deposits 1,432,205 879,000 784,000
Investment securities available
for sale 8,390,550 3,974,099 4,052,934
Investment securities held to
maturity (approximate market
value of $115,470,092,
$85,604,080, and $76,610,933) 114,181,749 84,398,152 76,273,558
Loans, less allowance for loan
losses of $2,181,135, $2,195,922,
and $2,192,755 161,824,677 166,501,512 168,571,199
Premises and equipment 5,745,842 5,895,275 5,620,478
Accrued interest income 1,405,587 1,753,816 1,948,199
Computer software 283,303 355,549 99,574
Deferred income taxes - 134,639 107,227
Other assets 106,004 145,603 91,036
369,242,946 336,824,567 289,048,011

Liabilities and Stockholders' Equity

Deposits
Noninterest-bearing 73,289,541 60,508,663 49,674,943
Interest-bearing 228,205,925 213,640,518 182,251,249
301,495,466 274,149,181 231,926,192
Securities sold under agreements
to repurchase 4,029,100 4,555,323 3,113,671
Pending purchases of investment
securities 2,990,830 - -
Accrued interest payable 243,468 529,348 503,519
Accrued income taxes 106,514 2,298 103,818
Note payable 198,912 215,702 231,517
Deferred income taxes 70,156 - -
Other liabilities 93,214 130,145 84,085
309,227,660 279,581,997 235,962,802

Stockholders' equity
Common stock, par value $1 per
share; authorized 10,000,000
shares; issued and outstanding
3,240,000 shares 3,240,000 3,240,000 3,240,000
Additional paid-in capital 17,290,000 17,290,000 17,290,000
Retained earnings 38,778,018 36,274,102 32,058,498
59,318,018 56,804,102 52,588,498
Accumulated other comprehensive
income 697,268 438,468 496,711
60,015,286 57,242,570 53,085,209
369,242,946 336,824,567 289,048,011

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

2

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

Years Ended December 31,
2002 2001 2000

Interest and dividend revenue
Loans, including fees 13,095,218 14,179,181 13,480,035
U. S. Treasury and government
agency securities 3,456,932 3,540,767 3,761,021
State and municipal securities 224,662 332,035 410,891
Federal funds sold 922,620 1,412,927 1,716,303
Time certificates of deposit 41,661 46,354 46,110
Equity securities 37,792 34,090 25,676
Total interest and dividend
revenue 17,778,885 19,545,354 19,440,036

Interest expense
Deposit interest 3,996,749 6,173,101 5,822,224
Other 40,848 75,287 37,807
Total interest expense 4,037,597 6,248,388 5,860,031
Net interest income 13,741,288 13,296,966 13,580,005
Provision for loan losses 25,000 22,985 174,080
Net interest income after
provision for loan losses 13,716,288 13,273,981 13,405,925
Other operating revenue
Service charges on deposit
accounts 993,302 853,107 724,845
Other noninterest revenue 469,160 447,528 379,013
Gain on sale of real estate 267,844 - -
Total other operating revenue 1,730,306 1,300,635 1,103,858
Other expenses
Salaries 2,994,325 2,943,241 2,723,713
Employee benefits 628,516 593,419 515,141
Occupancy 455,651 392,499 425,767
Furniture and equipment 578,779 674,296 671,040
Other operating 1,842,909 1,622,532 1,568,545
Total other expenses 6,500,180 6,225,987 5,904,206

Income before income taxes 8,946,414 8,348,629 8,605,577
Income taxes 3,192,498 2,934,225 2,981,019
Net income 5,753,916 5,414,404 5,624,558

Earnings per common share $1.78 $1.67 $1.74

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

3

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity

Accumulated
other
Common stock Additional Retained comprehensive Comprehensive
Shares Par value Paid-in capitalearnings income income

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 loss 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
Net income - - - 5,753,916 5,753,916
Unrealized gain on
investment securities
available for sale
net of income taxes - - - - 258,800 258,800
Comprehensive income 6,012,716
Cash dividend,
$1.00 per share - - - (3,240,000) -

Balance, December 31, 2002
3,240,000 3,240,000 17,290,000 38,788,018 697,268

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

4

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Cash Flows

Years Ended December 31,
2002 2001 2000

Cash flows from operating activities
Interest received 17,961,046 19,541,166 19,291,291
Fees and commissions received 1,462,551 1,361,593 1,080,633
Interest paid (4,323,477) (6,222,559) (5,780,554)
Cash paid to suppliers and
employees (5,909,413) (5,731,055) (5,371,499)
Income taxes paid (2,997,807) (3,075,025) (2,954,290)
6,192,900 5,874,120 6,265,581

Cash flows from investing activities
Certificates of deposits purchased,
net of maturities (553,205) (95,000) 199,000
Purchase of investments
available for sale (3,994,520) - -
Proceeds from maturities of
investments held to maturity 91,445,000 57,857,000 49,458,000
Purchase of investments held
to maturity (118,071,995) (65,799,078) (35,978,105)
Loans made, net of principal
collected 4,651,835 2,046,702 (16,744,775)
Proceeds from sale of premises
and equipment 503,160 17,000 423
Purchases of and deposits on
premises, equipment, and
computer software (650,339) (1,063,655) (443,405)
(26,670,064) (7,037,031) (3,508,862)

Cash flows from financing activities
Net increase (decrease) in
Time deposits (10,215,697) 15,567,519 3,256,887
Other deposits 37,561,982 26,655,470 (10,056,547)
Securities sold under
agreements to repurchase (526,223) 1,441,652 3,113,671
Payments on note payable (16,791) (15,814) (18,483)
Dividends paid (3,240,000) (1,198,800) (1,976,400)
23,563,271 42,450,027 (5,680,872)

Net increase (decrease) in cash
and cash equivalents 3,086,107 41,287,116 (2,924,153)

Cash and cash equivalents
at beginning of year 72,786,922 31,499,806 34,423,959
Cash and cash equivalents
at end of year 75,873,029 72,786,922 31,499,806

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

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
(Continued)

Years Ended December 31,
2002 2001 2000

Reconciliation of net income to net
cash provided by operating
activities
Net income 5,753,916 5,414,404 5,624,558

Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 629,738 528,247 498,612
Provision for loan losses 25,000 22,985 174,080
Deferred income taxes 41,961 9,234 (20,599)
Amortization of premiums and
accretion of discounts, net (166,068) (198,571) (129,281)
(Gain) loss on disposition
of assets (260,880) (12,365) 1,564
Decrease (increase) in
Accrued interest receivable 348,229 194,383 (19,464)
Other assets (8,914) (54,566) (73,960)
Increase (decrease) in
Accrued interest payable (285,880) 25,829 79,477
Accrued income taxes 152,730 (101,520) 47,328
Other liabilities (36,932) 46,060 83,266
6,192,900 5,874,120 6,265,581

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

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
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 subsidiary, Calvin B. Taylor Banking Company,
is a financial institution operating primarily in Worcester
County, Maryland and Sussex County, Delaware. The Bank
offers 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, telephone and internet banking,
debit cards, safe deposit boxes, money orders and travelers
cheques. The Bank also offers 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
subsidiary, Calvin B. Taylor Banking Company. 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 and interest-bearing deposits except for
time deposits. Federal funds are purchased and sold for one-
day periods.

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

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 Subsidiary
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, 2002, the
allowance included approximately $1,065,144 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 that 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 $59,942,898 for
2002, $53,138,449 for 2001, and $27,192,359 for 2000.

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 Subsidiary
Notes to Consolidated Financial Statements

3. Investment Securities

Included in investment securities are purchase commitments
entered into before December 31, 2002, for settlement after
December 31, 2002. The obligation for these commitments is
recorded as pending purchases of investment securities.
Investment securities are summarized as follows:

Amortized Unrealized Unrealized Market
cost gains losses value

December 31, 2002
Available for sale
U.S. Treasury 5,988,858 618,012 - 6,606,870
Equity 1,265,708 552,416 34,444 1,783,680
7,254,566 1,170,428 34,444 8,390,550
Held to maturity
U.S. Treasury 86,065,325 992,655 - 87,057,980
U.S. Government agency 19,902,908 211,063 - 20,113,971
State and municipal 8,213,516 85,275 650 8,298,141
114,181,749 1,288,993 650 115,470,092

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 agency 19,405,013 230,276 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 agency 18,650,177 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

9

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
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, 2002 December 31, 2001 December 31, 2000
Amortized Market Amortized Market Amortized Market
cost value cost value cost value

Available for sale due
After one year
through five years 3,994,528 4,003,750 - - - -
After ten years 1,994,330 2,603,120 1,994,041 2,336,880 1,993,753 2,428,120
5,988,858 6,606,870 1,994,041 2,336,880 1,993,753 2,428,120
Held to maturity due
In one year 55,013,475 55,394,968 41,521,902 42,125,457 45,333,736 45,313,048
After one year
through five years 59,168,274 60,075,124 42,876,250 43,478,623 30,939,822 31,297,885
114,181,749 115,470,092 84,398,152 85,604,080 76,273,558 76,610,933

Pledged securities 20,868,000 21,248,011 21,058,134 21,517,135 19,985,861 20,097,350

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 $18,000,000 as of December 31,
2002, and $19,000,000 as of December 31, 2001, and 2000.

5. Loans and Allowance for Loan losses

Major classifications of loans are as follows:

2002 2001 2000

Commercial 12,765,723 15,341,122 15,588,946
Mortgage 139,354,241 146,258,549 148,468,890
Construction 8,447,354 2,117,685 1,540,376
Consumer 3,438,494 4,980,078 5,165,742
164,005,812 168,697,434 170,763,954
Allowance for loan losses 2,181,135 2,195,922 2,192,755
Loans, net 161,824,677 166,501,512 168,571,199

10

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

5. Loans and Allowance for Loan losses (Continued)

The rate repricing distribution of the loan portfolio
follows:

2002 2001 2000

Immediately 160,567,318 164,098,147 165,596,389
Within one year 813,678 1,728,296 425,689
Over one to five years 2,197,969 2,648,073 4,114,779
Over five years 426,847 222,918 627,097
164,005,812 168,697,434 170,763,954

Outstanding loan commitments, lines of credit, and letters of
credit are as follows:

2002 2001 2000

Loan commitments and lines of credit
Construction and land development10,557,644 6,456,910 2,964,536
Other 11,876,437 8,639,337 3,192,350
22,434,081 15,096,247 6,156,886

Standby letters of credit
1,726,127 3,243,063 1,412,552

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 loan 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 Subsidiary
Notes to Consolidated Financial Statements

5. Loans and Allowance for Loan losses (Continued)

Transactions in the allowance for loan losses were as
follows:

2002 2001 2000

Beginning balance 2,195,922 2,192,755 2,082,031
Provision charged to operations 25,000 22,985 174,080
Recoveries 8,983 4,906 3,744
2,229,905 2,220,646 2,259,855
Loans charged off 48,770 24,724 67,100
Ending balance 2,181,135 2,195,922 2,192,755

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

December 31,
2002 2001 2000

Commercial 17,370 122,420 39,576
Mortgage 250,206 343,136 263,237
Consumer 15,280 50,883 18,296
282,856 516,439 321,109

Management has identified no impaired loans at December
31, 2002, 2001, and 2000. Accrual of interest had been
discontinued on one loan with a balance of $2,222 at December 31,
2002. There were no non-accruing loans at December 31, 2001 and
2000.

6. Premises and Equipment

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

Estimated useful life 2002 2001 2000

Land 1,659,793 1,891,950 1,891,950
Premises 5 - 50 years 5,028,225 4,826,954 4,645,138
Furniture and
equipment 5 - 40 years 3,326,082 3,652,244 3,742,681
Construction in progress 210,583 - -
10,224,683 10,371,148 10,279,769
Accumulated depreciation 4,478,841 4,475,873 4,659,291
Net premises and equipment 5,745,842 5,895,275 5,620,478

Depreciation expense 514,285 459,744 436,608

Calvin B. Taylor Banking Company has entered into a
contract to construct a building expansion at its Berlin office.
The amount of the contract is $1,473,877.

12

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

7. Deposits

Major classifications of interest-bearing deposits are as
follows:

2002 2001 2000

Money market 46,942,638 40,739,491 34,896,077
Savings and NOW 102,524,118 83,946,161 73,967,825
Other time 78,739,169 88,954,866 73,387,347
228,205,925 213,640,518 182,251,249

The rate repricing distribution of other time deposits
follows:

Three months or less 28,235,099 28,071,706 21,063,581
Over three through twelve months 36,006,763 48,240,152 35,778,555
Over one through two years 14,497,307 12,643,008 16,545,211
78,739,169 88,954,866 73,387,347

Included in other time deposits are certificates of
deposit of $100,000 or more as follows:

Amount outstanding 15,842,086 20,741,917 15,180,436
Interest expense 597,603 987,329 680,474

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.

2002 2001 2000

Maximum month-end amount
outstanding 6,531,215 5,383,038 4,557,860
Average amount outstanding 4,957,151 4,125,782 1,610,688
Average rate paid during the year .57% 1.50% 1.45%
Investment securities underlying
the agreements at year end
Carrying value 15,994,905 13,991,479 13,988,545
Estimated fair value 16,306,570 14,327,220 14,105,150

13

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

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:

2003 17,826
2004 18,925
2005 20,092
2006 21,332
2007 22,647
Remaining years 98,090
198,912

10. Profit Sharing Plan

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

The total cost of the profit sharing plan for 2002, 2001,
and 2000, were $146,568, $140,620, and $119,307, respectively.

11. Other Operating Expenses

The components of other operating expenses follow:

2002 2001 2000

Advertising 154,382 144,983 132,784
Business and product development 64,448 60,189 57,055
Computer software amortization 115,453 68,503 62,005
Computer software maintenance
contracts 91,141 - -
Courier service 96,120 96,726 99,466
Deposit insurance 47,800 43,413 35,157
Director fees 80,600 83,025 72,575
Dues, donations, and subscriptions 81,171 80,024 107,114
Freight 62,294 57,806 62,411
Liability insurance 60,042 44,608 61,649
Postage 181,567 155,002 145,325
Professional fees 72,399 52,400 62,660
Stationery and supplies 158,965 252,686 261,733
Telephone 130,172 100,455 82,256
ATM fees 182,487 154,289 123,398
Miscellaneous 263,868 228,423 202,957
1,842,909 1,622,532 1,568,545

14

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

12. Income Taxes

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

2002 2001 2000

Current
Federal 2,772,796 2,598,069 2,674,450
State 377,740 326,922 327,168
3,150,536 2,924,991 3,001,618
Deferred 41,962 9,234 (20,599)
3,192,498 2,934,225 2,981,019

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

2002 2001 2000

Provision for loan losses 2,656 (754) (40,495)
Non-accrual loan interest (43) - -
Depreciation 32,334 5,317 13,987
Discount accretion 3,191 412 (1,656)
Health insurance premium deposits - - 27
Organization costs 3,824 4,259 7,538
41,962 9,234 (20,599)

The components of the net deferred tax asset (liability)
are as follows:

Deferred tax asset
Allowance for loan losses 601,123 603,779 603,025
Non-accrual loan interest 43 - -
Organization costs 1,517 5,341 9,600
602,683 609,120 612,625

Deferred tax liabilities
Depreciation 220,601 188,267 182,950
Discount accretion 13,523 10,332 9,920
Unrealized gain on securities
available for sale 438,715 275,882 312,528
672,839 474,481 505,398

Net deferred tax asset (liability) (70,156) 134,639 107,227

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 (1.1) (1.5) (1.9)
State income taxes net of federal
income tax benefit 2.8 2.6 2.5
35.7% 35.1% 34.6%

15

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
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.

2002 2001 2000

Beginning balance 11,079,167 12,293,244 9,231,028
Advances 6,034,153 4,833,136 5,356,617
Other increases - - 1,272,750
17,113,320 17,126,380 15,860,395
Repayments 5,884,153 5,911,658 3,567,151
Other decreases 95,208 135,555 -
Ending balance 11,133,959 11,079,165 12,293,244

Officers, directors and employees are depositors of the
Bank. They receive the same deposit rates and terms as other
customers with similar deposits. As of December 31, 2002,
the individual deposits in excess of $100,000 of executive
officers, directors and their related interests represented
less than 2.5% of total deposits.

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
$1,235, $2,003, and $1,805 during the years ended December
31, 2002, 2001 and 2000.

14. Lease Commitments

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

Minimum
Period rentals

2003 15,000
2004 15,000
2005 15,000
2006 15,000
2007 15,000
Remaining years 25,000
100,000

16

Calvin B. Taylor Bankshares, Inc.
and Subsidiary
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, 2002 December 31, 2001 December 31, 2000
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value

Financial assets
Cash and due from
banks 21,051,412 21,163,525 18,397,266 18,510,175 13,332,279 13,479,427
Interest-bearing
deposits 1,432,205 1,469,452 879,000 906,928 784,000 784,116
Investment
securities 122,572,299 123,860,642 88,372,251 89,578,179 80,326,492 80,663,867
Loans, net 161,824,677 161,892,242 166,501,512 166,595,116 168,571,199 168,610,107

Financial liabilities
Interest-bearing
deposits 228,205,925 228,558,735 213,640,518 214,497,142 182,251,249 182,263,290
Note payable 198,912 193,045 215,702 206,453 231,517 210,648

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 Subsidiary
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
(in thousands) Actual capital adequacy capitalized
Amount Ratio Amount Ratio Amount Ratio

December 31, 2002
Total capital
(to risk weighted assets) 61,255 40.7% 12,032 8.0% 15,040 10.0%

Tier 1 capital
(to risk-weighted assets) 59,318 35.6% 6,016 4.0% 9,024 6.0%

Tier 1 capital
(to average fourth quarter
assets) 59,318 15.9% 14,902 4.0% 18,628 5.0%

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%

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
that should change the classification of the capital
adequacy.

18

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

17. Parent Company Financial Information

December 31,
Balance Sheets 2002 2001 2000

Assets
Cash and due from banks 353,604 57,513 9,110
Interest-bearing deposits - 1,512,125 75,505
Investment securities
available for sale 1,783,680 1,637,219 1,624,814
Investment securities
held to maturity 499,230 - -
Investment in subsidiary bank 56,226,822 52,445,405 49,806,120
Premises and equipment 1,375,315 1,640,946 1,609,939
Other assets 3,630 55,688 22,445
Total assets 60,242,281 57,348,896 53,147,933

Liabilities and Stockholders' Equity
Liabilities
Deferred income taxes 118,136 61,492 62,724
Other liabilities 108,859 44,834 -
226,995 106,326 62,724

Stockholders' equity
Common stock 3,240,000 3,240,000 3,240,000
Additional paid-in capital 17,290,000 17,290,000 17,290,000
Retained earnings 38,788,018 36,274,102 32,058,498
Accumulated other comprehensive
income 697,268 438,468 496,711
Total stockholders' equity 60,015,286 57,242,570 53,085,209

Total liabilities and
stockholders' equity 60,242,281 57,348,896 53,147,933

Years Ended December 31,
Statements of Income 2002 2001 2000

Interest revenue 37,066 25,816 3,690
Dividend revenue 37,792 34,090 25,676
Dividends from subsidiary 1,944,000 2,698,800 2,076,400
Equity in undistributed income
of subsidiary 3,612,515 2,695,465 3,548,585
Gain on sale of real estate 267,844 - -
Rental income and other fees 2,748 2,700 2,700
5,901,965 5,456,871 5,657,051

Expenses
Occupancy 15,831 6,115 24,898
Furniture and equipment 2,014 1,968 1,904
Other 21,263 36,044 15,168
39,108 44,127 41,970

Income before income taxes 5,862,857 5,412,744 5,615,081
Income taxes (benefit) 108,941 (1,660) (9,477)

Net income 5,753,916 5,414,404 5,624,558

19

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

17. Parent Company Financial Information (Continued)

Years Ended December 31,
2002 2001 2000

Statements of Cash Flows

Cash flows from operating activities
Interest and dividends received 2,012,520 2,749,579 2,105,906
Rental payments received 24,348 35,700 2,700
Cash paid for operating expenses (27,234) (44,008) (19,969)
Income taxes refunded 1,727 22,445 18,101
2,011,361 2,763,716 2,106,738

Cash flows from investing activities
Certificates of deposit purchased,
net of maturities 1,500,000 (1,500,000) 100,000
Purchase of investments available
for sale - (15,767) (297,474)
Proceeds from maturities of
investments held to maturity 1,500,000 - -
Purchase of investments held
to maturity (1,987,395) - -
Proceeds from sale of premises
and equipment 500,000 - -
Purchase of premises and equipment - (64,126) -
1,512,605 (1,579,893) (197,474)

Cash flows from financing activities
Dividends paid (3,240,000) (1,198,800) (1,976,400)
Net increase (decrease) in cash 283,966 (14,977) (67,136)

Cash at beginning of year 69,638 85,615 151,751
Cash at end of year 353,604 69,638 84,615

Reconciliation of net income
to net cash provided by operating
activities
Net income 5,753,916 5,414,404 5,624,558
Adjustments to reconcile
net income to net cash used
in operating activities
Undistributed net income
of subsidiary (3,612,515) (2,695,465) (3,548,585)
Accretion of discount on
debt securities (11,835) - -
Depreciation 33,475 33,120 29,200
Gain on sale of assets (267,844) - -
Increase (decrease) in
deferred income taxes and
other liabilities 64,106 44,900 5,769
Decrease (increase) in
other assets 52,058 (33,243) (4,204)
2,011,361 2,763,716 2,106,738

20

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

18. Quarterly Results of Operations (Unaudited)

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

2002
Interest revenue 4,227,559 4,553,255 4,555,972 4,442,099
Interest expense 835,131 995,620 1,036,065 1,170,781
Net interest income 3,392,428 3,557,635 3,519,907 3,271,318
Provision for loan
losses 25,000 - - -
Net income 1,441,829 1,491,997 1,540,177 1,279,913
Comprehensive income 1,500,543 1,658,031 1,608,412 1,245,730
Earnings per share $0.45 $0.46 $0.47 $0.40

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

21