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 Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the fiscal year ended December 31, 2003

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 preceding 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 ]

Check if the registrant is an accelerated filer (as defined in Rule 12b-2
of the Act). [X]

The aggregate market value of the Common Stock held by non-affiliates of
the registrant on December 31, 2003, was $104,258,822. This calculation is
based upon the last price known to the registrant at which its Common
Stock was sold as of the last business day of the registrant's most
recently completed second fiscal quarter, June 30, 2003, which is $37.00
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 29, 2004, 3,227,966 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 12, 2004, is incorporated by reference in this Form 10-K in
Part III, Item 10, Item 11, Item 12, Item 13, and Item 14.

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 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,
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, 2003, the Bank employed 93 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 2004 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, 2003, the Company and the Bank were qualified as "well
capitalized." For further discussions, see "Item 7. Management's Discussion
and Analysis of Financial Condition and Results 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 Bank leases the land on which the East Berlin
branch is located. The locations are described as follows:

Office
Location Square Footage
Main Office, Maryland
24 North Main Street, Berlin, Maryland 21811 24,229
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
Office Location
Square Footage

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 the fiscal year for which this report is
filed.

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 29, 2004 there were approximately 1,013 holders of
record of the common stock and 3,227,966 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.
In 2003, the Board of Directors of the Company approved a plan to purchase
up to 10% of the Company's common stock. Common shares repurchased under
this plan are retired. As of December 31, 2003, 12,034 shares had been
repurchased and retired at an average cost of $35.98 per share.

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 $.60
per share in 2003, $1.00 per share in 2002, and $.37 per share in 2001.
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.

Item 6. Selected Financial Data
The following table presents selected financial data for the five
years ended December 31, 2003. Prior period per share data is restated to
reflect the 100% stock dividend paid in 2000.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results 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 2003 net income was $5,540,214 compared to
$5,753,916 for 2002, and $5,414,404 for 2001. The Company had a return on
average equity of 9.22% and return on average assets of 1.46% for 2003,
compared to returns on average equity of 9.83% and 9.54%, and returns on
average assets of 1.65% and 1.75%, for 2002 and 2001, respectively.

Results of Operations

The Company's net income of $5,540,214, or $1.71 per share, for the
year ended December 31, 2003, was a decrease of $213,702, or 3.71%, from
the net income of $5,753,916, or $1.78 per share, for the year ended
December 31, 2002. Primarily responsible for this decrease was the
$267,844 gain on the sale of unimproved real estate in Ocean View,
Delaware which contributed $164,403 net of tax, to 2002 net income.

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.

Noninterest income decreased by 9.62% during 2003 compared to 2002,
while noninterest expense increased by 1.87% during the same period.
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,
noninterest income would increase from 2002 to 2003 by 6.93%. Noninterest
income and noninterest expense increased by 33.04% and 4.40%,
respectively, during 2002 compared to 2001. Eliminating the gain on the
Ocean View property, noninterest income would have increased 12.44%.

The Company's net income of $1,308,544 or $.40 per share, for the
quarter ended December 31, 2003, was a decrease of $133,285, or 9.25%,
from the net income of $1,441,829, or $.45 per share, for the quarter
ended December 31, 2002. Eliminating the fourth quarter 2002 net gain of
$164,403 on the Ocean View property, net income would have increased
$31,118 or 2.15%.

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 $276,685, 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. Also, a $267,844 gain on the sale of unimproved
real estate in Ocean View, Delaware contributed $164,403 net of tax,
to net income in fourth quarter 2002.

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
2003 was 3.96% compared to 4.32% for 2002 and 4.74% for 2001. 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 $165,194,000, $165,293,144, and $170,116,213 during 2003, 2002, and
2001, respectively, which constituted 46.90%, 50.75%, and 59.04% of
average interest-earning assets for the periods. The Company's loan to
deposit ratio was 51.03%, 53.67%, and 60.73% at December 31, 2003, 2002,
and 2001, respectively. Average loans to average deposits were 52.55%,
58.01%, and 68.70% for the same periods. The decrease in the loan to
deposit ratio over the periods presented is primarily attributable to
continued 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, 2003, 2002, and 2001, 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, 2003.

As of December 31, 2003, $161,799,662 or 98.40%, 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, 2003, 2002, and 2001,
respectively.

2003 2002 2001

Construction loans $ 10,495,735 $ 10,557,644 $ 6,456,910
Other loan commitments 15,036,346 11,876,437 8,639,337
Standby letters of credit 2,957,508 1,726,127 3,243,063
Total $ 28,489,589 $ 24,160,208 $ 18,339,310

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 an allowance 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 allowance 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 loan
loss or that additional increases in the loan 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 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, 2003, 2002, and 2001,
the respective allowances for loan losses were 1.33%, 1.33%, and 1.30% of
outstanding loans.

No provision for loan losses was made in 2003 due to the low level
of delinquencies and the year's net recoveries of previously charged-off
loans. The provision for loan losses was $25,000 in 2002, an increase of
$2,015 from the $22,985 provision in 2001.

Allocation of Allowance for Loan Losses
2002 2001 2000

Commercial $ 163,059 7.46% $ 139,005 6.37% $ 218,414 9.95%
Real estate, including
construction 868,828 39.72 864,111 39.62 913,449 41.60
Consumer 81,845 3.74 112,875 5.17 174,671 7.94
General 1,073,545 49.08 1,065,144 48.84 889,388 40.51
Total $ 2,187,277 100.00% $2,181,135 100.00% $2,195,922 100.00%

Allowance for Loan Losses
2003 2002 2001

Balance at beginning of year $2,181,135 $2,195,922 $2,192,755
Loan losses:
Commercial - 6,816 3,741
Mortgages - - -
Consumer 3,423 41,954 20,983
Total loan losses 3,423 48,770 24,724
Recoveries on loans previously
charged off:
Commercial 533 1,000 4,056
Consumer 9,032 7,983 850
Total loan recoveries 9,565 8,983 4,906

Net loan losses (6,142) 39,787 19,818
Provision for loan losses charged
to expense - 25,000 22,985
Balance at end of year $2,187,277 $2,181,135 $2,195,922

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

Net charge-offs to average loans 0.00% 0.02% 0.01%

As a result of management's ongoing review of the loan portfolio,
loans are classified as nonaccrual when it is not reasonable to expect
collection of interest under the original terms. These loans are
classified as nonaccrual even though the presence of collateral or the
borrower's financial strength may be sufficient to provide for ultimate
repayment. Interest on nonaccrual loans is recognized only when received.
A delinquent loan is generally placed in nonaccrual status when it becomes
90 days or more past due. When a loan is placed in nonaccrual status, all
interest that has been accrued on the loan but remains unpaid is reversed
and deducted from earnings as a reduction of reported interest income. No
additional interest is accrued on the loan balance until the collection of
both principal and interest becomes reasonably certain. The Company had
no nonperforming loans at December 31, 2003, or 2001. 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.

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, 2003, 2002, or
2001. 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, 2003,
2002, or 2001.

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 65.03% of average deposits for 2003, compared to 61.71%
and 53.08% for 2002 and 2001, respectively.

As of December 31, 2003, $76,892,594, or 49.21% 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, 2003, and 2002 were
$18,000,000. At December 31, 2001, 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, 2003

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 $29,525,781 $ - $ - $ - $ 29,525,781
Interest-bearing
deposits 350,132 1,541,687 389,518 - 2,281,337
Investment debt
securities 25,031,814 51,860,780 76,795,464 2,559,062 156,247,120
Loans 161,092,488 1,043,615 2,031,134 263,048 164,430,285
Total earning assets$216,000,215 $54,446,082 $79,216,116 $ 2,822,110 $352,484,523

Liabilities
Interest-bearing deposits
Money market $ 50,318,633 - - - $ 50,318,633
Savings and NOW 114,896,131 - - - 114,896,131
Certificates
$100,000 and over 6,430,433 8,640,956 4,966,374 - 20,037,763
Certificates under
$100,000 20,401,576 27,191,807 9,648,815 - 57,242,198
Securities sold under
agreements
to repurchase 4,113,154 - - - 4,113,154
Note payable 4,626 14,300 88,115 74,045 181,086
Total interest-bearing
liabilities $196,164,553 $35,847,063 $14,703,304 $ 74,045 $246,788,965

Period gap $ 19,835,662 $18,599,019 $ 64,512,812 $ 2,748,065 $105,695,558
Cumulative gap $ 19,835,662 $38,434,681 $102,947,493 $105,695,558

Ratio of cumulative gap
to total earning assets 5.63% 10.90% 29.21% 29.99%

Investment Securities Maturity Distribution and Yields

December 31, 2003 December 31, 2002 December 31, 2001
Amount Percent Amount Percent Amount Percent

US Treasury
One year or less 68,496,088 0.97% 50,003,569 2.87% 31,483,510 4.81%
Over one through
five years 51,965,421 1.74% 40,065,506 2.58% 26,563,088 3.96%
Over ten years 2,559,062 7.28% 2,603,120 7.28% 2,336,880 7.28%
Total U.S. Treasury
securities 123,020,571 1.43% 92,672,195 2.87% 60,383,478 4.52%

U.S. Government Agencies
One year or less 2,000,810 4.65% 1,000,000 4.49% 5,900,000 5.68%
Over one through
five years 15,000,000 2.31% 18,902,908 3.30% 13,505,013 4.84%
Total U. S. Government
Agencies 17,000,810 2.59% 19,902,908 3.35% 19,405,013 5.09%

State, county, and municipal
One year or less 6,395,697 1.72% 4,009,906 2.45% 4,138,392 5.54%
Over one through
five years 9,830,041 1.35% 4,203,610 2.34% 2,808,149 5.23%
Total state, county,
and municipal 16,225,738 1.49% 8,213,516 2.39% 6,946,541 5.43%

Total debt securities
One year or less 76,892,595 1.13% 55,013,475 2.87% 41,521,902 5.01%
Over one through
five years 76,795,462 1.80% 63,172,024 2.78% 42,876,250 4.32%
Over ten years 2,559,062 7.28% 2,603,120 7.28% 2,336,880 7.28%
Total debt securities156,247,119 1.56% 120,788,619 2.92% 86,735,032 4.73%

Equity securities 2,685,158 2.70% 1,783,680 2.51% 1,637,219 3.03%

Total securities 158,932,277 1.58% 122,572,299 2.91% 88,372,251 4.70%

Deposits and Other Interest-Bearing Liabilities

Average interest-bearing liabilities increased $17,588,168, or
7.81%, to $242,771,617 in 2003, from $225,183,449 in 2002. Average
interest-bearing deposits increased $18,425,292, or 8.37%, to
$238,447,362 in 2003, from $220,022,070 in 2002, while average non-
interest bearing demand deposits increased $10,982,926, or 16.92% to
$75,898,439 in 2003, from $64,915,513 in 2002. At December 31, 2003,
total deposits were $317,946,053, compared to $301,495,466 at December 31,
s2002, an increase of 5.46%.

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%.

The following table sets forth the deposits of the Company by category as
of December 31, 2003, 2002, and 2001,
respectively.

December 31,
2003 2002 2001
Percent of Percent of Percent of
Amount deposits Amount deposits Amount deposits

Demand deposits $ 75,601,460 23.78% $ 73,289,541 24.31% $ 60,508,663 22.07%
NOW accounts 63,400,879 19.94% 57,009,892 18.91% 45,639,869 16.65%
Money market 50,168,501 15.78% 46,942,638 15.57% 40,739,491 14.86%
Savings accounts 51,495,252 16.20% 45,514,226 15.10% 38,306,292 13.97%
Time deposits less than
$100,000 57,242,198 18.00% 62,897,083 20.86% 68,212,949 24.88%
Time deposits of $100,000 or
more 20,037,763 6.30% 15,842,086 5.25% 20,741,917 7.57%
Total deposits $317,946,053 100.00% $301,495,466 100.00% $274,149,181 100.00%

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
$12,254,910 and $32,246,116 during 2003 and 2002, 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, 2003, is shown in the following table.

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

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 $ 6,430,433 $ 2,134,033 $ 6,506,923 $ 4,966,374 $20,037,763

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 2003 decreased $166,469, or 9.62% from the
previous year. This includes a decrease of $267,844 related to a 2002
gain on the sale of property in Ocean View, Delaware. Service charges on
deposit accounts increased $35,004 primarily due to increased deposit
balances. Other non-interest income increase $66,371, of which $54,035
was the increase in cash surrender value of bank owned life insurance
policies with a face value of $4,000,000 which were purchased in August
2003.

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.

The following table presents the principal components of noninterest
income for the years ended December 31, 2003, 2002, and 2001,
respectively.

Noninterest Income
2003 2002 2001

Service charges on deposit accounts $ 1,028,306 $ 993,302 $ 853,107
Other noninterest revenue 535,531 469,160 447,528
Gain on sale of real estate ____-___ 267,844 ____-___
Total noninterest income $ 1,563,837 $ 1,730,306 $ 1,300,635

Noninterest income as a percentage
of average total assets 0.41% 0.50% 0.42%

Noninterest Expense

Noninterest expense increased $121,481, or 1.87%, from 2002 to 2003.
Increased personnel costs of $204,573 were due to annual raises,
increased 401(k) expense, and increased cost of group insurance.
Occupancy expense increased due increase depreciation related to recent
building construction and renovation, as well as increased maintenance
costs incurred to improve and maintain the grounds surrounding branches.
Furniture and equipment expense decreased $36,346 mainly due to decreases
in service contract costs, and improved classification of certain
maintenance expenses. Of the $127,364 decrease in other operating
expense, approximately $62,000 was directly attributable to the Ocean View
branch location, which previously operated as Calvin B. Taylor Bank of
Delaware, and its merger into the Calvin B. Taylor Bank of Berlin,
Maryland.

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
classification of software maintenance costs.

The following table presents the principal components of noninterest
expense for the years ended December 31, 2003, 2002, and 2001,
respectively.

Noninterest Expense
2003 2002 2001

Compensation and related expenses $ 3,827,414 $ 3,622,841 $ 3,536,660
Occupancy expense 536,269 455,651 392,499
Furniture and equipment expense 542,433 578,779 674,296
Advertising 152,358 154,382 144,983
Business and product development 66,480 64,448 60,189
Computer software amortization 91,736 115,453 68,503
Computer software maintenance 97,570 91,141 -
Courier service 93,457 96,120 96,726
Deposit insurance 46,975 47,800 43,413
Director fees 84,240 80,600 83,025
Dues, donations, and subscriptions 80,842 81,171 80,024
Freight 67,517 62,294 57,806
Liability insurance 47,160 60,042 44,608
Postage 168,083 181,567 155,002
Professional fees 37,551 72,399 52,400
Stationery and supplies 125,593 158,965 252,686
Telephone 117,602 130,172 100,455
ATM fees 182,168 182,487 154,289
Miscellaneous 256,213 263,868 228,423
Total noninterest
expense $ 6,621,661 $ 6,500,180 $ 6,225,987

Noninterest expense as a percentage
of average total assets 1.75% 1.86% 2.01%

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, 2003, the Company and the Bank exceeded the minimum
regulatory capital ratios, as set forth in the following table.

Analysis of Capital

Analysis of Capital
Required Consolidated Maryland Delaware
Minimums Company Bank Bank

2003
Total risk-based capital ratio 8.0% 39.1% 37.1%
Tier I risk-based capital ratio 4.0% 37.6% 35.9%
Tier I leverage ratio 3.0% 16.0% 14.9%

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%

Accounting Rule Changes

The following recent accounting pronouncements would apply to the Company
if the Company or the Bank entered into an applicable activity.

FASB Statement No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, improves financial reporting by requiring
that contracts with comparable characteristics be accounted for similarly. In
particular, this statement (1) clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative
discussed in paragraph 6(b) of Statement No. 133, (2) clarifies when a
derivative contains a financing component, and (3) amends certain other
pronouncements. This Statement is effective for contacts and hedging
relationships entered into or modified after September 30, 2003.

FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, requires that an issuer
classify a financial instrument that is within its scope as a liability.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003.

FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
An Interpretation of ARB No. 51, requires consolidation of variable interest
entities by the primary beneficiary. This Interpretation is effective for the
first interim period or fiscal year beginning after June 15, 2003, for
variable interest entities created before February 1, 2003. For entities
created after January 31, 2003, the effective date was immediate.

SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer, prohibits the "carrying over" of valuation allowances in loans and
securities acquired in a transfer. At transfer, the assets are to be recorded
at the total of cash flows expected to be collected. The SOP is effective for
loans acquired in fiscal years beginning after December 31, 2004.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Impact of Inflation

Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Company and the 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 and Supplementary Data

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, 2003, is incorporated herein by reference.

PART III

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

There have been no changes in or disagreements with accountants on
accounting or financial disclosure during the fiscal year covered by this
report.

Item 9A. 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.

Audit Committee and Financial Expert
The Board of Directors has adopted a written Audit Policy, which
serves as a charter for the Audit Committee. The Audit Committee is
comprised of seven independent directors, including Chairman James R.
Bergey, Jr. who serves as the financial expert.

Item 10. Directors and Executive Officers

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 12, 2004, 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 12, 2004, 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 12, 2004, 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 12, 2004, is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

In response to this item, the information included on page 6 of the
Company's Proxy Statement for Annual Meeting of Shareholders to be held
May 12, 2004, is incorporated herein by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules, 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, 2003.

(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 2003.

SIGNATURES
Pursuant to the requirements of 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: March 10, 2004 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chief Executive Officer
Chairman of the Board of Directors

Date: March 10, 2004 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer

Pursuant to the requirements of 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: March 10, 2004 By: /s/ James R. Bergey, Jr.
James R. Bergey, Jr., Director

Date: March 10, 2004 By: /s/ James R. Bergey, Sr.
James R. Bergey, Sr., Director

Date: ______________ By:
George H. Bunting, Jr., Director

Date: March 10, 2004 By: /s/ John H. Burbage, Jr.
John H. Burbage, Jr., Director

Date: March 10, 2004 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chief Executive Officer
Chairman of the Board of Directors

Date: ______________ By:
Reese F. Cropper, III, Director

Date: ______________ By:
Hale Harrison, Director

Date: March 10, 2004 By: /s/ Gerald T. Mason
Gerald T. Mason, Director

Date: March 10, 2004 By: /s/ William H. Mitchell
William H. Mitchell,
Vice President and Director

Date: March 10, 2004 By: /s/ Joseph E. Moore
Joseph E. Moore, Director

Date: March 10, 2004 By: /s/ Michael L. Quillin
Michael L. Quillin, Sr., Director

Date: March 10, 2004 By: /s/ D. Bruce Rogers
D. Bruce Rogers, Director

Date: March 10, 2004 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, 2003 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.

Date: March 10, 2004 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chairman & Chief Executive Officer
(Principal Executive Officer)

Date: March 10, 2004 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.

Date: March 10, 2004 By: /s/ Reese F. Cropper, Jr.
Reese F. Cropper, Jr.
Chairman & Chief Executive Officer
(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.

Date: March 10, 2004 By: /s/ Jennifer G. Hawkins
Jennifer G. Hawkins
Treasurer
(Principal Financial Officer)

EXHIBIT 13

ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 2003

Calvin B. Taylor Bankshares, Inc.
and Subsidiary

Financial Statements

December 31, 2003

Calvin B. Taylor Bankshares, Inc.
and Subsidiary

Table of Contents

Page

Report of Independent Auditors 1

Consolidated Financial Statements

Consolidated Balance Sheets 2

Consolidated Statements of Income 3

Consolidated Statements of Changes in Stockholders' Equity 4

Consolidated Statements of Cash Flows 5-6

Notes to Consolidated Financial Statements 7-21

Report of Independent Auditors

The Board of Directors and Stockholders
Calvin B. Taylor Bankshares, Inc. and Subsidiary
Berlin, Maryland

We have audited the accompanying consolidated balance sheets of
Calvin B. Taylor Bankshares, Inc. and Subsidiary as of December 31, 2003,
2002, and 2001, 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, 2003,
2002, and 2001, 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 15, 2004

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

December 31,
2003 2002 2001
Assets

Cash and due from banks $ 20,482,866 $ 21,051,412 $ 18,397,266
Federal funds sold 29,525,781 54,821,617 54,389,656
Interest-bearing deposits 2,281,337 1,432,205 879,000
Investment securities
available for sale 9,265,471 8,390,550 3,974,099
Investment securities held
to maturity (approximate market
value of $150,075,211,
$115,470,092, and $85,604,080) 149,666,806 114,181,749 84,398,152
Loans, less allowance for loan
losses of $2,187,277,
$2,181,135, and $2,195,922 162,243,008 161,824,677 166,501,512
Premises and equipment 7,064,970 5,745,842 5,895,275
Accrued interest income 1,344,613 1,405,587 1,753,816
Computer software 265,961 283,303 355,549
Deferred income taxes - - 134,639
Bank owned life insurance 4,054,035 - -
Other assets 291,553 106,004 145,603
$386,486,401 $369,242,946 $336,824,567

Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing $ 75,601,460 $ 73,289,541 $ 60,508,663
Interest-bearing 242,344,593 228,205,925 213,640,518
317,946,053 301,495,466 274,149,181
Securities sold under
agreements to repurchase 4,113,154 4,029,100 4,555,323
Pending purchases of investment
securities - 2,990,830 -
Accrued interest payable 145,044 243,468 529,348
Note payable 181,087 198,912 215,702
Deferred income taxes 355,632 70,156 -
Other liabilities 109,399 199,728 132,443
322,850,369 309,227,660 279,581,997
Stockholders' equity
Common stock, par value $1 per
share; authorized 10,000,000
shares; issued and outstanding
3,227,966 shares at December 31,
2003 and 3,240,000 shares at
December 31, 2002 and 2001 3,227,966 3,240,000 3,240,000
Additional paid-in capital 16,869,085 17,290,000 17,290,000
Retained earnings 42,391,363 38,788,018 36,274,102
62,488,414 59,318,018 56,804,102
Accumulated other
comprehensive income 1,147,618 697,268 438,468
63,636,032 60,015,286 57,242,570
$386,486,401 $369,242,946 $336,824,567

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,
2003 2002 2001

0Interest and dividend revenue
Loans, including fees $ 12,115,447 $ 13,095,218 $ 14,179,181
U. S. Treasury and government
agency securities 2,817,600 3,456,932 3,540,767
State and municipal securities 219,806 224,662 332,035
Federal funds sold 540,804 922,620 1,412,927
Time certificates of deposit 42,363 41,661 46,354
Equity securities 43,227 37,792 34,090
Total interest and dividend
revenue 15,779,247 17,778,885 19,545,354

Interest expense
Deposit interest 2,110,465 3,996,749 6,173,101
Other 21,493 40,848 75,287
Total interest expense 2,131,958 4,037,597 6,248,388
Net interest income 13,647,289 13,741,288 13,296,966

Provision for loan losses - 25,000 22,985
Net interest income after
provision for loan losses 13,647,289 13,716,288 13,273,981

Other operating revenue
Service charges on deposit
accounts 1,028,306 993,302 853,107
Other noninterest revenue 535,530 469,160 447,528
Gain on sale of real estate - 267,844 -
Total other operating revenue 1,563,836 1,730,306 1,300,635

Other expenses
Salaries 3,092,919 2,994,325 2,943,241
Employee benefits 734,495 628,516 593,419
Occupancy 536,269 455,651 392,499
Furniture and equipment 542,433 578,779 674,296
Other operating 1,715,545 1,842,909 1,622,532
Total other expenses 6,621,661 6,500,180 6,225,987

Income before income taxes 8,589,464 8,946,414 8,348,629

Income taxes 3,049,250 3,192,498 2,934,225

Net income $5,540,214 $5,753,916 $5,414,404

Earnings per common share $1.71 $1.78 $1.67

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, 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

Net income - - - 5,540,214 - $5,540,214
Unrealized gain on investment
securities available for sale
net of income taxes - - - - 450,350 450,350
Comprehensive income $5,990,564
Common shares retired (12,034) (12,034) (420,915) - -
Cash dividend,
$.60 per share - - - (1,936,869) -

Balance, December 31, 2003
3,227,966 $ 3,227,966 $16,869,085 $42,391,363 $1,147,618

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,
2003 2002 2001

Cash flows from operating activities
Interest received $ 15,761,248 $ 17,961,046 $ 19,541,166
Fees and commissions received 1,507,872 1,462,551 1,361,593
Interest paid (2,230,381) (4,323,477) (6,222,559)
Cash paid to suppliers
and employees (6,026,828) (5,909,413) (5,731,055)
Income taxes paid (3,232,338) (2,997,807) (3,075,025)
5,779,573 6,192,900 5,874,120

Cash flows from investing activities
Certificates of deposits
purchased, net of maturities (699,000) (553,205) (95,000)
Purchase of investments
available for sale (182,500) (3,994,520) -
Proceeds from maturities of
investments held to maturity 107,310,000 91,445,000 57,857,000
Purchase of investments held
to maturity (145,709,919) (118,071,995) (65,799,078)
Loans made, net of principal
collected (418,331) 4,651,835 2,046,702
Proceeds from sale of premises
and equipment - 503,160 17,000
Purchases of and deposits on
premises,equipment,and
computer software (1,941,071) (650,339) (1,063,655)
Purchase of bank owned
life insurance (4,000,000) - -
(45,640,821) (26,670,064) (7,037,031)

Cash flows from financing activities
Net increase (decrease) in
Time deposits (1,459,208) (10,215,697) 15,567,519
Other deposits 17,909,795 37,561,982 26,655,470
Securities sold under
agreements to repurchase 84,054 (526,223) 1,441,652
Payments on note payable (17,825) (16,791) (15,814)
Purchases and retirement of
common shares (432,949) - -
Dividends paid (1,936,869) (3,240,000) (1,198,800)
14,146,998 23,563,271 42,450,027

Net increase (decrease) in cash
and cash equivalents (25,714,250) 3,086,107 41,287,116

Cash and cash equivalents
at beginning of year 75,873,029 72,786,922 31,499,806
Cash and cash equivalents
at end of year $50,158,779 $75,873,029 $72,786,922

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,
2003 2002 2001

Reconciliation of net income to net
cash provided by operating
activities
Net income $ 5,540,214 $ 5,753,916 $ 5,414,404

Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation and amortization 633,383 629,738 528,247
Provision for loan losses - 25,000 22,985
Deferred income taxes 46,409 41,961 9,234
Amortization of premiums and
accretion of discounts, net (78,972) (166,068) (198,571)
(Gain) loss on disposition of
assets 5,902 (260,880) (12,365)
Decrease (increase) in
Accrued interest receivable 60,974 348,229 194,383
Cash surrender value of bank
owned life insurance (54,035) - -
Other assets (185,549) (8,914) (54,566)
Increase (decrease) in
Accrued interest payable (98,424) (285,880) 25,829
Accrued income taxes - 152,730 (101,520)
Other liabilities (90,329) (36,932) 46,060
$ 5,779,573 $ 6,192,900 $ 5,874,120

Composition of cash and cash equivalents
Cash and due from banks $ 20,482,866 $ 21,051,412 $ 18,397,266
Federal funds sold 29,525,781 54,821,617 54,389,656
Interest-bearing deposits,
except for time deposits 150,132 - -
$ 50,158,779 $ 75,873,029 $ 72,786,922

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

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

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, 2003, the allowance included
approximately $1,073,546 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.

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 (continued)

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.

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.

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

Bank owned life insurance
The Company records increases in cash surrender value of bank owned
life insurance as current period income based on projections provided by the
underwriting company.

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 are determined by dividing net income by the
weighted average of shares outstanding for the period. The weighted average
of common shares outstanding was 3,235,767, 3,240,000, and 3,240,000 shares
outstanding, for the years ended December 31, 2003, 2002, and 2001,
respectively.

2. Cash and Due From Banks

The Company normally carries balances with other banks that exceed the
federally insured limit. The average balances carried in excess of the
limit, including unsecured federal funds sold to the same banks, were
$53,869,724 for 2003, $59,942,898 for 2002, and $53,138,449 for 2001.
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, 2003
Available for sale
U.S. Treasury $ 5,991,862 $ 588,451 $ - $ 6,580,313
Equity 1,448,208 1,236,950 - 2,685,158
$ 7,440,070 $1,825,401 $ - $ 9,265,471
Held to maturity
U.S. Treasury $116,440,258 $ 416,411 $ 34,334 $116,822,335
U.S. Government agency 17,000,810 69,385 60,879 17,009,316
State and municipal 16,225,738 34,016 16,195 16,243,559
$149,666,806 $ 519,812 $111,408 $150,075,210

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 $ 42,839 $ - $ 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

9

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

3. Investment Securities (Continued)

All investment securities with unrealized losses have been in a
continuous loss position for less than twelve months. The table
below summarizes investment securities with unrealized losses as of
December 31, 2003.

Amortized Unrealized Market
cost losses value

December 31, 2003
Held to maturity
U.S. Treasury $ 14,988,119 $ 34,334 $ 14,953,785
U.S. Government Agency 8,750,000 60,879 8,689,121
State and municipal 5,778,066 16,195 5,761,871
$ 29,516,185 $111,408 $ 29,404,777

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, 2003 December 31, 2002 December 31, 2001
Amortized Market Amortized Market Amortized Market
cost value cost value cost value

Available for sale due
In one year $3,997,243 $4,021,251 $ - $ - $ - $ -
After one year
through five years - - 3,994,528 4,003,750 - -
After ten years 1,994,619 2,559,062 1,994,330 2,603,120 1,994,041 2,336,880
$5,991,862 $6,580,313 $5,988,858 $6,606,870 $1,994,041 $2,336,880

Held to maturity due
In one year $72,871,344 $73,184,592 $55,013,475 $55,394,968 $41,521,902 $42,125,457
After one year
through five years 76,795,462 76,890,618 59,168,274 60,075,124 42,876,250 43,478,623
$149,666,806 $150,075,210 $114,181,749 $115,470,092 $84,398,152 $85,604,080

Pledged securities
$21,790,367 $21,870,641 $20,868,000 $21,248,011 $21,058,134 $21,517,135

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

10

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

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, 2003 and December 31, 2002, and $19,000,000
as of December 31, 2001.

5. Loans and Allowance for Loan losses

Major classifications of loans are as follows:

2003 2002 2001

Commercial $ 13,199,879 $ 12,765,723 $ 15,341,122
Real estate 127,722,747 139,354,241 146,258,549
Construction 20,877,036 8,447,354 2,117,685
Consumer 2,630,623 3,438,494 4,980,078
164,430,285 164,005,812 168,697,434
Allowance for loan losses 2,187,277 2,181,135 2,195,922
Loans, net $162,243,008 $161,824,677 $166,501,512

The rate repricing distribution of the loan portfolio follows:

Immediately $160,730,764 $160,567,318 $164,098,147
Within one year 1,405,338 813,678 1,728,296
Over one to five years 2,031,134 2,197,969 2,648,073
Over five years 263,049 426,847 222,918
$164,430,285 $164,005,812 $168,697,434

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

Loan commitments and lines
of credit
Construction and land
development $ 10,495,735 $ 10,557,644 $ 6,456,910
Other 15,036,346 11,876,437 8,639,337
$ 25,532,081 $ 22,434,081 $ 15,096,247

Standby letters of credit $ 2,957,508 $ 1,726,127 $ 3,243,063

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.

11

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

5. Loans and Allowance for Loan losses (Continued)

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.

Transactions in the allowance for loan losses were as follows:

2003 2002 2001

Beginning balance $ 2,181,135 $ 2,195,922 $ 2,192,755
Provision charged to operations - 25,000 22,985
Recoveries 9,565 8,983 4,906
2,190,700 2,229,905 2,220,646
Loans charged off 3,423 48,770 24,724
Ending balance $ 2,187,277 $ 2,181,135 $ 2,195,922

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

Commercial $ 55,795 $ 17,370 $ 122,420
Real estate 251,658 250,206 343,136
Consumer 7,942 15,280 50,883
$ 315,395 $ 282,856 $ 516,439

Management has identified no impaired loans at December 31, 2003,
2002, and 2001. 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, 2003 and 2001.

6. 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

2004 15,000
2005 15,000
2006 15,000
2007 15,000
2008 15,000
2009 10,000
$ 85,000

12

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

7. Premises and Equipment

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

Estimated
useful life 2003 2002 2001

Land $ 1,893,946 $ 1,659,793 $ 1,891,950
Premises 5 - 50 years 6,423,636 5,028,225 4,826,954
Furniture and equipment 5 - 40 years 3,446,813 3,326,082 3,652,244
Construction in progress - 210,583 -
11,764,395 10,224,683 10,371,148
Accumulated depreciation 4,699,425 4,478,841 4,475,873
Net premises and equipment $ 7,064,970 $ 5,745,842 $ 5,895,275

Depreciation expense $ 541,647 $ 514,285 $ 459,744

8. Deposits

Major classifications of interest-bearing deposits are as follows:

2003 2002 2001

Money market $ 50,168,501 $ 46,942,638 $ 40,739,491
Savings and NOW 114,896,131 102,524,118 83,946,161
Other time 77,279,961 78,739,169 88,954,866
$242,344,593 $228,205,925 $213,640,518

The rate repricing distribution of other time deposits follows:

Three months or less $ 26,832,009 $ 28,235,099 $ 28,071,706
Over three through twelve months 35,832,764 36,006,763 48,240,152
Over one through two years 14,615,188 14,497,307 12,643,008
$ 77,279,961 $ 78,739,169 $ 88,954,866

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

Amount outstanding $ 20,037,763 $ 15,842,086 $ 20,741,917
Interest expense $ 324,822 $ 597,603 $ 987,329

13

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

9. 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.

2003 2002 2001

Maximum month-end amount outstanding$ 6,542,540 $ 6,531,215 $ 5,383,038
Average amount outstanding 4,134,892 4,957,151 4,125,782
Average rate paid during the year .24% .57% 1.50%
Investment securities underlying the
agreements at year end
Carrying value 16,993,472 15,994,905 13,991,479
Estimated fair value 17,050,781 16,306,570 14,327,220

10. 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:

2004 $ 18,925
2005 20,092
2006 21,332
2007 22,647
2008 24,044
Remaining years 74,047
$181,087

11. 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 2003, 2002, and 2001,
were $170,395, $146,568, and $140,620, respectively.

14

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

12. Other Operating Expenses

The components of other operating expenses follow:

2003 2002 2001

Advertising $ 152,358 $ 154,382 $ 144,983
Business and product development 66,480 64,448 60,189
Computer software amortization 91,736 115,453 68,503
Computer software maintenance contracts 97,570 91,141 -
Courier service 93,457 96,120 96,726
Deposit insurance 46,975 47,800 43,413
Director fees 84,240 80,600 83,025
Dues, donations, and subscriptions 80,842 81,171 80,024
Freight 67,517 62,294 57,806
Liability insurance 47,160 60,042 44,608
Postage 168,083 181,567 155,002
Professional fees 37,551 72,399 52,400
Stationery and supplies 125,593 158,965 252,686
Telephone 117,602 130,172 100,455
ATM fees 182,168 182,487 154,289
Miscellaneous 256,213 263,868 228,423
$1,715,545 $1,842,909 $1,622,532

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.

2003 2002 2001

Beginning balance $ 11,133,959 $ 11,079,167 $ 12,293,244
Advances 8,550,318 6,034,153 4,833,136
Other increases - - -
19,684,277 17,113,320 17,126,380
Repayments 9,729,587 5,884,153 5,911,658
Other decreases - 95,208 135,555
Ending balance $ 9,954,690 $ 11,133,959 $ 11,079,167

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, 2003, the individual deposits in excess of
$100,000 of executive officers, directors, and their related interests
represented less than 3.0% 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 $3,490,
$1,235, and $2,003 during the years ended December 31, 2003, 2002, and 2001.

15

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

14. Income Taxes

The components of income tax expense are as follows:

2003 2002 2001

Current
Federal $2,613,587 $2,772,796 $2,598,069
State 389,254 377,740 326,922
3,002,841 3,150,536 2,924,991
Deferred 46,409 41,962 9,234
$3,049,250 $3,192,498 $2,934,225

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

Provision for loan losses $ (2372) $ 2,656 $ (754)
Non-accrual loan interest 43 (43) -
Depreciation 47,512 32,334 5,317
Discount accretion (128) 3,191 412
Net operating loss carryforward
for state income tax (163) - -
Organization costs 1,517 3,824 4,259
$ 46,409 $ 41,962 $ 9,234

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

Deferred tax asset
Allowance for loan losses $ 603,495 $ 601,123 $ 603,779
Non-accrual loan interest - 43 -
Net operating loss
carryforward for state
income tax 163 - -
Organization costs 1,517 5,341
603,658 602,683 609,120

Deferred tax liabilities
Depreciation 268,112 220,601 188,267
Discount accretion 13,395 13,523 10,332
Unrealized gain on securities
available for sale 677,783 438,715 275,882
959,290 672,839 474,481

Net deferred tax asset (liability)$ (355,632) $ (70,156) $ 134,639

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

Statutory federal income tax rate 34.0 % 34.0 % 34.0 %
Increase (decrease) in tax rate
resulting from
Tax-exempt income (1.5) (1.1) (1.5)
State income taxes net of federal
income tax benefit 3.0 2.8 2.6
35.5 % 35.7 % 35.1 %

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 Financial Accounting Standards Board 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, 2003 December 31, 2002 December 31, 2001
Carrying Fair Carrying Fair Carrying Fair
amount value amount value amount value

Financial assets
Cash and due from
banks $20,482,866 $20,632,954 $21,051,412 $21,163,525 $18,397,266 $18,510,175
Interest-bearing
deposits 2,281,337 2,305,344 1,432,205 1,469,452 879,000 906,928
Investment
securities 158,932,277 159,340,681 122,572,299 123,860,642 88,372,251 89,578,179
Loans, net 162,243,008
Financial
liabilities
Interest-bearing
deposits $242,344,593 $242,471,838 $228,205,925 $228,558,735 $213,640,518 $214,497,142
Note payable 181,087 176,288 198,912 193,045 215,702 206,453

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, 2003
Total capital
(to risk weighted assets) $65,082 39.1% $13,299 8.0% $16,624 10.0%
Tier 1 capital
(to risk-weighted assets) $62,488 37.6% $ 6,650 4.0% $ 9,974 6.0%
Tier 1 capital
(to average fourth quarter
assets) $62,488 16.0% $15,636 4.0% $19,545 5.0%

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%

Tier 1 capital consists of common stock, additional paid in
capital, and retained earnings. Total risk-based 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 2003 2002 2001
Assets

Cash and due from banks $ 52,244 $ 353,604 $ 57,513
Interest-bearing deposits 650,132 - 1,512,125
Investment securities available for sale 2,685,158 1,783,680 1,637,219
Investment securities held to maturity 499,692 499,230 -
Investment in subsidiary bank 58,798,328 56,226,822 52,445,405
Premises and equipment 1,342,696 1,375,315 1,640,946
Other assets 163,001 3,630 55,688
Total assets $ 64,191,251 $ 60,242,281 $ 57,348,896

Liabilities and Stockholders' Equity

Liabilities
Deferred income taxes $ 393,950 $ 118,136 $ 61,492
Other liabilities 161,269 108,859 44,834
555,219 226,995 106,326
Stockholders' equity
Common stock 3,227,966 3,240,000 3,240,000
Additional paid-in capital 16,869,085 17,290,000 17,290,000
Retained earnings 42,391,363 38,788,018 36,274,102
Accumulated other comprehensive income 1,147,618 697,268 438,468
Total stockholders' equity 63,636,032 60,015,286 57,242,570
Total liabilities and stockholders' equity
$ 64,191,251 $ 60,242,281 $ 57,348,896

Years Ended December 31,
Statements of Income 2003 2002 2001

Interest revenue $ 12,678 $ 37,066 $ 25,816
Dividend revenue 43,227 37,792 34,090
Dividends from subsidiary 2,936,869 1,944,000 2,698,800
Equity in undistributed income
of subsidiary 2,562,464 3,612,515 2,695,465
Gain on sale of real estate - 267,844 -
Rental income and other fees 2,028 2,748 2,700
5,557,266 5,901,965 5,456,871

Expenses
Occupancy 3,777 15,831 6,115
Furniture and equipment 1,167 2,014 1,968
Other 20,272 21,263 36,044
25,216 39,108 44,127
Income before income taxes 5,532,050 5,862,857 5,412,744
Income taxes (benefit) (8,164) 108,941 (1,660)
Net income $ 5,540,214 $ 5,753,916 $ 5,414,404

19

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

17. Parent Company Financial Information (Continued)

Years Ended December 31,
2003 2002 2001

Statements of Cash Flows
Cash flows from operating activities
Interest and dividends received $ 2,992,141 $ 2,012,520 $ 2,749,579
Rental payments received 35,629 24,348 35,700
Cash paid for operating expenses (26,197) (27,234) (44,008)
Income taxes refunded (100,483) 1,727 22,445
2,901,090 2,011,361 2,763,716

Cash flows from investing activities
Certificates of deposit purchased,
net of maturities (500,000) 1,500,000 (1,500,000)
Purchase of investments available
for sale (182,500) - (15,767)
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)
(682,500) 1,512,605 (1,579,893)

Cash flows from financing activities
Purchases and retirement of
common shares (432,949) - -
Dividends paid (1,936,869) (3,240,000) (1,198,800)
Net increase (decrease) in cash (151,228) 283,966 (14,977)

Cash at beginning of year 353,604 69,638 84,615
Cash at end of year $ 202,376 $ 353,604 $ 69,638

Reconciliation of net income to net cash
provided by operating activities
Net income $ 5,540,214 $ 5,753,916 $ 5,414,404
Adjustments to reconcile net income
to net cash used in operating
activities
Undistributed net income of
subsidiary (2,562,464) (3,612,515) (2,695,465)
Accretion of discount on
debt securities (462) (11,835) -
Depreciation 32,619 33,475 33,120
Gain on sale of assets - (267,844) -
Increase (decrease) in deferred
income taxes and other liabilities 50,554 64,106 44,900
Decrease (increase) in other assets (159,371) 52,058 (33,243)
$ 2,901,090 $ 2,011,361 $ 2,763,716

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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,

2003
Interest revenue $3,826,749 $3,934,534 $4,024,543 $3,993,421
Interest expense 435,526 473,779 559,096 663,557
Net interest income 3,391,223 3,460,755 3,465,447 3,329,864
Provision for loan losses - - - -
Net income 1,308,544 1,429,125 1,450,040 1,352,505
Comprehensive income 1,372,451 1,288,388 1,994,551 1,335,174
Earnings per share $0.40 $0.44 $0.45 $0.42

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

21