UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2006			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, including zip code)

Registrant's telephone number, including area code: (410)641-1700
Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act: CommonStock, par value $1.00 per share

    Indicate by check mark whether theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. Yes [ X ] No ____    Indicate by check mark whether the registrant is not requiredto file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ____ No[ X ]    Indicate by check mark whether the registrant has (1) filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days. Yes [ X ] No ____    Indicate by check mark if disclosure of delinquent filers inresponse to Item 405 of Regulation S-K (§229.405of this chapter) is not contained in this form, and will not be contained, tothe best of the registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. [ X ]    Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of "accelerated filer and large accelerated filer" in Rule 12b-2 ofthe Exchange Act.Large accelerated filer ____ Accelerated filer [ X ] Non- accelerated filer ____     Indicate by check mark if the registrant is a shell company(as defined in Rule 12b-2 of the Act). Yes ____ No [ X ] 
The aggregate market value of the Common Stock, all of whichhas voting rights, held by non-affiliates of the registrant on December 31,2006, was $98,432,775. This calculation is based upon the last price known tothe registrant at which its Common Stock was sold as of the last business day ofthe registrant’s most recently completed second fiscal quarter. As of June 30,2006, the last known sale price was $37.50 per share. There is not an activetrading market for the Common Stock and it is not possible to identify preciselythe market value of the Common Stock.

OnFebruary 28, 2007, 3,145,489 sharesof the registrant's common stock were issued and outstanding.
**DOCUMENTS INCORPORATED BY REFERENCEThe Company's Proxy Statement for Annual Meeting of Stockholders to be held onMay 17, 2006, is incorporated by reference in this Form 10-K in Part III, Item10, Item 11, Item 12, Item 13, and Item 14.
***This Reportcontains statements which constitute forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and the Securities ExchangeAct of 1934. These statements appear in a number of places in this Report andinclude all statements regarding the intent, belief or current expectations ofthe Company, its directors, or its officers with respect to, among other things:(i) the Company's financing plans; (ii) trends affecting the Company's financialcondition or results of operations; (iii) the Company's growth strategy andoperating strategy; and (iv) the declaration and payment of dividends. Investorsare cautioned that any such forward-looking statements are not guarantees offuture performance and involve risks and uncertainties, and that actual resultsmay differ materially from those projected in the forward-looking statements asa result of various factors discussed herein and those factors discussed indetail in the Company's filings with the Securities and Exchange Commission. **PART I****Item 1. Business

General  Calvin B. Taylor Bankshares, Inc. (Company) was incorporated as a Marylandcorporation on October 31, 1995. The Company owns all of the stock of Calvin B.Taylor Banking Company of Berlin, Maryland (Bank). The Bank is a commercial bankincorporated under the laws of the State of Maryland on December 17, 1907, witha main office located in Berlin, Maryland. 
**Location and Service Area   The Company,through the Bank, is engaged in a general commercial and retail banking businessserving individuals, small- to medium-sized businesses, professionalorganizations, and governmental units. The Bank operates nine branches locatedthroughout Worcester County, Maryland and one branch located in Sussex County,Delaware. The Bank draws most of its customer deposits and conducts most of itslending transactions within the communities in which these branches are located.    Much of the Bank’s service area is located along the shores of theAtlantic Ocean and has grown as both a resort and a retirement community.The principal components of the economy are tourism andagriculture. Berlin has a strong component of health-care related businesses.The tourist businesses of Ocean City, Maryland and Bethany, Delaware and thehealth-care facilities in Berlin, Maryland (including Berlin Nursing Home andAtlantic General Hospital) are among the largest employers in the counties.**Banking Products and Services   The Bank offers a full range of deposit services includingchecking, NOW, Money Market, and savings accounts, and time deposits includingcertificates of deposit. The transaction accounts and time certificates aretailored to the Bank’s principal market areas at rates competitive to thoseoffered in the area. In addition, the Bank offers certain retirement accountservices, such as Individual Retirements Accounts. All deposits are insured bythe Federal Deposit Insurance Corporation (FDIC) up to the maximum amountallowed by law (generally, $100,000 per depositor subject to aggregation rules).The Bank solicits these accounts from individuals, businesses, associations andorganizations, and governmental authorities.   The Bank also offers a full range of short- to medium-termcommercial and personal loans. Commercial loans include both secured andunsecured loans for working capital (including inventory and receivables),business expansion (including acquisition of real estate and improvements), andpurchase of equipment and machinery. Consumer loans include secured andunsecured loans for financing automobiles, home improvements, education, andpersonal investments. The Bank originates commercial and residential mortgageloans and real estate construction and acquisition loans. These lendingactivities are subject to a variety of lending limits imposed by state andfederal law. The Bank lends to directors and officers of the Company and theBank under terms comparable to those offered to other borrowers entering intosimilar loan transactions. The Board of Directors approves all loans to officersand directors and reviews these loans every six months.    Other bank services include cash management services, 24-hourATM’s, debit cards, safe deposit boxes, travelers’ checks, direct deposit ofpayroll and social security funds, and automatic drafts for various accounts.The Bank offers bank-by-phone and Internet banking services, includingelectronic bill-payment, to both commercial and retail customers. The Bank alsooffers non-deposit products including retail repurchase agreements and discountbrokerage services through a correspondent bank.

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**Competition   The Company and the Bank face strong competition in all areas of operations. Thecompetition comes from entities operating in Worcester County, Maryland andSussex County, Delaware and neighboring counties and includes branches of someof the largest banks in Maryland, Delaware, and Virginia. Its most directcompetition for deposits historically has come from other commercial banks,savings banks, savings and loan associations, and credit unions operating in itsservice areas. The Bank also competes for deposits with money market mutualfunds and corporate and government securities. The Bank competes for loans withthe same banking entities, as well as mortgage banking companies and otherinstitutional lenders. The competition for loans varies from time to timedepending on certain factors. These factors include, among others, the generalavailability of lendable funds and credit, general and local economicconditions, current interest rate levels, conditions in the mortgage market, andother factors which are not readily predictable.    The Bank employs traditional marketing media including localnewspapers and radio, to attract new customers. Bank officers, directors, andemployees are active in numerous community organizations and participate incommunity-based events. These activities and referrals by satisfied customersresult in new business. 
**Employees    As of December 31, 2006, the Bank employed 98 full-timeequivalent employees. The Company's operations are conducted through the Bank.Consequently, the Company does not have separate employees. None of theemployees of the Bank are represented by any collective bargaining unit. TheBank considers its relations with its employees to be good.
**SUPERVISION AND REGULATION**
    The Company and the Bank are subject tostate and federal banking laws and regulations which impose specificrequirements or restrictions on, and provide for general regulatory oversightwith respect to, virtually all aspects of operations. These laws and regulationsare generally intended to protect depositors, not stockholders. The following isa summary of certain statutes, rules, and regulations affecting the Company andthe Bank. To the extent that the following summary describes statutory orregulatory provisions, it is qualified in its entirety by reference to theparticular statutory and regulatory provisions.    Proposed legislative changes and the policies of variousregulatory authorities may affect the operations of the Company and the Bank andthose effects may be material. The Company is unable to predict the nature orthe extent of the effect on its business and earnings that fiscal or monetarypolicies, economic controls, or new federal or state legislation may have in thefuture.
**The CompanyBank Holding Company Act of 1956    The Company is a bank holding company within the meaningof the federal Bank Holding Company Act of 1956 ( BHCA). Under the BHCA, theCompany is subject to periodic examination by the Federal Reserve and isrequired to file periodic reports of its operations and such additionalinformation as the Federal Reserve may require. The Company's and the Bank’sactivities are limited to banking, managing or controlling banks, furnishingservices to or performing services for its Subsidiary, or engaging in any otheractivity that the Federal Reserve determines to be so closely related to bankingor managing and controlling banks as to be a proper incident thereto.*    Investments, Control, and Activities.* With certainlimited exceptions, the BHCA requires a bank holding company to obtain the priorapproval of the Federal Reserve before (i) acquiring substantially all theassets of any bank, (ii) acquiring direct or indirect ownership or control ofany voting shares of any bank if after such acquisition it would own or controlmore than 5% of the voting shares of such bank (unless it already owns orcontrols the majority of such shares), or (iii) merging or consolidating withanother bank holding company.    In addition, and subject to certain exceptions, the BHCA andthe Change in Bank Control Act, together with regulations thereunder, requireFederal Reserve approval (or, depending on the circumstances, no notice ofdisapproval) prior to any person or company acquiring "control" of a bankholding company, such as the Company. Control is conclusively presumed to existif an individual or company acquires 25% or more of any class of votingsecurities of the bank holding company. Because the Company's Common Stock isregistered under the Securities Exchange Act of 1934, under Federal Reserveregulations, control will be rebuttably presumed to exist if a person acquiresat least 10% of the outstanding shares of any class of voting securities of theCompany. The regulations provide a procedure for challenge of the rebuttablecontrol presumption.
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    Under the BHCA, the Company is generally prohibited fromengaging in, or acquiring direct or indirect control of more than 5% of thevoting shares of any company engaged in non-banking activities, unless theFederal Reserve, by order or regulation, has found those activities to be soclosely related to banking or managing or controlling banks as to be a properincident thereto. *    Source of Strength; Cross-Guarantee.* Under FederalReserve policy, the Company is expected to act as a source of financial strengthto the Bank and to commit resources to support the Bank in circumstances inwhich the Company might not otherwise do so. The Federal Reserve may require abank holding company to terminate an activity or relinquish control of a nonbanksubsidiary if the Federal Reserve determines that such activity or control posesserious risk to the financial soundness or stability of a subsidiary bank.Further, federal bank regulatory authorities have discretion to require a bankholding company to divest itself of any bank or nonbank subsidiary if the agencydetermines that divestiture may aid the depository institution's financialcondition. The Bank may be required to indemnify, or cross-guarantee, the FDICagainst losses it incurs with respect to any other bank controlled by theCompany, which in effect makes the Company's equity investments in healthy banksubsidiaries available to the FDIC to assist any failing or failed banksubsidiary of the Company.

Gramm-Leach-Bliley Act    In November 1999, the Gramm-Leach-Bliley Act was signedinto law. Among other things, the Act repeals the restriction, contained in theGlass-Steagall Act, on banks affiliating with securities firms. The Act permitsbank holding companies to engage in a statutorily provided list of financialactivities, including insurance and securities underwriting and agencyactivities, merchant banking, and insurance company portfolio investmentactivities. The Act also authorizes activities that are "complementary" tofinancial activities. The Act is intended to grant certain powers to communitybanks that larger institutions have accumulated on an ad hoc basis. The Act mayhave the result of increasing competition that the Company and the Bank facefrom larger institutions and other types of companies. It is not possible topredict the full effect that the Act will have on the Company and the Bank. 

Securities Exchange Act of 1934    The Company’s common stock is registered with the Securitiesand Exchange Commission (SEC) under Section 12(g) of the Securities Exchange Actof 1934 (the Act). The Company is, therefore, subject to periodic and ad hocinformation reporting, proxy solicitation rules, restrictions on insidertrading, and other requirements of the Act. 

Sarbanes-Oxley Act    The Sarbanes-Oxley Act (SOX) of 2002 imposed additionaldisclosure requirements in the Company’s reports filed with SEC. SOX defines newstandards of independence for insiders, provides guidance for certain Boardcommittees including the composition of those committees, and establishescorporate governance requirements.
**The Bank*    General.* The Bank operates as a state nonmemberbanking association incorporated under the laws of the State of Maryland. It issubject to examination by the FDIC and the state department of bankingregulation for each state in which it has a branch. The States and FDIC regulateor monitor all areas of the Bank’s operations, including security devices andprocedures, 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 andrecords, and adequacy of staff training to carry on safe lending and depositgathering practices. The FDIC requires the Bank to maintain certain capitalratios and imposes limitations on the Bank’s aggregate investment in realestate, bank premises, and furniture and fixtures. The Bank is required by theFDIC to prepare quarterly reports on the Bank’s financial condition.    Under provisions of the FDICIA, all insured institutions mustundergo periodic on-site examination by the appropriate banking agency. The costof examinations of insured depository institutions and any affiliates may beassessed by the agency against each institution or affiliate, as it deemsnecessary or appropriate. Insured institutions are required to submit annualreports to the FDIC and the appropriate agency (and state supervisor whenapplicable). FDICIA also directs the FDIC to develop with other appropriateagencies a method for insured depository institutions to provide supplementaldisclosure of the estimated fair market value of assets and liabilities, to theextent 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, byregulation, standards for all insured depository institutions and depositoryinstitution holding companies relating, among other things, to: (i) internalcontrols, information systems, and audit systems; (ii) loan documentation; (iii)credit underwriting; (iv) interest rate risk exposure; and (v) asset quality.

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Transactions With Affiliates and Insiders    The Bank is subject to Section 23A of the Federal ReserveAct, which places limits on the amount of loans or extensions of credit to, orinvestment in, or certain other transactions with, affiliates and on the amountof advances to third parties collateralized by the securities or obligations ofaffiliates. The aggregate of all covered transactions is limited in amount, asto any one affiliate, to 10% of the Bank’s capital and surplus and, as to allaffiliates combined, to 20% of the Bank’s capital and surplus. In addition, eachcovered transaction must meet specific collateral requirements. The Bank is alsosubject to Section 23B of the Federal Reserve Act which, among other things,prohibits an institution from engaging in certain transactions with certainaffiliates unless the transactions are on terms substantially the same, or atleast as favorable to such institution or its subsidiaries, as those prevailingat the time for comparable transactions with nonaffiliated companies. The Bankis subject to certain restrictions on extensions of credit to executiveofficers, directors, certain principal stockholders, and their relatedinterests. Such extensions of credit (i) must be made on substantially the sameterms, including interest rates and collateral, as those prevailing at the timefor comparable transactions with third parties, and (ii) must not involve morethan the normal risk of repayment or present other unfavorable features.

Community Reinvestment Act    The Community Reinvestment Act requires that the Bank shallbe evaluated by its primary federal regulator with respect to its record inmeeting the credit needs of its local community, including low and moderateincome neighborhoods, consistent with safe and sound operations. These factorsare also considered in evaluating mergers, acquisitions, and applications toopen a branch or facility. The Bank received a satisfactory rating in its mostrecent evaluation.
**
USA Patriot Act    In response to the terrorist attacks on September 11, 2001,Congress passed the Patriot Act. The Patriot Act requires that Banks prepare andretain additional records designed to assist the government in an effort tocombat terrorism. The Act includes anti-money laundering and financialtransparency provisions, and guidelines for verifying customer identificationduring account opening. The Act promotes cooperation between law enforcement,financial institutions, and financial regulators in identifying persons involvedin illegal acts such as money laundering and terrorism.

Other Regulations    Interest and certain other charges collected or contractedfor 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 applicableto credit transactions, such as the federal Truth-In-Lending Act governingdisclosures of credit terms to consumer borrowers, the Home Mortgage DisclosureAct of 1975 requiring financial institutions to provide information to enablethe public and public officials to determine whether a financial institution isfulfilling its obligation to help meet the housing needs of the community itserves, the Equal Credit Opportunity Act prohibiting discrimination on the basisof race, creed, or other prohibited bases in extending credit, the Fair CreditReporting Act of 1978 governing the use and provision of information to creditreporting agencies, the Fair Debt Collection Act governing the manner in whichconsumer debts may be collected by collection agencies, and the rules andregulations of the various federal agencies charged with the responsibility ofimplementing such federal laws. The deposit operations of the Bank are alsosubject to the Right to Financial Privacy Act which imposes a duty to maintainconfidentiality of customers’ financial records and prescribes procedures forcomplying with administrative subpoenas of financial records, and the ElectronicFund Transfers Act as implemented by the Federal Reserve Board’s Regulation Ewhich governs automatic deposits to and withdrawals from deposit accounts andcustomers' rights and liabilities arising from the use of automated tellermachines and other electronic banking services.

Deposit Insurance    The FDICestablishes rates for the payment of premiums by federally insured banks andthrifts for deposit insurance. Separate insurance funds are maintained forcommercial banks (BIF) and thrifts (SAIF), with insurance premiums from theindustry used to offset losses from insurance payouts when banks and thriftsfail. Since 1993, insured depository institutions like the Bank have paid fordeposit insurance under a risk-based premium system. The Federal DepositInsurance Reform Act of 2005 creates a revised deposit insurance assessment ratestructure, effective January 1, 2007. Under this system, assessment rates arebased on Risk Categories as determined by a combination of CAMELS componentratings and financial ratios. Banks in Risk Category I, the lowest risk profile,will be assessed at a rate of 5 to 7 basis points. A One-time Assessment Creditfor banks that were in existence on December 31, 1996, will be applied to offsetassessments dollar-for-dollar until full benefit of the credit is received. In addition to the amount paid for deposit insurance, banks are assessed anadditional amount to service the interest on the bond obligations of theFinancial Corporation (FICO). Any increase in deposit insurance premiums for theBank will increase the Bank’s operating expenses, and there can be no assurancethat such costs can be passed on to the Bank’s customers. 
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**Dividends    The principal source of the Company's cash revenues comesfrom dividends received from the Bank. The amount of dividends that may be paidby the Bank to the Company depends on the Bank's earnings and capital positionand is limited by federal and state laws, regulations, and policies. The FederalReserve has stated that bank holding companies should refrain from or limitdividend increases or reduce or eliminate dividends under circumstances in whichthe bank holding company fails to meet minimum capital requirements or in whichearnings are impaired.    The Company's ability to pay any cash dividends to itsstockholders in the future will depend primarily on the Bank's ability to paydividends to the Company. In order to pay dividends to the Company, the Bankmust comply with the requirements of all applicable laws and regulations. UnderMaryland law, the Bank must pay a cash dividend only from the following, afterproviding for due or accrued expenses, losses, interest, and taxes: (i) itsundivided profits, or (ii) with the prior approval of the Department ofFinancial Regulation, its surplus in excess of 100% of its required capitalstock. Under FDICIA, the Bank may not pay a dividend if, after paying thedividend, the Bank would be undercapitalized. See "Capital Regulations" below.See Item 5 for a discussion of dividends paid by the Company in the past threeyears.    In addition to the availability of funds from the Bank, thefuture dividend policy of the Company is subject to the discretion of the Boardof Directors and will depend upon a number of factors, including futureearnings, financial condition, cash needs, and general business conditions. Theamount of dividends that might be declared in the future presently cannot beestimated and it cannot be known whether such dividends would continue forfuture periods.
**Capital Regulations    The federal bank regulatory authorities have adoptedrisk-based capital guidelines for banks and bank holding companies that aredesigned to make regulatory capital requirements more sensitive to differencesin risk profile among banks and bank holding companies, account for off-balancesheet exposure, and minimize disincentives for holding liquid assets. Theresulting capital ratios represent qualifying capital as a percentage of totalrisk-weighted assets and off-balance sheet items. The guidelines are minimums,and the regulators have noted that banks and bank holding companiescontemplating significant expansion programs should not allow expansion todiminish their capital ratios and should maintain ratios well in excess of theminimums.     Current guidelines require bank holdingcompanies and federally regulated banks to maintain a minimum ratio of totalcapital to risk-based assets equal to 8%, of which at least 4% must be Tier 1capital. Tier 1 capital includes common stockholders' equity before theunrealized gains and losses on securities available for sale, qualifyingperpetual preferred stock, and minority interests in equity accounts ofconsolidated subsidiaries, but excludes goodwill and most other intangibles, andexcludes the allowance for loan losses. Tier 2 capital includes the excess ofany preferred stock not included in Tier 1 capital, mandatory convertiblesecurities, hybrid capital instruments, subordinated debt and intermediateterm-preferred stock, and general reserves for loan losses up to 1.25% ofrisk-weighted assets. Total capital is the sum of Tier 1 plus Tier 2 capital.The federal bank regulatory authorities have also implemented a leverage ratio,which is Tier 1 capital as a percentage of average total assets lessintangibles, to be used as a supplement to the risk-based guidelines. Theprincipal objective of the leverage ratio is to place a constraint on themaximum degree to which a bank holding company may leverage its equity capitalbase. The minimum required leverage ratio for top-rated institutions is 3%, butmost institutions are required to maintain an additional cushion of at least 100to 200 basis points.    FDICIA established a new capital-based regulatory schemedesigned to promote early intervention for troubled banks and requires the FDICto choose the least expensive resolution of bank failures. The new capital-basedregulatory framework contains five categories for compliance with regulatorycapital requirements, including "well capitalized," "adequately capitalized,""undercapitalized," "significantly undercapitalized," and "criticallyundercapitalized." To qualify as a "well capitalized" institution, a bank musthave a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no lessthan 6%, and a total risk-based capital ratio of no less than 10%, and the bankmust not be under any order or directive from the appropriate regulatory agencyto meet and maintain a specific capital level. As of December 31, 2006, theCompany and the Bank were qualified as "well capitalized." For furtherdiscussions, see "Item 7. Management's Discussion and Analysis of FinancialCondition and Results of Operation - Capital."
**Recent Legislative Developments    Periodically, the federal and state legislatures considerbills with respect to the regulation of financial institutions. Some of theseproposals could significantly change the regulation of banks and the financialservices industry. The Company cannot predict if such proposals will be adoptedor the affect to the Company.

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**Item 1A. Risk Factors**
    The Company and the Bank are subject tovarious types of risk during the normal conduct of business. There has been nomaterial increase in any level of risk incurred by the Company or the Bankduring the quarter covered by this report. Following are descriptions of thesignificant categories of risk most relevant to the Company.Credit risk is the risk to the Company’s earnings or capital from thepotential of an obligor to fulfill its contractual commitment to the Company.Credit risk is most closely associated with the Company’s lending activities.Interest rate risk is the risk to earnings or capital from the potentialmovement in interest rates. It is the sensitivity of the Company’s futureearnings to interest rate changes.Liquidity risk is the risk to earnings or capital from the Company’sinability to meet its obligations when they come due without incurringunacceptable losses or costs.Market risk is the risk to earnings or capital from changes in the value ofportfolios of financial instruments. For the Company, market risk is the risk ofa decline in market value of its securities portfolio.Transaction risk is the risk to earnings or capital arising from problemswith service or product delivery. Transaction risk is the risk of a failure inthe Company’s operating processes, such as automation, employee integrity, orinternal controls.Compliance risk is the risk to earnings or capital from noncompliance withlaws, rules, and regulations. Compliance risk is one of the greatest risks theCompany faces.Reputation risk is the risk to earnings or capital from negative publicopinion. Customer and public relations are critical to the Company’s success.Accordingly, the Company’s reputation is extremely important and anything thatwould impair that reputation is a significant risk.Strategic risk is the risk to earnings or capital arising from adversebusiness decisions or improper implementation of those decisions.**Item 1B. Unresolved Staff Comments**
The registrant, an accelerated filer, has not receivedcomments from the Commission staff which remain unresolved at the time of thisfiling.
**Item 2. Properties**
    The Company has ten branch locations, allof which are owned by the Company or the Bank. The Bank leases the land on whichthe East Berlin branch is located. The locations are described as follows:

Office
Location
Square FootageMain Office, Berlin24 North Main Street,		Berlin, Maryland 21811       		24,229East Berlin Office10524 Old Ocean City		Boulevard, Berlin, Maryland 21811
1,50020th Street		Office100 20th Street,		Ocean City, Maryland 21842
3,100Ocean Pines Office11003 Cathell Road, Berlin,		Maryland 21811
2,420Mid-Ocean City Office9105 Coastal Highway, Ocean		City, Maryland 21842
1,984North Ocean City Office14200 Coastal Highway, Ocean		City, Maryland 21842
2,545West Ocean City Office9923 Golf Course Road, Ocean		City, Maryland 21842
2,496Pocomoke Office2140 Old Snow Hill Road,		Pocomoke, Maryland 21851
2,624Snow Hill Office108 West Market Street, Snow		Hill, Maryland 21863
3,773Ocean View, Delaware Office50 Atlantic Avenue, Ocean		View, Delaware 19970
4,900
    The Berlin office is the centralizedlocation for the Company and the Bank. Executive offices, loan processing,proof, bookkeeping, and the computer department are housed there. Most branches have a manager who also serves as a loan officer. All officesparticipate in normal day-to-day banking operations. The Company operatesautomated teller machines in all branches and at one non-branch location in alocal hospital.
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**Item 3. Legal Proceedings**
(a) There are no material pending legal proceedings		to which the Company or the Bank or any of their properties are subject.		(b) No proceedings were terminated during the fourth quarter of the		fiscal year covered by this report.
**Item 4. Submission of Matters to a Vote of Security Holders**
    There were no matters submitted to a voteof the stockholders of the Company during the fourth quarter of the fiscal yearcovered by this report.
**PART II****Item 5. Market for Registrant’s Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities**
    The Company's Articles of Incorporation,as amended, authorize it to issue up to 10,000,000 shares of common stock.    As of February28, 2007 there were approximately 1,027 stockholders of record and 3,145,489shares of Common Stock issued and outstanding.There is no established public trading market in the stock, and there is nolikelihood that a trading market will develop in the near future. Transactionsin the common stock are infrequent and are frequently negotiated privatelybetween the persons involved in those transactions.     All outstanding shares of common stock of the Company areentitled to share equally in dividends from funds legally available, when, as,and if declared by the Board of Directors. The Company paid or declareddividends of $.75 per share in 2006, $2.10 per share in 2005, and $.65 per sharein 2004. Included is a special cash dividend of $1.40 per share in 2005, whichis not expected to be an annual event.     The following table presents information about the Company’srepurchase of its equity securities during the calendar quarter ended on thedate of this Form 10-K.
		                            		(a) Total Number of shares		(b)  Average Price Paid per Share		(c) Total Number of		Shares Purchased as Part of a Publicly Announced Program		(d) Maximum Number of Shares that may yet be Purchased Under the Program		Period     		  October		-0-		N/A 		-0-		269,053		  November		        2,340 		$36.00  		        2,340 		266,713		  December		        4,987 		$36.00  		        4,987 		261,726		Totals		        7,327 		$36.00  		        7,327  
   The Company publicly announced on August 14, 2003, that itwould repurchase up to 10% of its outstanding equity stock at that time, whichequated to a total of 324,000 common shares available for repurchase. There wasno expiration date for this program. No other stock repurchase plan or programexisted simultaneously, nor had any other plan or program expired during theperiod covered by this table. Common shares repurchased under this plan wereretired.    As of January 1, 2005, this plan was renewed, by public announcement, makingup to 10% of the Company’s outstanding equity stock at that time, which equatesto a total of 320,848 common shares, available for repurchase. This renewalcontinues into 2007. Common shares repurchased under this plan are retired. 

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** 

Item 6. Selected Financial Data**
The following table presents selected financial data for thefive years ended December 31, 2006.
****
2006
2005
2004
2003
2002
(Dollars in thousands, except for per share data)At Year EndTotal assets
$ 367,532
$ 389,075
$ 393,333
$ 386,486
$ 369,243Total deposits
$ 290,325
$ 310,858
$ 319,772
$ 317,946
$ 301,495Total loans, net		of unearned income andallowance for		loan losses
$ 231,252
$ 204,442
$ 161,510
$ 162,243
$ 161,825Total		stockholders’ equity
$ 70,170
$ 66,318
$ 66,698
$ 63,636
$ 60,015For the YearNet interest		income
$ 16,963
$ 15,912
$ 13,698
$ 13,647
$ 13,741Net income
$ 7,400
$ 6,798
$ 5,613
$ 5,540
$ 5,754Per share		dataBook value
$ 22.28
$ 20.81
$ 20.79
$ 19.71
$ 18.52Net income
$ 2.33
$ 2.13
$ 1.74
$ 1.71
$ 1.78Cash dividends		declared
$ .75
$ 2.10
$ .65
$ .60
$ 1.00
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**Item 7. Management's Discussion and Analysis of Financial Condition andResults of Operation   The following discussion of the Company's financial condition andresults of operations should be read in conjunction with the Company's financialstatements and related notes and other statistical information included in thisreport.
**Overview   Consolidated income of the Company is derived primarily from operations ofthe Bank. Net income for 2006 was $7,400,369 compared to $6,797,638 for 2005 and$5,613,187 for 2004. The Company had a return on average equity of 10.87% andreturn on average assets of 1.97% for 2006, compared to returns on averageequity of 10.01% and 8.64%, and returns on average assets of 1.71% and 1.42%,for 2005 and 2004, respectively. **Results of Operations    The Company’s net income of $7,400,369, or $2.33 per share,for the year ended December 31, 2006, was an increase of $602,731 or 8.87%, fromnet income of $6,797,638, or $2.13 per share, for the year ended December 31,2005. Contributing to this increase was a $1,050,666 (6.60%) increase in netinterest income. Noninterest revenue increased $149,370 (8.30%) from 2005 to2006, while noninterest expense increased $195,005 (2.72%) during the sameperiod.     The Company’s net income of $6,797,638, or $2.13 per share,for the year ended December 31, 2005, was an increase of $1,184,451 or 21.10%,from the net income of $5,613,187, or $1.74 per share, for the year endedDecember 31, 2004. Contributing to this increase was a $2,213,985 (16.16%)increase in net interest income. Noninterest revenue increased $49,577 (2.83%)from 2004 to in 2005, while noninterest expense increased $351,211 (5.16%)during the same period.     The Company’s net income of $1,831,259 or $.58 per share, forthe quarter ended December 31, 2006, was an increase of $127,316, or 7.47%, fromthe net income of $1,703,943 or $.53 per share, for the quarter ended December31, 2005. Increased net interest income, the primary reason for the increase,was due to a second year of continued growth in the Bank’s loan portfolio andhigher earnings rates on the Bank’s investments. Deposit interest expenseincreased due to rate increases targeted at deposit retention.    The Company’s net income of $1,703,943 or $.53 per share, forthe quarter ended December 31, 2005, was an increase of $252,597, or 17.40%,from the net income of $1,451,346 or $.45 per share, for the quarter endedDecember 31, 2004. Increased net interest income, the primary reason for theincrease, was due to growth in the Bank’s loan portfolio and higher earningsrates on the Bank’s investments. Deposit interest expense increased due to rateincreases, but the effect on earnings was ameliorated by a reduction in thevolume of time deposits.**Net Interest Income    The primary source of income for the Company is net interestincome, which is the difference between revenue on interest-earning assets, suchas investment securities and loans, and interest incurred on interest-bearingsources of funds, such as deposits and borrowings. The level of net interestincome is determined primarily by the average balance of interest-earning assetsand the Company’s funding sources and the various rate spreads between theinterest-earning assets and funding sources. Changes in net interest income fromperiod to period result from increases or decreases in the volume ofinterest-earning assets and interest-bearing liabilities, and increases ordecreases in the average rates earned and paid on such assets and liabilities.The volume of interest-earning assets and interest-bearing liabilities isaffected by the ability to manage the earning-asset portfolio, which includesloans, and the availability of particular sources of funds, such asnoninterest-bearing deposits.    The key performance measure for net interest income is the"net margin on interest-earning assets," or net interest income divided byaverage interest-earning assets. The Company's net interest margin for 2006 on anon-GAAP tax-equivalent basis, was 5.02%, compared to 4.45% and 3.88% for 2005and 2004, respectively. Because most of the Bank’s loans are written with ademand feature, the income of the Bank should not change dramatically asinterest rates change. Management of the Company expects to maintain the netmargin on interest-earning assets. The net margin may decline, however, ifcompetition increases, loan demand decreases, or the cost of funds rises fasterthan the return on loans and securities. Although such expectations are based onmanagement's judgment, actual results will depend on a number of factors thatcannot be predicted with certainty, and fulfillment of management's expectationscannot be assured.    The following tables present information including averagebalances of interest-earning assets and interest-bearing liabilities, the amountof related interest income and interest expense, and the resulting yields bycategory of interest-earning asset and interest-bearing liability. In thesetables, dividends and interest on tax-exempt securities and loans are reportedon a fully taxable equivalent basis, which is a non-GAAP measure as defined inSEC Regulation G and Item 10 of SEC Regulation S-K. Management believes thatthese measures provide better yield comparability as a tool for managing netinterest income.
10
		Average Balances, Interest, and Yields		(Dollars stated in thousands)		For the Year Ended		For the Year Ended		For the Year Ended		December 31, 2006		December 31, 2005		December 31, 2004		Average  		Average  		Average  		Balance		Interest		Yield		Balance		Interest		Yield		Balance		Interest		Yield		Assets         		Federal funds sold		 $  22,547 		 $   1,137 		5.04%		 $  34,233 		 $   1,078 		3.15%		 $  41,762 		 $      547 		1.31%		Interest-bearing deposits		2,173		79		3.64%		2,175		56		2.56%		2,201		48		2.16%		Investment securities:         		  U. S. Treasury		71,441		2,614		3.66%		105,456		2,881		2.73%		116,537		2,443		2.10%		  U. S. Government Agency		13,378		398		2.98%		19,666		525		2.67%		18,844		503		2.67%		  State and municipal		7,443		219		2.94%		16,618		388		2.34%		19,004		407		2.14%		  Other		       1,900 		         102 		5.37%		       1,882 		           90 		4.80%		       1,786 		           79 		4.43%		   Total investment securities		     94,162 		      3,333 		3.54%		   143,622 		      3,884 		2.70%		   156,171 		      3,432 		2.20%		Loans:         		  Commercial		23,804		1,711		7.19%		19,134		1,322		6.91%		15,243		1,052		6.90%		  Mortgage		200,588		14,020		6.99%		165,415		11,485		6.94%		146,121		10,289		7.04%		  Consumer		       2,491 		         206 		8.27%		       2,083 		         178 		8.53%		       2,305 		         201 		8.73%		   Total loans		226,883		15,937		7.02%		186,632		12,985		6.96%		163,669		11,542		7.05%		Allowance for loan losses		       2,190   		       2,193   		       2,188   		   Total loans, net of allowance		   224,693 		    15,937 		7.09%		   184,439 		    12,985 		7.04%		   161,481 		    11,542 		7.15%		Total interest-earning assets		343,575		 $ 20,486 		5.96%		364,469		 $ 18,003 		4.94%		361,615		 $ 15,569 		4.31%		Noninterest-bearing cash		17,694  		19,946  		19,705  		Premises and equipment		6,605  		6,757  		6,968  		Other assets		       7,358   		       6,194   		       6,428   		        Total assets		 $375,232   		 $397,366   		 $394,716   		Interest-bearing deposits         		  NOW 		 $  57,052 		 $      141 		0.25%		 $  67,452 		 $      101 		0.15%		 $  64,537 		 $        97 		0.15%		  Money market		41,810		335		0.80%		50,537		218		0.43%		49,733		198		0.40%		  Savings 		47,812		285		0.60%		54,988		218		0.40%		53,196		213		0.40%		  Other time		     68,359 		      2,414 		3.53%		     63,710 		      1,202 		1.89%		     72,621 		      1,028 		1.42%		Total interest-bearing deposits		215,033		3,175		1.48%		236,687		1,739		0.73%		240,087		1,536		0.64%		Securities sold under agreements         		  to repurchase		5,878		40		0.68%		6,325		22		0.34%		5,021		8		0.17%		Borrowed funds		          145 		            		8 		5.52%		          151 		            		9 		6.07%		          171 		           10 		6.06%		Total interest-bearing liabilities		221,056		3,223		1.46%		243,163		1,770		0.73%		245,279		1,554		0.63%		Noninterest-bearing deposits		     84,380 		             		-  		     85,526 		             		-  		     83,498 		             		-  		305,436		 $   3,223 		1.06%		328,689		 $   1,770 		0.54%		328,777		 $   1,554 		0.47%		Other liabilities		1,739  		750  		990  		Stockholders' equity		     68,057   		     67,927   		     64,949   		        Total liabilities and         		        stockholders' equity		 $375,232   		 $397,366   		 $394,716   		Net interest spread  		4.50%  		4.21%  		3.68%		Net interest income 		 $ 17,263   		 $ 16,233   		 $ 14,015  		Net margin on interest-earning assets 		5.02%  		4.45%  		3.88%        		Tax equivalent adjustment included in:        		    Investment income 		 $      231   		 $      291   		 $      286  		    Loan income 		 $        69   		 $        27   		 $        31  
11
****		Analysis of Changes in Net Interest Income		(Dollars stated in thousands)      		Year ended December 31,		Year ended December 31,		2006 compared with 2005		2005 compared with 2004		variance due to		variance due to		Total		Rate		Volume		Total		Rate		Volume		Interest-earning assets      		  Federal funds sold		           59 		         427 		       (368)		         531 		         630 		         (99)		  Interest-bearing deposits		           23 		           23 		            -   		            		8 		            		9 		           (1)		  Investment securities:      		    U. S. Treasury		       (267)		         662 		       (929)		         438 		         670 		       (232)		    U. S. Government Agency		       (127)		           41 		       (168)		           22 		            -   		           22 		    State and municipals		       (169)		           45 		       (214)		         (19)		           32 		         (51)		    Other		           12 		           11 		            		1 		           11 		            		7 		            		4 		  Loans:      		    Commercial		         389 		           66 		         323 		         270 		            		1 		         269 		    Mortgage		      2,535 		           93 		      2,442 		      1,196 		       (163)		      1,359 		    Consumer		           28 		           (7)		           35 		         (23)		           (4)		         (19)		        Total interest revenue		      2,483 		      1,361 		      1,122 		      2,434 		      1,182 		      1,252       		Interest-bearing liabilities      		  NOW		           40 		           56 		         (16)		            		4 		            -   		            		4 		  Money market		         117 		         155 		         (38)		           20 		           17 		            		3 		  Savings		           67 		           95 		         (28)		            		5 		           (2)		            		7 		  Other time deposits		      1,212 		      1,124 		           88 		         174 		         300 		       (126)		  Other borrowed funds		           17 		           19 		           (2)		           13 		           12 		            		1 		        Total interest expense		      1,453 		      1,449 		            		4 		         216 		         327 		       (111)      		Net interest income		      1,030 		         (88)		      1,118 		      2,218 		         855 		      1,363 
****
    In the preceding table, the variance thatis both rate and volume related is reported with the rate variance.
**Composition of Loan Portfolio    Because loans are expected to produce higher yields thaninvestment securities and other interest-earning assets (assuming that loanlosses are not excessive), the absolute volume of loans and the volume as apercentage of total earning assets is an important determinant of net interestmargin. Average loans, net of the allowance for loan losses, were $224,693,000,$184,439,000, and $161,481,000 during 2006, 2005, and 2004, respectively, whichconstituted 65.40%, 50.60%, and 44.66% of average interest-earning assets forthe periods. The Company’s loan to deposit ratio was 79.65%, 65.77%, and 50.51%at December 31, 2006, 2005, and 2004, respectively. Average loans to averagedeposits were 75.04%, 57.24%, and 49.90% for 2006, 2005, and 2004. The increasein the loan to deposit ratio from 2005 to 2006 is attributable to 21.83% growthin the average loan portfolio accompanied by a 7.08% reduction in averagedeposits during 2006. Throughout 2005 and 2006, the Bank continued to enjoyincreased loan opportunity due to steady demand and competitive pricing.     The Company extends loans primarily to customers located inand near Worcester County, Maryland and Sussex County, Delaware. There are noindustry concentrations in the Company’s loan portfolio. The Company does,however, have a substantial portion of its loans in real estate and performancewill be influenced by the real estate market in the region.

12

    The following table sets forth thecomposition of the Company's loan portfolio as of December 31, 2006, 2005, and2004, respectively.
		Composition of the Loan Portfolio Stated in Dollars and Percentages 		2006		2005		2004		2003		2002 		     Real estate mortgages      		       Construction, land,       		          and land 		development		 $   37,331,256 		 $   23,430,345 		 $   14,304,860 		 $   17,467,578 		 $   10,838,756  		       Residential 1 to 4 family		      88,599,071 		      81,327,154 		      74,211,899 		      79,624,476 		      79,005,353  		       Second mortgages		        2,395,178 		        2,094,749 		        1,900,559 		        1,353,800 		           553,316  		       Commercial properties		      79,484,039 		      76,103,526 		      57,252,929 		      50,153,929 		      57,404,170  		     Commercial		      23,264,997 		      21,461,593 		      14,007,430 		      13,199,879 		      12,765,723  		     Consumer		        2,352,660 		        2,215,299 		        2,010,406 		        2,630,623 		        3,438,494  		           Total loans		233,427,201		206,632,666		163,688,083		164,430,285		164,005,812 		     Less allowance for loan losses		        2,175,418 		        2,190,709 		        2,177,926 		        2,187,277 		        2,181,135  		           Loans, net		 $ 231,251,783 		 $ 204,441,957 		 $ 161,510,157 		 $ 162,243,008 		 $ 161,824,677         		     Real estate mortgages      		       Construction, land,       		          and land 		development		15.99%		11.34%		8.74%		10.62%		6.61% 		       Residential 1 to 4 family		37.95%		39.36%		45.33%		48.43%		48.17% 		       Second mortgages		1.03%		1.01%		1.16%		0.82%		0.34% 		       Commercial properties		34.05%		36.83%		34.98%		30.50%		35.00% 		     Commercial		9.97%		10.39%		8.56%		8.03%		7.78% 		     Consumer		1.01%		1.07%		1.23%		1.60%		2.10% 		           Total loans		100.00%		100.00%		100.00%		100.00%		100.00% 
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    The following table sets forth thematurity distribution, classified according to sensitivity to changes ininterest rates, for selected components of the Company's loan portfolio as ofDecember 31, 2006.
		Loan Maturity Schedule and Sensitivity to Changes in Interest Rates		December 31, 2006 		 		Over one through		Over five  		One year or less		five years		years		Total		     Real estate mortgages    		       Construction, land,     		          and land 		development		 $        37,209,747 		 $              		62,518 		 $              		58,991 		 $        37,331,256 		       Residential 1 to 4 family		           88,318,586 		                 		51,749 		               		228,736 		           88,599,071 		       Second mortgages		            		2,395,178 		                           		- 		                           		- 		            		2,395,178 		       Commercial properties		           79,165,424 		                 		53,191 		               		265,424 		           79,484,039 		     Commercial		           20,443,065 		            		2,203,607 		               		618,325 		           23,264,997 		     Consumer		            		1,075,144 		            		1,125,642 		               		151,874 		            		2,352,660  		 $      228,607,144 		 $          3,496,707 		 $          1,323,350 		 $      233,427,201      		     Fixed interest rate		 $          1,432,234 		 $          3,496,707 		 $          1,323,350 		 $          6,252,291 		     Variable interest rate (or demand)		         227,174,910  				                   		-    		                         		-    		         227,174,910 		           Total 		 $      228,607,144 		 $          3,496,707 		 $          1,323,350 		 $      233,427,201 
    As of December 31, 2006, $227,174,910 or97.32%, of the total loans were either variable rate loans or loans written ondemand. 

    The Company has the following commitments,lines of credit, and letters of credit outstanding as of December 31, 2006,2005, and 2004, respectively.
 		2006		2005		2004		       Construction and land development		loans		 $       18,866,083 		 $       21,845,161 		 $        		7,294,592 		       Other loan commitments		         		21,557,185 		         		24,252,637 		         		21,276,025 		       Standby letters of credit		           		1,682,942 		           		1,272,000 		           		1,535,210 		               		Total		 $       42,106,210 		 $       47,369,798 		 $       30,105,827 
    Loan commitments are agreements to lend toa customer as long as there is no violation of any condition to the contract.Loan commitments may have interest fixed at current rates, fixed expirationdates, and may require the payment of a fee. Letters of credit are commitmentsissued to guarantee the performance of a customer to a third party. Loancommitments and letters of credit are made on the same terms, includingcollateral, as outstanding loans. The Company's exposure to loss in the event ofnonperformance by the borrower is represented by the contract amount of thecommitment. 

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**Loan Quality    The allowance for loan losses represents an allowance forpotential losses in the loan portfolio. The adequacy of the allowance for loanlosses is evaluated periodically based on a review of all significant loans,with a particular emphasis on non-accruing, past due, and other loans thatmanagement believes require attention. The determination of the allowance restsupon management's judgment about factors affecting loan quality and assumptionsabout the economy. Management considers the year-end allowance appropriate andadequate to cover possible losses in the loan portfolio; however, management'sjudgment is based upon a number of assumptions about future events, which arebelieved to be reasonable, but which may or may not prove valid. Thus, there canbe no assurance that charge-offs in future periods will not exceed the allowancefor loan loss or that additional increases in the loan loss allowance will notbe required.    It is the Company’s policy to evaluate loan portfolio riskfor the purpose of establishing an adequate allowance. The allowance may includereserves for specific loans identified as substandard during management's loanreview. For significant problem loans, management's review consists ofevaluation of the financial strengths of the borrowers and guarantors, therelated collateral, and the effects of economic conditions. The overallevaluation of the adequacy of the total allowance for loan losses is based on ananalysis of historical loan losses ratios, loan charge-offs, delinquency trends,and previous collection experience, along with an assessment of the effects ofexternal economic conditions. The recent slow-down in the real-estate market hasaffected both the price and time to market residential and commercialproperties. Management closely monitors such trends and the potential effect onthe Company.     The provision for loan losses is a charge to earnings in thecurrent period to replenish the allowance and maintain it at a level managementhas determined to be adequate. No provision for loan losses was made in 2006,2005, or 2004 due to low levels of delinquencies. Generally, the Company willnot require a negative provision to reduce the allowance as a result of eithernet recoveries, or a decrease in loans.     Substantially all of the balance of the allowance as ofDecember 31 2006, 2005, and 2004, is "general" in nature, that is, it cannot bespecifically allocated among the major categories of loans in any meaningfulmanner. Management believes that this is consistent with the Company’s historyof conservative underwriting, high asset quality, low levels of delinquency, andminimal loan losses. As of December 31, 2006, the allowance for loan losses was..93% of outstanding loans, down from 1.06% at December 31, 2005, and 1.33% atDecember 31, 2004. 
		Allowance for Loan Losses		2006		2005		2004		2003		2002		Balance at beginning of year		 $   2,190,709 		 $   2,177,926 		 $   2,187,277 		 $   2,181,135 		 $   2,195,922 		Loan losses:     		  Commercial		            		5,357 		                    		- 		                    		- 		                    		- 		            		6,816 		  Mortgages		                    		- 		                    		- 		                    		- 		                    		- 		                    		- 		  Consumer		           10,029 		            		8,131 		           13,874 		            		3,423 		           41,954 		        Total loan losses		           15,386 		            		8,131 		           13,874 		            		3,423 		           48,770 		Recoveries on loans previously charged off:     		  Commercial		                    		- 		                    		- 		            		2,577 		               		533 		            		1,000 		  Mortgages		                    		- 		           15,263 		                    		- 		                    		- 		                    		- 		  Consumer		                 		95 		            		5,651 		            		1,946 		            		9,032 		            		7,983 		        Total loan recoveries		                 		95 		           20,914 		            		4,523 		            		9,565 		            		8,983 		Net loan losses (recoveries)		           15,291 		         (12,783)		            		9,351 		           (6,142)		           39,787 		Provision for loan losses charged to expense		                    		- 		                    		- 		                    		- 		                    		- 		           25,000 		Balance at end of year		 $   2,175,418 		 $   2,190,709 		 $   2,177,926 		 $   2,187,277 		 $   2,181,135      		Allowance for loan losses to loans     		 outstanding at end of year		0.93%		1.06%		1.33%		1.33%		1.33%		Net charge-offs to average loans		0.01%		-0.01%		0.01%		0.00%		0.02%
15

    As a result of management's ongoing reviewof the loan portfolio, loans are classified as nonaccrual when it is notreasonable to expect collection of interest under the original terms. Theseloans are classified as nonaccrual even though the presence of collateral or theborrower's financial strength may be sufficient to provide for ultimaterepayment. Interest payments received on nonaccrual loans are recognized as areduction of principal. A delinquent loan is generally placed in nonaccrualstatus when it becomes 90 days or more past due. When a loan is placed innonaccrual status, all interest that has been accrued on the loan but remainsunpaid is reversed and deducted from earnings as a reduction of reportedinterest income. No additional interest is accrued on the loan balance until thecollection of both principal and interest becomes reasonably certain.    Nonperforming loans are loans past due 90 or more days andstill accruing plus nonaccrual loans. When real estate acquired in foreclosureand held for sale is included with nonperforming loans, the result comprisesnonperforming assets. There were no nonperforming assets other thannonperforming loans as of December 31, 2006, 2005, 2004, 2003, or 2002, as shownin the following table.
		2006		2005		2004		2003		2002		Loans 90 days or more past due      		  and still accruing		 $     239,620 		 $     131,717 		 $     391,676 		 $    315,395 		 $    282,856 		Nonaccruing loans		                   		- 		                   		- 		                   		- 		                   		- 		          		2,222 		        Total nonperforming loans		 $     239,620 		 $     131,717 		 $     391,676 		 $    315,395 		 $    285,078 
    Loans are classified as impaired when thecollection of contractual obligations, including principal and interest, isdoubtful. Management has identified no significant impaired loans as of December31, 2006, 2005, or 2004.
**Liquidity and Interest Rate Sensitivity    The primary objective of asset/liability management is toensure the steady growth of the Company's primary source of earnings, netinterest income. Net interest income can fluctuate with significant interestrate movements. To lessen the impact of these margin swings, the balance sheetshould be structured so that repricing opportunities exist for both assets andliabilities in roughly equivalent amounts at approximately the same timeintervals. Imbalances in these repricing opportunities at any point in timeconstitute interest rate sensitivity.    Liquidity represents the ability to provide steady sources offunds for loan commitments and investment activities, as well as to providesufficient funds to cover deposit withdrawals and payment of debt and operatingobligations. These funds can be obtained by converting assets to cash or byattracting new deposits. Average liquid assets (cash and amounts due from banks,interest-bearing deposits in other banks, federal funds sold, and investmentsecurities) were 45.61% of average deposits for 2006, compared to 62.06% and67.94% for 2005 and 2004, respectively. 
16
    As of December 31, 2006, $48,945,961, or 68.93% of theinvestment debt securities mature in one year or less, of which, $11,919,970 areclassified as "available-for-sale." Federal funds sold provide additionalliquidity. Other sources of liquidity include letters of credit, overnightfederal funds, and reverse repurchase agreements available from correspondentbanks. The total lines and letters of credit available from correspondent bankswere $21,000,000 as of December 31, 2006, and $19,000,000 as of December 31,2005 and 2004.
		Investment Securities Maturity Distribution and Yields		December 31, 2006		December 31, 2005		December 31, 2004		Amount		  Yield		Amount		  Yield		Amount		  Yield		U. S. Treasury      		  One year or less		 $   37,408,625 		4.04%		 $   57,192,124 		2.66%		 $   58,255,488 		1.71%		  Over one through five years		      18,479,455 		4.69%		      27,462,872 		3.48%		      58,361,766 		2.57%		  Over ten years		        2,524,375 		7.28%		        2,587,187 		7.28%		        2,554,687 		7.28%		Total U.S. Treasury securities		      58,412,455 		4.38%		      87,242,183 		3.05%		    119,171,941 		2.25%      		U.S. Government Agencies      		  One year or less 		        8,749,280 		3.11%		        9,999,514 		2.31%		        3,250,000 		2.20%		  Over one through five years		                      		- 		           - 		        7,746,483 		3.13%		      16,741,938 		2.61%		Total U. S. Government Agencies		        8,749,280 		3.11%		      17,745,997  				2.67%		      19,991,938  				2.55%      		State, county, and municipal      		  One year or less		        2,788,056 		2.43%		        6,822,528 		1.59%		      11,399,926 		1.34%		  Over one through five years		        1,062,744 		2.82%		        3,551,782 		2.32%		        8,121,361 		1.60%		Total state, county, and municipal		        3,850,800 		2.54%		      10,374,310  				1.84%		      19,521,287  				1.45%      		Total debt securities      		  One year or less		      48,945,961 		3.78%		      74,014,166 		2.51%		      72,905,414 		1.67%		  Over one through five years		      19,542,199 		4.59%		      38,761,137 		3.30%		      83,225,065 		2.48%		  Over ten years		        2,524,375 		7.28%		        2,587,187 		7.28%		        2,554,687 		7.28%		Total debt securities		      71,012,535  				4.13%		    115,362,490 		2.89%		    158,685,166 		2.19%      		Equity securities		        4,113,288 		3.72%		        3,721,950 		2.95%		        3,265,566 		2.72%      		Total securities		 $   75,125,823 		4.11%		 $ 119,084,440 		2.89%		 $ 161,950,732 		2.20%
    Interest rate sensitivity refers to theresponsiveness of interest-bearing assets and liabilities to changes in marketinterest rates. The rate-sensitive position, or gap, is the difference in thevolume of rate-sensitive assets and liabilities at a given time interval. Thegeneral objective of gap management is to actively manage rate-sensitive assetsand liabilities to reduce the impact of interest rate fluctuations on the netinterest margin. Management generally attempts to maintain a balance betweenrate-sensitive assets and liabilities as the exposure period is lengthened tominimize the overall interest rate risk to the Company.    Interest rate sensitivity may be controlled on either side ofthe balance sheet. On the asset side, management exercises some control overmaturities. Also, loans are written to provide repricing opportunities on fixedrate notes. The Company's investment portfolio, including federal funds sold,provides the most flexible and fastest control over rate sensitivity since itcan generally be restructured more quickly than the loan portfolio.    On the liability side, deposit products are structured tooffer incentives to attain the maturity distribution desired. Competitivefactors sometimes make control over deposits more difficult and, therefore, lesseffective as an interest rate sensitivity management tool.    The asset mix of the balance sheet is continually evaluatedin terms of several variables: yield, credit quality, appropriate fundingsources, and liquidity. Management of the liability mix of the balance sheetfocuses on expanding the various funding sources.

17

    As of December 31, 2006, the Company wascumulatively asset-sensitive for all time horizons. For asset-sensitiveinstitutions, if interest rates should decrease, the net interest margins shoulddecline. 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, 2006 		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 		 $   24,616,735 		  $               		-    		  $               		-    		  $               		-    		 $   24,616,735 		  Interest-bearing deposits		           215,278 		        1,349,411 		           491,000 		                   		-    		        2,055,689 		  Investment debt securities 		      23,779,618 		      25,166,343 		      19,542,199 		        2,524,375 		      71,012,535  				  Loans		    227,578,213 		        1,028,931 		        3,496,707 		        1,323,350 		    233,427,201 		Total earning assets		 $ 276,189,844 		 $   27,544,685 		 $   23,529,906 		 $     3,847,725 		 $ 331,112,160      		Liabilities     		Interest-bearing deposits     		   NOW 		 $   54,458,814 		  $               		-    		  $               		-    		  $               		-    		 $   54,458,814 		   Money market 		      36,413,676 		                    		-    		                   		-    		                    		-    		      36,413,676  				   Savings		      45,844,558 		                    		-    		                   		-    		                    		-    		      45,844,558  				   Certificates $100,000 and over		      10,632,910 		      16,438,142 		           890,730 		                    		- 		      27,961,782  				   Certificates under $100,000		      16,631,525 		      24,070,763 		        5,317,789 		                    		- 		      46,020,077  				Securities sold under agreements    		                      		- 		   to repurchase		        5,624,048 		                    		-    		                   		-    		                    		-    		        5,624,048 		Note payable		              		5,535 		            		17,112 		            		98,090 		                      		- 		           120,737 		Total interest-bearing liabilities		 $ 169,611,066 		 $   40,526,017 		 $     6,306,609 		 $                   		- 		 $ 216,443,692      		Period gap		 $ 106,578,778 		 $  (12,981,332)		 $   17,223,297 		 $     3,847,725 		 $ 114,668,468 		Cumulative gap		 $ 106,578,778 		 $   93,597,446 		 $ 110,820,743 		 $ 114,668,468 		   		Ratio of cumulative gap to     		   total earning assets		32.19%		28.27%		33.47%		34.63% 
 
**Deposits and Other Interest-Bearing Liabilities    Average interest-bearing liabilities decreased $22,107,000,or 9.09%, to $221,056,000 in 2006, from $243,163,000 in 2005. Averageinterest-bearing deposits decreased $21,654,000, or 9.15%, to $215,033,000 in2006 from $236,687,000 in 2005, while average noninterest-bearing demanddeposits decreased $1,146,000, or 1.34% to $84,380,000 in 2006 from $85,526,000in 2005. At December 31, 2006, total deposits were $290,324,760, compared to$310,857,607 at December 31, 2005, a decrease of 6.60%.     Average interest-bearing liabilities decreased $2,116,000, or..86%, from $245,279,000 in 2004, to $243,163,000 in 2005. Averageinterest-bearing deposits decreased $3,400,000, or 1.42%, from $240,087,000 in2004 to $236,687,000 in 2005, while average noninterest-bearing demand depositsincreased $2,028,000, or 2.43% from $83,498,000 in 2004 to $85,526,000 in 2005.At December 31, 2005, total deposits were $310,857,607, compared to $319,772,358at December 31, 2004, a decrease of 2.79%.    Management believes that decreasing deposit volume through2005 and 2006 is indicative of a return by investors to non-deposit investmentproducts and strong competition for deposits in the local market. Managementmonitors deposit decreases closely and implements counter-measures as needed,including but not limited to rate increases on existing products and thedevelopment of new products.
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    The following table sets forth thedeposits of the Company by category as of December 31, 2006, 2005, and 2004,respectively.
 		December 31, 		2006		2005		2004   		Percent of 		Percent of 		Percent of 		Amount		deposits		Amount		deposits		Amount		deposits		Demand deposit accounts		 $      79,625,853 		27.43%		 $      88,236,133 		28.39%		 $      78,542,414 		24.56%		NOW accounts		          54,458,814 		18.76%		          62,601,973 		20.14%		          68,892,269 		21.55%		Money market		          36,413,676 		12.54%		          46,464,340 		14.95%		          49,362,532 		15.44%		Savings accounts		          45,844,558 		15.79%		          51,648,088 		16.61%		          53,667,019 		16.78%		Time deposits less than $100,000		          46,020,077 		15.85%		          44,028,847 		14.16%		          50,683,867 		15.85%		Time deposits of $100,000 or more		         27,961,782 		9.63%		         17,878,226 		5.75%		         18,624,257 		5.82%		           Total		deposits		 $    290,324,760 		100.00%		 $    310,857,607 		100.00%		 $    319,772,358 		100.00%
    Core deposits, which exclude certificatesof deposit of $100,000 or more, provide a relatively stable funding source forthe Company's loan portfolio and other earning assets. The Company's coredeposits decreased $30,616,403 during 2006 and $8,168,720 during 2005.Management attributes this decrease to more aggressive competition for timedeposits in the rising rate environment of 2006 and 2005. Rate increasesimplemented to retain deposits have caused a shift of funds from core depositsinto time deposits of $100,000 or more. During this period, as in the previousyear, management believes there has been a reversal of some of the 2001 through2004 migration of funds from the stock market into insured deposits.    Deposits, and particularly core deposits, have been theCompany's primary source of funding and have enabled the Company to meet bothits short-term and long-term liquidity needs. Management anticipates that whilesuch deposits will continue to be the Company's primary source of funding in thefuture, continued reductions in deposit levels, if coupled with growth in theCompany’s loan portfolio, could require periodic borrowing of funds. In thisevent, it is likely that Management would liquidate investment securities fromthe available for sale portfolio or purchase overnight federal funds as needed.    The maturity distribution of the Company's time deposits of$100,000 or more at December 31, 2006, is shown in the following table.

Maturities of Certificates of Deposit and Other Time		Deposits of $100,000 or More
December 31, 2006
After six
After three
through
Within three
Through
twelve
After twelve
months
six months
months
months
TotalTime of deposits		of $100,000 or more
$ 10,632,910
$ 10,796,797
$ 5,641,345 
$ 890,730 
$ 27,961,782 
    Large certificate of deposit customerstend to be extremely sensitive to interest rate levels, making these depositsless reliable sources of funding for liquidity planning purposes than coredeposits. Some financial institutions partially fund their balance sheets usinglarge certificates of deposit obtained through brokers. These brokered depositsare generally expensive and are unreliable as long-term funding sources.Accordingly, the Company does not accept brokered deposits.

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**Noninterest revenue    Noninterest revenue for 2006 increased$149,370, or 8.30% from the previous year. Service charges on deposit accountsincreased $65,715, or 6.24%, due to fee increases effective in early January2006. ATM and debit card revenue increased $75,776, or 20.35%, due to acombination of fee increases and card usage.    Noninterest revenue for 2005 increased $49,577, or 2.83% fromthe previous year. Of this, $49,710, representing a 15.40% line item increase,is attributable to revenues from ATM and VISA debit card usage.     The following table presents the principal components ofnoninterest revenue for the years ended December 31, 2006, 2005, and 2004,respectively.****  		2006		2005		2004		Service charges on deposit accounts 		 $   1,119,158 		 $   1,053,443 		 $   1,050,504 		ATM and debit card revenue  		         448,202 		         372,426 		         322,716 		Miscellaneous revenue 		         381,384 		         373,505 		         376,577 		  Total noninterest revenue 		 $   1,948,744 		 $   1,799,374 		 $   1,749,797      		Noninterest revenue as a percentage    		   of average total assets 		0.52%		0.45%		0.44%**Noninterest Expense    Noninterest expense increased $195,005, or 2.72%, from 2005to 2006. Increased personnel costs of $159,652 include a $48,300 cash bonus paidin February 2006, and a $28,197 increase in expense related to the Bank’semployee retirement plan. Occupancy expense increased $69,284 which includes a$29,430, or 24.93%, increase in utility costs. Furniture and equipment expenseare down $12,404, which is attributable to lower depreciation expense. Otheroperating expense decreased $21,527, as the net result of several increases anddecreases. Increased directors’ fees resulted from a fee increase, an additionalBoard seat, and one additional meeting in 2006 as compared to 2005. Postagecosts are down by $30,200 due to the timing of as-needed meter replenishment,and the Company’s efforts to reduce unnecessary mailings. Professional fees in2005 included non-recurring consulting fees of $19,052.     Noninterest expense increased $351,211, or 5.16%, from 2004to 2005. Increased personnel costs of $194,255 include a $37,487 increase inexpense related to the Bank’s employee retirement plan and the accrual of a10-year commitment, valued at $107,409, to provide long-term care insurance tothe Chairman of the Board. Occupancy expense increased $46,860 due to routineincreases in costs of utilities, real property taxes, and insurance, in additionto several significant repairs. Furniture and equipment expense are down$60,766, of which $26,769 is reduced depreciation expense, and $21,944 is lowercost of service contracts and repairs. Other operating expense increased$170,862, including a $29,452 increase in telephone and networktelecommunications.

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    The following table presents the principal components ofnoninterest expense for the years ended December 31, 2006, 2005, and 2004,respectively.
** 		2006		2005		2004		Salaries and employee benefits 		 $       4,257,185 		 $       4,097,533 		 $       3,903,278 		Occupancy expense 		            		709,619 		            		640,335 		            		593,475 		Furniture and equipment expense 		            		478,551 		            		490,955 		            		551,721 		Advertising 		            		166,441 		            		147,541 		            		145,583 		Armored car service 		              		52,513 		              		76,068 		              		60,829 		ATM and debit card 		            		234,409 		            		234,732 		            		232,353 		Business and product development 		              		79,623 		              		78,399 		              		70,720 		Computer software amortization 		            		111,765 		            		121,982 		            		117,191 		Computer software maintenance 		            		111,777 		            		101,875 		              		82,514 		Courier service 		            		108,961 		            		105,148 		            		103,922 		Deposit insurance 		              		36,275 		              		42,098 		              		45,403 		Director fees 		            		140,200 		              		99,900 		              		89,375 		Dues, donations, and subscriptions 		              		88,255 		              		94,385 		              		81,328 		Liability insurance 		              		39,402 		              		40,380 		              		41,556 		Postage 		            		149,262 		            		179,462 		            		169,569 		Professional fees 		              		41,337 		              		65,090 		              		22,745 		Stationery and supplies 		            		123,652 		            		111,593 		            		135,269 		Telephone  		            		170,960 		            		152,464 		            		123,012 		Miscellaneous 		            		254,500 		            		279,742 		            		238,628 		  Total noninterest expense 		 $       7,354,687 		 $       7,159,682 		 $       6,808,471     		Noninterest expense as a percentage of   		    average total assets		1.96%		1.80%		1.73%**
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******Capital    Under capital guidelines adopted by the Federal Reserve Boardand the FDIC, the Company and the Bank are currently required to maintain aminimum risk-based total capital ratio of 8%, with at least 4% being Tier 1capital. Tier 1 capital consists of common stockholders’ equity, qualifyingperpetual preferred stock, and minority interests in equity accounts ofconsolidated subsidiaries, less certain intangibles. In addition, the Companyand the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital tototal assets) of at least 4%, but this minimum ratio is increased by 100 to 200basis points for other than the highest-rated institutions.     At December 31, 2006, 2005, and 2004, the Company and theBank were well-capitalized, exceeding all minimum requirements, as set forth inthe following table.  		Analysis of Capital   		Consolidated 		To be well		Required 		Company		Bank		capitalized		minimums		2006    		Total risk-based capital ratio		33.7%		32.1%		10.0%		8.0%		Tier I risk-based capital ratio		32.2%		31.0%		6.0%		4.0%		Tier I leverage ratio		18.4%		17.5%		5.0%		4.0%      		2005    		Total risk-based capital ratio		35.2%		32.9%		10.0%		8.0%		Tier I risk-based capital ratio		33.5%		31.7%		6.0%		4.0%		Tier I leverage ratio		16.2%		15.4%		5.0%		4.0%      		2004    		Total risk-based capital ratio		43.3%		41.3%		10.0%		8.0%		Tier I risk-based capital ratio		41.7%		40.1%		6.0%		4.0%		Tier I leverage ratio		16.0%		15.3%		5.0%		4.0%**Website Access to SEC Reports    The Bank maintains an Internet website at www.taylorbank.com. The Company’s periodic SEC reports, includingannual reports on Form 10-K, quarterly reports on Form 10-Q, and current reportson Form 8-K, are accessible through this website. Access to these filings isfree of charge. The reports are available as soon as practicable after they arefiled electronically with the SEC. **Accounting Rule Changes**    The following accounting pronouncements have been approved bythe Financial Accounting Standards Board but have not become effective as ofDecember 31, 2006. These pronouncements would apply to the Company if theCompany or the Bank entered into an applicable activity.    FASB Statement No. 156, "Accounting for Servicing ofFinancial Assets" amends FASB Statement No. 140, "Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities", with respectto the accounting for separately recognized servicing assets and servicingliabilities. The Statement requires an entity to recognize a servicing asset orservicing liability each time it undertakes an obligation to service a financialasset by entering into a servicing contract in each of several specificsituations. It also requires all separately recognized servicing assets andservicing liabilities to be initially measured at fair value, if practicable,and permits an entity to choose either of two accepted measurement methods foreach class of separately recognized servicing assets and servicing liabilities.The Statement permits, at its initial adoption, a one-time reclassification ofavailable-for-sale securities to trading securities by entities with recognizedservicing rights. Lastly, the Statement requires separate presentation ofservicing assets and servicing liabilities subsequently measured at fair valueand additional disclosures for all separately recognized servicing assets andservicing liabilities. SFAS No. 156 is effective for fiscal years beginningafter September 15, 2006. Management does not expect the adoption of thisStatement to have a material impact on the Company’s consolidated financialstatements.
22

    FASB Statement No. 157, "Fair Value Measurements" definesfair value, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements.  SFAS No. 157 will be appliedprospectively and is effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years.  Management does notexpect SFAS No. 157 to have a material impact on the Company’s consolidatedfinancial statements.    FASB Statement No. 158, "Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106, and 132(R)"requires companies to recognize a net liability orasset to report the funded status of their defined benefit pension and otherpostretirement benefit plans on their balance sheets.  The effective dateof the recognition and disclosure provisions for calendar-year public companiesis for calendar years ending after December 15, 2006.  Management does notexpect SFAS No. 158 to have a material impact on the Company's consolidatedfinancial statements since the Company does not currently have any definedbenefit plans.	    FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes – an interpretation of FASB Statement No. 109” clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FASB Statement No. 109, “Accounting forIncome Taxes.” This Interpretation prescribes a recognition and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 is effective forfiscal years beginning after December 15, 2006. Management does not expect FINNo. 48 to have a material impact on the Company's consolidated financialstatements.    The accounting policies adopted by management are consistentwith accounting principles generally accepted in the United States of Americaand are consistent with those followed by peer Banks.
**Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk

Impact of Inflation    Unlike most industrial companies, the assets and liabilitiesof financial institutions such as the Company and the Bank are primarilymonetary in nature. Therefore, interest rates have a more significant effect onthe Company's performance than do the effects of changes in the general rate ofinflation and change in prices. In addition, interest rates do not necessarilymove in the same direction or in the same magnitude as the prices of goods andservices. As discussed previously, management seeks to manage the relationshipsbetween interest sensitive assets and liabilities in order to protect againstwide 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 informationincluded on pages 1 through 21 of the Company's Annual Report to Stockholdersfor the year ended December 31, 2006, is incorporated herein by reference.
**Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosures**
    There have been no changes in or disagreements withaccountants on accounting or financial disclosure during the fiscal year coveredby this report.

23
**Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures    Disclosure controls and procedures are designed andmaintained by the Company to ensure that information required to be disclosed inthe Company’s publicly filed reports is recorded, processed, summarized andreported in a timely manner. Such information must be available to management,including the Chief Executive Officer (CEO) and Treasurer, to allow them to maketimely decisions about required disclosures. Even a well-designed and maintainedcontrol system can provide only reasonable, not absolute, assurance that itsobjectives are achieved. Inherent limitations in any system of controls includeflawed judgment, errors, omissions, or intentional circumvention of controls.    The Company’s management, including the CEO and Treasurer,performed an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of December 31, 2006. Based onthat evaluation, the Company’s management, including the CEO and Treasurer, hasconcluded that the Company’s disclosure controls and procedures are effective.The projection of an evaluation of controls to future periods is subject to therisk that procedures may become inadequate due to changes in conditionsincluding the degree of compliance with procedures.
**Internal Control Over Financial ReportingManagement Report on Internal Control over Financial Reporting    Calvin B. Taylor Bankshares, Inc. maintains a system ofinternal control over financial reporting, which is designed to providereasonable assurance to the Company’s management and board of directorsregarding the preparation of reliable published financial statements. The systemincludes an organizational structure and division of responsibility, establishedpolicies and procedures including a code of conduct to foster a strong ethicalclimate, and the careful selection, training and development of our staff. Thesystem contains self-monitoring mechanisms, and an internal auditor monitors theoperation of the internal control system and reports findings andrecommendations to management and the board of directors. Corrective actions aretaken to address control deficiencies and other opportunities for improving thesystem as they are identified. The board, operating through its audit committee,which is composed entirely of directors who are not officers or employees of theCompany, provides oversight to the financial reporting process.    There are inherent limitations in the effectiveness of anysystem of internal controls, including the possibility of human error and thecircumvention or overriding of controls. Accordingly, even an effective internalcontrol system can provide only reasonable assurance with respect to financialstatement preparation. Furthermore, the effectiveness of an internal controlsystem may vary over time and with circumstances.    The Company assessed its internal control system as ofDecember 31, 2006 in relation to criteria for effective internal control overfinancial reporting as described in *Internal Control – Integrated Framework*,issued by the Committee of Sponsoring Organizations of the Treadway Commission.Based on its assessment, the Company believes that, as of December 31, 2006, itssystem of internal control over financial reporting met those criteria.
CALVIN B. TAYLOR BANKSHARES, INC.(Registrant)

Date: January 31, 2007     												By: Raymond M. Thompson                                                   												Chief Executive Officer
Date: 												January 31, 2007     												By: Jennifer G. Hawkins                                                   												Treasurer / Principal Financial												Officer

24

Attestation Report of the Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and StockholdersCalvin B. Taylor Bankshares, Inc.Berlin, Maryland

        We have auditedmanagement’s assessment, included in the accompanying Management Report onInternal Control Over Financial Reporting, that Calvin B. Taylor Bankshares,Inc. and Subsidiary maintained effective internal control over financialreporting as of December 31, 2006, based on criteria established in *InternalControl – Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internal controlover financial reporting based on our audit.        We conducted our audit in accordancewith the standards of the Public Company Accounting Oversight Board in theUnited States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating the designand operating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.        A company’s internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generally acceptedaccounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors ofthe company; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.        Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.        In our opinion, management’sassessment that Calvin B. Taylor Bankshares, Inc. and Subsidiary maintainedeffective internal control over financial reporting as of December 31, 2006, isfairly stated, in all material respects, based on criteria established in *Internal Control – Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). Also, in ouropinion, Calvin B. Taylor Bankshares, Inc. and Subsidiary maintained, in allmaterial respects, effective internal control over financial reporting as ofDecember 31, 2006, based on criteria established in *Internal Control –Integrated Framework* issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO).        We have audited, in accordance withthe standards of the Public Company Accounting Oversight Board in the UnitedStates of America,the balance sheets and therelated statements of income, changes in stockholders’ equity and cash flows of CalvinB. Taylor Bankshares, Inc. and Subsidiary, and our report dated February 2,2007, expressed an unqualified opinion.

 

/s/ Rowles & Company, LLP

Baltimore, MarylandFebruary 2, 2007

25

 
**Changes in Internal Controls**
    During the quarter ended on the date ofthis report, there were no significant changes in the Company’s internalcontrols over financial reporting that have had or are reasonably likely to havea material affect on the Company’s internal control over financial reporting. Asof December 31, 2006, the Company’s management, including the CEO and Treasurer,has concluded that the Company’s internal controls over financial reporting areeffective.
**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 iscomprised of eight independent directors, including Chairman James R. Bergey,Jr. who serves as the financial expert. The Audit Committee is scheduled to meetquarterly and held six meetings in 2006.
**PART III

Item 10. Directors and Executive Officers of the Registrant    The information required by this item is included inthe Company's Proxy Statement to be filed in connection with the 2007 AnnualMeeting of Stockholders, and is incorporated herein by reference.
**Item 11. Executive Compensation     The information required by this item is included inthe Company's Proxy Statement to be filed in connection with the 2007 AnnualMeeting of Stockholders, and is incorporated herein by reference.
**Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.    The information required by this item is included inthe Company's Proxy Statement to be filed in connection with the 2007 AnnualMeeting of Stockholders, and is incorporated herein by reference.
**Item 13. Certain Relationships and Related Transactions    The information required by this item is included inthe Company's Proxy Statement to be filed in connection with the 2007 AnnualMeeting of Stockholders, and is incorporated herein by reference.
**Item 14. Principal Accounting Fees and Services    The information required by this item is included inthe Company's Proxy Statement to be filed in connection with the 2007 AnnualMeeting of Stockholders, and is incorporated herein by reference.
**PART IV

Item 15. Exhibits, Financial Statement Schedules**
(a) Exhibits    (a)(1),(2) Annual Report toStockholders for the year ended December 31, 2006.    3.1 Articles of Incorporation of the Company, incorporated byreference to Exhibit 3.1 of Registration Statement Form S-4, File No. 33-99762.    3.2 Bylaws of the Company, incorporated by reference toExhibit 3.2 of Registration Statement Form S-4, File No. 33-99762.

26

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

CALVIN B. TAYLOR BANKSHARES, INC.(Registrant)

Date:												March 8, 2007    												By: Raymond M. Thompson                                       												Chief Executive Officer

Date: 												March 8, 2007    												By: Jennifer G. Hawkins                                       												Treasurer / Principal Financial												Officer

Pursuant to the requirements of the Securities Exchange Actof 1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

Date: March  , 2007    By: /s/ James R. Bergey, Jr., Director

Date: March  , 2007    By: /s/ John H. Burbage, Jr., Director

Date: March  , 2007    By: /s/ Todd E. Burbage, Director

Date: March  , 2007    By: /s/ Charlotte K. Cathell, Director

Date: March  , 2007    By:  /s/ Reese F. Cropper, Jr.                                       Chairman of the Board of Directors

Date: March  , 2007    By: /s/ Reese F. Cropper, III, Director

Date: March  , 2007    By: /s/ Hale Harrison, Director

Date: March  , 2007    By: /s/ Gerald T. Mason, Director

Date: March  , 2007    By: /s/ William H. Mitchell, Director                                       Vice President

Date: March  , 2007    By: /s/ Joseph E. Moore, Director

Date: March  , 2007    By:/s/ Michael L. Quillin, Sr., Director
Date: March  , 2007    By: /s/ D. Bruce Rogers, Director

Date: March  , 2007    By: /s/ Raymond M. Thompson, Director                                       President and Chief Executive Officer

Certification - Pursuant to 18 U.S.C. 1350Section 906 of the Sarbanes-Oxley Act of 2002

We, the undersigned, certify that to the best of our knowledge, based upon areview of the Annual Report on Form 10-K for the period ended December 31, 2005of the Registrant (the "Report"):	The Report fully complies with the requirements of Section 13(a) or 15(d) of	the Securities Exchange Act of 1934, as amended; and	The information contained in the Report fairly presents, in all material	respects, the financial condition and results of operations of the	Registrant.
 

 

CALVIN B. TAYLOR BANKSHARES, INC.(Registrant)

Date:												March 8, 2007    												By: /s/ Raymond M. Thompson                                       												Chief Executive Officer

Date: 												March 8, 2007    												By: /s/ Jennifer G. Hawkins                                       												Treasurer / Principal Financial												Officer

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

I, Raymond M. Thompson, certify that:
	I have reviewed this annual report on Form 10-K of Calvin B. Taylor	Bankshares, Inc.;	..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;	..Based on my knowledge, the financial statements, and other financial	information included in this report, fairly present in all material respects	the financial condition, results of operations and cash flows of the	registrant as of, and for, the periods presented in this report;	..The registrant’s other certifying officer and I are responsible for	establishing and maintaining disclosure controls and procedures (as defined	in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over	financial reporting (as defined in Exchange Act Rules 13a-15(f) and	15d-15(f) for the registrant and have:				a) designed such disclosure controls and procedures, or caused				such disclosure controls and procedures to be designed under our				supervision, to ensure that material information relating to the				registrant, including its consolidated subsidiary, is made known				to us by others within those entities, particularly during the				period in which this report is being prepared;				b) designed such internal control over financial reporting, or				caused such internal control over financial reporting to be				designed under our supervision, to provide reasonable assurance				regarding the reliability of financial reporting and the				preparation of financial statements for external purposes in				accordance with generally accepted accounting principles;				c) evaluated the effectiveness of the registrant’s disclosure				controls and procedures and presented in this report our				conclusions about the effectiveness of the disclosure controls				and procedures, as of the end of the period covered by this				report based on such evaluations; and				d) disclosed in this report any change in the registrant’s				internal control over financial reporting that occurred during				the registrant’s most recent fiscal quarter that has materially				affected, or is reasonably likely to materially affect, the				registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on	our most recent evaluation of internal control over financial reporting, to	the registrant’s auditors and the audit committee of the registrant’s board	of directors:				a) all significant deficiencies and material weaknesses in the				design or operation of internal control over financial reporting				which are reasonably likely to adversely affect the registrant’s				ability to record, process, summarize and report financial				information; and 				b) any fraud, whether or not material, that involves management				or other employees who have a significant role in the				registrant’s internal control over financial reporting.
**Calvin B. Taylor Bankshares, Inc.**
 

Date: March 8, 2007 

By: 					 /s/					Raymond M. Thompson					President & Chief Executive Officer
 

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

I, Jennifer G. Hawkins, certify that:	I have reviewed this annual report on Form 10-K of Calvin B. Taylor	Bankshares, Inc.;	..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;	..Based on my knowledge, the financial statements, and other financial	information included in this report, fairly present in all material respects	the financial condition, results of operations and cash flows of the	registrant as of, and for, the periods presented in this report;	..The registrant’s other certifying officer and I are responsible for	establishing and maintaining disclosure controls and procedures (as defined	in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over	financial reporting (as defined in Exchange Act Rules 13a-15(f) and	15d-15(f) for the registrant and have:				a) designed such disclosure controls and procedures, or caused				such disclosure controls and procedures to be designed under our				supervision, to ensure that material information relating to the				registrant, including its consolidated subsidiary, is made known				to us by others within those entities, particularly during the				period in which this report is being prepared;				b) designed such internal control over financial reporting, or				caused such internal control over financial reporting to be				designed under our supervision, to provide reasonable assurance				regarding the reliability of financial reporting and the				preparation of financial statements for external purposes in				accordance with generally accepted accounting principles;				c) evaluated the effectiveness of the registrant’s disclosure				controls and procedures and presented in this report our				conclusions about the effectiveness of the disclosure controls				and procedures, as of the end of the period covered by this				report based on such evaluations; and				d) disclosed in this report any change in the registrant’s				internal control over financial reporting that occurred during				the registrant’s most recent fiscal quarter that has materially				affected, or is reasonably likely to materially affect, the				registrant’s internal control over financial reporting; and
The registrant’s other certifying officer and I have disclosed, based on	our most recent evaluation of internal control over financial reporting, to	the registrant’s auditors and the audit committee of the registrant’s board	of directors:				a) all significant deficiencies and material weaknesses in the				design or operation of internal control over financial reporting				which are reasonably likely to adversely affect the registrant’s				ability to record, process, summarize and report financial				information; and 				b) any fraud, whether or not material, that involves management				or other employees who have a significant role in the				registrant’s internal control over financial reporting.
**Calvin B. Taylor Bankshares, Inc.**
 

Date:										March 8, 2007 

										By: /s/ Jennifer G. HawkinsTreasurer										/ Principal Financial Officer*****************************************************************