UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

Commission File Number: 000-50047

CALVIN B. TAYLOR BANKSHARES, INC.

I.R.S. Employer Identification No.: 52-1948274
State of incorporation: Maryland
Address of principal executive offices: 24 North MainStreet, Berlin, Maryland 21811
Issuer’s telephone number: (410) 641-1700
 

Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days. YES   X   NO ____
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 whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act). YES ____ NO   X  
Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date: Theregistrant had 3,186,014 shares ofcommon stock ($1.00 par) outstanding as of July 31, 2006.** 

Calvin B. Taylor Bankshares, Inc. and Subsidiary

Form 10-Q

Index**Part I - Financial		InformationPageItem 1Consolidated		Financial StatementsConsolidated		Balance Sheets as of June 30, 2006 and December 31, 20053 Consolidated		Statements of Income for the three months ended June		30, 2006 and 20054Consolidated		Statements of Income for the six months ended June		30, 2006 and 20055Consolidated		Statements of Cash Flows for the six months ended June		30, 2006 and 20056-7Notes to		Consolidated Financial Statements8-9Item 2Management’s		Discussion and Analysis of Financial Conditionand Results		of Operations10-15Item 3Quantitative		and Qualitative Disclosures About Market Risks 15Item 4Controls and		Procedures16Part II - Other		InformationItem 1Legal		Proceedings17Item 1ARisk Factors17Item 2Unregistered		Sales of Equity Securities and Use of Proceeds17-18Item 3Defaults Upon		Senior Securities18Item 4Submission of		Matters to a Vote of Security Holders18Item 5Other		Information18Item 6Exhibits18-21Signatures22 		Calvin B. Taylor Bankshares, Inc. and Subsidiary  		Part I - Financial Information   		Consolidated Balance Sheets    		(unaudited)   		June 30,		December 31,  		2006		2005 		Assets 		Cash and due from banks		 $       20,258,240 		 $       24,069,790  		Federal funds sold		26,008,837 		26,296,780  		Interest-bearing deposits		2,232,228 		2,192,731  		Investment securities available for sale		8,803,416 		6,505,278  		Investment securities held to maturity (approximate    		  fair value of $76,267,903 and $111,306,528)		77,222,368 		112,579,162  		Loans, less allowance for loan losses   		  of $2,190,778 and $2,190,709		233,648,286 		204,441,957  		Premises and equipment		6,630,027 		6,664,051  		Accrued interest receivable		1,628,232 		1,504,945  		Computer software		214,675 		228,014  		Bank owned life insurance		4,446,263 		4,367,744  		Other assets		              241,924 		              224,172   		 $     381,334,496		 $     389,074,624 		Liabilities and Stockholders' Equity 		Deposits   		  Noninterest-bearing		 $       84,940,085 		 $       88,236,133  		  Interest-bearing		        218,347,181 		        222,621,474   		        303,287,266 		        310,857,607  		Securities sold under agreements to repurchase		           6,832,019 		           6,149,263  		Dividend payable		                      - 		           4,462,578  		Accrued interest payable 		              254,339 		              177,357  		Note payable		              131,563 		              142,069  		Deferred income taxes		              738,829 		              635,336  		Other liabilities		              106,125 		              332,030   		        311,350,141 		        322,756,240  		Stockholders' equity   		  Common stock, par value $1 per share    		   authorized 10,000,000 shares, issued and outstanding   		   3,186,014 shares at June 30,2006, and   		   3,187,556 shares at December 31, 2005		           3,186,014 		           3,187,556  		  Additional paid-in capital		         15,400,765 		         15,454,735  		  Retained earnings		         49,602,690 		         46,021,128   		         68,189,469 		         64,663,419  		  Accumulated other comprehensive income		           1,794,886 		           1,654,965   		         69,984,355 		         66,318,384   		 $     381,334,496 		 $     389,074,624  		See accompanying Notes to Consolidated Financial Statements 		Calvin B. Taylor Bankshares, Inc. and Subsidiary  		Consolidated Statements of Income (unaudited)       		For the three months ended June 30,  		2006		2005 		Interest and dividend revenue   		  Loans, including fees		 $        3,928,251 		 $        3,204,198  		  U.S. Treasury and government agency securities		              649,515 		              764,872  		  State and municipal securities		               43,353 		               71,951  		  Federal funds sold 		              200,550 		              225,819  		  Interest-bearing deposits		               18,090 		               12,701  		  Equity securities		               18,409 		               10,204  		          Total interest and dividend revenue		           4,858,168 		           4,289,745      		Interest expense   		  Deposits		              739,085 		              383,715  		  Borrowings		               11,207 		                 5,219  		    Total interest expense		              750,292 		              388,934      		    Net interest income		           4,107,876 		           3,900,811      		Provision for loan losses		                      -   		                      -    		    Net interest income after provision for loan losses		           4,107,876 		           3,900,811      		Noninterest revenue   		  Service charges on deposit accounts		              297,844 		              266,598  		  ATM and debit card revenue		              130,477 		              110,689  		  Miscellaneous revenue		               99,970 		               95,421  		    Total noninterest revenue		              528,291 		              472,708      		Noninterest expenses   		  Salaries		              809,015 		              766,409  		  Employee benefits		              171,346 		              200,184  		  Occupancy		              168,430 		              152,598  		  Furniture and equipment		              130,272 		              126,753  		  Other operating		              497,943 		              504,710  		    Total noninterest expenses		           1,777,006 		           1,750,654      		    Income before income taxes		           2,859,161 		           2,622,865  		Income taxes		           1,041,000 		              935,000      		Net income		 $        1,818,161 		 $        1,687,865      		Earnings per common share - basic and diluted		 $                0.57 		 $                0.53  		See accompanying Notes to Consolidated Financial Statements 		Calvin B. Taylor Bankshares, Inc. and Subsidiary  		Consolidated Statements of Income (unaudited)       		For the six months ended June 30,  		2006		2005 		Interest and dividend revenue   		  Loans, including fees		 $        7,642,850 		 $        6,087,427  		  U.S. Treasury and government agency securities		           1,381,200 		           1,535,965  		  State and municipal securities		               91,312 		              144,978  		  Federal funds sold 		              338,038 		              406,003  		  Interest-bearing deposits		               35,323 		               24,863  		  Equity securities		               43,402 		               31,660  		          Total interest and dividend revenue		           9,532,125 		           8,230,896      		Interest expense   		  Deposits		           1,378,727 		              740,310  		  Borrowings		               22,255 		                 9,638  		    Total interest expense		           1,400,982 		              749,948      		    Net interest income		           8,131,143 		           7,480,948      		Provision for loan losses		                      -   		                      -    		    Net interest income after provision for loan losses		           8,131,143 		           7,480,948      		Noninterest revenue   		  Service charges on deposit accounts		              580,065 		              522,196  		  ATM and debit card revenue		              237,875 		              186,861  		  Miscellaneous revenue		              185,977 		              193,312  		    Total noninterest revenue		           1,003,917 		              902,369      		Noninterest expenses   		  Salaries		           1,644,032 		           1,532,588  		  Employee benefits		              383,487 		              383,211  		  Occupancy		              348,909 		              316,495  		  Furniture and equipment		              239,430 		              248,464  		  Other operating		              930,640 		              952,235  		    Total noninterest expenses		           3,546,498 		           3,432,993      		    Income before income taxes		           5,588,562 		           4,950,324  		Income taxes		           2,007,000 		           1,762,000      		Net income		 $        3,581,562 		 $        3,188,324      		Earnings per common share - basic and diluted		 $                1.12 		 $                1.00  		See accompanying Notes to Consolidated Financial Statements 		Calvin B. Taylor Bankshares, Inc. and Subsidiary  		Consolidated Statements of Cash Flows (unaudited)       		For the six months ended June 30,  		2006		2005 		Cash flows from operating activities   		  Interest and dividends received		 $        9,366,111 		 $        8,036,145  		  Fees and commissions received		              923,460 		              901,216  		  Interest paid		          (1,324,000)		            (751,952) 		  Cash paid to suppliers and employees		          (3,371,186)		          (3,085,257) 		  Income taxes paid		          (2,124,938)		          (1,730,920)  		           3,469,447 		           3,369,232  		Cash flows from investing activities   		  Certificates of deposit purchased, net of maturities		                (2,252)		                (1,000) 		  Purchase of investments available for sale		          (2,050,203)		            (145,379) 		  Proceeds from maturities of investments held to    		     maturity		         35,395,000 		         44,845,000  		  Purchase of investment held to maturity		                      -   		        (28,070,433) 		  Loans made, net of principal collected		        (29,206,329)		        (27,754,530) 		  Purchases of premises, equipment,   		    and computer software		            (251,729)		            (154,869)  		           3,884,487 		        (11,281,211)     		Cash flows from financing activities   		  Net increase (decrease) in   		    Time deposits		           3,018,750 		          (7,697,384) 		    Other deposits		        (10,589,091)		         20,548,102  		    Securities sold under agreements to repurchase		              682,756 		              867,981  		  Payments on note payable		              (10,506)		                (9,895) 		  Common shares repurchased		              (55,512)		            (749,592) 		  Dividends paid		          (4,462,578)		                      -     		        (11,416,181)		         12,959,212      		Net increase (decrease) in cash and cash equivalents		          (4,062,247)		           5,047,233  		Cash and cash equivalents at beginning of period		         50,425,595 		         54,623,503  		Cash and cash equivalents at end of period		 $       46,363,348 		 $       59,670,736  		Calvin B. Taylor Bankshares, Inc. and Subsidiary  		Consolidated Statements of Cash Flows (unaudited)       		For the six months ended June 30,  		2006		2005 		Reconciliation of net income to net cash provided   		  by operating activities   		  Net income		 $        3,581,562 		 $        3,188,324  		  Adjustments to reconcile net income to net cash   		    provided by operating activities   		    Depreciation and amortization		              299,092 		              323,560  		    Amortization of premiums and accretion of   		      discount, net		              (42,727)		              (66,772) 		    Decrease (increase) in   		      Accrued interest receivable		            (123,287)		            (127,980) 		      Cash surrender value of bank owned life insurance		              (78,519)		              (75,436) 		      Other assets		              (17,751)		              200,168  		    Increase (decrease) in   		      Accrued interest payable		               76,982 		                (2,004) 		      Other liabilities		            (225,905)		              (70,628)  		 $        3,469,447 		 $        3,369,232          		  Composition of cash and cash equivalents   		    Cash and due from banks		 $       20,258,241 		 $       18,594,369  		    Federal funds sold 		         26,008,837 		         41,059,122  		    Interest-bearing deposits, except for time deposits		               96,270 		               17,245   		 $       46,363,348 		 $       59,670,736                                                                		See accompanying Notes to Consolidated Financial Statements
**Calvin B. Taylor Bankshares, Inc. and SubsidiaryNotes to Consolidated Financial Statements (unaudited)**
1. Basis of Presentation	The accompanying unaudited consolidated financial	statements have been prepared in accordance with generally accepted	accounting principles in the United States of America for interim financial	information and with the instructions to Form 10-Q. Accordingly, they do not	include all the information and footnotes required by generally accepted	accounting principles for complete financial statements. In the opinion of	management, all adjustments considered necessary for a fair presentation of	financial position and results of operations have been made. These	adjustments are of a normal recurring nature. Results of operations for the	six months ended June 30, 2006 are not necessarily indicative of the results	that may be expected for the year ending December 31, 2006. For further	information, refer to the audited consolidated financial statements and	related footnotes included in the Company's Form 10-K for the year ended	December 31, 2005.

Consolidation has resulted in the elimination of all	significant intercompany accounts and transactions.

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

Per share data	Earnings per common share are determined by dividing net income by the	weighted average number of common shares outstanding for the period,	as follows:  		2006		2005 		Three months ended June 30		             3,186,014 		             3,196,432  		Six months ended June 30		             3,186,333 		             3,201,817 
2. Comprehensive Income	          Comprehensive income consists of:  		For the six months ended June 30,  		2006		2005 		Net income		 $          3,581,562 		 $          3,188,324  		Unrealized gain (loss) on investment securities   		  available for sale, net of income taxes		               139,921 		               309,154  		Comprehensive income		 $          3,721,483 		 $          3,497,478 
3. Loan commitments	          Loan commitments are agreements to lend to customers as	long as there is no violation of any conditions of the contracts. As of June	30, outstanding loan commitments and letters of credit consist of:
  			2006			2005 			Loan commitments			$        45,053,177 			 $        36,185,825  			Standby letters of credit			 $             874,086 			 $          1,608,631 **Calvin B. Taylor Bankshares, Inc. and SubsidiaryNotes to Consolidated Financial Statements (unaudited) (continued)**

4.  New accounting standards	       In February 2006, the FASB	published FASB Statement No. 155, "Accounting for Certain Hybrid Financial	Instruments" ("SFAS No.155" or the "Statement"). SFAS 155 amends FASB	Statements No. 133, "Accounting for Derivative Instruments and Hedging	Activities" and No. 140, "Accounting for Transfers and Servicing of	Financial Assets and Extinguishments of Liabilities." Among other things,	the Statement resolves issues related to the financial reporting of certain	hybrid financial instruments (financial instruments that have embedded	derivatives) to be accounted for as a whole at fair value if the holder	elects this option. This accounting eliminates the need to bifurcate the	derivative from its host. The Statement also eliminates certain previous	guidance that provided that beneficial interests in securitized financial	assets are not subject to the provisions of SFAS No. 133. Lastly, the	Statement also eliminates a restriction on the passive derivative	instruments that a qualifying special purpose entity may hold. Management	does not expect the adoption of this Statement to have a material impact on	the Company’s consolidated financial statements. 
      In March 2006, the FASB	published FASB Statement No. 156, "Accounting for Servicing of Financial	Assets" ("SFAS No.156" or the "Statement"). This Statement amends FASB	Statement No. 140, "Accounting for Transfers and Servicing of Financial	Assets and Extinguishments of Liabilities", with respect to the accounting	for separately recognized servicing assets and servicing liabilities. The	Statement requires an entity to recognize a servicing asset or servicing	liability each time it undertakes an obligation to service a financial asset	by entering into a servicing contract in each of several specific	situations. It also requires all separately recognized servicing assets and	servicing liabilities to be initially measured at fair value, if	practicable, and permits an entity to choose either of two accepted	measurement methods for each class of separately recognized servicing assets	and servicing liabilities. Further, the Statement permits, at its initial	adoption, a one-time reclassification of available-for-sale securities to	trading securities by entities with recognized servicing rights. Lastly, the	Statement requires separate presentation of servicing assets and servicing	liabilities subsequently measured at fair value and additional disclosures	for all separately recognized servicing assets and servicing liabilities.	SFAS No. 156 is effective for fiscal years beginning after September 15,	2006. Management does not expect the adoption of this Statement to have a	material impact on the Company’s consolidated financial statements.
**Calvin B. Taylor Bankshares, Inc. and SubsidiaryPart I. Financial InformationItem 2. Management's Discussion and Analysis of Financial Condition andResults of Operations
*This Report contains statements which constituteforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and the Securities Exchange Act of 1934. These statements appear ina number of places in this Report and include all statements regarding theintent, belief or current expectations of the Company, its directors, or itsofficers with respect to, among other things: (i) the Company's financing plans;(ii) trends affecting the Company's financial condition or results ofoperations; (iii) the Company's growth strategy and operating strategy; and (iv)the declaration and payment of dividends. Investors are cautioned that any suchforward-looking statements are not guarantees of future performance and involverisks and uncertainties, and that actual results may differ materially fromthose projected in the forward-looking statements as a result of various factorsdiscussed herein and those factors discussed in detail in the Company's filingswith the Securities and Exchange Commission.*
The following discussion of the financial condition andresults of operations of the Registrant (the Company) should be read inconjunction with the Company's financial statements and related notes and otherstatistical information included elsewhere herein.

GeneralCalvin B. Taylor Bankshares, Inc. (Company) was incorporatedas a Maryland corporation on October 31, 1995. The Company owns all of the stockof Calvin B. Taylor Banking Company (Bank), a commercial bank that wasestablished in 1890 and incorporated under the laws of the State of Maryland onDecember 17, 1907. The Bank operates nine banking offices in Worcester County,Maryland and one banking office in Ocean View, Delaware. The Bank'sadministrative office is located in Berlin, Maryland. The Bank is engaged in ageneral commercial and retail banking business serving individuals, businesses,and governmental units in Worcester County, Maryland, Ocean View, Delaware, andneighboring counties.

The Company currently engages in no business other thanowning and managing the Bank.

Critical Accounting PoliciesThe Company’s financial condition and results of operationsare sensitive to accounting measurements and estimates of inherently uncertainmatters. When applying accounting policies in areas that are subjective innature, management uses its best judgment to arrive at the carrying value ofcertain assets. One of the most critical accounting policies applied is relatedto the valuation of the loan portfolio. Management estimates the appropriateallowance for loan losses, including the timing of loan charge-offs.

The allowance for loan losses represents a reserve forpotential losses in the loan portfolio. It is one of the most difficult andsubjective judgments. The adequacy of the allowance for loan losses is evaluatedperiodically based on a review of the loan portfolio, with a particular emphasison non-accruing, past due, and other loans that management believes requireattention. The determination of the reserve level relies on management'sjudgment about factors affecting loan quality, current trends in delinquenciesand charge-offs, and anticipated changes in the composition and size of theportfolio. Management also considers external factors such as changes in theinterest rate environment, the view of the Bank’s regulators, economicconditions in the Bank’s service area and beyond, and legislation that affectsthe banking industry.

Financial ConditionTotal assets of the Company decreased $7.7 million fromDecember 31, 2005 to June 30, 2006. Combined deposits and customer repurchaseagreements decreased $6.9 million during the same period. During the secondquarter of the year, the Bank typically experiences a growth in deposits fromseasonal business customers, summer residents and tourists. In 2006, the Bank’saverage assets and average deposits decreased modestly from the first quarter tosecond quarter of 2006 by $1.4 million and $1.3 million, respectively.Management attributes this decrease to 1) increased competition for deposits,evidenced by high rate certificate of deposit "specials" in our market area, 2)a slow down in real estate settlements, reflected in lower attorneys’ accountbalances, and 3) a return of investor confidence in the stock market, which iscausing some reversal of the deposit influx experienced from late 2001 throughmid 2004. Management carefully monitors deposit reductions and the effect onliquidity, taking steps to retain core deposits.

During the first six months of 2006, the Bank’s gross loanportfolio has increased $29.2 million. Funding for these loans was provided by areduction of the investment portfolio. As loans earn at higher average ratesthan investments, this shift has a positive effect on earnings. The increase inloans does not negatively impact the Company’s ability to meet liquiditydemands.

Historically, the Company has low loan charge-offs. Based ona review of the consolidated loan portfolio, the Company determined that anallowance of 0.93% of gross loans was adequate as of June 30, 2006. At December31, 2005, the allowance was 1.06% of gross loans. At June 30, 2006, loansdelinquent ninety days or more and still accruing interest totaled $178,760 or..08% of the portfolio. At December 31, 2005, loans delinquent ninety days ormore and still accruing interest totaled $131,717 or .06% of the portfolio. AtJune 30, 2006, there was one nonaccrual loan with a balance of $6,601. Therewere no nonaccrual loans as of December 31, 2005.

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

LiquidityThe Company’s major sources of liquidity are loan repayments,maturities of short-term investments including federal funds sold, and increasesin core deposits. Throughout the first quarter of the year, when the Banktypically experiences a decline in deposits, federal funds sold and investmentsecurities are primary sources of liquidity. During the second quarter of theyear, additional sources of liquidity become more readily available as businessborrowers start repaying loans, and the Bank receives seasonal deposits.Throughout the second and third quarters the Bank maintains a high liquiditylevel. Funds from seasonal deposits are generally invested in short-term U.S.Treasury Bills and overnight federal funds. 

The Company has available lines of credit, includingovernight federal funds, reverse repurchase agreements and letters of credit,totaling $21,000,000 as of June 30, 2006.

Average liquid assets (cash and amounts due from banks,interest-bearing deposits in other banks, federal funds sold, and investmentsecurities) compared to average deposits and retail repurchase agreements were44.06% for the second quarter of 2006 compared to 47.36% for the first quarterof 2006 and 60.78% for the second quarter of 2005. Contributing to thequarter-to-quarter and year-to-year decreases is growth of the loan portfoliowhich has been funded by decreased investments in debt securities. 

Results of OperationsNet income for the three months ended June 30, 2006,was $1,818,161 or $.57 per share, compared to $1,687,865 or $.53 pershare for the second quarter of 2005. This represents an increase of $130,296 or7.72% from the prior year. Year to date net income has increased $393,238 or$.12 per share from $3,188,324 or $1.00 per share in 2005 to $3,581,562 or $1.12per share******in 2006. The key components of net income are discussedin the following paragraphs. 

For the first six months of 2006 compared to 2005, netinterest income increased $650,195. Net interest income increased $207,065 inthe second quarter of 2006 compared to the second quarter of 2005. This increaseis attributable to 1) a shift in earning assets from federal funds sold andinvestment securities to higher yielding loans, and 2) the steady rise of marketrates that began in mid-2004. The Company’s overnight investment in federalfunds sold has repriced with the market, while debt securities are repricingmore slowly. Although loan rates are relatively unchanged, increases in the loanportfolio contribute to increased net interest spread. The Company’s Managementhas implemented gradual increases to deposit rates in response to marketpressures.

The tax-equivalent yield on interest earning assets increasedby 97 basis points from 4.87% for second quarter 2005 to 5.84% in 2006. Thequarterly yield on interest-bearing liabilities increased by 72 basis pointsfrom .64% in 2005 to 1.36% in 2006. Combined, the result is an increase in netinterest margin of 51 basis points.

The following table presentsinformation including average balances of interest-earning assets andinterest-bearing liabilities, the amount of related interest income and interestexpense, and the resulting yields by category of interest-earning asset andinterest-bearing liability. In this table, dividends and interest on tax-exemptsecurities and loans are reported on a fully taxable equivalent basis, which isa non-GAAP measure as defined in SEC Regulation G and Item 10 of SEC RegulationS-K. Management believes that these measures provide better yield comparabilityas a tool for managing net interest income.**Average Balances, Interest, and Yields** 		For the quarter ended		For the quarter ended 		June 30, 2006		June 30, 2005 		Average  		Average   		balance		Interest		Yield		balance		Interest		Yield       		Assets      		  Federal funds sold		$16,961,214 		$200,550 		4.74%		$31,397,300 		$225,819 		2.88%		  Interest-bearing deposits		2,224,899		18,090		3.26%		2,180,369		12,701		2.34%		  Investment securities		95,624,286		770,520		3.23%		144,219,382		923,049		2.57%		  Loans, net of allowance		223,805,472		3,940,651		7.06%		182,258,733		3,211,116		7.07%		    Total interest-earning assets		338,615,871		$4,929,811 		5.84%		360,055,784		$4,372,685 		4.87%		Noninterest-bearing cash		18,042,747  		20,105,324  		Other assets		13,408,287  		13,286,839  		        Total assets		$370,066,905   		$393,447,947          		Liabilities and Stockholders' Equity      		Interest-bearing deposits      		  NOW 		$59,032,074 		$33,890 		0.23%		$67,814,313 		$25,335 		0.15%		  Money market		42,249,574		82,497		0.78%		53,825,169		53,370		0.40%		  Savings		48,192,270		71,317		0.59%		55,094,414		54,359		0.40%		  Other time		66,812,366		551,381		3.31%		62,370,006		250,651		1.61%		    Total interest-bearing deposits		216,286,284		739,085		1.37%		239,103,902		383,715		0.64%		Securities sold under agreements to repurchase & federal funds purchased		5,504,844		9,180		0.67%		5,465,953		2,885		0.21%		Borrowed funds		133,410		2,027		6.09%		153,969		2,334		6.08%		    Total interest-bearing liabilities		221,924,538		750,292		1.36%		244,723,824		388,934		0.64%		Noninterest-bearing deposits		79,718,655  		81,014,023   		301,643,193		$750,292  				1.00%		325,737,847		$388,934  				0.48%		Other liabilities		518,141  		529,779  		Stockholders' equity		67,905,571  		67,180,321  		        Total liabilities and      		        stockholders' equity		$370,066,905   		$393,447,947   		Net interest spread  		4.48%  		4.23%		Net interest income 		$4,179,519  		  		$3,983,751  		 		Net margin on interest-earning assets  		4.95%  		4.44%       		Tax equivalent adjustment in:      		    Investment income 		$59,243   		$76,022  		    Loan income 		$12,400   		$6,918  

The Company’s net interest income isone of the most important factors in evaluating its financial performance.Management uses interest sensitivity analysis to determine the effect of ratechanges. Net interest income is projected over a one-year period to determinethe effect of an increase or decrease in the prime rate of 100 basis points. Ifprime were to decrease one hundred basis points, and all assets and liabilitiesmaturing within that period were fully adjusted for the rate change, the Companywould experience a decrease of approximately 5.3% in net interest income.Conversely, if prime were to increase one hundred basis points, and all assetsand liabilities maturing within that period were fully adjusted for the ratechange, the Company would experience a corresponding increase in net interestincome. The sensitivity analysis does not consider the likelihood of these ratechanges nor whether management’s reaction to this rate change would be toreprice its loans or deposits. 
No provision for loan losses was charged to expense duringthe first six months of 2006 or 2005. Net loan charged-offs (recoveries) were($69) during the first half of 2006 versus ($14,332) in the same period in 2005.

Noninterest revenue for the second quarter and year-to-dateexceeds last year by $55,583 and $101,548, respectively. Two factors contributesignificantly to this increase. In January 2006, the Bank increased servicecharges and deposit account activity fees. Additionally, fees related to use ofATM / VISA debit cards continue to rise due to increased usage.

Noninterest expense for the second quarter and year-to-dateexceeds last year by $26,352 and $113,505, respectively. An increase of $111,720in salaries and benefits for the first six months of 2006 includes a bonus of$48,300 which was paid to nearly all employees. The Bank employed 99 full timeequivalent employees as of June 30, 2006. The Bank hires seasonal employeesduring the summer. The Company has no employees other than those hired by theBank.

Income taxes are $106,000 higher than the same quarter lastyear, on a pre-tax income increase of $236,296. For the first six months of2006, income taxes are $245,000 higher than last year, on a pre-tax incomeincrease of $638,238. The Company’s effective tax rate for the first six monthsof 2006 increased to 35.9% from 35.6% in the same period in 2005.

Plans of OperationThe 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 ("IRAs"). All deposits areinsured by the Federal Deposit Insurance Corporation (the "FDIC") up to themaximum amount allowed by law (generally, $100,000 for non-IRA accounts perdepositor and $250,000 for IRAs per depositor, subject to aggregation rules).The Bank solicits these accounts from individuals, businesses, associations andorganizations, and governmental authorities. 

The Company, through the Bank, offers a full range of short-to medium-term commercial and personal loans. Commercial loans include bothsecured and unsecured loans for working capital (including inventory andreceivables), business expansion (including acquisition of real estate andimprovements), and purchase of equipment and machinery. Consumer loans includesecured and unsecured loans for financing automobiles, home improvements,education, and personal investments. The Company originates commercial andresidential mortgage loans and real estate construction and acquisition loans.These lending activities are subject to a variety of lending limits imposed bystate and federal law. The Bank may not make any loans to any director orexecutive officer (except for commercial loans to directors who are not officersor employees) unless the Board of Directors of the Bank approves the loans. TheBoard of Directors reviews these loans every six months.

Other bank services include cashmanagement services, 24-hour ATM’s, debit cards, safe deposit boxes, travelers’checks, direct deposit of payroll and social security, and automatic drafts forvarious accounts. The Bank offers bank-by-phone and Internet banking services,including electronic bill-payment, to both commercial and retail customers. TheBank also offers non-deposit products including retail repurchase agreements anddiscount brokerage services through a correspondent bank.
Capital Resources and AdequacyTotal stockholders’ equity increased $3,665,971 from December31, 2005 to June 30, 2006. This increase is attributable to comprehensive incomerecorded during the period, as detailed in Note 2 of the Notes to FinancialStatements, reduced by $55,512 used to repurchase and retire 1,542 shares ofcommon stock. Stock repurchases were at a price of $36.00 per share.

Under the capital guidelines of the Federal Reserve Board andthe FDIC, the Company and Bank are currently required to maintain a minimumrisk-based total capital ratio of 8%, with at least 4% being Tier 1 capital.Tier 1 capital consists of stockholders' equity less accumulated othercomprehensive income. In addition, the Company and the Bank must maintain aminimum Tier 1 leverage ratio (Tier 1 capital to total assets) of at least 4%,but this minimum ratio is increased by 100 to 200 basis points for other thanthe highest-rated institutions.

Tier one risk-based capital ratios ofthe Company as of June 30, 2006 and December 31, 2005 were 30.1% and 33.5%,respectively. Both are substantially in excess of regulatory minimumrequirements. 
Website Access to SEC ReportsThe Bank maintains an Internet website at www.taylorbank.com.The Company’s periodic SEC reports, including annual reports on Form 10-K,quarterly reports on Form 10-Q, and current reports on Form 8-K, are accessiblethrough this website. Access to these filings is free of charge. The reports areavailable as soon as practicable after they are filed electronically with theSEC.**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk
The Company’s principal market risk exposure relates tointerest rates on interest-earning assets and interest-bearing liabilities.Unlike most industrial companies, the assets and liabilities of financialinstitutions such as the Company and the Bank are primarily monetary in nature.Therefore, interest rates have a more significant effect on the Company'sperformance than do the effects of changes in the general rate of inflation andchange in prices. In addition, interest rates do not necessarily move in thesame direction or in the same magnitude as the prices of goods and services. Asdiscussed previously, management monitors and seeks to manage the relationshipsbetween interest sensitive assets and liabilities in order to protect againstwide interest rate fluctuations, including those resulting from inflation. 

At June 30, 2006, the Company’s interest rate sensitivity, asmeasured by gap analysis, showed the Company was asset-sensitive with a one-yearcumulative gap of 30.03%, as a percentage of interest-earning assets. Generallyasset-sensitivity indicates that assets reprice more quickly than liabilitiesand in a rising rate environment net interest income typically increases.Conversely, if interest rates decrease, net interest income would decline. TheBank has classified its demand mortgage and commercial loans as immediatelyrepriceable. Unlike loans tied to prime, these rates do not necessarily changeas prime changes since the decision to call the loans and change the rates restswith management. 
**Item 4. Controls and procedures
Disclosure controls and procedures are designed andmaintained by the Company to ensure that information required to be disclosed inthe Company’s publicly filed reports is recorded, processed, summarized andreported in a timely manner. Such information must be available to management,including the Chief Executive Officer (CEO) and Treasurer, to allow them to maketimely decisions about required disclosures. Even a well-designed and maintainedcontrol system can provide only reasonable, not absolute, assurance that itsobjectives are achieved. Inherent limitations in any system of controls includeflawed judgment, errors, omissions, or intentional circumvention of controls.

The Company’s management, including the CEO and Treasurer,performed an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of June 30, 2006. Based on thatevaluation, the Company’s management, including the CEO and Treasurer, hasconcluded that the Company’s disclosure controls and procedures are effective.The projection of an evaluation of controls to future periods is subject to therisk that procedures may become inadequate due to changes in conditionsincluding the degree of compliance with procedures.
**Changes in Internal Controls**
During the quarter ended on the date of this report, therewere no significant changes in the Company’s internal control over financialreporting that have had or are reasonably likely to have a material affect onthe Company’s internal control over financial reporting. As of June 30, 2006,the Company’s management, including the CEO and Treasurer, has concluded thatthe Company’s internal controls over financial reporting are effective. 

 

 

 
**Calvin B. Taylor Bankshares, Inc. and SubsidiaryPart II. Other Information**
Item 1 Legal Proceedings	Not applicable
Item 1A Risk Factors			The Company and the Bank are subject to various			types of risk during the normal conduct of business. There has been			no material increase in any level of risk incurred by the Company or			the Bank during the quarter ended June 30, 2006. Following are			descriptions of the significant categories of risk most relevant to			the Company.
Credit risk is the risk to the Company’s			earnings or capital from the potential 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 potential movement in interest rates. It is the			sensitivity of the Company’s future earnings to interest rate			changes.Liquidity risk is the risk to earnings or			capital from the Company’s inability to meet its obligations when			they come due without incurring unacceptable losses or costs.Market risk is the risk to earnings or			capital from changes in the value of portfolios of financial			instruments. For the Company, market risk is the risk of a decline			in market value of its securities portfolio.Transaction risk is the risk to earnings			or capital arising from problems with service or product delivery.			Transaction risk is the risk of a failure in the Company’s operating			processes, such as automation, employee integrity, or internal			controls.Compliance risk is the risk to earnings or			capital from noncompliance with laws, rules, and regulations.			Compliance risk is one of the greatest risks the Company faces.Reputation risk is the risk to earnings or			capital from negative public opinion. Customer and public relations			are critical to the Company’s success. Accordingly, the Company’s			reputation is extremely important and anything that would impair			that reputation is a significant risk.Strategic risk is the risk to earnings or			capital arising from adverse business decisions or improper			implementation of those decisions.

Item 2 Unregistered Sales of Equity Securities and Use ofProceeds
(c) The following table presents information about		the Company’s repurchase of its equity securities during the calendar		quarter ended on the date of this Form 10-Q.    				(c) Total number				(d) Maximum number  				(a) Total				(b) Average				of Shares Puchased				of Shares that may  				Number				Price Paid				as Part of a Publicly				yet be Purchased 				Period				of Shares				per Share				Announced Program				Under the Program 				April				- 0 -				N/A				 - 0 -				298,384 				May				- 0 -				N/A				 - 0 -				298,384 				June				- 0 -				N/A				 - 0 -				298,384 				Totals				- 0 -				N/A				- 0 -				N/A
The Company publicly announced on August 14, 2003,		that it would repurchase up to 10% of its outstanding equity stock at		that time, which equated to a total of 324,000 common shares available		for repurchase. As of January 1, 2005, this plan was renewed, by public		announcement, making up to 10% of the Company’s outstanding equity stock		at that time, which equated to a total of 320,848 common shares,		available for repurchase. There is no expiration date for this program.		No other stock repurchase plan or program existed or exists		simultaneously, nor has any other plan or program expired during the		period covered by this table. Common shares repurchased under this plan		are retired. 

Item 3 Defaults Upon Senior Securities	Not applicable
Item 4 Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on May 17, 2006,		during which the items detailed in the proxy statement dated April 17,		2006, were approved. This includes the reelection of the Board of		Directors.

Item 5 Other information	Not applicable
Item 6 Exhibits and Reports on Form 8-K
a)  Exhibits

2. Proxy Statement dated April 17, 2006, is			incorporated by reference.

31. Certifications of Principal Executive			Officer and Principal Financial Officer pursuant to Section 302			of the Sarbanes-Oxley Act of 2002 are presented on pages 19 and			20, respectively.

32. Certification of Principal Executive			Officer and Principal Financial Officer pursuant to Section 906			of the Sarbanes-Oxley Act of 2002 is presented on page 21.

b) Reports on Form 8-K

There were no reports on Form 8-K filed			for the quarter ended June 30, 2006.

Exhibit 31.1

Certification - Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

I, Raymond M. Thompson, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Calvin B. Taylor	Bankshares, Inc.;	2.  Based on my knowledge, this 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 report;	3.  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;	4.  The registrant’s other certifying officers and I are responsible for	establishing and maintaining disclosure controls and procedures (as defined	in Exchange Act Rules 13a-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 we 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			evaluation; and			d. disclosed in this report any change in the registrant’s			internal control over financial reporting that occurred during the			most recent fiscal quarter that has or is reasonably likely to			materially affect the registrant’s internal control over financial			reporting; and

5.  The registrant’s other certifying officers 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 (or persons performing the equivalent function):

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: August 4, 2006_______
By:
/s/ Raymond M. Thompson   
Raymond M. Thompson  
Chief Executive Officer
Exhibit 31.2

Certification - Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

I, Jennifer G. Hawkins, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Calvin B. Taylor	Bankshares, Inc.;	2.  Based on my knowledge, this 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 report;	3.  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;	4.  The registrant’s other certifying officers and I are responsible for	establishing and maintaining disclosure controls and procedures (as defined	in Exchange Act Rules 13a-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 we 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			evaluation; and			d. disclosed in this report any change in the registrant’s			internal control over financial reporting that occurred during the			most recent fiscal quarter that has or is reasonably likely to			materially affect the registrant’s internal control over financial			reporting; and

5.  The registrant’s other certifying officers 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 (or persons performing the equivalent function):

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: August 4, 2006_______
By:
/s/ Jennifer G. Hawkins   
Jennifer G. Hawkins  
Treasurer (Principal Financial Officer)
Exhibit 32

Certification - Pursuant to 18 U.S.C. 1350

(Section 906 of the Sarbanes-Oxley Act of 2002)

We, the undersigned, certify that to the best of our knowledge, based upon areview of the Quarterly Report on Form 10-Q for the period ended June 30, 2006of the Registrant (the "Report"):

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

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

 

 
  **Calvin B. Taylor Bankshares, Inc.   
Date: August 4, 2006_______
By:
/s/ Raymond M. Thompson   
Raymond M. Thompson  
Chief Executive Officer      
Date: August 4, 2006_______
By:
/s/ Jennifer G. Hawkins   
Jennifer G. Hawkins  
Treasurer (Principal Financial Officer)
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

 
  **Calvin B. Taylor Bankshares, Inc.   
Date: August 4, 2006_______
By:
/s/ Raymond M. Thompson   
Raymond M. Thompson  
Chief Executive Officer      
Date: August 4, 2006_______
By:
/s/ Jennifer G. Hawkins   
Jennifer G. Hawkins  
Treasurer (Principal Financial Officer)**************