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 SEPTEMBER 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 3,156,683 shares ofcommon stock ($1.00 par) outstanding as of October 31, 2006.** 

Calvin B. Taylor Bankshares, Inc. and Subsidiary

Form 10-Q

Index**Part I - Financial		InformationPageItem 1Consolidated		Financial StatementsConsolidated		Balance Sheets as of September 30, 2006 and December 31, 20053 Consolidated		Statements of Income for the three months ended		September 30, 2006 and 20054Consolidated		Statements of Income for the nine months ended		September 30, 2006 and 20055Consolidated		Statements of Cash Flows for the nine months ended		September 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)   		September 30,		December 31,  		2006		2005 		Assets 		Cash and due from banks		 $       19,188,701 		 $       24,069,790  		Federal funds sold		34,737,015 		26,296,780  		Interest-bearing deposits		2,142,396 		2,192,731  		Investment securities available for sale		20,773,427 		6,505,278  		Investment securities held to maturity (approximate    		  fair value of $70,616,599 and $111,306,528)		70,997,167 		112,579,162  		Loans, less allowance for loan losses   		  of $2,190,778 and $2,190,709		228,845,965 		204,441,957  		Premises and equipment		6,583,350 		6,664,051  		Accrued interest receivable		1,596,530 		1,504,945  		Computer software		189,020 		228,014  		Bank owned life insurance		4,488,032 		4,367,744  		Other assets		              322,407 		              224,172   		 $       389,864,010 		 $       389,074,624  		Liabilities and Stockholders' Equity 		Deposits   		  Noninterest-bearing		 $       87,253,780 		 $       88,236,133  		  Interest-bearing		        223,614,307 		        222,621,474   		        310,868,087 		        310,857,607  		Securities sold under agreements to repurchase		           6,088,972 		           6,149,263  		Dividend payable		                      - 		           4,462,578  		Accrued interest payable 		              336,479 		              177,357  		Note payable		              126,191 		              142,069  		Deferred income taxes		              796,283 		              635,336  		Other liabilities		              621,074 		              332,030   		        318,837,086 		        322,756,240  		Stockholders' equity   		  Common stock, par value $1 per share    		   authorized 10,000,000 shares, issued and outstanding   		   3,156,683 shares at September 30,2006, and   		   3,187,556 shares at December 31, 2005		           3,156,683 		           3,187,556  		  Additional paid-in capital		         14,374,177 		         15,454,735  		  Retained earnings		         51,590,238 		         46,021,128   		         69,121,098 		         64,663,419  		  Accumulated other comprehensive income		           1,905,826 		           1,654,965   		         71,026,924 		         66,318,384   		 $     389,864,010 		 $     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  		September 30,  		2006		2005 		Interest and dividend revenue   		  Loans, including fees		 $        4,118,206 		 $        3,315,873  		  U.S. Treasury and government agency securities		              709,789 		              871,838  		  State and municipal securities		               36,227 		               66,927  		  Federal funds sold 		              450,742 		              378,846  		  Interest-bearing deposits		               20,962 		               14,766  		  Equity securities		                 8,152 		                 8,316  		          Total interest and dividend revenue		           5,344,078 		           4,656,566      		Interest expense   		  Deposits		              832,106 		              448,726  		  Borrowings		               14,005 		               10,125  		    Total interest expense		              846,111 		              458,851      		    Net interest income		           4,497,967 		           4,197,715  		Provision for loan losses		                      -   		                      -    		    Net interest income after provision for loan losses		           4,497,967 		           4,197,715      		Noninterest revenue   		  Service charges on deposit accounts		              272,495 		              262,392  		  ATM and debit card revenue		              127,202 		              108,364  		  Miscellaneous revenue		               84,844 		               88,536  		    Total noninterest revenue		              484,541 		              459,292      		Noninterest expenses   		  Salaries		              818,334 		              768,349  		  Employee benefits		              179,344 		              170,344  		  Occupancy		              188,231 		              156,146  		  Furniture and equipment		              150,167 		              147,460  		  Other operating		              517,384 		              464,337  		    Total noninterest expenses		           1,853,460 		           1,706,636      		    Income before income taxes		           3,129,048 		           2,950,371  		Income taxes		           1,141,500 		           1,045,000  		Net income		 $        1,987,548 		 $        1,905,371      		Earnings per common share, basic and diluted		 $                0.63 		 $                0.60     		See accompanying Notes to Consolidated Financial Statements 		Calvin B. Taylor Bankshares, Inc. and Subsidiary  		Consolidated Statements of Income (unaudited)    		For the nine months ended  		September 30,  		2006		2005 		Interest and dividend revenue   		  Loans, including fees		 $       11,761,056 		 $        9,403,300  		  U.S. Treasury and government agency securities		           2,090,989 		           2,407,803  		  State and municipal securities		              127,539 		              211,905  		  Federal funds sold 		              788,780 		              784,849  		  Interest-bearing deposits		               56,285 		               39,629  		  Equity securities		               51,554 		               39,976  		          Total interest and dividend revenue		         14,876,203 		         12,887,462      		Interest expense   		  Deposits		           2,210,833 		           1,189,036  		  Borrowings		               36,260 		               19,763  		    Total interest expense		           2,247,093 		           1,208,799      		    Net interest income		         12,629,110 		         11,678,663  		Provision for loan losses		                      -   		                      -    		    Net interest income after provision for loan losses		         12,629,110 		         11,678,663      		Noninterest revenue   		  Service charges on deposit accounts		              852,560 		              784,588  		  ATM and debit card revenue		              337,585 		              277,271  		  Miscellaneous revenue		              298,313 		              299,802  		    Total noninterest revenue		           1,488,458 		           1,361,661      		Noninterest expenses   		  Salaries		           2,462,366 		           2,300,937  		  Employee benefits		              562,831 		              553,555  		  Occupancy		              537,140 		              472,641  		  Furniture and equipment		              389,597 		              395,924  		  Other operating		           1,448,024 		           1,416,572  		    Total noninterest expenses		           5,399,958 		           5,139,629      		    Income before income taxes		           8,717,610 		           7,900,695  		Income taxes		           3,148,500 		           2,807,000  		Net income		 $        5,569,110 		 $        5,093,695      		Earnings per common share, basic and diluted		 $                1.75 		 $                1.59     		See accompanying Notes to Consolidated Financial Statements
 		Calvin B. Taylor Bankshares, Inc. and Subsidiary  		Consolidated Statements of Cash Flows (unaudited)    		For the nine months ended  		September 30,  		2006		2005 		Cash flows from operating activities   		  Interest and dividends received		 $       14,636,435 		 $       12,536,294  		  Fees and commissions received		           1,367,603 		           1,322,259  		  Interest paid		          (2,087,971)		          (1,179,635) 		  Cash paid to suppliers and employees		          (5,181,433)		          (4,783,172) 		  Income taxes paid		          (3,220,114)		          (2,690,920)  		           5,514,520 		           5,204,826  		Cash flows from investing activities   		  Certificates of deposit purchased, net of maturities		                (3,268)		                (1,864) 		  Purchase of investments available for sale		        (13,750,206)		            (145,379) 		  Proceeds from maturities of investments held to    		     maturity		         58,150,000 		         65,215,000  		  Purchase of investment held to maturity		        (16,026,291)		        (45,080,673) 		  Loans made, net of principal collected		        (24,404,008)		        (34,433,834) 		  Purchases of premises, equipment,   		    and computer software		            (335,505)		            (218,595)  		           3,630,722 		        (14,665,345)  		     		Cash flows from financing activities   		  Net increase (decrease) in   		    Time deposits		         12,149,970 		          (6,464,506) 		    Other deposits		        (12,139,491)		         18,603,792  		    Securities sold under agreements to repurchase		              (60,291)		           1,543,699  		  Payments on note payable		              (15,878)		              (14,956) 		  Common shares repurchased		          (1,111,431)		            (749,592) 		  Dividends paid		          (4,462,578)		                      -     		          (5,639,699)		         12,918,437      		Net increase (decrease) in cash and cash equivalents		           3,505,543 		           3,457,918  		Cash and cash equivalents at beginning of period		         50,425,595 		         54,623,503  		Cash and cash equivalents at end of period		 $       53,931,138 		 $       58,081,421 
 		Calvin B. Taylor Bankshares, Inc. and Subsidiary  		Consolidated Statements of Cash Flows (unaudited)    		For the nine months ended  		September 30,  		2006		2005 		Reconciliation of net income to net cash provided   		  by operating activities   		  Net income		 $        5,569,110 		 $        5,093,695  		  Adjustments to reconcile net income to net cash   		    provided by operating activities   		    Depreciation and amortization		              452,549 		              492,740  		    Amortization of premiums and accretion of   		      discount, net		            (148,182)		            (168,795) 		    Loss on disposition of assets		                 2,651 		                 2,162  		    Decrease (increase) in   		      Accrued interest receivable		              (91,585)		            (182,373) 		      Cash surrender value of bank owned life insurance		            (120,288)		            (113,686) 		      Other assets		              (98,235)		               36,914  		    Increase (decrease) in   		      Accrued interest payable		              159,122 		               29,164  		      Other liabilities		            (210,622)		               15,005   		 $        5,514,520 		 $        5,204,826          		  Composition of cash and cash equivalents   		    Cash and due from banks		 $       19,188,701 		 $       24,123,033  		    Federal funds sold 		         34,737,015 		         33,915,275  		    Interest-bearing deposits, except for time deposits		                 5,422 		               43,113   		 $       53,931,138 		 $       58,081,421                                                              		See accompanying Notes to Consolidated Financial Statements**Calvin B. Taylor Bankshares, Inc. and Subsidiary

Notes 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	nine months ended September 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 September 30		             3,176,307 		             3,187,656  		Nine months ended September 30		             3,182,979 		             3,197,045 
2. Comprehensive Income       Comprehensive income consists of:  		For the nine months ended  		September 30,  		2006		2005 		Net income		 $          5,569,110 		 $          5,093,695  		Unrealized gain on investment securities   		  available for sale, net of income taxes		               250,861 		               287,608  		Comprehensive income		 $          5,819,971 		 $          5,381,303 

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	September 30, outstanding loan commitments and letters of credit consist of:
  		2006		2005 		Loan commitments		 $        48,337,226 		 $        36,501,237  		Standby letters of credit		 $          1,498,823 		 $          1,277,488 ** 

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.

In September, 2006, the FASB published FASB Statement No.	157, "Fair Value Measurements" ("SFAS No. 157"or the "Statement"). 	SFAS No. 157 defines fair value, establishes a framework for measuring fair	value, and expands disclosures about fair value measurements.  SFAS No.	157 will be applied prospectively and is effective for fiscal years	beginning after November 15, 2007, and interim periods within those fiscal	years.  Management does not expect SFAS No. 157 to have a material	impact on the Company’s consolidated financial statements.

In September, 2006, the FASB published FASB Statement No.	158, "Employers’ Accounting for Defined Benefit Pension and Other	Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and	132(R)".  Under this new standard, companies must recognize a net	liability or asset to report the funded status of their defined benefit	pension and other postretirement benefit plans on their balance sheets. 	The effective date of the recognition and disclosure provisions for	calendar-year public companies is for calendar years ending after December	15, 2006.  Management does not expect SFAS No. 158 to have a material impact	on the Company's consolidated financial statements since the Company does	not currently have any defined benefit plans.
** 

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.

General

Calvin 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 Policies

The 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 Condition

Total assets of the Company increased $789,386 from December31, 2005 to September 30, 2006. Combined deposits and customer repurchaseagreements decreased $49,811 during the same period. The Company’s averageassets and average deposits increased from the second to third quarters of 2006by $15.9 million and $13.4 million, respectively. This increase results from anannual cycle related to the local summer tourism industry. Management expectsthat asset size and deposit volume will fall during the fourth quarter asseasonal deposits are withdrawn.

During the first nine months of 2006, the Bank’s gross loanportfolio has increased $24.4 million. Funding for these loans was provided byreduction 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 0.95% of gross loans was adequate as of September 30, 2006. AtDecember 31, 2005, the allowance was 1.06% of gross loans. At September 30,2006, loans delinquent ninety days or more and still accruing interest totaled$225,515 or .10% of the portfolio. At December 31, 2005, loans delinquent ninetydays or more and still accruing interest totaled $131,717 or .06% of theportfolio. At September 30, 2006, there was one nonaccrual loan with a balanceof $5,357. There were 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.

Liquidity

The 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 September 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 were44.81% for the third quarter of 2006 compared to 44.06% for the second quarterof 2006 and 61.61% for the third quarter of 2005. Contributing to theyear-to-year decrease is growth of the loan portfolio which has been funded bydecreased investments in debt securities. Liquidity levels have been stable fromthe second to the third quarter of this year.

Results of Operations

Net income for the three months ended September 30, 2006***,***was $1,987,548 or $.63 per share, compared to $1,905,371 or $.60 pershare for the third quarter of 2005. This represents an increase of $82,177 or4.31% from the prior year. Year to date net income has increased $475,415 or$.16 per share from $5,093,695 or $1.59 per share in 2005 to $5,569,110 or $1.75per share******in 2006. The key components of net income are discussedin the following paragraphs. 

For the first nine months of 2006 compared to 2005, netinterest income increased $950,447. Net interest income increased $300,252 inthe third quarter of 2006 compared to the third 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) market rate increases thatbegan in mid-2004. The Company’s overnight investment in federal funds sold hasrepriced with the market, while debt securities and deposits in other banks arerepricing more gradually. Although loan yields have increased only slightly,increases in the loan portfolio contribute to increased net interest spread. TheCompany’s Management has implemented gradual increases to deposit rates inresponse to market pressures.

The tax-equivalent quarterly yield on interest-earning assetsincreased by 111 basis points from 4.97% for third quarter 2005 to 6.08% in2006. The quarterly yield on interest-bearing liabilities increased by 78 basispoints from .74% in 2005 to 1.52% in 2006. Combined, the result is an increasein net margin on interest-earning assets of 64 basis points.

The following table presents 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 thistable, dividends and interest on tax-exempt securities and loans are reported ona fully taxable equivalent basis, which is a non-GAAP measure as defined in SECRegulation G and Item 10 of SEC Regulation S-K. Management believes that thesemeasures provide better yield comparability as a tool for managing net interestincome.
**Average Balances, Interest, and Yields** 		For the quarter ended		For the quarter ended 		September 30, 2006		September 30, 2005 		Average  		Average   		balance		Interest		Yield		balance		Interest		Yield       		Assets      		  Federal funds sold		$34,536,931 		$450,742 		5.18%		$44,317,690 		$378,846 		3.39%		  Interest-bearing deposits		2,200,454		20,962		3.78%		2,164,972		14,766		2.71%		  Investment securities		86,506,091		806,850		3.70%		143,770,375		1,017,017		2.81%		  Loans, net of allowance		230,717,689		4,142,871		7.12%		187,679,503		3,322,526		7.02%		    Total interest-earning assets		353,961,165		$5,421,425 		6.08%		377,932,540		$4,733,155 		4.97%		Noninterest-bearing cash		18,497,065  		20,786,478  		Other assets		13,556,213  		13,072,374  		        Total assets		$386,014,443   		$411,791,392          		Liabilities and Stockholders' Equity      		Interest-bearing deposits      		  NOW 		$55,258,697 		$32,594 		0.23%		$67,815,151 		$25,743 		0.15%		  Money market		42,420,120		82,943		0.78%		53,795,227		53,728		0.40%		  Savings		47,520,408		70,538		0.59%		54,900,239		54,572		0.39%		  Other time		68,473,727		646,031		3.74%		61,425,769		314,683		2.03%		    Total interest-bearing deposits		213,672,952		832,106		1.55%		237,936,386		448,726		0.75%		Securities sold under agreements to repurchase & federal funds purchased		6,872,328		12,059		0.70%		7,802,266		7,866		0.40%		Borrowed funds		128,086		1,946		6.03%		148,953		2,259		6.02%		    Total interest-bearing liabilities		220,673,366		846,111		1.52%		245,887,605		458,851		0.74%		Noninterest-bearing deposits		95,741,109  		96,799,285   		316,414,475		$846,111  				1.06%		342,686,890		$458,851  				0.53%		Other liabilities		457,252  		142,224  		Stockholders' equity		69,142,716  		68,962,278  		        Total liabilities and      		        stockholders' equity		$386,014,443   		$411,791,392   		Net interest spread  		4.56%  		4.23%		Net interest income 		$4,575,314  		  		$4,274,304  		 		Net margin on interest-earning assets  		5.13%  		4.49%       		Tax equivalent adjustment in:      		    Investment income 		$52,682   		$69,936  		    Loan income 		$24,665   		$6,653  
The Company’s net interest income is one of the mostimportant factors in evaluating its financial performance. Management usesinterest sensitivity analysis to determine the effect of rate changes. Netinterest income is projected over a one-year period to determine the effect ofan increase or decrease in the prime rate of 100 basis points. If prime were todecrease one hundred basis points, and all assets and liabilities maturingwithin that period were fully adjusted for the rate change, the Company wouldexperience a decrease of approximately 5.1% in net interest income. Conversely,if prime were to increase one hundred basis points, and all assets andliabilities maturing within that period were fully adjusted for the rate change,the Company would experience a corresponding increase in net interest income.The sensitivity analysis does not consider the likelihood of these rate changesnor whether management’s reaction to this rate change would be to reprice itsloans or deposits. 

No provision for loan losses was charged to expense duringthe first three quarters of 2006 or 2005. Net loan charged-offs (recoveries)were ($69) during the first nine months of 2006 versus ($15,182) in the sameperiod in 2005. 

Noninterest revenue for the third quarter and year-to-dateexceeds last year by $25,249 and $126,797, 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 third quarter and year-to-dateexceeds last year by $146,824 and $260,329, respectively. An increase of$170,705 in salaries and benefits for the first nine months of 2006 includes abonus of $48,300 which was paid to nearly all employees. The Bank employed 95full time equivalent employees as of September 30, 2006. The Bank hires seasonalemployees during the summer. The Company has no employees other than those hiredby the Bank.

Income taxes are $96,500 higher than the same quarter lastyear, on a pre-tax income increase of $178,677. For the first nine months of2006, income taxes are $341,500 higher than last year, on a pre-tax incomeincrease of $816,915. The Company’s effective tax rate for the first nine monthsof 2006 increased to 36.1% from 35.5% in the same period in 2005. The highereffective rate results from a reduction of tax preferenced income both in actualdollars and as a percentage of pretax income.

Plans of Operation

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 ("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 must review any such loan 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, and automatic drafts for various accounts. The Bankoffers bank-by-phone and Internet banking services, including electronicbill-payment, to both commercial and retail customers. The Bank also offersnon-deposit products including retail repurchase agreements and discountbrokerage services through a correspondent bank.

Capital Resources and Adequacy

Total stockholders’ equity increased $4,708,540 from December31, 2005 to September 30, 2006. This increase is attributable to comprehensiveincome recorded during the period, as detailed in Note 2 of the Notes toFinancial Statements, reduced by $1,111,431 used to repurchase and retire 30,873shares of common 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 of the Company as ofSeptember 30, 2006 and December 31, 2005 were 32.7% and 33.5%, respectively.Both are substantially in excess of regulatory minimum requirements. 

Website Access to SEC Reports

The 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 September 30, 2006, the Company’s interest ratesensitivity, as measured by gap analysis, showed the Company was asset-sensitivewith a one-year cumulative gap of 28.32%, as a percentage of interest-earningassets. Generally asset-sensitivity indicates that assets reprice more quicklythan liabilities and in a rising rate environment net interest income typicallyincreases. Conversely, if interest rates decrease, net interest income woulddecline. The Bank has classified its demand mortgage and commercial loans asimmediately repriceable. Unlike loans tied to prime, these rates do notnecessarily change as prime changes since the decision to call the loans andchange the rates rests with 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 September 30, 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.
**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 September 30,2006, the Company’s management, including the CEO and Treasurer, has concludedthat the Company’s internal controls over financial reporting are effective. 

 

 

 
**Calvin B. Taylor Bankshares, Inc. and SubsidiaryPart II. Other Information**
Item 1 Legal ProceedingsNot 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 covered by this report. 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 Purchased				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 				July				               -   				N/A				                           -   				298,384 				August				        28,035 				          36.00 				                     28,035 				270,349 				September				          1,296 				          36.00 				                      1,296 				269,053 				Totals				        29,331 				          36.00 				                     29,331 				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
Not applicable

Item 5 Other information
Not applicable.

Item 6 Exhibits and Reports on Form 8-K
a) Exhibits

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				during the quarter covered by this report.

 

Exhibit 31.1

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

I, Raymond M. Thompson, certify that:I have reviewed this quarterly report on Form 10-Q of Calvin B. TaylorBankshares, Inc.;	1. 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;	2. 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;	3. 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	4. 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: November 6, 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:I have reviewed this quarterly report on Form 10-Q of Calvin B. TaylorBankshares, Inc.;	1. 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;	2. 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;	3. 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	4. 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: November 6, 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 September 30,2006 of the Registrant (the "Report"):

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

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

 
  **Calvin B. Taylor Bankshares, Inc.      
Date: November 6, 2006_______
By:
/s/ Raymond M. Thompson   
Raymond M. Thompson  
Chief Executive Officer      
Date: November 6, 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: November 6, 2006_______
By:
/s/ Raymond M. Thompson   
Raymond M. Thompson  
Chief Executive Officer      
Date: November 6, 2006_______
By:
/s/ Jennifer G. Hawkins   
Jennifer G. Hawkins  
Treasurer (Principal Financial Officer)**************