Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2012
Commission File No. 000-50047

Calvin B. Taylor Bankshares, Inc.
(Exact name of registrant as specified in its Charter)

Maryland
(State of incorporation)

52-1948274
(I.R.S. Employer Identification No.)

24 North Main Street, Berlin, Maryland 21811
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: (410) 641-1700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
   Large accelerated filer ____                                                                                  Accelerated filer [X]
   Non-accelerated filer ____ (Do not check if a smaller reporting company)         Smaller reporting company ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). No [X]

On November 6, 2012, 2,981,404 shares of the registrant's common stock were issued and outstanding.

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1.  Basis of Presentation

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2.  Investment Securities

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2.  Investment Securities (continued)

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3.  Loans and Allowance for Loan Losses

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

3.  Loans and Allowance for Loan Losses (continued)

	Real estate mortgages
	Construction
September 30, 2012	and land	Residential	Commercial	Commercial	Consumer	Unallocated	Total
Beginning balance	$            160,392	$              42,064	$            193,570	$           197,353	$              60,487	$        18,395	$             672,261
Loans charged off	(45,081)	(239,044)	(206,707)	(11,077)	-	-	(517,966)
Recoveries	-	15,943	-	103	8,375	-	24,421
Provision charged to operations	15,190	319,100	224,200	(59,053)	(1,083)	5,346	503,700
Ending balance	$             130,501	$            138,063	$           211,063	$         122,346	$            56,702	$        23,741	$             682,416
Individually evaluated for impairment:
Balance in allowance	$                      -	$                    -	$                    -	$                  -	$                 -		$                      -
Related loan balance	$             900,199	$           792,292	$         1,975,887	$                  -	$                  -		$          3,668,378
Collectively evaluated for impairment:
Balance in allowance	$            130,501	$           138,063	$          211,063	$         122,346	$          56,702	$        23,741	$             682,416
Related loan balance	$        11,773,620	$       80,705,924	$    114,652,570	$     10,849,619	$      1,997,699		$       219,979,432
December 31, 2011
Beginning balance	$            235,437	$              50,602	$             356,993	$         194,946	$             119,228	$       25,972	$             983,178
Loans charged off	(227,197)	(353,238)	(865,683)	(18,492)	(19,650)	-	(1,484,260)
Recoveries	39,072	300	-	410	6,261	-	46,043
Provision charged to operations	113,080	344,400	702,260	20,489	(45,352)	(7,577)	1,127,300
Ending balancee	$            160,392	$            42,064	$              193,570	$         197,353	$          60,487	$        18,395	$             672,261
Individually evaluated for impairment::
Balance in allowance	$                    -	$                   -	$                      -	$                  -	$                  -		$                      -
Related loan balancee	$        1,220,789	$        1,188,260	$          1,617,388	$                  -	$                  -		$          4,026,437
Collectively evaluated for impairment::
Balance in allowance	$            160,392	$             42,064	$            193,570	$        197,353	$          60,487	$        18,395	$             672,261
Related loan balancee	$        11,941,671	$       86,599,462	$      111,393,555	$    12,507,978	$      1,737,297		$       224,179,963
September 30, 2011
Beginning balance	$           235,437	$              50,602	$             356,993	$         194,946	$        119,228	$        25,972	$            983,178
Loans charged offf	(131,562)	(347,886)	(835,000)	(3,011)	(14,756)	-	(1,332,215)
Recoveries	39,071	300	-	410	4,892	-	44,673
Provision charged to operations	61,002	325,000	705,000	(16,878))	(52,252)	(17,472))	1,004,400
Ending balance	$            203,948	$               28,016	$             226,993	$        175,467	$          57,112	$         8,500	$            700,036
Individually evaluated for impairment:
Balance in allowance	$             46,088	$              7,000	$              15,000	$                  -	$                  -		$             68,088
Related loan balance	$         1,660,623	$           571,457	$          1,842,227	$                  -	$                  -		$         4,074,307
Collectively evaluated for impairment:
Balance in allowance	$            157,860	$             21,016	$             211,993	$         175,467	$          57,112	$         8,500	$            631,948
Related loan balance	$        12,226,101	$       89,088,830	$       109,826,733	$     11,882,732	$      1,694,321		$      224,718,717

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3.  Loans and Allowance for Loan Losses (continued)

Age Analysis of Past Due Loans
			Greater than				90 Days Past
	30-59 Days	60-89 Days	90 Days	Total		Total	Due or Greater
September 30, 2012	Past Due	Past Due	Past Due	Past Due	Current	Loans	and Accruing
Real estate mortgages
Construction, land development,
and land	$                 -	$       330,415	$       230,749	$       561,164	$     12,112,655	$      12,673,819	$        230,749
Residential 1 to 4 family, 1st liens	1,701,465	505,759	529,285	2,736,509	76,945,235	79,681,744	-
Residential 1 to 4 family, subordinate	-	-	-	-	1,816,472	1,816,472	-
Commercial properties	-	60,000	1,585,889	1,645,889	114,982,568	116,628,457	684,422
Commercial	-	-	-	-	10,849,619	10,849,619	-
Consumer	-	18,659	-	18,659	1,979,040	1,997,699	-
Total	$    1,701,465	$       914,833	$    2,345,923	$    4,962,221	$   218,685,589	$    223,647,810	$        915,171
December 31, 2011
Real estate mortgages
Construction, land development,
and land	$                 -	$       232,655	$       255,081	$       487,736	$     12,674,724	$      13,162,460	$                  -
Residential 1 to 4 family, 1st liens	177,908	827,281	968,570	1,973,759	83,798,608	85,772,367	-
Residential 1 to 4 family, subordinate	-	-	-	-	2,015,355	2,015,355	-
Commercial properties	627,117	32,953	1,617,388	2,277,458	110,733,485	113,010,943	684,422
Commercial	-	-	-	-	12,507,978	12,507,978	-
Consumer	-	2,302	-	2,302	1,734,995	1,737,297	-
Total	$       805,025	$    1,095,191	$    2,841,039	$    4,741,255	$   223,465,145	$    228,206,400	$        684,422

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3.  Loans and Allowance for Loan Losses (continued)

3.  Loans and Allowance for Loan Losses (continued)

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements (unaudited) (continued)

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4.  Loan commitments

	September 30, 2012	December 31, 2011
Loan commitments and lines of credit
Construction and land development	$              5,290,572	$               1,999,670
Other	27,669,422	22,346,026
	$            32,959,994	$             24,345,696
Standby letters of credit	$              1,333,758	$               1,486,677

5.  Assets Measured at Fair Value

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6.  New accounting standards

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    The following discussion of the financial condition and results of operations of the Registrant (the Company) should be read in conjunction with the Company's financial statements and related notes and other statistical information included elsewhere herein.

General
    Calvin B. Taylor Bankshares, Inc. (Company) was incorporated as a Maryland corporation on October 31, 1995. The Company owns all of the stock of Calvin B. Taylor Banking Company (Bank), a commercial bank that was established in 1890 and incorporated under the laws of the State of Maryland on December 17, 1907. The Bank operates nine banking offices in Worcester County, Maryland and one banking office in Ocean View, Delaware. The Bank's administrative office is located in Berlin, Maryland. The Bank is engaged in a general commercial and retail banking business serving individuals, businesses, and governmental units in Worcester County, Maryland, Sussex County, Delaware, and neighboring counties.
    The Company currently engages in no business other than owning and managing the Bank. The Bank employed 92 full time equivalent employees as of September 30, 2012. The Bank hires seasonal employees during the summer. The Company has no employees other than those hired by the Bank.

Use of estimates
    The preparation of financial statements in conformity with accounting principles generally accepted in the United State of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions may affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Critical Accounting Policies
    The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of inherently uncertain matters. When applying accounting policies in areas that are subjective in nature, management uses its best judgment to arrive at the carrying value of certain assets. One of the most critical accounting policies applied is related to the valuation of the loan portfolio.
    The allowance for loan losses (ALLL) represents management’s best estimate of inherent probable losses in the loan portfolio as of the balance sheet date. It is one of the most difficult and subjective judgments. The adequacy of the allowance for loan losses is evaluated no less than quarterly. The determination of the balance of the allowance for loan losses is based on management’s judgments about the credit quality of the loan portfolio as of the review date. It should be sufficient to absorb losses in the loan portfolio as determined by management’s consideration of factors including an analysis of historical losses, specific reserves for non-performing or past due loans, delinquency trends, portfolio composition (including segment growth or shifting of balances between segments, products and processes, and concentrations of credit, both regional and by relationship), lending staff experience and changes in staffing, critical documentation and policy exceptions, risk rating analysis, interest rates and the competitive environment, economic conditions in the Bank’s service area, and results of independent reviews, including audits and regulatory examinations.

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Financial Condition
    Total assets of the Company increased $40.3 million (9.67%) from December 31, 2011 to September 30, 2012. Combined deposits and customer repurchase agreements increased $37.3 million (10.96%) during the same period. Much of the deposit and asset growth from the previous year-end to the end of the 3^rd quarter stems from seasonal activity, which is further discussed in the section titled Liquidity.
    Average assets and average deposits increased $23.0 million and $19.6 million, respectively, from the 3^rd quarter 2011 to the 3^rd quarter 2012. Management believes the year-to-year growth in deposits results, to some extent, from continuing economic uncertainty due to the continued slow recovery following the recession of 2008-2009. Depositors often seek the safety of conservatively run, well capitalized community banks when the financial markets are perceived to be unstable. Increased deposits may also indicate economic recovery within the Bank’s resort service area; however, depositors are not spending or investing the funds as they remain uncertain about continued recovery. This is also evident in the lack of demand for loans and is consistent with trends in the banking industry. Increased deposit insurance limits also give customers a greater sense of security in bank deposits.

Loan Portfolio
    During the first nine months of 2012, the Bank’s gross loan portfolio has decreased by $4.6 million (2.00%). It is typical for the Bank to experience growth in both deposits and loans by the end of the second quarter. By late June, many seasonal merchants have drawn on their working capital lines of credit and, if the tourist season is successful, they are experiencing increased sales. Throughout the 3^rd quarter, seasonal merchants pay down their lines of credit. Due to the challenges of the current economy, management has been proactive in monitoring the repayment of seasonal lines of credit. Replenishment of the loan portfolio has slowed as demand for new credit has fallen off due to the depressed economy and the challenges of competing with low rates offered by other lenders.
    The Company makes loans to customers located primarily in the Delmarva region. Although the loan portfolio is diversified, its performance will be influenced by the economy of the region. Since late 2008, the local and regional economies have been adversely affected by a recession of national and international reach. Although economists consider that the recession ended in mid-2009, the Bank continues to experience higher than historical levels of loan delinquencies and losses due to trailing effects of the recession and the slow pace of recovery.

Loan Quality and the Allowance for Loan Losses
    The allowance for loan losses (ALLL) represents an amount which management believes to be adequate to absorb identified and inherent losses in the loan portfolio as of the balance sheet date. Valuation of the allowance is completed no less than quarterly. The determination of the allowance is inherently subjective as it relies on estimates of potential loss related to specific loans, the effects of portfolio trends, and other internal and external factors.
    The ALLL consists of (i) formula-based reserves comprised of potential losses in the balance of the loan portfolio segmented into homogeneous pools, (ii) specific reserves comprised of potential losses on loans that management has identified as impaired and (iii) unallocated reserves. Unallocated reserves are not associated with a specific portfolio segment or a specific loan, but may be appropriate if properly supported and in accordance with GAAP.
    The Company evaluates loan portfolio risk for the purpose of establishing an adequate allowance for loan losses. In determining an adequate level for the formula-based portion of the ALLL, management considers historical loss experience for major types of loans. Homogenous categories of loans are evaluated based on loss experience in the most recent five years, applied to the current portfolio. This formulation gives weight to portfolio size and loss experience for categories of real-estate secured loans, other loans to commercial borrowers, and other consumer loans. However, historical data may not be an accurate predictor of loss potential in the current loan portfolio.
    Management also evaluates trends in delinquencies, the composition of the portfolio, concentrations of credit, and changes in lending products, processes, or staffing. Management further considers external factors such as the interest rate environment, competition, current local and national economic trends, and the results of recent independent reviews by auditors and banking regulators. The protracted slow-down in the real-estate market has affected both the price and time to market of residential and commercial properties. Management closely monitors such trends and the potential effect on the Company. Since the beginning of the current adverse economic conditions in late 2007, the Company has experienced historically high loan losses and provisions for loan losses. Management expects this trend to continue for the remainder of 2012 and into 2013.

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    Loans are considered impaired when, based on current information, management considers it unlikely that collection of principal and interest payments will be made according to contractual terms. A performing loan may be categorized as impaired based on knowledge of circumstances that are deemed relevant to loan collection, including the deterioration of the borrower’s financial condition or devaluation of collateral. Not all impaired loans are past due nor are losses expected for every impaired loan.
    Impaired loans may have specific reserves, or valuation allowances, allocated to them in the ALLL. Estimates of loss reserves on impaired loans may be determined based on any of the three following measurement methods which conform to authoritative accounting guidance: (1) the present value of future cash flows, (2) the fair value of collateral, if repayment of the loan is expected to be provided by the sale of the underlying collateral (i.e. collateral dependent), or (3) the loan’s observable fair value. The Bank selects and applies, on a loan-by-loan basis, the appropriate valuation method. Upon identification of a loss on a collateral dependent loan, the loss amount is recorded as a charge-off consistent with regulatory guidance. During the 3^rd quarter of 2012, a charge-off of $206,707 was recorded related to a collateral dependent real estate loan. Loans determined to be impaired, but for which no specific valuation allowance or charge-off is appropriate because management believes the loan is secured with adequate collateral or the Bank will not take a loss on such loan, are grouped with other homogeneous loans for evaluation under formula-based criteria described previously. Impaired loans (including all nonaccruing loans) decreased $358,059 (8.89%) from $4,026,437 at December 31, 2011 to $3,668,378 at September 30, 2012, primarily as the result of short sales and charge-offs on collateral dependent loans. Refer to Note 3 for additional information about impaired loans.
    The accrual of interest on a loan is discontinued when principal or interest is 90 days past due or when the loan is determined to be impaired, unless collateral is sufficient to discharge the debt in full and the loan is in process of collection. When a loan is placed in nonaccruing status, any interest previously accrued but unpaid, is reversed from interest income. Interest payments received on nonaccrual loans may be recorded as cash basis income, or as a reduction of principal, on a loan by loan basis, based upon management’s judgment. All nonaccrual loan payments received in 2012 were recorded as reductions of principal. Accrual of interest may be restored when all principal and interest are current and management believes that future payments will be received in accordance with the loan agreement.
    Nonperforming loans are loans past due 90 or more days and still accruing plus nonaccrual loans. Nonperforming assets are comprised of nonperforming loans combined with real estate acquired in foreclosure and held for sale (OREO). Nonperforming assets decreased $599,444 (10.39%) from $5,767,831 at December 31, 2011 to $5,168,387 at September 30, 2012, primarily as a result of decreases in nonaccrual loans from short sales and charge-offs on collateral dependent loans during the same period. Management monitors the accruing loans in this category closely to assure that collateral is sufficient to fully discharge the debt to the Bank. Refer to Note 3 for additional information about nonperforming assets.

Liquidity
    Liquidity represents the ability to provide steady sources of funds for loan commitments and investment activities, as well as to provide sufficient funds to cover deposit withdrawals and payment of debt and operating obligations. These funds can be obtained by converting assets to cash or by attracting new deposits. The Company’s major sources of liquidity are loan repayments, maturities of short-term investments including federal funds sold, and increases in core deposits. Funds from seasonal deposits are generally invested in short-term U.S. Treasury Bills and overnight federal funds.
    Due to its location in a seasonal resort area, the Bank typically experiences a decline in deposits, federal funds sold and investment securities throughout the 1st quarter of the year when business customers are using their deposits to meet cash flow needs. This trend is not evident in 2012 as deposits levels at the end of the 1st quarter were comparable with deposits as of December 31, 2011. Refer to the Financial Condition section above for further discussion of deposit activity. Beginning late in the 2^nd quarter and throughout the 3^rd quarter, additional sources of liquidity become more readily available as business borrowers start repaying loans, and the Bank receives deposits from seasonal business customers, summer residents and tourists. Consistent with historical 3rd quarter trends, deposits have increased by $16.4 million (4.64%) since June 30, 2012. Management anticipates that deposits will decrease in the 4^th quarter at a rate similar to or greater than the same period in the two previous years.
    Average liquid assets (cash and amounts due from banks, interest-bearing deposits in other banks, federal funds sold, and investment securities) compared to average deposits and retail repurchase agreements were 55.27% for the 3^rd quarter of 2012 compared to 51.19% for the same quarter of 2011. The increased liquidity is a result of a decrease in average loans occurring primarily in the 3^rd quarter of 2012.
    The Company has available lines of credit, including overnight federal funds and reverse repurchase agreements, totaling $28,000,000 as of September 30, 2012.

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Interest Rate Sensitivity
    The primary objective of asset/liability management is to ensure the steady growth of the Company's primary source of earnings, net interest income. Net interest income can fluctuate with significant interest rate movements. To lessen the impact of these margin swings, the balance sheet should be structured so that repricing opportunities exist for both assets and liabilities in roughly equivalent amounts at approximately the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest rate sensitivity.
    Interest rate sensitivity refers to the responsiveness of interest-bearing assets and liabilities to changes in market interest rates. The rate-sensitive position, or gap, is the difference in the volume of rate-sensitive assets and liabilities at a given time interval. The general objective of gap management is to actively manage rate-sensitive assets and liabilities to reduce the impact of interest rate fluctuations on the net interest margin. Management generally attempts to maintain a balance between rate-sensitive assets and liabilities as the exposure period is lengthened to minimize the overall interest rate risk to the Company.
    Interest rate sensitivity may be controlled on either side of the balance sheet. On the asset side, management exercises some control over maturities. Also, loans are written to provide repricing opportunities on fixed rate loans. The Company's investment portfolio, including federal funds sold, provides the most flexible and fastest control over rate sensitivity since it can generally be restructured more quickly than the loan portfolio. Short term investment maturities are preferred and are utilized to manage interest rate risk.
    On the liability side, deposit products are structured to offer incentives to attain the desired maturity distribution and repricing opportunities. Competitive factors sometimes make control over deposits more difficult and, therefore, less effective as an interest rate sensitivity management tool.
    The asset mix of the balance sheet is continually evaluated in terms of several variables: yield, credit quality, appropriate funding sources, and liquidity. Management of the liability mix of the balance sheet focuses on deposit product pricing and offerings.
    As of September 30, 2012, the Company was cumulatively asset-sensitive for all time horizons primarily due to the ability to reprice fixed rate loans. For asset-sensitive institutions, if interest rates should decrease, the net interest margins should decline. Since all interest rates and yields do not adjust at the same velocity, the gap is only a general indicator of rate sensitivity.

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Results of Operations
    Net income for the three months ended September 30, 2012, was $1,124,243 ($0.38 per share), compared to $1,321,612 ($0.44 per share) for the same quarter of 2011, resulting in a decrease of $197,369 or 14.93%. Year-to-date net income has decreased $42,749 ($0.01 per share) from $3,487,714 ($1.16 per share) in 2011 to $3,444,965 ($1.15 per share) in 2012. The key components of net income are discussed in the following paragraphs.
    For the 3^rd quarter of 2012 compared to the same quarter 2011, net interest income decreased $116,888 (3.17%). Net interest income decreased $602,504 (5.31%) in the first nine months of 2012 compared to the same period in 2011. Average interest-bearing assets and liabilities have increased compared to the 3^rd quarter of 2011, however these volume increases have been more than offset by lower rates, resulting in reductions in both interest revenue and expense.
    The tax-equivalent quarterly yield on interest-earning assets decreased by 42 bps from 4.10% for the 3^rd quarter 2011 to 3.68% in the same period in 2012. The quarterly tax-equivalent yield on interest-bearing liabilities decreased 23 bps from 0.51% in 2011 to 0.28% in the same period in 2012. In combination, these shifts contribute to a decrease in net interest margin on interest-earning assets of 27 bps.
    To offset interest revenue decreases, management has gradually lowered deposit rates from 2009 to the present. Interest expense for the quarter ended September 30, 2012 decreased by $138,856 (41.97%) relative to the same period in the prior year. Year-to-date interest expense through September 30, 2012 is $396,872 (35.81%) lower than the same period in the previous year. Interest rates on deposit products (excluding interest bearing checking) and repurchase agreements have been reduced by at least 50% since the beginning of 2012 which have resulted in the significant decrease in interest expense.
    The Company’s net interest income is one of the most important factors in evaluating its financial performance. Management uses interest rate sensitivity analysis to determine the effect of rate changes. Net interest income is projected over a one-year period to determine the effect of an increase or decrease in the prime rate of 100 basis points. If prime were to decrease one hundred basis points, and all assets and liabilities maturing or repricing within that period were fully adjusted for the rate change, the Company would experience a decrease of approximately 3.6% in net interest income. Conversely, if prime were to increase one hundred basis points, and all assets and liabilities maturing or repricing within that period were fully adjusted for the rate change, the Company would experience an increase in net interest income of the same percentage. The current interest rate sensitivity of 3.6% is a substantial decrease from the 5.2% in the previous quarter which can be attributed to a lower percentage of assets (both investments and loans) that will reprice in the next 3 months and an increase in immediately repriceable deposits. The sensitivity analysis does not consider the likelihood of these rate changes nor whether management’s reaction to this rate change would be to reprice its loans or deposits or both.

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    The following table presents information including average balances of interest-earning assets and interest-bearing liabilities, the amount of related interest income and interest expense, and the resulting yields by category of interest-earning asset and interest-bearing liability. In this table, dividends and interest on tax-exempt securities and loans are reported on a fully taxable equivalent basis, which is a non-GAAP measure as defined in SEC Regulation G and Item 10 of SEC Regulation S-K. Management believes that these measures provide better yield comparability as a tool for managing net interest income.

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    Provisions for loan losses of $206,200 and $55,500 were recorded during the 3^rd quarter of 2012 and 2011, respectively. The 3^rd quarter provisions were higher than the amount recorded in the same period in the prior year due to charge-offs on several collateral dependent real estate loans. Provisions for loan losses of $503,700 and $1,004,400 were recorded for the nine months ending September 30, 2012 and 2011, respectively. The year-to-date provisions for loan losses in 2012 are significantly less than the amount recorded during the same period in the prior year due to substantial losses recorded on several collateral dependent real estate loans in the first half of 2011. During the 3^rd quarter of 2011, the expected losses on these collateral-dependent real estate loans were charged-off. Net loans charged-off were $493,545 and $1,287,542 during the first nine months of 2012 and 2011, respectively. Management attributes the continued high level of loan losses to the weak economic conditions of the area and severely depressed real estate values. Management expects additional losses to occur during the remainder of 2012 and into 2013, and those losses may be significant. Provisions for anticipated losses are included in the ALLL. Refer to the Loan Quality and the Allowance for Loan Losses section above for a discussion of the provision for loan losses.
    Noninterest revenue for the 3^rd quarter of 2012 is approximately the same as the comparable period last year. Year-to-date noninterest revenue is $203,970 (15.77%) higher than the same period last year. The positive variances in the year-to-date periods result from lower other than temporary impairment (OTTI) losses on equity investments in 2012. OTTI losses were $157,090 lower in 2012. The remaining increase over the prior year is attributable to the incremental income from an additional investment made in bank owned life insurance in the 1st quarter of 2012. Increases in fee income in other areas such as ATM and debit card, merchant services, and wire transfers were offset by a reduction in service charge revenue on deposit accounts associated with prohibition of insufficient funds fees on non-recurring consumer point-of-sale transaction and implementation of free online banking.
    Non-interest expense for the 3^rd quarter of 2012 is $102,161 (5.08%) higher than the comparable period last year driven by increased employee payroll and group insurance costs. For the year-to-date period, non-interest expense is $207,415 (3.37%) higher than last year also as a result of increased employee payroll and group insurance costs along with higher consulting, training, and OREO holding costs. The aforementioned increases in year-to-date non-interest expenses were partially offset by decreases in FDIC deposit insurance premiums, occupancy costs, and legal fees.
    Income taxes for the nine months ended September 30, 2012 are $62,500 (3.15%) lower than the same period last year while pre-tax income decreased by $105,249 (1.92%) during the same period. The decrease in income tax expense for the nine months ended September 30, 2012 is proportionate to the decrease in income before income taxes during the same period. The Company’s effective tax rate of 35.79% for the nine months ended September 30, 2012 is consistent with the rate through September 30, 2011 of 36.24%. The slight decrease in the effective tax rate is due to a higher percentage of tax-exempt income in 2012, mostly attributable to the additional bank owned life insurance investment in the 1^st quarter. At this time, there are no changes in the operations of the Company or tax laws applicable to the Company that would have a significant impact on the effective income tax rate.
 

Plans of Operation
    The Bank offers a full range of deposit services including checking, NOW, Money Market, and savings accounts, and time deposits including certificates of deposit. The transaction, savings, and certificate of deposit accounts are tailored to the Bank’s principal market areas at rates competitive to those offered in the area by other community banks. The Bank also offers Individual Retirement Accounts (IRA), Health Savings Accounts, and Education Savings Accounts. All deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum amount allowed by law. The Bank solicits these accounts from individuals, businesses, associations and organizations, and governmental authorities. The Bank offers individual customers up to $50 million in FDIC insured deposits through the Certificate of Deposit Account Registry Services® network (CDARS).
    The Bank also offers a full range of short to medium-term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans include secured and unsecured loans for financing automobiles, home improvements, education, and personal investments. The Bank originates commercial and residential mortgage loans and real estate construction, acquisition and development loans. These lending activities are subject to a variety of lending limits imposed by state and federal law. The Bank lends to directors and officers of the Company and the Bank under terms comparable to those offered to other borrowers entering into similar loan transactions. The Board of Directors approves all loans to officers and directors and reviews these loans every six months.
    Other bank services include cash management services, 24-hour ATMs, debit cards, safe deposit boxes, direct deposit of payroll and social security funds, and automatic drafts for various accounts. The Bank offers bank-by-phone and Internet banking services, including electronic bill-payment, to both commercial and retail customers. The Bank’s commercial customers can subscribe to a remote capture service that enables them to electronically capture check images and make on-line deposits. The Bank also offers non-deposit investment products including retail repurchase agreements.

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Capital Resources and Adequacy
    Total stockholders’ equity increased $3,093,801 from December 31, 2011 to September 30, 2012. This increase is attributable to comprehensive income of $3,450,576 for the nine months ended September 30, 2012, less the cost to repurchase shares of $356,775 during the same period.
    Under the capital guidelines of the Federal Reserve Board and the FDIC, the Company and Bank are currently required to maintain a minimum risk-based total capital ratio of 8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common stockholders' equity – common stock, additional paid-in capital, and retained earnings. In addition, the Company and the Bank must maintain a minimum Tier 1 leverage ratio (Tier 1 capital to average total assets) of at least 4%, but this minimum ratio is increased by 100 to 200 basis points for other than the highest-rated institutions.
    Tier one risk-based capital ratios of the Company as of September 30, 2012 and December 31, 2011 were 35.9% and 34.6%, respectively. Both are substantially in excess of regulatory minimum requirements. The increase in the tier one capital ratio since December 31, 2011 is primarily attributable to a reduction in the loan portfolio during the same period.
    On June 7, 2012, the Board of Governors of the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively the "banking agencies") issued joint notices of proposed rulemaking that would revise and replace the banking agencies’ current regulatory capital framework. The proposed rules would implement the Basel III capital standards as established by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As proposed, the new regulatory capital framework would apply to the Bank and would establish higher minimum regulatory capital ratios, add a new Common Tier 1 regulatory capital ratio, establish capital conservation buffers, and significantly revise the rules for calculating risk weighted assets. As currently written, the proposed rules would not apply to the Company as its total assets are currently less than $500 million.
    During the 3^rd quarter of 2012, management analyzed the proposed rules and estimated the potential impact on the Bank’s regulatory capital ratios, capital planning, and operations. A detailed comment letter identifying the potential impact on the Bank including opposition to the proposed rules was written by management and submitted to the Bank’s regulators. A copy of the letter, in its entirety, can be found on the website of the FDIC. In summary, three areas of the proposed rules will have a significant impact on the Bank’s regulatory capital ratios including, inclusion of unrealized gains and losses on available-for-sale securities in regulatory capital, increased risk weighting for residential mortgages and increased risk weighting for unused commitments. Inclusion of unrealized gains and losses on available-for-sale securities would create volatility in the Bank’s regulatory capital ratios as interest rates increase or decrease. However, the changes in capital would only be temporary as the Bank typically holds its securities until maturity or until a call option is exercised. Changes in the risk-weighting of residential mortgages and unused commitments, as written in the proposed rules, are estimated to decrease the Bank’s regulatory capital ratios by at least 550 bps. This reduction is significant but the Bank’s capital ratios would remain substantially in excess of regulatory minimum requirements. Due to the aforementioned impacts of the proposed rules, the Bank may be required to designate fewer investment securities as available-for-sale, make significant changes to its residential mortgage and line of credit product offerings, and consider selling residential mortgages from its portfolio. Costs of compliance related to the proposed rules are expected to have a negative impact on the Bank’s earnings.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
    The Company’s principal market risk exposure relates to interest rates on interest-earning assets and interest-bearing liabilities. Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management monitors and seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
    At September 30, 2012, the Company’s interest rate sensitivity, as measured by gap analysis, showed the Company was asset-sensitive with a one-year cumulative gap of 17.85%, as a percentage of interest-earning assets. Generally asset-sensitivity indicates that assets reprice more quickly than liabilities and in a rising rate environment net interest income typically increases. Conversely, if interest rates decrease, net interest income would decline. The Bank has classified its demand mortgage and commercial loans as immediately repriceable. Unlike loans tied to prime, these rates do not necessarily change as prime changes since the decision to call the loans and change the rates rests with management.

Item 4. Controls and procedures
    Disclosure controls and procedures are designed and maintained by the Company to ensure that information required to be disclosed in the Company’s publicly filed reports is recorded, processed, summarized and reported in a timely manner. Such information must be available to management, including the Chief Executive Officer (CEO) and Treasurer, to allow them to make timely decisions about required disclosures. Even a well-designed and maintained control system can provide only reasonable, not absolute, assurance that its objectives are achieved. Inherent limitations in any system of controls include flawed 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 the Company’s disclosure controls and procedures as of September 30, 2012. Based on that evaluation, the Company’s management, including the CEO and Treasurer, has concluded that the Company’s disclosure controls and procedures are effective. The projection of an evaluation of controls to future periods is subject to the risk that procedures may become inadequate due to changes in conditions including the degree of compliance with procedures.

Changes in Internal Controls
    During the quarter ended on the date of this report, there were no significant changes in the Company’s internal control over financial reporting that have had or are reasonably likely to have a material effect on the Company’s internal control over financial reporting. As of September 30, 2012, the Company’s management, including the CEO and Treasurer, has concluded that the Company’s internal controls over financial reporting are effective.

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Calvin B. Taylor Bankshares, Inc. and Subsidiary
Part 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 change in risk factors or levels of risk as previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    ( 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 report.

    The Company publicly announced on August 14, 2003, that it would repurchase up to 10% of its outstanding equity stock at that time. As of January 1, 2005, and again on May 18, 2007, this plan was renewed by public announcement, making up to 10% of the Company’s outstanding equity stock available for repurchase at the time of each renewal. On January 13, 2010 and again on February 9, 2011, as part of its capital planning, the Board of Directors voted to suspend the stock buy-back program. On September 14, 2011, the Board reinstated this program and the Company publicly announced that it would repurchase up to 10% of its outstanding equity at that time (300,050 shares).
    There is no set 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. From its inception through September 30, 2012, 258,196 shares were retired under this program with 14,519 of those shares being retired during the nine months ended September 30, 2012. As of September 30, 2012, there are 281,346 shares available for repurchase under the reinstated program announced on September 14, 2011.

    The following table presents high and low bid information obtained from the Over the Counter Bulletin Board and from other trades known to management of the Company. Because transactions in the Company’s common stock are infrequent and are often negotiated privately between the persons involved in those transactions, actual prices may be higher or lower than those included in this table. Additionally, the number of shares traded at high or low prices may vary significantly. There is no established public trading market in the stock, and there is no likelihood that a trading market will develop in the near future.

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Item 3. Defaults Upon Senior Securities
    Not applicable.

Item 4. Mine Safety Disclosures
    Not applicable.

Item 5. Other information
    There is no information required to be disclosed in a report on Form 8-K during the period covered by this report, which has not been reported.

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

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Exhibit 31.1
Rule 13a-14(a) Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Raymond M. Thompson, certify that:

I have reviewed this quarterly report on Form 10-Q of Calvin B. Taylor Bankshares, 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

4. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

Date: November 6, 2012

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

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Exhibit 31.2
Rule 13a-14(a) Certification of the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Jennifer G. Hawkins, certify that:

I have reviewed this quarterly report on Form 10-Q of Calvin B. Taylor Bankshares, 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

4. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

Date: November 6, 2012

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

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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 a review of the Quarterly Report on Form 10-Q for the period ended September 30, 2012, of Calvin B. Taylor Bankshares, Inc.:

Date: November 6, 2012

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

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

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SIGNATURES

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

Date: November 6, 2012

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

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

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