##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2009
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File No.: 000-25805
 Fauquier Bankshares, Inc.
  Virginia
    
    54-1288193(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 10 Courthouse Square, Warrenton, Virginia
    
    20186(Address of principal executive offices)
    
    (Zip Code)
 (540) 347-2700
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



FAUQUIER BANKSHARES, INC.
 PagePart I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008
  3Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 2009
and 2008
  4Consolidated Statements of Income (unaudited) for the Nine Months Ended September 30, 2009
and 2008
  5Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Nine Months
Ended
September 30, 2009 and 2008
  6Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2009
and 2008
  7Notes to Consolidated Financial Statements
  8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  19Item 3. Quantitative and Qualitative Disclosures about Market Risk
  41Item 4. Controls and Procedures
  41Part II. OTHER INFORMATION
  42Item 1. Legal Proceedings
  42Item 1A. Risk Factors
  42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  42Item 3. Defaults Upon Senior Securities
  42Item 4. Submission of Matters to a Vote of Security Holders
  42Item 5. Other Information
  42Item 6. Exhibits
  42SIGNATURES
  43EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
  Fauquier Bankshares, Inc. and Subsidiaries


Consolidated Balance Sheets
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    5,491,989
    
    
    $
    7,698,661Interest-bearing deposits in other banks
    
    
    14,964,633
    
    
    
    3,324,501Federal funds sold
    
    
    10,340
    
    
    
    Securities available for sale
    
    
    38,275,106
    
    
    
    37,839,375Loans, net of allowance for loan losses of $5,221,035
in 2009 and $4,779,662 in 2008
    
    
    455,391,125
    
    
    
    434,678,433Bank premises and equipment, net
    
    
    12,827,259
    
    
    
    8,621,217Accrued interest receivable
    
    
    1,462,759
    
    
    
    1,549,597Other real estate owned
    
    
    2,029,085
    
    
    
    3,034,470Other assets
    
    
    17,931,939
    
    
    
    17,768,978Total assets
    
    $
    548,384,235
    
    
    $
    514,515,232Liabilities and Shareholders EquityDeposits:Noninterest-bearing
    
    
    64,347,781
    
    
    
    69,065,944Interest-bearing:NOW accounts
    
    
    81,296,578
    
    
    
    74,555,901Savings and money market accounts
    
    
    102,924,321
    
    
    
    102,810,758Time certificates of deposit
    
    
    186,998,679
    
    
    
    153,861,028Total interest-bearing
    
    
    371,219,578
    
    
    
    331,227,687Total deposits
    
    
    435,567,359
    
    
    
    400,293,631Federal funds purchased
    
    
    10,000,000
    
    
    
    18,275,000Federal Home Loan Bank advances
    
    
    50,000,000
    
    
    
    45,000,000Company-obligated mandatorily redeemable
capital securities
    
    
    4,124,000
    
    
    
    4,124,000Other liabilities
    
    
    6,091,826
    
    
    
    5,334,664Commitments and contingencies
    
    
    
    
    
    
    Total liabilities
    
    
    505,783,185
    
    
    
    473,027,295Shareholders EquityCommon stock, par value, $3.13; authorized 8,000,000
shares: issued and outstanding, 2009: 3,598,537 shares
(includes nonvested shares of 51,134); 2008: 3,564,317 shares
(includes nonvested shares of 38,219)
    
    
    11,103,371
    
    
    
    11,036,687Retained earnings
    
    
    33,362,931
    
    
    
    32,668,530Accumulated other comprehensive income (loss), net
    
    
    (1,865,252
    )
    
    
    (2,217,280
    )Total shareholders equity
    
    
    42,601,050
    
    
    
    41,487,937Total liabilities and shareholders equity
    
    $
    548,384,235
    
    
    $
    514,515,232
  3




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##### Table of Contents



Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income
(Unaudited)
For the Three Months Ended September 30, 2009 and 2008
 2009
    
    
    2008Interest IncomeInterest and fees on loans
    
    $
    6,698,083
    
    
    $
    6,768,554Interest and dividends on securities available for sale:Taxable interest income
    
    
    307,862
    
    
    
    366,630Interest income exempt from federal income taxes
    
    
    59,374
    
    
    
    58,289Dividends
    
    
    22,291
    
    
    
    59,978Interest on federal funds sold
    
    
    38
    
    
    
    3Interest on deposits in other banks
    
    
    4,511
    
    
    
    15,305Total interest income
    
    
    7,092,159
    
    
    
    7,268,759Interest ExpenseInterest on deposits
    
    
    1,310,379
    
    
    
    1,761,639Interest on federal funds purchased
    
    
    15,698
    
    
    
    23,877Interest on Federal Home Loan Bank advances
    
    
    274,382
    
    
    
    519,870Distribution on capital securities of subsidiary trusts
    
    
    23,483
    
    
    
    45,757Total interest expense
    
    
    1,623,942
    
    
    
    2,351,143Net interest income
    
    
    5,468,217
    
    
    
    4,917,616Provision for loan losses
    
    
    360,000
    
    
    
    431,000Net interest income after provision for loan losses
    
    
    5,108,217
    
    
    
    4,486,616Other IncomeWealth management income
    
    
    317,811
    
    
    
    324,890Service charges on deposit accounts
    
    
    700,521
    
    
    
    722,065Other service charges, commissions and income
    
    
    419,256
    
    
    
    436,889(Loss) on impairment of securities
    
    
    (245,741
    )
    
    
    (297,500
    )(Loss) on sale of other real estate owned
    
    
    
    
    
    
    (3,000
    )Total other income
    
    
    1,191,847
    
    
    
    1,183,344Other ExpensesSalaries and benefits
    
    
    2,677,232
    
    
    
    2,141,693Net occupancy expense of premises
    
    
    387,895
    
    
    
    328,600Furniture and equipment
    
    
    259,107
    
    
    
    313,889Marketing expense
    
    
    184,127
    
    
    
    142,873Legal, audit, and consulting expense
    
    
    220,023
    
    
    
    261,178Data processing expense
    
    
    232,563
    
    
    
    325,227Federal Deposit Insurance Corporation assessment
    
    
    145,050
    
    
    
    64,174Other operating expenses
    
    
    915,151
    
    
    
    678,431Total other expenses
    
    
    5,021,148
    
    
    
    4,256,065Income before income taxes
    
    
    1,278,916
    
    
    
    1,413,895Income tax expense
    
    
    322,982
    
    
    
    478,892Net Income
    
    $
    955,934
    
    
    $
    935,003Earnings per Share, basic
    
    $
    0.27
    
    
    $
    0.26Earnings per Share, assuming dilution
    
    $
    0.26
    
    
    $
    0.26Dividends per Share
    
    $
    0.20
    
    
    $
    0.20
  4




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##### Table of Contents



Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income
(Unaudited)
For the Nine Months Ended September 30, 2009 and 2008
 2009
    
    
    2008Interest IncomeInterest and fees on loans
    
    $
    19,587,882
    
    
    $
    20,292,584Interest and dividends on securities available for sale:Taxable interest income
    
    
    980,004
    
    
    
    1,028,308Interest income exempt from federal income taxes
    
    
    178,759
    
    
    
    174,700Dividends
    
    
    42,519
    
    
    
    183,098Interest on federal funds sold
    
    
    194
    
    
    
    33,296Interest on deposits in other banks
    
    
    11,488
    
    
    
    27,851Total interest income
    
    
    20,800,846
    
    
    
    21,739,837Interest ExpenseInterest on deposits
    
    
    4,310,152
    
    
    
    5,485,364Interest on federal funds purchased
    
    
    38,544
    
    
    
    87,236Interest on Federal Home Loan Bank advances
    
    
    770,743
    
    
    
    1,401,345Distribution on capital securities of subsidiary trusts
    
    
    88,703
    
    
    
    155,462Total interest expense
    
    
    5,208,142
    
    
    
    7,129,407Net interest income
    
    
    15,592,704
    
    
    
    14,610,430Provision for loan losses
    
    
    920,000
    
    
    
    1,721,000Net interest income after provision for loan losses
    
    
    14,672,704
    
    
    
    12,889,430Other IncomeWealth management income
    
    
    814,855
    
    
    
    1,000,127Service charges on deposit accounts
    
    
    2,026,642
    
    
    
    2,098,330Other service charges, commissions and income
    
    
    1,212,112
    
    
    
    1,478,325Gain on sale of securities
    
    
    
    
    
    
    87,585(Loss) on impairment of securities
    
    
    (412,129
    )
    
    
    (422,500
    )Gain (Loss) on sale of other real estate owned
    
    
    (135,759
    )
    
    
    25,718Total other income
    
    
    3,505,721
    
    
    
    4,267,585Other ExpensesSalaries and benefits
    
    
    7,362,842
    
    
    
    6,768,719Net occupancy expense of premises
    
    
    1,013,204
    
    
    
    958,926Furniture and equipment
    
    
    808,388
    
    
    
    885,431Advertising expense
    
    
    492,485
    
    
    
    468,469Legal, audit, and consulting expense
    
    
    1,032,927
    
    
    
    802,566Data processing expense
    
    
    906,487
    
    
    
    987,569Federal Deposit Insurance Corporation assessment
    
    
    675,150
    
    
    
    86,903Other operating expenses
    
    
    2,347,868
    
    
    
    2,088,464Total other expenses
    
    
    14,639,351
    
    
    
    13,047,047Income before income taxes
    
    
    3,539,074
    
    
    
    4,109,968Income tax expense
    
    
    936,550
    
    
    
    1,224,045Net Income
    
    $
    2,602,524
    
    
    $
    2,885,923Earnings per Share, basic
    
    $
    0.72
    
    
    $
    0.82Earnings per Share, assuming dilution
    
    $
    0.72
    
    
    $
    0.81Dividends per Share
    
    $
    0.60
    
    
    $
    0.60
  5




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##### Table of Contents



Fauquier Bankshares, Inc. and Subsidiaries


Consolidated Statements of Changes in Shareholders Equity
For the Nine Months Ended September 30, 2009 and 2008
 AccumulatedOtherCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveStock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Income
    
    
    TotalBalance, December 31, 2007
    
    $
    10,974,293
    
    
    $
    31,626,627
    
    
    $
    (773,168
    )
    
    
    
    
    
    $
    41,827,752Comprehensive income:Net income
    
    
    
    
    
    
    2,885,923
    
    
    
    
    
    
    $
    2,885,923
    
    
    
    2,885,923Other comprehensive income net of tax:Unrealized
holding gains (losses) on securities available
for sale, net of tax benefit of $1,145,186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,523,548
    )Add: reclassification adjustments, net of tax
benefit of $12,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    322,194Other comprehensive income (loss) net of tax of $1,132,465
    
    
    
    
    
    
    
    
    
    
    (2,201,354
    )
    
    
    (2,201,354
    )
    
    
    (2,201,354
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    684,569Effects of changing pension plan measurement date,
pursuant to FAS 158, net of deferred income tax
benefit of $12,437
    
    
    
    
    
    
    (24,144
    )
    
    
    
    
    
    
    
    
    
    
    (24,144
    )Initial implementation of EITF 06-4, net of income tax
benefit of $6,433
    
    
    
    
    
    
    (12,487
    )
    
    
    
    
    
    
    
    
    
    
    (12,487
    )Cash dividends ($.60 per share)
    
    
    
    
    
    
    (2,140,915
    )
    
    
    
    
    
    
    
    
    
    
    (2,140,915
    )Acquisition of 7,332 shares of common stock
    
    
    (22,949
    )
    
    
    (103,123
    )
    
    
    
    
    
    
    
    
    
    
    (126,072
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    244,227
    
    
    
    
    
    
    
    
    
    
    
    244,227Restricted Stock forfeiture
    
    
    
    
    
    
    (49,604
    )
    
    
    
    
    
    
    
    
    
    
    (49,604
    )Issuance of common stock  nonvested shares
(10,315 shares)
    
    
    32,286
    
    
    
    (32,286
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    59,220
    
    
    
    128,300
    
    
    
    
    
    
    
    
    
    
    
    187,520Balance, September 30, 2008
    
    $
    11,042,850
    
    
    $
    32,522,518
    
    
    $
    (2,974,522
    )
    
    
    
    
    
    $
    40,590,846Balance, December 31, 2008
    
    $
    11,036,687
    
    
    $
    32,668,530
    
    
    $
    (2,217,280
    )
    
    
    
    
    
    $
    41,487,937Comprehensive income:Net income
    
    
    
    
    
    
    2,602,524
    
    
    
    
    
    
    
    2,602,524
    
    
    
    2,602,524Other comprehensive income net of tax:Unrealized holding gains on securities available
for sale, net of tax of $21,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,630Add: reclassification adjustments, net of tax
benefit of $101,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310,398Other comprehensive income net of tax of $123,177
    
    
    
    
    
    
    
    
    
    
    352,028
    
    
    
    352,028
    
    
    
    352,028Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,954,552Cash dividends ($.60 per share)
    
    
    
    
    
    
    (2,158,322
    )
    
    
    
    
    
    
    
    
    
    
    (2,158,322
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    218,843
    
    
    
    
    
    
    
    
    
    
    
    218,843Issuance of common stock  nonvested
shares (10,585 shares)
    
    
    33,131
    
    
    
    (33,131
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    33,553
    
    
    
    64,487
    
    
    
    
    
    
    
    
    
    
    
    98,040Balance, September 30, 2009
    
    $
    11,103,371
    
    
    $
    33,362,931
    
    
    $
    (1,865,252
    )
    
    
    
    
    
    $
    42,601,050
  6




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##### Table of Contents



Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Cash Flows from Operating ActivitiesNet income
    
    $
    2,602,524
    
    
    $
    2,885,923Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    602,622
    
    
    
    696,976Provision for loan losses
    
    
    920,000
    
    
    
    1,721,000Loss (gain) on sale of other real estate
    
    
    135,759
    
    
    
    (25,718
    )Loss on impairment of securities
    
    
    412,129
    
    
    
    422,500(Gain) on sale of securities
    
    
    
    
    
    
    (87,585
    )Amortization (accretion) of security premiums, net
    
    
    (32,079
    )
    
    
    (7,486
    )Amortization of unearned compensation, net of forfeiture
    
    
    218,843
    
    
    
    194,623Changes in assets and liabilities:(Increase) in other assets
    
    
    (257,471
    )
    
    
    (315,556
    )(Decrease) increase in other liabilities
    
    
    757,163
    
    
    
    (19,209
    )Net cash provided by operating activities
    
    
    5,359,490
    
    
    
    5,465,468Cash Flows from Investing ActivitiesProceeds from sale of securities available for sale
    
    
    
    
    
    
    9,078,470Proceeds from maturities, calls and principal
payments of securities available for sale
    
    
    7,127,108
    
    
    
    3,710,672Purchase of securities available for sale
    
    
    (6,689,614
    )
    
    
    (13,965,595
    )Purchase of premises and equipment
    
    
    (4,808,664
    )
    
    
    (1,848,458
    )(Purchase) of other bank stock
    
    
    (719,900
    )
    
    
    (392,300
    )Net (increase) in loans
    
    
    (21,632,692
    )
    
    
    (16,375,094
    )Proceeds from sale of other real estate owned
    
    
    869,626
    
    
    
    710,083Net cash (used in) investing activities
    
    
    (25,854,136
    )
    
    
    (19,082,222
    )Cash Flows from Financing ActivitiesNet increase (decrease) in demand deposits, NOW accounts
and savings accounts
    
    
    2,136,077
    
    
    
    (35,735,451
    )Net increase in certificates of deposit
    
    
    33,137,651
    
    
    
    36,799,720Federal Home Loan Bank advances
    
    
    170,000,000
    
    
    
    70,000,000Federal Home Loan Bank principal repayments
    
    
    (165,000,000
    )
    
    
    (60,000,000
    )(Repayment) of federal funds, net
    
    
    (8,275,000
    )
    
    
    Cash dividends paid on common stock
    
    
    (2,158,322
    )
    
    
    (2,140,915
    )Issuance of common stock
    
    
    98,040
    
    
    
    187,520Acquisition of common stock
    
    
    
    
    
    
    (126,072
    )Net cash provided by financing activities
    
    
    29,938,446
    
    
    
    8,984,802Increase (decrease) in cash and cash equivalents
    
    
    9,443,800
    
    
    
    (4,631,952
    )Cash and Cash EquivalentsBeginning
    
    
    11,023,162
    
    
    
    19,552,174Ending
    
    $
    20,466,962
    
    
    $
    14,920,222Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    5,419,609
    
    
    $
    7,262,818Income taxes
    
    $
    1,106,000
    
    
    $
    941,000Supplemental Disclosures of Noncash Investing ActivitiesUnrealized gain (loss) on securities available for sale, net
of tax effect
    
    $
    41,630
    
    
    $
    (2,523,548
    )FAS 158 Pension Liability Implementation Adjustment,
net of tax effect
    
    $
    
    
    
    $
    (24,144
    )Implementation of EITF 06-4, net of tax effect
    
    $
    
    
    
    $
    (12,487
    )
  7




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##### Table of Contents



FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
 Note 1. General
 The consolidated statements include the accounts of Fauquier Bankshares, Inc. (the Company)
and its wholly-owned subsidiaries: The Fauquier Bank (the Bank) and Fauquier Statutory Trust
II; and the Banks wholly-owned subsidiary, Fauquier Bank Services, Inc. In consolidation,
significant intercompany financial balances and transactions have been eliminated. In the
opinion of management, the accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present fairly the
financial positions as of September 30, 2009 and December 31, 2008 and the results of operations
for the three and nine months ended September 30, 2009 and 2008. The notes included herein
should be read in conjunction with the consolidated financial statements and accompanying notes
included in the Companys 2008 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
 The results of operations for the three and nine months ended September 30, 2009 are not
necessarily indicative of the results expected for the full year.
 Note 2. Securities
 The amortized cost and fair value of securities available for sale, with unrealized gains and
losses follows:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueSeptember 30, 2009Obligations of U.S. Government
corporations and agencies
    
    $
    24,803,452
    
    
    $
    963,654
    
    
    $
    
    
    
    $
    25,767,106Obligations of states and political
subdivisions
    
    
    5,569,506
    
    
    
    199,372
    
    
    
    (6,352
    )
    
    
    5,762,526Corporate Bonds
    
    
    5,700,791
    
    
    
    
    
    
    
    (3,070,244
    )
    
    
    2,630,547Mutual Funds
    
    
    312,786
    
    
    
    941
    
    
    
    
    
    
    
    313,727FHLMC Preferred Bank Stock
    
    
    18,500
    
    
    
    8,000
    
    
    
    
    
    
    
    26,500Restricted investments:Federal Home Loan Bank Stock
    
    
    3,625,700
    
    
    
    
    
    
    
    
    
    
    
    3,625,700Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000$
    40,179,735
    
    
    $
    1,171,967
    
    
    $
    (3,076,596
    )
    
    $
    38,275,106
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueDecember 31, 2008Obligations of U.S. Government
corporations and agencies
    
    $
    25,212,561
    
    
    $
    561,884
    
    
    $
    (2,030
    )
    
    $
    25,772,415Obligations of states and political
subdivisions
    
    
    5,574,709
    
    
    
    29,033
    
    
    
    (146,019
    )
    
    
    5,457,723Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (2,861,903
    )
    
    
    3,138,097Mutual Funds
    
    
    303,889
    
    
    
    
    
    
    
    (5,969
    )
    
    
    297,920FHLMC Preferred Bank Stock
    
    
    18,500
    
    
    
    
    
    
    
    (13,000
    )
    
    
    5,500Restricted investments:Federal Home Loan Bank Stock
    
    
    2,905,800
    
    
    
    
    
    
    
    
    
    
    
    2,905,800Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000Silverton Bank Stock
    
    
    112,920
    
    
    
    
    
    
    
    
    
    
    
    112,920$
    40,277,379
    
    
    $
    590,917
    
    
    $
    (3,028,921
    )
    
    $
    37,839,375
 8




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##### Table of Contents



The amortized cost and fair value of securities available for sale, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations without penalties.
 September 30, 2009Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    466,740
    
    
    $
    472,063Due after one year through five years
    
    
    163,128
    
    
    
    168,412Due after five years through ten years
    
    
    9,388,373
    
    
    
    9,748,445Due after ten years
    
    
    26,055,508
    
    
    
    23,771,259Equity securities
    
    
    4,105,986
    
    
    
    4,114,927$
    40,179,735
    
    
    $
    38,275,106
 During the three and nine months ended September 30, 2009, the Company recognized a permanent
impairment of $245,741 and $299,209, respectively, on its investment in pooled trust preferred
securities. A tax benefit of $83,552 and $101,731, respectively, has been recognized on these
impairment losses for the same three and nine month periods. In addition, during the nine months
ended September 30, 2009, the Company recognized a permanent impairment of $112,920 on its 50
shares of Silverton Bank common stock. No tax benefit has been recognized on this impairment
loss.
 During the three and nine months ended September 30, 2008, the Bank recognized permanent
impairment losses of $297,500 and $422,500, respectively, on its 10,000 shares of Freddie Mac
preferred stock.
 There were no securities sold in the three and nine months ended September 30, 2009, or for the
three months ended September 30, 2008. For the nine months ended September 30, 2008, gross
realized gains from sales of securities available for sale amounted to $87,585. The proceeds
from the sale of these securities, including the realized gain, amounted to $9.1 million. The
tax expense applicable to this net realized gain amounted to $29,779.
 The following table shows the Company securities with gross unrealized losses and fair value,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position, at September 30, 2009 and December 31, 2008, respectively.
 September 30, 2009
    
    Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)Obligations of U.S. Government,
corporations and agencies
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Obligations of states and political
subdivisions
    
    
    
    
    
    
    
    
    
    
    277,675
    
    
    
    (6,352
    )
    
    
    277,675
    
    
    
    (6,352
    )Corporate Bonds
    
    
    
    
    
    
    
    
    
    
    2,630,547
    
    
    
    (3,070,244
    )
    
    
    2,630,547
    
    
    
    (3,070,244
    )Subtotal, debt securities
    
    
    
    
    
    
    
    
    
    
    2,908,222
    
    
    
    (3,076,596
    )
    
    
    2,908,222
    
    
    
    (3,076,596
    )Mutual Funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FHLMC Preferred Bank Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total temporary impaired securities
    
    $
    
    
    
    $
    
    
    
    $
    2,908,222
    
    
    $
    (3,076,596
    )
    
    $
    2,908,222
    
    
    $
    (3,076,596
    )
 December 31, 2008
    
    Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)Obligations of U.S. Government,
corporations and agencies
    
    $
    785,744
    
    
    $
    (2,030
    )
    
    $
    
    
    
    $
    
    
    
    
    785,744
    
    
    $
    (2,030
    )Obligations of states and political
subdivisions
    
    
    4,181,657
    
    
    
    (146,019
    )
    
    
    
    
    
    
    
    
    
    
    4,181,657
    
    
    
    (146,019
    )Corporate Bonds
    
    
    
    
    
    
    
    
    
    
    3,138,097
    
    
    
    (2,861,903
    )
    
    
    3,138,097
    
    
    
    (2,861,903
    )Subtotal, debt securities
    
    
    4,967,401
    
    
    
    (148,049
    )
    
    
    3,138,097
    
    
    
    (2,861,903
    )
    
    
    8,105,498
    
    
    
    (3,009,952
    )Mutual Funds
    
    
    
    
    
    
    
    
    
    
    297,920
    
    
    
    (5,969
    )
    
    
    297,920
    
    
    
    (5,969
    )FHLMC Preferred Bank Stock
    
    
    5,500
    
    
    
    (13,000
    )
    
    
    
    
    
    
    
    
    
    
    5,500
    
    
    
    (13,000
    )Total temporary impaired securities
    
    $
    4,972,901
    
    
    $
    (161,049
    )
    
    $
    3,436,017
    
    
    $
    (2,867,872
    )
    
    $
    8,408,918
    
    
    $
    (3,028,921
    )
 The nature of securities which are temporarily impaired for a continuous 12 month period or more
at September
 9




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##### Table of Contents



30, 2009 can be segregated into two groups:
 The first group consists of four corporate bonds with a cost basis totaling $5.7 million and a
temporary loss of approximately $3.1 million. The method for valuing these four corporate bonds
came from Moodys Analytics. Moodys Analytics employs a two step discounted cash-flow valuation
process. The first step is to use Monte Carlo simulations to evaluate the credit quality of the
collateral pool and the structural supports. Step two is to apply a discount rate to the cash
flows to calculate a value. These four corporate bonds are the Class B or subordinated
mezzanine tranche of pooled trust preferred securities. The trust preferred securities are
collateralized by the interest and principal payments made on trust preferred capital offerings
by a geographically diversified pool of approximately 50 different financial institutions. They
have an estimated maturity of 26 years, but can be called at par on the five year anniversary
date of issuance, which has already passed for all four bonds. If not called, the bonds reprice
every three months at a fixed rate index above the three-month London Interbank Offered Rate
(LIBOR). These bonds have sufficient collateralization and cash flow projections to satisfy
their valuation based on the cash flow portion of the Other Than Temporary Impairment (OTTI)
test under authoritative accounting guidance as of September 30, 2009. Two of the bonds totaling
$1,996,221, at fair value, are current, and two bonds totaling $634,326 are greater than 90 days
past due, and are classified as nonperforming corporate bond investments in the nonperforming
asset table in Note 4.
 Additional information regarding each of the pooled trust preferred securities as of September
30, 2009 follows:
 Estimate in amountof additionaldeferrals/defaultsPercent of
    
    Percent of
    
    Percent of
    
    
    
    
    
    before temporaryUnderlying
    
    Underlying
    
    Underlying
    
    Current
    
    or permanentCost, net of
    
    
    
    
    
    Collateral
    
    Collateral in
    
    Collateral in
    
    Moodys
    
    shortfall inOTTI loss
    
    Fair Value
    
    Performing
    
    Deferral
    
    Default
    
    Rating
    
    cash flow$
    798,082
    
    
    
    296,704
    
    
    
    71.1
    %
    
    
    20.6
    %
    
    
    8.3
    %
    
    Ca
    
    0.0%2,000,000
    
    
    
    962,903
    
    
    
    82.2
    %
    
    
    9.5
    %
    
    
    8.3
    %
    
    Ca
    
    6.1%2,000,000
    
    
    
    1,033,318
    
    
    
    84.9
    %
    
    
    13.4
    %
    
    
    1.7
    %
    
    Ca
    
    3.0%902,709
    
    
    
    337,622
    
    
    
    78.0
    %
    
    
    10.7
    %
    
    
    11.3
    %
    
    Ca
    
    0.0%
 The second group consists of one municipal bond totaling $277,675 with a temporary loss of
$6,352. This bond is current. The Company plans to hold it until maturity in 2020.
 The carrying value of securities pledged to secure deposits and for other purposes amounted to
$22.1 million and $25.9 million at September 30, 2009 and December 31, 2008, respectively.
 Note 3. Loans
 A summary of the balances of loans follows:
 September 30,
    
    
    December 31,2009
    
    
    2008(Thousands)Real estate loans:Construction
    
    $
    38,223
    
    
    $
    38,037Secured by farmland
    
    
    950
    
    
    
    1,293Secured by 1 - to - 4 family residential
    
    
    187,852
    
    
    
    175,791Other real estate loans
    
    
    183,431
    
    
    
    160,443Commercial and industrial loans (not secured by real estate)
    
    
    37,954
    
    
    
    39,985Consumer installment loans
    
    
    11,632
    
    
    
    15,695All other loans
    
    
    776
    
    
    
    8,934Total loans
    
    $
    460,818
    
    
    $
    440,178Unearned income
    
    
    (206
    )
    
    
    (720
    )Allowance for loan losses
    
    
    (5,221
    )
    
    
    (4,780
    )Net loans
    
    $
    455,391
    
    
    $
    434,678
 10




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##### Table of Contents



Of the $183.4 million in other real estate loans at September 30, 2009, $103.7 million were
owner occupied. Of the $160.4 million in other real estate loans at December 31, 2008, $96.2
million were owner occupied.
 Note 4. Allowance for Loan Losses
 Analysis of the allowance for loan losses follows:
 Nine Months
    
    
    Nine Months
    
    
    Twelve MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    December 31,2009
    
    
    2008
    
    
    2008Balance at beginning of year
    
    $
    4,779,662
    
    
    $
    4,185,209
    
    
    $
    4,185,209Provision for loan losses
    
    
    920,000
    
    
    
    1,721,000
    
    
    
    3,227,269Recoveries of loans previously charged-off
    
    
    77,096
    
    
    
    66,800
    
    
    
    72,298Loan losses charged-off
    
    
    (555,723
    )
    
    
    (1,288,571
    )
    
    
    (2,705,114
    )Balance at end of year
    
    $
    5,221,035
    
    
    $
    4,684,438
    
    
    $
    4,779,662
 Nonperforming assets consist of the following:
 September 30,
    
    
    December 31,
    
    
    September 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2008Nonaccrual loans
    
    $
    4,332
    
    
    $
    1,208
    
    
    $
    4,457Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    $
    4,332
    
    
    $
    1,208
    
    
    $
    4,457Other real estate owned
    
    
    2,029
    
    
    
    3,034
    
    
    
    Repossessed automobiles
    
    
    68
    
    
    
    33
    
    
    
    133Nonperforming corporate bond investments, at fair value
    
    
    634
    
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    7,063
    
    
    $
    4,275
    
    
    $
    4,590Allowance for loan losses to period end loans
    
    
    1.13
    %
    
    
    1.08
    %
    
    
    1.10
    %Non-performing loans and repossessed assets to period end
loans and repossessed assets owned
    
    
    1.39
    %
    
    
    0.97
    %
    
    
    1.07
    %Non-performing assets to period end total assets
    
    
    1.29
    %
    
    
    0.81
    %
    
    
    0.92
    %
 September 30, 2009
    
    
    December 31, 2008
    
    
    September 30, 2008Impaired loans for which an allowance has been provided
    
    $
    3,137,846
    
    
    $
    809,221
    
    
    $
    1,863,300Impaired loans for which no allowance has been provided
    
    
    1,832,247
    
    
    
    81,604
    
    
    
    3,389,723$
    4,970,093
    
    
    $
    890,825
    
    
    $
    5,253,023Allowance provided for impaired loans, included in the allowance for loan losses
    
    $
    1,425,051
    
    
    $
    720,395
    
    
    $
    1,274,158
 Nine Months
    
    
    Twelve Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008Average balance in impaired loans
    
    $
    4,978,382
    
    
    $
    1,308,909
    
    
    $
    5,201,012Interest income recognized on impaired loans
    
    $
    171,440
    
    
    $
    35,940
    
    
    $
    199,884
 Total loans past due 90 days or more and still accruing interest were $448,000 at September 30,
2009, and $102,000 and $1,000 on December 31, 2008 and September 30, 2008, respectively. Total
loans past due 90 days
 11




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##### Table of Contents



or more and still accruing interest at September 30, 2009, consisted of three separate lending
relationships of $320,000, $125,000 and $3,000. These loans were well collateralized and/or were
in the process of collection at September 30, 2009.
 The Company has adopted Accounting Standard Codification (ASC) 310  Loans and Debt Securities
with Deteriorated Credit Quality (previously Financial Accounting Standards Board (FASB)
Statement No. 114, Accounting by Creditors for Impairment of a Loan, as amended by FASB
Statement No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures). ASC 310, as amended, requires that the impairment of loans that have been
separately identified for evaluation is to be measured based on the present value of expected
future cash flows or, alternatively, the observable market price of the loans or the fair value
of the collateral. However, for those loans that are collateral dependent (that is, if repayment
of those loans is expected to be provided solely by the underlying collateral) and for which
management has determined foreclosure is probable, the measure of impairment is to be based on
the net realizable value of the collateral. ASC 310, as amended, also requires certain
disclosures about investments in impaired loans and the allowance for loan losses and interest
income recognized on loans.
 A loan is considered impaired when it is probable that the Bank will be unable to collect all
principal and interest amounts according to the contractual terms of the loan agreement. Factors
involved in determining impairment include, but are not limited to, expected future cash flows,
financial condition of the borrower, and the current economic conditions. A performing loan may
be considered impaired if the factors above indicate a need for impairment. A loan on
non-accrual status may not be impaired if it is in the process of collection or if the shortfall
in payment is insignificant. A delay of less than 30 days or a shortfall of less than 5% of the
required principal and interest payments generally is considered insignificant and would not
indicate an impairment situation, if in managements judgment the loan will be paid in full.
Loans that meet the regulatory definitions of doubtful or loss generally qualify as impaired
loans under ASC 310. As is the case for all loans, charge-offs for impaired loans occur when the
loan or portion of the loan is determined to be uncollectible.
 Note 5. Company-Obligated Mandatorily Redeemable Capital Securities
 On September 21, 2006, the Companys wholly-owned Connecticut statutory business trust privately
issued $4 million face amount of the trusts Floating Rate Capital Securities in a pooled
capital securities offering (Trust II). Simultaneously, the trust used the proceeds of that
sale to purchase $4.0 million principal amount of the Companys Floating Rate Junior
Subordinated Deferrable Interest Debentures due 2036. The interest rate on the capital security
resets every three months at 1.70% above the then current three month LIBOR. Interest is paid
quarterly.
 Total capital securities at September 30, 2009 and December 31, 2008 were $4,124,000 for both
respective dates. The Trust II issuance of capital securities and the respective subordinated
debentures are callable at any time after five years from the issue date. The subordinated
debentures are an unsecured obligation of the Company and are junior in right of payment to all
present and future senior indebtedness of the Company. The capital securities are guaranteed by
the Company on a subordinated basis.
 Note 6. Earnings Per Share
 The following table shows the weighted average number of shares used in computing earnings per
share and the effect on weighted average number of shares of dilutive potential common stock.
Dilutive potential common stock had no effect on income available to common shareholders.
 12




---



##### Table of Contents



Three Months
    
    
    Three MonthsEnded
    
    
    EndedSeptember 30, 2009
    
    
    September 30, 2008Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,597,602
    
    
    $
    0.27
    
    
    
    3,529,347
    
    
    $
    0.26Effect of dilutive securities, stock-based awards
    
    
    12,558
    
    
    
    
    
    
    
    31,1843,610,160
    
    
    $
    0.26
    
    
    
    3,560,531
    
    
    $
    0.26
 Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2009
    
    
    September 30, 2008Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,591,796
    
    
    $
    0.72
    
    
    
    3,525,633
    
    
    $
    0.82Effect of dilutive securities, stock-based awards
    
    
    9,068
    
    
    
    
    
    
    
    33,3843,600,864
    
    
    $
    0.72
    
    
    
    3,559,017
    
    
    $
    0.81
 Note 7. Stock-Based Compensation
 The Companys 2009 Stock Incentive Plan (Plan) provides for the granting of incentive stock
options, restricted stock, and phantom stock units to key employees. The Plan replaced the
Omnibus Stock Ownership and Long Term Incentive Plan filed with the Securities and Exchange
Commission on October 15, 2002, and became effective on May 19, 2009 after shareholders approved
the Plan at the annual meeting of shareholders. The Plan makes available 350,000 shares, which
may be awarded to directors and employees of the Company in the form of equity-based awards.
 Effective January 1, 2006, the Company adopted the provisions of ASC 718 Compensation 
Stock Compensation (previously SFAS No. 123 (R), Share-Based Payment,) which requires that
the Company recognize expense related to the fair value of stock-based compensation awards in
net income.
 The Company accounts for non-vested shares of restricted stock using the fair market value of
the Companys common stock on the date the restricted shares were awarded. The restricted
shares issued to executive officers and directors are subject to a vesting period over the next
three years. Compensation expense for non-vested shares of restricted stock amounted to $66,780
and $68,952, net of any forfeiture, for the three months ended September 30, 2009 and 2008,
respectively. Compensation expense for non-vested shares of restricted stock amounted to
$218,843 and $194,623, net of any forfeiture, for the nine months ended September 30, 2009 and
2008, respectively.
 The Company did not grant stock options during the nine months ended September 30, 2009 or
September 30, 2008.
 13




---



##### Table of Contents



A summary of the status of the options issued under the 2009 Stock Incentive Plan, the Omnibus
Stock Ownership and Long-Term Incentive Plan, and the Non-employee Director Stock Option Plan
(collectively, the Plans) is presented below:
 Nine Months EndedSeptember 30, 2009WeightedAverage
    
    
    AverageNumber of
    
    
    Exercise
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value (1)Outstanding at January 1, 2009
    
    
    77,180
    
    
    $
    9.84Granted
    
    
    Exercised
    
    
    (10,720
    )
    
    
    9.15Expired
    
    
    (3,980
    )
    
    
    9.75Outstanding at September 30, 2009
    
    
    62,480
    
    
    $
    9.96Exercisable at end of quarter
    
    
    62,480
    
    
    $
    9.96
    
    
    $
    283,715Weighted-average fair value per option of options granted during the year
    
    
    
 
 (1)
    
    The aggregate intrinsic value of stock options in the table above
reflects the pre-tax intrinsic value (the amount by which the September 30, 2009
market value of the underlying stock option exceeded the exercise price of the
option) that would have been received by the option holders had all option holders
exercised their options on September 30, 2009. This amount changes based on the
changes in the market value of the Companys stock. The total intrinsic value of options exercised during the nine months ended September 30, 2009
and 2008 was $35,838 and $132,774, respectively.
 A summary of the status of the Companys non-vested restricted shares issued under the Plans is
presented below:
 Nine Months EndedSeptember 30, 2009WeightedNumber of
    
    AverageShares
    
    PriceNonvested at January 1, 2009
    
    
    38,219Granted
    
    
    23,500
    
    
    $
    10.06Vested
    
    
    (10,585
    )Nonvested at September 30, 2009
    
    
    51,134
 As of September 30, 2009, there was $351,605 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the Plans. That cost is expected
to be recognized over an approximate period of 29 months.
 In addition to the nonvested restricted shares noted above, the Company issued 15,050 non-vested
phantom stock units during the nine month period ending September 30, 2009. These units were
awarded to members of senior management, and will fully vest on January 1, 2012 if certain
Company earnings performance measures are achieved. When fully vested, each stock unit will be
exchanged for one share of Fauquier Bankshares, Inc. common stock. For the three and nine month
periods ended September 30, 2009, $24,707 and $63,586, respectively, of expense was recognized
related to the phantom stock units. As of September 30, 2009 approximately $162,314 of
additional compensation cost related to non-vested phantom stock units are expected to be
recognized over an approximate period of 27 months.
 14




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##### Table of Contents



Note 8. Employee Benefit Plan
 The following table provides a reconciliation of the changes in the defined benefit pension
plans obligations for the three and nine months ended September 30, 2009 and 2008.
 Three Months EndedSeptember 30,2009
    
    
    2008Service cost
    
    $
    62,707
    
    
    $
    111,081Interest cost
    
    
    73,827
    
    
    
    77,352Expected return on plan assets
    
    
    (65,839
    )
    
    
    (149,050
    )Amortization of transition (asset)
    
    
    
    
    
    
    (4,745
    )Amortization of prior service cost
    
    
    
    
    
    
    1,942Recognized net actuarial loss
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    70,695
    
    
    $
    36,580
 Nine Months EndedSeptember 30,2009
    
    
    2008Service cost
    
    $
    188,121
    
    
    $
    333,243Interest cost
    
    
    221,481
    
    
    
    232,056Expected return on plan assets
    
    
    (197,517
    )
    
    
    (447,150
    )Amortization of transition (asset)
    
    
    
    
    
    
    (14,235
    )Amortization of prior service cost
    
    
    
    
    
    
    5,826Recognized net actuarial loss
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    212,085
    
    
    $
    109,740
 The Company previously disclosed in its financial statements for the year ended December 31,
2008, that there were no contributions made to its pension plan in 2008. As of September 30,
2009, the pension plan required no additional contributions.
 On December 20, 2007, the Companys Board of Directors approved the termination of the defined
benefit pension plan effective on December 31, 2009, and effective January 1, 2010, the Company
will replace the defined benefit pension plan with an enhanced 401(k) plan. On January 18,
2008, the assets within the defined benefit pension plan were redeployed from ownership in
various equity and debt mutual fund investments, and into a short-term money market fund in
order to preserve asset value until the plan is terminated.
 Defined benefit pension plan expenses are projected to be approximately $285,000 in 2009 and
nothing due to curtailment going forward. Expenses for the 401(k) plan are projected to increase
from approximately $154,000 in 2009 to approximately $625,000 in 2010. Growth in 401(k) after
2010 is projected to increase approximately at the same rate of increase as salaries.
 Note 9. Fair Value Measurement
 The Company adopted ASC 820 Fair Value Measurement and Disclosures (previously SFAS No. 157,
Fair Value Measurements), on January 1, 2008 to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures. ASC 820 clarifies that the fair
value of certain assets and liabilities is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants.
 ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those
valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Companys market
assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types
of inputs are as follows:
 Level 1 
    
    Valuation is based on quoted prices in active markets for identical
 15




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assets and liabilities.Level 2 
    
    Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for
identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant
assumptions can be derived primarily from or corroborated by observable data in the market.Level 3 
    
    Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.
 The following describes the valuation techniques used by the Company to measure certain
financial assets and liabilities recorded at fair value on a recurring basis in the financial
statements:
 Securities available for sale: Securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted market prices, when available
(Level 1). If quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which significant
assumptions are derived primarily from or corroborated by observable market data. Third party
vendors compile prices from various sources and may determine the fair value of identical or
similar securities by using pricing models that considers observable market data (Level 2).
 The following table presents the balances of financial assets and liabilities measured at fair
value on a recurring basis as of September 30, 2009:
 Fair Value Measurements at September 30, 2009 Using Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantBalance at
    
    Identical
    
    Observable
    
    Unobservable(In Thousands)
    
    September 30,
    
    Assets
    
    Inputs
    
    InputsDescription
    
    2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)AssetsAvailable-for-sale securities
    
    $
    38,275
    
    
    $
    35,644
    
    
    $
    2,631
    
    
    $
    
 Certain financial assets are measured at fair value on a nonrecurring basis in accordance with
accounting principles generally accepted in the United States. Adjustments to the fair value of
these assets usually result from the application of lower-of-cost-or-market accounting or
write-downs of individual assets.
 The following describes the valuation techniques used by the Company to measure certain
financial assets recorded at fair value on a nonrecurring basis in the financial statements:
 Loans held for sale: Loans held for sale are carried at the lower of cost or market value. These
loans currently consist of one-to-four family residential loans originated for sale in the
tertiary market. Fair value is based on the price tertiary markets are currently offering for
similar loans using observable market data which is not materially different than cost due to
the short duration between origination and sale (Level 2). As such, the
Company records any fair value adjustments on a nonrecurring basis. The Company had no loans
held for sale as of September 30, 2009.
 Impaired Loans: Loans are designated as impaired when, in the judgment of management based on
current information and events, it is probable that all amounts due according to the contractual
terms of the loan agreement will not be collected. The measurement of loss associated with
impaired loans can be based on either the observable market price of the loan or the fair value
of the collateral. Fair value is measured based on the value of the collateral securing the
loans. Collateral may be in the form of real estate or business assets including equipment,
inventory, and accounts receivable. The value of real estate collateral is determined utilizing
an income or market valuation approach based on an appraisal conducted by an independent,
licensed
 16




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\

appraiser outside of the Company using observable market data (Level 2). However, if the
collateral is a house or building in the process of construction or if an appraisal of the real
estate property is over two years old, then the fair value is considered Level 3. The value of
business equipment is based upon an outside appraisal if deemed significant, or the net book
value on the applicable business financial statements if not considered significant using
observable market data. Likewise, values for inventory and accounts receivables collateral are
based on financial statement balances or aging reports (Level 3). Impaired loans allocated to
the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value
adjustments are recorded in the period incurred as provision for loan losses on the Consolidated
Statements of Income.
 Certain assets such as other real estate owned are measured at fair value less the cost to sell.
Management believes that the fair value component in its valuation follows the provisions of ASC
820.
 The following table summarizes the Companys financial and non-financial assets that were
measured at fair value on a nonrecurring basis during the period.
 Carrying value at September 30, 2009Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantBalance as of
    
    Identical
    
    Observable
    
    Unobservable(In Thousands)
    
    September 30,
    
    Assets
    
    Inputs
    
    InputsDescription
    
    2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Impaired loans,
net of reserve
for losses
    
    $
    1,713
    
    
    
    
    
    
    $
    1,270
    
    
    $
    443
 The fair value of a financial instrument is the current amount that would be exchanged between
willing parties, other than in a forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market prices for the
Companys various financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instruments. ASC 820, (previously SFAS No. 107 Disclosures about
Fair Value of Financial Instruments,) excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value of the Company.
 The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
 Cash and cash equivalents
  Securities
  17




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Loan Receivables
  Accrued Interest
  Deposit Liabilities
  Federal Funds Purchased
  Federal Home Loan Bank Advances
  Off-Balance-Sheet Financial Instruments
    18




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The estimated fair values of the Companys financial instruments are as follows:
 September 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    Fair(In Thousands)
    
    Amount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and short-term
investments
    
    $
    20,457
    
    
    $
    20,457
    
    
    $
    11,023
    
    
    $
    11,023Federal funds sold
    
    
    10
    
    
    
    10
    
    
    
    
    
    
    
    Securities
    
    
    38,275
    
    
    
    38,275
    
    
    
    37,839
    
    
    
    37,839Loans, net
    
    
    455,391
    
    
    
    511,811
    
    
    
    434,678
    
    
    
    452,946Accrued interest receivable
    
    
    1,463
    
    
    
    1,463
    
    
    
    1,550
    
    
    
    1,550Financial liabilities:Deposits
    
    $
    435,567
    
    
    $
    437,407
    
    
    $
    400,294
    
    
    $
    402,589FHLB advances
    
    
    50,000
    
    
    
    50,651
    
    
    
    45,000
    
    
    
    46,037Federal funds purchased
    
    
    10,000
    
    
    
    10,000
    
    
    
    18,275
    
    
    
    18,275Company obligated mandatorily
redeemable capital securities
    
    
    4,124
    
    
    
    3,062
    
    
    
    4,124
    
    
    
    3,116Accrued interest payable
    
    
    651
    
    
    
    651
    
    
    
    863
    
    
    
    863
 The Company assumes interest rate risk (the risk that general interest rate levels will
change) as a result of its normal operations. As a result, the fair values of the Companys
financial instruments will change when interest rate levels change and that change may be either
favorable or unfavorable to the Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate environment. Management
monitors rates and maturities of assets and liabilities and attempts to minimize interest rate
risk by adjusting terms of new loans and deposits and by investing in securities with terms that
mitigate the Companys overall interest rate risk.
 
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
  19




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GENERAL
        20




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CRITICAL ACCOUNTING POLICIES
    21




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EXECUTIVE OVERVIEW
       22




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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER
30, 2008
 NET INCOME
  NET INTEREST INCOME AND EXPENSE
      23




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AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 Three Months Ended September 30, 2009
    
    
    Three Months Ended September 30, 2008Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    446,344
    
    
    $
    6,599
    
    
    
    5.79
    %
    
    $
    417,624
    
    
    $
    6,664
    
    
    
    6.26
    %Tax-exempt (1)
    
    
    8,252
    
    
    
    150
    
    
    
    7.09
    %
    
    
    8,642
    
    
    
    159
    
    
    
    7.21
    %Nonaccrual (2)
    
    
    2,048
    
    
    
    
    
    
    
    
    
    
    
    3,089
    
    
    
    Total Loans
    
    
    456,644
    
    
    
    6,749
    
    
    
    5.79
    %
    
    
    429,355
    
    
    
    6,823
    
    
    
    6.23
    %SecuritiesTaxable
    
    
    31,955
    
    
    
    330
    
    
    
    4.13
    %
    
    
    32,970
    
    
    
    427
    
    
    
    5.17
    %Tax-exempt (1)
    
    
    5,575
    
    
    
    90
    
    
    
    6.45
    %
    
    
    5,265
    
    
    
    88
    
    
    
    6.71
    %Total securities
    
    
    37,530
    
    
    
    420
    
    
    
    4.48
    %
    
    
    38,235
    
    
    
    515
    
    
    
    5.39
    %Deposits in banks
    
    
    8,506
    
    
    
    5
    
    
    
    0.21
    %
    
    
    3,269
    
    
    
    15
    
    
    
    1.83
    %Federal funds sold
    
    
    64
    
    
    
    0.04
    
    
    
    0.25
    %
    
    
    Total earning assets
    
    
    502,744
    
    
    
    7,174
    
    
    
    5.60
    %
    
    
    470,859
    
    
    
    7,353
    
    
    
    6.13
    %Less: Reserve for loan losses
    
    
    (5,204
    )
    
    
    
    
    
    
    
    
    
    
    (4,491
    )Cash and due from banks
    
    
    5,863
    
    
    
    
    
    
    
    
    
    
    
    14,658Bank premises and equipment,
net
    
    
    11,994
    
    
    
    
    
    
    
    
    
    
    
    8,451Other assets
    
    
    23,613
    
    
    
    
    
    
    
    
    
    
    
    17,501Total Assets
    
    $
    539,010
    
    
    
    
    
    
    
    
    
    
    $
    506,978LIABILITIES &
SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    63,139
    
    
    
    
    
    
    
    
    
    
    $
    66,170Interest-bearing depositsNOW accounts
    
    
    78,102
    
    
    
    93
    
    
    
    0.47
    %
    
    
    82,685
    
    
    
    186
    
    
    
    0.90
    %Money market accounts
    
    
    62,894
    
    
    
    91
    
    
    
    0.57
    %
    
    
    89,437
    
    
    
    433
    
    
    
    1.95
    %Savings accounts
    
    
    42,054
    
    
    
    69
    
    
    
    0.65
    %
    
    
    31,748
    
    
    
    39
    
    
    
    0.49
    %Time deposits
    
    
    184,797
    
    
    
    1,057
    
    
    
    2.27
    %
    
    
    124,902
    
    
    
    1,104
    
    
    
    3.52
    %Total
interest-bearing
deposits
    
    
    367,847
    
    
    
    1,310
    
    
    
    1.41
    %
    
    
    328,772
    
    
    
    1,762
    
    
    
    2.13
    %Federal funds purchased
    
    
    5,624
    
    
    
    16
    
    
    
    1.11
    %
    
    
    3,953
    
    
    
    24
    
    
    
    2.40
    %Federal Home Loan Bank
advances
    
    
    49,511
    
    
    
    275
    
    
    
    2.17
    %
    
    
    57,880
    
    
    
    519
    
    
    
    3.51
    %Capital securities of
subsidiary trust
    
    
    4,124
    
    
    
    23
    
    
    
    2.23
    %
    
    
    4,124
    
    
    
    46
    
    
    
    4.34
    %Total interest-bearing
liabilities
    
    
    427,106
    
    
    
    1,624
    
    
    
    1.50
    %
    
    
    394,729
    
    
    
    2,351
    
    
    
    2.36
    %Other liabilities
    
    
    6,027
    
    
    
    
    
    
    
    
    
    
    
    4,041Shareholders equity
    
    
    42,738
    
    
    
    
    
    
    
    
    
    
    
    42,038Total Liabilities &
Shareholders Equity
    
    $
    539,010
    
    
    
    
    
    
    
    
    
    
    $
    506,978Net interest spread
    
    
    
    
    
    $
    5,550
    
    
    
    4.09
    %
    
    
    
    
    
    $
    5,002
    
    
    
    3.77
    %Interest expense as a
percent of average
earning assets
    
    
    
    
    
    
    
    
    
    
    1.28
    %
    
    
    
    
    
    
    
    
    
    
    1.98
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.32
    %
    
    
    
    
    
    
    
    
    
    
    4.15
    %
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a
federal tax rate of 34%.(2)
    
    Nonaccrual loans are included in the average balance of total loans
and total earning assets. 25




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RATE/VOLUME ANALYSIS
  RATE / VOLUME VARIANCE(In Thousands)Three Months Ended September 30, 2009 Compared toThree Months Ended September 30, 2008Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOME
    
    
    
    
    
    
    
    
    
    
    Loans; taxable
    
    $
    (64
    )
    
    $
    458
    
    
    
    (522
    )Loans; tax-exempt (1)
    
    
    (10
    )
    
    
    (7
    )
    
    
    (3
    )Securities; taxable
    
    
    (96
    )
    
    
    (13
    )
    
    
    (83
    )Securities; tax-exempt (1)
    
    
    2
    
    
    
    5
    
    
    
    (3
    )Deposits in banks
    
    
    (11
    )
    
    
    25
    
    
    
    (36
    )Federal funds sold
    
    
    
    
    
    
    
    
    
    
    Total Interest Income
    
    
    (179
    )
    
    
    468
    
    
    
    (647
    )INTEREST EXPENSENOW accounts
    
    
    (93
    )
    
    
    (10
    )
    
    
    (83
    )Money market accounts
    
    
    (342
    )
    
    
    (128
    )
    
    
    (214
    )Savings accounts
    
    
    30
    
    
    
    13
    
    
    
    17Time deposits
    
    
    (46
    )
    
    
    529
    
    
    
    (575
    )Federal funds purchased and securities sold under agreements to repurchase
    
    
    (8
    )
    
    
    10
    
    
    
    (18
    )Federal Home Loan Bank advances
    
    
    (245
    )
    
    
    (75
    )
    
    
    (170
    )Capital securities of subsidiary trust
    
    
    (23
    )
    
    
    
    
    
    
    (23
    )Total Interest Expense
    
    
    (727
    )
    
    
    339
    
    
    
    (1,066
    )Net Interest Income
    
    $
    548
    
    
    $
    129
    
    
    $
    419
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. PROVISION FOR LOAN LOSSES, ALLOWANCE FOR LOAN LOSSES, AND ASSET QUALITY
   OTHER INCOME
  26




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OTHER EXPENSE
      27




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INCOME TAXES
  COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30,
2008
 NET INCOME
   (Dollars in Thousands)Before Taxes
    
    Tax Expense
    
    After Taxes
    
    Per Fully-Diluted ShareFor the Nine Months Ended September 30, 2009Net income on GAAP basis
    
    $
    3,539
    
    
    $
    937
    
    
    $
    2,603
    
    
    $
    0.723Plus: Proxy contest expense
    
    
    291
    
    
    
    99
    
    
    
    192
    
    
    
    0.053
 28




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(Dollars in Thousands)Before Taxes
    
    Tax Expense
    
    After Taxes
    
    Per Fully-Diluted SharePlus: FDIC special assessment expense
    
    
    240
    
    
    
    82
    
    
    
    158
    
    
    
    0.044Net income after non-GAAP adjustment items
    
    $
    4,070
    
    
    $
    1,118
    
    
    $
    2,953
    
    
    $
    0.820
  For Nine Months endedSeptember 30, 2009Return on Average Assets:Net income on GAAP basis
    
    
    0.66
    %Net income after non-GAAP adjustment items
    
    
    0.75
    %Return on Average Equity:Net income on GAAP basis
    
    
    8.26
    %Net income after non-GAAP adjustment items
    
    
    9.37
    %
 NET INTEREST INCOME AND EXPENSE
      29




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AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 Nine Months Ended September 30, 2009
    
    
    Nine Months Ended September 30, 2008Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    439,632
    
    
    $
    19,254
    
    
    
    5.78
    %
    
    $
    410,676
    
    
    $
    20,007
    
    
    
    6.38
    %Tax-exempt (1)
    
    
    8,411
    
    
    
    441
    
    
    
    6.91
    %
    
    
    7,916
    
    
    
    433
    
    
    
    7.18
    %Nonaccrual (2)
    
    
    1,719
    
    
    
    
    
    
    
    
    
    
    
    2,244
    
    
    
    Total Loans
    
    
    449,762
    
    
    
    19,695
    
    
    
    5.78
    %
    
    
    420,836
    
    
    
    20,440
    
    
    
    6.40
    %SecuritiesTaxable
    
    
    31,061
    
    
    
    1,023
    
    
    
    4.39
    %
    
    
    32,675
    
    
    
    1,211
    
    
    
    4.71
    %Tax-exempt (1)
    
    
    5,537
    
    
    
    271
    
    
    
    6.52
    %
    
    
    5,386
    
    
    
    265
    
    
    
    6.55
    %Total securities
    
    
    36,598
    
    
    
    1,294
    
    
    
    4.71
    %
    
    
    38,061
    
    
    
    1,476
    
    
    
    5.17
    %Deposits in banks
    
    
    6,535
    
    
    
    11
    
    
    
    0.23
    %
    
    
    1,693
    
    
    
    28
    
    
    
    2.16
    %Federal funds sold
    
    
    102
    
    
    
    0.2
    
    
    
    0.25
    %
    
    
    1,640
    
    
    
    33
    
    
    
    2.71
    %Total earning assets
    
    
    492,997
    
    
    
    21,000
    
    
    
    5.63
    %
    
    
    462,230
    
    
    
    21,977
    
    
    
    6.27
    %Less: Reserve for loan losses
    
    
    (5,034
    )
    
    
    
    
    
    
    
    
    
    
    (4,285
    )Cash and due from banks
    
    
    8,041
    
    
    
    
    
    
    
    
    
    
    
    15,550Bank premises and equipment, net
    
    
    10,154
    
    
    
    
    
    
    
    
    
    
    
    8,160Other assets
    
    
    21,438
    
    
    
    
    
    
    
    
    
    
    
    16,825Total Assets
    
    $
    527,596
    
    
    
    
    
    
    
    
    
    
    $
    498,480LIABILITIES &
SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    63,623
    
    
    
    
    
    
    
    
    
    
    $
    67,617Interest-bearing depositsNOW accounts
    
    
    77,359
    
    
    
    252
    
    
    
    0.43
    %
    
    
    86,067
    
    
    
    655
    
    
    
    1.02
    %Money market accounts
    
    
    68,145
    
    
    
    401
    
    
    
    0.79
    %
    
    
    94,142
    
    
    
    1,517
    
    
    
    2.15
    %Savings accounts
    
    
    36,052
    
    
    
    117
    
    
    
    0.43
    %
    
    
    31,363
    
    
    
    111
    
    
    
    0.47
    %Time deposits
    
    
    171,397
    
    
    
    3,540
    
    
    
    2.76
    %
    
    
    113,762
    
    
    
    3,202
    
    
    
    3.76
    %Total interest-bearing deposits
    
    
    352,953
    
    
    
    4,310
    
    
    
    1.63
    %
    
    
    325,334
    
    
    
    5,485
    
    
    
    2.25
    %Federal funds purchased
    
    
    4,207
    
    
    
    39
    
    
    
    1.22
    %
    
    
    3,984
    
    
    
    87
    
    
    
    2.93
    %Federal Home Loan Bank advances
    
    
    54,795
    
    
    
    771
    
    
    
    1.85
    %
    
    
    50,961
    
    
    
    1,401
    
    
    
    3.61
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    89
    
    
    
    2.84
    %
    
    
    4,124
    
    
    
    156
    
    
    
    4.95
    %Total interest-bearing liabilities
    
    
    416,079
    
    
    
    5,209
    
    
    
    1.67
    %
    
    
    384,403
    
    
    
    7,129
    
    
    
    2.47
    %Other liabilities
    
    
    5,764
    
    
    
    
    
    
    
    
    
    
    
    3,829Shareholders equity
    
    
    42,130
    
    
    
    
    
    
    
    
    
    
    
    42,631Total Liabilities & Shareholders Equity
    
    $
    527,596
    
    
    
    
    
    
    
    
    
    
    $
    498,480Net interest spread
    
    
    
    
    
    $
    15,791
    
    
    
    3.96
    %
    
    
    
    
    
    $
    14,848
    
    
    
    3.80
    %Interest expense as a percent of average
earning assets
    
    
    
    
    
    
    
    
    

    
    1.41
    %
    
    
    
    
    
    
    
    
    
    
    2.05
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.22
    %
    
    
    
    
    
    
    
    
    
    
    4.21
    %
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal
tax rate of 34%.(2)
    
    Nonaccrual loans are included in the average balance of total loans and total earning assets. 31




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RATE/VOLUME ANALYSIS
  RATE / VOLUME VARIANCE(In Thousands)Nine Months Ended September 30, 2009 Compared toNine Months Ended September 30, 2008Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOMELoans; taxable
    
    $
    (754
    )
    
    $
    1,411
    
    
    
    (2,165
    )Loans; tax-exempt (1)
    
    
    8
    
    
    
    27
    
    
    
    (19
    )Securities; taxable
    
    
    (188
    )
    
    
    (60
    )
    
    
    (128
    )Securities; tax-exempt (1)
    
    
    6
    
    
    
    7
    
    
    
    (1
    )Deposits in banks
    
    
    (17
    )
    
    
    80
    
    
    
    (97
    )Federal funds sold
    
    
    (33
    )
    
    
    (31
    )
    
    
    (2
    )Total Interest Income
    
    
    (978
    )
    
    
    1,434
    
    
    
    (2,412
    )INTEREST EXPENSENOW accounts
    
    
    (403
    )
    
    
    (66
    )
    
    
    (337
    )Money market accounts
    
    
    (1,116
    )
    
    
    (419
    )
    
    
    (697
    )Savings accounts
    
    
    6
    
    
    
    17
    
    
    
    (11
    )Time deposits
    
    
    338
    
    
    
    1,622
    
    
    
    (1,284
    )Federal funds purchased and securities sold under agreements to repurchase
    
    
    (48
    )
    
    
    5
    
    
    
    (53
    )Federal Home Loan Bank advances
    
    
    (631
    )
    
    
    105
    
    
    
    (736
    )Capital securities of subsidiary trust
    
    
    (67
    )
    
    
    
    
    
    
    (67
    )Total Interest Expense
    
    
    (1,921
    )
    
    
    1,264
    
    
    
    (3,185
    )Net Interest Income
    
    $
    943
    
    
    $
    170
    
    
    $
    773
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. PROVISION FOR LOAN LOSSES, ALLOWANCE FOR LOAN LOSSES, AND ASSET QUALITY
   OTHER INCOME
   32




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OTHER EXPENSE
         INCOME TAXES
  COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
  33




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34




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ASSET QUALITY
           35




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CONTRACTUAL OBLIGATIONS
    OFF-BALANCE SHEET ARRANGEMENTS
  CAPITAL
   RISK BASED CAPITAL RATIOS
(Dollars in Thousands)
 September 30,
    
    
    December 31,2009
    
    
    2008Tier 1 Capital:Shareholders Equity
    
    $
    42,601
    
    
    $
    41,488Plus: Unrealized loss on securities
available for sale/FAS 158, net
    
    
    1,865
    
    
    
    2,217Less: Unrealized loss on equity securities, net
    
    
    
    
    
    
    (13
    )Plus: Company-obligated madatorily
redeemable capital securities
    
    
    4,000
    
    
    
    4,000Total Tier 1 Capital
    
    
    48,466
    
    
    
    47,692Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    5,221
    
    
    
    4,780Total Capital:
    
    
    53,687
    
    
    
    52,472Risk Weighted Assets:
    
    $
    448,587

    
    
    $
    416,265Regulatory Capital Ratios:Leverage Ratio
    
    
    9.00
    %
    
    
    9.37
    %Tier 1 to Risk Weighted Assets
    
    
    10.80
    %
    
    
    11.38
    %Total Capital to Risk Weighted Assets
    
    
    11.97
    %
    
    
    12.52
    %
 36




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CAPITAL RESOURCES AND LIQUIDITY
       37




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LIQUIDITY SOURCES AND USES
(Dollars in Thousands)
 September 30, 2009
    
    
    December 31, 2008Total
    
    
    In Use
    
    
    Available
    
    
    Total
    
    
    In Use
    
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    74,840
    
    
    $
    10,000
    
    
    $
    64,840
    
    
    $
    88,195
    
    
    $
    18,275
    
    
    $
    69,920Federal Home Loan Bank advances
    
    
    94,027
    
    
    
    50,000
    
    
    
    44,027
    
    
    
    115,214
    
    
    
    45,000
    
    
    
    70,214Federal funds sold
    
    
    
    
    
    
    
    
    
    
    10Securities, available for sale and
unpledged
at fair value
    
    
    
    
    
    
    
    
    
    
    12,638
    
    
    
    
    
    
    
    
    
    
    
    8,428Total short-term funding sources
    
    
    
    
    
    
    
    
    
    $
    111,515
    
    
    
    
    
    
    
    
    
    
    $
    148,562Uses:Unfunded loan commitments and
lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    81,850
    
    
    
    
    
    
    
    
    
    
    $
    74,023Letters of credit
    
    
    
    
    
    
    
    
    
    
    9,281
    
    
    
    
    
    
    
    
    
    
    
    5,366Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    91,131
    
    
    
    
    
    
    
    
    
    
    $
    79,389Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    122.4
    %
    
    
    
    
    
    
    
    
    
    
    187.1
    %
  IMPACT OF INFLATION AND CHANGING PRICES
  CHANGES IN ACCOUNTING PRINCIPLES
  38




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RECENT ACCOUNTING PROUNCEMENTS
    39




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40




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   41




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit
    
    ExhibitNumber
    
    Description11
    
    Refer to Part I, Item 1, Note 6 to the Consolidated Financial Statements.31.1
    
    Certification of CEO pursuant to Rule 13a-14(a).31.2
    
    Certification of CFO pursuant to Rule 13a-14(a).
 42




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Exhibit
    
    ExhibitNumber
    
    Description32.1
    
    Certification of CEO pursuant to 18 U.S.C. Section 1350.32.2
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350.
 
   FAUQUIER BANKSHARES, INC.
(Registrant)/s/ Randy K. FerrellRandy K. FerrellPresident & Chief Executive OfficerDated: November 9, 2009/s/ Eric P. GraapEric P. GraapExecutive Vice President & Chief Financial OfficerDated: November 9, 2009
 43