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 June 30, 2008
 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
  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 Statements


1Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007


1Consolidated Statements of Income (unaudited) for the Three Months Ended June 30, 2008 and 2007


2Consolidated Statements of Income (unaudited) for the Six Months Ended June 30, 2008 2007


3Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Six Months Ended June 30, 2008
   and 2007


4Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2008 and 2007


5Notes to Consolidated Financial Statements


6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations


14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk


33Item 4.
    
    Controls and Procedures


33Part II. OTHER INFORMATIONItem 1.
    
    Legal Proceedings


34Item 1A.
    
    Risk Factors


34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds


34Item 3.
    
    Defaults Upon Senior Securities


35Item 4.
    
    Submission of Matters to a Vote of Security Holders


35Item 5.
    
    Other Information


35Item 6.
    
    Exhibits


36SIGNATURES


37




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##### 



Part I. FINANCIAL INFORMATION
 
  Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 June 30,
    
    
    December 31,2008
    
    
    2007AssetsCash and due from banks
    
    $
    11,718,495
    
    
    $
    16,708,922Interest-bearing deposits in other banks
    
    
    752,641
    
    
    
    823,252Federal funds sold
    
    
    
    
    
    
    2,020,000Securities available for sale
    
    
    39,862,904
    
    
    
    37,376,725Loans, net of allowance for loan losses of $4,319,306
in 2008 and $4,185,209 in 2007
    
    
    425,134,460
    
    
    
    409,107,482Bank premises and equipment, net
    
    
    8,484,975
    
    
    
    7,180,369Accrued interest receivable
    
    
    1,594,833
    
    
    
    1,748,546Other assets
    
    
    15,480,867
    
    
    
    14,930,932Total assets
    
    $
    503,029,175
    
    
    $
    489,896,228Liabilities and Shareholders EquityDeposits:Noninterest-bearing
    
    
    70,418,228
    
    
    
    76,080,935Interest-bearing:NOW accounts
    
    
    88,395,113
    
    
    
    90,169,640Savings and money market accounts
    
    
    124,558,248
    
    
    
    127,472,913Time certificates of deposit
    
    
    104,869,335
    
    
    
    110,835,435Total interest-bearing
    
    
    317,822,696
    
    
    
    328,477,988Total deposits
    
    
    388,240,924
    
    
    
    404,558,923Federal Home Loan Bank advances
    
    
    65,000,000
    
    
    
    35,000,000Company-obligated mandatorily redeemable
capital securities
    
    
    4,124,000
    
    
    
    4,124,000Other liabilities
    
    
    3,892,568
    
    
    
    4,385,553Commitments and Contingencies
    
    
    
    
    
    
    Total liabilities
    
    
    461,257,492
    
    
    
    448,068,476Shareholders EquityCommon stock, par value, $3.13; authorized 8,000,000
shares: issued and outstanding, 2008: 3,569,325
(includes nonvested shares of 38,771); 2007: 3,537,354 shares
(includes nonvested shares of 31,190)
    
    
    11,050,634
    
    
    
    10,974,293Retained earnings
    
    
    32,274,031
    
    
    
    31,626,627Accumulated other comprehensive income (loss), net
    
    
    (1,552,982
    )
    
    
    (773,168
    )Total shareholders equity
    
    
    41,771,683
    
    
    
    41,827,752Total liabilities and shareholders equity
    
    $
    503,029,175
    
    
    $
    489,896,228
  1




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Statements of Income
 (Unaudited)
For the Three Months Ended June 30, 2008 and 2007
 2008
    
    
    2007Interest IncomeInterest and fees on loans
    
    $
    6,590,186
    
    
    $
    7,233,485Interest and dividends on securities available for sale:Taxable interest income
    
    
    334,172
    
    
    
    363,447Interest income exempt from federal income taxes
    
    
    58,187
    
    
    
    16,291Dividends
    
    
    70,118
    
    
    
    92,907Interest on federal funds sold
    
    
    4,452
    
    
    
    23,951Interest on deposits in other banks
    
    
    4,488
    
    
    
    15,872Total interest income
    
    
    7,061,603
    
    
    
    7,745,953Interest ExpenseInterest on deposits
    
    
    1,649,515
    
    
    
    2,542,648Interest on federal funds purchased
    
    
    29,872
    
    
    
    51,602Interest on Federal Home Loan Bank advances
    
    
    469,438
    
    
    
    378,656Distribution on capital securities of subsidiary trusts
    
    
    45,463
    
    
    
    71,341Total interest expense
    
    
    2,194,288
    
    
    
    3,044,247Net interest income
    
    
    4,867,315
    
    
    
    4,701,706Provision for loan losses
    
    
    834,000
    
    
    
    120,000Net interest income after provision for loan losses
    
    
    4,033,315
    
    
    
    4,581,706Other IncomeWealth management income
    
    
    331,821
    
    
    
    354,685Service charges on deposit accounts
    
    
    751,368
    
    
    
    717,525Other service charges, commissions and income
    
    
    664,000
    
    
    
    440,859(Loss) on impairment of securities
    
    
    (125,000
    )
    
    
    Gain on sale of other real estate owned
    
    
    28,718
    
    
    
    Total other income
    
    
    1,650,907
    
    
    
    1,513,069Other ExpensesSalaries and benefits
    
    
    2,298,802
    
    
    
    2,313,208Net occupancy expense of premises
    
    
    347,931
    
    
    
    265,177Furniture and equipment
    
    
    285,035
    
    
    
    296,109Advertising expense
    
    
    155,854
    
    
    
    161,692Consulting expense
    
    
    260,707
    
    
    
    193,948Data processing expense
    
    
    329,697
    
    
    
    312,860Other operating expenses
    
    
    717,362
    
    
    
    722,053Total other expenses
    
    
    4,395,388
    
    
    
    4,265,047Income before income taxes
    
    
    1,288,834
    
    
    
    1,829,728Income tax expense
    
    
    346,420
    
    
    
    550,295Net Income
    
    $
    942,414
    
    
    $
    1,279,433Earnings per Share, basic
    
    $
    0.27
    
    
    $
    0.36Earnings per Share, assuming dilution
    
    $
    0.26
    
    
    $
    0.36Dividends per Share
    
    $
    0.20
    
    
    $
    0.20
  2




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Statements of Income
 (Unaudited)
For the Six Months Ended June 30, 2008 and 2007
 2008
    
    
    2007Interest IncomeInterest and fees on loans
    
    $
    13,388,785
    
    
    $
    14,511,990Interest and dividends on securities available for sale:Taxable interest income
    
    
    661,678
    
    
    
    735,452Interest income exempt from federal income taxes
    
    
    116,411
    
    
    
    29,488Dividends
    
    
    123,120
    
    
    
    143,404Interest on federal funds sold
    
    
    33,293
    
    
    
    66,551Interest on deposits in other banks
    
    
    12,546
    
    
    
    20,662Total interest income
    
    
    14,335,833
    
    
    
    15,507,547Interest ExpenseInterest on deposits
    
    
    3,723,725
    
    
    
    4,961,275Interest on federal funds purchased
    
    
    63,359
    
    
    
    138,445Interest on Federal Home Loan Bank advances
    
    
    881,475
    
    
    
    903,604Distribution on capital securities of subsidiary trusts
    
    
    109,705
    
    
    
    227,442Total interest expense
    
    
    4,778,264
    
    
    
    6,230,766Net interest income
    
    
    9,557,569
    
    
    
    9,276,781Provision for loan losses
    
    
    1,290,000
    
    
    
    240,000Net interest income after provision for loan losses
    
    
    8,267,569
    
    
    
    9,036,781Other IncomeWealth management income
    
    
    675,237
    
    
    
    693,558Service charges on deposit accounts
    
    
    1,459,965
    
    
    
    1,377,316Other service charges, commissions and income
    
    
    1,092,981
    
    
    
    864,997Gain on sale of other real estate owned
    
    
    28,718
    
    
    
    Realized gain (loss) on securities
    
    
    (37,415
    )
    
    
    Total other income
    
    
    3,219,486
    
    
    
    2,935,871Other ExpensesSalaries and benefits
    
    
    4,627,026
    
    
    
    4,661,441Net occupancy expense of premises
    
    
    630,326
    
    
    
    533,283Furniture and equipment
    
    
    571,542
    
    
    
    583,709Advertising expense
    
    
    325,596
    
    
    
    282,093Consulting expense
    
    
    541,388
    
    
    
    433,890Data processing expense
    
    
    662,342
    
    
    
    612,541Other operating expenses
    
    
    1,432,762
    
    
    
    1,347,271Total other expenses
    
    
    8,790,982
    
    
    
    8,454,228Income before income taxes
    
    
    2,696,073
    
    
    
    3,518,424Income tax expense
    
    
    745,153
    
    
    
    1,066,513Net Income
    
    $
    1,950,920
    
    
    $
    2,451,911Earnings per Share, basic
    
    $
    0.55
    
    
    $
    0.70Earnings per Share, assuming dilution
    
    $
    0.55
    
    
    $
    0.69Dividends per Share
    
    $
    0.40
    
    
    $
    0.39
  3




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
 For the Six Months Ended June 30, 2008 and 2007
 AccumulatedOtherCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveStock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Income
    
    
    TotalBalance, December 31, 2006 as restated
    
    $
    10,789,521
    
    
    $
    28,962,409
    
    
    $
    (1,217,318
    )
    
    
    
    
    
    $
    38,534,612Comprehensive income:Net income
    
    
    
    
    
    
    2,451,911
    
    
    
    
    
    
    $
    2,451,911
    
    
    
    2,451,911Other comprehensive income net of tax:Unrealized holding gains on securities available
for sale, net of deferred income taxes $7,418
    
    
    
    
    
    
    
    
    
    
    (14,397
    )
    
    
    (14,397
    )
    
    
    (14,397
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,437,514Cash dividends ($.39 per share)
    
    
    
    
    
    
    (1,380,939
    )
    
    
    
    
    
    
    
    
    
    
    (1,380,939
    )Acquisition of 8,270 shares of common stock
    
    
    (25,886
    )
    
    
    (180,955
    )
    
    
    
    
    
    
    
    
    
    
    (206,841
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    127,140
    
    
    
    
    
    
    
    
    
    
    
    127,140Issuance of common stock  nonvested shares
(11,437 shares)
    
    
    35,797
    
    
    
    (35,797
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    199,224
    
    
    
    341,874
    
    
    
    
    
    
    
    
    
    
    
    541,098Balance, June 30, 2007
    
    $
    10,998,656
    
    
    $
    30,285,643
    
    
    $
    (1,231,715
    )
    
    
    
    
    
    $
    40,052,584Balance, December 31, 2007
    
    $
    10,974,293
    
    
    $
    31,626,627
    
    
    $
    (773,168
    )
    
    
    
    
    
    $
    41,827,752Comprehensive income:Net income
    
    
    
    
    
    
    1,950,920
    
    
    
    
    
    
    
    1,950,920
    
    
    
    1,950,920Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of tax benefit of $414,444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (804,508
    )Less: reclassification adjustments, net of taxes
of $12,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,694Other comprehensive income net of tax benefit of $401,723
    
    
    
    
    
    
    
    
    
    
    (779,814
    )
    
    
    (779,814
    )
    
    
    (779,814
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,171,106Effects of changing pension plan measurement date,
pursuant to FAS158, 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 ($.40 per share)
    
    
    
    
    
    
    (1,427,573
    )
    
    
    
    
    
    
    
    
    
    
    (1,427,573
    )Acquisition of 4,293 shares of common stock
    
    
    (13,437
    )
    
    
    (62,725
    )
    
    
    
    
    
    
    
    
    
    
    (76,162
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    175,275
    
    
    
    
    
    
    
    
    
    
    
    175,275Restricted stock forfeiture
    
    
    
    
    
    
    (49,604
    )
    
    
    
    
    
    
    
    
    
    
    (49,604
    )Issuance of common stock  nonvested
shares (9,763 shares)
    
    
    30,558
    
    
    
    (30,558
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    59,220
    
    
    
    128,300
    
    
    
    
    
    
    
    
    
    
    
    187,520Balance, June 30, 2008
    
    $
    11,050,634
    
    
    $
    32,274,031
    
    
    $
    (1,552,982
    )
    
    
    
    
    
    $
    41,771,683
  4




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
 2008
    
    
    2007Cash Flows from Operating ActivitiesNet income
    
    $
    1,950,920
    
    
    $
    2,451,911Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    466,498
    
    
    
    518,956Provision for loan losses
    
    
    1,290,000
    
    
    
    240,000Loss on impairment of securities
    
    
    125,000Gain on sale of securities
    
    
    (87,585
    )
    
    
    Amortization (accretion) of security premiums, net
    
    
    (3,185
    )
    
    
    (2,798
    )Amortization of unearned compensation, net of forfeiture
    
    
    125,670
    
    
    
    127,140Changes in assets and liabilities:Decrease (increase) in other assets
    
    
    26,593
    
    
    
    97,126(Decrease) increase in other liabilities
    
    
    (548,485
    )
    
    
    (207,280
    )Net cash provided by operating activities
    
    
    3,345,426
    
    
    
    3,225,055Cash Flows from Investing ActivitiesProceeds from sale of securities available for sale
    
    
    9,078,470
    
    
    
    Proceeds from maturities, calls and principal
payments of securities available for sale
    
    
    2,472,159
    
    
    
    1,997,343Purchase of securities available for sale
    
    
    (13,962,499
    )
    
    
    (1,093,743
    )Purchase of premises and equipment
    
    
    (1,771,104
    )
    
    
    (346,311
    )(Purchase) proceeds from sale of other bank stock
    
    
    (1,292,300
    )
    
    
    1,159,700Net (increase) decrease in loans
    
    
    (17,316,978
    )
    
    
    10,611,841Net cash provided by (used in) investing activities
    
    
    (22,792,252
    )
    
    
    12,328,830Cash Flows from Financing ActivitiesNet (decrease) increase in demand deposits, NOW accounts
and savings accounts
    
    
    (10,351,899
    )
    
    
    9,571,507Net (decrease) increase in certificates of deposit
    
    
    (5,966,100
    )
    
    
    (15,491,931
    )Federal Home Loan Bank advances
    
    
    65,000,000
    
    
    
    25,000,000Federal Home Loan Bank principal repayments
    
    
    (35,000,000
    )
    
    
    (52,000,000
    )Purchase (repayment) of federal funds
    
    
    
    
    
    
    Repayment (issuance) of trust preferred securities
    
    
    
    
    
    
    (4,124,000
    )Cash dividends paid on common stock
    
    
    (1,427,573
    )
    
    
    (1,380,939
    )Issuance of common stock
    
    
    187,521
    
    
    
    541,098Acquisition of common stock
    
    
    (76,161
    )
    
    
    (206,841
    )Net cash provided by financing activities
    
    
    12,365,788
    
    
    
    (38,091,106
    )Increase (decrease) in cash and cash equivalents
    
    
    (7,081,038
    )
    
    
    (22,537,221
    )Cash and Cash EquivalentsBeginning
    
    
    19,552,174
    
    
    
    41,679,655Ending
    
    $
    12,471,136
    
    
    $
    19,142,434Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    5,006,550
    
    
    $
    5,017,141Income taxes
    
    $
    380,000
    
    
    $
    720,000Supplemental Disclosures of Noncash Investing ActivitiesUnrealized gain (loss) on securities available for sale, net
of tax effect
    
    $
    (804,508
    )
    
    $
    (14,397
    )FAS 158 Pension Liability Implementation Adjustment,
net of tax effect
    
    $
    (24,144
    )
    
    $
    Implementation of EITF 06-4, net of tax effect
    
    $
    (12,487
    )
    
    $
    
  5




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##### 



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), Fauquier Statutory Trust I
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 June 30, 2008 and December 31, 2007 and the results
of operations for the three and six months ended June 30, 2008 and 2007. The notes included
herein should be read in conjunction with the consolidated financial statements and accompanying
notes included in the Companys 2007 Annual Report on Form 10-K filed with the Securities and
Exchange Commission.The results of operations for the three and six months ended June 30, 2008 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)
    
    
    ValueJune 30, 2008Obligations of U.S. Government
corporations and agencies
    
    $
    25,576,577
    
    
    $
    11,272
    
    
    $
    (238,946
    )
    
    $
    25,348,903Obligations of states and political
subdivisions
    
    
    5,294,315
    
    
    
    65,930
    
    
    
    (55,616
    )
    
    
    5,304,629Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (1,453,750
    )
    
    
    4,546,250Mutual Funds
    
    
    297,707
    
    
    
    
    
    
    
    (10,205
    )
    
    
    287,502FHLMC Preferred Bank Stock
    
    
    316,000
    
    
    
    
    
    
    
    (8,100
    )
    
    
    307,900Restricted investments:Federal Home Loan Bank Stock
    
    
    3,805,800
    
    
    
    
    
    
    
    
    
    
    
    3,805,800Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    112,920
    
    
    
    
    
    
    
    
    
    
    
    112,920$
    41,552,319
    
    
    $
    77,202
    
    
    $
    (1,766,617
    )
    
    $
    39,862,904
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueDecember 31, 2007Obligations of U.S. Government
corporations and agencies
    
    $
    23,080,415
    
    
    $
    30,014
    
    
    $
    (162,347
    )
    
    $
    22,948,082Obligations of states and political
subdivisions
    
    
    5,293,965
    
    
    
    82,166
    
    
    
    (3,948
    )
    
    
    5,372,183Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (348,750
    )
    
    
    5,651,250Mutual Funds
    
    
    291,581
    
    
    
    
    
    
    
    (5,791
    )
    
    
    285,790FHLMC Preferred Bank Stock
    
    
    441,000
    
    
    
    
    
    
    
    (97,000
    )
    
    
    344,000Restricted investments:Federal Home Loan Bank Stock
    
    
    2,513,500
    
    
    
    
    
    
    
    
    
    
    
    2,513,500Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    112,920
    
    
    
    
    
    
    
    
    
    
    
    112,920$
    37,882,381
    
    
    $
    112,180
    
    
    $
    (617,836
    )
    
    $
    37,376,725
 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.
 6




---



##### 



June 30, 2008Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    14,141
    
    
    $
    14,162Due after one year through five years
    
    
    1,156,015
    
    
    
    1,153,134Due after five years through ten years
    
    
    11,007,337
    
    
    
    9,586,761Due after ten years
    
    
    24,693,399
    
    
    
    24,445,725Equity securities
    
    
    4,681,427
    
    
    
    4,663,122$
    41,552,319
    
    
    $
    39,862,904
 For the six months ended June 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. There were no securities sold in the quarter ended June 30, 2008 or the
quarter and six month period ended June 30, 2007.For the quarter and the six months ended June 30, 2008, the Bank recognized a permanent
impairment of $125,000 on its 10,000 shares of Freddie Mac preferred stock. There were no other
impairment losses on securities in the quarter and six months ended June 30, 2008, or the
quarter and six month period ended June 30, 2007.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 June 30, 2008 and December 31, 2007.
 June 30, 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
    
    $
    19,618,367
    
    
    $
    (238,946
    )
    
    $
    
    
    
    $
    
    
    
    $
    19,618,367
    
    
    $
    (238,946
    )Obligations of states and political
subdivisions
    
    $
    2,952,945
    
    
    $
    (55,616
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,952,945
    
    
    $
    (55,616
    )Corporate Bonds
    
    
    3,035,000
    
    
    
    (965,000
    )
    
    
    1,511,250
    
    
    
    (488,750
    )
    
    
    4,546,250
    
    
    
    (1,453,750
    )Subtotal, debt securities
    
    
    25,606,312
    
    
    
    (1,259,562
    )
    
    
    1,511,250
    
    
    
    (488,750
    )
    
    
    27,117,562
    
    
    
    (1,748,312
    )Mutual Funds
    
    
    
    
    
    
    
    
    
    
    287,502
    
    
    
    (10,205
    )
    
    
    287,502
    
    
    
    (10,205
    )FHLMC Preferred Bank Stock
    
    
    
    
    
    
    
    
    
    
    307,900
    
    
    
    (8,100
    )
    
    
    307,900
    
    
    
    (8,100
    )Total temporary impaired securities
    
    $
    25,606,312
    
    
    $
    (1,259,562
    )
    
    $
    2,106,652
    
    
    $
    (507,055
    )
    
    $
    27,712,964
    
    
    $
    (1,766,617
    )
 December 31, 2007
    
    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
    
    $
    
    
    
    $
    
    
    
    $
    17,798,157
    
    
    $
    (162,347
    )
    
    $
    17,798,157
    
    
    $
    (162,347
    )Obligations of states and political
subdivisions
    
    $
    899,333
    
    
    $
    (3,948
    )
    
    $
    
    
    
    $
    
    
    
    $
    899,333
    
    
    $
    (3,948
    )Corporate Bonds
    
    
    3,770,000
    
    
    
    (230,000
    )
    
    
    1,881,250
    
    
    
    (118,750
    )
    
    
    5,651,250
    
    
    
    (348,750
    )Subtotal, debt securities
    
    
    4,669,333
    
    
    
    (233,948
    )
    
    
    19,679,407
    
    
    
    (281,097
    )
    
    
    24,348,740
    
    
    
    (515,045
    )Mutual Funds
    
    
    
    
    
    
    
    
    
    
    285,790
    
    
    
    (5,791
    )
    
    
    285,790
    
    
    
    (5,791
    )FHLMC Preferred Bank Stock
    
    
    344,000
    
    
    
    (97,000
    )
    
    
    
    
    
    
    
    
    
    
    344,000
    
    
    
    (97,000
    )Total temporary impaired securities
    
    $
    5,013,333
    
    
    $
    (330,948
    )
    
    $
    19,965,197
    
    
    $
    (286,888
    )
    
    $
    24,978,530
    
    
    $
    (617,836
    )
 7




---



##### 



The nature of securities which are temporarily impaired for a continuous 12 month period or more
at June 30, 2008 can be segregated into three groups:The first group consists of two corporate bonds, rated A2 by Moodys, have a total amortized
cost of $2.0 million with a temporary loss of approximately $489,000. These bonds have an
estimated maturity of 26 years, but can be called at par on the five year anniversary, which
will occur in 2008 and 2009. 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 are
current, and the Company has the ability to hold these bonds to maturity.The second group consists of a Community Reinvestment Act qualified investment bond fund with a
temporary loss of approximately $10,000. The fund is a relatively small segment of the
portfolio and the Company plans to hold it indefinitely.The third group consists of a temporary loss of approximately $8,000 on 10,000 shares of Freddie
Mac preferred stock. For the quarter ended June 30, 2008, the Bank recognized a permanent
impairment of $125,000 on the Freddie Mac preferred stock, and will be continually monitoring
its valuation of the preferred stock as more information becomes available.The carrying value of securities pledged to secure deposits and for other purposes amounted to
$18,909,148 and $13,565,758 at June 30, 2008 and December 31, 2007, respectively.
 Note 3. Loans
  June 30,
    
    
    December 31,2008
    
    
    2007(Thousands)Real estate loans:Construction
    
    $
    38,420
    
    
    $
    37,204Secured by farmland
    
    
    1,765
    
    
    
    1,365Secured by 1 - to - 4 family residential
    
    
    172,951
    
    
    
    170,983Other real estate loans
    
    
    148,368
    
    
    
    132,918Commercial and industrial loans (not secured by real estate)
    
    
    38,286
    
    
    
    38,203Consumer installment loans
    
    
    19,267
    
    
    
    24,133All other loans
    
    
    10,864
    
    
    
    8,824Total loans
    
    $
    429,921
    
    
    $
    413,630Unearned income
    
    
    (468
    )
    
    
    (338
    )Allowance for loan losses
    
    
    (4,319
    )
    
    
    (4,185
    )Net loans
    
    $
    425,134
    
    
    $
    409,107
 Note 4. Allowance for Loan Losses
  Six Months
    
    
    Six Months
    
    
    Twelve MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended December2008
    
    
    2007
    
    
    31, 2007Balance at beginning of year
    
    $
    4,185,209
    
    
    $
    4,470,533
    
    
    $
    4,470,533Provision for loan losses
    
    
    1,290,000
    
    
    
    240,000
    
    
    
    717,000Recoveries of loans previously charged-off
    
    
    30,629
    
    
    
    21,542
    
    
    
    60,616Loan losses charged-off
    
    
    (1,186,532
    )
    
    
    (324,654
    )
    
    
    (1,062,940
    )Balance at end of year
    
    $
    4,319,306
    
    
    $
    4,407,421
    
    
    $
    4,185,209
 8




---



##### 



Nonperforming assets consist of the following:
 June 30,
    
    
    December 31,
    
    
    June 30,(Dollars in thousands)
    
    2008
    
    
    2007
    
    
    2007Nonaccrual loans
    
    $
    2,956
    
    
    $
    1,906
    
    
    $
    724Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    $
    2,956
    
    
    $
    1,906
    
    
    $
    724Foreclosed property
    
    
    56
    
    
    
    222
    
    
    
    284Total nonperforming assets
    
    $
    3,012
    
    
    $
    2,128
    
    
    $
    1,008
 June 30, 2008
    
    
    December 31, 2007Impaired loans for which an allowance has been provided
    
    $
    1,407,864
    
    
    $
    2,688,501Impaired loans for which no allowance has been provided
    
    
    2,160,361
    
    
    
    1,247,461$
    3,568,225
    
    
    $
    3,935,962Allowance provided for impaired loans, included in the
allowance for loan losses
    
    $
    1,136,167
    
    
    $
    1,392,236
 For the Six Months
    
    
    For the YearJune 30, 2008
    
    
    December 31, 2007Average balance in impaired loans
    
    $
    3,842,355
    
    
    $
    4,359,817Interest income recognized on impaired loans
    
    $
    89,152
    
    
    $
    261,257
 Total loans past due 90 days or more and still accruing
interest totaled $9,000, $770,000, and
$1,000 on June 30, 2008, December 31, 2007, and June 30, 2007, respectively. At March 31, 2008,
there were two loans to one borrower totaling $2.0 million which were 90 days past due and still
accruing interest. At that time the Bank had reason to believe that the loans would be sold, and
the proceeds from the sale to be adequate to repay outstanding principal and interest. Due to
various issues, including the filing of personal bankruptcy by the borrower, the sale was
further delayed, and subsequently canceled. As of June 30, 2008, the $2.0 million has been added
to nonaccrual loans with all uncollected interest and fees, totaling approximately $62,000,
reversed against loan income.The Company has adopted 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. FASB
Statement No. 114, 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. FASB Statement No. 114, 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 FASB Statement No. 114. As is the
 9




---



##### 



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 March 26, 2002, the Company established a subsidiary trust that issued $4.0 million of
capital securities as part of a pooled trust preferred security offering with other financial
institutions (Trust I). The Company used the offering proceeds for the purposes of expansion
and the repurchase of additional shares of its common stock. The interest rate on the capital
security resets every three months at 3.60% above the then current three month LIBOR. Interest
is paid quarterly. Under applicable regulatory guidelines, the capital securities are treated as
Tier 1 capital for purposes of the Federal Reserves capital guidelines for bank holding
companies, as long as the capital securities and all other cumulative preferred securities of
the Company together do not exceed 25% of Tier 1 capital.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.The purpose of the September 2006 Trust II issuance was to use the proceeds to redeem the
existing capital securities of Trust I on March 26, 2007. Because of changes in the market
pricing of capital securities from 2002 to 2006, the September 2006 issuance was priced 190
basis points less than that of the March 2002 issuance, and the repayment of the March 2002
issuance in March 2007 reduced the interest expense associated with the distribution on capital
securities of subsidiary trust by $76,000 annually. The Company redeemed all the existing
capital securities issued by Trust I on March 26, 2007.Total capital securities at June 30, 2008 and 2007 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.
 10




---



##### 



Three Months
    
    
    Three MonthsEnded
    
    
    EndedJune 30, 2008
    
    
    June 30, 2007Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,531,310
    
    
    $
    0.270
    
    
    
    3,515,669
    
    
    $
    0.36Effect of dilutive securities, stock-based awards
    
    
    32,516
    
    
    
    
    
    
    
    71,9793,563,826
    
    
    $
    0.260
    
    
    
    3,587,648
    
    
    $
    0.36
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2008
    
    
    June 30, 2007Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,523,392
    
    
    $
    0.55
    
    
    
    3,503,359
    
    
    $
    0.70Effect of dilutive securities, stock-based awards
    
    
    34,483
    
    
    
    
    
    
    
    72,6943,557,875
    
    
    $
    0.55
    
    
    
    3,576,053
    
    
    $
    0.69
 Note 7. Stock-Based Compensation
 The Company has a stock-based compensation plan. Effective January 1, 2006 the Company adopted
the provisions of Statement of Financial Accounting Standard (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 nonvested shares are accounted for 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 nonvested shares amounted to $63,041 and $64,545 for the three months ended June 30,
2008 and 2007, respectively. Compensation expense for nonvested shares amounted to $125,671 and
$127,140 for the six months ended June 30, 2008 and 2007, respectively.The Company did not grant options during the three months or six months ended June 30, 2008 and
2007.A summary of the status of the Omnibus Stock Ownership and Long-Term Incentive Plan and
Non-employee Director Stock Option Plan ( collectively, the Plans) is presented below:
 Six Months EndedJune 30, 2008WeightedAverage
    
    
    AverageNumber of
    
    
    Exercise
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value (1)Outstanding at January 1
    
    
    96,100
    
    
    $
    9.85Granted
    
    
    Exercised
    
    
    (18,920
    )
    
    
    9.91Forfeited
    
    
    Outstanding at June 30,
    
    
    77,180
    
    
    $
    9.84
    
    
    $
    514,380Exercisable at end of quarter
    
    
    77,180
    
    
    $
    9.84
    
    
    $
    514,380Weighted-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 June 30, 2008 market
value of the underlying stock option exceeded the exercise price of the option)
that would have 11




---



##### 



been received by the option holders had all option holders exercised their options on
June 30, 2008. 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 six months ended June 30, 2008 and
2007 was $132,774 and $1,065,008, respectively.A summary of the status of the Companys nonvested shares is presented below:
 Six Months EndedJune 30, 2008WeightedAverageNumber of
    
    ExerciseShares
    
    PriceNonvested at January 1, 2008
    
    
    31,190Granted
    
    
    19,692
    
    
    $
    17.70Vested
    
    
    (9,763
    )Forfeited, nonvested
    
    
    (2,348
    )
    
    $
    21.13Nonvested at June 30, 2008
    
    
    38,771
  Note 8. Employee Benefit Plan
  Three Months EndedJune 30,2008
    
    
    2007Service cost
    
    $
    111,081
    
    
    $
    167,680Interest cost
    
    
    77,352
    
    
    
    100,343Expected return on plan assets
    
    
    (149,050
    )
    
    
    (111,378
    )Amortization of transition (asset)
    
    
    (4,745
    )
    
    
    1,942Amortization of prior service cost
    
    
    1,942
    
    
    
    (4,745
    )Recognized net actuarial loss
    
    
    
    
    
    
    5,258Net periodic benefit cost
    
    $
    36,580
    
    
    $
    159,100
 Six Months EndedJune 30,2008
    
    
    2007Service cost
    
    $
    222,162
    
    
    $
    335,360Interest cost
    
    
    154,704
    
    
    
    200,686Expected return on plan assets
    
    
    (298,100
    )
    
    
    (222,756
    )Amortization of transition (asset)
    
    
    (9,490
    )
    
    
    3,884Amortization of prior service cost
    
    
    3,884
    
    
    
    (9,490
    )Recognized net actuarial loss
    
    
    
    
    
    
    10,516Net periodic benefit cost
    
    $
    73,160
    
    
    $
    318,200
 12




---



##### 



13




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   GENERAL
    14




---



##### 



CRITICAL ACCOUNTING POLICIES
   15




---



##### 



EXECUTIVE OVERVIEW
     16




---



##### 



COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND JUNE 30, 2007
 NET INCOME
  NET INTEREST INCOME AND EXPENSE
    17




---



##### 



18




---



##### 



AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 3 Months Ended June 30, 2008
    
    
    3 Months Ended June 30, 2007Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    412,973
    
    
    $
    6,498
    
    
    
    6.24
    %
    
    $
    403,856
    
    
    $
    7,142
    
    
    
    7.00
    %Tax-exempt (1)
    
    
    7,752
    
    
    
    141
    
    
    
    7.16
    %
    
    
    7,711
    
    
    
    140
    
    
    
    7.18
    %Nonaccrual (2)
    
    
    1,758
    
    
    
    
    
    
    
    
    
    
    
    1,569
    
    
    
    Total Loans
    
    
    422,483
    
    
    
    6,639
    
    
    
    6.23
    %
    
    
    413,136
    
    
    
    7,282
    
    
    
    6.98
    %SecuritiesTaxable
    
    
    33,127
    
    
    
    404
    
    
    
    4.88
    %
    
    
    36,930
    
    
    
    456
    
    
    
    4.94
    %Tax-exempt (1)
    
    
    5,446
    
    
    
    88
    
    
    
    6.47
    %
    
    
    1,290
    
    
    
    25
    
    
    
    7.65
    %Total securities
    
    
    38,573
    
    
    
    492
    
    
    
    5.11
    %
    
    
    38,220
    
    
    
    481
    
    
    
    5.03
    %Deposits in banks
    
    
    811
    
    
    
    4
    
    
    
    2.19
    %
    
    
    1,061
    
    
    
    16
    
    
    
    5.96
    %Federal funds sold
    
    
    549
    
    
    
    4
    
    
    
    3.21
    %
    
    
    1,869
    
    
    
    24
    
    
    
    5.07
    %Total earning assets
    
    
    462,416
    
    
    
    7,139
    
    
    
    6.13
    %
    
    
    454,286
    
    
    
    7,803
    
    
    
    6.81
    %Less: Reserve for loan losses
    
    
    (4,196
    )
    
    
    
    
    
    
    
    
    
    
    (4,512
    )Cash and due from banks
    
    
    16,521
    
    
    
    
    
    
    
    
    
    
    
    15,820Bank premises and equipment, net
    
    
    8,561
    
    
    
    
    
    
    
    
    
    
    
    7,479Other assets
    
    
    16,587
    
    
    
    
    
    
    
    
    
    
    
    15,556Total Assets
    
    $
    499,889
    
    
    
    
    
    
    
    
    
    
    $
    488,629LIABILITIES &
SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    69,981
    
    
    
    
    
    
    
    
    
    
    $
    77,103Interest-bearing depositsNOW accounts
    
    
    89,958
    
    
    
    200
    
    
    
    0.89
    %
    
    
    72,261
    
    
    
    229
    
    
    
    1.27
    %Money market accounts
    
    
    22,636
    
    
    
    81
    
    
    
    1.45
    %
    
    
    26,063
    
    
    
    92
    
    
    
    1.41
    %Premium money market accounts
    
    
    71,230
    
    
    
    372
    
    
    
    2.10
    %
    
    
    70,049
    
    
    
    724
    
    
    
    4.15
    %Savings accounts
    
    
    31,893
    
    
    
    38
    
    
    
    0.47
    %
    
    
    33,287
    
    
    
    34
    
    
    
    0.41
    %Time deposits
    
    
    105,466
    
    
    
    959
    
    
    
    3.66
    %
    
    
    129,551
    
    
    
    1,464
    
    
    
    4.53
    %Total interest-bearing deposits
    
    
    321,183
    
    
    
    1,650
    
    
    
    2.07
    %
    
    
    331,211
    
    
    
    2,543
    
    
    
    3.08
    %Federal funds purchased
    
    
    4,910
    
    
    
    30
    
    
    
    2.45
    %
    
    
    3,676
    
    
    
    52
    
    
    
    5.63
    %Federal Home Loan Bank advances
    
    
    52,912
    
    
    
    469
    
    
    
    3.51
    %
    
    
    28,473
    
    
    
    379
    
    
    
    5.26
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    45
    
    
    
    4.36
    %
    
    
    4,124
    
    
    
    71
    
    
    
    6.84
    %Total interest-bearing liabilities
    
    
    383,129
    
    
    
    2,194
    
    
    
    2.29
    %
    
    
    367,484
    
    
    
    3,045
    
    
    
    3.32
    %Other liabilities
    
    
    3,700
    
    
    
    
    
    
    
    
    
    
    
    3,489Shareholders equity
    
    
    43,079
    
    
    
    
    
    
    
    
    
    
    
    40,553Total Liabilities & Shareholders Equity
    
    $
    499,889
    
    
    
    
    
    
    
    
    
    
    $
    488,629Net interest spread
    
    
    
    
    
    $
    4,945
    
    
    
    3.83
    %
    
    
    
    
    
    $
    4,758
    
    
    
    3.49
    %Interest expense as a percent of average
earning assets
    
    
    
    
    
    
    
    
    
    
    1.90
    %
    
    
    
    
    
    
    
    
    
    
    2.68
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.22
    %
    
    
    
    
    
    
    
    
    
    
    4.12
    %
 
 (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. RATE/VOLUME ANALYSIS
  19




---



##### 



RATE / VOLUME VARIANCE(In Thousands)Three Months Ended June 30, 2008 Compared toThree Months Ended June 30, 2007Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOMELoans; taxable
    
    $
    (644
    )
    
    $
    (20
    )
    
    
    (624
    )Loans; tax-exempt (1)
    
    
    1
    
    
    
    
    
    
    
    1Securities; taxable
    
    
    (52
    )
    
    
    (13
    )
    
    
    (39
    )Securities; tax-exempt (1)
    
    
    63
    
    
    
    80
    
    
    
    (17
    )Deposits in banks
    
    
    (12
    )
    
    
    (4
    )
    
    
    (8
    )Federal funds sold
    
    
    (20
    )
    
    
    (17
    )
    
    
    (3
    )Total Interest Income
    
    
    (664
    )
    
    
    26
    
    
    
    (690
    )INTEREST EXPENSENOW accounts
    
    
    (29
    )
    
    
    55
    
    
    
    (84
    )Premium NOW accounts
    
    
    (10
    )
    
    
    (12
    )
    
    
    2Money market accounts
    
    
    (352
    )
    
    
    12
    
    
    
    (364
    )Savings accounts
    
    
    4
    
    
    
    (1
    )
    
    
    5Time deposits
    
    
    (505
    )
    
    
    (272
    )
    
    
    (233
    )Federal funds purchased and securities sold under agreements to repurchase
    
    
    (22
    )
    
    
    17
    
    
    
    (39
    )Federal Home Loan Bank advances
    
    
    90
    
    
    
    325
    
    
    
    (235
    )Capital securities of subsidiary trust
    
    
    (26
    )
    
    
    
    
    
    
    (26
    )Total Interest Expense
    
    
    (850
    )
    
    
    124
    
    
    
    (974
    )Net Interest Income
    
    $
    186
    
    
    $
    (98
    )
    
    $
    284
 
 (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
   NON-INTEREST INCOME
   20




---



##### 



NON-INTEREST EXPENSE
      21




---



##### 



INCOME TAXES
  COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND JUNE 30, 2007
 NET INCOME
  NET INTEREST INCOME AND EXPENSE
     22




---



##### 



23




---



##### 



AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES(Dollars in Thousand)
 Six Months Ended June 30, 2008
    
    
    Six Months Ended June 30, 2007Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    407,443
    
    
    $
    13,209
    
    
    
    6.41
    %
    
    $
    407,805
    
    
    $
    14,327
    
    
    
    7.00
    %Tax-exempt (1)
    
    
    7,549
    
    
    
    273
    
    
    
    7.16
    %
    
    
    7,779
    
    
    
    281
    
    
    
    7.18
    %Nonaccrual (2)
    
    
    1,537
    
    
    
    
    
    
    
    
    
    
    
    1,601
    
    
    
    Total Loans
    
    
    416,529
    
    
    
    13,482
    
    
    
    6.42
    %
    
    
    417,185
    
    
    
    14,607
    
    
    
    6.97
    %SecuritiesTaxable
    
    
    32,526
    
    
    
    785
    
    
    
    4.63
    %
    
    
    37,604
    
    
    
    879
    
    
    
    4.67
    %Tax-exempt (1)
    
    
    5,447
    
    
    
    176
    
    
    
    6.48
    %
    
    
    1,150
    
    
    
    45
    
    
    
    7.77
    %Total securities
    
    
    37,973
    
    
    
    961
    
    
    
    5.06
    %
    
    
    38,754
    
    
    
    924
    
    
    
    4.76
    %Deposits in banks
    
    
    896
    
    
    
    13
    
    
    
    2.77
    %
    
    
    1,472
    
    
    
    21
    
    
    
    2.79
    %Federal funds sold
    
    
    2,469
    
    
    
    33
    
    
    
    2.71
    %
    
    
    2,595
    
    
    
    67
    
    
    
    5.10
    %Total earning assets
    
    
    457,868
    
    
    
    14,489
    
    
    
    6.28
    %
    
    
    460,006
    
    
    
    15,619
    
    
    
    6.76
    %Less: Reserve for loan losses
    
    
    (4,181
    )
    
    
    
    
    
    
    
    
    
    
    (4,500
    )Cash and due from banks
    
    
    16,016
    
    
    
    
    
    
    
    
    
    
    
    15,100Bank premises and equipment, net
    
    
    8,013
    
    
    
    
    
    
    
    
    
    
    
    7,499Other assets
    
    
    16,503
    
    
    
    
    
    
    
    
    
    
    
    15,678Total Assets
    
    $
    494,219
    
    
    
    
    
    
    
    
    
    
    $
    493,783LIABILITIES &
SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    68,348
    
    
    
    
    
    
    
    
    
    
    $
    75,713Interest-bearing depositsNOW accounts
    
    
    87,778
    
    
    
    470
    
    
    
    1.08
    %
    
    
    71,415
    
    
    
    430
    
    
    
    1.21
    %Money market accounts
    
    
    23,609
    
    
    
    170
    
    
    
    1.45
    %
    
    
    27,347
    
    
    
    194
    
    
    
    1.43
    %Premium money market accounts
    
    
    72,911
    
    
    
    914
    
    
    
    2.52
    %
    
    
    64,088
    
    
    
    1,300
    
    
    
    4.09
    %Savings accounts
    
    
    31,168
    
    
    
    72
    
    
    
    0.46
    %
    
    
    33,747
    
    
    
    68
    
    
    
    0.41
    %Time deposits
    
    
    108,131
    
    
    
    2,097
    
    
    
    3.90
    %
    
    
    131,892
    
    
    
    2,969
    
    
    
    4.54
    %Total interest-bearing deposits
    
    
    323,596
    
    
    
    3,724
    
    
    
    2.31
    %
    
    
    328,489
    
    
    
    4,961
    
    
    
    3.05
    %Federal funds purchased
    
    
    3,999
    
    
    
    63
    
    
    
    3.19
    %
    
    
    4,969
    
    
    
    138
    
    
    
    5.62
    %Federal Home Loan Bank advances
    
    
    47,465
    
    
    
    881
    
    
    
    3.73
    %
    
    
    34,862
    
    
    
    904
    
    
    
    5.16
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    110
    
    
    
    5.35
    %
    
    
    6,129
    
    
    
    227
    
    
    
    7.38
    %Total interest-bearing liabilities
    
    
    379,184
    
    
    
    4,778
    
    
    
    2.53
    %
    
    
    374,449
    
    
    
    6,230
    
    
    
    3.35
    %Other liabilities
    
    
    3,757
    
    
    
    
    
    
    
    
    
    
    
    3,548Shareholders equity
    
    
    42,930
    
    
    
    
    
    
    
    
    
    
    
    40,072Total Liabilities & Shareholders
Equity
    
    $
    494,219
    
    
    
    
    
    
    
    
    
    
    $
    493,783Net interest spread
    
    
    
    
    
    $
    9,711
    
    
    
    3.75
    %
    
    
    
    
    
    $
    9,389
    
    
    
    3.41
    %Interest expense as a percent of average
earning assets
    
    
    
    
    
    
    
    
    
    
    2.10
    %
    
    
    
    
    
    
    
    
    
    
    2.72
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.18
    %
    
    
    
    
    
    
    
    
    
    
    4.04
    %
 
 (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. RATE/VOLUME ANALYSIS
  24




---



##### 



RATE / VOLUME VARIANCE
(In Thousands)
 Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOME
    
    
    
    
    
    
    
    
    
    
    Loans; taxable
    
    $
    (1,118
    )
    
    $
    (15
    )
    
    
    (1,103
    )Loans; tax-exempt (1)
    
    
    (8
    )
    
    
    (8
    )
    
    
    0Securities; taxable
    
    
    (94
    )
    
    
    (82
    )
    
    
    (12
    )Securities; tax-exempt (1)
    
    
    132
    
    
    
    167
    
    
    
    (35
    )Deposits in banks
    
    
    (8
    )
    
    
    (8
    )
    
    
    0Federal funds sold
    
    
    (34
    )
    
    
    (3
    )
    
    
    (31
    )Total Interest Income
    
    
    (1,130
    )
    
    
    51
    
    
    
    (1,181
    )INTEREST EXPENSENOW accounts
    
    
    40
    
    
    
    99
    
    
    
    (59
    )Premium NOW accounts
    
    
    (24
    )
    
    
    (27
    )
    
    
    3Money market accounts
    
    
    (386
    )
    
    
    179
    
    
    
    (565
    )Savings accounts
    
    
    4
    
    
    
    (5
    )
    
    
    9Time deposits
    
    
    (872
    )
    
    
    (535
    )
    
    
    (337
    )Federal funds purchased and securities
sold under agreements to repurchase
    
    
    (75
    )
    
    
    (27
    )
    
    
    (48
    )Federal Home Loan Bank advances
    
    
    (23
    )
    
    
    327
    
    
    
    (350
    )Capital securities of subsidiary trust
    
    
    (117
    )
    
    
    (74
    )
    
    
    (43
    )Total Interest Expense
    
    
    (1,453
    )
    
    
    (63
    )
    
    
    (1,390
    )Net Interest Income
    
    $
    323
    
    
    $
    114
    
    
    $
    209
 
 (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
   NON-INTEREST INCOME
   25




---



##### 



NON-INTEREST EXPENSE
        INCOME TAXES
  COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2008 AND DECEMBER 31, 2007
  26




---



##### 



ASSET QUALITY
  27




---



##### 



CONTRACTUAL OBLIGATIONS
   OFF-BALANCE SHEET ARRANGEMENTS
  28




---



##### 



CAPITAL
   June 30,
    
    
    December 31,2008
    
    
    2007Tier 1 Capital:Shareholders Equity
    
    $
    41,772
    
    
    $
    41,828Plus: Unrealized loss on securities
available for sale/FAS 158 and EITF 06-4
    
    
    1,553
    
    
    
    773Less: Intangible assets, net
    
    
    (18
    )
    
    
    (103
    )Plus: Company-obligated madatorily
redeemable capital securities
    
    
    4,000
    
    
    
    4,000Total Tier 1 Capital
    
    
    47,307
    
    
    
    46,498Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    4,319
    
    
    
    4,185Total Capital:
    
    
    51,626
    
    
    
    50,683Risk Weighted Assets:
    
    $
    401,569
    
    
    $
    390,597Regulatory Capital Ratios:Leverage Ratio
    
    
    9.46
    %
    
    
    9.49
    %Tier 1 to Risk Weighted Assets
    
    
    11.78
    %
    
    
    11.90
    %Total Capital to Risk Weighted Assets
    
    
    12.86
    %
    
    
    12.98
    %
 CAPITAL RESOURCES AND LIQUIDITY
    29




---



##### 



30




---



##### 



LIQUIDITY SOURCES AND USES  (Dollars in Thousands)
 June 30, 2008
    
    
    December 31, 2007Total
    
    
    In Use
    
    
    Available
    
    
    Total
    
    
    In Use
    
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    62,013
    
    
    $
    
    
    
    $
    62,013
    
    
    $
    52,036
    
    
    $
    
    
    
    $
    52,036Federal Home Loan Bank advances
    
    
    145,372
    
    
    
    65,000
    
    
    
    80,372
    
    
    
    136,159
    
    
    
    35,000
    
    
    
    101,159Federal funds sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,020Securities, available for sale and unpledged
at fair value
    
    
    16,290
    
    
    
    
    
    
    
    16,290
    
    
    
    
    
    
    
    
    
    
    
    23,632Total short-term funding sources
    
    
    
    
    
    
    
    
    
    $
    158,675
    
    
    
    
    
    
    
    
    
    
    $
    178,847Uses:Unfunded loan commitments and
lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    72,178
    
    
    
    
    
    
    
    
    
    
    $
    72,503Letters of credit
    
    
    
    
    
    
    
    
    
    
    6,502
    
    
    
    
    
    
    
    
    
    
    
    6,749Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    78,680
    
    
    
    
    
    
    
    
    
    
    $
    79,252Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    201.7
    %
    
    
    
    
    
    
    
    
    
    
    225.7
    %
  IMPACT OF INFLATION AND CHANGING PRICES
  CHANGES IN ACCOUNTING PRINCIPLES
   31




---



##### 



FAIR VALUE MEASUREMENTS
 Fair Value Measurements
 
    
    Level 1
    
    inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
    
    Level 2
    
    inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument.
    
    Level 3
    
    inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
  Securities
  Loans held for sale
  Impaired loans
 Accounting by Creditors for Impairment of a Loan
 Other Real Estate Owned
  32




---



##### 



RECENT ACCOUNTING PRONOUNCEMENTS
     
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  33




---



##### 



PART II
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Issuer Purchases of Equity Securities
 Total Number of
    
    Maximum NumberShares Purchased
    
    of Shares that Mayas Part of Publically
    
    Yet Be PurchasedTotal Number of
    
    Average Price
    
    Announced Plan
    
    Under the PlanShares Purchased
    
    Paid per Share
    
    (1)
    
    (1)April 1  30, 2008
    
    
    210
    
    
    $
    18.23
    
    
    
    210
    
    
    
    209,351May 1  31, 2008
    
    
    1,082
    
    
    $
    19.09
    
    
    
    1,082
    
    
    
    208,269June 1  30, 2008
    
    
    321
    
    
    $
    17.99
    
    
    
    321
    
    
    
    207,948Total
    
    
    1,613
    
    
    
    
    
    
    
    1,613
 
 (1)
    
    In September 1998, the Company announced an open market buyback program for its common stock.
Annually, the Board resets the amount of shares authorized to be repurchased during the year
under the buyback program. On January 17, 2008, the Board authorized the Company to repurchase
up to 212,241 shares (6% of the shares of common stock outstanding on January 1, 2008)
beginning January 1, 2008 and continuing until the next Board reset.
 34




---



##### 



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    FOR
    
    WITHHELDDouglas C. Larson
    
    
    2,864,739
    
    
    
    178,566Randolph T. Minter
    
    
    2,890,107
    
    
    
    153,198H. Frances Stringfellow
    
    
    2,847,271
    
    
    
    196,034
  FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER NON-VOTE2,995,401
    
    1,274
    
    46,630
    
    0
 
 ITEM 5. OTHER INFORMATION
  35




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##### 



ITEM 6. EXHIBITS
 Exhibit
    
    ExhibitNumber
    
    Description3.1
    
    Articles of Incorporation of Fauquier Bankshares, Inc., as amended, incorporated by reference
to Exhibit 3(i) to registration statement on Form 10 filed April 16, 1999.3.2
    
    Bylaws of Fauquier Bankshares, Inc., as amended and restated, incorporated by reference to
Exhibit 3.2 to Form 8-K filed November 15, 2007.11
    
    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).32.1
    
    Certification of CEO pursuant to 18 U.S.C. Section 1350.32.2
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350.
 36




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##### 



/s/ Randy K. Ferrell

Randy K. FerrellPresident & Chief Executive OfficerDated: August 8, 2008/s/ Eric P. GraapEric P. GraapExecutive Vice President & Chief Financial OfficerDated: August 8, 2008
 37