UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2009
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period fromto
 Commission File No.: 000-25805
 Fauquier Bankshares, Inc.
  Virginia
(State or other jurisdiction of 
incorporation or organization)
    
    54-1288193
(I.R.S. Employer Identification No.)
 10 Courthouse Square, Warrenton, Virginia
(Address of principal executive offices)
    
    20186
(Zip Code)
 (540) 347-2700
 þ o
 o o
  Large accelerated filer oAccelerated filer þNon-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 INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008
    
    
    3Consolidated Statements of Income (unaudited) for the Three Months Ended June 30, 2009 and 2008
    
    
    4Consolidated Statements of Income (unaudited) for the Six Months Ended June 30, 2009 and 2008
    
    
    5Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Six Months
Ended June 30, 2009 and 2008
    
    
    6Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 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
    
    
    40Item 4. Controls and Procedures
    
    
    40Part II. OTHER INFORMATION
    
    
    41Item 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    42SIGNATURES
    
    
    43




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##### 



Part I. FINANCIAL INFORMATION
 
  
 Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    4,964,168
    
    
    $
    7,698,661Interest-bearing deposits in other banks
    
    
    4,433,033
    
    
    
    3,324,501Federal funds sold
    
    
    11,043
    
    
    
    Securities available for sale
    
    
    36,385,418
    
    
    
    37,839,375Loans, net of allowance for loan losses of $5,090,838
in 2009 and $4,779,662 in 2008
    
    
    452,132,379
    
    
    
    434,678,433Bank premises and equipment, net
    
    
    11,006,374
    
    
    
    8,621,217Accrued interest receivable
    
    
    1,424,287
    
    
    
    1,549,597Other real estate owned
    
    
    2,029,085
    
    
    
    3,034,470Other assets
    
    
    18,448,587
    
    
    
    17,768,978Total assets
    
    $
    530,834,374
    
    
    $
    514,515,232Liabilities and Shareholders EquityDeposits:Noninterest-bearing
    
    
    57,784,661
    
    
    
    69,065,944Interest-bearing:NOW accounts
    
    
    75,117,520
    
    
    
    74,555,901Savings and money market accounts
    
    
    109,280,344
    
    
    
    102,810,758Time certificates of deposit
    
    
    170,418,126
    
    
    
    153,861,028Total interest-bearing
    
    
    354,815,990
    
    
    
    331,227,687Total deposits
    
    
    412,600,651
    
    
    
    400,293,631Federal funds purchased
    
    
    21,800,000
    
    
    
    18,275,000Federal Home Loan Bank advances
    
    
    45,000,000
    
    
    
    45,000,000Company-obligated mandatorily redeemable
capital securities
    
    
    4,124,000
    
    
    
    4,124,000Other liabilities
    
    
    5,920,347
    
    
    
    5,334,664Commitments and contingencies
    
    
    
    
    
    
    Total liabilities
    
    
    489,444,998
    
    
    
    473,027,295Shareholders EquityCommon stock, par value, $3.13; authorized 8,000,000
shares: issued and outstanding, 2009: 3,596,537 shares
(includes nonvested shares of 51,134); 2008: 3,564,317 shares
(includes nonvested shares of 38,219)
    
    
    11,097,111
    
    
    
    11,036,687Retained earnings
    
    
    33,049,924
    
    
    
    32,668,530Accumulated other comprehensive income (loss), net
    
    
    (2,757,659
    )
    
    
    (2,217,280
    )Total shareholders equity
    
    
    41,389,376
    
    
    
    41,487,937Total liabilities and shareholders equity
    
    $
    530,834,374
    
    
    $
    514,515,232
  3




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
 (Unaudited)
 For
the Three Months Ended June 30, 2009 and 2008
 2009
    
    
    2008Interest IncomeInterest and fees on loans
    
    $
    6,486,153
    
    
    $
    6,590,186Interest and dividends on securities available for sale:Taxable interest income
    
    
    315,979
    
    
    
    334,172Interest income exempt from federal income taxes
    
    
    57,925
    
    
    
    58,187Dividends
    
    
    15,765
    
    
    
    70,118Interest on federal funds sold
    
    
    49
    
    
    
    4,452Interest on deposits in other banks
    
    
    3,309
    
    
    
    4,488Total interest income
    
    
    6,879,180
    
    
    
    7,061,603Interest ExpenseInterest on deposits
    
    
    1,440,997
    
    
    
    1,649,515Interest on federal funds purchased
    
    
    12,400
    
    
    
    29,872Interest on Federal Home Loan Bank advances
    
    
    229,694
    
    
    
    469,438Distribution on capital securities of subsidiary trusts
    
    
    29,385
    
    
    
    45,463Total interest expense
    
    
    1,712,476
    
    
    
    2,194,288Net interest income
    
    
    5,166,704
    
    
    
    4,867,315Provision for loan losses
    
    
    360,000
    
    
    
    834,000Net interest income after provision for loan losses
    
    
    4,806,704
    
    
    
    4,033,315Other IncomeWealth management income
    
    
    245,588
    
    
    
    331,821Service charges on deposit accounts
    
    
    718,944
    
    
    
    751,368Other service charges, commissions and income
    
    
    414,082
    
    
    
    664,000(Loss) on impairment of securities
    
    
    (166,388
    )
    
    
    (125,000
    )Gain on sale of other real estate owned
    
    
    
    
    
    
    28,718Total other income
    
    
    1,212,226
    
    
    
    1,650,907Other ExpensesSalaries and benefits
    
    
    2,330,671
    
    
    
    2,298,802Net occupancy expense of premises
    
    
    318,242
    
    
    
    347,931Furniture and equipment
    
    
    268,831
    
    
    
    285,035Marketing expense
    
    
    187,380
    
    
    
    155,854Legal, audit, and consulting expense
    
    
    476,961
    
    
    
    260,707Data processing expense
    
    
    325,429
    
    
    
    329,697Other operating expenses
    
    
    1,115,722
    
    
    
    717,362Total other expenses
    
    
    5,023,236
    
    
    
    4,395,388Income before income taxes
    
    
    995,694
    
    
    
    1,288,834Income tax expense
    
    
    272,013
    
    
    
    346,420Net Income
    
    $
    723,681
    
    
    $
    942,414Earnings per Share, basic
    
    $
    0.20
    
    
    $
    0.27Earnings per Share, assuming dilution
    
    $
    0.20
    
    
    $
    0.26Dividends per Share
    
    $
    0.20
    
    
    $
    0.20
  4




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Six Months Ended June 30, 2009 and 2008
 2009
    
    
    2008Interest IncomeInterest and fees on loans
    
    $
    12,846,384
    
    
    $
    13,388,785Interest and dividends on securities available for sale:Taxable interest income
    
    
    672,142
    
    
    
    661,678Interest income exempt from federal income taxes
    
    
    119,386
    
    
    
    116,411Dividends
    
    
    20,228
    
    
    
    123,120Interest on federal funds sold
    
    
    156
    
    
    
    33,293Interest on deposits in other banks
    
    
    6,978
    
    
    
    12,546Total interest income
    
    
    13,665,274
    
    
    
    14,335,833Interest ExpenseInterest on deposits
    
    
    2,999,773
    
    
    
    3,723,725Interest on federal funds purchased
    
    
    22,846
    
    
    
    63,359Interest on Federal Home Loan Bank advances
    
    
    496,361
    
    
    
    881,475Distribution on capital securities of subsidiary trusts
    
    
    65,220
    
    
    
    109,705Total interest expense
    
    
    3,584,200
    
    
    
    4,778,264Net interest income
    
    
    10,081,074
    
    
    
    9,557,569Provision for loan losses
    
    
    560,000
    
    
    
    1,290,000Net interest income after provision for loan losses
    
    
    9,521,074
    
    
    
    8,267,569Other IncomeWealth management income
    
    
    497,044
    
    
    
    675,237Service charges on deposit accounts
    
    
    1,326,120
    
    
    
    1,459,965Other service charges, commissions and income
    
    
    836,270
    
    
    
    1,092,981Gain on sale of securities
    
    
    
    
    
    
    87,585(Loss) on impairment of securities
    
    
    (166,388
    )
    
    
    (125,000
    )Gain (Loss) on sale of other real estate owned
    
    
    (135,759
    )
    
    
    28,718Total other income
    
    
    2,357,287
    
    
    
    3,219,486Other ExpensesSalaries and benefits
    
    
    4,685,610
    
    
    
    4,627,026Net occupancy expense of premises
    
    
    625,309
    
    
    
    630,326Furniture and equipment
    
    
    549,281
    
    
    
    571,542Advertising expense
    
    
    308,358
    
    
    
    325,596Legal, audit, and consulting expense
    
    
    812,904
    
    
    
    541,388Data processing expense
    
    
    673,923
    
    
    
    662,342Other operating expenses
    
    
    1,962,818
    
    
    
    1,432,762Total other expenses
    
    
    9,618,203
    
    
    
    8,790,982Income before income taxes
    
    
    2,260,158
    
    
    
    2,696,073Income tax expense
    
    
    613,568
    
    
    
    745,153Net Income
    
    $
    1,646,590
    
    
    $
    1,950,920Earnings per Share, basic
    
    $
    0.46
    
    
    $
    0.55Earnings per Share, assuming dilution
    
    $
    0.46
    
    
    $
    0.55Dividends per Share
    
    $
    0.40
    
    
    $
    0.40
 5




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
For the Six Months Ended June 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
    
    
    
    
    
    
    1,950,920
    
    
    
    
    
    
    $
    1,950,920
    
    
    
    1,950,920Other comprehensive income net of tax:Unrealized holding gains on securities available
for sale, net of tax benefit of $414,444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (804,508
    )Add: reclassification adjustments, net of tax
benefit of $12,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,694Other comprehensive income net of tax of $401,723
    
    
    
    
    
    
    
    
    
    
    (779,814
    )
    
    
    (779,814
    )
    
    
    (779,814
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,171,106Effects 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 ( $.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
    )
    
    
    
    
    
    $
    41,771,683Balance, December 31, 2008
    
    $
    11,036,687
    
    
    $
    32,668,530
    
    
    $
    (2,217,280
    )
    
    
    
    
    
    $
    41,487,937Comprehensive income:Net income
    
    
    
    
    
    
    1,646,590
    
    
    
    
    
    
    
    1,646,590
    
    
    
    1,646,590Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of tax benefit of $334,949
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650,195
    )Add: reclassification adjustments, net of tax
benefit
of $56,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,816Other comprehensive income net of tax of $278,377
    
    
    
    
    
    
    
    
    
    
    (540,379
    )
    
    
    (540,379
    )
    
    
    (540,379
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,106,211Cash dividends ( $.40 per share)
    
    
    
    
    
    
    (1,438,615
    )
    
    
    
    
    
    
    
    
    
    
    (1,438,615
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    152,063
    
    
    
    
    
    
    
    
    
    
    
    152,063Issuance of common stock  nonvested
shares (10,585 shares)
    
    
    33,131
    
    
    
    (33,131
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    27,293
    
    
    
    54,487
    
    
    
    
    
    
    
    
    
    
    
    81,780Balance, June 30, 2009
    
    $
    11,097,111
    
    
    $
    33,049,924
    
    
    $
    (2,757,659
    )
    
    
    
    
    
    $
    41,389,376
 6




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Cash Flows from Operating ActivitiesNet income
    
    $
    1,646,590
    
    
    $
    1,950,920Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    404,070
    
    
    
    466,498Provision for loan losses
    
    
    560,000
    
    
    
    1,290,000Loss on sale of other real estate
    
    
    135,759
    
    
    
    Loss on impairment of securities
    
    
    166,388
    
    
    
    125,000(Gain) on sale of securities
    
    
    
    
    
    
    (87,585
    )Amortization (accretion) of security premiums, net
    
    
    (20,186
    )
    
    
    (3,185
    )Amortization of unearned compensation, net of forfeiture
    
    
    152,063
    
    
    
    125,670Changes in assets and liabilities:(Increase) decrease in other assets
    
    
    (275,387
    )
    
    
    26,593(Decrease) increase in other liabilities
    
    
    585,683
    
    
    
    (548,485
    )Net cash provided by operating activities
    
    
    3,354,980
    
    
    
    3,345,426Cash 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
    
    
    4,804,868
    
    
    
    2,472,159Purchase of securities available for sale
    
    
    (3,596,504
    )
    
    
    (13,962,499
    )Purchase of premises and equipment
    
    
    (2,789,227
    )
    
    
    (1,771,104
    )(Purchase) proceeds from sale of other bank stock
    
    
    (719,900
    )
    
    
    (1,292,300
    )Net (increase) decrease in loans
    
    
    (18,013,946
    )
    
    
    (17,316,978
    )Proceeds from sale of other real estate owned
    
    
    869,626
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (19,445,083
    )
    
    
    (22,792,252
    )Cash Flows from Financing ActivitiesNet (decrease) increase in demand deposits, NOW accounts
and savings accounts
    
    
    (4,250,078
    )
    
    
    (10,351,899
    )Net (decrease) increase in certificates of deposit
    
    
    16,557,098
    
    
    
    (5,966,100
    )Federal Home Loan Bank advances
    
    
    150,000,000
    
    
    
    65,000,000Federal Home Loan Bank principal repayments
    
    
    (150,000,000
    )
    
    
    (35,000,000
    )Purchase of federal funds, net
    
    
    3,525,000
    
    
    
    Cash dividends paid on common stock
    
    
    (1,438,615
    )
    
    
    (1,427,573
    )Issuance of common stock
    
    
    81,780
    
    
    
    187,521Acquisition of common stock
    
    
    
    
    
    
    (76,161
    )Net cash provided by financing activities
    
    
    14,475,185
    
    
    
    12,365,788(Decrease) in cash and cash equivalents
    
    
    (1,614,918
    )
    
    
    (7,081,038
    )Cash and Cash EquivalentsBeginning
    
    
    11,023,162
    
    
    
    19,552,174Ending
    
    $
    9,408,244
    
    
    $
    12,471,136Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    3,726,758
    
    
    $
    5,006,550Income taxes
    
    $
    635,000
    
    
    $
    380,000Supplemental Disclosures of Noncash Investing ActivitiesUnrealized (loss) on securities available for sale, net
of tax effect
    
    $
    (540,379
    )
    
    $
    (804,508
    )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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##### 



FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
 Note 1. General
   Note 2. Securities
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueJune 30, 2009Obligations of U.S. Government corporations and agencies
    
    $
    24,024,239
    
    
    $
    687,302
    
    
    $
    (2,285
    )
    
    $
    24,709,256Obligations of states and political subdivisions
    
    
    5,569,318
    
    
    
    21,800
    
    
    
    (144,954
    )
    
    
    5,446,164Corporate Bonds
    
    
    5,946,532
    
    
    
    
    
    
    
    (3,807,939
    )
    
    
    2,138,593Mutual Funds
    
    
    308,890
    
    
    
    
    
    
    
    (3,685
    )
    
    
    305,205FHLMC Preferred Bank Stock
    
    
    18,500
    
    
    
    
    
    
    
    (7,000
    )
    
    
    11,500Restricted 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$
    39,642,179
    
    
    $
    709,102
    
    
    $
    (3,965,863
    )
    
    $
    36,385,418
 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




---



##### 



June 30, 2009Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    576,038
    
    
    $
    584,367Due after one year through five years
    
    
    191,864
    
    
    
    197,199Due after five years through ten years
    
    
    9,946,551
    
    
    
    10,186,570Due after ten years
    
    
    24,825,636
    
    
    
    21,325,877Equity securities
    
    
    4,102,090
    
    
    
    4,091,405$
    39,642,179
    
    
    $
    36,385,418
     June 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
    
    $
    2,008,085
    
    
    $
    (2,285
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,008,085
    
    
    $
    (2,285
    )Obligations of states and political subdivisions
    
    
    2,283,202
    
    
    
    (62,705
    )
    
    
    2,079,715
    
    
    
    (82,249
    )
    
    
    4,362,917
    
    
    
    (144,954
    )Corporate Bonds
    
    
    
    
    
    
    
    
    
    
    2,138,593
    
    
    
    (3,807,939
    )
    
    
    2,138,593
    
    
    
    (3,807,939
    )Subtotal, debt securities
    
    
    4,291,287
    
    
    
    (64,990
    )
    
    
    4,218,308
    
    
    
    (3,890,188
    )
    
    
    8,509,595
    
    
    
    (3,955,178
    )Mutual Funds
    
    
    
    
    
    
    
    
    
    
    305,205
    
    
    
    (3,685
    )
    
    
    
    
    
    
    (3,685
    )FHLMC Preferred Bank Stock
    
    
    11,500
    
    
    
    (7,000
    )
    
    
    
    
    
    
    
    
    
    
    11,500
    
    
    
    (7,000
    )Total temporary impaired securities
    
    $
    4,302,787
    
    
    $
    (71,990
    )
    
    $
    4,523,513
    
    
    $
    (3,893,873
    )
    
    $
    8,521,095
    
    
    $
    (3,965,863
    )
 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
    )
 9




---



##### 



Estimateof 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
    
    cashflow$946,532
    
    $
    250,980
    
    
    
    75.3
    %
    
    
    21.9
    %
    
    
    2.8
    %
    
    Ca
    
    
    0.0
    %2,000,000
    
    
    846,328
    
    
    
    85.6
    %
    
    
    13.9
    %
    
    
    0.5
    %
    
    Ca
    
    
    13.5
    %2,000,000
    
    
    806,979
    
    
    
    89.3
    %
    
    
    9.6
    %
    
    
    1.1
    %
    
    Ca
    
    
    16.1
    %1,000,000
    
    
    234,306
    
    
    
    82.7
    %
    
    
    12.3
    %
    
    
    5.0
    %
    
    Ca
    
    
    8.0
    %
    10




---



##### 



Note 3. Loans
  June 30,
    
    
    December 31,2009
    
    
    2008(Thousands)Real estate loans:Construction
    
    $
    41,899
    
    
    $
    38,037Secured by farmland
    
    
    1,268
    
    
    
    1,293Secured by 1 - to - 4 family residential
    
    
    182,800
    
    
    
    175,791Other real estate loans
    
    
    172,559
    
    
    
    160,443Commercial and industrial loans (not secured by real estate)
    
    
    39,406
    
    
    
    39,985Consumer installment loans
    
    
    13,151
    
    
    
    15,695All other loans
    
    
    6,979
    
    
    
    8,934Total loans
    
    $
    458,062
    
    
    $
    440,178Unearned income
    
    
    (839
    )
    
    
    (720
    )Allowance for loan losses
    
    
    (5,091
    )
    
    
    (4,780
    )Net loans
    
    $
    452,132
    
    
    $
    434,678
  Note 4. Allowance for Loan Losses
  Twelve MonthsSix Months
    
    
    Six Months
    
    
    EndedEnded June 30,
    
    
    Ended June 30,
    
    
    December 31,2009
    
    
    2008
    
    
    2008Balance at beginning of year
    
    $
    4,779,662
    
    
    $
    4,185,209
    
    
    $
    4,185,209Provision for loan losses
    
    
    560,000
    
    
    
    1,290,000
    
    
    
    3,227,269Recoveries of loans previously charged-off
    
    
    45,203
    
    
    
    30,629
    
    
    
    72,298Loan losses charged-off
    
    
    (294,028
    )
    
    
    (1,186,532
    )
    
    
    (2,705,114
    )Balance at end of year
    
    $
    5,090,837
    
    
    $
    4,319,306
    
    
    $
    4,779,662
  June 30,
    
    
    December 31,
    
    
    June 30,(Dollars in thousands)
    
    2009
    
    
    2008
    
    
    2008Nonaccrual loans
    
    $
    1,139
    
    
    $
    1,208
    
    
    $
    2,956Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    $
    1,139
    
    
    $
    1,208
    
    
    $
    2,956Other real estate owned
    
    
    2,029
    
    
    
    3,034
    
    
    
    Foreclosed property
    
    
    51
    
    
    
    33
    
    
    
    56Total nonperforming assets
    
    $
    3,219
    
    
    $
    4,275
    
    
    $
    3,012Allowance for loan losses to period end loans
    
    
    1.11
    %
    
    
    1.08
    %
    
    
    1.02
    %Non-performing assets to period end loans and
repossessed assets owned
    
    
    0.70
    %
    
    
    0.97
    %
    
    
    0.70
    %Non-performing assets to period end total assets
    
    
    0.61
    %
    
    
    0.81
    %
    
    
    0.60
    %
 11




---



##### 



June 30, 2009
    
    
    December 31, 2008
    
    
    June 30, 2008Impaired loans for which an allowance has been provided
    
    $
    2,080,567
    
    
    $
    809,221
    
    
    $
    1,407,864Impaired loans for which no allowance has been provided
    
    
    180,361
    
    
    
    81,604
    
    
    
    2,160,361$
    2,260,928
    
    
    $
    890,825
    
    
    $
    3,568,225Allowance provided for impaired loans, included in the
allowance for loan losses
    
    $
    1,080,071
    
    
    $
    720,395
    
    
    $
    1,136,167
 Three Months
    
    
    Twelve Months
    
    
    Three MonthsEnded June 30,
    
    
    Ended
    
    
    Ended June 30,2009
    
    
    December 31, 2008
    
    
    2008Average balance in impaired loans
    
    $
    2,278,436
    
    
    $
    1,308,909
    
    
    $
    3,842,355Interest income recognized on impaired loans
    
    $
    42,231
    
    
    $
    35,940
    
    
    $
    89,152
    Note 5. Company-Obligated Mandatorily Redeemable Capital Securities
   12




---



##### 



Note 6. Earnings Per Share
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedJune 30, 2009
    
    
    June 30, 2008Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,596,537
    
    
    $
    0.20
    
    
    
    3,531,310
    
    
    $
    0.27Effect of dilutive securities, stock-based awards
    
    
    9,992
    
    
    
    
    
    
    
    32,5163,606,529
    
    
    $
    0.20
    
    
    
    3,563,826
    
    
    $
    0.26
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2009
    
    
    June 30, 2008Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,588,845
    
    
    $
    0.46
    
    
    
    3,523,392
    
    
    $
    0.55Effect of dilutive securities, stock-based awards
    
    
    7,324
    
    
    
    
    
    
    
    34,4833,596,169
    
    
    $
    0.46
    
    
    
    3,557,875
    
    
    $
    0.55
  Note 7. Stock-Based Compensation
     13




---



##### 



Six Months EndedJune 30, 2009WeightedAverage
    
    
    AverageNumber of
    
    
    Exercise
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value (1)Outstanding at January 1, 2009
    
    
    77,180
    
    
    $
    9.84Granted
    
    
    Exercised
    
    
    (8,720
    )
    
    
    9.38Expired
    
    
    (3,980
    )
    
    
    9.75Outstanding at June 30, 2009
    
    
    64,480
    
    
    $
    9.89Exercisable at end of quarter
    
    
    64,480
    
    
    $
    9.90
    
    
    $
    290,651Weighted-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, 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 June 30, 2009. This amount changes based on the
changes in the market value of the Companys stock.   Six Months EndedJune 30, 2009WeightedNumber of
    
    
    AverageShares
    
    
    PriceNonvested at January 1, 2009
    
    
    38,219Granted
    
    
    23,500
    
    
    $
    10.05Vested
    
    
    (10,585
    )Nonvested at June 30, 2009
    
    
    51,134
   Note 8. Employee Benefit Plan
  14




---



##### 



Three Months EndedJune 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
 Six Months EndedJune 30,2009
    
    
    2008Service cost
    
    $
    125,414
    
    
    $
    222,162Interest cost
    
    
    147,654
    
    
    
    154,704Expected return on plan assets
    
    
    (130,868
    )
    
    
    (298,100
    )Amortization of transition (asset)
    
    
    
    
    
    
    (9,490
    )Amortization of prior service cost
    
    
    
    
    
    
    3,884Recognized net actuarial loss
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    142,200
    
    
    $
    73,160
    Note 9. Fair Value Measurement
    15




---



##### 



Level 1 
    
    Valuation is based on quoted prices in active markets for
identical 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.
    Fair Value Measurements at June 30, 2009 Using Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantBalance at
    
    Identical
    
    Observable
    
    Unobservable(In Thousands)
    
    June 30,
    
    Assets
    
    Inputs
    
    InputsDescription
    
    2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)AssetsAvailable-for-sale securities
    
    $
    36,385
    
    
    $
    34,246
    
    
    $
    2,139
    
    
    $
    
     16




---



##### 



Fair values of financial instruments
   Cash and cash equivalents
  Securities
  17




---



##### 



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




---



##### 



June 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    Fair(In Thousands)
    
    Amount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and short-term
investments
    
    $
    9,397
    
    
    $
    9,397
    
    
    $
    11,023
    
    
    $
    11,023Federal funds sold
    
    
    11
    
    
    
    11
    
    
    
    
    
    
    
    Securities
    
    
    36,385
    
    
    
    36,385
    
    
    
    37,839
    
    
    
    37,839Loans, net
    
    
    452,132
    
    
    
    458,809
    
    
    
    434,678
    
    
    
    452,946Accrued interest receivable
    
    
    1,424
    
    
    
    1,424
    
    
    
    1,550
    
    
    
    1,550Financial liabilities:Deposits
    
    $
    412,601
    
    
    $
    414,107
    
    
    $
    400,294
    
    
    $
    402,589FHLB advances
    
    
    45,000
    
    
    
    45,521
    
    
    
    45,000
    
    
    
    46,037Federal funds purchased
    
    
    21,800
    
    
    
    21,800
    
    
    
    18,275
    
    
    
    18,275Company obligated mandatorily
redeemable capital securities
    
    
    4,124
    
    
    
    2,571
    
    
    
    4,124
    
    
    
    3,116Accrued interest payable
    
    
    720
    
    
    
    720
    
    
    
    863
    
    
    
    863
  Note
10: Subsequent Events
 Subsequent Events
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
  19




---



##### 



CAUTIONARY STATEMENT REGARDING NON-GAAP MEASURES
  GENERAL
       20




---



##### 



CRITICAL ACCOUNTING POLICIES
    21




---



##### 



EXECUTIVE OVERVIEW
       22




---



##### 



COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
 NET INCOME
   (Dollars in Thousands)Before Taxes
    
    Tax Expense
    
    After Taxes
    
    Per Fully-Diluted ShareFor the Quarter Ended June 30, 2009Net income on GAAP basis
    
    $
    996
    
    
    $
    272
    
    
    $
    724
    
    
    $
    0.201Plus: Proxy contest expense
    
    
    291
    
    
    
    99
    
    
    
    192
    
    
    
    0.053Plus: FDIC special assessment expense
    
    
    240
    
    
    
    82
    
    
    
    158
    
    
    
    0.044Plus: Impairment loss on Silverton stock
    
    
    113
    
    
    
    0
    
    
    
    113
    
    
    
    0.031Net income after non-GAAP adjustment
items
    
    $
    1,640
    
    
    $
    453
    
    
    $
    1,187
    
    
    $
    0.329
  For Quarter endedJune 30, 2009Return on Average Assets:Net income on GAAP basis
    
    
    0.55
    %Net income after non-GAAP adjustment
items
    
    
    0.90
    %
 23




---



##### 



For Quarter endedJune 30, 2009Return on Average Equity:Net income on GAAP basis
    
    
    7.02
    %Net income after non-GAAP adjustment
items
    
    
    11.52
    %
 NET INTEREST INCOME AND EXPENSE
        24




---



##### 



AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 Three Months Ended June 30, 2009
    
    
    Three Months Ended June 30, 2008Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    439,302
    
    
    $
    6,390
    
    
    
    5.76
    %
    
    $
    412,973
    
    
    $
    6,498
    
    
    
    6.24
    %Tax-exempt (1)
    
    
    8,450
    
    
    
    146
    
    
    
    6.84
    %
    
    
    7,752
    
    
    
    141
    
    
    
    7.16
    %Nonaccrual (2)
    
    
    1,574
    
    
    
    
    
    
    
    
    
    
    
    1,758
    
    
    
    Total Loans
    
    
    449,326
    
    
    
    6,536
    
    
    
    5.76
    %
    
    
    422,483
    
    
    
    6,639
    
    
    
    6.23
    %SecuritiesTaxable
    
    
    29,187
    
    
    
    329
    
    
    
    4.51
    %
    
    
    33,127
    
    
    
    404
    
    
    
    4.88
    %Tax-exempt (1)
    
    
    5,365
    
    
    
    88
    
    
    
    6.54
    %
    
    
    5,446
    
    
    
    88
    
    
    
    6.47
    %Total securities
    
    
    34,552
    
    
    
    417
    
    
    
    4.82
    %
    
    
    38,573
    
    
    
    492
    
    
    
    5.11
    %Deposits in banks
    
    
    6,397
    
    
    
    3
    
    
    
    0.20
    %
    
    
    811
    
    
    
    4
    
    
    
    2.19
    %Federal funds sold
    
    
    75
    
    
    
    0.1
    
    
    
    0.25
    %
    
    
    549
    
    
    
    4
    
    
    
    3.21
    %Total earning assets
    
    
    490,350
    
    
    
    6,956
    
    
    
    5.62
    %
    
    
    462,416
    
    
    
    7,139
    
    
    
    6.13
    %Less: Reserve for loan losses
    
    
    (5,013
    )
    
    
    
    
    
    
    
    
    
    
    (4,196
    )Cash and due from banks
    
    
    6,823
    
    
    
    
    
    
    
    
    
    
    
    16,521Bank premises and equipment, net
    
    
    9,685
    
    
    
    
    
    
    
    
    
    
    
    8,561Other assets
    
    
    21,633
    
    
    
    
    
    
    
    
    
    
    
    16,587Total Assets
    
    $
    523,478
    
    
    
    
    
    
    
    
    
    
    $
    499,889LIABILITIES &
SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    63,575
    
    
    
    
    
    
    
    
    
    
    $
    69,981Interest-bearing depositsNOW accounts
    
    
    77,702
    
    
    
    78
    
    
    
    0.40
    %
    
    
    89,958
    
    
    
    200
    
    
    
    0.89
    %Money market accounts
    
    
    70,406
    
    
    
    138
    
    
    
    0.79
    %
    
    
    93,866
    
    
    
    453
    
    
    
    1.94
    %Savings accounts
    
    
    34,579
    
    
    
    24
    
    
    
    0.27
    %
    
    
    31,893
    
    
    
    38
    
    
    
    0.47
    %Time deposits
    
    
    168,509
    
    
    
    1,201
    
    
    
    2.86
    %
    
    
    105,466
    
    
    
    959
    
    
    
    3.66
    %Total interest-bearing deposits
    
    
    351,196
    
    
    
    1,441
    
    
    
    1.65
    %
    
    
    321,183
    
    
    
    1,650
    
    
    
    2.07
    %Federal funds purchased
    
    
    3,900
    
    
    
    12
    
    
    
    1.28
    %
    
    
    4,910
    
    
    
    30
    
    
    
    2.45
    %Federal Home Loan Bank advances
    
    
    56,464
    
    
    
    230
    
    
    
    1.61
    %
    
    
    52,912
    
    
    
    469
    
    
    
    3.51
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    29
    
    
    
    2.82
    %
    
    
    4,124
    
    
    
    45
    
    
    
    4.36
    %Total interest-bearing liabilities
    
    
    415,684
    
    
    
    1,712
    
    
    
    1.65
    %
    
    
    383,129
    
    
    
    2,194
    
    
    
    2.29
    %Other liabilities
    
    
    2,875
    
    
    
    
    
    
    
    
    
    
    
    3,700Shareholders equity
    
    
    41,344
    
    
    
    
    
    
    
    
    
    
    
    43,079Total Liabilities & Shareholders Equity
    
    $
    523,478
    
    
    
    
    
    
    
    
    
    
    $
    499,889Net interest spread
    
    
    
    
    
    $
    5,244
    
    
    
    3.98
    %
    
    
    
    
    
    $
    4,945
    
    
    
    3.83
    %Interest expense as a percent of average earning assets
    
    
    
    
    
    
    
    
    
    
    1.40
    %
    
    
    
    
    
    
    
    
    
    
    1.91
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.23
    %
    
    
    
    
    
    
    
    
    
    
    4.22
    %
 
 (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




---



##### 



RATE/VOLUME ANALYSIS
  RATE / VOLUME VARIANCE  (In Thousands)
 Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOME
    
    
    
    
    
    
    
    
    
    
    Loans; taxable
    
    $
    (108
    )
    
    $
    414
    
    
    
    (522
    )Loans; tax-exempt (1)
    
    
    5
    
    
    
    13
    
    
    
    (8
    )Securities; taxable
    
    
    (75
    )
    
    
    (48
    )
    
    
    (27
    )Securities; tax-exempt (1)
    
    
    
    
    
    
    (1
    )
    
    
    1Deposits in banks
    
    
    (1
    )
    
    
    28
    
    
    
    (29
    )Federal funds sold
    
    
    (4
    )
    
    
    (3
    )
    
    
    (1
    )Total Interest Income
    
    
    (183
    )
    
    
    403
    
    
    
    (586
    )INTEREST EXPENSENOW accounts
    
    
    (122
    )
    
    
    (27
    )
    
    
    (95
    )Money market accounts
    
    
    (315
    )
    
    
    (113
    )
    
    
    (202
    )Savings accounts
    
    
    (14
    )
    
    
    3
    
    
    
    (17
    )Time deposits
    
    
    243
    
    
    
    573
    
    
    
    (330
    )Federal funds purchased and securities
    
    
    
    
    
    
    
    
    
    
    sold under agreements to repurchase
    
    
    (18
    )
    
    
    (6
    )
    
    
    (12
    )Federal Home Loan Bank advances
    
    
    (239
    )
    
    
    31
    
    
    
    (270
    )Capital securities of subsidiary trust
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )Total Interest Expense
    
    
    (481
    )
    
    
    461
    
    
    
    (942
    )Net Interest Income
    
    $
    298
    
    
    $
    (58
    )
    
    $
    356
 
 (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




---



##### 



OTHER EXPENSE
     27




---



##### 



INCOME TAXES
  COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008
 NET INCOME
  28




---



##### 



(Dollars in Thousands)Before Taxes
    
    Tax Expense
    
    After Taxes
    
    Per Fully-Diluted ShareFor the Six Months Ended June 30, 2009Net income on GAAP basis
    
    $
    2,260
    
    
    $
    613
    
    
    $
    1,647
    
    
    $
    0.458Plus: Proxy contest expense
    
    
    291
    
    
    
    99
    
    
    
    192
    
    
    
    0.053Plus: FDIC special assessment expense
    
    
    240
    
    
    
    82
    
    
    
    158
    
    
    
    0.044Plus: Impairment loss on Silverton stock
    
    
    113
    
    
    
    0
    
    
    
    113
    
    
    
    0.031Net income after non-GAAP adjustment
items
    
    $
    2,904
    
    
    $
    794
    
    
    $
    2,110
    
    
    $
    0.586
  For Six Months endedJune 30, 2009Return on Average Assets:Net income on GAAP basis
    
    
    0.64
    %Net income after non-GAAP adjustment
items
    
    
    0.82
    %Return on Average Equity:Net income on GAAP basis
    
    
    7.94
    %Net income after non-GAAP adjustment
items
    
    
    10.17
    %
 NET INTEREST INCOME AND EXPENSE
     29




---



##### 



30




---



##### 



AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 Six Months Ended June 30, 2009
    
    
    Six Months Ended June 30, 2008Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    436,220
    
    
    $
    12,654
    
    
    
    5.78
    %
    
    $
    407,443
    
    
    $
    13,209
    
    
    
    6.41
    %Tax-exempt (1)
    
    
    8,492
    
    
    
    291
    
    
    
    6.82
    %
    
    
    7,549
    
    
    
    273
    
    
    
    7.16
    %Nonaccrual (2)
    
    
    1,552
    
    
    
    
    
    
    
    
    
    
    
    1,537
    
    
    
    Total Loans
    
    
    446,264
    
    
    
    12,945
    
    
    
    5.78
    %
    
    
    416,529
    
    
    
    13,482
    
    
    
    6.42
    %SecuritiesTaxable
    
    
    30,606
    
    
    
    692
    
    
    
    4.52
    %
    
    
    32,526
    
    
    
    785
    
    
    
    4.63
    %Tax-exempt (1)
    
    
    5,518
    
    
    
    181
    
    
    
    6.56
    %
    
    
    5,447
    
    
    
    176
    
    
    
    6.48
    %Total securities
    
    
    36,124
    
    
    
    873
    
    
    
    4.83
    %
    
    
    37,973
    
    
    
    961
    
    
    
    5.06
    %Deposits in banks
    
    
    5,533
    
    
    
    7
    
    
    
    0.25
    %
    
    
    897
    
    
    
    13
    
    
    
    2.77
    %Federal funds sold
    
    
    122
    
    
    
    0.2
    
    
    
    0.26
    %
    
    
    2,469
    
    
    
    33
    
    
    
    2.71
    %Total earning assets
    
    
    488,043
    
    
    
    13,825
    
    
    
    5.64
    %
    
    
    457,868
    
    
    
    14,489
    
    
    
    6.28
    %Less: Reserve for loan losses
    
    
    (4,948
    )
    
    
    
    
    
    
    
    
    
    
    (4,181
    )Cash and due from banks
    
    
    9,148
    
    
    
    
    
    
    
    
    
    
    
    16,016Bank premises and equipment, net
    
    
    9,218
    
    
    
    
    
    
    
    
    
    
    
    8,013Other assets
    
    
    20,333
    
    
    
    
    
    
    
    
    
    
    
    16,503Total Assets
    
    $
    521,794
    
    
    
    
    
    
    
    
    
    
    $
    494,219LIABILITIES &
SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    63,869
    
    
    
    
    
    
    
    
    
    
    $
    68,348Interest-bearing depositsNOW accounts
    
    
    76,982
    
    
    
    159
    
    
    
    0.42
    %
    
    
    87,778
    
    
    
    470
    
    
    
    1.08
    %Money market accounts
    
    
    70,813
    
    
    
    311
    
    
    
    0.88
    %
    
    
    96,520
    
    
    
    1,084
    
    
    
    2.26
    %Savings accounts
    
    
    33,001
    
    
    
    48
    
    
    
    0.30
    %
    
    
    31,168
    
    
    
    72
    
    
    
    0.46
    %Time deposits
    
    
    164,586
    
    
    
    2,482
    
    
    
    3.04
    %
    
    
    108,130
    
    
    
    2,098
    
    
    
    3.91
    %Total interest-bearing deposits
    
    
    345,382
    
    
    
    3,000
    
    
    
    1.75
    %
    
    
    323,596
    
    
    
    3,724
    
    
    
    2.31
    %Federal funds purchased
    
    
    3,488
    
    
    
    23
    
    
    
    1.32
    %
    
    
    3,999
    
    
    
    63
    
    
    
    3.19
    %Federal Home Loan Bank advances
    
    
    57,480
    
    
    
    496
    
    
    
    1.72
    %
    
    
    47,465
    
    
    
    881
    
    
    
    3.73
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    65
    
    
    
    3.15
    %
    
    
    4,124
    
    
    
    110
    
    
    
    5.35
    %Total interest-bearing liabilities
    
    
    410,474
    
    
    
    3,584
    
    
    
    1.76
    %
    
    
    379,184
    
    
    
    4,778
    
    
    
    2.53
    %Other liabilities
    
    
    5,631
    
    
    
    
    
    
    
    
    
    
    
    3,757Shareholders equity
    
    
    41,820
    
    
    
    
    
    
    
    
    
    
    
    42,930Total Liabilities & Shareholders
Equity
    
    $
    521,794
    
    
    
    
    
    
    
    
    
    
    $
    494,219Net interest spread
    
    
    
    
    
    $
    10,241
    
    
    
    3.89
    %
    
    
    
    
    
    $
    9,711
    
    
    
    3.75
    %Interest expense as a percent of average earning assets
    
    
    
    
    
    
    
    
    
    
    1.48
    %
    
    
    
    
    
    
    
    
    
    
    2.10
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.17
    %
    
    
    
    
    
    
    
    
    
    
    4.18
    %
 
 (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




---



##### 



RATE/VOLUME ANALYSIS
  RATE / VOLUME VARIANCE
(In Thousands)
 Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOMELoans; taxable
    
    $
    (555
    )
    
    $
    933
    
    
    
    (1,488
    )Loans; tax-exempt (1)
    
    
    18
    
    
    
    34
    
    
    
    (16
    )Securities; taxable
    
    
    (93
    )
    
    
    (46
    )
    
    
    (47
    )Securities; tax-exempt (1)
    
    
    5
    
    
    
    2
    
    
    
    3Deposits in banks
    
    
    (6
    )
    
    
    67
    
    
    
    (73
    )Federal funds sold
    
    
    (33
    )
    
    
    (31
    )
    
    
    (2
    )Total Interest Income
    
    
    (664
    )
    
    
    959
    
    
    
    (1,623
    )INTEREST EXPENSENOW accounts
    
    
    (311
    )
    
    
    (58
    )
    
    
    (253
    )Money market accounts
    
    
    (773
    )
    
    
    (289
    )
    
    
    (484
    )Savings accounts
    
    
    (24
    )
    
    
    4
    
    
    
    (28
    )Time deposits
    
    
    385
    
    
    
    1,095
    
    
    
    (710
    )Federal funds purchased and securities
    
    
    
    
    
    
    
    
    
    
    sold under agreements to repurchase
    
    
    (40
    )
    
    
    (8
    )
    
    
    (32
    )Federal Home Loan Bank advances
    
    
    (385
    )
    
    
    186
    
    
    
    (571
    )Capital securities of subsidiary trust
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Total Interest Expense
    
    
    (1,193
    )
    
    
    930
    
    
    
    (2,123
    )Net Interest Income
    
    $
    529
    
    
    $
    29
    
    
    $
    500
 
 (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




---



##### 



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




---



##### 



ASSET QUALITY
  34




---



##### 



CONTRACTUAL OBLIGATIONS
    35




---



##### 



OFF-BALANCE SHEET ARRANGEMENTS
  CAPITAL
   RISK BASED CAPITAL RATIOS
(Dollars in Thousands)
 June 30,
    
    
    December 31,2009
    
    
    2008Tier 1 Capital:Shareholders Equity
    
    $
    41,389
    
    
    $
    41,488Plus: Unrealized loss on securities
available for sale/FAS 158, net
    
    
    2,758
    
    
    
    2,217Less: Unrealized loss on equity securities, net
    
    
    (7
    )
    
    
    (13
    )Plus: Company-obligated madatorily
redeemable capital securities
    
    
    4,000
    
    
    
    4,000Total Tier 1 Capital
    
    
    48,140
    
    
    
    47,692Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    5,091
    
    
    
    4,780Total Capital:
    
    
    53,231
    
    
    
    52,472Risk Weighted Assets:
    
    $
    442,150
    
    
    $
    416,265Regulatory Capital Ratios:Leverage Ratio
    
    
    9.14
    %
    
    
    9.37
    %Tier 1 to Risk Weighted Assets
    
    
    10.89
    %
    
    
    11.38
    %Total Capital to Risk Weighted Assets
    
    
    12.04
    %
    
    
    12.52
    %
 CAPITAL RESOURCES AND LIQUIDITY
  36




---



##### 



37




---



##### 



LIQUIDITY SOURCES AND USES
(Dollars in Thousands)
 June 30, 2009
    
    
    December 31, 2008Total
    
    
    In Use
    
    
    Available
    
    
    Total
    
    
    In Use
    
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    86,010
    
    
    $
    21,800
    
    
    $
    64,210
    
    
    $
    88,195
    
    
    $
    18,275
    
    
    $
    69,920Federal Home Loan Bank advances
    
    
    102,628
    
    
    
    45,000
    
    
    
    57,628
    
    
    
    115,214
    
    
    
    45,000
    
    
    
    70,214Federal funds sold
    
    
    11
    
    
    
    
    
    
    
    11Securities, available for sale and unpledged
at fair value
    
    
    
    
    
    
    
    
    
    
    6,353
    
    
    
    
    
    
    
    
    
    
    
    8,428Total short-term funding sources
    
    
    
    
    
    
    
    
    
    $
    128,202
    
    
    
    
    
    
    
    
    
    
    $
    148,562Uses:Unfunded loan commitments and
lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    83,897
    
    
    
    
    
    
    
    
    
    
    $
    74,023Letters of credit
    
    
    
    
    
    
    
    
    
    
    9,491
    
    
    
    
    
    
    
    
    
    
    
    5,366Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    93,388
    
    
    
    
    
    
    
    
    
    
    $
    79,389Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    137.3
    %
    
    
    
    
    
    
    
    
    
    
    187.1
    %
  IMPACT OF INFLATION AND CHANGING PRICES
  CHANGES IN ACCOUNTING PRINCIPLES
  38




---



##### 



RECENT ACCOUNTING PROUNCEMENTS
 Recent Accounting Pronouncements
    .
   39




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  40




---



##### 



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
  41




---



##### 



CLASS I NOMINEES
    
    FOR
    
    WITHHELDJohn B. Adams, Jr.
    
    
    2,905,786
    
    
    
    26,566Randolph D. Frostick
    
    
    1,963,924
    
    
    
    34,850Jay B. Keyser
    
    
    2,862,011
    
    
    
    70,341John J. Norman, Jr.
    
    
    2,878,898
    
    
    
    53,454David M. van Roijen
(not elected)
    
    
    926,601
    
    
    
    6,936
 CLASS III NOMINEES
    
    FOR
    
    WITHHELDEric P. Graap
    
    
    1,965,937
    
    
    
    18,837C. H. Lawrence, Jr.
    
    
    2,877,899
    
    
    
    54,453C. Hunton Tiffany (not elected)
    
    
    941,132
    
    
    
    6,405
  BROKERFOR
    
    AGAINST
    
    ABSTAIN
    
    NON-VOTE2,840,733
    
    
    27,133
    
    
    
    64,686
    
    
    
    200
  FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER 
NON-VOTE1,374,857
    
    
    1,537,091
    
    
    
    20,601
    
    
    
    198
  FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER 
NON-VOTE2,818,018
    
    
    45,634
    
    
    
    68,898
    
    
    
    199
  FOR
    
    AGAINST
    
    ABSTAIN
    
    BROKER 
NON-VOTE2,703,001
    
    
    173,293
    
    
    
    56,256
    
    
    
    199
 
 ITEM 5. OTHER INFORMATION
  
 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.
 42




---



##### 



Exhibit
    
    ExhibitNumber
    
    Description3.2
    
    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.
 
   FAUQUIER BANKSHARES, INC.
(Registrant)/s/ Randy K. FerrellRandy K. FerrellPresident & Chief Executive OfficerDated: August 7, 2009 /s/ Eric P. GraapEric P. GraapExecutive Vice President & Chief Financial OfficerDated: August 7, 2009 43