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 September 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




---



##### 



FAUQUIER BANKSHARES, INC.
 PagePart I. FINANCIAL INFORMATION
    
    3Item 1. Financial Statements
    
    3Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007
    
    3Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 2008
and 2007
    
    4Consolidated Statements of Income (unaudited) for the Nine Months Ended September 30, 2008
and 2007
    
    5Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Nine Months
Ended
September 30, 2008 and 2007
    
    6Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2008
and 2007
    
    7Notes to Consolidated Financial Statements
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    36Item 4. Controls and Procedures
    
    36Part II. OTHER INFORMATION
    
    36Item 1. Legal Proceedings
    
    36Item 1A. Risk Factors
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    37Item 3. Defaults Upon Senior Securities
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    37Item 5. Other Information
    
    37Item 6. Exhibits
    
    38SIGNATURES
    
    39
 2




---



##### 



Part I. FINANCIAL INFORMATION
 
  Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Audited)*AssetsCash and due from banks
    
    $
    13,652,340
    
    
    $
    16,708,922Interest-bearing deposits in other banks
    
    
    1,267,882
    
    
    
    823,252Federal funds sold
    
    
    
    
    
    
    2,020,000Securities available for sale
    
    
    35,284,228
    
    
    
    37,376,725Loans, net of allowance for loan losses of $4,684,438
in 2008 and $4,185,209 in 2007
    
    
    423,077,211
    
    
    
    409,107,482Bank premises and equipment, net
    
    
    8,331,851
    
    
    
    7,180,369Accrued interest receivable
    
    
    1,681,120
    
    
    
    1,748,546Other assets
    
    
    16,465,251
    
    
    
    14,930,932Total assets
    
    $
    499,759,883
    
    
    $
    489,896,228Liabilities and Shareholders EquityDeposits:Noninterest-bearing
    
    
    65,139,676
    
    
    
    76,080,935Interest-bearing:NOW accounts
    
    
    77,441,602
    
    
    
    90,169,640Savings and money market accounts
    
    
    115,406,759
    
    
    
    127,472,913Time certificates of deposit
    
    
    147,635,155
    
    
    
    110,835,435Total interest-bearing
    
    
    340,483,516
    
    
    
    328,477,988Total deposits
    
    
    405,623,192
    
    
    
    404,558,923Federal Home Loan Bank advances
    
    
    45,000,000
    
    
    
    35,000,000Company-obligated mandatorily redeemable
capital securities
    
    
    4,124,000
    
    
    
    4,124,000Other liabilities
    
    
    4,421,845
    
    
    
    4,385,553Commitments and Contingencies
    
    
    
    
    
    
    Total liabilities
    
    
    459,169,037
    
    
    
    448,068,476Shareholders EquityCommon stock, par value, $3.13; authorized 8,000,000
shares: issued and outstanding, 2008: 3,566,286 (includes nonvested shares of 38,219); 2007: 3,537,354 shares
(includes nonvested shares of 31,190)
    
    
    11,042,850
    
    
    
    10,974,293Retained earnings
    
    
    32,522,518
    
    
    
    31,626,627Accumulated other comprehensive income (loss), net
    
    
    (2,974,522
    )
    
    
    (773,168
    )Total shareholders equity
    
    
    40,590,846
    
    
    
    41,827,752Total liabilities and shareholders equity
    
    $
    499,759,883
    
    
    $
    489,896,228
 
 *
    
    Condensed from audited financial statement.  3




---



##### 



Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Statements of Income
 (Unaudited)
 For the Three Months Ended September 30, 2008 and 2007
 2008
    
    
    2007Interest IncomeInterest and fees on loans
    
    $
    6,701,211
    
    
    $
    7,227,839Interest and dividends on securities available for sale:Taxable interest income
    
    
    366,630
    
    
    
    372,966Interest income exempt from federal income taxes
    
    
    58,289
    
    
    
    37,774Dividends
    
    
    59,978
    
    
    
    47,046Interest on federal funds sold
    
    
    3
    
    
    
    15,432Interest on deposits in other banks
    
    
    15,305
    
    
    
    5,322Total interest income
    
    
    7,201,416
    
    
    
    7,706,379Interest ExpenseInterest on deposits
    
    
    1,761,639
    
    
    
    2,542,449Interest on federal funds purchased
    
    
    23,877
    
    
    
    45,709Interest on Federal Home Loan Bank advances
    
    
    519,870
    
    
    
    436,153Distribution on capital securities of subsidiary trusts
    
    
    45,757
    
    
    
    72,652Total interest expense
    
    
    2,351,143
    
    
    
    3,096,963Net interest income
    
    
    4,850,273
    
    
    
    4,609,416Provision for loan losses
    
    
    431,000
    
    
    
    120,000Net interest income after provision for loan losses
    
    
    4,419,273
    
    
    
    4,489,416Other IncomeWealth management income
    
    
    324,890
    
    
    
    358,441Service charges on deposit accounts
    
    
    763,383
    
    
    
    762,328Other service charges, commissions and income
    
    
    462,914
    
    
    
    417,358(Loss) on impairment of securities
    
    
    (297,500
    )
    
    
    (Loss) on sale of other real estate owned
    
    
    (3,000
    )
    
    
    Total other income
    
    
    1,250,687
    
    
    
    1,538,127Other ExpensesSalaries and benefits
    
    
    2,141,693
    
    
    
    2,295,427Net occupancy expense of premises
    
    
    328,600
    
    
    
    265,361Furniture and equipment
    
    
    313,889
    
    
    
    306,121Advertising expense
    
    
    142,873
    
    
    
    139,700Consulting expense
    
    
    261,178
    
    
    
    226,930Data processing expense
    
    
    325,227
    
    
    
    343,970Other operating expenses
    
    
    742,605
    
    
    
    705,891Total other expenses
    
    
    4,256,065
    
    
    
    4,283,400Income before income taxes
    
    
    1,413,895
    
    
    
    1,744,143Income tax expense
    
    
    478,892
    
    
    
    534,006Net Income
    
    $
    935,003
    
    
    $
    1,210,137Earnings per Share, basic
    
    $
    0.26
    
    
    $
    0.34Earnings per Share, assuming dilution
    
    $
    0.26
    
    
    $
    0.34Dividends per Share
    
    $
    0.20
    
    
    $
    0.20
  4




---



##### 



Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Statements of Income
 (Unaudited)
 For the Nine Months Ended September 30, 2008 and 2007
 2008
    
    
    2007Interest IncomeInterest and fees on loans
    
    $
    20,089,996
    
    
    $
    21,739,829Interest and dividends on securities available for sale:Taxable interest income
    
    
    1,028,308
    
    
    
    1,108,418Interest income exempt from federal income taxes
    
    
    174,700
    
    
    
    67,262Dividends
    
    
    183,098
    
    
    
    190,450Interest on federal funds sold
    
    
    33,296
    
    
    
    81,983Interest on deposits in other banks
    
    
    27,851
    
    
    
    25,984Total interest income
    
    
    21,537,249
    
    
    
    23,213,926Interest ExpenseInterest on deposits
    
    
    5,485,364
    
    
    
    7,503,724Interest on federal funds purchased
    
    
    87,236
    
    
    
    184,154Interest on Federal Home Loan Bank advances
    
    
    1,401,345
    
    
    
    1,339,757Distribution on capital securities of subsidiary trusts
    
    
    155,462
    
    
    
    300,094Total interest expense
    
    
    7,129,407
    
    
    
    9,327,729Net interest income
    
    
    14,407,842
    
    
    
    13,886,197Provision for loan losses
    
    
    1,721,000
    
    
    
    360,000Net interest income after provision for loan losses
    
    
    12,686,842
    
    
    
    13,526,197Other IncomeWealth management income
    
    
    1,000,127
    
    
    
    1,051,999Service charges on deposit accounts
    
    
    2,223,348
    
    
    
    2,139,644Other service charges, commissions and income
    
    
    1,555,895
    
    
    
    1,282,355Gain on sale of other real estate owned
    
    
    25,718
    
    
    
    (Loss) on impairment of securities
    
    
    (422,500
    )
    
    
    Realized gain on sale of securities
    
    
    87,585
    
    
    
    Total other income
    
    
    4,470,173
    
    
    
    4,473,998Other ExpensesSalaries and benefits
    
    
    6,768,719
    
    
    
    6,956,868Net occupancy expense of premises
    
    
    958,926
    
    
    
    798,644Furniture and equipment
    
    
    885,431
    
    
    
    889,830Advertising expense
    
    
    468,469
    
    
    
    421,793Consulting expense
    
    
    802,566
    
    
    
    660,820Data processing expense
    
    
    987,569
    
    
    
    956,511Other operating expenses
    
    
    2,175,367
    
    
    
    2,053,162Total other expenses
    
    
    13,047,047
    
    
    
    12,737,628Income before income taxes
    
    
    4,109,968
    
    
    
    5,262,567Income tax expense
    
    
    1,224,045
    
    
    
    1,600,519Net Income
    
    $
    2,885,923
    
    
    $
    3,662,048Earnings per Share, basic
    
    $
    0.82
    
    
    $
    1.05Earnings per Share, assuming dilution
    
    $
    0.81
    
    
    $
    1.03Dividends per Share
    
    $
    0.60
    
    
    $
    0.59
 5




---



##### 



Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
 For the Nine Months Ended September 30, 2008 and 2007
 Accumulated
OtherCommon
    
    
    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
    
    
    
    
    
    
    3,662,048
    
    
    
    
    
    
    $
    3,662,048
    
    
    
    3,662,048Other comprehensive income net of tax:Unrealized holding gains on securities available
for sale, net of deferred income taxes of $73,738
    
    
    
    
    
    
    
    
    
    
    143,138
    
    
    
    143,138
    
    
    
    143,138Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,805,186Cash dividends ($.59 per share)
    
    
    
    
    
    
    (2,089,302
    )
    
    
    
    
    
    
    
    
    
    
    (2,089,302
    )Acquisition of 27,370 shares of common stock
    
    
    (85,668
    )
    
    
    (516,802
    )
    
    
    
    
    
    
    
    
    
    
    (602,470
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    191,685
    
    
    
    
    
    
    
    
    
    
    
    191,685Issuance of common stock  nonvested shares
(11,437 shares)
    
    
    35,797
    
    
    
    (35,797
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    247,664
    
    
    
    469,410
    
    
    
    
    
    
    
    
    
    
    
    717,074Balance, September 30, 2007
    
    $
    10,987,314
    
    
    $
    30,643,651
    
    
    $
    (1,074,180
    )
    
    
    
    
    
    $
    40,556,785Balance, December 31, 2007
    
    $
    10,974,293
    
    
    $
    31,626,627
    
    
    $
    (773,168
    )
    
    
    
    
    
    $
    41,827,752Comprehensive income:Net income
    
    
    
    
    
    
    2,885,923
    
    
    
    
    
    
    
    2,885,923
    
    
    
    2,885,923Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of tax benefit of $1,145,186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,523,548
    )Less: reclassification adjustments, net of taxes
of $12,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    322,194Other comprehensive income net of tax benefit of $1,132,465
    
    
    
    
    
    
    
    
    
    
    (2,201,354
    )
    
    
    (2,201,354
    )
    
    
    (2,201,354
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    684,569Effects of changing pension plan measurement date,
pursuant to 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 ($.60 per share)
    
    
    
    
    
    
    (2,140,915
    )
    
    
    
    
    
    
    
    
    
    
    (2,140,915
    )Acquisition of 7,332 shares of common stock
    
    
    (22,949
    )
    
    
    (103,123
    )
    
    
    
    
    
    
    
    
    
    
    (126,072
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    244,227
    
    
    
    
    
    
    
    
    
    
    
    244,227Restricted stock forfeiture
    
    
    
    
    
    
    (49,604
    )
    
    
    
    
    
    
    
    
    
    
    (49,604
    )Issuance of common stock  nonvested
shares (10,315 shares)
    
    
    32,286
    
    
    
    (32,286
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    59,220
    
    
    
    128,300
    
    
    
    
    
    
    
    
    
    
    
    187,520Balance, September 30, 2008
    
    $
    11,042,850
    
    
    $
    32,522,518
    
    
    $
    (2,974,522
    )
    
    
    
    
    
    $
    40,590,846
  6




---



##### 



Fauquier Bankshares, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 For the Nine Months Ended September 30, 2008 and 2007
 (Unaudited)
 2008
    
    
    2007Cash Flows from Operating ActivitiesNet income
    
    $
    2,885,923
    
    
    $
    3,662,048Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    696,976
    
    
    
    773,598Provision for loan losses
    
    
    1,721,000
    
    
    
    360,000Loss on impairment of securities
    
    
    422,500
    
    
    
    Gain on sale of securities
    
    
    (87,585
    )
    
    
    Amortization (accretion) of security premiums, net
    
    
    (7,486
    )
    
    
    3,049Amortization of unearned compensation, net of forfeiture
    
    
    194,623
    
    
    
    191,685Changes in assets and liabilities:Decrease (increase) in other assets
    
    
    (315,556
    )
    
    
    60,029(Decrease) increase in other liabilities
    
    
    (19,209
    )
    
    
    198,370Net cash provided by operating activities
    
    
    5,491,186
    
    
    
    5,248,779Cash 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
    
    
    3,710,672
    
    
    
    2,951,459Purchase of securities available for sale
    
    
    (13,965,595
    )
    
    
    (3,816,728
    )Purchase of premises and equipment
    
    
    (1,848,458
    )
    
    
    (462,804
    )(Purchase) proceeds from sale of other bank stock
    
    
    (392,300
    )
    
    
    923,500Net (increase) decrease in loans
    
    
    (15,690,729
    )
    
    
    9,354,725Net cash provided by (used in) investing activities
    
    
    (19,107,940
    )
    
    
    8,950,152Cash Flows from Financing ActivitiesNet (decrease) increase in demand deposits, NOW accounts
and savings accounts
    
    
    (35,735,451
    )
    
    
    12,308,976Net (decrease) increase in certificates of deposit
    
    
    36,799,720
    
    
    
    (30,074,213
    )Federal Home Loan Bank advances
    
    
    70,000,000
    
    
    
    35,000,000Federal Home Loan Bank principal repayments
    
    
    (60,000,000
    )
    
    
    (55,000,000
    )Purchase of federal funds
    
    
    
    
    
    
    4,400,000Repayment of trust preferred securities
    
    
    
    
    
    
    (4,124,000
    )Cash dividends paid on common stock
    
    
    (2,140,915
    )
    
    
    (2,089,302
    )Issuance of common stock
    
    
    187,520
    
    
    
    717,074Acquisition of common stock
    
    
    (126,072
    )
    
    
    (602,470
    )Net cash provided by financing activities
    
    
    8,984,802
    
    
    
    (39,463,935
    )Increase (decrease) in cash and cash equivalents
    
    
    (4,631,952
    )
    
    
    (25,265,004
    )Cash and Cash EquivalentsBeginning
    
    
    19,552,174
    
    
    
    41,679,655Ending
    
    $
    14,920,222
    
    
    $
    16,414,651Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    7,262,818
    
    
    $
    7,685,021Income taxes
    
    $
    941,000
    
    
    $
    1,363,000Supplemental Disclosures of Noncash Investing ActivitiesUnrealized gain (loss) on securities available for sale, net
of tax effect
    
    $
    (2,523,548
    )
    
    $
    143,138FAS 158 Pension Liability Implementation Adjustment,
net of tax effect
    
    $
    (24,144
    )
    
    $
    Implementation of EITF 06-4, net of tax effect
    
    $
    (12,487
    )
    
    $
    
  7




---



##### 



FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 Note 1. General
   Note 2. Securities
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueSeptember 30, 2008Obligations of U.S. Government
corporations and agencies
    
    $
    24,342,106
    
    
    $
    134,979
    
    
    $
    (17,689
    )
    
    $
    24,459,396Obligations of states and
political
subdivisions
    
    
    5,294,573
    
    
    
    28,050
    
    
    
    (185,317
    )
    
    
    5,137,306Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (3,789,850
    )
    
    
    2,210,150Mutual Funds
    
    
    300,804
    
    
    
    
    
    
    
    (9,648
    )
    
    
    291,156FHLMC Preferred Bank Stock
    
    
    18,500
    
    
    
    
    
    
    
    
    
    
    
    18,500Restricted investments:Federal Home Loan Bank
Stock
    
    
    2,905,800
    
    
    
    
    
    
    
    
    
    
    
    2,905,800Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank
Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    112,920
    
    
    
    
    
    
    
    
    
    
    
    112,920$
    39,123,703
    
    
    $
    163,029
    
    
    $
    (4,002,504
    )
    
    $
    35,284,228
 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
  8




---



##### 



September 30, 2008Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    4,106
    
    
    
    4,103Due after one year through five years
    
    
    1,089,455
    
    
    
    1,088,003Due after five years through ten years
    
    
    4,670,499
    
    
    
    4,711,712Due after ten years
    
    
    29,872,619
    
    
    
    26,003,034Equity securities
    
    
    3,487,024
    
    
    
    3,477,376$
    39,123,703
    
    
    $
    35,284,228
    September 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
    
    $
    4,784,242
    
    
    $
    (17,689
    )
    
    $
    
    
    
    $
    
    
    
    $
    4,784,242
    
    
    $
    (17,689
    )Obligations of states
and political
subdivisions
    
    
    4,142,781
    
    
    
    (185,317
    )
    
    
    
    
    
    
    
    
    
    
    4,142,781
    
    
    
    (185,317
    )Corporate Bonds
    
    
    1,436,040
    
    
    
    (2,563,960
    )
    
    
    774,110
    
    
    
    (1,225,890
    )
    
    
    2,210,150
    
    
    
    (3,789,850
    )Subtotal, debt securities
    
    
    10,363,063
    
    
    
    (2,766,966
    )
    
    
    774,110
    
    
    
    (1,225,890
    )
    
    
    11,137,173
    
    
    
    (3,992,856
    )Mutual Funds
    
    
    
    
    
    
    
    
    
    
    291,156
    
    
    
    (9,648
    )
    
    
    291,156
    
    
    
    (9,648
    )FHLMC Preferred Bank
Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total temporary impaired
securities
    
    $
    10,363,063
    
    
    $
    (2,766,966
    )
    
    $
    1,065,266
    
    
    $
    (1,235,538
    )
    
    $
    11,428,329
    
    
    $
    (4,002,504
    )
 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
    )
 9




---



##### 



Note 3. Loans
  September 30,
    
    
    December 31,2008
    
    
    2007(Thousands)Real estate loans:Construction
    
    $
    41,257
    
    
    $
    37,204Secured by farmland
    
    
    1,315
    
    
    
    1,365Secured by 1  to  4 family residential
    
    
    174,053
    
    
    
    170,983Other real estate loans
    
    
    146,877
    
    
    
    132,918Commercial and industrial loans (not secured by real estate)
    
    
    36,821
    
    
    
    38,203Consumer installment loans
    
    
    17,786
    
    
    
    24,133All other loans
    
    
    10,122
    
    
    
    8,824Total loans
    
    $
    428,231
    
    
    $
    413,630Unearned income
    
    
    (470
    )
    
    
    (338
    )Allowance for loan losses
    
    
    (4,684
    )
    
    
    (4,185
    )Net loans
    
    $
    423,077
    
    
    $
    409,107
  10




---



##### 



Note 4. Allowance for Loan Losses
  Nine Months
    
    
    Nine Months
    
    
    Twelve MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    December 31,2008
    
    
    2007
    
    
    2007Balance at beginning of year
    
    $
    4,185,209
    
    
    $
    4,470,533
    
    
    $
    4,470,533Provision for loan losses
    
    
    1,721,000
    
    
    
    360,000
    
    
    
    717,000Recoveries of loans previously charged-off
    
    
    66,800
    
    
    
    43,701
    
    
    
    60,616Loan losses charged-off
    
    
    (1,288,571
    )
    
    
    (461,038
    )
    
    
    (1,062,940
    )Balance at end of year
    
    $
    4,684,438
    
    
    $
    4,413,196
    
    
    $
    4,185,209
  (Dollars in thousands)
    
    September 30,
    
    
    December 31,
    
    
    September 30,2008
    
    
    2007
    
    
    2007Nonaccrual loans
    
    $
    4,457
    
    
    $
    1,906
    
    
    $
    1,240Restructured loans
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    $
    4,457
    
    
    $
    1,906
    
    
    $
    1,240Foreclosed property
    
    
    133
    
    
    
    222
    
    
    
    142Total nonperforming assets
    
    $
    4,590
    
    
    $
    2,128
    
    
    $
    1,382
 September 30, 2008
    
    
    December 31, 2007Impaired loans for which an allowance has been provided
    
    $
    1,863,300
    
    
    $
    2,688,501Impaired loans for which no allowance has been provided
    
    
    3,389,723
    
    
    
    1,247,461$
    5,253,023
    
    
    $
    3,935,962Allowance provided for impaired loans, included in the
allowance for loan losses
    
    $
    1,274,158
    
    
    $
    1,392,236
 Twelve MonthsNine Months Ended
    
    
    EndedSeptember 30, 2008
    
    
    December 31, 2007Average balance in impaired loans
    
    $
    5,201,012
    
    
    $
    4,359,817Interest income recognized on impaired loans
    
    $
    199,884
    
    
    $
    261,257
  11




---



##### 



Note 5. Company-Obligated Mandatorily Redeemable Capital Securities
     Note 6. Earnings Per Share
  12




---



##### 



Three Months
    
    
    Three MonthsEnded
    
    
    EndedSeptember 30, 2008
    
    
    September 30, 2007Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    Amount3,529,347
    
    
    $
    0.26
    
    
    
    3,513,130
    
    
    $
    0.3431,184
    
    
    
    
    
    
    
    45,1793,560,531
    
    
    $
    0.26
    
    
    
    3,558,309
    
    
    $
    0.34Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2008
    
    
    September 30, 2007Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    Amount3,525,633
    
    
    $
    0.82
    
    
    
    3,503,844
    
    
    $
    1.0533,384
    
    
    
    
    
    
    
    63,5223,559,017
    
    
    $
    0.81
    
    
    
    3,567,366
    
    
    $
    1.03
 Note 7. Stock-Based Compensation
     Nine Months EndedSeptember 30, 2008WeightedAverage
    
    
    AverageNumber of
    
    
    Exercise
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value (1)Outstanding at January 1, 2008
    
    
    96,100
    
    
    $
    9.85Granted
    
    
    Exercised
    
    
    (18,920
    )
    
    
    9.91Forfeited
    
    
    Outstanding at September 30, 2008
    
    
    77,180
    
    
    $
    9.84
    
    
    $
    434,523Exercisable at end of quarter
    
    
    77,180
    
    
    $
    9.84
    
    
    $
    434,523Weighted-average fair value per option of
options granted during the year
    
    
    
 
 (1)
    
    The aggregate intrinsic value of stock options in the table above
reflects the pre-tax intrinsic value (the amount by which the September 30, 2008
market value of the underlying stock option exceeded the exercise price of the
option) that would have been received by the option holders had all option holders
exercised their options on September 30, 2008. This amount changes based on the
changes in the market value of the Companys stock. 13




---



##### 



Nine Months EndedSeptember 30, 2008WeightedAverageNumber of
    
    ExerciseShares
    
    PriceNonvested at January 1, 2008
    
    
    31,190Granted
    
    
    19,692
    
    
    $
    17.70Vested
    
    
    (10,315
    )Forfeited, nonvested
    
    
    (2,348
    )
    
    $
    21.13Nonvested at September 30, 2008
    
    
    38,219
  Note 8. Employee Benefit Plan
  Three Months EndedSeptember 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
 Nine Months EndedSeptember 30,2008
    
    
    2007Service cost
    
    $
    333,243
    
    
    $
    503,040Interest cost
    
    
    232,056
    
    
    
    301,029Expected return on plan assets
    
    
    (447,150
    )
    
    
    (334,134
    )Amortization of transition (asset)
    
    
    (14,235
    )
    
    
    5,826Amortization of prior service cost
    
    
    5,826
    
    
    
    (14,235
    )Recognized net actuarial loss
    
    
    
    
    
    
    15,774Net periodic benefit cost
    
    $
    109,740
    
    
    $
    477,300
 14




---



##### 



15




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   GENERAL
    16




---



##### 



CRITICAL ACCOUNTING POLICIES
   17




---



##### 



EXECUTIVE OVERVIEW
     18




---



##### 



COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND SEPTEMBER 30,
2007
 NET INCOME
  NET INTEREST INCOME AND EXPENSE
  19




---



##### 



20




---



##### 



AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 Three Months Ended September 30, 2008
    
    
    Three Months Ended September 30, 2007Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    417,624
    
    
    $
    6,596
    
    
    
    6.19
    %
    
    $
    404,429
    
    
    $
    7,137
    
    
    
    6.90
    %Tax-exempt (1)
    
    
    8,642
    
    
    
    159
    
    
    
    7.21
    %
    
    
    7,536
    
    
    
    139
    
    
    
    7.17
    %Nonaccrual (2)
    
    
    3,089
    
    
    
    
    
    
    
    
    
    
    
    744
    
    
    
    Total Loans
    
    
    429,355
    
    
    
    6,755
    
    
    
    6.17
    %
    
    
    412,709
    
    
    
    7,276
    
    
    
    6.90
    %SecuritiesTaxable
    
    
    32,970
    
    
    
    427
    
    
    
    5.17
    %
    
    
    36,024
    
    
    
    420
    
    
    
    4.66
    %Tax-exempt (1)
    
    
    5,265
    
    
    
    88
    
    
    
    6.71
    %
    
    
    3,299
    
    
    
    57
    
    
    
    6.94
    %Total securities
    
    
    38,235
    
    
    
    515
    
    
    
    5.39
    %
    
    
    39,323
    
    
    
    477
    
    
    
    4.85
    %Deposits in banks
    
    
    3,269
    
    
    
    15
    
    
    
    1.83
    %
    
    
    641
    
    
    
    5
    
    
    
    3.25
    %Federal funds sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,289
    
    
    
    15
    
    
    
    4.69
    %Total earning assets
    
    
    470,859
    
    
    
    7,285
    
    
    
    6.08
    %
    
    
    453,962
    
    
    
    7,773
    
    
    
    6.72
    %Less: Reserve for loan losses
    
    
    (4,491
    )
    
    
    
    
    
    
    
    
    
    
    (4,414
    )Cash and due from banks
    
    
    14,658
    
    
    
    
    
    
    
    
    
    
    
    14,292Bank premises and equipment, net
    
    
    8,451
    
    
    
    
    
    
    
    
    
    
    
    7,350Other assets
    
    
    17,501
    
    
    
    
    
    
    
    
    
    
    
    16,093Total Assets
    
    $
    506,978
    
    
    
    
    
    
    
    
    
    
    $
    487,283LIABILITIES & SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    66,170
    
    
    
    
    
    
    
    
    
    
    $
    73,072Interest-bearing depositsNOW accounts
    
    
    82,685
    
    
    
    186
    
    
    
    0.90
    %
    
    
    70,966
    
    
    
    232
    
    
    
    1.30
    %Money market accounts
    
    
    20,447
    
    
    
    74
    
    
    
    1.43
    %
    
    
    25,112
    
    
    
    92
    
    
    
    1.45
    %Premium money market accounts
    
    
    68,990
    
    
    
    359
    
    
    
    2.07
    %
    
    
    78,628
    
    
    
    812
    
    
    
    4.10
    %Savings accounts
    
    
    31,748
    
    
    
    39
    
    
    
    0.49
    %
    
    
    32,173
    
    
    
    34
    
    
    
    0.43
    %Time deposits
    
    
    124,902
    
    
    
    1,104
    
    
    
    3.52
    %
    
    
    122,956
    
    
    
    1,372
    
    
    
    4.43
    %Total interest-bearing deposits
    
    
    328,772
    
    
    
    1,762
    
    
    
    2.13
    %
    
    
    329,835
    
    
    
    2,542
    
    
    
    3.06
    %Federal funds purchased
    
    
    3,953
    
    
    
    24
    
    
    
    2.40
    %
    
    
    3,146
    
    
    
    46
    
    
    
    5.76
    %Federal Home Loan Bank advances
    
    
    57,880
    
    
    
    519
    
    
    
    3.51
    %
    
    
    32,207
    
    
    
    436
    
    
    
    5.30
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    46
    
    
    
    4.34
    %
    
    
    4,124
    
    
    
    73
    
    
    
    6.89
    %Total interest-bearing liabilities
    
    
    394,729
    
    
    
    2,351
    
    
    
    2.36
    %
    
    
    369,312
    
    
    
    3,097
    
    
    
    3.32
    %Other liabilities
    
    
    4,041
    
    
    
    
    
    
    
    
    
    
    
    3,811Shareholders equity
    
    
    42,038
    
    
    
    
    
    
    
    
    
    
    
    41,088Total Liabilities & Shareholders Equity
    
    $
    506,978
    
    
    
    
    
    
    
    
    
    
    $
    487,283Net interest spread
    
    
    
    
    
    $
    4,934
    
    
    
    3.72
    %
    
    
    
    
    
    $
    4,676
    
    
    
    3.40
    %Interest expense as a percent of average earning assets
    
    
    
    
    
    
    
    
    
    
    1.98
    %
    
    
    
    
    
    
    
    
    
    
    2.70
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.10
    %
    
    
    
    
    
    
    
    
    
    
    4.02
    %
 
 (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. 21




---



##### 



RATE/VOLUME ANALYSIS
  RATE / VOLUME VARIANCE(In Thousands)Three Months Ended September 30, 2008 Compared toThree Months Ended September 30, 2007Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOME
    
    
    
    
    
    
    
    
    
    
    Loans; taxable
    
    $
    (541
    )
    
    $
    190
    
    
    $
    (731
    )Loans; tax-exempt (1)
    
    
    20
    
    
    
    20
    
    
    
    Securities; taxable
    
    
    7
    
    
    
    (33
    )
    
    
    40Securities; tax-exempt (1)
    
    
    31
    
    
    
    34
    
    
    
    (3
    )Deposits in banks
    
    
    10
    
    
    
    22
    
    
    
    (12
    )Federal funds sold
    
    
    (15
    )
    
    
    (15
    )
    
    
    Total Interest Income
    
    
    (488
    )
    
    
    218
    
    
    
    (706
    )INTEREST EXPENSENOW accounts
    
    
    (46
    )
    
    
    38
    
    
    
    (84
    )Money market accounts
    
    
    (18
    )
    
    
    (17
    )
    
    
    (1
    )Premium money market accounts
    
    
    (453
    )
    
    
    (100
    )
    
    
    (353
    )Savings accounts
    
    
    5
    
    
    
    
    
    
    
    5Time deposits
    
    
    (268
    )
    
    
    22
    
    
    
    (290
    )Federal funds purchased and securities
    
    
    
    
    
    
    
    
    
    
    sold under agreements to repurchase
    
    
    (22
    )
    
    
    12
    
    
    
    (34
    )Federal Home Loan Bank advances
    
    
    83
    
    
    
    348
    
    
    
    (265
    )Capital securities of subsidiary trust
    
    
    (27
    )
    
    
    
    
    
    
    (27
    )Total Interest Expense
    
    
    (746
    )
    
    
    303
    
    
    
    (1,049
    )Net Interest Income
    
    $
    258
    
    
    $
    (85
    )
    
    $
    343
 
 (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
  22




---



##### 



OTHER EXPENSE
         23




---



##### 



INCOME TAXES
  COMPARISON
OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
SEPTEMBER 30, 2007
 NET INCOME
  NET INTEREST INCOME AND EXPENSE
     24




---



##### 



25




---



##### 



AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 Nine Months Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2007Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    410,676
    
    
    $
    19,805
    
    
    
    6.31
    %
    
    $
    406,667
    
    
    $
    21,462
    
    
    
    6.95
    %Tax-exempt (1)
    
    
    7,916
    
    
    
    433
    
    
    
    7.18
    %
    
    
    7,697
    
    
    
    419
    
    
    
    7.18
    %Nonaccrual (2)
    
    
    2,244
    
    
    
    
    
    
    
    
    
    
    
    1,313
    
    
    
    Total Loans
    
    
    420,836
    
    
    
    20,238
    
    
    
    6.33
    %
    
    
    415,677
    
    
    
    21,881
    
    
    
    6.95
    %SecuritiesTaxable
    
    
    32,675
    
    
    
    1,211
    
    
    
    4.71
    %
    
    
    37,071
    
    
    
    1,299
    
    
    
    4.63
    %Tax-exempt (1)
    
    
    5,386
    
    
    
    265
    
    
    
    6.55
    %
    
    
    1,874
    
    
    
    102
    
    
    
    7.25
    %Total securities
    
    
    38,061
    
    
    
    1,476
    
    
    
    5.17
    %
    
    
    38,945
    
    
    
    1,401
    
    
    
    4.79
    %Deposits in banks
    
    
    1,693
    
    
    
    28
    
    
    
    2.16
    %
    
    
    1,192
    
    
    
    26
    
    
    
    2.87
    %Federal funds sold
    
    
    1,640
    
    
    
    33
    
    
    
    2.71
    %
    
    
    2,155
    
    
    
    82
    
    
    
    5.02
    %Total earning assets
    
    
    462,230
    
    
    
    21,775
    
    
    
    6.21
    %
    
    
    457,969
    
    
    
    23,390
    
    
    
    6.75
    %Less: Reserve for loan losses
    
    
    (4,285
    )
    
    
    
    
    
    
    
    
    
    
    (4,471
    )Cash and due from banks
    
    
    15,550
    
    
    
    
    
    
    
    
    
    
    
    14,854Bank premises and equipment, net
    
    
    8,160
    
    
    
    
    
    
    
    
    
    
    
    7,449Other assets
    
    
    16,825
    
    
    
    
    
    
    
    
    
    
    
    15,792Total Assets
    
    $
    498,480
    
    
    
    
    
    
    
    
    
    
    $
    491,593LIABILITIES & SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    67,617
    
    
    
    
    
    
    
    
    
    
    $
    74,823Interest-bearing depositsNOW accounts
    
    
    86,067
    
    
    
    655
    
    
    
    1.02
    %
    
    
    71,263
    
    
    
    658
    
    
    
    1.23
    %Money market accounts
    
    
    22,547
    
    
    
    244
    
    
    
    1.44
    %
    
    
    26,594
    
    
    
    286
    
    
    
    1.44
    %Premium money market accounts
    
    
    71,595
    
    
    
    1,273
    
    
    
    2.37
    %
    
    
    68,988
    
    
    
    2,117
    
    
    
    4.10
    %Savings accounts
    
    
    31,363
    
    
    
    111
    
    
    
    0.47
    %
    
    
    33,216
    
    
    
    103
    
    
    
    0.41
    %Time deposits
    
    
    113,762
    
    
    
    3,202
    
    
    
    3.76
    %
    
    
    128,880
    
    
    
    4,341
    
    
    
    4.50
    %Total interest-bearing deposits
    
    
    325,334
    
    
    
    5,485
    
    
    
    2.25
    %
    
    
    328,941
    
    
    
    7,505
    
    
    
    3.05
    %Federal funds purchased
    
    
    3,984
    
    
    
    87
    
    
    
    2.93
    %
    
    
    4,354
    
    
    
    184
    
    
    
    5.65
    %Federal Home Loan Bank advances
    
    
    50,961
    
    
    
    1,401
    
    
    
    3.61
    %
    
    
    33,967
    
    
    
    1,340
    
    
    
    5.20
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    156
    
    
    
    4.95
    %
    
    
    5,453
    
    
    
    300
    
    
    
    7.26
    %Total interest-bearing liabilities
    
    
    384,403
    
    
    
    7,129
    
    
    
    2.47
    %
    
    
    372,715
    
    
    
    9,328
    
    
    
    3.34
    %Other liabilities
    
    
    3,829
    
    
    
    
    
    
    
    
    
    
    
    3,640Shareholders equity
    
    
    42,631
    
    
    
    
    
    
    
    
    
    
    
    40,415Total Liabilities & Shareholders Equity
    
    $
    498,480
    
    
    
    
    
    
    
    
    
    
    $
    491,593Net interest spread
    
    
    
    
    
    $
    14,646
    
    
    
    3.74
    %
    
    
    
    
    
    $
    14,061
    
    
    
    3.41
    %Interest expense as a percent of average earning
assets
    
    
    
    
    
    
    
    
    
    
    2.05
    %
    
    
    
    
    
    
    
    
    
    
    2.72
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.15
    %
    
    
    
    
    
    
    
    
    
    
    4.03
    %
 
 (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. 26




---



##### 



RATE/VOLUME ANALYSIS
  RATE / VOLUME VARIANCE(In Thousands)Nine Months Ended September 30, 2008 Compared toNine Months Ended September 30, 2007Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOME
    
    
    
    
    
    
    
    
    
    
    Loans; taxable
    
    $
    (1,657
    )
    
    $
    (125
    )
    
    $
    (1,532
    )Loans; tax-exempt (1)
    
    
    14
    
    
    
    12
    
    
    
    2Securities; taxable
    
    
    (88
    )
    
    
    (109
    )
    
    
    21Securities; tax-exempt (1)
    
    
    163
    
    
    
    191
    
    
    
    (28
    )Deposits in banks
    
    
    2
    
    
    
    11
    
    
    
    (9
    )Federal funds sold
    
    
    (49
    )
    
    
    (20
    )
    
    
    (29
    )Total Interest Income
    
    
    (1,615
    )
    
    
    (40
    )
    
    
    (1,575
    )INTEREST EXPENSENOW accounts
    
    
    (3
    )
    
    
    137
    
    
    
    (140
    )Money market accounts
    
    
    (42
    )
    
    
    (43
    )
    
    
    1Premium money market accounts
    
    
    (844
    )
    
    
    80
    
    
    
    (924
    )Savings accounts
    
    
    8
    
    
    
    (6
    )
    
    
    14Time deposits
    
    
    (1,139
    )
    
    
    (509
    )
    
    
    (630
    )Federal funds purchased and securities
sold under agreements to repurchase
    
    
    (97
    )
    
    
    (16
    )
    
    
    (81
    )Federal Home Loan Bank advances
    
    
    61
    
    
    
    670
    
    
    
    (609
    )Capital securities of subsidiary trust
    
    
    (144
    )
    
    
    (73
    )
    
    
    (71
    )Total Interest Expense
    
    
    (2,200
    )
    
    
    240
    
    
    
    (2,440
    )Net Interest Income
    
    $
    585
    
    
    $
    (281
    )
    
    $
    866
 
 (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
  27




---



##### 



NON-INTEREST EXPENSE
        INCOME TAXES
  28




---



##### 



COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
        29




---



##### 



ASSET QUALITY
         30




---



##### 



CONTRACTUAL OBLIGATIONS
   OFF-BALANCE SHEET ARRANGEMENTS
  CAPITAL
   RISK BASED CAPITAL RATIOS
(Dollars in Thousands)
 September 30,
    
    
    December 31,2008
    
    
    2007Tier 1 Capital:Shareholders Equity
    
    $
    40,591
    
    
    $
    41,828Plus: Unrealized loss on securities
available for sale/FAS 158 and EITF 06-4
    
    
    2,965
    
    
    
    773Less: Intangible assets, net
    
    
    
    
    
    
    (103
    )Plus: Company-obligated madatorily
redeemable capital securities
    
    
    4,000
    
    
    
    4,000Total Tier 1 Capital
    
    
    47,556
    
    
    
    46,498Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    4,684
    
    
    
    4,185Total Capital:
    
    
    52,240
    
    
    
    50,683Risk Weighted Assets:
    
    $
    397,755
    
    
    $
    390,597Regulatory Capital Ratios:Leverage Ratio
    
    
    9.38
    %
    
    
    9.49
    %Tier 1 to Risk Weighted Assets
    
    
    11.96
    %
    
    
    11.90
    %Total Capital to Risk Weighted Assets
    
    
    13.13
    %
    
    
    12.98
    %
 31




---



##### 



CAPITAL RESOURCES AND LIQUIDITY
         32




---



##### 



LIQUIDITY SOURCES AND USES
(Dollars in Thousands)
 September 30, 2008
    
    
    December 31, 2007Total
    
    
    In Use
    
    
    Available
    
    
    Total
    
    
    In Use
    
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    73,873
    
    
    $
    
    
    
    $
    73,873
    
    
    $
    52,036
    
    
    $
    
    
    
    $
    52,036Federal Home Loan Bank advances
    
    
    110,997
    
    
    
    45,000
    
    
    
    65,997
    
    
    
    136,159
    
    
    
    35,000
    
    
    
    101,159Federal funds sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,020Securities, available for sale and unpledged
at fair value
    
    
    
    
    
    
    
    
    
    
    5,805
    
    
    
    
    
    
    
    
    
    
    
    23,632Total short-term funding sources
    
    
    
    
    
    
    
    
    
    $
    145,675
    
    
    
    
    
    
    
    
    
    
    $
    178,847Uses:Unfunded loan commitments and
lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    68,063
    
    
    
    
    
    
    
    
    
    
    $
    72,503Letters of credit
    
    
    
    
    
    
    
    
    
    
    6,254
    
    
    
    
    
    
    
    
    
    
    
    6,749Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    74,317
    
    
    
    
    
    
    
    
    
    
    $
    79,252Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    196.0
    %
    
    
    
    
    
    
    
    
    
    
    225.7
    %
  IMPACT OF INFLATION AND CHANGING PRICES
  CHANGES IN ACCOUNTING PRINCIPLES
  33




---



##### 



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
  34




---



##### 



RECENT ACCOUNTING PROUNCEMENTS
 Recent Accounting Pronouncements
       35




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
     
 PART II
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  36




---



##### 



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 MayTotal Number of
    
    
    
    
    
    as Part of Publically
    
    Yet Be PurchasedShares
    
    Average Price
    
    Announced Plan
    
    Under the PlanPurchased
    
    Paid per Share
    
    (1)
    
    (1)July 1  31, 2008
    
    
    1,451
    
    
    $
    16.21
    
    
    
    1,451
    
    
    
    206,497August 1  31, 2008
    
    
    637
    
    
    $
    16.72
    
    
    
    637
    
    
    
    205,860September 1  30,
2008
    
    
    951
    
    
    $
    16.55
    
    
    
    951
    
    
    
    204,909Total
    
    
    3,039
    
    
    $
    16.42
    
    
    
    3,039
 
 (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. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  37




---



##### 



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.
 38




---



##### 



/s/ Randy K. Ferrell
 /s/ Eric P. Graap
 39