• Fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuation and income and expense projections;

• Effects of implementation of certain balance sheet strategies;

• Impacts of fair value accounting;

• Timing of expected implementation of certain balance sheet strategies;

• Anticipated growth of our insurance company;

• Assumptions used within our Asset Liability Management (ALM) process and Net Interest Income (NII) and Economic Value of Equity (EVE) models;

• Adverse changes in the overall national economy as well as adverse economic conditions in our specific market areas within Northern Virginia, Fredericksburg, and the greater Washington, D.C. Metropolitan region;

• Risks inherent in making loans such as repayment risks and fluctuating collateral values;

• The timing and value realized upon the sale of Other Real Estate Owned (OREO) property;

• Sustained weakness in the local housing market;

• Additional negative changes in the national and local home mortgage market;

• Maintaining and developing well-established and valuable client relationships and referral source relationships;

• Our use of technology and the use of technology by key competitors;

• Changing trends in customer profiles and behavior;

• Competitive factors within the financial services industry;

• Impacts of implementing various accounting standards;

• Changes in regulatory requirements and/or restrictive banking legislation, including the impact of any policies or programs implemented pursuant to the Emergency Economic Stabilization Act of 2008 (EESA); and

• Other factors described from time to time in our SEC filings.

Because of these and other uncertainties, our actual results and performance may be materially different from results indicated by these forward-looking statements. In addition, our past results of operations are not necessarily indicative of future performance.
We caution you that the above list of important factors is not exclusive. These forward-looking statements are made as of the date of this report, and we may not update these forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking statements are made.
Recent Developments
The significant disruptions in the financial system over the past year and especially in recent months could impact Bankshare's performance. Dramatic declines in the housing market in the past year have resulted in write-downs of asset values by financial institutions around the country and in the greater Washington, D.C. Metropolitan region. Concerns about the stability of the financial markets have led to a tightening of credit, reduction of business activity, lack of consumer confidence and increased market volatility. It is not clear what impact the Emergency Economic Stabilization Act of 2008 (EESA), or other liquidity and funding initiatives announced by the Treasury and other bank regulatory agencies will have on the financial markets and the financial services industry. The extreme levels of volatility and lack of consumer confidence could continue to affect the banking industry and the broader U.S. economy, which would have a direct impact on all financial institutions, including Bankshares.

Bankshares' Board of Directors and management are optimistic about the future and will embrace all initiatives that will have a calming influence on this disruption. We believe that the decision to temporarily increase Federal Deposit Insurance Corporation (FDIC) deposit insurance from $100,000 to $250,000 per depositor and to provide unlimited deposit insurance coverage for non-interest bearing transaction accounts at institutions participating in FDIC's Temporary Liquidity Guarantee Program through December 31, 2009 is a positive move to restore confidence in the financial services industry and the economy in general.
Critical Accounting Policies
Bankshares' financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). These accounting principles are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such judgments, assumptions or estimates may have a significant impact on our consolidated financial statements. Actual results, in fact, could differ from initial estimates. The accounting policies with the greatest uncertainty and that require our most difficult, subjective or complex judgments and the greatest likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are our allowance for loan losses, accounting for goodwill, and fair valuation of certain compensation expenses, which are described below.
The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (1) SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and
(2) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has two basic components: the specific allowance for impaired credits and the general allowance based on relevant risk factors. Each of these components is determined based upon estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance for loans identified for impairment testing. Impairment testing includes consideration of the borrower's overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses. When impairment is identified, a specific reserve is established based on Bankshares' calculation of the loss embedded in the individual loan. Large groups of smaller balance and homogeneous loans are collectively evaluated for impairment. Accordingly, Bankshares does not separately identify individual consumer and residential loans for impairment testing unless loans become 60 days or more past due.

The general allowance is determined by aggregating un-criticized loans (non-classified loans and loans identified for impairment testing for which no impairment was identified) by loan type based on common purpose, collateral, repayment source or other credit characteristics. We then apply allowance factors which in the judgment of management represent the expected losses over the life of the loans. In determining those factors, we consider the following:
(1) delinquencies and overall risk ratings, (2) loss history, (3) trends in volume and terms of loans, (4) effects of changes in lending policy, (5) the experience and depth of the borrowers' management, (6) national and local economic trends, (7) concentrations of credit by individual credit size and by class of loans, (8) quality of loan review system and (9) the effect of external factors (e.g., competition and regulatory requirements). This is the largest component of the overall allowance. Goodwill
Bankshares adopted SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142) effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Based on the results of these tests, Bankshares concluded that there was no impairment, and no write-downs were recorded. Additionally, under SFAS No. 142, acquired intangible assets are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over its useful life. The costs of other intangible assets, based on independent valuation and/or internal valuations, are being amortized over their estimated lives not to exceed fifteen years.
Share-Based Compensation
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R). SFAS No. 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and nonvested shares, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). Bankshares adopted SFAS No. 123R effective January 1, 2006 using the modified prospective method and as such, results for prior periods have not been restated. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period. Overview
Bankshares' primary financial goals are to maximize earnings and to deploy capital in profitable growth initiatives that will enhance shareholder value. Bankshares tracks the performance of our two principal business activities:
commercial and mortgage banking and our insurance agencies, in order to assess the level of success in achieving these goals.

Highlights of Bankshares' financial results include the following:
• Total loans decreased by $27.4 million or 6.9% to $370.8 million as of September 30, 2008 compared to $398.2 million as of December 31, 2007.

• Non-interest bearing deposits increased by $8.0 million or 12.1% to $74.2 million as of September 30, 2008 compared to $66.2 million as of December 31, 2007.

• We recorded an additional provision for loan losses of $2.2 million in the third quarter of 2008 due to previously impaired loans that were charged-off. In addition, a provision were made for our home equity loan (HELOC) portfolio which weakened in the quarter.

• We sold $1.1 million in residential OREO properties during the quarter. Subsequently, we sold a $2.0 million OREO property in October 2008, at no additional cost.

• We had $715 thousand in OREO expenses during the third quarter of 2008, of which $351 thousand were additional write downs on four properties.

• As of September 30, 2008, fair value trading assets amounted to $89.4 million compared to $67.4 million of fair value trading liabilities. We recorded a fair value loss of $142 thousand, an improvement of $587 thousand for the third quarter of 2008, compared to a fair value loss of $729 thousand for the third quarter of 2007.

Principal Business Activities. An overview of the financial results for each of Bankshares' principal segments is presented below. A more detailed discussion is included in "Results of Operations."
Commercial and Mortgage Banking: The Bank's pre-tax loss was $3.8 million for the three months ended September 30, 2008 compared to pre-tax income of $104 thousand (which was partially offset by ABMD's pre-tax loss of $86 thousand) for the same period in the prior year. The third quarter 2008 pre-tax loss includes an increased provision for loan losses of $2.2 million, which includes additional charge-offs and provisions specifically for the HELOC portion of our portfolio. Other items included $715 thousand in OREO expense, trading activity and fair value adjustments of $142 thousand and the reversal of $69 thousand of interest income related to nonaccrual loans.
The following table reflects the key drivers of the unusual costs associated with the performance for the following periods indicated:

                                                     Three               Nine
                                                  Months Ended       Months Ended
                                                 September 30,      September 30,
                                                      2008               2008
                                                      (dollars in thousands)
   Provision for loan losses                     $        2,200     $        3,360
   Trading activity and fair value adjustments              142              2,351
   OREO direct expense                                      351                794
   OREO write off                                           364                495
   Nonaccrual interest reversal                              69                475
   Fredericksburg branching costs                            41                 41


   Total                                         $        3,167     $        7,516

The Bank's pre-tax loss was $9.3 million for the nine months ended September 30, 2008 compared to $1.0 million pre-tax income for the same period in the prior year. The pre-tax loss for the nine months ended September 30, 2008 includes the effects of $2.5 million related to the rebalancing and mark-to-market of the trading securities, $1.3 million of OREO expense and the reversal of $475 thousand of interest income related to nonaccrual loans. The pre-tax loss also includes provisions for loan losses of $3.4 million, which includes additional charge-offs and provisions specifically for the HELOC portion of our portfolio. The total of these unusual expenses are $7.5 million for the nine months ended September 30, 2008.
As of September 30, 2008, the Bank had $89.4 million in fair value trading assets and $67.4 million in fair value trading liabilities, as compared to $85.0 million in fair value trading assets and $187.3 million in fair value trading liabilities as of December 31, 2007. During the third quarter of 2008, we had maturities of fair value liabilities of $37.5 million. In the first quarter of 2008 we prepaid $40.0 million in FHLB advances and had maturities of fair value liabilities of $31.9 million. As a result of this rebalancing, we recorded a trading loss of $142 thousand for the third quarter, compared to a trading loss of $729 thousand in the third quarter of 2007.
At September 30, 2008, the Bank had nonaccrual loans totaling $2.8 million. The nonaccrual loans relate to nine borrowers. The largest two are $810 thousand, which relate to commercial construction loan on a residential condominium project in Virginia Beach and $679 thousand which is secured by a commercial building and assets of a retail hardware and lumber company. The remainder of nonaccrual loans is made up of first and second trusts on properties in the greater Washington, D.C. Metropolitan region.
The OREO balance was $13.4 million as of September 30, 2008, compared to $14.5 million as of June 30, 2008, and $4.3 million as of December 31, 2007. During the first nine months of 2008 there were foreclosures on nonaccrual loans of $14.8 million, capital improvements of $915 thousand, sales of $6.0 million and market value adjustments of $545 thousand. Subsequently, an OREO property for $2.0 million was sold in October 2008.

Total loans were $370.8 million as of September 30, 2008, compared to $398.2 million as of December 31, 2007, a decrease of $27.4 million. This decrease is a result of the tighter credit market and management's conscious decision to reduce its exposure to construction and land loans.
Total deposits amounted to $401.4 million as of September 30, 2008, compared to $365.3 million in total deposits as of December 31, 2007. Non-interest bearing deposits were $74.2 million, or 18.5% of total deposits as of September 30, 2008, an increase of $8.0 million compared to the December 31, 2007 level of $66.2 million, or 18.1% of total deposits.
Bankshares is considered "well capitalized", as stockholders' equity amounted to $39.3 million as of September 30, 2008 and $45.7 million as of December 31, 2007.
Insurance Agencies: Pre-tax income for AIA was $103 thousand for the three months ended September 30, 2008, a decrease of $125 thousand, compared to $228 thousand for the same period in the prior year. Commission revenues for the three month period ended September 30, 2008 were $681 thousand, a decrease of $101 thousand or 12.9%, compared to commission revenues of $782 thousand for the three month period ended September 30, 2007.
Pre-tax income for AIA was $697 thousand for the nine months ended September 30, 2008, a decrease of $261 thousand, compared to $958 thousand for the same period in the prior year. Commission revenues were $2.5 million for the nine month period ended September 30, 2008 compared to $2.6 million for the nine month period ended September 30, 2007. The insurance market has softened in 2008, and additional operating costs have risen as FIG was in operation for a full year.
Financial Performance Measures. Bankshares had a net loss for the three month period ended September 30, 2008 of $2.4 million compared to net income of $197 thousand for the same period in the prior year. The net loss of $2.4 million includes the effects of the additional provision for loan losses, the OREO expenses and the reversal of interest income on nonaccrual loans. These results led to $0.46 basic and diluted loss per share for the quarter ended September 30, 2008, compared to $0.04 basic and diluted income per share for the quarter ended September 30, 2007. Weighted average diluted shares outstanding were 5,106,819 for the three months ended September 30, 2008 compared to the prior year weighted average diluted shares outstanding of 5,465,239.
For the nine month period ended September 30, 2008, Bankshares had a net loss of $5.5 million compared to net income of $1.4 million for the same period in the prior year. The net loss of $5.5 million includes the effects of the portfolio rebalancing, mark-to-market of the trading portfolio, the additional provision for loan losses and the reversal of interest income on nonaccrual loans. These results led to $1.08 basic and diluted loss per share for the nine months ended September 30, 2008. The basic income per share for the nine months ended September 30, 2007 was $0.26 per common share and diluted income per share for the same period was $0.25 per common share. Weighted average diluted shares outstanding were 5,106,819 for the nine months ended September 30, 2008 compared to the prior year weighted average diluted shares outstanding of 5,742,793.

Net interest margin was 2.65% for the three months ended September 30, 2008 compared to 3.44% for the three months ended September 30, 2007. The reversal of nonaccrual interest income reduced the third quarter 2008 net interest margin by 5 basis points. Return on equity (ROE) and return on assets (ROA) on an annualized basis during the three months ended September 30, 2008 were not meaningful due to the net loss of $2.4 million. ROE and ROA on an annualized basis during the three months ended September 30, 2007 was 1.54% and 0.14%, respectively.
Net interest margin was 2.60% for the nine months ended September 30, 2008 compared to 3.36% for the nine months ended September 30, 2007. The reversal of nonaccrual interest income reduced the nine month 2008 net interest margin by 13 basis points. ROE and ROA on an annualized basis during the nine months ended September 30, 2008 were not meaningful due to the net loss of $5.5 million. ROE and ROA on an annualized basis for the nine months ended September 30, 2007 was 3.51% and 0.32%, respectively.
Results of Operations
Net Interest Income. Net interest income (on a fully tax equivalent basis) for the three months ended September 30, 2008 was $3.3 million compared to $4.6 million for the same period in 2007. Loan interest income decreased $1.9 million to $5.9 million in the three months ended September 30, 2008 compared to $7.8 million for the same period in 2007.
Net interest income (on a fully tax equivalent basis) for the nine months ended September 30, 2008 was $9.8 million compared to $14.1 million for the same period in 2007. Loan interest income decreased $5.4 million to $18.1 million in the nine months ended September 30, 2008 compared to $23.5 million for the same period in 2007.
The following table illustrates average balances of total interest earning assets and total interest-bearing liabilities for the three month periods indicated, showing the average distribution of assets, liabilities, stockholders' equity and related income, expense and corresponding weighted average yields and rates. The average balances used in this table and other statistical data were calculated using daily average balances.

  Average Balances, Interest Income and Expense and Average Yield and Rates(1)

                                                           Three Months Ended September 30,
                                               2008                                                2007
                            Average          Income /          Yield /          Average          Income /          Yield /
                            Balance          Expense            Rate            Balance          Expense            Rate
                                                                (dollars in thousands)
Assets
Interest earning
assets:
Loans (2)                  $ 371,206        $    5,897             6.32 %      $ 394,684        $    7,838             7.88 %
Trading securities            93,944               986             4.18 %        110,383             1,455             5.23 %
Investment securities         23,106               332             5.72 %         25,038               395             6.26 %
Federal funds sold             6,022                28             1.85 %          2,137                52             9.65 %

Total interest
earning assets               494,278             7,243             5.83 %        532,242             9,740             7.26 %
Non-interest earning
assets:
Cash and due from
banks                         21,647                                              14,771
Premises and
equipment                      2,027                                               2,257
Other real estate
owned (OREO)                  14,428                                                 660
Other assets                  21,260                                              16,462
Less: allowance for
loan losses                   (5,333 )                                            (4,961 )

Total non-interest
earning assets                54,029                                              29,189

Total Assets               $ 548,307                                           $ 561,431


Liabilities and
Stockholders' Equity
Interest-bearing
liabilities:
Interest-bearing
demand deposits            $  29,622        $      121             1.63 %      $  32,389        $      193             2.36 %
Money market deposit
accounts                      25,887               162             2.49 %         34,394               363             4.19 %
Savings accounts               3,131                 6             0.76 %          4,634                13             1.11 %
Time deposits(3)             263,084             2,877             4.35 %        195,261             2,488             5.06 %

Total
interest-bearing
deposits                     321,724             3,166             3.91 %        266,678             3,057             4.55 %
FHLB advances(4)              50,926               304             2.37 %         75,013               862             4.56 %
Other borrowings              65,812               484             2.93 %         90,910             1,206             5.26 %

Total
interest-bearing
liabilities                  438,462             3,954             3.59 %        432,601             5,125             4.70 %

Non-interest bearing
liabilities:
Demand deposits               65,432                                              76,691
Other liabilities              2,585                                               1,421

Total liabilities            506,479                                             510,713
Stockholders' Equity          41,828                                              50,718

Total Liabilities and
Stockholders' Equity       $ 548,307                                           $ 561,431


Interest Spread (5)                                                2.24 %                                              2.56 %


Net Interest Margin
(6)                                         $    3,289             2.65 %                       $    4,615             3.44 %

(1) The rates and yields are on a fully tax equivalent basis assuming a 34% federal tax rate.

(2) The Bank had average nonaccrual loans of $2.7 million in 2008 and average nonaccrual loans of $2.8 million in 2007.

The 2008 and
2007 interest
income excluded
from the loans
above was $69
thousand and $21
thousand,
respectively.

(3) Average fair value of time deposits for the third quarter of . . .