##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended March 31, 2006
  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 incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 10 Courthouse SquareWarrenton, Virginia
    
    20186(Address of principal executive offices)
    
    (Zip Code)
 (540) 347-2700
  Not Applicable
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  Yes o
    
    No þ




---



##### 



FAUQUIER BANKSHARES, INC.
  PagePart I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    2Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005
    
    
    2Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2006 and 2005
    
    
    3Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Three Months Ended March 31, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    24Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURES
    
    
    26




---



##### 



Part I. FINANCIAL INFORMATION
 ITEM 1. FINANCIAL STATEMENTS
 Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
 Unaudited
    
    
    AuditedMarch 31, 2006
    
    
    December 31, 2005AssetsCash and due from banks
    
    $
    12,485,118
    
    
    $
    26,565,702Interest-bearing deposits in other banks
    
    
    505,633
    
    
    
    680,013Federal funds sold
    
    
    409,000
    
    
    
    493,000Securities, at fair value
    
    
    44,036,735
    
    
    
    48,390,771Loans, net of allowance for loan losses of
$4,319,555 in 2006 and $4,238,143 in 2005
    
    
    397,084,310
    
    
    
    381,049,471Bank premises and equipment, net
    
    
    8,168,954
    
    
    
    8,289,581Accrued interest receivable
    
    
    1,582,982
    
    
    
    1,585,849Other assets
    
    
    13,293,624
    
    
    
    14,191,023Total assets
    
    
    477,566,356
    
    
    
    481,245,410LiabilitiesDeposits:Noninterest-bearing
    
    
    90,523,925
    
    
    
    95,411,624Interest-bearing
    
    
    306,686,400
    
    
    
    296,245,545Total deposits
    
    
    397,210,325
    
    
    
    391,657,169Federal funds purchased
    
    
    3,000,000
    
    
    
    5,000,000Dividends payable
    
    
    
    
    
    
    Federal Home Loan Bank advances
    
    
    34,000,000
    
    
    
    42,000,000Company-obligated mandatorily redeemable capital
securities
    
    
    4,124,000
    
    
    
    4,124,000Other liabilities
    
    
    2,699,341
    
    
    
    2,885,096Commitments and contingent liabilities
    
    
    
    
    
    
    Total liabilities
    
    
    441,033,666
    
    
    
    445,666,265Shareholders EquityCommon stock, par value, $3.13; authorized
8,000,000 shares; issued and outstanding, 2006
3,473,179 shares; 2005 3,448,786 shares
    
    
    10,871,050
    
    
    
    10,794,700Retained earnings
    
    
    26,303,731
    
    
    
    25,440,838Accumulated other comprehensive income (loss), net
    
    
    (642,091
    )
    
    
    (656,393
    )Total shareholders equity
    
    
    36,532,690
    
    
    
    35,579,145Total liabilities and shareholders equity
    
    $
    477,566,356
    
    
    $
    481,245,410
  2




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended March 31, 2006 and 2005
 2006
    
    
    2005Interest IncomeInterest and fees on loans
    
    $
    6,423,438
    
    
    $
    5,329,831Interest and dividends on securities available for sale:Taxable interest income
    
    
    417,837
    
    
    
    506,745Interest income exempt from federal income taxes
    
    
    13,123
    
    
    
    13,082Dividends
    
    
    47,148
    
    
    
    26,731Interest on federal funds sold
    
    
    14,642
    
    
    
    7,151Interest on deposits in other banks
    
    
    4,975
    
    
    
    1,521Total interest income
    
    
    6,921,163
    
    
    
    5,885,061Interest ExpenseInterest on deposits
    
    
    1,571,098
    
    
    
    1,039,386Interest on federal funds purchased
    
    
    37,800
    
    
    
    25,430Interest on Federal Home Loan Bank advances
    
    
    487,812
    
    
    
    203,538Distribution on capital securities of subsidiary trust
    
    
    85,705
    
    
    
    61,788Total interest expense
    
    
    2,182,415
    
    
    
    1,330,142Net interest income
    
    
    4,738,748
    
    
    
    4,554,919Provision for loan losses
    
    
    120,000
    
    
    
    125,000Net interest income after
provision for loan losses
    
    
    4,618,748
    
    
    
    4,429,919Other IncomeWealth management income
    
    
    327,547
    
    
    
    317,701Service charges on deposit accounts
    
    
    635,939
    
    
    
    641,125Other service charges, commissions and income
    
    
    352,342
    
    
    
    303,586Gain on sale of property rights
    
    
    250,000
    
    
    
    Total other income
    
    
    1,565,828
    
    
    
    1,262,412Other ExpensesSalaries and benefits
    
    
    2,183,767
    
    
    
    2,057,922Net occupancy expense of premises
    
    
    241,153
    
    
    
    233,070Furniture and equipment
    
    
    331,719
    
    
    
    317,287Other operating expenses
    
    
    1,348,452
    
    
    
    1,211,212Loss on sale of securities
    
    
    82,564
    
    
    
    Total other expenses
    
    
    4,187,655
    
    
    
    3,819,491Income before income taxes
    
    
    1,996,921
    
    
    
    1,872,840Income tax expense
    
    
    599,309
    
    
    
    562,572Net Income
    
    $
    1,397,612
    
    
    $
    1,310,268Earnings per Share, basic
    
    $
    0.40
    
    
    $
    0.38Earnings per Share, assuming dilution
    
    $
    0.39
    
    
    $
    0.37Dividends per Share
    
    $
    0.175
    
    
    $
    0.15
  3




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
For the Three Months Ended March 31, 2006 and 2005
 AccumulatedOtherCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveStock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Income
    
    
    TotalBalance, December 31, 2004
    
    $
    10,618,775
    
    
    $
    21,320,223
    
    
    $
    (47,934
    )
    
    
    
    
    
    
    31,891,064Comprehensive income:Net income
    
    
    
    
    
    
    1,310,268
    
    
    
    
    
    
    $
    1,310,268
    
    
    
    1,310,268Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of deferred income taxes of $265,746
    
    
    
    
    
    
    
    
    
    
    (513,919
    )
    
    
    (513,919
    )
    
    
    (513,919
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    796,349Cash dividends ($.15 per share)
    
    
    
    
    
    
    (515,011
    )
    
    
    
    
    
    
    
    
    
    
    (515,011
    )Restricted stock forfeiture
    
    
    (3,506
    )
    
    
    (24,494
    )
    
    
    
    
    
    
    
    
    
    
    (28,000
    )Net issuance of restricted stock, stock incentive plan (10,045 shares)
    
    
    31,441
    
    
    
    218,077
    
    
    
    
    
    
    
    
    
    
    
    249,518Unearned compensation on restricted stock
    
    
    
    
    
    
    (249,518
    )
    
    
    
    
    
    
    
    
    
    
    (249,518
    )Amortization of unearned compensation, restricted stock awards
    
    
    
    
    
    
    98,127
    
    
    
    
    
    
    
    
    
    
    
    98,127Issuance of common stock
    
    
    4,301
    
    
    
    29,658
    
    
    
    
    
    
    
    
    
    
    
    33,959Exercise of stock options
    
    
    95,556
    
    
    
    161,865
    
    
    
    
    
    
    
    
    
    
    
    257,421Balance, March 31, 2005
    
    $
    10,746,567
    
    
    $
    22,349,195
    
    
    $
    (561,853
    )
    
    
    
    
    
    $
    32,533,909Balance, December 31, 2005
    
    $
    10,794,700
    
    
    $
    25,440,838
    
    
    $
    (656,393
    )
    
    
    
    
    
    $
    35,579,146Comprehensive income:Net income
    
    
    
    
    
    
    1,397,612
    
    
    
    
    
    
    $
    1,397,612
    
    
    
    1,397,612Other comprehensive income net of tax:Unrealized holding losses on
securities available
for sale, net of deferred
income taxes of $330,775
    
    
    
    
    
    
    
    
    
    
    14,302
    
    
    
    14,302
    
    
    
    14,302Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,411,914
    
    
    
    Cash dividends ($.175 per share)
    
    
    
    
    
    
    (607,806
    )
    
    
    
    
    
    
    
    
    
    
    (607,806
    )Net issuance of restricted stock, stock incentive plan (10,347 shares)
    
    
    32,386
    
    
    
    228,772
    
    
    
    
    
    
    
    
    
    
    
    261,158Unearned compensation on restricted stock
    
    
    
    
    
    
    (261,158
    )
    
    
    
    
    
    
    
    
    
    
    (261,158
    )Amortization of unearned compensation, restricted stock awards
    
    
    
    
    
    
    44,185
    
    
    
    
    
    
    
    
    
    
    
    44,185Issuance of common stock
    
    
    5,027
    
    
    
    34,528
    
    
    
    
    
    
    
    
    
    
    
    39,554Exercise of stock options
    
    
    38,937
    
    
    
    26,760
    
    
    
    
    
    
    
    
    
    
    
    65,697Balance, March 31, 2006
    
    $
    10,871,050
    
    
    $
    26,303,731
    
    
    $
    (642,091
    )
    
    
    
    
    
    $
    36,532,690
 4




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended March 31, 2006 and 2005
 2006
    
    
    2005Cash Flows from Operating ActivitiesNet income
    
    $
    1,397,612
    
    
    $
    1,310,268Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    301,839
    
    
    
    294,362Provision for loan losses
    
    
    120,000
    
    
    
    125,000Amortization of security premiums, net
    
    
    9,759
    
    
    
    19,930Amortization of unearned compensation
    
    
    44,185
    
    
    
    98,127Changes in assets and liabilities:Decrease (Increase) in other assets
    
    
    892,900
    
    
    
    (69,810
    )(Decrease) Increase in other liabilities
    
    
    (185,755
    )
    
    
    (856,579
    )Net cash provided by operating activities
    
    
    2,580,540
    
    
    
    921,298Cash Flows from Investing ActivitiesProceeds from sale of securities available for sale
    
    
    3,024,745
    
    
    
    Proceeds from maturities, calls and principal
payments of securities available for sale
    
    
    1,341,200
    
    
    
    2,850,255Purchase of securities available for sale
    
    
    
    
    
    
    (255,794
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    Purchase of premises and equipment
    
    
    (181,212
    )
    
    
    (169,222
    )Purchase of other investment
    
    
    
    
    
    
    (360,000
    )Net Decrease (Increase) in loans
    
    
    (16,154,839
    )
    
    
    (6,343,580
    )Net cash (used in) investing activities
    
    
    (11,970,106
    )
    
    
    (4,278,341
    )Cash Flows from Financing ActivitiesNet (Decrease) Increase in demand deposits, NOW accounts
and savings accounts
    
    
    (3,081,639
    )
    
    
    5,120,612Net (Decrease) Increase in certificates of deposit
    
    
    8,634,797
    
    
    
    5,842,377Federal Home Loan Bank advances
    
    
    
    
    
    
    8,000,000Federal Home Loan Bank principal repayments
    
    
    (8,000,000
    )
    
    
    Purchase (Repayment) of Federal Funds
    
    
    (2,000,000
    )
    
    
    Cash dividends paid on common stock
    
    
    (607,806
    )
    
    
    (1,023,898
    )Issuance of common stock
    
    
    105,251
    
    
    
    291,380Acquisition of common stock
    
    
    
    
    
    
    (28,000
    )Net cash provided by (used in) financing activities
    
    
    (4,949,397
    )
    
    
    18,202,471Increase (Decrease) in cash and cash equivalents
    
    
    (14,338,964
    )
    
    
    14,845,428Cash and Cash EquivalentsBeginning
    
    
    27,738,715
    
    
    
    9,166,574Ending
    
    $
    13,399,752
    
    
    $
    24,012,002Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    1,491,715
    
    
    $
    1,291,297Income taxes
    
    $
    
    
    
    $
    Supplemental Disclosures of Noncash Investing ActivitiesUnrealized gain (loss) on securities available for sale, net
    
    $
    (21,669
    )
    
    $
    (779,665
    )
  5




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##### 



Fauquier Bankshares, Inc. and subsidiaries
Notes to Consolidated Financial Statements
 1.
    
    GeneralThe consolidated statements include the accounts of Fauquier Bankshares, Inc. (the Company) and its
wholly-owned subsidiary, The Fauquier Bank (the Bank), and the Banks wholly-owned subsidiary,
Fauquier Bank Services, Inc. In consolidation, significant intercompany financial balances and
transactions have been eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial positions as of March 31, 2006 and December 31,
2005 and the results of operations and cash flows for the three months ended March 31, 2006 and
2005.The results of operations for the three months ended March 31, 2006 and 2005 are not necessarily
indicative of the results expected for the full year.2.
    
    SecuritiesThe amortized cost of securities available for sale, with unrealized gains and losses follows:
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueMarch 31, 2006Obligations of U.S.
Government, corporations
and agencies
    
    $
    34,608,777
    
    
    $
    4,690
    
    
    $
    (919,535
    )
    
    $
    33,693,932Obligations of states and political
subdivisions
    
    
    962,192
    
    
    
    58,608
    
    
    
    
    
    
    
    1,020,800Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (90,000
    )
    
    
    5,910,000Mutual Funds
    
    
    270,711
    
    
    
    
    
    
    
    (12,128
    )
    
    
    258,583FHLMC Preferred Bank Stock
    
    
    441,000
    
    
    
    
    
    
    
    (14,500
    )
    
    
    426,500Restricted investments:Federal Home Loan Bank Stock
    
    
    2,492,000
    
    
    
    
    
    
    
    
    
    
    
    2,492,000Federal Reserve Bank Stock
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    72,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    112,920
    
    
    
    
    
    
    
    
    
    
    
    112,920$
    45,009,600
    
    
    $
    63,298
    
    
    $
    (1,036,163
    )
    
    $
    44,036,735
 6




---



##### 



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueDecember 31, 2005Obligations of U.S.
Government, corporations
and agencies
    
    $
    38,731,324
    
    
    $
    10,072
    
    
    $
    (943,127
    )
    
    $
    37,798,269Obligations of states and political
subdivisions
    
    
    962,013
    
    
    
    57,516
    
    
    
    
    
    
    
    1,019,529Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (98,750
    )
    
    
    5,901,250Mutual Funds
    
    
    267,947
    
    
    
    
    
    
    
    (7,144
    )
    
    
    260,803FHLMC Preferred Bank Stock
    
    
    441,000
    
    
    
    
    
    
    
    (13,100
    )
    
    
    427,900Restricted investments:Federal Home Loan Bank Stock
    
    
    2,748,100
    
    
    
    
    
    
    
    
    
    
    
    2,748,100Federal Reserve Bank Stock
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    72,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    112,920
    
    
    
    
    
    
    
    
    
    
    
    112,920$
    49,385,304
    
    
    $
    67,588
    
    
    $
    (1,062,121
    )
    
    $
    48,390,771
  March 31, 2006Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    421
    
    
    $
    421Due after one year through
five years
    
    
    18,085,112
    
    
    
    17,629,442Due after five years through
ten years
    
    
    688,713
    
    
    
    672,719Due after ten years
    
    
    22,796,723
    
    
    
    22,322,150Equity Securities
    
    
    3,438,631
    
    
    
    3,412,003$
    45,009,600
    
    
    $
    44,036,735
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalDescription of Securities
    
    Fair Value
    
    
    Unrealized
    
    
    Fair Value
    
    
    Unrealized
    
    
    Fair Value
    
    
    Unrealized(Losses)
    
    
    
    
    
    
    (Losses)
    
    
    
    
    
    
    (Losses)Obligations of U.S. Government,
corporations and agencies
    
    $
    3,491,358
    
    
    $
    (54,950
    )
    
    $
    29,895,189
    
    
    $
    (864,585
    )
    
    $
    33,386,547
    
    
    $
    (919,535
    )Corporate Bonds
    
    
    1,987,500
    
    
    
    (12,500
    )
    
    
    3,922,500
    
    
    
    (77,500
    )
    
    
    5,910,000
    
    
    
    (90,000
    )Subtotal, debt securities
    
    
    5,478,858
    
    
    
    (67,450
    )
    
    
    33,817,689
    
    
    
    (942,085
    )
    
    
    39,296,547
    
    
    
    (1,009,535
    )Preferred Stock
    
    
    441,000
    
    
    
    (14,500
    )
    
    
    
    
    
    
    
    
    
    
    441,000
    
    
    
    (14,500
    )Mutual Fund
    
    
    
    
    
    
    
    
    
    
    270,711
    
    
    
    (12,128
    )
    
    
    270,711
    
    
    
    (12,128
    )Total temporary impaired securities
    
    $
    5,919,858
    
    
    $
    (81,950
    )
    
    $
    34,088,400
    
    
    $
    (954,213
    )
    
    $
    40,008,258
    
    
    $
    (1,036,163
    )
 7




---



##### 



3.
    
    LoansA summary of the balances of loans follows:
 March 31,
    
    
    December 31,2006
    
    
    2005(Thousands)Real estate loans:Construction
    
    $
    27,112
    
    
    $
    27,302Secured by farmland
    
    
    832
    
    
    
    535Secured by 1 - to - 4 family residential
    
    
    155,611
    
    
    
    153,997Other real estate loans
    
    
    129,544
    
    
    
    120,416Commercial and industrial loans (not secured by real estate)
    
    
    37,964
    
    
    
    35,497Consumer installment loans
    
    
    36,391
    
    
    
    38,677All other loans
    
    
    14,499
    
    
    
    9,386Total loans
    
    $
    401,953
    
    
    $
    385,810Unearned income
    
    
    (549
    )
    
    
    (523
    )Allowance for loan losses
    
    
    4,320
    
    
    
    4,238Net loans
    
    $
    397,084
    
    
    $
    381,049
  Three Months
    
    
    Three Months
    
    
    Twelve MonthsEnded
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    March 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2005Balance at beginning of period
    
    $
    4,238,143
    
    
    $
    4,060,321
    
    
    $
    4,060,321Provision charged to operating expense
    
    
    120,000
    
    
    
    125,000
    
    
    
    472,917Recoveries added to the allowance
    
    
    34,994
    
    
    
    15,173
    
    
    
    53,331Loan losses charged to the allowance
    
    
    (73,582
    )
    
    
    (74,072
    )
    
    
    (348,426
    )Balance at end of period
    
    $
    4,319,555
    
    
    $
    4,126,422
    
    
    $
    4,238,143
  March 31,
    
    
    December 31,2006
    
    
    2005(Thousands)Nonaccrual loans
    
    $
    1,072
    
    
    $
    13Restructured loans
    
    
    
    
    
    
    Total nonperforming loans
    
    
    1,072
    
    
    
    13Foreclosed property
    
    
    169
    
    
    
    182Total nonperforming assets
    
    $
    1,241
    
    
    $
    195
  8




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##### 



4. Company-Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust
 On March 26, 2002, the Companys wholly-owned Connecticut statutory business trust privately issued
$4 million face amount
of the trusts Floating Rate Capital Securities (Capital Securities) in a pooled capital
securities offering. Simultaneously, the
trust used the proceeds of that sale to purchase $4 million principal amount of the Companys
Floating Rate Junior Subordinated
Deferrable Interest Debentures due 2032 (Subordinated Debentures). Both the Capital
Securities and the Subordinated Debentures
are callable at any time after five years from the issue date. The Subordinated Debentures are an
unsecured obligation of the
Company and are junior in right of payment to all present and future senior indebtedness of
the Company. The Capital Securities
are guaranteed by the Company on a subordinated basis.The Capital Securities are presented in the consolidated balance sheets of the Company under
the caption Company-obligated
mandatorily redeemable capital securities. The Company records distributions payable on the
Capital Securities as an Interest
Expense in its consolidated statements of income. The cost of issuance of the Capital
Securities was approximately $128,000.
This cost is being amortized over a five year period from the issue date.5.
    
    Earnings Per ShareThe following table shows the weighted average number of shares used in computing earnings per
share and the
effect on weighted average number of shares of dilutive potential common stock. Dilutive potential
common stock
had no effect on income available to common shareholders.
 Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2006
    
    
    March 31, 2005Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,457,834
    
    
    $
    0.40
    
    
    
    3,404,113
    
    
    $
    0.38Effect of dilutive securities, stock options
    
    
    112,386
    
    
    
    
    
    
    
    130,153Diluted earnings per share
    
    
    3,570,220
    
    
    $
    0.39
    
    
    
    3,534,266
    
    
    $
    0.37
 9




---



##### 



6.
    
    Stock-Based CompensationAt March 31, 2006, the Company has a stock-based compensation plan. Effective January 1, 2006, the
Company adopted the provisions of FASB Statement No. 123(R), Share-Based Payment, which requires
that the Company recognize expense related to the fair value of stock-based compensation awards in
net income. Prior to January 1, 2006, the Company accounted for its stock-based compensation
under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations. Accordingly, stock compensation expense was not
recognized in net income, as all stock options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant. However, prior years financial
statements included pro forma disclosures of the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based compensation.The following table illustrates the effect on net income and earnings per share for the Company had
the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, been applied to stock-based compensation for three months ended March 31, 2005.
 2005Net Income, as reported
    
    $
    1,310,268Deduct: Total stock-based employee compensation
expense determined based on fair value
method of awards, net of tax
    
    
    (13,815
    )Pro forma net income
    
    $
    1,296,453Earnings per share:Basic  as reported
    
    $
    0.38Basic  pro forma
    
    
    0.38Diluted  as reported
    
    
    0.37Diluted  pro forma
    
    
    0.37
 7.
    
    Employee Benefit PlanThe following table provides a reconciliation of the changes in the defined benefit pension plans
obligations for
the periods ended March 31, 2006 and 2005.
 Three Months EndedMarch 31,2006
    
    
    2005Service cost
    
    $
    173,127
    
    
    $
    143,620Interest cost
    
    
    93,997
    
    
    
    85,120Expected return on plan assets
    
    
    (98,960
    )
    
    
    (75,429
    )Amortization of transition obligation/(asset)
    
    
    (4,745
    )
    
    
    (4,745
    )Amortization of prior service cost
    
    
    1,942
    
    
    
    1,942Recognized net actuarial (gain)/loss
    
    
    15,239
    
    
    
    15,578Net periodic benefit cost
    
    $
    180,600
    
    
    $
    166,086
  10




---



##### 



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
  GENERAL
    11




---



##### 



CRITICAL ACCOUNTING POLICIES
   12




---



##### 



EXECUTIVE OVERVIEW
    13




---



##### 



COMPARISION OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31,
2005
 NET INCOME.
 NET INTEREST INCOME.
 14




---



##### 



15




---



##### 



Three Months Ended March 31, 2006
    
    
    Three Months Ended March 31, 2005Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    381,641
    
    
    $
    6,324
    
    
    
    6.64
    %
    
    $
    339,099
    
    
    $
    5,244
    
    
    
    6.20
    %Tax-exempt (1)
    
    
    7,666
    
    
    
    150
    
    
    
    7.82
    %
    
    
    7,265
    
    
    
    130
    
    
    
    7.14
    %Nonaccrual
    
    
    720
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    Total Loans
    
    
    390,027
    
    
    
    6,474
    
    
    
    6.65
    %
    
    
    346,468
    
    
    
    5,374
    
    
    
    6.22
    %SecuritiesTaxable
    
    
    45,788
    
    
    
    465
    
    
    
    4.06
    %
    
    
    56,232
    
    
    
    533
    
    
    
    3.80
    %Tax-exempt (1)
    
    
    1,021
    
    
    
    20
    
    
    
    7.79
    %
    
    
    1,023
    
    
    
    20
    
    
    
    7.75
    %Total securities
    
    
    46,809
    
    
    
    485
    
    
    
    4.14
    %
    
    
    57,255
    
    
    
    553
    
    
    
    3.87
    %Deposits in banks
    
    
    734
    
    
    
    5
    
    
    
    2.71
    %
    
    
    93
    
    
    
    2
    
    
    
    6.53
    %Federal funds sold
    
    
    1,176
    
    
    
    15
    
    
    
    4.98
    %
    
    
    1,123
    
    
    
    7
    
    
    
    2.55
    %Total earning assets
    
    
    438,746
    
    
    
    6,979
    
    
    
    6.37
    %
    
    
    404,939
    
    
    
    5,936
    
    
    
    5.90
    %Less: Reserve for loan losses
    
    
    (4,302
    )
    
    
    
    
    
    
    
    
    
    
    (4,053
    )Cash and due from banks
    
    
    18,203
    
    
    
    
    
    
    
    
    
    
    
    16,131Bank premises and equipment, net
    
    
    8,260
    
    
    
    
    
    
    
    
    
    
    
    7,491Other assets
    
    
    15,347
    
    
    
    
    
    
    
    
    
    
    
    15,825Total Assets
    
    $
    476,254
    
    
    
    
    
    
    
    
    
    
    $
    440,333LIABILITIES AND SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    88,880
    
    
    
    
    
    
    
    
    
    
    $
    84,131Interest-bearing depositsNOW accounts
    
    
    74,321
    
    
    
    112
    
    
    
    0.61
    %
    
    
    107,004
    
    
    
    278
    
    
    
    1.05
    %Money market accounts
    
    
    40,968
    
    
    
    140
    
    
    
    1.38
    %
    
    
    64,134
    
    
    
    171
    
    
    
    1.08
    %Premium money market accounts
    
    
    40,562
    
    
    
    390
    
    
    
    3.90
    %
    
    
    
    
    
    
    Savings accounts
    
    
    38,045
    
    
    
    30
    
    
    
    0.32
    %
    
    
    42,486
    
    
    
    35
    
    
    
    0.34
    %Time deposits
    
    
    105,166
    
    
    
    899
    
    
    
    3.47
    %
    
    
    81,508
    
    
    
    556
    
    
    
    2.77
    %Total interest-bearing deposits
    
    
    299,062
    
    
    
    1,571
    
    
    
    2.13
    %
    
    
    295,132
    
    
    
    1,040
    
    
    
    1.43
    %Federal funds purchased and securities
sold
under agreements to repurchase
    
    
    3,419
    
    
    
    38
    
    
    
    4.42
    %
    
    
    3,934
    
    
    
    25
    
    
    
    2.62
    %Federal Home Loan Bank advances
    
    
    41,456
    
    
    
    488
    
    
    
    4.71
    %
    
    
    18,733
    
    
    
    204
    
    
    
    4.35
    %Capital Securities of Subsidiary Trust
    
    
    4,124
    
    
    
    86
    
    
    
    8.31
    %
    
    
    4,124
    
    
    
    62
    
    
    
    5.99
    %Total interest-bearing liabilities
    
    
    348,061
    
    
    
    2,183
    
    
    
    2.53
    %
    
    
    321,923
    
    
    
    1,331
    
    
    
    1.67
    %Other liabilities
    
    
    2,616
    
    
    
    
    
    
    
    
    
    
    
    1,978Shareholders equity
    
    
    36,697
    
    
    
    
    
    
    
    
    
    
    
    32,301Total Liabilities & Shareholders Equity
    
    $
    476,254
    
    
    
    
    
    
    
    
    
    
    $
    440,333Net interest spread
    
    
    
    
    
    $
    4,796
    
    
    
    3.84
    %
    
    
    
    
    
    $
    4,605
    
    
    
    4.23
    %Interest expense as a percent of average earning assets
    
    
    
    
    
    
    
    
    
    
    2.01
    %
    
    
    
    
    
    
    
    
    
    
    1.33
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.36
    %
    
    
    
    
    
    
    
    
    
    
    4.57
    %
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal
tax rate of 34%.
 16




---



##### 



RATE/VOLUME ANALYSIS
  
 Three Months Ended March 31, 2006 Compared toThree Months Ended March 31, 2005Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOMELoans; taxable
    
    $
    1,080
    
    
    $
    690
    
    
    $
    390Loans; tax-exempt (1)
    
    
    20
    
    
    
    7
    
    
    
    13Securities; taxable
    
    
    (68
    )
    
    
    (109
    )
    
    
    41Securities; tax-exempt (1)
    
    
    
    
    
    
    
    
    
    
    Deposits in banks
    
    
    3
    
    
    
    3
    
    
    
    Federal funds sold
    
    
    8
    
    
    
    
    
    
    
    8Total Interest Income
    
    
    1,043
    
    
    
    591
    
    
    
    452INTEREST EXPENSENOW accounts
    
    
    (166
    )
    
    
    (70
    )
    
    
    (96
    )Money market accounts
    
    
    (31
    )
    
    
    (143
    )
    
    
    112Premium money market accounts
    
    
    390
    
    
    
    390
    
    
    
    Savings accounts
    
    
    (5
    )
    
    
    (4
    )
    
    
    (1
    )Time deposits
    
    
    343
    
    
    
    183
    
    
    
    160Federal funds purchased and securities
sold under agreements to repurchase
    
    
    13
    
    
    
    (3
    )
    
    
    16Federal Home Loan Bank Advances
    
    
    284
    
    
    
    266
    
    
    
    18Capital Securities of Subsidiary Trust
    
    
    24
    
    
    
    
    
    
    
    24Total Interest Expense
    
    
    852
    
    
    
    619
    
    
    
    233Net Interest Income
    
    $
    191
    
    
    $
    (28
    )
    
    $
    219
 
 (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.
 17




---



##### 



TOTAL OTHER INCOME.
   18




---



##### 



COMPARISON OF MARCH 31, 2006 AND DECEMBER 31, 2005 FINANCIAL CONDITION
  CASH AND DUE FROM BANKS.
 LOANS.
 DEPOSITS
 FEDERAL HOME LOAN ADVANCES.
 SSET QUALITY
   19




---



##### 



CONTRACTUAL OBLIGATIONS
  OFF-BALANCE SHEET ARRANGEMENTS
  CAPITAL RESOURCES
     20




---



##### 



March 31, 2006
    
    
    December 31, 2005Tier 1 Capital:Shareholders Equity
    
    $
    36,533
    
    
    $
    35,579Plus: Unrealized loss on securities available for sale
    
    
    615
    
    
    
    636Less: Intangible assets, net
    
    
    (26
    )
    
    
    (32
    )Plus: Company-obligated madatorily redeemable capital securities
    
    
    4,000
    
    
    
    4,000Total Tier 1 Capital
    
    
    41,122
    
    
    
    40,183Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    4,319
    
    
    
    4,238Total Capital
    
    $
    45,441
    
    
    $
    44,421Risk Weighted Assets:
    
    $
    372,561
    
    
    $
    371,193Regulatory Capital Ratios:Leverage Ratio
    
    
    8.64
    %
    
    
    8.66
    %Tier 1 to Risk Weighted Assets
    
    
    11.04
    %
    
    
    10.83
    %Total Capital to Risk Weighted Assets
    
    
    12.20
    %
    
    
    11.97
    %
 LIQUIDITY
  21




---



##### 



LIQUIDITY SOURCES AND USES(In Thousands)March 31, 2006
    
    
    December 31, 2005Total
    
    
    In Use
    
    
    Available
    
    
    Total
    
    
    In Use
    
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    51,983
    
    
    $
    3,000
    
    
    $
    48,983
    
    
    $
    52,020
    
    
    $
    5,000
    
    
    $
    47,020Federal Home Loan Bank advances
    
    
    124,422
    
    
    
    34,000
    
    
    
    90,422
    
    
    
    106,420
    
    
    
    42,000
    
    
    
    64,420Federal funds sold
    
    
    
    
    
    
    
    
    
    
    409
    
    
    
    
    
    
    
    
    
    
    
    4,794Securities, available for sale and unpledged
at fair value
    
    
    
    
    
    
    
    
    
    
    24,483
    
    
    
    
    
    
    
    
    
    
    
    27,090Total short-term funding sources
    
    $
    176,405
    
    
    $
    37,000
    
    
    $
    164,297
    
    
    $
    158,440
    
    
    $
    47,000
    
    
    $
    143,324Uses:Unfunded loan commitments and
lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    116,614
    
    
    
    
    
    
    
    
    
    
    $
    106,542Letters of credit
    
    
    
    
    
    
    
    
    
    
    4,956
    
    
    
    
    
    
    
    
    
    
    
    5,839Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    121,570
    
    
    
    
    
    
    
    
    
    
    $
    112,381Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    135.1
    %
    
    
    
    
    
    
    
    
    
    
    127.5
    %
    22




---



##### 



23




---



##### 



Part II. OTHER INFORMATION
 
 
     24




---



##### 



3.1
    
    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
    
    Amended and restated Bylaws of Fauquier Bankshares, Inc., incorporated by reference to
Exhibit 3.2 to Form 8-K filed March 22, 2006.10.17
    
    Director Compensation, incorporated by reference to Exhibit 10.17 to Form
8-K filed February 23, 2006.10.19
    
    Description of Employment Agreement with C. Hunton Tiffany as amended
February 16, 2006, incorporated by reference to Exhibit 10.19 to Form 8-K filed
February 23, 2006.11
    
    Refer to Part I, Item 1, Footnote 5 to the Consolidated Financial Statements.31.1
    
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).31.2
    
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer.
 25




---



##### 



FAUQUIER BANKSHARES, INC.(Registrant)Date: May 12, 2006
    
    /s/ Randy K. FerrellRandy K. FerrellPresident and Chief Executive Officer(principal executive officer)Date: May 12, 2006
    
    /s/ Eric P. GraapEric P. GraapSenior Vice President and Chief Financial Officer(principal financial and accounting officer)
 26