##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-Q
 
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the quarterly period ended June 30, 2005
 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 incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 10 Courthouse Square Warrenton, Virginia
    
    20186(Address of principal executive offices)
    
    (Zip Code)
 (540) 347-2700
  Not Applicable
  þ o
 o þ




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##### 



FAUQUIER BANKSHARES, INC.
 INDEX
 PagePart I. FINANCIAL INFORMATION
    
    
    2Item 1. Financial Statements
    
    
    2Consolidated Balance Sheets as of June 30, 2005 (unaudited) and December 31, 2004
    
    
    2Consolidated Statements of Income (unaudited) for the Three Months Ended June 30, 2005 and
2004
    
    
    3Consolidated Statements of Income (unaudited) for the Six Months Ended June 30, 2005 and 2004
    
    
    4Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Six Months
Ended
June 30, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2005 and
2004
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25Part II. OTHER INFORMATION
    
    
    26Item 1. Legal Proceedings
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities26Item 4. Submission of Matters to a Vote of Security Holders26Item 5. Other Information
    
    
    27Item 6. Exhibits
    
    
    27SIGNATURES
    
    
    27




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##### 



Part I. FINANCIAL INFORMATION Item 1. Financial Statements Fauquier Bankshares, Inc. and Subsidiaries
 Consolidated Balance Sheets
 Unaudited
    
    AuditedJune 30, 2005
    
    December 31, 2004AssetsCash and due from banks
    
    $
    19,784,221
    
    
    $
    8,944,590Interest-bearing deposits in other banks
    
    
    303,718
    
    
    
    112,984Federal funds sold
    
    
    294,000
    
    
    
    109,000Securities, at fair value
    
    
    51,168,361
    
    
    
    58,594,905Loans, net of allowance for loan losses of $4,288,931
in 2005 and $4,060,321 in 2004
    
    
    352,327,426
    
    
    
    337,791,782Bank premises and equipment, net
    
    
    8,396,017
    
    
    
    8,533,619Accrued interest receivable
    
    
    1,483,922
    
    
    
    1,507,391Other assets
    
    
    14,192,787
    
    
    
    13,604,948Total assets
    
    $
    447,950,452
    
    
    $
    429,199,219LiabilitiesDeposits:Noninterest-bearing
    
    $
    89,841,301
    
    
    $
    79,222,524Interest-bearing
    
    
    295,057,166
    
    
    
    295,433,173Total deposits
    
    $
    384,898,467
    
    
    $
    374,655,697Federal funds purchased
    
    
    5,000,000
    
    
    
    Dividends payable
    
    
    
    
    
    
    508,887Federal Home Loan Bank advances
    
    
    18,000,000
    
    
    
    15,000,000Company-obligated mandatorily redeemable capital securities
    
    
    4,124,000
    
    
    
    4,124,000Other liabilities
    
    
    2,299,897
    
    
    
    3,019,571Commitments and contingent liabilities
    
    
    
    
    
    
    Total liabilities
    
    $
    414,322,364
    
    
    $
    397,308,155Shareholders EquityCommon stock, par value, $3.13; authorized 8,000,000 shares;
issued and outstanding, 2005, 3,433,408 shares; 2004, 3,392,580 shares
    
    
    10,770,734
    
    
    
    10,618,775Retained earnings
    
    
    23,171,698
    
    
    
    21,320,223Accumulated other comprehensive income (loss), net
    
    
    (314,344
    )
    
    
    (47,934
    )Total shareholders equity
    
    $
    33,628,088
    
    
    $
    31,891,064Total liabilities and shareholders equity
    
    $
    447,950,452
    
    
    $
    429,199,219
  2




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 Consolidated Statements of Income
(Unaudited)
For the Three Months Ended June 30, 2005 and 2004
 2005
    
    2004Interest IncomeInterest and fees on loans
    
    $
    5,744,799
    
    
    $
    4,865,129Interest and dividends on securities available for sale:Taxable interest income
    
    
    483,732
    
    
    
    361,012Interest income exempt from federal income taxes
    
    
    13,054
    
    
    
    14,343Dividends
    
    
    58,768
    
    
    
    48,207Interest on federal funds sold
    
    
    30,345
    
    
    
    20,442Interest on deposits in other banks
    
    
    1,309
    
    
    
    11,533Total interest income
    
    
    6,332,007
    
    
    
    5,320,666Interest ExpenseInterest on deposits
    
    
    1,202,909
    
    
    
    792,425Interest on federal funds purchased
    
    
    1,456
    
    
    
    2,483Interest on Federal Home Loan Bank advances
    
    
    218,565
    
    
    
    196,374Distribution on capital securities of subsidiary trust
    
    
    67,812
    
    
    
    47,802Total interest expense
    
    
    1,490,742
    
    
    
    1,039,084Net interest income
    
    
    4,841,265
    
    
    
    4,281,582Provision for loan losses
    
    
    208,750
    
    
    
    154,166Net interest income after
provision for loan losses
    
    
    4,632,515
    
    
    
    4,127,416Other incomeWealth management income
    
    
    284,667
    
    
    
    308,632Service charges on deposit accounts
    
    
    660,395
    
    
    
    636,870Other service charges, commissions and fees
    
    
    313,802
    
    
    
    289,033Other operating income
    
    
    8,174
    
    
    
    23,587Total other income
    
    
    1,267,038
    
    
    
    1,258,122Other ExpensesSalaries and benefits
    
    
    2,074,304
    
    
    
    1,951,551Net occupancy expense of premises
    
    
    230,248
    
    
    
    215,954Furniture and equipment
    
    
    319,841
    
    
    
    310,125Other operating expenses
    
    
    1,476,442
    
    
    
    1,354,505Total other expenses
    
    
    4,100,835
    
    
    
    3,832,135Income before income taxes
    
    
    1,798,718
    
    
    
    1,553,403Income tax expense
    
    
    549,567
    
    
    
    469,322Net Income
    
    $
    1,249,151
    
    
    $
    1,084,081Earnings per Share, basic
    
    $
    0.36
    
    
    $
    0.33Earnings per Share, assuming dilution
    
    $
    0.35
    
    
    $
    0.31Dividends per Share
    
    $
    0.16
    
    
    $
    0.14
  3




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 Consolidated Statements of Income
(Unaudited)
For the Six Months Ended June 30, 2005 and 2004
 2005
    
    2004Interest IncomeInterest and fees on loans
    
    $
    11,074,630
    
    
    $
    9,590,001Interest and dividends on securities available for sale:Taxable interest income
    
    
    990,477
    
    
    
    705,809Interest income exempt from federal income taxes
    
    
    26,136
    
    
    
    28,791Dividends
    
    
    85,499
    
    
    
    64,229Interest on federal funds sold
    
    
    37,496
    
    
    
    20,463Interest on deposits in other banks
    
    
    2,830
    
    
    
    18,260Total interest income
    
    
    12,217,068
    
    
    
    10,427,553Interest ExpenseInterest on deposits
    
    
    2,242,295
    
    
    
    1,524,079Interest on federal funds purchased
    
    
    26,886
    
    
    
    33,802Interest on Federal Home Loan Bank advances
    
    
    422,103
    
    
    
    407,254Distribution on capital securities of subsidiary trust
    
    
    129,600
    
    
    
    96,032Total interest expense
    
    
    2,820,884
    
    
    
    2,061,167Net interest income
    
    
    9,396,184
    
    
    
    8,366,386Provision for loan losses
    
    
    333,750
    
    
    
    308,333Net interest income after
provision for loan losses
    
    
    9,062,434
    
    
    
    8,058,053Other incomeWealth management income
    
    
    602,368
    
    
    
    633,321Service charges on deposit accounts
    
    
    1,301,520
    
    
    
    1,235,474Other service charges, commissions and fees
    
    
    609,419
    
    
    
    623,487Other operating income
    
    
    16,143
    
    
    
    24,317Total other income
    
    
    2,529,450
    
    
    
    2,516,599Other ExpensesSalaries and benefits
    
    
    4,132,226
    
    
    
    3,838,583Net occupancy expense of premises
    
    
    463,318
    
    
    
    427,718Furniture and equipment
    
    
    637,128
    
    
    
    609,517Other operating expenses
    
    
    2,687,654
    
    
    
    2,633,460Total other expenses
    
    
    7,920,326
    
    
    
    7,509,278Income before income taxes
    
    
    3,671,558
    
    
    
    3,065,374Income tax expense
    
    
    1,112,139
    
    
    
    911,356Net Income
    
    $
    2,559,419
    
    
    $
    2,154,018Earnings per Share, basic
    
    $
    0.74
    
    
    $
    0.65Earnings per Share, assuming dilution
    
    $
    0.72
    
    
    $
    0.61Dividends per Share
    
    $
    0.31
    
    
    $
    0.27
  4




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 Consolidated Statements of Changes in Shareholders Equity
(Unaudited)
For the Six Months Ended June 30, 2005 and 2004
 AccumulatedOtherCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveStock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Income
    
    
    TotalBalance, December 31, 2003
    
    $
    10,367,280
    
    
    $
    18,082,684
    
    
    $
    12,821
    
    
    
    
    
    
    $
    28,462,785Comprehensive income:Net income
    
    
    
    
    
    
    2,154,018
    
    
    
    
    
    
    $
    2,154,018
    
    
    
    2,154,018Other comprehensive income net of tax:Unrealized holding gain on securities available
for sale, net of deferred income taxes of $204,180
    
    
    
    
    
    
    
    
    
    
    (396,350
    )
    
    
    (396,350
    )
    
    
    (396,350
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,757,668
    
    
    
    Cash dividends ($.27 per share)
    
    
    
    
    
    
    (896,359
    )
    
    
    
    
    
    
    
    
    
    
    (896,359
    )Acquisition of 30,570 shares of common stock
    
    
    (95,684
    )
    
    
    (601,147
    )
    
    
    
    
    
    
    
    
    
    
    (696,831
    )Net issuance of restricted stock, stock incentive plan (12,557 shares)
    
    
    39,304
    
    
    
    274,622
    
    
    
    
    
    
    
    
    
    
    
    313,926Unearned compensation on restricted stock
    
    
    
    
    
    
    (313,925
    )
    
    
    
    
    
    
    
    
    
    
    (313,925
    )Amortization of unearned compensation, restricted stock awards
    
    
    
    
    
    
    38,805
    
    
    
    
    
    
    
    
    
    
    
    38,805Exercise of stock options
    
    
    87,668
    
    
    
    123,888
    
    
    
    
    
    
    
    
    
    
    
    211,556Balance, June 30, 2004
    
    $
    10,398,568
    
    
    $
    18,862,586
    
    
    $
    (383,529
    )
    
    
    
    
    
    $
    28,877,625Balance, December 31, 2004
    
    $
    10,618,775
    
    
    $
    21,320,223
    
    
    $
    (47,934
    )
    
    
    
    
    
    
    31,891,064Comprehensive income:Net income
    
    
    
    
    
    
    2,559,419
    
    
    
    
    
    
    $
    2,559,419
    
    
    
    2,559,419Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of deferred income taxes of $137,241
    
    
    
    
    
    
    
    
    
    
    (266,410
    )
    
    
    (266,410
    )
    
    
    (266,410
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,293,009
    
    
    
    Cash dividends ($.31 per share)
    
    
    
    
    
    
    (1,065,592
    )
    
    
    
    
    
    
    
    
    
    
    (1,065,592
    )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
    
    
    
    
    
    
    157,790
    
    
    
    
    
    
    
    
    
    
    
    157,790Issuance of common stock
    
    
    8,811
    
    
    
    62,736
    
    
    
    
    
    
    
    
    
    
    
    71,547Exercise of stock options
    
    
    115,213
    
    
    
    193,057
    
    
    
    
    
    
    
    
    
    
    
    308,270Balance, June 30, 2005
    
    $
    10,770,734
    
    
    $
    23,171,698
    
    
    $
    (314,344
    )
    
    
    
    
    
    $
    33,628,088
  5




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, 2005 and 2004
 2005
    
    2004Cash Flows from Operating ActivitiesNet income
    
    $
    2,559,419
    
    
    $
    2,154,018Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    591,207
    
    
    
    532,956Provision for loan losses
    
    
    333,750
    
    
    
    308,333(Gain) on sale of premises and equipment
    
    
    
    
    
    
    (5,910
    )Amortization of security premiums, net
    
    
    30,175
    
    
    
    168,701Amortization of unearned compensation
    
    
    157,790
    
    
    
    Changes in assets and liabilities:(Increase) in other assets
    
    
    (427,128
    )
    
    
    (490,624
    )(Decrease) in other liabilities
    
    
    (719,674
    )
    
    
    (215,972
    )Net cash provided by operating activities
    
    
    2,525,539
    
    
    
    2,451,502Cash Flows from Investing ActivitiesProceeds from maturities, calls and principal
payments of securities available for sale
    
    
    7,712,216
    
    
    
    10,118,697Purchase of securities available for sale
    
    
    (258,199
    )
    
    
    (10,534,777
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    5,910Purchase of premises and equipment
    
    
    (453,605
    )
    
    
    (1,314,941
    )Purchase of other investment
    
    
    (461,300
    )
    
    
    Net (increase) in loans
    
    
    (14,869,394
    )
    
    
    (21,344,645
    )Net cash (used in) investing activities
    
    
    (8,330,282
    )
    
    
    (23,069,756
    )Cash Flows from Financing ActivitiesNet increase (decrease) in demand deposits, NOW accounts
and savings accounts
    
    
    (8,587,708
    )
    
    
    39,431,206Net increase (decrease) in certificates of deposit
    
    
    18,830,478
    
    
    
    (1,197,911
    )Federal Home Loan Bank advances
    
    
    8,000,000
    
    
    
    9,000,000Federal Home Loan Bank principal repayments
    
    
    (5,000,000
    )
    
    
    (9,000,000
    )Proceeds from Federal Funds Purchased
    
    
    5,000,000
    
    
    
    21,000Repayment from Federal Funds Purchased
    
    
    
    
    
    
    (2,000,000
    )Cash dividends paid
    
    
    (1,574,479
    )
    
    
    (1,326,949
    )Issuance of common stock
    
    
    379,817
    
    
    
    250,362Acquisition of common stock
    
    
    (28,000
    )
    
    
    (696,831
    )Net cash provided by financing activities
    
    
    17,020,108
    
    
    
    34,480,877Increase (decrease) in cash and cash equivalents
    
    
    11,215,365
    
    
    
    13,862,623Cash and Cash EquivalentsBeginning
    
    
    9,166,574
    
    
    
    11,950,429Ending
    
    $
    20,381,939
    
    
    $
    25,813,052Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    2,693,981
    
    
    $
    2,033,270Income taxes
    
    $
    1,290,000
    
    
    $
    791,000Supplemental Disclosures of Noncash Investing ActivitiesUnrealized gain (loss) on securities available for sale, net
    
    $
    (403,652
    )
    
    $
    (600,530
    )
  6




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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
subsidiaries,
Fauquier Statutory Trust I (Trust I) and The Fauquier
Bank (the Bank), and the Banks wholly-owned subsidiary Fauquier Services, Inc. In consolidation,
significant intercompany financial balances and transactions have been eliminated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial positions as of June 30, 2005 and December 31, 2004, the
results of operations for the three and six months ended June 30, 2005 and 2004, and cash flows for the six months ended June 30, 2005 and 2004.The results of operations for the six and three months ended June 30, 2005 and 2004 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)
    
    ValueJune 30, 2005Obligations of U.S.
Government corporations
and agencies
    
    $
    42,087,625
    
    
    $
    22,818
    
    
    $
    (483,618
    )
    
    $
    41,626,825Obligations of states and political
subdivisions
    
    
    961,760
    
    
    
    58,299
    
    
    
    
    
    
    
    1,020,059Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (66,250
    )
    
    
    5,933,750Mutual Funds
    
    
    262,043
    
    
    
    
    
    
    
    (1,529
    )
    
    
    260,514FHLMC Preferred Bank stock
    
    
    441,000
    
    
    
    
    
    
    
    (6,000
    )
    
    
    435,000Restricted investments:Federal Home Loan
Bank stock
    
    
    1,668,100
    
    
    
    
    
    
    
    
    
    
    
    1,668,100Federal Reserve Bank
stock
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    72,000Community Bankers
Bank stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    102,113
    
    
    
    
    
    
    
    
    
    
    
    102,113$
    51,644,641
    
    
    $
    81,117
    
    
    $
    (557,397
    )
    
    $
    51,168,361
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    (Losses)
    
    ValueDecember 31, 2004Obligations of U.S.
Government corporations
and agencies
    
    $
    49,352,582
    
    
    $
    175,475
    
    
    $
    (238,296
    )
    
    $
    49,289,761Obligations of states and political
subdivisions
    
    
    961,515
    
    
    
    60,037
    
    
    
    
    
    
    
    1,021,552Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (68,750
    )
    
    
    5,931,250Mutual Funds
    
    
    256,524
    
    
    
    
    
    
    
    (1,095
    )
    
    
    255,429FHLMC Preferred Bank stock
    
    
    441,000
    
    
    
    
    
    
    
    
    
    
    
    441,000Restricted investments:Federal Home Loan
Bank stock
    
    
    1,431,800
    
    
    
    
    
    
    
    
    
    
    
    1,431,800Federal Reserve Bank
stock
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    72,000Community Bankers
Bank stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    102,113
    
    
    
    
    
    
    
    
    
    
    
    102,113$
    58,667,534
    
    
    $
    235,512
    
    
    $
    (308,141
    )
    
    $
    58,594,905
 7




---



##### 



The amortized cost and fair value of securities available for sale, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations without penalties.
 June 30, 2005Amortized
    
    FairCost
    
    ValueDue in one year or less
    
    $
    9,457
    
    
    $
    9,550Due after one year through five years
    
    
    20,209,376
    
    
    
    19,936,337Due after five years through ten years
    
    
    2,113,591
    
    
    
    2,084,408Due after ten years
    
    
    26,716,961
    
    
    
    26,550,339Equity securities
    
    
    2,595,256
    
    
    
    2,587,727$
    51,644,641
    
    
    $
    51,168,361
 The following table shows the Companys investments with gross unrealized
losses and their fair value, aggregated by investment category and the length
of time that individual securities have been in a continuous unrealized loss
position, at June 30, 2005.
 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
    
    $
    25,127,788
    
    
    $
    (172,807
    )
    
    $
    13,181,175
    
    
    $
    (310,811
    )
    
    $
    38,308,963
    
    
    $
    (483,618
    )Corporate bonds
    
    
    4,963,750
    
    
    
    (36,250
    )
    
    
    970,000
    
    
    
    (30,000
    )
    
    
    5,933,750
    
    
    
    (66,250
    )Subtotal, debt securities
    
    
    30,091,538
    
    
    
    (209,057
    )
    
    
    14,151,175
    
    
    
    (340,811
    )
    
    
    44,242,713
    
    
    
    (549,868
    )Preferred Stock
    
    
    441,000
    
    
    
    (6,000
    )
    
    
    
    
    
    
    
    
    
    
    441,000
    
    
    
    (6,000
    )Mutual Fund
    
    
    259,638
    
    
    
    (1,528
    )
    
    
    
    
    
    
    
    
    
    
    259,638
    
    
    
    (1,528
    )Total temporary impaired
securities
    
    $
    30,792,176
    
    
    $
    (216,585
    )
    
    $
    14,151,175
    
    
    $
    (340,811
    )
    
    $
    44,943,351
    
    
    $
    (557,396
    )
 The nature of the securities which are temporarily impaired for a continuous 12
months or more can be segmented into three groups.
The first group consists of two Federal Agency securities totaling $6.8 million
with a temporary loss of approximately $170,000. Both
bonds within this group have Aaa/AAA ratings from Moodys and Standard & Poors.
The securities within this group have
maturity dates of 18 months and 36 months. The Company has the ability to hold
these bonds to maturity.The second group consists of three Federal agency mortgage-backed securities
totaling $6.4 million with a temporary loss of approximately
$141,000. The securities within this group have estimated maturity dates
ranging from 48 months to 72 months, and return principal on a
monthly basis representing the repayment and prepayment of the underlying
mortgages. The Company has the ability to hold these bonds to
maturity.The third group consists of one corporate bond, rated A2 by Moodys, totaling
$1.0 million with a temporary loss of approximately
$30,000. This bond has a remaining maturity of approximately 29 years, but can
be called at par on its five year anniversary. If not called,
the bond reprices, every three months at a fixed index above LIBOR.
The Company has the ability to hold this bond to its maturity.The carrying value of securities pledged to secure deposits and for other
purposes amounted to $16,506,023 and $9,695,444 at
June 30, 2005 and December 31, 2004, respectively.
 3.
    
    LoansA summary of the balances of loans follows:
 June 30,
    
    December 31,2005
    
    2004(Thousands)Real estate loans:Construction
    
    $
    26,228
    
    
    $
    29,270Secured by farmland
    
    
    825
    
    
    
    965Secured by 1-4 family residential
    
    
    145,252
    
    
    
    136,165Other real estate loans
    
    
    100,499
    
    
    
    100,757Commercial and industrial loans (except
those secured by real estate)
    
    
    36,017
    
    
    
    24,036Consumer installment loans
    
    
    39,349
    
    
    
    41,088All other loans
    
    
    8,864
    
    
    
    9,941Total loans
    
    $
    357,034
    
    
    $
    342,222Unearned income
    
    
    (418
    )
    
    
    (370
    )Allowance for loan losses
    
    
    4,289
    
    
    
    4,060Net loans
    
    $
    352,327
    
    
    $
    337,792
 8




---



##### 



Analysis of the allowance for loan losses follows:
 Six Months
    
    Six Months
    
    Twelve MonthsEnding
    
    Ending
    
    EndingJune 30,
    
    June 30,
    
    December 31,2005
    
    2004
    
    2004Balance at beginning of period
    
    $
    4,060,321
    
    
    $
    3,575,002
    
    
    $
    3,575,002Provision charged to operating expense
    
    
    333,750
    
    
    
    308,333
    
    
    
    539,583Recoveries added to the allowance
    
    
    32,920
    
    
    
    14,500
    
    
    
    300,830Loan losses charged to the allowance
    
    
    (138,060
    )
    
    
    (96,144
    )
    
    
    (355,094
    )Balance at end of period
    
    $
    4,288,931
    
    
    $
    3,801,691
    
    
    $
    4,060,321
 Nonperforming assets consist of the following:
 June 30,
    
    December 31,2005
    
    2004(Thousands)Nonaccrual loans
    
    $
    130
    
    
    $
    62Restructured loans
    
    
    
    
    
    
    Total non-performing loans
    
    
    130
    
    
    
    62Foreclosed property
    
    
    114
    
    
    
    121Total non-performing assets
    
    $
    244
    
    
    $
    183
 Total loans past due 90 days or more and still accruing interest totaled
$163,000 on June 30, 2005 and
$162,000 on December 31, 2004, respectively.4.
    
    Company-Obligated Mandatorily Redeemable Capital Securities of Subsidiary TrustOn 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 Companys 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
    
    Six Months
    
    Six MonthsEnding
    
    Ending
    
    EndingJune 30, 2005
    
    June 30, 2005
    
    June 30, 2004Per Share
    
    
    
    
    
    Per Share
    
    
    
    
    
    Per ShareShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBasic earnings per share
    
    
    3,437,718
    
    
    $
    0.36
    
    
    
    3,421,009
    
    
    $
    0.74
    
    
    
    3,314,255
    
    
    $
    0.65Effect of dilutive
securities, stock options
    
    
    127,555
    
    
    
    
    
    
    
    128,854
    
    
    
    
    
    
    
    195,767Diluted earnings per share
    
    
    3,565,273
    
    
    $
    0.35
    
    
    
    3,549,863
    
    
    $
    0.72
    
    
    
    3,510,022
    
    
    $
    0.61
 9




---



##### 



6.
    
    Stock-Based CompensationAt June 30, 2005, the Company has a stock-based compensation plan.
The Company accounts for the plan under the recognition and
measurement principles of APB Opinion 25, Accounting for Stock Issued
to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted
under the plan had an exercise price equal to the market value of the
underlying common stock on the date of the grant. 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.
 June 30,
    
    June 30,2005
    
    2004Net income, as reported
    
    $
    2,559,419
    
    
    $
    2,154,018Deduct: total stock-based employee compensation
expense determined based on fair value
method of awards, net of tax
    
    
    
    
    
    
    (34,937
    )Pro forma net income
    
    $
    2,559,419
    
    
    $
    2,119,081Earnings per share:Basic  as reported
    
    $
    0.74
    
    
    $
    0.65Basic  pro forma
    
    $
    0.74
    
    
    $
    0.64Diluted  as reported
    
    $
    0.72
    
    
    $
    0.61Diluted  pro forma
    
    $
    0.72
    
    
    $
    0.60
 7.
    
    Employee Benefit PlanThe following table provides a reconciliation of the changes in
the defined benefit pension plans obligations for the
periods ending June 30, 2005 and 2004.
 Six Months EndedJune 30,2005
    
    2004Service cost
    
    $
    287,240
    
    
    $
    227,918Interest cost
    
    
    170,240
    
    
    
    202,846Expected return on plan assets
    
    
    (150,858
    )
    
    
    (196,574
    )Amortization of transition obligation/(asset)
    
    
    (9,490
    )
    
    
    (9,490
    )Amortization of prior service cost
    
    
    3,884
    
    
    
    3,884Recognized net actuarial (gain)/loss
    
    
    31,156
    
    
    
    19,678Net periodic benefit cost
    
    $
    332,172
    
    
    $
    248,262
 The Company previously disclosed in its financial statements for the year ended
December 31, 2004, that it expected to contribute $1,186,714 to its pension
plan in 2005. As of June 30, 2005, contributions totaling $1,186,714 have been
made. The Company presently anticipates no additional contributions to fund
its pension plan in 2005.
 10




---



##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
  
    
    interest rates,
    
    general economic conditions,
    
    the legislative/regulatory climate,
    
    monetary and fiscal policies of the U.S. Government, including the policies of
the U.S. Treasury and the Board of Governors of the Federal Reserve System,
    
    the quality or composition of The Fauquier Banks (the Bank) loan or investment portfolios,
    
    competition,
    
    demand for financial products and services in our market area, and
    
    accounting principles, policies and guidelines.
  GENERAL
     11




---



##### 



CRITICAL ACCOUNTING POLICIES
 GENERAL.
 ALLOWANCE FOR LOAN LOSSES.
 EXECUTIVE OVERVIEW
  12




---



##### 



NET INCOME.
 NET INTEREST INCOME.
   13




---



##### 



14




---



##### 



Three Months Ended June 30, 2005
    
    Three Months Ended June 30, 2004Average
    
    Income/
    
    Average
    
    Average
    
    Income/
    
    AverageBalances
    
    Expense
    
    Rate
    
    Balances
    
    Expense
    
    RateASSETS:LoansTaxable
    
    $
    343,860
    
    
    $
    5,659
    
    
    
    6.52
    %
    
    $
    305,108
    
    
    $
    4,771
    
    
    
    6.20
    %Tax-exempt (1)
    
    
    7,167
    
    
    
    130
    
    
    
    7.17
    %
    
    
    7,893
    
    
    
    143
    
    
    
    7.16
    %Nonaccrual
    
    
    177
    
    
    
    
    
    
    
    
    
    
    
    915
    
    
    
    Total Loans
    
    
    351,204
    
    
    
    5,789
    
    
    
    6.53
    %
    
    
    313,916
    
    
    
    4,914
    
    
    
    6.21
    %SecuritiesTaxable
    
    
    52,953
    
    
    
    542
    
    
    
    4.09
    %
    
    
    46,532
    
    
    
    409
    
    
    
    3.52
    %Tax-exempt (1)
    
    
    1,018
    
    
    
    20
    
    
    
    7.77
    %
    
    
    1,218
    
    
    
    22
    
    
    
    7.14
    %Total securities
    
    
    53,971
    
    
    
    562
    
    
    
    4.16
    %
    
    
    47,750
    
    
    
    431
    
    
    
    3.61
    %Deposits in banks
    
    
    263
    
    
    
    2
    
    
    
    1.97
    %
    
    
    1,298
    
    
    
    11
    
    
    
    3.52
    %Federal funds sold
    
    
    4,321
    
    
    
    30
    
    
    
    2.78
    %
    
    
    9,472
    
    
    
    20
    
    
    
    0.85
    %Total earning assets
    
    
    409,759
    
    
    
    6,383
    
    
    
    6.18
    %
    
    
    372,436
    
    
    
    5,376
    
    
    
    5.73
    %Less: Reserve for loan losses
    
    
    (4,232
    )
    
    
    
    
    
    
    
    
    
    
    (3,742
    )Cash and due from banks
    
    
    17,263
    
    
    
    
    
    
    
    
    
    
    
    18,807Bank premises and equipment, net
    
    
    8,426
    
    
    
    
    
    
    
    
    
    
    
    8,522Other assets
    
    
    15,366
    
    
    
    
    
    
    
    
    
    
    
    11,151Total Assets
    
    $
    446,582
    
    
    
    
    
    
    
    
    
    
    $
    407,174LIABILITIES AND SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    86,020
    
    
    
    
    
    
    
    
    
    
    $
    85,150Interest-bearing depositsNOW accounts
    
    
    62,225
    
    
    
    19
    
    
    
    0.12
    %
    
    
    57,361
    
    
    
    19
    
    
    
    0.13
    %Premium NOW accounts
    
    
    41,705
    
    
    
    227
    
    
    
    2.18
    %
    
    
    20,493
    
    
    
    115
    
    
    
    2.25
    %Money market accounts
    
    
    58,669
    
    
    
    190
    
    
    
    1.30
    %
    
    
    69,642
    
    
    
    138
    
    
    
    0.80
    %Savings accounts
    
    
    43,138
    
    
    
    36
    
    
    
    0.33
    %
    
    
    40,633
    
    
    
    36
    
    
    
    0.35
    %Time deposits
    
    
    95,010
    
    
    
    731
    
    
    
    3.08
    %
    
    
    77,763
    
    
    
    484
    
    
    
    2.50
    %Total interest-bearing deposits
    
    
    300,747
    
    
    
    1,203
    
    
    
    1.60
    %
    
    
    265,892
    
    
    
    792
    
    
    
    1.20
    %Federal funds purchased and
securities sold
under agreements to repurchase
    
    
    220
    
    
    
    1
    
    
    
    2.66
    %
    
    
    110
    
    
    
    2
    
    
    
    9.04
    %Federal Home Loan Bank advances
    
    
    20,473
    
    
    
    219
    
    
    
    4.22
    %
    
    
    21,319
    
    
    
    196
    
    
    
    3.64
    %Capital Securities of Subsidiary Trust
    
    
    4,124
    
    
    
    68
    
    
    
    6.51
    %
    
    
    4,124
    
    
    
    48
    
    
    
    4.59
    %Total interest-bearing liabilities
    
    
    325,564
    
    
    
    1,491
    
    
    
    1.83
    %
    
    
    291,445
    
    
    
    1,039
    
    
    
    1.43
    %Other liabilities
    
    
    1,859
    
    
    
    
    
    
    
    
    
    
    
    1,591Shareholders equity
    
    
    33,139
    
    
    
    
    
    
    
    
    
    
    
    28,988Total Liabilities & Shareholders
Equity
    
    $
    446,582
    
    
    
    
    
    
    
    
    
    
    $
    407,174Net interest spread
    
    
    
    
    
    $
    4,892
    
    
    
    4.35
    %
    
    
    
    
    
    $
    4,337
    
    
    
    4.30
    %Interest expense as a percent of average earning assets
    
    
    
    
    
    
    
    
    
    
    1.46
    %
    
    
    
    
    
    
    
    
    
    
    1.13
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.72
    %
    
    
    
    
    
    
    
    
    
    
    4.60
    %
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. 15




---



##### 



RATE/VOLUME VARIANCE(In thousands)Three Months Ended June 30, 2005 Compared toThree Months Ended June 30, 2004Due to
    
    Due toChange
    
    Volume
    
    RateINTEREST INCOMELoans; taxable
    
    $
    888
    
    
    $
    611
    
    
    $
    277Loans; tax-exempt (1)
    
    
    (13
    )
    
    
    (13
    )
    
    
    Securities; taxable
    
    
    134
    
    
    
    60
    
    
    
    74Securities; tax-exempt (1)
    
    
    (2
    )
    
    
    (4
    )
    
    
    2Deposits in banks
    
    
    (11
    )
    
    
    (6
    )
    
    
    (5
    )Federal funds sold
    
    
    10
    
    
    
    (3
    )
    
    
    13Total Interest Income
    
    
    1,006
    
    
    
    645
    
    
    
    361INTEREST EXPENSENOW accounts
    
    
    
    
    
    
    
    
    
    
    Premium NOW accounts
    
    
    112
    
    
    
    116
    
    
    
    (4
    )Money market accounts
    
    
    52
    
    
    
    (19
    )
    
    
    71Savings accounts
    
    
    
    
    
    
    
    
    
    
    Time deposits
    
    
    245
    
    
    
    118
    
    
    
    127Federal funds purchased and securities
sold under agreements to repurchase
    
    
    (1
    )
    
    
    2
    
    
    
    (3
    )Federal Home Loan Bank Advances
    
    
    23
    
    
    
    (7
    )
    
    
    30Capital Securities of Subsidiary Trust
    
    
    20
    
    
    
    
    
    
    
    20Total Interest Expense
    
    
    451
    
    
    
    210
    
    
    
    241Net Interest Income
    
    $
    555
    
    
    $
    435
    
    
    $
    120
 
 (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.
 16




---



##### 



TOTAL OTHER INCOME.
 TOTAL OTHER EXPENSES.
   NET INCOME.
 NET INTEREST INCOME.
  17




---



##### 



18




---



##### 



Six Months Ended June 30, 2005
    
    Six Months Ended June 30, 2004Average
    
    Income/
    
    Average
    
    Average
    
    Income/
    
    AverageBalances
    
    Expense
    
    Rate
    
    Balances
    
    Expense
    
    RateASSETS:LoansTaxable
    
    $
    341,493
    
    
    $
    10,903
    
    
    
    6.36
    %
    
    $
    299,721
    
    
    $
    9,389
    
    
    
    6.21
    %Tax-exempt (1)
    
    
    7,216
    
    
    
    259
    
    
    
    7.15
    %
    
    
    8,360
    
    
    
    304
    
    
    
    7.20
    %Nonaccrual
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    962
    
    
    
    Total Loans
    
    
    348,850
    
    
    
    11,162
    
    
    
    6.38
    %
    
    
    309,043
    
    
    
    9,693
    
    
    
    6.22
    %SecuritiesTaxable
    
    
    54,583
    
    
    
    1,076
    
    
    
    3.94
    %
    
    
    48,021
    
    
    
    770
    
    
    
    3.17
    %Tax-exempt (1)
    
    
    1,020
    
    
    
    40
    
    
    
    7.76
    %
    
    
    1,229
    
    
    
    44
    
    
    
    7.12
    %Total securities
    
    
    55,603
    
    
    
    1,116
    
    
    
    4.01
    %
    
    
    49,250
    
    
    
    814
    
    
    
    3.27
    %Deposits in banks
    
    
    179
    
    
    
    3
    
    
    
    3.20
    %
    
    
    4,246
    
    
    
    18
    
    
    
    0.86
    %Federal funds sold
    
    
    2,731
    
    
    
    37
    
    
    
    2.73
    %
    
    
    4,773
    
    
    
    20
    
    
    
    0.86
    %Total earning assets
    
    
    407,363
    
    
    
    12,318
    
    
    
    6.03
    %
    
    
    367,312
    
    
    
    10,545
    
    
    
    5.69
    %Less: Reserve for loan losses
    
    
    (4,289
    )
    
    
    
    
    
    
    
    
    
    
    (3,695
    )Cash and due from banks
    
    
    19,814
    
    
    
    
    
    
    
    
    
    
    
    16,651Bank premises and equipment, net
    
    
    8,396
    
    
    
    
    
    
    
    
    
    
    
    8,264Other assets
    
    
    12,142
    
    
    
    
    
    
    
    
    
    
    
    10,947Total Assets
    
    $
    443,426
    
    
    
    
    
    
    
    
    
    
    $
    399,479LIABILITIES AND SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    85,085
    
    
    
    
    
    
    
    
    
    
    $
    77,555Interest-bearing depositsNOW accounts
    
    
    60,931
    
    
    
    39
    
    
    
    0.13
    %
    
    
    56,207
    
    
    
    40
    
    
    
    0.14
    %Premium NOW accounts
    
    
    44,527
    
    
    
    485
    
    
    
    2.20
    %
    
    
    15,327
    
    
    
    172
    
    
    
    2.25
    %Money market accounts
    
    
    61,387
    
    
    
    361
    
    
    
    1.19
    %
    
    
    68,647
    
    
    
    277
    
    
    
    0.81
    %Savings accounts
    
    
    42,814
    
    
    
    71
    
    
    
    0.33
    %
    
    
    40,456
    
    
    
    73
    
    
    
    0.36
    %Time deposits
    
    
    88,296
    
    
    
    1,286
    
    
    
    2.94
    %
    
    
    77,687
    
    
    
    962
    
    
    
    2.49
    %Total interest-bearing
deposits
    
    
    297,955
    
    
    
    2,242
    
    
    
    1.52
    %
    
    
    258,324
    
    
    
    1,524
    
    
    
    1.18
    %Federal funds purchased and
securities sold
under agreements to repurchase
    
    
    2,066
    
    
    
    27
    
    
    
    2.62
    %
    
    
    5,244
    
    
    
    34
    
    
    
    1.29
    %Federal Home Loan Bank advances
    
    
    19,608
    
    
    
    422
    
    
    
    4.28
    %
    
    
    23,754
    
    
    
    407
    
    
    
    3.39
    %Capital Securities of Subsidiary
Trust
    
    
    4,124
    
    
    
    130
    
    
    

    6.25
    %
    
    
    4,124
    
    
    
    96
    
    
    
    4.61
    %Total interest-bearing
liabilities
    
    
    323,753
    
    
    
    2,821
    
    
    
    1.75
    %
    
    
    291,446
    
    
    
    2,061
    
    
    
    1.41
    %Other liabilities
    
    
    1,866
    
    
    
    
    
    
    
    
    
    
    
    1,627Shareholders equity
    
    
    32,722
    
    
    
    
    
    
    
    
    
    
    
    28,851Total Liabilities &
Shareholders Equity
    
    $
    443,426
    
    
    
    
    
    
    
    
    
    
    $
    399,479Net interest spread
    
    
    
    
    
    $
    9,497
    
    
    
    4.28
    %
    
    
    
    
    
    $
    8,484
    
    
    
    4.28
    %Interest expense as a percent of
average earning assets
    
    
    
    
    
    
    
    
    
    
    1.39
    %
    
    
    
    
    
    
    
    
    
    
    1.12
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.63
    %
    
    
    
    
    
    
    
    
    
    
    4.57
    %
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. 19




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##### 



RATE/VOLUME ANALYSIS
    Six Months Ended June 30, 2005 Compared toSix Months Ended June 30, 2004Due to
    
    Due toChange
    
    Volume
    
    RateINTEREST INCOMELoans; taxable
    
    $
    1,514
    
    
    $
    1,331
    
    
    $
    183Loans; tax-exempt (1)
    
    
    (45
    )
    
    
    (41
    )
    
    
    (4
    )Securities; taxable
    
    
    306
    
    
    
    114
    
    
    
    192Securities; tax-exempt (1)
    
    
    (4
    )
    
    
    (9
    )
    
    
    5Deposits in banks
    
    
    (15
    )
    
    
    7
    
    
    
    (22
    )Federal funds sold
    
    
    17
    
    
    
    (4
    )
    
    
    21Total Interest Income
    
    
    1,773
    
    
    
    1,398
    
    
    
    375INTEREST EXPENSENOW accounts
    
    
    (1
    )
    
    
    1
    
    
    
    (2
    )Premium NOW accounts
    
    
    313
    
    
    
    317
    
    
    
    (4
    )Money market accounts
    
    
    84
    
    
    
    (24
    )
    
    
    108Savings accounts
    
    
    (2
    )
    
    
    (43
    )
    
    
    41Time deposits
    
    
    324
    
    
    
    140
    
    
    
    184Federal funds purchased and securities
sold under agreements to repurchase
    
    
    (7
    )
    
    
    (21
    )
    
    
    14Federal Home Loan Bank Advances
    
    
    15
    
    
    
    (32
    )
    
    
    47Capital Securities of Subsidiary Trust
    
    
    34
    
    
    
    
    
    
    
    34Total Interest Expense
    
    
    760
    
    
    
    338
    
    
    
    422Net Interest Income
    
    $
    1,013
    
    
    $
    1,060
    
    
    $
    (47
    )
 
 (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.
 TOTAL OTHER INCOME.
 20




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##### 



TOTAL OTHER EXPENSES.
 COMPARISON OF JUNE 30, 2005 AND DECEMBER 31, 2004 FINANCIAL CONDITION
  CASH AND DUE FROM BANKS.
 LOANS.
 DEPOSITS
 FEDERAL FUNDS PURCHASED.
 ASSET QUALITY
  21




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##### 



CONTRACTUAL OBLIGATIONS
  OFF-BALANCE SHEET ARRANGEMENTS
  CAPITAL RESOURCES
     22




---



##### 



June 30, 2005
    
    December 31, 2004Tier 1 Capital:Shareholders Equity
    
    $
    33,628
    
    
    $
    31,891Plus: Unrealized loss on securities available for sale
    
    
    314
    
    
    
    46Less: Intangible assets, net
    
    
    (52
    )
    
    
    (58
    )Plus: Company-obligated madatorily redeemable capital securities
    
    
    4,000
    
    
    
    4,000Total Tier 1 Capital
    
    
    37,890
    
    
    
    35,879Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    4,289
    
    
    
    4,060Total Capital
    
    $
    42,179
    
    
    $
    39,939Risk Weighted Assets:
    
    $
    342,778
    
    
    $
    330,177Regulatory Capital Ratios:Leverage Ratio
    
    
    8.51
    %
    
    
    8.30
    %Tier 1 to Risk Weighted Assets
    
    
    11.05
    %
    
    
    10.87
    %Total Capital to Risk Weighted Assets
    
    
    12.30
    %
    
    
    12.10
    %
 LIQUIDITY
   23




---



##### 



June 30, 2005
    
    December 31, 2004Total
    
    In Use
    
    Available
    
    Total
    
    In Use
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    42,806
    
    
    $
    5,000
    
    
    $
    37,806
    
    
    $
    37,800
    
    
    $
    
    
    
    $
    37,800Federal Reserve discount window
    
    
    279
    
    
    
    
    
    
    
    279
    
    
    
    369
    
    
    
    
    
    
    
    369Federal Home Loan Bank advances*
    
    
    81,262
    
    
    
    18,000
    
    
    
    63,262
    
    
    
    80,658
    
    
    
    15,000
    
    
    
    65,658Federal funds sold
    
    
    
    
    
    
    
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    109Securities, available for sale and unpledged
at fair value
    
    
    
    
    
    
    
    
    
    
    32,770
    
    
    
    
    
    
    
    
    
    
    
    47,232Total short-term funding sources
    
    $
    124,347
    
    
    $
    23,000
    
    
    $
    134,411
    
    
    $
    118,827
    
    
    $
    15,000
    
    
    $
    151,168Uses:Unfunded loan commitments and
lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    84,135
    
    
    
    
    
    
    
    
    
    
    $
    71,612Letters of credit
    
    
    
    
    
    
    
    
    
    
    11,060
    
    
    
    
    
    
    
    
    
    
    
    11,343Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    95,195
    
    
    
    
    
    
    
    
    
    
    $
    82,955Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    141.2
    %
    
    
    
    
    
    
    
    
    
    
    182.2
    %
 
 *
    
    Represents the Lendable Collateral Value of blanket lien with the FHLB of Atlanta as of the date indicated. The Banks line
of credit with the FHLB of Atlanta had a borrowing
limit of $134.3 million and $127.4 million at June 30, 2005 and December 31, 2004, respectively. Additional collateral would be required to be added to the blanket lien for total borrowings in excess of Lendable Collateral Value.  RECENT ACCOUNTING PRONOUNCEMENTS
   24




---



##### 



25




---



##### 



Part II. OTHER INFORMATION
          1.
    
    For Directors:
 FOR
    
    WITHHELDDouglas C. Larson
    
    
    2,530,723
    
    
    
    122,806Randolph T. Minter
    
    
    2,637,941
    
    
    
    15,588H. Frances Stringfellow
    
    
    2,549,621
    
    
    
    103,908
  FOR
    
    AGAINST
    
    ABSTAIN2,615,512
    
    
    
    30,042
    
    
    
    7,975
 26




---



##### 



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, 19993.2
    
    Bylaws of Fauquier Bankshares, Inc., incorporated by reference to
Exhibit 3(ii) to registration statement on Form 10 filed April 16, 1999Certain instruments relating to capital securities not being registered have been
omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant
will furnish a copy of any such instrument to the Securities and Exchange
Commission upon its request.
 10.4.1
    
    Amendment and Termination of Agreement, dated April 21, 2005,
between The Fauquier Bank and C. Hunton Tiffany, incorporated by
reference to Exhibit 10.4.1 to Form 8-K filed April 26, 200510.20
    
    Consulting Agreement, dated June 8, 2005,
between The Fauquier Bank and C.H. Lawrence, Jr., incorporated by
reference to Exhibit 10.20 to Form 8-K filed June 14, 2005.
 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 Officer32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer99
    
    Report of Independent Registered Public Accounting Firm
   FAUQUIER BANKSHARES, INC. 
(Registrant)Date: August 12, 2005
    /s/  Randy K. FerrellRandy K. FerrellPresident and Chief Executive Officer
(principal executive officer) Date: August 12, 2005
    /s/ Eric P. GraapEric P. GraapSenior Vice President and Chief Financial Officer
(principal financial and accounting officer) 27