##### Table of Contents



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, 2010
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File No.: 000-25805
 Fauquier Bankshares, Inc.
  Virginia
    
    54-1288193(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 10 Courthouse Square, Warrenton, Virginia
    
    20186(Address of principal executive offices)
    
    (Zip Code)
 (540) 347-2700
  þ o
  o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
  o þ




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##### 



FAUQUIER BANKSHARES, INC.
 PagePart I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009
    
    
    3Consolidated Statements of Income (unaudited) for the Three Months Ended June 30, 2010 and 2009
    
    
    4Consolidated Statements of Income (unaudited) for the Six Months Ended June 30, 2010 and 2009
    
    
    5Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Six Months Ended
June 30, 2010 and 2009
    
    
    6Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2010 and 2009
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4. Controls and Procedures
    
    
    40Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    41Item 4. Removed and Reserved
    
    
    41Item 5. Other Information
    
    
    41Item 6. Exhibits
    
    
    41SIGNATURES
    
    
    42EX-3.2EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



Part I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)
    
    
    (Audited)AssetsCash and due from banks
    
    $
    5,427,162
    
    
    $
    5,652,617Interest-bearing deposits in other banks
    
    
    33,308,994
    
    
    
    20,546,596Federal funds sold
    
    
    7,763
    
    
    
    9,154Securities available for sale
    
    
    41,571,312
    
    
    
    36,692,094Restricted investments
    
    
    3,774,700
    
    
    
    3,774,700Loans, net of allowance for loan losses of $5,397,291
in 2010 and $5,481,963 in 2009
    
    
    462,730,068
    
    
    
    462,783,962Bank premises and equipment, net
    
    
    14,521,091
    
    
    
    14,025,745Accrued interest receivable
    
    
    1,493,861
    
    
    
    1,495,085Other real estate owned, net of valuation allowance
    
    
    2,412,085
    
    
    
    2,479,860Other assets
    
    
    21,109,497
    
    
    
    21,022,655Total assets
    
    $
    586,356,533
    
    
    $
    568,482,468Liabilities and Shareholders EquityDeposits:Noninterest-bearing
    
    
    67,182,415
    
    
    
    68,469,699Interest-bearing:NOW accounts
    
    
    108,356,203
    
    
    
    83,395,687Savings and money market accounts
    
    
    118,721,836
    
    
    
    106,458,563Time certificates of deposit
    
    
    198,565,203
    
    
    
    207,662,808Total interest-bearing
    
    
    425,643,242
    
    
    
    397,517,058Total deposits
    
    
    492,825,657
    
    
    
    465,986,757Federal funds purchased
    
    
    
    
    
    
    Federal Home Loan Bank advances
    
    
    40,000,000
    
    
    
    50,000,000Company-obligated mandatorily redeemable
capital securities
    
    
    4,124,000
    
    
    
    4,124,000Other liabilities
    
    
    5,532,892
    
    
    
    5,732,869Commitments and contingencies
    
    
    
    
    
    
    Total liabilities
    
    
    542,482,549
    
    
    
    525,843,626Shareholders EquityCommon stock, par value, $3.13; authorized 8,000,000
shares: issued and outstanding, 2010: 3,635,758 shares
(includes nonvested shares of 33,772); 2009: 3,594,685 shares
(includes nonvested shares of 47,282)
    
    
    11,274,216
    
    
    
    11,103,371Retained earnings
    
    
    34,140,810
    
    
    
    33,458,933Accumulated other comprehensive income (loss), net
    
    
    (1,541,042
    )
    
    
    (1,923,462
    )Total shareholders equity
    
    
    43,873,984
    
    
    
    42,638,842Total liabilities and shareholders equity
    
    $
    586,356,533
    
    
    $
    568,482,468
  3




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##### Table of Contents



Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income
(Unaudited)
For the Three Months Ended June 30, 2010 and 2009
 2010
    
    
    2009Interest IncomeInterest and fees on loans
    
    $
    6,722,975
    
    
    $
    6,465,313Interest and dividends on securities available for sale:Taxable interest income
    
    
    302,606
    
    
    
    315,979Interest income exempt from federal income taxes
    
    
    56,542
    
    
    
    57,925Dividends
    
    
    6,651
    
    
    
    15,765Interest on federal funds sold
    
    
    8
    
    
    
    49Interest on deposits in other banks
    
    
    15,990
    
    
    
    3,309Total interest income
    
    
    7,104,772
    
    
    
    6,858,340Interest ExpenseInterest on deposits
    
    
    1,337,008
    
    
    
    1,441,683Interest on federal funds purchased
    
    
    36
    
    
    
    12,400Interest on Federal Home Loan Bank advances
    
    
    192,161
    
    
    
    229,694Distribution on capital securities of subsidiary trusts
    
    
    20,503
    
    
    
    29,385Total interest expense
    
    
    1,549,708
    
    
    
    1,713,162Net interest income
    
    
    5,555,064
    
    
    
    5,145,178Provision for loan losses
    
    
    375,000
    
    
    
    360,000Net interest income after provision for loan losses
    
    
    5,180,064
    
    
    
    4,785,178Other IncomeWealth management income
    
    
    355,838
    
    
    
    247,808Service charges on deposit accounts
    
    
    645,489
    
    
    
    719,444Other service charges, commissions and income
    
    
    515,939
    
    
    
    432,890(Loss) on sale or impairment of other real estate owned
    
    
    (45,000
    )
    
    
    (Loss) on sale of investments
    
    
    (1,689
    )
    
    
    Net other than temporary impairment losses on securities
    
    
    
    
    
    
    (166,388
    )Total other income
    
    
    1,470,577
    
    
    
    1,233,754Other ExpensesSalaries and benefits
    
    
    2,802,936
    
    
    
    2,328,120Net occupancy expense of premises
    
    
    443,404
    
    
    
    318,242Furniture and equipment
    
    
    291,122
    
    
    
    268,831Marketing expense
    
    
    164,444
    
    
    
    187,299Legal, audit and consulting expense
    
    
    294,721
    
    
    
    476,961Federal Deposit Insurance Corporation expense
    
    
    170,462
    
    
    
    385,050Data processing expense
    
    
    378,891
    
    
    
    333,511Other operating expenses
    
    
    738,588
    
    
    
    725,224Total other expenses
    
    
    5,284,568
    
    
    
    5,023,238Income before income taxes
    
    
    1,366,073
    
    
    
    995,694Income tax expense
    
    
    355,501
    
    
    
    272,013Net Income
    
    $
    1,010,572
    
    
    $
    723,681Earnings per Share, basic
    
    $
    0.28
    
    
    $
    0.20Earnings per Share, assuming dilution
    
    $
    0.28
    
    
    $
    0.20Dividends per Share
    
    $
    0.20
    
    
    $
    0.20
  4




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##### Table of Contents



Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income
(Unaudited)
For the Six Months Ended June 30, 2010 and 2009
 2010
    
    
    2009Interest IncomeInterest and fees on loans
    
    $
    13,414,252
    
    
    $
    12,846,384Interest and dividends on securities available for sale:Taxable interest income
    
    
    605,261
    
    
    
    672,142Interest income exempt from federal income taxes
    
    
    115,977
    
    
    
    119,386Dividends
    
    
    13,467
    
    
    
    20,228Interest on federal funds sold
    
    
    11
    
    
    
    156Interest on deposits in other banks
    
    
    24,078
    
    
    
    6,978Total interest income
    
    
    14,173,046
    
    
    
    13,665,274Interest ExpenseInterest on deposits
    
    
    2,612,032
    
    
    
    2,999,773Interest on federal funds purchased
    
    
    36
    
    
    
    22,846Interest on Federal Home Loan Bank advances
    
    
    465,781
    
    
    
    496,361Distribution on capital securities of subsidiary trusts
    
    
    39,828
    
    
    
    65,220Total interest expense
    
    
    3,117,677
    
    
    
    3,584,200Net interest income
    
    
    11,055,369
    
    
    
    10,081,074Provision for loan losses
    
    
    750,000
    
    
    
    560,000Net interest income after provision for loan losses
    
    
    10,305,369
    
    
    
    9,521,074Other IncomeWealth management income
    
    
    662,407
    
    
    
    497,044Service charges on deposit accounts
    
    
    1,266,941
    
    
    
    1,326,120Other service charges, commissions and income
    
    
    942,271
    
    
    
    836,270(Loss) on sale or impairment of other real estate owned
    
    
    (61,139
    )
    
    
    (135,759
    )Gain on sale of investments
    
    
    87,418
    
    
    
    Net other than temporary impairment losses on securities
recognized in earnings (includes total other than temporary
impairment
losses of $276,278, net of $199,395 gain recognized in other
comprehensive income for the six months ended June 30, 2010
before tax
benefit)
    
    
    (475,673
    )
    
    
    (166,388
    )Total other income
    
    
    2,422,225
    
    
    
    2,357,287Other ExpensesSalaries and benefits
    
    
    5,250,624
    
    
    
    4,685,610Net occupancy expense of premises
    
    
    943,306
    
    
    
    625,309Furniture and equipment
    
    
    608,818
    
    
    
    549,281Marketing expense
    
    
    320,862
    
    
    
    308,358Legal, audit and consulting expense
    
    
    561,952
    
    
    
    812,904Federal Deposit Insurance Corporation expense
    
    
    353,079
    
    
    
    530,100Data processing expense
    
    
    736,996
    
    
    
    691,389Other operating expenses
    
    
    1,537,918
    
    
    
    1,415,252Total other expenses
    
    
    10,313,555
    
    
    
    9,618,203Income before income taxes
    
    
    2,414,039
    
    
    
    2,260,158Income tax expense
    
    
    599,574
    
    
    
    613,568Net Income
    
    $
    1,814,465
    
    
    $
    1,646,590Earnings per Share, basic
    
    $
    0.50
    
    
    $
    0.46Earnings per Share, assuming dilution
    
    $
    0.50
    
    
    $
    0.46Dividends per Share
    
    $
    0.40
    
    
    $
    0.40
  5




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##### Table of Contents



Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity
For the Six Months Ended June 30, 2010 and 2009
 AccumulatedOtherCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveStock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Income
    
    
    TotalBalance, December 31, 2008
    
    $
    11,036,687
    
    
    $
    32,668,530
    
    
    $
    (2,217,280
    )
    
    
    
    
    
    $
    41,487,937Comprehensive income:Net income
    
    
    
    
    
    
    1,646,590
    
    
    
    
    
    
    
    1,646,590
    
    
    
    1,646,590Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of tax benefit of $334,949
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650,195
    )Add: reclassification adjustments for other than
temporary impairment, net of tax of $56,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,816Other comprehensive income net of tax of $278,377
    
    
    
    
    
    
    
    
    
    
    (540,379
    )
    
    
    (540,379
    )
    
    
    (540,379
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,106,211Cash dividends ($.40 per share)
    
    
    
    
    
    
    (1,438,615
    )
    
    
    
    
    
    
    
    
    
    
    (1,438,615
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    152,063
    
    
    
    
    
    
    
    
    
    
    
    152,063Issuance of common stock  nonvested
shares (10,585 shares)
    
    
    33,131
    
    
    
    (33,131
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    27,293
    
    
    
    54,487
    
    
    
    
    
    
    
    
    
    
    
    81,780Balance, June 30, 2009
    
    $
    11,097,111
    
    
    $
    33,049,924
    
    
    $
    (2,757,659
    )
    
    
    
    
    
    $
    41,389,376Balance, December 31, 2009
    
    $
    11,103,371
    
    
    $
    33,458,933
    
    
    $
    (1,923,462
    )
    
    
    
    
    
    $
    42,638,842Comprehensive income:Net income
    
    
    
    
    
    
    1,814,465
    
    
    
    
    
    
    $
    1,814,465
    
    
    
    1,814,465Other comprehensive income net of tax:Unrealized holding gains on securities available
for sale, net of tax of $64,998
    
    
    
    
    
    
    
    
    
    
    126,172
    
    
    
    126,172
    
    
    
    126,172Less: gain on sale of securities available for sale, net
net of tax benefit of $29,722
    
    
    
    
    
    
    
    
    
    
    (57,696
    )
    
    
    (57,696
    )
    
    
    (57,696
    )Add: reclassification adjustments for other than
temporary impairment, net of tax of $161,729
    
    
    
    
    
    
    
    
    
    
    313,944
    
    
    
    313,944
    
    
    
    313,944Other comprehensive income net of tax of $197,005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    382,420Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,196,885Cash dividends ($.40 per share)
    
    
    
    
    
    
    (1,451,260
    )
    
    
    
    
    
    
    
    
    
    
    (1,451,260
    )Amortization of unearned compensation,
restricted stock awards
    
    
    
    
    
    
    243,554
    
    
    
    
    
    
    
    
    
    
    
    243,554Issuance of common stock  nonvested
shares (28,847 shares)
    
    
    90,291
    
    
    
    (90,291
    )
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock  vested
shares (6,522 shares)
    
    
    20,414
    
    
    
    69,459
    
    
    
    
    
    
    
    
    
    
    
    89,873Exercise of stock options
    
    
    60,140
    
    
    
    95,950
    
    
    
    
    
    
    
    
    
    
    
    156,090Balance, June 30, 2010
    
    $
    11,274,216
    
    
    $
    34,140,810
    
    
    $
    (1,541,042
    )
    
    
    
    
    
    $
    43,873,984
  6




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##### Table of Contents



Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2010 and 2009
(Unaudited)
 2010
    
    
    2009Cash Flows from Operating ActivitiesNet income
    
    $
    1,814,465
    
    
    $
    1,646,590Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    622,495
    
    
    
    404,070Provision for loan losses
    
    
    750,000
    
    
    
    560,000Loss on impairment of other real estate
    
    
    45,000
    
    
    
    Loss on sale of other real estate
    
    
    16,139
    
    
    
    135,759(Gain) on sale of securities
    
    
    (87,418
    )
    
    
    Loss on impairment of securities
    
    
    475,673
    
    
    
    166,388Amortization (accretion) of security premiums, net
    
    
    26,018
    
    
    
    (20,186
    )Amortization of unearned compensation, net of forfeiture
    
    
    243,554
    
    
    
    152,063Changes in assets and liabilities:(Increase) in other assets
    
    
    (282,624
    )
    
    
    (275,387
    )(Decrease) increase in other liabilities
    
    
    (199,976
    )
    
    
    585,683Net cash provided by operating activities
    
    
    3,423,326
    
    
    
    3,354,980Cash Flows from Investing ActivitiesProceeds from sale of securities available for sale
    
    
    1,541,751
    
    
    
    Proceeds from maturities, calls and principal
payments of securities available for sale
    
    
    5,255,068
    
    
    
    4,804,868Purchase of securities available for sale
    
    
    (11,510,884
    )
    
    
    (3,596,504
    )Purchase of premises and equipment
    
    
    (1,117,841
    )
    
    
    (2,789,227
    )Purchase proceeds from sale of other bank stock
    
    
    
    
    
    
    (719,900
    )Net (increase) in loans
    
    
    (1,124,106
    )
    
    
    (18,013,946
    )Proceeds from sale of other real estate owned
    
    
    434,636
    
    
    
    869,626Net cash used in investing activities
    
    
    (6,521,376
    )
    
    
    (19,445,083
    )Cash Flows from Financing ActivitiesNet increase (decrease) in demand deposits, NOW accounts
and savings accounts
    
    
    35,936,505
    
    
    
    (4,250,078
    )Net (decrease) increase in certificates of deposit
    
    
    (9,097,606
    )
    
    
    16,557,098Federal Home Loan Bank advances
    
    
    
    
    
    
    150,000,000Federal Home Loan Bank principal repayments
    
    
    (10,000,000
    )
    
    
    (150,000,000
    )Purchase of federal funds
    
    
    
    
    
    
    3,525,000Cash dividends paid on common stock
    
    
    (1,451,260
    )
    
    
    (1,438,615
    )Issuance of common stock
    
    
    245,963
    
    
    
    81,780Net cash provided by financing activities
    
    
    15,633,602
    
    
    
    14,475,185Increase (decrease) in cash and cash equivalents
    
    
    12,535,552
    
    
    
    (1,614,918
    )Cash and Cash EquivalentsBeginning
    
    
    26,208,367
    
    
    
    11,023,162Ending
    
    $
    38,743,919
    
    
    $
    9,408,244Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    3,144,161
    
    
    $
    3,726,758Income taxes
    
    $
    1,024,000
    
    
    $
    635,000Supplemental Disclosures of Noncash Investing ActivitiesUnrealized gain (loss) on securities available for sale, net
of tax effect
    
    $
    382,420
    
    
    $
    (540,379
    )Other real estate acquired in settlement of loans
    
    $
    428,000
    
    
    $
    
  7




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##### Table of Contents



FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 Note 1. General
   Recent Accounting Pronouncements
   ,
  Accounting for Various Topics  Technical
Corrections to SEC Paragraphs
 8




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##### Table of Contents



Note 2. Securities
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueJune 30, 2010Obligations of U.S. Government
corporations and agencies
    
    $
    32,708,867
    
    
    $
    1,214,897
    
    
    $
    
    
    
    $
    33,923,764Obligations of states and political
subdivisions
    
    
    5,468,100
    
    
    
    214,747
    
    
    
    (3,723
    )
    
    
    5,679,124Corporate Bonds
    
    
    4,865,613
    
    
    
    
    
    
    
    (3,229,435
    )
    
    
    1,636,178Mutual Funds
    
    
    321,419
    
    
    
    4,827
    
    
    
    
    
    
    
    326,246FHLMC Preferred Bank Stock
    
    
    18,500
    
    
    
    
    
    
    
    (12,500
    )
    
    
    6,000$
    43,382,499
    
    
    $
    1,434,471
    
    
    $
    (3,245,658
    )
    
    $
    41,571,312
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueDecember 31, 2009Obligations of U.S. Government
corporations and agencies
    
    $
    27,837,619
    
    
    $
    916,798
    
    
    $
    (25,592
    )
    
    $
    28,728,825Obligations of states and political
subdivisions
    
    
    5,569,586
    
    
    
    163,021
    
    
    
    (8,758
    )
    
    
    5,723,849Corporate Bonds
    
    
    5,341,286
    
    
    
    
    
    
    
    (3,428,830
    )
    
    
    1,912,456Mutual Funds
    
    
    315,715
    
    
    
    
    
    
    
    (3,451
    )
    
    
    312,264FHLMC Preferred Bank Stock
    
    
    18,500
    
    
    
    
    
    
    
    (3,800
    )
    
    
    14,700$
    39,082,706
    
    
    $
    1,079,819
    
    
    $
    (3,470,431
    )
    
    $
    36,692,094
  9




---



##### Table of Contents



June 30, 2010Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    
    
    
    $
    Due after one year through five years
    
    
    4,109,304
    
    
    
    4,118,968Due after five years through ten years
    
    
    8,993,687
    
    
    
    9,457,520Due after ten years
    
    
    29,939,589
    
    
    
    27,662,578Equity securities
    
    
    339,919
    
    
    
    332,246$
    43,382,499
    
    
    $
    41,571,312
    June 30, 2010
    
    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
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Obligations of states and political
subdivisions
    
    
    
    
    
    
    
    
    
    
    280,374
    
    
    
    (3,723
    )
    
    
    280,374
    
    
    
    (3,723
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    1,636,178
    
    
    
    (3,229,435
    )
    
    
    1,636,178
    
    
    
    (3,229,435
    )Subtotal, debt securities
    
    
    
    
    
    
    
    
    
    
    1,916,552
    
    
    
    (3,233,158
    )
    
    
    1,916,552
    
    
    
    (3,233,158
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FHLMC preferred bank stock
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    (12,500
    )
    
    
    6,000
    
    
    
    (12,500
    )Total temporary impaired securities
    
    $
    
    
    
    $
    
    
    
    $
    1,922,552
    
    
    $
    (3,245,658
    )
    
    $
    1,922,552
    
    
    $
    (3,245,658
    )
 December 31, 2009
    
    Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)Obligations of U.S.
Government corporations
and agencies
    
    $
    3,030,782
    
    
    $
    (25,592
    )
    
    $
    
    
    
    $
    
    
    
    $
    3,030,782
    
    
    $
    (25,592
    )Obligations of states and political
subdivisions
    
    
    312,667
    
    
    
    (174
    )
    
    
    275,475
    
    
    
    (8,584
    )
    
    
    588,142
    
    
    
    (8,758
    )Corporate bonds
    
    
    
    
    
    
    
    
    
    
    1,912,456
    
    
    
    (3,428,830
    )
    
    
    1,912,456
    
    
    
    (3,428,830
    )Subtotal, debt securities
    
    
    3,343,449
    
    
    
    (25,766
    )
    
    
    2,187,931
    
    
    
    (3,437,414
    )
    
    
    5,531,380
    
    
    
    (3,463,180
    )Mutual funds
    
    
    
    
    
    
    
    
    
    
    312,263
    
    
    
    (3,451
    )
    
    
    312,263
    
    
    
    (3,451
    )FHLMC preferred bank stock
    
    
    14,700
    
    
    
    (3,800
    )
    
    
    
    
    
    
    
    
    
    
    14,700
    
    
    
    (3,800
    )Total temporary impaired securities
    
    $
    3,358,149
    
    
    $
    (29,566
    )
    
    $
    2,500,194
    
    
    $
    (3,440,865
    )
    
    $
    5,858,343
    
    
    $
    (3,470,431
    )
 10




---



##### Table of Contents



Percent of
    
    
    
    
    
    
    
    
    
    
    EstimatedUnderlying
    
    
    Percent of
    
    
    Percent of
    
    
    incremental
    
    
    
    
    
    
    
    
    
    
    Cumulative OtherCurrent
    
    
    Underlying
    
    
    Underlying
    
    
    defaults
    
    
    Current
    
    
    Cumulative
    
    
    CompreshensiveCost, net of
    
    
    
    
    
    
    Collateral
    
    
    Collateral in
    
    
    Collateral in
    
    
    required to
    
    
    Moodys
    
    
    Amount of
    
    
    Loss, net of taxOTTI loss
    
    
    Fair Value
    
    
    Performing
    
    
    Deferral
    
    
    Default
    
    
    break yield (1)
    
    
    Rating
    
    
    OTTI Loss
    
    
    benefit$
    359,294
    
    
    $
    38,376
    
    
    
    55.7
    %
    
    
    29.5
    %
    
    
    14.8
    %
    
    broken
    
    Ca
    
    $
    640,706
    
    
    $
    211,8061,822,050
    
    
    
    730,097
    
    
    
    76.3
    %
    
    
    11.7
    %
    
    
    12.0
    %
    
    broken
    
    Ca
    
    
    177,950
    
    
    
    720,6891,899,350
    
    
    
    690,878
    
    
    
    77.1
    %
    
    
    18.1
    %
    
    
    4.8
    %
    
    broken
    
    Ca
    
    
    100,650
    
    
    
    797,592784,919
    
    
    
    176,827
    
    
    
    73.4
    %
    
    
    14.6
    %
    
    
    12.0
    %
    
    broken
    
    Ca
    
    
    215,081
    
    
    
    401,341$
    4,865,613
    
    
    $
    1,636,178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,134,387
    
    
    $
    2,131,428
 
 (1)
    
    A break in yield for a given tranche investment means that defaults and/or deferrals
have reached such a level that the specific tranche would not receive all of the
contractual principal and interest cash flow by its maturity, resulting in not a temporary
shortfall, but an actual loss.    11




---



##### Table of Contents



Available for saleBeginning balance as of December 31, 2009
    
    $
    658,714Add: Amount related to the credit loss for which an other-than- temporary impairment was
not previously recognized
    
    
    100,650Add: Increases to the amount related to the credit loss for which an other-than temporary
impairment was previously recognized
    
    
    375,023Less: Realized losses for securities sold
    
    
    Less: Securities for which the amount previously recognized in other comprehensive income
was recognized in earnings because the Company intends to sell the security or more likely
than not will be required to sell the security before recovery of its amortized cost basis
    
    
    Less: Increases in cash flows expected to be collected that are recognized over the
remaining
life of the security (See FASB ASC 320-10-35-35)
    
    
    Ending balance as of June 30, 2010
    
    $
    1,134,387
   June 30, 2010Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueRestricted investments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal Home Loan Bank Stock
    
    $
    3,625,700
    
    
    $
    
    
    
    $
    
    
    
    $
    3,625,700Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000$
    3,774,700
    
    
    $
    
    
    
    $
    
    
    
    $
    3,774,700
 December 31, 2009Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueRestricted investments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Federal Home Loan Bank Stock
    
    $
    3,625,700
    
    
    $
    
    
    
    $
    
    
    
    $
    3,625,700Federal Reserve Bank Stock
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    99,000Community Bankers Bank Stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000$
    3,774,700
    
    
    $
    
    
    
    $
    
    
    
    $
    3,774,700
  12




---



##### Table of Contents



Note 3. Loans
  June 30,
    
    
    December 31,2010
    
    
    2009(Thousands)Real estate loans:Construction
    
    $
    35,834
    
    
    $
    33,003Secured by farmland
    
    
    1,090
    
    
    
    948Secured by 1 - to - 4 family residential
    
    
    191,258
    
    
    
    193,709Other real estate loans
    
    
    189,249
    
    
    
    186,463Commercial and industrial loans (not secured by real estate)
    
    
    28,253
    
    
    
    29,286Consumer installment loans
    
    
    8,350
    
    
    
    10,390All other loans
    
    
    14,331
    
    
    
    14,559Total loans
    
    $
    468,365
    
    
    $
    468,358Unearned income
    
    
    (238
    )
    
    
    (92
    )Allowance for loan losses
    
    
    (5,397
    )
    
    
    (5,482
    )Net loans
    
    $
    462,730
    
    
    $
    462,784
  Note 4. Allowance for Loan Losses
  Six Months
    
    
    Six Months
    
    
    Twelve MonthsEnded June 30,
    
    
    Ended June 30,
    
    
    Ended December 31,2010
    
    
    2009
    
    
    2009Balance at beginning of year
    
    $
    5,481,963
    
    
    $
    4,779,662
    
    
    $
    4,779,662Provision for loan losses
    
    
    750,000
    
    
    
    560,000
    
    
    
    1,710,000Recoveries of loans previously charged-off
    
    
    66,056
    
    
    
    45,203
    
    
    
    81,106Loan losses charged-off
    
    
    (900,728
    )
    
    
    (294,028
    )
    
    
    (1,088,805
    )Balance at end of year
    
    $
    5,397,291
    
    
    $
    5,090,837
    
    
    $
    5,481,963
  June 30,
    
    
    December 31,
    
    
    June 30,(Dollars in thousands)
    
    2010
    
    
    2009
    
    
    2009Non-accrual loans
    
    $
    2,479
    
    
    $
    3,410
    
    
    $
    1,139Restructured loans
    
    
    
    
    
    
    
    
    
    
    Other real estate owned
    
    
    2,412
    
    
    
    2,480
    
    
    
    2,029Other repossessed assets owned
    
    
    11
    
    
    
    54
    
    
    
    51Non-performing corporate bond investments, at fair value
    
    
    1,636
    
    
    
    1,126
    
    
    
    Total nonperforming assets
    
    $
    6,538
    
    
    $
    7,070
    
    
    $
    3,219Allowance for loan losses to total loans, period end
    
    
    1.15
    %
    
    
    1.17
    %
    
    
    1.11
    %Non-accrual loans to total loans, period end
    
    
    0.53
    %
    
    
    0.73
    %
    
    
    0.25
    %Allowance for loan losses to non-accrual loans, period end
    
    
    217.71
    %
    
    
    160.76
    %
    
    
    446.96
    %Non-performing assets to total assets, period end
    
    
    1.12
    %
    
    
    1.24
    %
    
    
    0.61
    %
 13




---



##### Table of Contents



June 30, 2010
    
    
    December 31, 2009
    
    
    June 30, 2009Impaired loans for which an allowance has been provided
    
    $
    2,579,891
    
    
    $
    3,213,516
    
    
    $
    2,080,567Impaired loans for which no allowance has been provided
    
    
    509,475
    
    
    
    175,429
    
    
    
    180,361$
    3,089,366
    
    
    $
    3,388,945
    
    
    $
    2,260,928Allowance provided for impaired loans, included in the
allowance for loan losses
    
    $
    1,008,100
    
    
    $
    1,163,072
    
    
    $
    1,080,071
 Six Months
    
    
    Twelve Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended
    
    
    Ended June 30,2010
    
    
    December 31, 2009
    
    
    2009Average balance in impaired loans
    
    $
    3,171,924
    
    
    $
    3,631,937
    
    
    $
    2,278,436Interest income recognized on impaired loans
    
    $
    36,032
    
    
    $
    148,490
    
    
    $
    42,231
    Note 5. Company-Obligated Mandatorily Redeemable Capital Securities
   14




---



##### Table of Contents



Note 6. Earnings Per Share
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedJune 30, 2010
    
    
    June 30, 2009Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,631,411
    
    
    $
    0.28
    
    
    
    3,596,537
    
    
    $
    0.20Effect of dilutive securities, stock-based awards
    
    
    16,943
    
    
    
    
    
    
    
    9,9923,648,354
    
    
    $
    0.28
    
    
    
    3,606,529
    
    
    $
    0.20
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2010
    
    
    June 30, 2009Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,617,173
    
    
    $
    0.50
    
    
    
    3,588,845
    
    
    $
    0.46Effect of dilutive securities, stock-based awards
    
    
    17,549
    
    
    
    
    
    
    
    7,3243,634,722
    
    
    $
    0.50
    
    
    
    3,596,169
    
    
    $
    0.46
  Note 7. Stock-Based Compensation
 Stock Incentive Plan (2009)
    15




---



##### Table of Contents



Six Months EndedJune 30, 2010WeightedAverage
    
    
    AverageNumber of
    
    
    Exercise
    
    
    IntrinsicShares
    
    
    Price
    
    
    Value (1)Outstanding at January 1, 2010
    
    
    62,480
    
    
    $
    9.96Granted
    
    
    Exercised
    
    
    (19,214
    )
    
    
    8.12Forfeited
    
    
    Outstanding at June 30, 2010
    
    
    43,266
    
    
    $
    10.77Exercisable at end of quarter
    
    
    43,266
    
    
    
    
    
    
    $
    204,035Weighted-average fair value per option of
options granted during the year
    
    
    
 
 (1)
    
    The aggregate intrinsic value of stock options in the table above reflects the
pre-tax intrinsic value (the amount by which the June 30, 2010 market value of
the underlying stock option exceeded the exercise price of the option) that would
have been received by the option holders had all option holders exercised their
options on June 30, 2010. This amount changes based on the changes in the market
value of the Companys stock.     Six Months EndedJune 30, 2010WeightedNumber of
    
    
    AverageShares
    
    
    PriceNon-vested at January 1, 2010
    
    
    47,282Granted
    
    
    15,337
    
    
    $
    13.78Vested
    
    
    (28,847
    )Non-vested at June 30, 2010
    
    
    33,772
 16




---



##### Table of Contents



Note 8. Employee Benefit Plan
  Three Months EndedJune 30,2010
    
    
    2009Service cost
    
    $
    
    
    
    $
    62,707Interest cost
    
    
    79,523
    
    
    
    73,827Expected return on plan assets
    
    
    (64,176
    )
    
    
    (65,839
    )Amortization of transition (asset)
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    Recognized net actuarial (gain) loss
    
    
    186,613
    
    
    
    Net periodic benefit cost
    
    $
    201,960
    
    
    $
    70,695
 Six Months EndedJune 30,2010
    
    
    2009Service cost
    
    $
    
    
    
    $
    125,414Interest cost
    
    
    159,046
    
    
    
    147,654Expected return on plan assets
    
    
    (128,352
    )
    
    
    (130,868
    )Amortization of transition (asset)
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    
    
    
    
    Recognized net actuarial (gain) loss
    
    
    186,613Net periodic benefit cost
    
    $
    217,307
    
    
    $
    142,200
    17




---



##### Table of Contents



Note 9. Fair Value Measurement
   Level 1 
    
    Valuation is based on quoted prices in active markets for
identical assets and liabilities.Level 2 
    
    Valuation is based on observable inputs including quoted
prices in active markets for similar assets and
liabilities, quoted prices for identical or similar
assets and liabilities in less active markets, and
model-based valuation techniques for which significant
assumptions can be derived primarily from or corroborated
by observable data in the market.Level 3 
    
    Valuation is based on model-based techniques that use one
or more significant inputs or assumptions that are
unobservable in the market.
   18




---



##### Table of Contents



Fair Value Measurements at UsingActive Markets for
    
    
    Significant Other
    
    
    Significant(In Thousands)
    
    
    
    
    
    Identical Assets
    
    
    Observable Inputs
    
    
    UnobservableDescription
    
    Balance
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    Inputs (Level 3)Assets at June 30, 2010Available-for-sale securities:Obligations of U.S. Government
corporations and agencies
    
    $
    33,924
    
    
    $
    
    
    
    $
    33,924
    
    
    $
    Obligations of states and political
subdivisions
    
    
    5,679
    
    
    
    
    
    
    
    5,679
    
    
    
    Corporate bonds
    
    
    1,636
    
    
    
    
    
    
    
    
    
    
    
    1,636Mutual funds
    
    
    326
    
    
    
    
    
    
    
    326
    
    
    
    FHLMC Preferred
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    Total
available-for-sale securities
    
    $
    41,571
    
    
    
    
    
    
    $
    39,935
    
    
    $
    1,636Assets at
December 31, 2009Available-for-sale securities:Obligations of U.S. Government
corporations and agencies
    
    $
    28,729
    
    
    $
    
    
    
    $
    28,729
    
    
    $
    Obligations of states and political
subdivisions
    
    
    5,724
    
    
    
    
    
    
    
    5,724
    
    
    
    Corporate bonds
    
    
    1,912
    
    
    
    
    
    
    
    
    
    
    
    1,912Mutual funds
    
    
    312
    
    
    
    
    
    
    
    312
    
    
    
    FHLMC Preferred
    
    
    15
    
    
    
    
    
    
    
    15
    
    
    
    Total
available-for-sale securities
    
    $
    36,692
    
    
    
    
    
    
    $
    34,780
    
    
    $
    1,912
 Change in Level 3 Fair Value
  Total Gains (Losses)Realized/UnrealizedIncluded inBalance
    
    
    
    
    
    
    Other
    
    
    Transfers in(In Thousands)
    
    January 1,
    
    
    Included in
    
    
    Comprehensive
    
    
    and/or out of
    
    
    Balance JuneDescription
    
    2010
    
    
    earnings
    
    
    Income
    
    
    Level 3
    
    
    30, 2010Assets at June 30, 2010Available-for-sale securities:Corporate bonds
    
    $
    1,912
    
    
    $
    (476
    )
    
    $
    (276
    )
    
    $
    476
    
    
    $
    1,636
    19




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##### Table of Contents



Carrying value at June 30, 2010Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantBalance as of
    
    
    Identical
    
    
    Observable
    
    
    Unobservable(In Thousands)
    
    June 30,
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Impaired loans, net
    
    $
    1,572
    
    
    
    
    
    
    $
    1,457
    
    
    $
    115Other real estate owned
    
    
    2,412
    
    
    
    
    
    
    
    2,412
    
    
    
    
 Carrying value at December 31, 2009Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantBalance as of
    
    
    Identical
    
    
    Observable
    
    
    Unobservable(In Thousands)
    
    December 31,
    
    
    Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Impaired loans, net
    
    $
    2,050
    
    
    
    
    
    
    $
    794
    
    
    $
    1,256Other real estate owned
    
    
    2,480
    
    
    
    
    
    
    
    2,480
    
    
    
    
  20




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##### Table of Contents



Cash and cash equivalents
  Securities
  Loan Receivables
  Accrued Interest
  Deposit Liabilities
  Federal Funds Purchased
  Federal Home Loan Bank Advances
  Off-Balance-Sheet Financial Instruments
   21




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##### Table of Contents



June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(In Thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and short-term
investments
    
    $
    38,736
    
    
    $
    38,736
    
    
    $
    26,199
    
    
    $
    26,199Federal funds sold
    
    
    8
    
    
    
    8
    
    
    
    9
    
    
    
    9Securities
    
    
    41,571
    
    
    
    41,571
    
    
    
    36,692
    
    
    
    36,692Restricted securities
    
    
    3,775
    
    
    
    3,775
    
    
    
    3,775
    
    
    
    3,775Loans, net
    
    
    462,730
    
    
    
    484,347
    
    
    
    462,784
    
    
    
    477,100Accrued interest receivable
    
    
    1,494
    
    
    
    1,494
    
    
    
    1,495
    
    
    
    1,495Financial liabilities:Deposits
    
    $
    492,826
    
    
    $
    483,878
    
    
    $
    465,987
    
    
    $
    467,600FHLB advances
    
    
    40,000
    
    
    
    41,296
    
    
    
    50,000
    
    
    
    50,477Federal funds purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Company obligated mandatorily
redeemable capital securities
    
    
    4,124
    
    
    
    2,973
    
    
    
    4,124
    
    
    
    2,673
  Note 10. Subsequent Events
   22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   GENERAL
    23




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   24




---



##### Table of Contents



The Washington Post, The Fauquier Times Democrat The Bull Run
Observer Federal
Reserve Beige Book for the Richmond Federal Reserve District Global Insight
  EXECUTIVE OVERVIEW
   25




---



##### Table of Contents



COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND JUNE 30, 2009
 NET INCOME
  NET INTEREST INCOME AND EXPENSE
  26




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##### Table of Contents



27




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##### Table of Contents



AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 Three
Months Ended June 30, 2010
    
    

Three
Months Ended June 30, 2009Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    

Expense
    
    

Rate
    
    

Balances
    
    

Expense
    
    

RateASSETS:LoansTaxable
    
    $
    451,954
    
    
    $
    6,561
    
    
    
    5.75
    %
    
    $
    439,302
    
    
    $
    6,390
    
    
    
    5.76
    %Tax-exempt (1)
    
    
    14,032
    
    
    
    246
    
    
    
    6.93
    %
    
    
    8,450
    
    
    
    146
    
    
    
    6.84
    %Nonaccrual (2)
    
    
    3,099
    
    
    
    
    
    
    
    
    
    
    
    1,574
    
    
    
    
    
    
    
    Total Loans
    
    
    469,085
    
    
    
    6,807
    
    
    
    5.75
    %
    
    
    449,326
    
    
    
    6,536
    
    
    
    5.76
    %SecuritiesTaxable
    
    
    36,626
    
    
    
    309
    
    
    
    3.38
    %
    
    
    29,187
    
    
    
    329
    
    
    
    4.51
    %Tax-exempt (1)
    
    
    5,631
    
    
    
    86
    
    
    
    6.09
    %
    
    
    5,365
    
    
    
    88
    
    
    
    6.54
    %Total securities
    
    
    42,257
    
    
    
    395
    
    
    
    3.74
    %
    
    
    34,552
    
    
    
    417
    
    
    
    4.82
    %Deposits in banks
    
    
    35,388
    
    
    
    16
    
    
    
    0.18
    %
    
    
    6,397
    
    
    
    3
    
    
    
    0.20
    %Federal funds sold
    
    
    8
    
    
    
    
    
    
    
    0.38
    %
    
    
    75
    
    
    
    
    
    
    
    0.25
    %Total earning assets
    
    
    546,738
    
    
    
    7,218
    
    
    
    5.23
    %
    
    
    490,350
    
    
    
    6,956
    
    
    
    5.62
    %Less: Reserve for loan losses
    
    
    (5,526
    )
    
    
    
    
    
    
    
    
    
    
    (5,013
    )Cash and due from banks
    
    
    6,317
    
    
    
    
    
    
    
    
    
    
    
    6,823Bank premises and equipment, net
    
    
    14,536
    
    
    
    
    
    
    
    
    
    
    
    9,685Other real estate owned
    
    
    2,354
    
    
    
    
    
    
    
    
    
    
    
    2,029Other assets
    
    
    22,211
    
    
    
    
    
    
    
    
    
    
    
    19,604Total Assets
    
    $
    586,630
    
    
    
    
    
    
    
    
    
    
    $
    523,478LIABILITIES & SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    68,406
    
    
    
    
    
    
    
    
    
    
    $
    63,575Interest-bearing depositsNOW accounts
    
    
    106,912
    
    
    
    185
    
    
    
    0.69
    %
    
    
    77,702
    
    
    
    78
    
    
    
    0.40
    %Money market accounts
    
    
    64,082
    
    
    
    120
    
    
    
    0.75
    %
    
    
    70,406
    
    
    
    138
    
    
    
    0.79
    %Savings accounts
    
    
    50,160
    
    
    
    59
    
    
    
    0.47
    %
    
    
    34,579
    
    
    
    24
    
    
    
    0.27
    %Time deposits
    
    
    197,742
    
    
    
    973
    
    
    
    1.97
    %
    
    
    168,509
    
    
    
    1,201
    
    
    
    2.86
    %Total interest-bearing deposits
    
    
    418,896
    
    
    
    1,337
    
    
    
    1.28
    %
    
    
    351,196
    
    
    
    1,441
    
    
    
    1.65
    %Federal funds purchased
    
    
    55
    
    
    
    
    
    
    
    0.26
    %
    
    
    3,900
    
    
    
    12
    
    
    
    1.28
    %Federal Home Loan Bank advances
    
    
    46,044
    
    
    
    192
    
    
    
    1.65
    %
    
    
    56,464
    
    
    
    230
    
    
    
    1.61
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    21
    
    
    
    1.97
    %
    
    
    4,124
    
    
    
    29
    
    
    
    2.82
    %Total interest-bearing liabilities
    
    
    469,119
    
    
    
    1,550
    
    
    
    1.32
    %
    
    
    415,684
    
    
    
    1,712
    
    
    
    1.65
    %Other liabilities
    
    
    5,442
    
    
    
    
    
    
    
    
    
    
    
    2,875Shareholders equity
    
    
    43,663
    
    
    
    
    
    
    
    
    
    
    
    41,344Total Liabilities & Shareholders Equity
    
    $
    586,630
    
    
    
    
    
    
    
    
    
    
    $
    523,478Net interest spread
    
    
    
    
    
    $
    5,668
    
    
    
    3.91
    %
    
    
    
    
    
    $
    5,244
    
    
    
    3.98
    %Interest expense as a percent of average earning assets
    
    
    
    
    
    
    
    
    
    
    1.13
    %
    
    
    
    
    
    
    
    
    
    
    1.40
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.10
    %
    
    
    
    
    
    
    
    
    
    
    4.23
    %
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%.(2)
    
    Nonaccrual loans are included in the average balance of total loans and total earning assets.  28




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Average
    
    
    Net interest
    
    
    AverageBalance
    
    
    income
    
    
    RateTotal Earning Assets and Margin
    
    $
    546,738
    
    
    $
    5,668
    
    
    
    4.10
    %Plus: Excess brokered deposits and FHLB advances
    
    
    
    
    
    
    37
    
    
    
    0.84
    %Less: Incremental Deposits at other banks
    
    
    (17,500
    )
    
    
    (8
    )
    
    
    0.18
    %Subtotal
    
    
    529,238
    
    
    
    5,697
    
    
    
    4.32
    %Less: Gain on early repayment of FHLB advance
    
    
    
    
    
    
    (85
    )Adjusted Earning Assets and Margin
    
    $
    529,238
    
    
    $
    5,612
    
    
    
    4.25
    %
 RATE/VOLUME ANALYSIS
  RATE / VOLUME VARIANCE
(In Thousands)
 Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOME
    
    
    
    
    
    
    
    
    
    
    Loans; taxable
    
    $
    171
    
    
    $
    184
    
    
    
    (13
    )Loans; tax-exempt (1)
    
    
    100
    
    
    
    96
    
    
    
    4Securities; taxable
    
    
    (20
    )
    
    
    84
    
    
    
    (104
    )Securities; tax-exempt (1)
    
    
    (2
    )
    
    
    4
    
    
    
    (6
    )Deposits in banks
    
    
    13
    
    
    
    14
    
    
    
    (1
    )Federal funds sold
    
    
    
    
    
    
    
    
    
    
    Total Interest Income
    
    
    262
    
    
    
    382
    
    
    
    (120
    )INTEREST EXPENSENOW accounts
    
    
    107
    
    
    
    29
    
    
    
    78Money market accounts
    
    
    (18
    )
    
    
    (12
    )
    
    
    (6
    )Savings accounts
    
    
    35
    
    
    
    11
    
    
    
    24Time deposits
    
    
    (228
    )
    
    
    208
    
    
    
    (436
    )Federal
funds purchased and securities sold under agreements to repurchase
    
    
    (12
    )
    
    
    (12
    )
    
    
    Federal Home Loan Bank advances
    
    
    (38
    )
    
    
    (42
    )
    
    
    4Capital securities of subsidiary trust
    
    
    (8
    )
    
    
    
    
    
    
    (8
    )Total Interest Expense
    
    
    (162
    )
    
    
    182
    
    
    
    (344
    )Net Interest Income
    
    $
    424
    
    
    $
    200
    
    
    $
    224
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. PROVISION FOR LOAN LOSSES, ALLOWANCE FOR LOAN LOSSES, AND ASSET QUALITY
  29




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OTHER INCOME
     OTHER EXPENSE
    30




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##### Table of Contents



INCOME TAXES
  COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND JUNE 30, 2009
 NET INCOME
  NET INTEREST INCOME AND EXPENSE
   31




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32




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AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(Dollars in Thousands)
 Six Months Ended June 30, 2010
    
    
    Six Months Ended June 30, 2009Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    450,630
    
    
    $
    13,090
    
    
    
    5.79
    %
    
    $
    436,220
    
    
    $
    12,654
    
    
    
    5.78
    %Tax-exempt (1)
    
    
    14,079
    
    
    
    491
    
    
    
    6.96
    %
    
    
    8,492
    
    
    
    291
    
    
    
    6.82
    %Nonaccrual (2)
    
    
    3,413
    
    
    
    
    
    
    
    
    
    
    
    1,552
    
    
    
    
    
    
    
    Total Loans
    
    
    468,122
    
    
    
    13,581
    
    
    
    5.78
    %
    
    
    446,264
    
    
    
    12,945
    
    
    
    5.78
    %SecuritiesTaxable
    
    
    36,124
    
    
    
    619
    
    
    
    3.43
    %
    
    
    30,606
    
    
    
    692
    
    
    
    4.52
    %Tax-exempt (1)
    
    
    5,698
    
    
    
    176
    
    
    
    6.17
    %
    
    
    5,518
    
    
    
    181
    
    
    
    6.56
    %Total securities
    
    
    41,822
    
    
    
    795
    
    
    
    3.80
    %
    
    
    36,124
    
    
    
    873
    
    
    
    4.83
    %Deposits in banks
    
    
    26,335
    
    
    
    24
    
    
    
    0.18
    %
    
    
    5,533
    
    
    
    7
    
    
    
    0.25
    %Federal funds sold
    
    
    9
    
    
    
    
    
    
    
    0.26
    %
    
    
    122
    
    
    
    
    
    
    
    0.26
    %Total earning assets
    
    
    536,288
    
    
    
    14,400
    
    
    
    5.35
    %
    
    
    488,043
    
    
    
    13,825
    
    
    
    5.64
    %Less: Reserve for loan losses
    
    
    (5,509
    )
    
    
    
    
    
    
    
    
    
    
    (4,948
    )Cash and due from banks
    
    
    6,025
    
    
    
    
    
    
    
    
    
    
    
    9,148Bank premises and equipment, net
    
    
    14,509
    
    
    
    
    
    
    
    
    
    
    
    9,218Other real estate owned
    
    
    2,409
    
    
    
    
    
    
    
    
    
    
    
    2,523Other assets
    
    
    22,361
    
    
    
    
    
    
    
    
    
    
    
    17,810Total Assets
    
    $
    576,083
    
    
    
    
    
    
    
    
    
    
    $
    521,794LIABILITIES &
SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    66,077
    
    
    
    
    
    
    
    
    
    
    $
    63,869Interest-bearing depositsNOW accounts
    
    
    98,932
    
    
    
    318
    
    
    
    0.65
    %
    
    
    76,982
    
    
    
    159
    
    
    
    0.42
    %Money market accounts
    
    
    61,719
    
    
    
    230
    
    
    
    0.75
    %
    
    
    70,813
    
    
    
    311
    
    
    
    0.88
    %Savings accounts
    
    
    49,410
    
    
    
    118
    
    
    
    0.48
    %
    
    
    33,001
    
    
    
    48
    
    
    
    0.30
    %Time deposits
    
    
    198,652
    
    
    
    1,946
    
    
    
    1.98
    %
    
    
    164,586
    
    
    
    2,482
    
    
    
    3.04
    %Total interest-bearing deposits
    
    
    408,713
    
    
    
    2,612
    
    
    
    1.29
    %
    
    
    345,382
    
    
    
    3,000
    
    
    
    1.75
    %Federal funds purchased
    
    
    28
    
    
    
    
    
    
    
    0.26
    %
    
    
    3,488
    
    
    
    23
    
    
    
    1.32
    %Federal Home Loan Bank advances
    
    
    48,011
    
    
    
    466
    
    
    
    1.93
    %
    
    
    57,480
    
    
    
    496
    
    
    
    1.72
    %Capital securities of subsidiary trust
    
    
    4,124
    
    
    
    40
    
    
    
    1.92
    %
    
    
    4,124
    
    
    
    65
    
    
    
    3.15
    %Total interest-bearing liabilities
    
    
    460,876
    
    
    
    3,118
    
    
    
    1.36
    %
    
    
    410,474
    
    
    
    3,584
    
    
    
    1.76
    %Other liabilities
    
    
    4,605
    
    
    
    
    
    
    
    
    
    
    
    5,631Shareholders equity
    
    
    44,525
    
    
    
    
    
    
    
    
    
    
    
    41,820Total Liabilities & Shareholders Equity
    
    $
    576,083
    
    
    
    
    
    
    
    
    
    
    $
    521,794Net interest spread
    
    
    
    
    
    $
    11,282
    
    
    
    3.99
    %
    
    
    
    
    
    $
    10,241
    
    
    
    3.88
    %Interest expense as a percent of
average earning assets
    
    
    
    
    
    
    
    
    
    
    1.17
    %
    
    
    
    
    
    
    
    
    
    
    1.47
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.18
    %
    
    
    
    
    
    
    
    
    
    
    4.17
    %
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%.(2)
    
    Nonaccrual loans are included in the average balance of total loans and total earning assets. RATE/VOLUME ANALYSIS
  33




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RATE / VOLUME VARIANCE
(In Thousands)
 Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOME
    
    
    
    
    
    
    
    
    
    
    Loans; taxable
    
    $
    436
    
    
    $
    418
    
    
    
    18Loans; tax-exempt (1)
    
    
    200
    
    
    
    191
    
    
    
    9Securities; taxable
    
    
    (73
    )
    
    
    125
    
    
    
    (198
    )Securities; tax-exempt (1)
    
    
    (5
    )
    
    
    6
    
    
    
    (11
    )Deposits in banks
    
    
    17
    
    
    
    26
    
    
    
    (9
    )Federal funds sold
    
    
    
    
    
    
    
    
    
    
    Total Interest Income
    
    
    575
    
    
    
    766
    
    
    
    (191
    )INTEREST EXPENSENOW accounts
    
    
    159
    
    
    
    45
    
    
    
    114Money market accounts
    
    
    (81
    )
    
    
    (40
    )
    
    
    (41
    )Savings accounts
    
    
    70
    
    
    
    24
    
    
    
    46Time deposits
    
    
    (536
    )
    
    
    514
    
    
    
    (1,050
    )Federal funds purchased and securities
sold under agreements to repurchase
    
    
    (23
    )
    
    
    (23
    )
    
    
    Federal Home Loan Bank advances
    
    
    (30
    )
    
    
    (82
    )
    
    
    52Capital securities of subsidiary trust
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Total Interest Expense
    
    
    (466
    )
    
    
    438
    
    
    
    (904
    )Net Interest Income
    
    $
    1,041
    
    
    $
    328
    
    
    $
    713
 
 (1)
    
    Income and rates on non-taxable assets are computed on a tax equivalent basis using a federal tax rate of 34%. PROVISION FOR LOAN LOSSES, ALLOWANCE FOR LOAN LOSSES, AND ASSET QUALITY
  OTHER INCOME
     OTHER EXPENSE
  34




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INCOME TAXES
  COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2010 AND DECEMBER 31, 2009
    35




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ASSET QUALITY
      Age Analysis of Past Due Financing Receivables
(In thousands)
 At June 30, 2010
 Past due as30-59 Days Past
    
    
    60-89 Days Past
    
    
    Greater than 90
    
    
    
    
    
    
    
    
    
    
    Percentage ofDue
    
    
    Due
    
    
    Days
    
    
    Total Past Due
    
    
    Total Loans
    
    
    LoansSecured by real estate:Construction
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    35,834
    
    
    
    0.00
    %Farmland
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,090
    
    
    
    0.00
    %1-4 Family Residential
    
    
    2,581
    
    
    
    992
    
    
    
    279
    
    
    
    3,852
    
    
    
    191,258
    
    
    
    2.01
    %Commercial Real Estate
    
    
    423
    
    
    
    
    
    
    
    1,538
    
    
    
    1,961
    
    
    
    189,249
    
    
    
    1.04
    %Commercial and Industrial
    
    
    1,044
    
    
    
    
    
    
    
    194
    
    
    
    1,238
    
    
    
    28,253
    
    
    
    4.38
    %Consumer
    
    
    253
    
    
    
    12
    
    
    
    5
    
    
    
    270
    
    
    
    8,350
    
    
    
    3.23
    %Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,331
    
    
    
    0.00
    %Total
    
    $
    4,301
    
    
    $
    1,004
    
    
    $
    2,016
    
    
    $
    7,321
    
    
    $
    468,365
    
    
    
    1.56
    %
 At December 31, 2009
 Past due as30-59 Days Past
    
    
    60-89 Days Past
    
    
    Greater than 90
    
    
    
    
    
    
    
    
    
    
    Percentage ofDue
    
    
    Due
    
    
    Days
    
    
    Total Past Due
    
    
    Total Loans
    
    
    LoansSecured by real estate:Construction
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    33,003
    
    
    
    0.00
    %Farmland
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    948
    
    
    
    0.00
    %1-4 Family Residential
    
    
    1,978
    
    
    
    469
    
    
    
    432
    
    
    
    2,879
    
    
    
    193,709
    
    
    
    1.49
    %Commercial Real Estate
    
    
    354
    
    
    
    123
    
    
    
    1,720
    
    
    
    2,197
    
    
    
    186,463
    
    
    
    1.18
    %Commercial and Industrial
    
    
    781
    
    
    
    168
    
    
    
    764
    
    
    
    1,713
    
    
    
    29,286
    
    
    
    5.85
    %Consumer
    
    
    137
    
    
    
    30
    
    
    
    41
    
    
    
    208
    
    
    
    10,390
    
    
    
    2.00
    %Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,559
    
    
    
    0.00
    %Total
    
    $
    3,250
    
    
    $
    790
    
    
    $
    2,957
    
    
    $
    6,997
    
    
    $
    468,358
    
    
    
    1.49
    %
 At June 30, 2009
 Past due as30-59 Days Past
    
    
    60-89 Days Past
    
    
    Greater than 90
    
    
    
    
    
    
    
    
    
    
    Percentage ofDue
    
    
    Due
    
    
    Days
    
    
    Total Past Due
    
    
    Total Loans
    
    
    LoansSecured by real estate:Construction
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    41,899
    
    
    
    0.00
    %Farmland
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,268
    
    
    
    0.00
    %1-4 Family Residential
    
    
    4,069
    
    
    
    448
    
    
    
    481
    
    
    
    4,998
    
    
    
    182,800
    
    
    
    2.73
    %Commercial Real Estate
    
    
    
    
    
    
    1,601
    
    
    
    466
    
    
    
    2,067
    
    
    
    172,559
    
    
    
    1.20
    %Commercial and Industrial
    
    
    1,503
    
    
    
    419
    
    
    
    632
    
    
    
    2,554
    
    
    
    39,406
    
    
    
    6.48
    %Consumer
    
    
    202
    
    
    
    
    
    
    
    96
    
    
    
    298
    
    
    
    13,151
    
    
    
    2.27
    %Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,979
    
    
    
    0.00
    %Total
    
    $
    5,774
    
    
    $
    2,468
    
    
    $
    1,675
    
    
    $
    9,917
    
    
    $
    458,062
    
    
    
    2.16
    %
 36




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##### Table of Contents



CONTRACTUAL OBLIGATIONS
  OFF-BALANCE SHEET ARRANGEMENTS
  CAPITAL
   37




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##### Table of Contents



RISK BASED CAPITAL RATIOS  (Dollars in Thousands)
 June 30,
    
    
    December 31,2010
    
    
    2009Tier 1 Capital:Shareholders Equity
    
    $
    43,874
    
    
    $
    42,639Plus: Unrealized loss on
securities
available for sale/FAS 158, net
    
    
    1,536
    
    
    
    1,919Less: Unrealized loss on equity securities, net
    
    
    (5
    )
    
    
    (4
    )Plus: Company-obligated
madatorily
redeemable capital securities
    
    
    4,000
    
    
    
    4,000Total Tier 1 Capital
    
    
    49,405
    
    
    
    48,554Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    5,397
    
    
    
    5,485Total Capital:
    
    
    54,802
    
    
    
    54,039Risk Weighted Assets:
    
    $
    438,674
    
    
    $
    442,658Regulatory Capital Ratios:Leverage Ratio
    
    
    8.42
    %
    
    
    8.68
    %Tier 1 to Risk Weighted Assets
    
    
    11.26
    %
    
    
    10.97
    %Total
Capital to Risk Weighted Assets
    
    
    12.49
    %
    
    
    12.21
    %
 CAPITAL RESOURCES AND LIQUIDITY
     38




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##### Table of Contents



LIQUIDITY SOURCES AND USES
(Dollars in Thousands)
 June 30, 2010
    
    
    December 31, 2009Total
    
    
    In Use
    
    
    Available
    
    
    Total
    
    
    In Use
    
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    68,288
    
    
    $
    
    
    
    $
    68,288
    
    
    $
    72,563
    
    
    $
    
    
    
    $
    72,563Federal Home Loan Bank advances
    
    
    121,695
    
    
    
    40,000
    
    
    
    81,695
    
    
    
    108,310
    
    
    
    50,000
    
    
    
    58,310Federal funds sold and interest-bearing
deposits in other banks, excluding
requirements
    
    
    
    
    
    
    
    
    
    
    24,052
    
    
    
    
    
    
    
    
    
    
    
    13,617Securities, available for sale and unpledged
at fair value
    
    
    
    
    
    
    
    
    
    
    10,743
    
    
    
    
    
    
    
    
    
    
    
    10,730Total short-term funding sources
    
    
    
    
    
    
    
    
    
    $
    184,778
    
    
    
    
    
    
    
    
    
    
    $
    155,220Uses:Unfunded loan commitments and
lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    66,985
    
    
    
    
    
    
    
    
    
    
    $
    71,523Letters of credit
    
    
    
    
    
    
    
    
    
    
    5,766
    
    
    
    
    
    
    
    
    
    
    
    8,585Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    72,751
    
    
    
    
    
    
    
    
    
    
    $
    80,108Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    254.0
    %
    
    
    
    
    
    
    
    
    
    
    193.8
    %
 IMPACT OF INFLATION AND CHANGING PRICES
  39




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4.
    
    CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
     
 PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  40




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##### Table of Contents



ITEM 1A.
    
    RISK FACTORS
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    (REMOVED AND RESERVED)
 
 ITEM 5.
    
    OTHER INFORMATION
  
    
    Eliminating the ability of three or more stockholders with a collective ownership of 25% or
more of the Companys common stock from calling a special meeting of stockholders. (Section
1.3)
 
    
    Permitting a notice of meeting of stockholders to be given in any manner permitted by the
Virginia Stock Corporation Act (the VSCA), including by electronic transmission. (Section
1.4)
 
    
    Changing the timing of the notice requirement for a stockholder requesting that certain
business be conducted at a stockholders meeting from not less than 60 days to not less than
120 days prior to the anniversary date of the previous years proxy statement; clarifying
certain notice requirements for such a stockholders request so that the notice must (i) state
the reasons for conducting such business at the meeting, (ii) disclose any material interest
of the stockholder in such business, and (iii) contain a representation that the stockholder
will notify the Company of any changes to the information provided in the notice. (Section
1.5)
 
    
    Removing language permitting the exact number of directors to be established within a range
by resolution of the stockholders at any meeting of the stockholders and retaining the right
of the number of directors to be set by the full Board of Directors by resolution. (Section
2.2)
 
    
    Clarifying the timing on when a stockholder is required to give notice for a director
nomination so that notice must be received by the Company not less than 120 days prior to the
anniversary date of the previous years proxy statement (the provision on timing of the notice
had previously called for notice not less than 30 days prior to the first anniversary date of
the initial notice given to stockholders of record for the previous annual meeting by or at
the direction of the Board of Directors, provided, however, that the notice was not required
to be given more than 90 days prior to the annual meeting of stockholders); adding a provision
that a stockholder
is to provide a description of any agreement, arrangement or understanding with respect to any
nomination between or among the stockholder or any other person on whose behalf the nomination
is made and any of its affiliates or associates; and adding a provision that a stockholder
provide a representation that the stockholder will notify the Company of any changes to the
information provided in the notice. (Section 2.4)
 
    
    Eliminating a provision permitting a former director to become a director-emeritus for a
three-year term, and allowing such director-emeritus to attend meetings of the Board of
Directors of the Company and be paid a fee equal to the regular fee paid to a director.
(Section 2.7)
 
    
    Eliminating the provision requiring that the Chairman and President are ex officio members
of all committees. (Sections 4.4 and 4.5)
  
 ITEM 6.
    
    EXHIBITS
 Exhibit Number
    
    Exhibit Description3.1
    
    Articles of Incorporation of Fauquier Bankshares, Inc., as amended, incorporated by reference
to Exhibit 3.1 to Form 10-K filed March 15, 2010.3.2
    
    Bylaws of Fauquier Bankshares, Inc., as amended and restated.31.1
    
    Certification of CEO pursuant to Rule 13a-14(a).31.2
    
    Certification of CFO pursuant to Rule 13a-14(a).32.1
    
    Certification of CEO pursuant to 18 U.S.C. Section 1350.32.2
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350.
 41




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##### Table of Contents



/s/ Randy K. FerrellRandy K. FerrellPresident & Chief Executive OfficerDated: August 9, 2010/s/ Eric P. GraapEric P. GraapExecutive Vice President & Chief Financial OfficerDated: August 9, 2010 42