CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to the historical information contained herein, this report contains forward-looking statements. Forward-looking statements are based on certain assumptions and describe future plans, strategies, and expectations of the Company and the Bank, and are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" "may," "will" or similar expressions. Although we believe our plans, intentions and expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these plans, intentions, or expectations will be achieved. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain, and actual results could differ materially from those contemplated. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in:
interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the Bank's loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area, our plans to expand our branch network and increase our market share, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements in this report and you should not place undue reliance on such statements, which reflect our position as of the date of this report.

For additional discussion of risk factors that may cause our actual future results to differ materially from the results indicated within forward-looking statements, please see "Risk Factors" in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2008.
GENERAL
Fauquier Bankshares, Inc. ("the Company") was incorporated under the laws of the Commonwealth of Virginia on January 13, 1984. The Company is a registered bank holding company and owns all of the voting shares of The Fauquier Bank ("the Bank"). The Company engages in its business through the Bank, a Virginia state-chartered bank that commenced operations in 1902. The Company has no significant operations other than owning the stock of the Bank. The Company had issued and outstanding 3,598,537 shares of common stock, par value $3.13 per share, held by approximately 434 holders of record on September 30, 2009. The Bank has nine full service branch offices located in the Virginia communities of Warrenton, Catlett, The Plains, Sudley Road-Manassas, Old Town-Manassas, New Baltimore, Bealeton and Bristow. The executive offices of the Company and the main office of the Bank are located at 10 Courthouse Square, Warrenton, Virginia 20186. The Bank has leased property in Haymarket, Virginia, where it plans to build its tenth full-service branch offices, scheduled to open during 2010. The Bank's general market area principally includes Fauquier County, western Prince William County, and neighboring communities and is located approximately fifty (50) miles southwest of Washington, D.C.
The Bank provides a range of consumer and commercial banking services to individuals, businesses and industries. The deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"). The basic services offered by the Bank include:
demand interest bearing and non-interest bearing accounts, money market deposit accounts, NOW accounts, time deposits, safe deposit services, credit cards, cash management, direct deposits, notary services, night depository, prepaid debit cards, cashier's checks, domestic collections, savings bonds, automated teller services, drive-in tellers, internet banking, telephone banking, and banking by mail. In addition, the Bank makes secured and unsecured commercial and real estate loans, issues stand-by letters of credit and grants available credit for installment, unsecured and secured personal loans, residential mortgages and home equity loans, as well as automobile and other types of consumer financing. The Bank provides automated teller machine ("ATM") cards, as a part of the Star, NYCE, and Plus ATM networks, thereby permitting customers to utilize the convenience of larger ATM networks. The Bank also is a member of the Certificate of Deposit Account Registry Service ("CDARS"). CDARs can provide a customer multi-million dollar FDIC insurance on CD investments through the transfer and/or exchange with other FDIC insured institutions. CDARS is a registered service mark of Promontory Interfinancial Network, LLC.
The Bank operates a Wealth Management Services ("WMS" or "Wealth Management") division that began with the granting of trust powers to the Bank in 1919. The WMS division provides personalized services that include investment management, trust, estate settlement, retirement, insurance, and brokerage services. The Bank, through its subsidiary Fauquier Bank Services, Inc., has non-controlling equity ownership interests in Bankers Insurance, LLC, a Virginia independent insurance company; Infinex Investments, Inc., a full service broker/dealer; and Bankers Title Shenandoah, LLC, a title insurance company. On April 30, 2008, the Bank's ownership of stock in BI Investments, LLC was exchanged for Infinex stock as part of a merger.
The revenues of the Bank are primarily derived from interest on, and fees received in connection with, real estate and other loans, and from interest and dividends from investment and mortgage-backed securities, and short-term investments. The principal sources of funds for the Bank's lending activities are its deposits, repayment of loans, the sale and maturity of investment securities, and borrowings from the Federal Home Loan Bank ("FHLB") of Atlanta. Additional revenues are derived from fees for deposit-related and WMS-related services. The Bank's principal expenses are the interest paid on deposits and operating and general administrative expenses.
As is the case with banking institutions generally, the Bank's operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Board of Governors of the Federal Reserve System ("Federal Reserve"). As a Virginia-

chartered bank and a member of the Federal Reserve, the Bank is supervised and examined by the Federal Reserve and the Virginia State Corporation Commission. Interest rates on competing investments and general market rates of interest influence deposit flows and costs of funds. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Bank faces strong competition in the attraction of deposits (its primary source of lendable funds) and in the origination of loans. Please see "Risk Factors" in Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2008. As of September 30, 2009, the Company had total consolidated assets of $548.4 million, total loans net of allowance for loan losses of $455.4 million, total consolidated deposits of $435.6 million, and total consolidated shareholders' equity of $42.6 million.
CRITICAL ACCOUNTING POLICIES
GENERAL. The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use in our estimates. In addition, GAAP itself may change from one previously acceptable accounting method to another method. Although the economics of the Company's transactions would be the same, the timing of events that would impact the Company's transactions could change.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on three basic principles of accounting: (i) ASC 450 "Contingencies" (previously SFAS No. 5, "Accounting for Contingencies"), which requires that losses be accrued when they are probable of occurring and estimable, (ii) ASC 310 "Receivables" (previously SFAS No. 114, "Accounting by Creditors for Impairment of a Loan"), which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance and
(iii) Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues," which requires adequate documentation to support the allowance for loan losses estimate. The Company's allowance for loan losses has two basic components: the specific allowance and the general allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The specific allowance is used to individually allocate an allowance for larger balance, non-homogeneous loans. The specific allowance uses various techniques to arrive at an estimate of loss. First, analysis of the borrower's overall financial condition, resources and payment record, the prospects for support from financial guarantors, and the fair market value of collateral are used to estimate the probability and severity of inherent losses. Then the migration of historical default rates and loss severities, internal risk ratings, industry and market conditions and trends, and other environmental factors are considered. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The general allowance is used for estimating the loss on pools of smaller-balance, homogeneous loans; including 1-4 family mortgage loans, installment loans, other consumer loans, and outstanding loan commitments. Also, the general allowance is used for the remaining pool of larger balance, non-homogeneous loans which were not allocated a specific allowance upon their review. The general allowance begins with estimates of probable losses inherent in the homogeneous portfolio based upon various statistical analyses. These include analysis of historical and peer group delinquency and credit loss experience, together with analyses that reflect current trends and conditions. The Company also considers trends and changes in the volume and term of loans, changes in the credit process and/or lending policies and procedures, and an evaluation of overall credit quality. The general allowance uses a historical loss view as an indicator of future losses. As a result, even though this history is regularly updated with the most recent loss information, it could differ from the loss incurred in the future. The general allowance also captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in the specific allowances.

EXECUTIVE OVERVIEW
This discussion is intended to focus on certain financial information regarding the Company and the Bank and may not contain all the information that is important to the reader. The purpose of this discussion is to provide the reader with a more thorough understanding of our financial statements. As such, this discussion should be read carefully in conjunction with the consolidated financial statements and accompanying notes contained elsewhere in this report. The Bank is the primary independent community bank in its immediate market area as measured by deposit market share. It seeks to be the primary financial service provider for its market area by providing the right mix of consistently high quality customer service, efficient technological support, value-added products, and a strong commitment to the community. The Company and the Bank's primary operating businesses are in commercial and retail lending, deposit accounts and core deposits, and assets under WMS management.
Net income of $956,000 for the third quarter of 2009, was a 2.2% increase from the net income for the third quarter of 2008 of $935,000. Net income of $2.60 million for the nine months ending September 30, 2009, was a 9.8% decrease from the net income for the nine months ending September 30, 2008 of $2.89 million. Loans, net of reserve, totaling $455.4 million at September 30, 2009, increased 4.8% when compared with December 31, 2008, and increased 7.6% when compared with September 30, 2008. Deposits, totaling $435.6 million at September 30, 2009, increased 8.8% compared with December 31, 2008, and increased 7.4% when compared with September 30, 2008. Assets under WMS management, totaling $303.1 million in market value at September 30, 2009, increased 10.7% from $273.7 million in market value at September 30, 2008, despite the decline in valuations of the average common stock under management. For example, from September 30, 2008 to September 30, 2009, stocks measured in the S&P 500 index declined by approximately 9.4%.
Net interest income is the largest component of net income, and equals the difference between income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Future trends regarding net interest income are dependent on the absolute level of market interest rates, the shape of the yield curve, the amount of lost income from non-performing assets, the amount of prepaying loans, the mix and amount of various deposit types, competition for loans and deposits, and many other factors, as well as the overall volume of interest-earning assets. These factors are individually difficult to predict, and when taken together, the uncertainty of future trends compounds. Based on management's current projections, net interest income may increase through the end of 2009 and beyond as average interest-earning assets increase, but this may be offset in part or in whole by a possible contraction in the Bank's net interest margin resulting from competitive market conditions and/or a flat or inverted yield curve. A steeper yield curve is projected to result in an increase in net interest income, while a flatter or inverted yield curve is projected to result in a decrease in net interest income.
Since the third quarter of 2008, the Bank has seen its competition for deposits increase significantly. The pricing of retail deposits, which traditionally has been at an interest rate less than the interest rate on a FHLB of Atlanta advance of similar term, has exceeded the corresponding FHLB rate by 50 to 100 basis points or more. The increased cost of deposits has resulted in less net interest income and a narrower net interest margin. The intensified competition for deposits is, for the most part, may be the result of liquidity and capitalization pressures faced by many of the large multi-state financial institutions who compete in the Bank's market area.
The Bank's non-performing assets totaled $7.1 million or 1.29% of total assets at September 30, 2009, as compared with $4.3 million or 0.81% of total assets at December 31, 2008, and $4.6 million or 0.92% of total assets at September 30, 2008. Included in total non-performing assets at September 30, 2009 were $634,000 of non-performing pooled trust preferred corporate bonds. The Bank's non-performing loans and repossessed assets totaled $6.4 million or 1.39% of total loans and repossessed assets, including real estate owned, at September 30, 2009, as compared with $4.3 million or 0.97% of total loans and repossessed assets at December 31, 2008, and $4.6 million or 1.07% of total loans and repossessed assets at September 30, 2008. The provision for loan losses was $920,000 for the first nine months of 2009 compared with $1.72 million for the first nine months of 2008. Loan chargeoffs, net of recoveries, totaled $479,000 or 0.14% of total average loans on an annualized basis for the first nine months of 2009, compared with $1.22 million or 0.29% of total average loans for the first nine months of 2008. The $801,000 decrease in the provision for loan losses from the first nine months of 2008 to the first nine months of 2009 was largely in response to the $743,000 decline in net charge-offs for the respective nine month periods. Total

allowance for loan losses was $5.2 million or 1.13% of total loans at September 30, 2009 compared with $4.8 million or 1.08% of loans at December 31, 2008 and $4.7 million or 1.10% of loans at September 30, 2008.
Management seeks to continue the expansion of the Bank's branch network. The Bank has leased land in Bristow, Virginia and Haymarket, Virginia, in order to build its ninth and tenth full-service branch offices, respectively. The Bristow office opened on July 13, 2009, and the Haymarket office is scheduled to open in late 2009 or early 2010. The Bank is looking toward these new retail markets for growth in deposits and WMS income. Management seeks to increase the level of its fee income from deposits and WMS through the increase of its market share within its marketplace.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008
NET INCOME
Net income was $956,000 for the third quarter of 2009, a 2.2% increase from the third quarter of 2008 net income of $935,000. Earnings per share on a fully diluted basis were $0.26 in 2009 compared with $0.26 in 2008. Profitability as measured by return on average assets decreased from 0.73% in the third quarter of 2008 to 0.70% for the same period in 2009. Profitability as measured by return on average equity increased from 8.85% to 8.87% over the same respective third quarters in 2008 and 2009. The increase in net income was primarily due to the $551,000 increase in net interest income in the third quarter of 2009 compared with the third quarter of 2008. This was partially offset by a $246,000 permanent impairment loss on the Bank's investments in pooled trust preferred securities, as well as increased FDIC insurance expense.
NET INTEREST INCOME AND EXPENSE
Net interest income increased $551,000 or 11.2% to $5.47 million for the quarter ended September 30, 2009 from $4.92 million for the quarter ended September 30, 2008. The increase in net interest income was partially due to the impact of total average earning assets increasing 6.8% from $470.9 million during the third quarter of 2008 to $502.7 million during the third quarter of 2009. In addition, the Company's net interest margin increased from 4.15% in the third quarter of 2008 to 4.32% in the third quarter of 2009.
Total interest income decreased $177,000 or 2.4% to $7.09 million for the third quarter of 2009 from $7.27 million for the third quarter of 2008. This decrease was primarily due to the 53 basis point decrease in the yield on average assets from third quarter 2008 to third quarter 2009. This was partially offset by the increase in total average earning assets of $31.9 million.
The average yield on loans decreased to 5.79% for the third quarter of 2009 compared with 6.23% for the third quarter of 2008. Average loan balances increased $27.3 million or 6.4% from $429.4 million during the third quarter of 2008 to $456.6 million during the third quarter of 2009. The increase in loans outstanding, offset by the decline in rate, resulted in a $70,000 or 1.0% decrease in interest and fee income from loans for the third quarter of 2009 compared with the same period in 2008.
Average investment security balances decreased $705,000 from $38.2 million in the third quarter of 2008 to $37.5 million in the third quarter of 2009. The tax-equivalent average yield on investments decreased from 5.39% for the third quarter of 2008 to 4.48% for the third quarter of 2009. Together, there was a decrease in interest and dividend income on security investments of $95,000 or 19.6%, from $485,000 for the third quarter of 2008 to $390,000 for the third quarter of 2009. This decrease was primarily due to the decrease in overall market rates as well as the suspension of interest income on two of the Bank's investments in pooled trust preferred corporate bonds. Interest income on deposits in other banks decreased $9,000 from third quarter 2008 to third quarter 2009.
Total interest expense decreased $727,000 or 30.9% from $2.35 million for the third quarter of 2008 to $1.62 million for the third quarter of 2009 primarily due to the overall decline in shorter-term market interest rates. Interest paid on deposits decreased $451,000 or 25.6% from $1.76 million for the third quarter of 2008 to $1.31 million for the third quarter of 2009. Average NOW deposit balances decreased $4.6 million from the third quarter of 2008 to the third quarter of 2009, while the average rate on NOW accounts decreased from 0.90% to 0.47% resulting in a reduction of $93,000 in NOW interest expense for the third quarter of 2009. Average money market account

balances decreased $26.5 million from third quarter 2008 to third quarter 2009, while their average rate decreased from 1.95% to 0.57% over the same period resulting in a decrease of $342,000 of interest expense for the third quarter of 2009. Average time deposit balances increased $59.9 million from third quarter of 2008 to the third quarter of 2009 while the average rate on time deposits decreased from 3.52% to 2.27% resulting in a decrease of $46,000 in interest expense for the third quarter of 2009.
Interest expense on federal funds purchased decreased $8,000 for the third quarter of 2009 when compared to the third quarter of 2008 due to the decline in the average fed funds rate from 2.40% to 1.11%, which offset the $1.7 million increase in average federal funds purchased. Interest expense on FHLB of Atlanta advances decreased $245,000 from the third quarter of 2008 to the third quarter of 2009 due to the decrease in the average rate paid on FHLB advances from 3.51% to 2.17%, as well as the decrease in average FHLB advance balances of $8.4 million, The average rate on total interest-bearing liabilities decreased from 2.36% for the third quarter of 2008 to 1.50% for the third quarter of 2009. The following table sets forth information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields and rates paid for the periods indicated. These yields and costs are derived by dividing income or expense by the average daily balances of assets and liabilities, respectively, for the periods presented.

      AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
                             (Dollars in Thousands)

                                                          Three Months Ended September 30, 2009                               Three Months Ended September 30, 2008
                                                    Average                 Income/               Average               Average                 Income/               Average
                                                   Balances                 Expense                Rate                Balances                 Expense                Rate
ASSETS:
Loans
Taxable                                         $       446,344           $      6,599                5.79 %        $       417,624           $      6,664                6.26 %
Tax-exempt (1)                                            8,252                    150                7.09 %                  8,642                    159                7.21 %
Nonaccrual (2)                                            2,048                      -                                        3,089                      -

Total Loans                                             456,644                  6,749                5.79 %                429,355                  6,823                6.23 %


Securities
Taxable                                                  31,955                    330                4.13 %                 32,970                    427                5.17 %
Tax-exempt (1)                                            5,575                     90                6.45 %                  5,265                     88                6.71 %

Total securities                                         37,530                    420                4.48 %                 38,235                    515                5.39 %


Deposits in banks                                         8,506                      5                0.21 %                  3,269                     15                1.83 %
Federal funds sold                                           64                   0.04                0.25 %                      -

Total earning assets                                    502,744                  7,174                5.60 %                470,859                  7,353                6.13 %


Less: Reserve for loan losses                            (5,204 )                                                            (4,491 )
Cash and due from banks                                   5,863                                                              14,658
Bank premises and equipment, net                         11,994                                                               8,451
Other assets                                             23,613                                                              17,501


Total Assets                                    $       539,010                                                     $       506,978