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 Fauquier Bankshares, Inc. ("the Company") the 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.

GENERAL
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 3,695,160 shares of common stock, par value $3.13 per share, held by approximately 408 holders of record on March 31, 2012. The Bank has ten full service branch offices located in the Virginia communities of Old Town-Warrenton, Warrenton, Catlett, The Plains, Sudley Road-Manassas, Old Town-Manassas, New Baltimore, Bealeton, Bristow and Haymarket. An eleventh branch office is currently projected to open in Gainesville, Virginia during 2013. The executive offices of the Company and the main office of the Bank are located at 10 Courthouse Square, Warrenton, Virginia 20186.

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:
non-interest-bearing and interest bearing demand deposit 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 Maestro, Accel-Exchange 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") and Insured Cash Sweep Service ("IND"), to provide customers multi-million dollar FDIC insurance on CD investments and deposit sweeps through the transfer and/or exchange with other FDIC insured institutions. CDARS and IND are registered service marks 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 equity ownership interests in Bankers Insurance, LLC, a Virginia independent insurance company, Bankers Title Shenandoah, LLC, a title insurance company, and Infinex Investments, Inc., a full service broker/dealer. Bankers Insurance and Bankers Title Shenandoah are owned by a consortium of Virginia community banks, and Infinex is owned by banks and banking associations in various states.

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.

As of March 31, 2012, the Company had total consolidated assets of $594.2 million, total loans net of allowance for loan losses of $450.3 million, total consolidated deposits of $511.2 million, and total consolidated shareholders' equity of $48.1 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) Accounting Standards Codification ("ASC") 450 "Contingencies" (previously Statement of Financial Accounting Standards ("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 identified as impaired. The specific allowance uses various techniques to arrive at an estimate of loss. 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. 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 identified as impaired. The general allowance begins with estimates of probable losses inherent in the homogeneous portfolio based upon various statistical analyses. These include analysis of historical 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.

Specifically, the Company uses both external and internal qualitative factors when determining the non-loan-specific allowances. The external factors utilized include: unemployment in the Company's defined market area of Fauquier County, Prince William County, and the City of Manassas ("market area"), as well as state and national unemployment trends; new residential construction permits for the market area; bankruptcy statistics for the Virginia Eastern District and trends for the United States; and foreclosure statistics for the market area and the state. Quarterly, these external qualitative factors as well as relevant anecdotal information are evaluated from data compiled from local periodicals such as The Washington Post, The Fauquier Times Democrat, and The Bull Run Observer, which cover the Company's market area. Additionally, data is gathered from the Federal Reserve Beige Book for the Richmond Federal Reserve District, Global Insight's monthly economic review, the George Mason School of Public Policy Center for Regional Analysis, and daily economic updates from various other sources. Internal Bank data utilized includes: loans past due aging statistics, nonperforming loan trends, trends in collateral values, loan concentrations, loan review status downgrade trends, and lender turnover and experience trends. Both external and internal data is analyzed on a rolling eight quarter basis to determine risk profiles for each qualitative factor. Ratings are assigned through a defined matrix to calculate the allowance consistent with authoritative accounting literature. A narrative summary of the reserve allowance is produced quarterly and reported directly to the Company's Board of Directors. The Company's application of these qualitative factors to the allowance for loan losses has been consistent over the reporting period.

The Company employs an independent outsourced loan review function, which annually substantiates and/or adjusts internally generated risk ratings. This independent review is reported directly to the Company's Board of Directors' audit committee, and the results of this review are factored into the calculation of the allowance for loan losses.

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 $954,000 for the first quarter of 2012 was a 3.6% increase from the net income for the first quarter of 2011 of $921,000. Loans, net of reserve, totaling $450.3 million at March 31, 2012, decreased 0.4% when compared with December 31, 2011, and decreased 1.0% when compared with March 31, 2011. Deposits, totaling $511.2 million at March 31, 2012, decreased 3.7% compared with year-end 2011, and decreased 0.6% when compared with March 31, 2011. Assets under WMS management, totaling $307.1 million in market value at March 31, 2012, decreased 5.8% from March 31, 2011.

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 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. The current absolute level of historically low market interest rates, as well as the current slowness of new loan production, is also projected to result in a decrease in net interest income.

The Bank's non-performing assets totaled $6.9 million or 1.16% of total assets at March 31, 2012, as compared with $6.7 million or 1.10% of total assets at December 31, 2011, and $5.3 million or 0.89% of total assets at March 31, 2011. Nonaccrual loans totaled $4.8 million or 1.06% of total loans at March 31, 2012 compared with $4.6 million or 1.01% of total loans at December 31, 2011, and $1.7 million or 0.37% of total loans at March 31, 2011. The provision for loan losses was $500,000 for the first three months of 2012 compared with $463,000 for the first three months of 2011. Loan charge-offs, net of recoveries, totaled $351,000 or 0.08% of total average loans for the first three months of 2012, compared with $96,000 or 0.02% of total average loans for the first three months of 2011. Total allowance for loan losses was $6.9 million or 1.50% of total loans at March 31, 2012 compared with $6.7 million or 1.47% of loans at December 31, 2011 and $6.7 million or 1.45% of loans at March 31, 2011.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2012 and
MARCH 31, 2011

NET INCOME
Net income of $954,000 for the first quarter of 2012 was a 3.6% increase from the net income for the first quarter of 2011 of $921,000. Earnings per share on a fully diluted basis were $0.26 for the first quarter of 2012 compared to $0.25 for the first quarter of 2011. Profitability as measured by return on average assets increased from 0.63% in the first quarter of 2011 to 0.64% for the same period in 2012. Profitability as measured by return on average equity decreased from 8.37% to 7.97% over the same respective quarters in 2011 and 2012. The increase in net income was primarily due to a $189,000 decrease in other-than-temporary impairment losses on securities. This was partially offset by a $143,000 decrease in net interest income in the first quarter of 2012 compared with the first quarter of 2011.

NET INTEREST INCOME AND EXPENSE
Net interest income decreased $143,000 or 2.6% to $5.40 million for the quarter ended March 31, 2012 from $5.54 million for the quarter ended March 31, 2011. The decrease in net interest income was due primarily to the decline in loan balances and reduced yields on earning assets. These were partially offset by reduced rates on deposits and wholesale funding over the same period. The Company's net interest margin decreased from 4.12% in the first quarter of 2011 to 3.89% in the first quarter of 2012.

Total interest income decreased $332,000 or 4.8% to $6.51 million for the first quarter of 2012 from $6.84 million for the first quarter of 2011. This decrease was primarily due to a 38 basis point decline in the yield on earning assets and reduced loan balances from first quarter 2011 to first quarter 2012. This was partially offset by an increase in balances of investment securities and deposits in other banks.

The average yield on loans was 5.42% for the first quarter of 2012, down from 5.77% in the first quarter of 2011. Average loan balances decreased $6.6 million or 1.4% from $463.2 million during the first quarter of 2011 to $456.6 million during the first quarter of 2012. The decrease in loans outstanding and yield resulted in a $385,000 or 5.9% decline in interest and fee income from loans for the first quarter of 2012 compared with the same period in 2011.

Average investment security balances increased $4.6 million from $51.4 million in the first quarter of 2011 to $56.0 million in the first quarter of 2012. The tax-equivalent average yield on investments increased from 2.64% for the first quarter of 2011 to 2.72% for the first quarter of 2012. Interest and dividend income on security investments increased $40,000 or 13.1%, from $309,000 for the first quarter of 2011 to $349,000 for the first quarter of 2012. Interest income on deposits in other banks increased $12,000 from first quarter 2011 to first quarter 2012 resulting from higher earning balances at the Federal Reserve.

Total interest expense decreased $189,000 or 14.5% from $1.30 million for the first quarter of 2011 to $1.11 million for the first quarter of 2012, primarily due to the decline in interest paid on money market accounts and time deposits.

Interest paid on deposits decreased $192,000 or 19.1% from $1.01 million for the first quarter of 2011 to $815,000 for the first quarter of 2012. Average balances on time deposits declined $16.7 million or 9.7% from $173.3 million to $156.6 million while the average rate decreased from 1.70% to 1.60% in the first quarter of 2011 to the first quarter of 2012, resulting in $102,000 less of interest expense. Average money market accounts decreased $35.0 million or 43.1% from the first quarter of 2011 to the first quarter of 2012, while the rate declined from 0.45% to 0.23%, resulting in $64,000 less in interest expense. Average savings account balances increased $9.0 million from first quarter 2011 to first quarter 2012, while their average rate decreased from 0.26% to 0.16% over the same period, resulting in a decrease of $10,000 of interest expense for the first quarter of 2012. Average NOW deposit balances increased $39.5 million from the first quarter of 2011 to the first quarter of 2012, while the average rate decreased from 0.46% to 0.31%, resulting in a decrease of $15,000 in NOW interest expense for the first quarter of 2012. The decrease in money market accounts and majority of the increase in NOW accounts was due to the elimination of the "sweep" money market account and transfer, for the most part, into the business NOW account.

Interest expense on capital securities increased $1,000 from the first quarter of 2011 to the first quarter of 2012. From the first quarter of 2011 to the first quarter of 2012, interest expense on FHLB of Atlanta advances increased $3,000. The average rate on total interest-bearing liabilities decreased from 1.10% in the first quarter of 2011 to 0.95% for the first quarter of 2012.

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 Expense, and Average Yields and Rates

                                    Three Months Ended March 31, 2012                    Three Months Ended March 31, 2011
(In thousands except as
noted)                          Average            Income/          Average          Average            Income/          Average
Assets                         Balances            Expense           Rate           Balances            Expense           Rate
Loans
Taxable                      $     442,503       $      6,024            5.46 %   $     445,456       $      6,328            5.76 %
Tax-exempt (1)                       9,099                146            6.44 %          15,851                268            6.85 %
Nonaccrual (2)                       5,046                  -                             1,938                  -
Total Loans                        456,648              6,170            5.42 %         463,245              6,596            5.77 %

Securities
Taxable                             49,090                288            2.34 %          45,531                251            2.20 %
Tax-exempt (1)                       6,896                 93            5.41 %           5,843                 88            6.00 %
Total securities                    55,986                381            2.72 %          51,374                339            2.64 %

Deposits in banks                   51,354                 37            0.29 %          41,737                 25            0.24 %
Federal funds sold                       8                  -            0.22 %              11                  -            0.29 %
Total earning assets               563,996       $      6,588            4.69 %         556,367       $      6,960            5.07 %

Less: Reserve for loan
losses                              (6,891 )                                             (6,434 )
Cash and due from banks              4,958                                                5,273
Bank premises and
equipment, net                      14,991                                               14,140
Other real estate owned              1,776                                                3,110
Other assets                        23,530                                               23,467
Total Assets                 $     602,360                                        $     595,923

Liabilities and
Shareholders' Equity
Deposits
Demand deposits              $      75,625                                        $      71,194

Interest-bearing deposits
NOW accounts                       175,315       $        137            0.31 %         135,822       $        153            0.46 %
Money market accounts               46,275                 26            0.23 %          81,258                 90            0.45 %
Savings accounts                    64,517                 25            0.16 %          55,528                 36            0.26 %
Time deposits                      156,561                626            1.60 %         173,304                728            1.70 %
Total interest-bearing
deposits                           442,668                814            0.74 %         445,912              1,007            0.92 %


Federal funds purchased                  8                  -            0.76 %               8                  -            0.67 %
Federal Home Loan Bank
advances                            25,000                247            3.96 %          25,000                245            3.91 %
Capital securities of
subsidiary trust                     4,124                 50            4.86 %           4,124                 49            4.76 %
Total interest-bearing
liabilities                        471,800              1,111            0.95 %         475,044              1,301            1.10 %

Other liabilities                    6,903                                                5,077
Shareholders' equity                48,032                                               44,608
Total Liabilities &
Shareholders' Equity         $     602,360                                        $     595,923

Net interest spread                              $      5,477            3.74 %                       $      5,659            3.96 %

Interest expense as a
percent of average earning
assets                                                                   0.80 %                                               0.95 %
Net interest margin                                                      3.89 %                                               4.12 %

RATE/VOLUME ANALYSIS . . .