FAUQUIER BANKSHARES INC - 10-K Annual Report

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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

COMMISSION FILE NO.: 2-25805

FAUQUIER BANKSHARES, INC.
(Exact name of registrant as specified in its charter)

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
(Registrant's telephone number)

SECURITIES TO BE REGISTERED UNDER SECTION 12(B) OF THE ACT: None

SECURITIES TO BE REGISTERED UNDER SECTION 12(G) OF THE ACT:

COMMON STOCK, PAR VALUE $3.13 PER SHARE
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X ).

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and ask prices of such common equity, as of a specified date within
60 days prior to the date of filing. The aggregate market value of the Company's
common shares held by "non-affiliates" of the registrant, based upon the closing
sale price of its common shares on the NASDAQ SmallCap Market System, was
approximately $25,087,288. Common shares held by each officer, director and
holder of 5% or more of the Company's outstanding common shares have been
excluded in that such persons or entities may be deemed to be affiliates. Such
determination of affiliate status is not a conclusive determination for other
purposes.

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date. The Company had 1,774,811 shares
outstanding as of March 27, 2000.

DOCUMENTS INCORPORTATED BY REFERENCE

Portions of the definitive proxy statement for the 2000 annual meeting of share
holders to be filed within 120 days of the fiscal year ended December 31, 1999
are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

Page

PART I

Item 1. Business 2

Item 2. Properties 9

Item 3. Legal Proceedings 10

Item 4. Submission of Matters to a Vote of Security Holders 10

PART II

Item 5. Market for Bankshares' Common Equity and Related
Shareholder Matters 10

Item 6. Selected Financial Data 11

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 12

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26

Item 8. Financial Statements and Supplementary Data 27

Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 28

PART III

Item 10. Directors and Executive Officers 28

Item 11. Executive Compensation 30

Item 12. Security Ownership of Certain Beneficial Owners and
Management 30

Item 13. Certain Relationships and Related Transactions 30

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K. 30

Audited Financial Statements 30

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PART I

ITEM 1. BUSINESS

GENERAL

Fauquier Bankshares, Inc. ("Bankshares") was incorporated under the laws of the
Commonwealth of Virginia on January 13, 1984. Bankshares is a registered bank
holding company and owns all of the voting shares of The Fauquier Bank ("TFB").
Bankshares engages in its business through TFB, a Virginia state-chartered bank
that commenced operations in 1902. Bankshares has no significant operations
other than owning the stock of TFB. Bankshares has issued and outstanding
1,774,037 shares of common stock, par value $3.13 per share, held by
approximately 430 holders of record on December 31, 1999.

TFB has six full service branch offices located in the Virginia communities of
Warrenton, Catlett, The Plains, Manassas and New Baltimore, in addition to the
main office branch located in Warrenton, Virginia. The executive offices of
Bankshares and the main office of TFB are located at 10 Courthouse Square,
Warrenton, Virginia 20186.

THE FAUQUIER BANK

TFB's general market area principally includes Fauquier County, western Prince
William County, and neighboring communities and is located approximately sixty
(60) miles southwest of Washington, D.C.

TFB provides a range of consumer and commercial banking services to individuals,
businesses and industries. The deposits of TFB are insured up to applicable
limits by the Bank Insurance Fund of the Federal Deposit Insurance Fund. The
basic services offered by TFB 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, money orders, night depository, traveler's checks, cashier's checks,
domestic collections, savings bonds, bank drafts, automated teller services,
drive-in tellers, internet banking, and banking by mail. In addition, TFB 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 consumer financing. TFB provides automated teller machine
(ATM) cards, as a part of the Honor and Plus ATM networks, thereby permitting
customers to utilize the convenience of larger ATM networks.

TFB operates an Investments and Trust Services Division that was established in
1919. It is staffed with nine professionals that provide personalized services
that include investment management, trust, estate settlement, retirement, and
brokerage services. During 1999, managed assets increased by $ 2.3 million to
$124,453,121 or 2.3%. Similarly, revenue grew by $10,370 to $566,029 or 1.9%.

The revenues of TFB 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 TFB's lending activities are its deposits,
repayment of loans, and the sale and maturity of investment securities, and
borrowings from the Federal Home Loan Bank of Atlanta. The principal expenses of
TFB are the interest paid on deposits, and operating and general administrative
expenses.

As is the case with banking institutions generally, TFB'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, TFB is supervised and examined by the Federal Reserve and the State
Corporation Commission ("SCC"). 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

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demand and availability of funds. TFB faces strong competition in the attraction
of deposits (its primary source of lendable funds) and in the origination of
loans. See "Competition."

As of December 31, 1999, Bankshares had total consolidated assets of $233.2
million, total consolidated deposits of $187.3 million, and total consolidated
shareholders' equity of $21.2 million.

LENDING ACTIVITIES

TFB offers a range of lending services, including real estate, consumer and
commercial loans, to individuals as well as small to medium sized businesses and
other organizations that are located in or conduct a substantial portion of
their business in TFB's market area. TFB's total loans at December 31, 1999 were
$183.9 million, or 78.3% of total assets. The interest rates charged on loans
vary with the degree of risk, maturity, and amount of the loan, and are further
subject to competitive pressures, money market rates, availability of funds, and
government regulations. TFB has no foreign loans or loans for highly leveraged
transactions.

TFB's primary market area consists of Fauquier and Prince William Counties,
Virginia and the surrounding communities. There is no assurance that this area
will experience economic growth. Adverse conditions in any one or more of the
industries operating in Fauquier or Prince William Counties or a slow-down in
general economic conditions could have an adverse effect on Bankshares (and
TFB).

TFB's loans are concentrated in three major areas: commercial loans, real estate
loans, and consumer loans. Approximately 9.1% of TFB's loan portfolio at
December 31, 1999 consisted of commercial loans. The majority of TFB's loans are
made on a secured basis. As of December 31, 1999, approximately 69.9% of the
loan portfolio consisted of loans secured by mortgages on real estate.

LOANS SECURED BY REAL ESTATE

SINGLE FAMILY RESIDENTIAL LOANS. TFB's single-family residential mortgage loan
portfolio consists of conventional loans, with interest rates fixed for 10 years
or less and balloon loans with 3, 5, 7, or 10 year maturities and amortized for
30 years or less. As of December 31, 1999, TFB's conventional single-family
loans amounted to $64.9 million or 35.3% of the total loan portfolio.
Substantially all of TFB's single-family residential mortgage loans are secured
by properties located in TFB's service area. The majority of residential
mortgage loans originated by TFB are originated under terms and documentation
which permit the loans to be sold to the Federal Home Loan Mortgage Corporation
("FHLMC").

Loans with a fixed rate longer than 10 years are sold into the secondary market.
TFB does not retain the servicing of sold loans.

TFB requires private mortgage insurance if the principal amount of the loan
exceeds 80% of the value of the security property. TFB uses the underwriting
guidelines of the PMI provider for loans having a loan-to-value ratio in excess
of 80%.

TFB also considers the income of the borrower in determining whether to make
single-family residential mortgage loans.

CONSTRUCTION LOANS. The majority of TFB's construction loans are made to
individuals to construct a primary residence. Such loans have a maximum term of
nine months, have a fixed rate of interest, and have loan-to-value ratios of 80%
or less of the appraised value upon completion. TFB requires that permanent
financing, with TFB or some other lender, be in place prior to closing any
construction loan. Construction loans are generally considered to involve a
higher degree of credit risk than single-family residential mortgage loans. The
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion.

TFB also provides construction loans and lines of credit to developers. Such
loans generally have maximum loan-to-value ratios of 80% of the appraised value
upon completion. The loans are made with a fixed rate of interest. The majority
of such loans consist of loans to selected local developers with whom TFB is
familiar

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to build single-family dwellings on either a pre-sold or speculative basis. TFB
limits the number of unsold units under construction. Loan proceeds are
disbursed in stages after inspections of the project indicate that such
disbursements are for costs already incurred and which have added to the value
of the project. Construction loans include loans to developers to acquire the
necessary land, develop the site and construct the residential units.

COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate comprised
$62.8 million or 34.1% of total loans and consist principally of commercial
loans where real estate constitutes a source of collateral. These loans are
secured primarily by owner-occupied properties. Commercial real estate loans
generally involve a greater degree of risk than single-family residential
mortgage loans because repayment of such loans may be subject to a greater
extent to adverse conditions in the real estate market or the economy.

CONSUMER LOANS

The consumer loan portfolio consists primarily of loans to individuals for
various consumer purposes, but includes some business purpose loans which are
payable on an installment basis. TFB offers a wide variety of consumer loans,
which include installment loans, credit card loans, home equity loans and other
secured and unsecured credit facilities. The majority of these loans are for
terms of less than five years and are secured by liens on various personal
assets of the borrowers, but consumer loans may also be made on an unsecured
basis. Consumer loans are made at fixed and variable rates, and are often based
on up to a five-year amortization schedule.

COMMERCIAL LOANS

TFB's commercial loans include loans to individuals and small to medium sized
businesses located primarily in Fauquier and Prince William Counties for working
capital, equipment purchases, and various other business purposes. Equipment or
similar assets secure a majority of TFB's commercial loans, but these loans may
also be made on an unsecured basis. Commercial loans may be made at variable or
fixed rates of interest. Commercial lines of credit are typically granted on a
one-year basis. Other commercial loans with terms or amortization schedules
longer than one year will normally carry interest rates which vary with the
prime lending rate and other financial indexes and will become payable in full
in three to five years.

Loan originations are derived from a number of sources, including direct
solicitation by TFB's loan officers, existing customers and borrowers,
advertising and walk-in customers.

Certain credit risks are inherent in making loans. These include prepayment
risks, risks resulting from uncertainties in the future value of collateral,
risks resulting from changes in economic and industry conditions, and risks
inherent in dealing with individual borrowers. In particular, longer maturities
increase the risk that economic conditions will change and adversely affect our
ability to collect. TFB attempts to minimize loan losses through various means.
In particular, on larger credits, TFB generally relies on the cash flow of a
debtor as the source of repayment and secondarily on the value of the underlying
collateral. In addition, TFB attempts to utilize shorter loan terms in order to
reduce the risk of a decline in the value of such collateral.

DEPOSIT ACTIVITIES

Deposits are the major source of TFB's funds for lending and other investment
activities. TFB considers the majority of its regular savings, demand, NOW and
money market deposit accounts to be core deposits. These accounts comprised
approximately 75.1% of TFB's total deposits at December 31, 1999. Approximately
24.9% of TFB's deposits as of December 31, 1999 were certificates of deposit.
Generally, TFB attempts to maintain the rates paid on its deposits at a
competitive level. Time deposits of $100,000 and over made up approximately 6.9%
of TFB's total deposits as of December 31, 1999 and pay interest at the same
rates as certificates of less than $100,000. The majority of the deposits of TFB
are generated from Fauquier and Prince William Counties. TFB does not accept
brokered deposits.

4

INVESTMENTS

TFB invests a portion of its assets in U.S. Treasury and U.S. Government
corporation and agency obligations, state, county and municipal obligations,
mutual funds, FHLB stock, and equity securities. TFB's investments are managed
in relation to loan demand and deposit growth, and are generally used to provide
for the investment of excess funds at reduced yields and risks relative to
yields and risks of the loan portfolio, while providing liquidity to fund
increases in loan demand or to offset fluctuations in deposits. TFB does not
engage in any hedging activities.

GOVERNMENT SUPERVISION AND REGULATION

FINANCIAL SERVICES MODERNIZATION LEGISLATION. On November 12, 1999, President
Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization
Act of 1999 (the "Act"), federal legislation intended to modernize the financial
services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the Act: (i.) repeals the
historical restrictions and eliminates many federal and state law barriers to
affiliations among banks, securities firms, insurance companies and other
financial service providers; (ii.) provides a uniform framework for the
functional regulation of the activities of banks, savings institutions and their
holding companies; (iii.) broadens the activities that may be conducted by
national banks, banking subsidiaries of bank holding companies and their
financial subsidiaries; (iv.) provides an enhanced framework for protecting the
privacy of consumer information; (v.) adopts a number of provisions related to
the capitalization, membership, corporate governance and other measures designed
to modernize the Federal Home Loan Bank system; (vi.) modifies the laws
governing the implementation of the Community Reinvestment Act; (vii.) and
addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.

Bank holding companies will be permitted to engage in a wider variety of
financial activities than permitted under prior law, particularly with respect
to insurance and securities activities. In addition, in a change from prior law,
bank holding companies will be in a position to be owned, controlled or acquired
by any company engaged in financially-related activities.

Bankshares does not believe that the Act will have a material adverse effect on
our operations in the near-term. However, to the extent that it permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of financial institutions that offer a wider variety of financial
services than Bankshares currently offers and that can aggressively compete in
the markets Bankshares currently serves.

BANK HOLDING COMPANY REGULATION. Bankshares is a one-bank holding company,
registered with the Federal Reserve under the Bank Holding Company Act of 1956
("BHC Act"). As such, Bankshares is subject to the supervision, examination, and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve. Bankshares is required to furnish to the Federal Reserve an annual
report of its operations at the end of each fiscal year, and such additional
information as the Federal Reserve may require pursuant to the BHC Act.

The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before (i) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
total voting shares of the bank, (ii) it or any of its subsidiaries, other than
a bank, may acquire all or substantially all of the assets of the bank, or (iii)
it may merge or consolidate with any other bank holding company.

The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anti-competitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial

5

resources and future prospects of the bank holding companies and banks concerned
and the convenience and needs of the community to be served. Consideration of
financial resources generally focuses on capital adequacy and consideration of
convenience and needs issues including the parties' performance under the
Community Reinvestment Act of 1977 (the "CRA"), both of which are discussed
below.

The BHC Act generally prohibits Bankshares from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity reasonably can be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or unsound banking
practices. For example, factoring accounts receivable, acquiring or servicing
loans, leasing personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal Reserve to be
permissible activities of bank holding companies. Despite prior approval, the
Federal Reserve has the power to order a bank holding company or its
subsidiaries to terminate any activity or to terminate its ownership or control
of any subsidiary when it has reasonable cause to believe that continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that bank
holding company.

Banks are subject to the provisions of the CRA. Under the terms of the CRA, the
appropriate federal bank regulatory agency is required, in connection with its
examination of a bank, to assess such bank's record in meeting the credit needs
of the community served by that bank, including low- and moderate-income
neighborhoods. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office, or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application.

BANK REGULATION. TFB is chartered under the laws of the Commonwealth of
Virginia. The Federal Deposit Insurance Corporation (the "FDIC") insures its
deposits to the extent provided by law. TFB is subject to comprehensive
regulation, examination and supervision by the Federal Reserve and to other laws
and regulations applicable to banks. Such regulations include limitations on
loans to a single borrower and to its directors, officers and employees;
restrictions on the opening and closing of branch offices; the maintenance of
required capital and liquidity ratios; the granting of credit under equal and
fair conditions; and the disclosure of the costs and terms of such credit. State
regulatory authorities also have broad enforcement powers over TFB, including
the power to impose fines and other civil or criminal penalties and to appoint a
receiver in order to conserve the assets of any such institution for the benefit
of depositors and other creditors.

Under federal law, federally insured banks are subject, with certain exceptions,
to certain restrictions on any extension of credit to their parent holding
companies or other affiliates, on investment in the stock or other securities of
affiliates, and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.

In 1989, the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") was enacted. FIRREA contains major regulatory reforms, stronger
capital standards for savings and loan associations and stronger civil and
criminal enforcement provisions. FIRREA also provides that a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the default of a commonly controlled

6

FDIC insured depository institution, or (ii) any assistance provided by the FDIC
to a commonly controlled FDIC insured institution in danger of default.

In 1991, the FDIC Improvement Act of 1991 ("FDICIA") was enacted. FDICIA made a
number of reforms addressing the safety and soundness of deposit insurance
funds, supervision, accounting, and prompt regulatory action, and also
implements other regulatory improvements. Annual full-scope, on-site
examinations are required of all insured depository institutions. The cost for
conducting an examination of an institution may be assessed to that institution,
with special consideration given to affiliates and any penalties imposed for
failure to provide information requested. Insured state banks also are precluded
from engaging as principal in any type of activity that is impermissible for a
national bank, including activities relating to insurance and equity
investments. FDICIA also re-codified current law restricting extensions of
credit to insiders under the Federal Reserve Act.

DIVIDENDS. Dividends from TFB constitute the primary source of funds for
dividends to be paid by Bankshares. There are various statutory and contractual
limitations on the ability of TFB to pay dividends, extend credit, or otherwise
supply funds to Bankshares, including the requirement under Virginia banking
laws that cash dividends only be paid out of undivided profits and only if such
dividends would not impair the capital of TFB. The Federal Reserve also has the
general authority to limit the dividends paid by bank holding companies and
state member banks, if such payment may be deemed to constitute an unsafe and
unsound practice. The Federal Reserve Board has indicated that banking
organizations should generally pay dividends only if (1) the organization's net
income available to common shareholders over the past year has been sufficient
to fund fully the dividends and (2) the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and
overall financial condition. TFB does not expect any of these laws, regulations
or policies to materially impact its ability to pay dividends.

EFFECT OF GOVERNMENTAL POLICIES. The earnings and business of Bankshares and TFB
are affected by the policies of various regulatory authorities of the United
States, especially the Federal Reserve. The Federal Reserve, among other things,
regulates the supply of credit and deals with general economic conditions within
the United States. The instruments of monetary policy employed by the Federal
Reserve for those purposes influence in various ways the overall level of
investments, loans, other extensions of credits, and deposits, and the interest
rates paid on liabilities and received on assets.

ENFORCEMENT POWERS. Congress has provided the Federal Reserve and the FDIC with
an array of powers to enforce laws, rules, regulations and orders. Among other
things, the agencies may require that institutions cease and desist from certain
activities, may preclude persons from participating in the affairs of insured
depository institutions, may suspend or remove deposit insurance, and may impose
civil money penalties against institution-affiliated parties for certain
violations.

MAXIMUM LEGAL INTEREST RATES. Like the laws of many states, Virginia law
contains provisions on interest rates that may be charged by banks and other
lenders on certain types of loans. Numerous exceptions exist to the general
interest limitations imposed by Virginia law. The relative importance of these
interest limitation laws to the financial operations of TFB will vary from time
to time, depending on a number of factors, including conditions in the money
markets, the costs and availability of funds, and prevailing interest rates.

CHANGE OF CONTROL. Federal law restricts the amount of voting stock of a bank
holding company and a bank that a person may acquire without the prior approval
of banking regulators. The overall effect of such laws is to make it more
difficult to acquire a bank holding company and a bank by tender offer or
similar means than it might be to acquire control of another type of
corporation. Consequently, shareholders of Bankshares may be less likely to
benefit from the rapid increases in stock prices that may result from tender
offers or similar efforts to acquire control of other companies. Federal law
also imposes restrictions on acquisitions of stock in a bank holding company and
a state bank. Under the federal Change in Bank Control Act and the regulations
thereunder, a person or group must give advance notice to the Federal Reserve
before acquiring control of any bank holding company. Upon receipt of such
notice, the Federal Reserve and the SCC, as the case may be, may approve or
disapprove the acquisition. The Change in Bank Control Act creates

7

a rebuttable presumption of control if a member or group acquires a certain
percentage or more of a bank holding company's or bank's voting stock, or if one
or more other control factors set forth in the act are present.

INSURANCE OF DEPOSITS. TFB's deposit accounts are insured by the FDIC up to a
maximum of $100,000 per insured depositor. The FDIC issues regulations, conducts
periodic examinations, requires the filing of reports and generally supervises
the operations of its insured banks. Any insured bank that is not operated in
accordance with or does not conform to FDIC regulations, policies and directives
may be sanctioned for non-compliance. Proceedings may be instituted against any
insured bank or any director, officer, or employee of such bank engaging in
unsafe and unsound practices, including the violation of applicable laws and
regulations. The FDIC has the authority to terminate insurance of accounts
pursuant to procedures established for that purpose.

CAPITAL REQUIREMENTS. The federal bank regulatory authorities have adopted
risk-based capital guidelines for banks and bank holding companies that are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain all ratios well in excess of the minimums.
The current guidelines require all bank holding companies and federally
regulated banks to maintain a minimum risk-based total capital ratio equal to
8%, of which at least 4% must be Tier 1 capital. Tier 1 capital includes common
stockholders' equity, qualifying perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, but excludes goodwill
and most other intangibles and excludes the allowance for loan and lease losses.
Tier 2 capital includes the excess of any preferred stock not included in Tier 1
capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate term-preferred stock, and general reserves
for loan and lease losses up to 1.25% of risk-weighted assets. As of December
31, 1999 (i) Bankshares' Tier 1 and total risk-based capital ratios were 12.2 %
and 13.4%, respectively, and (ii) TFB's Tier 1 and total risk-based capital
ratios were 12.2% and 13.5%, respectively.

FDICIA contains "prompt corrective action" provisions pursuant to which banks
are to be classified into one of five categories based upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
require (subject to certain exceptions) the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"significantly undercapitalized" or "critically undercapitalized".

The FDIC has issued regulations to implement the "prompt corrective action"
provisions of FDICIA. In general, the regulations define the five capital
categories as follows: (i) an institution is "well capitalized" if it has a
total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based
capital ratio of 6% or greater, has a leverage ratio of 5% or greater and is not
subject to any written capital order or directive to meet and maintain a
specific capital level for any capital measures; (ii) an institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater, and has a
leverage ratio of 4% or greater; (iii) an institution is "undercapitalized" if
it has a total risk-based capital ratio of less than 8%, has a Tier 1 risk-based
capital ratio that is less than 4% or has a leverage ratio that is less than 4%;
(iv) an institution is "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio
that is less than 3% or a leverage ratio that is less than 3%; and (v) an
institution is "critically undercapitalized" if its "tangible equity" is equal
to or less than 2% of its total assets. The FDIC also, after an opportunity for
a hearing, has authority to downgrade an institution from "well capitalized" to
"adequately capitalized" or to subject an "adequately capitalized" or
"under-capitalized" institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. As of December 31, 1999, TFB had
a total risk-based capital ratio of 13.5%, a Tier 1 risk-based capital ratio of
12.2%, and a leverage ratio of 8.9%. TFB was notified by the Federal Reserve
Bank of Richmond that, at December 31, 1999, TFB was "well capitalized" under
the regulatory framework for prompt corrective action.

Additionally, FDICIA requires, among other things, that (i) only a "well
capitalized" depository institution may accept brokered deposits without prior
regulatory approval and (ii) the appropriate federal

8

banking agency annually examine all insured depository institutions, with some
exceptions for small, "well capitalized" institutions and state-chartered
institutions examined by state regulators. FDICIA also contains a number of
consumer banking provisions, including disclosure requirements and substantive
contractual limitations with respect to deposit accounts.

COMPETITION

Bankshares encounters strong competition both in making loans and in attracting
deposits. The deregulation of the banking industry and the widespread enactment
of state laws which permit multi-bank holding companies as well as an increasing
level of interstate banking have created a highly competitive environment for
commercial banking. In one or more aspects of its business, TFB competes with
other commercial banks, savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, brokerage and investment banking
companies, and other financial intermediaries. Most of these competitors, some
of which are affiliated with bank holding companies, have substantially greater
resources and lending limits, and may offer certain services that TFB does not
currently provide. In addition, many of TFB's non-bank competitors are not
subject to the same extensive federal regulations that govern bank holding
companies and federally insured banks. Recent federal and state legislation has
heightened the competitive environment in which financial institutions must
conduct their business, and the potential for competition among financial
institutions of all types has increased significantly.

To compete, TFB relies upon specialized services, responsive handling of
customer needs, and personal contacts by its officers, directors, and staff.
Large multi-branch banking competitors tend to compete primarily by rate and the
number and location of branches while smaller, independent financial
institutions tend to compete primarily by rate and personal service.

EMPLOYEES

As of December 31, 1999, Bankshares and TFB employed 78 full-time employees and
27 part-time employees. A collective bargaining unit does not represent the
employees. Bankshares and TFB consider relations with employees to be good.

ITEM 2. PROPERTIES

TFB owns property and operates branches at the following locations:

LOCATION LEASE/OWN RENT (ANNUAL) EXPIRATION RENEWAL
- ---------------------------------------------------------------------------------------------------

Main Office *
P.O. Box 561 Own N/A N/A N/A
10 Courthouse Square
Warrenton, VA 20186

Catlett Branch Office
Rt. 28 and 806 Own N/A N/A N/A
Catlett, VA 20119

Manassas Branch Office
8091 Sudley Rd. Lease $41,160 2004 Additional 5 yrs.
Manassas, VA 20109

New Baltimore Office
5119 Lee Highway Own N/A N/A N/A
Warrenton, VA 20187

The Plains Office
6464 Main Street Own N/A N/A N/A
The Plains, VA 20198

View Tree Office
216 Broadview Avenue Own N/A N/A N/A
Warrenton, VA 20186
- ---------------------------------------------------------------------------------------------------

* TFB and Bankshares

9

ITEM 3. LEGAL PROCEEDINGS

There is no pending or threatened litigation and no litigation was terminated
during the fourth quarter of the fiscal year ended December 31, 1999 that, in
the opinion of management, may materially impact the financial condition of
Bankshares or TFB.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Bankshares' common shares are traded over the counter on the National
Association of Securities Dealers Automated Quote ("NASDAQ") SmallCap Market
System under the symbol "FBSS". Bankshares' common shares commenced trading on
December 27, 1999.

As of December 31, 1999, there were 1,774,037 outstanding shares of common
stock, which is the only class of Bankshares stock. As of December 31, 1999
there were approximately 430 holders of record of Bankshares common stock. On
March 19, 1998, Bankshares declared a 2 for 1 stock split. The following sets
for the high and low sales prices for Bankshares common shares and the amounts
of any cash dividends paid for each full quarterly period within the two most
recent fiscal years:

SEC 10K Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters

1999 1998 Dividends Per Share
---------------------- --------------------- --------------------------
High Low High Low 1999 1998
---------------------- --------------------- --------------------------

1st Quarter $ 19.38 $ 18.50 $ 21.25 $ 18.75 $ 0.13 $ 0.10
2nd Quarter $ 19.00 $ 18.00 $ 21.50 $ 21.00 $ 0.14 $ 0.11
3rd Quarter $ 19.00 $ 18.38 $ 22.00 $ 19.00 $ 0.14 $ 0.11
4th Quarter $ 19.38 $ 17.00 $ 20.00 $ 18.50 $ 0.15 $ 0.13

Per share data adjusted for splits.

Bankshares' future dividend policy is subject to the discretion of the Board of
Directors and will depend upon a number of factors, including future earnings,
financial condition, cash requirements, and general business conditions.
Bankshares' ability to pay cash dividends will depend entirely upon TFB's
abilities to pay dividends to Bankshares.

Transfer of funds from TFB to Bankshares in the form of loans, advances and cash
dividends are restricted by federal and state regulatory authorities. As of
December 31, 1999, the aggregate amount of unrestricted

10

funds that could be transferred from TFB to Bankshares without prior regulatory
approval totaled $2.2 million.

ITEM 6: SELECTED FINANCIAL DATA

At and for the Year Ended December 31,

(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995

EARNINGS STATEMENT DATA:
Interest income 17,129 15,024 13,575 12,547 11,969
Interest expense 6,043 5,519 4,751 4,699 4,511
---------- ---------- ---------- ---------- ----------
Net interest income 11,086 9,505 8,824 7,848 7,458
Provision for loan losses 695 535 465 578 430
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 10,391 8,970 8,359 7,270 7,028
Noninterest income 2,433 2,202 2,217 2,207 2,055
Securities gains (losses) -- 17 10 78 (108)
Noninterest expense 9,023 7,708 7,354 6,965 7,066
---------- ---------- ---------- ---------- ----------
Income before income taxes 3,801 3,481 3,232 2,590 1,909
Income taxes 1,162 1,039 981 748 568
---------- ---------- ---------- ---------- ----------
Net income 2,639 2,442 2,251 1,842 1,341
========== ========== ========== ========== ==========
PER SHARE DATA: (1)
Net income per share, basic 1.46 1.31 1.18 0.96 0.70
Net income per share, diluted 1.45 1.30 1.17 0.96 0.70
Cash dividends 0.56 0.45 0.35 0.26 0.21
Average basic shares outstanding 1,802,165 1,857,282 1,913,008 1,912,328 1,911,648
Average diluted shares outstanding 1,818,132 1,875,641 1,921,073 1,916,513 1,911,648
Book value at period end 11.95 11.52 10.97 10.08 9.37

BALANCE SHEET DATA:

Total Assets 233,208 220,026 184,442 173,416 167,239
Loans, net 181,503 162,272 128,153 114,280 98,814
Investment securities 18,779 22,791 27,946 41,705 49,604
Deposits 187,273 179,217 161,869 152,938 148,283
Shareholders' equity 21,204 21,177 20,978 19,270 17,921

PERFORMANCE RATIOS:
Net interest margin(2) 5.35% 5.35% 5.45% 5.16% 5.09%
Return on average assets 1.14% 1.21% 1.27% 1.09% 0.82%
Return on average equity 12.50% 11.60% 11.62% 9.86% 7.63%
Dividend payout 34.34% 34.10% 29.70% 27.00% 29.90%
Efficiency ratio(3) 63.51% 65.90% 65.80% 68.30% 73.00%

ASSET QUALITY RATIOS:
Allowance for loan losses to period
end loans, net 1.24% 1.13% 1.27% 1.18% 1.16%
Nonperforming loans to allowance for
loan losses 5.49% 35.96% 38.93% 50.03% 51.09%
Net charge-offs to average loans 0.15% 0.23% 0.22% 0.28% 0.32%

CAPITAL AND LIQUIDITY RATIOS:
Leverage 8.80% 9.70% 11.90% 11.10% 10.90%
Risk Based Capital Ratios:
Tier 1 capital 12.20% 13.10% 16.40% 16.50% 16.70%
Total capital 13.40% 14.30% 17.70% 17.70% 17.80%

(1) Amounts have been restated to reflect a two-for-one stock split during 1998
and a four-for-one stock split during 1996.

(2) Net interest margin is calculated as fully taxable equivalent net interest
income divided by average earning assets and represents the Corporation's
net yield on its earning assets.

(3) Efficiency ratio is computed by dividing non-interest expense by the sum of
fully taxable equivalent net interest income and non-interest income.

11

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

The following discussion is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Form 10-K. In addition to the historical information contained herein,
this report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies, and expectations of
Bankshares, are generally identifiable by use of the words "believe," "expect."
"intend," "anticipate," "estimate," "project" or similar expressions.
Bankshares' ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of Bankshares include, but are not
limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, 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 loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in Bankshares' market area and accounting
principles, policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.

INTRODUCTION

This discussion is intended to focus on certain financial information regarding
Bankshares and TFB. The purpose of this discussion is to provide the reader with
a more thorough understanding of the financial statements. This discussion
should be read in conjunction with the financial statements and accompanying
notes contained elsewhere herein.

Management is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity, capital
resources or operations. Also, management is not aware of any current
recommendations by its regulatory authorities that would have a material effect
on liquidity, capital resources or operations. TFB's internal sources of
liquidity are deposits, loan repayments and securities available for sale. TFB's
primary external source of liquidity is advances from the Federal Home Loan Bank
of Atlanta.

OVERVIEW

The reported results of Bankshares are dependent on a variety of factors,
including the general interest rate environment, competitive conditions in the
industry, governmental policies and regulations and conditions in the markets
for financial assets. Net interest income is the largest component of net
income, and consists of the difference between income generated on
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is primarily affected by the volume, interest
rates and composition of interest-earning assets and interest-bearing
liabilities.

COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998

Net income of $2.6 million in 1999, was an 8.1% increase from 1998 net income of
$2.4 million. Earnings per share (EPS) on a fully diluted basis were $1.45 in
1999 compared to $1.30 in 1998. Profitability as measured by return on average
equity increased from 11.6% in 1998 to 12.5% in 1999. Certain non-recurring
expenses associated with a misappropriation of cash of $288,000, net of tax,
reduced 1999 earnings and return on average equity by 9.9% and 13.9%,
respectively. Bankshares has undertaken an aggressive investigation of the loss.
The Bank's counsel has reviewed the Bank's insurance coverage with respect to
the loss and, subject to further results of the ongoing investigation, is
preliminarily of the view that the loss is within the coverage afforded. Any
recovery under the policy will be recognized as income in the year received.

12

NET INTEREST INCOME. Total interest income grew $2.1 million or 14.1% to $17.1
million in 1999 from $15.0 million in 1998. This increase was primarily the
result of loan growth. Loan receivables grew 11.9% or $19.2 million from
December 31, 1998 to December 31, 1999. Loan growth was funded by an increase in
deposits of $8.1 million, a $5 million increase in Federal Home Loan Bank
advances and a reduction of $4.0 million in the investment portfolio. Total
interest expense grew by $524,000 or 9.5% to $6.0 million in 1999 from $5.5
million in 1998.

Net interest income for 1999 increased $1.6 million or 16.7% to $11.1 million
for the year ended December 31, 1999 from $9.5 million for the year ended
December 31, 1998. This increase was accomplished through a rise in total
average earning assets from $185.7 million in 1998 to $215.2 million in 1999.
The percentage of average earning assets to total assets increased slightly in
1999 to 92.9% from 92.0%. The Bank's net interest margin remained constant in
1999 at 5.35%.

PROVISION FOR LOAN LOSSES. The provision for loan losses was $695,000 for 1999
and $535,000 for 1998. The amount of the provision for loan loss for 1999 and
1998 was determined based upon management's continual evaluation of the adequacy
of the allowance for loan losses, which encompasses the overall risk
characteristics of the loan portfolio, trends in TFB's delinquent and
non-performing loans, and the impact of economic conditions on borrowers. There
can be no assurances, however, that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.

NON-INTEREST INCOME. Total other income increased by $214,000 or 9.7% from $2.2
million for 1998 to $2.4 million for 1999. Other income is primarily derived
from non-interest fee income, which consists primarily of fiduciary fees,
service charges, and other fee income. In 1999, the increase stemmed from an
$83,000 increase in other service charges, commissions and fees, a $143,000
increase in service charges on deposit accounts and a $10,000 increase in trust
department income. These increases were partially offset by $22,000 decrease in
gains on sales of securities and other operating income in 1999.

NON-INTEREST EXPENSE. Total other operating expenses increased $1.3 million or
17.1% in 1999 from 1998. The primary components of the increase were an increase
in salaries and employees' benefits of $532,000, partially due to the staffing
of the Manassas branch opened in 1999, and a $437,000 non-recurring
miscellaneous non-loan charge resulting from a misappropriation of cash. Also,
net occupancy and furniture and equipment expense increased by $139,000 during
1999.

INCOME TAXES. Income tax expense increased by $123,000 for the year ended
December 31, 1999 compared to the year ended December 31, 1998. The effective
tax rates were 30.6% for 1999 and 29.9% for 1998. The effective tax rate differs
from the statutory federal income tax rate of 34% due to TFB's investment in
tax-exempt securities.

The following table presents a quarterly summary of earnings for the last two
years. In 1999, quarterly income increased in the first three quarters and
declined during the fourth quarter. The reduction in fourth quarter earnings was
due primarily to the aforementioned non-recurring expenses associated with a
misappropriation of cash. In 1998, earnings exhibited stable growth,
particularly strong in the third quarter, due to increased earnings from
operations.

13

EARNINGS
(In Thousands)

Three Months Ended 1999 Three Months Ended 1998
------------------------------------------ ------------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
------------------------------------------ ------------------------------------------

Interest income $4,231 $4,494 $4,387 $4,017 $3,752 $3,914 $3,790 $3,569
Interest expense 1,479 1,510 1,486 1,568 1,534 1,399 1,314 1,271
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 2,752 2,984 2,901 2,449 2,218 2,515 2,476 2,297
Provision for loan losses 49 180 225 241 145 180 135 75
------ ------ ------ ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 2,703 2,804 2,676 2,208 2,073 2,335 2,341 2,222
Other income 902 495 519 516 810 523 444 442
Other expense 2,735 2,103 2,102 2,084 1,951 1,912 1,979 1,866
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 871 1,196 1,093 641 933 945 805 798
Income tax expense 269 381 302 210 287 195 301 256
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 602 $ 815 $ 791 $ 431 $ 645 $ 750 $ 504 $ 542
====== ====== ====== ====== ====== ====== ====== ======
Net income per share, basic $ 0.33 $ 0.45 $ 0.44 $ 0.24 $ 0.35 $ 0.40 $ 0.27 $ 0.29
Net Income per share, diluted $ 0.33 $ 0.45 $ 0.43 $ 0.24 $ 0.34 $ 0.40 $ 0.27 $ 0.29

COMPARISON OF OPERATING RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997

NET INTEREST INCOME. Total interest income and fees on loans grew $1.4 million
or 10.7% to $15.0 million for the year ended December 31, 1998 from $13.6
million for the year ended December 31, 1997. The increase was primarily the
result of loan growth of 26.6% or $34.1 million from December 31, 1997. An
increase in deposits of $17.3 million and an increase of $18 million in
long-term fixed rate Federal Home Loan Bank advances primarily funded the loan
growth.

Total interest expense increased $768,000 or 16.2% to $5.5 million in 1998 from
$4.8 million in 1997. This was due to an increase of 12.3% or $16.2 million in
the average balance of interest-bearing liabilities in 1998 from 1997.

Net interest income increased by $682,000 or 7.7% to $9.5 million in 1998 from
$8.8 million in 1997. The increase was the result of high loan growth increasing
average interest-earning assets by 6.3% or $12.6 million partially offset by an
increase in interest-bearing liabilities.

PROVISION FOR LOAN LOSSES. The provision for loan losses was $535,000 for 1998
and $465,000 for 1997. The amount of the provision for loan loss for 1998 and
1997 was determined based upon management's continual evaluation of the adequacy
of the allowance for loan losses, which encompasses the overall risk
characteristics of the loan portfolio, trends in TFB's delinquent and
non-performing loans, and the impact of economic conditions on borrowers. There
can be no assurances, however, that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods.

NON-INTEREST INCOME. Total other income decreased by $9,000 or .4% in 1998. The
primary components of other income are fiduciary, service charges on deposit
accounts and other fee income. Fiduciary income increased by $34,000 during 1998
from $522,000 to $556,000. Furthermore, service charges on deposit accounts grew
by 1.8% or $19,000 and gains on sales of securities increased $7,000 during
1998. These increases were offset by a decline in other operating income of
$48,000 from $54,000 in 1997 to $6,000 in 1998.

NON-INTEREST EXPENSE. Other expense increased 4.8% or $355,000 for the year
ended December 31, 1998 compared to the year ended December 31, 1997. During the
same periods salaries and benefits increased $122,000, while all other expenses
increased $233,000.

INCOME TAXES. Income tax expense increased by $58,000 for the year ended
December 31, 1998 compared to the year ended December 31, 1997. The effective
tax rates were 29.9% for 1998 compared to 30.4% in 1997. The effective rate
differs from the statutory federal income tax rate of 34% due to TFB's
investment in tax-exempt securities

14

COMPARISON OF DECEMBER 31, 1999 AND DECEMBER 31, 1998 FINANCIAL CONDITION

Total assets were $233.2 million at December 31, 1999, an increase of 6.0% or
$13.2 million from $220 million at December 31, 1998. Balance sheet categories
reflecting significant changes included investment securities, total loans,
deposits, and Federal Home Loan Bank advances. Each of these categories is
discussed below.

INVESTMENT SECURITIES. Total investment securities amounted to $18.8 million at
December 31, 1999, reflecting a decrease of $4.0 million from $22.8 million at
December 31, 1998. The decrease was primarily reinvested into loans. At December
31,1999, the investment securities portfolio was segregated into available for
sale of $13.4 million and held to maturity of $5.4 million. The valuation
allowance for the available for sale portfolio had an unrealized loss of
$557,433 at December 31, 1999 compared to $11,281 at December 31, 1998.

LOANS. Total net loan balance after allowance for loan losses was $181.5 million
at December 31, 1999, which represents an increase of $19.2 million or 11.9%
from $162.3 million as of December 31, 1998. The majority of this increase was
reflected in the real estate ($15.6 million) and consumer installment ($3.5
million) loan categories. The bulk of growth in real estate loans was split
between commercial ($4.6 million) and 1-4 family residential ($11.4 million)
loans. The majority of consumer installment loans were comprised of automobile
loans. TFB's loans are made primarily to customers located within its local
trade area.

DEPOSITS. For the year ended December 31, 1999, total deposits grew $8.1 million
or 4.5%. The majority of the growth was in interest-bearing demand deposits that
increased by $5.5 million and time deposits that increased $3.9 million.
Non-interest bearing deposits declined by $1.4 million.

FHLB ADVANCES. Amounts borrowed from the FHLB of Atlanta increased from $18
million or 9.7% of earning assets at December 31, 1998 to $23 million or 10.7%
of earning assets. The increased borrowings from the FHLB was to support high
loan growth surpassing deposit growth. The term structure of the advances
borrowed was 10 years with a 5 year call option for $13 million and the
remaining $10 million has a 6 month maturity and matures March, 2000.

ASSET QUALITY

Non-performing loans, in most cases, consist of loans for which the accrual of
interest has been discontinued. Management evaluates loans that are 90 days or
more past due in addition to loans that have suffered financial distress to
determine if they should be placed on non-accrual status. Factors considered by
management include the estimated value of collateral, if any, and other
resources of the borrower that may be available to satisfy the delinquency.

Nonaccrual loans totaled approximately $125,000 or .06% of total loans at
December 31, 1999, as compared to $666,000 or .41% of total loans at December
31, 1998. Non-performing loans as a percentage of the allowance for loan losses
were 5.5% and 36.0% at December 31, 1999 and 1998, respectively.

There are no loans other than those disclosed above as either non-performing or
impaired where known information about the borrower caused management to have
serious doubts about the borrower's ability to comply with the contractual
repayment obligations. There are also no other interest-bearing assets that
would be subject to disclosure as either non-performing or impaired if such
interest-bearing assets were loans. There are no concentrations of loans to
borrowers engaged in similar activities that exceed 10% of total loans of which
management is aware.

15

CAPITAL RESOURCES AND LIQUIDITY

Shareholders' equity totaled $21.2 million at December 31, 1999. Equity remained
constant with December 31, 1998, reflecting management's desire to increase
shareholders' return on equity by minimizing growth in equity. During the first
quarter of 1998, the company initiated a Dutch Auction self-tender offer to buy
back shares directly from shareholders. As a result of this action, Bankshares
bought back 60,238 shares, as adjusted for the two for one stock split, (3.2% of
shares outstanding on December 31, 1997) for $1.2 million. Exclusive of the
Dutch Auction, Bankshares initiated an open market buyback program in 1998,
through which it has bought back an additional 83,713 shares at a cost of
$1,596,000. Furthermore, the securities portfolio valuation account increased
its unrealized loss after tax to $368,000 at December 31, 1999 compared to an
unrealized loss of $7,000 at December 31, 1998.

Banking regulations have established minimum capital requirements for financial
institutions including risk-based capital ratios and leveraged ratios. As of
December 31, 1999, the appropriate regulatory authorities have categorized
Bankshares and TFB as well capitalized under the regulatory framework for prompt
corrective action.

The primary sources of funds are deposits, repayment of loans, maturities of
investments, funds provided from operations and advances from the FHLB of
Atlanta. While scheduled repayments of loans and maturities of investment
securities are predictable sources of funds, deposit flows and loan repayments
are greatly influenced by the general level of interest rates, economic
conditions and competition. TFB uses its sources of funds to fund existing and
future loan commitments, to fund maturing certificates of deposit and demand
deposit withdrawals, to invest in other interest-earning assets, to maintain
liquidity, and to meet operating expenses. Management monitors projected
liquidity needs and determines the desirable level based in part on TFB's
commitments to make loans and management's assessment of TFB's ability to
generate funds.

Cash and amounts due from depository institutions and federal funds sold totaled
$25.0 million at December 31, 1999. These assets provide the primary source of
liquidity for TFB. In addition, management has designated a substantial portion
of the investment portfolio, ($13.4 million) as available for sale and has an
available line of credit with the Federal Home Loan Bank of Atlanta with a
borrowing limit of approximately $37 million at December 31, 1999 to provide
additional sources of liquidity.

16

CERTAIN STATISTICAL INFORMATION

The following schedules present, for the period indicated, certain financial and
statistical information, or a specific reference as to the location of the
required disclosures elsewhere herein.

At and for the Year Ended December 31,

(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995

EARNINGS STATEMENT DATA:
Interest income 17,129 15,024 13,575 12,547 11,969
Interest expense 6,043 5,519 4,751 4,699 4,511
---------- ---------- ---------- ---------- ----------
Net interest income 11,086 9,505 8,824 7,848 7,458
Provision for loan losses 695 535 465 578 430
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 10,391 8,970 8,359 7,270 7,028
Noninterest income 2,433 2,202 2,217 2,207 2,055
Securities gains (losses) -- 17 10 78 (108)
Noninterest expense 9,023 7,708 7,354 6,965 7,066
---------- ---------- ---------- ---------- ----------
Income before income taxes 3,801 3,481 3,232 2,590 1,909
Income taxes 1,162 1,039 981 748 568
---------- ---------- ---------- ---------- ----------
Net income 2,639 2,442 2,251 1,842 1,341
========== ========== ========== ========== ==========
PER SHARE DATA: (1)
Net income per share, basic 1.46 1.31 1.18 0.96 0.70
Net income per share, diluted 1.45 1.30 1.17 0.96 0.70
Cash dividends 0.56 0.45 0.35 0.26 0.21
Average basic shares outstanding 1,802,165 1,857,282 1,913,008 1,912,328 1,911,648
Average diluted shares outstanding 1,818,132 1,875,641 1,921,073 1,916,513 1,911,648
Book value at period end 11.95 11.52 10.97 10.08 9.37

BALANCE SHEET DATA:

Total Assets 233,208 220,026 184,442 173,416 167,239
Loans, net 181,503 162,272 128,153 114,280 98,814
Investment securities 18,779 22,791 27,946 41,705 49,604
Deposits 187,273 179,217 161,869 152,938 148,283
Shareholders' equity 21,204 21,177 20,978 19,270 17,921

PERFORMANCE RATIOS:
Net interest margin(2) 5.35% 5.35% 5.45% 5.16% 5.09%
Return on average assets 1.14% 1.21% 1.27% 1.09% 0.82%
Return on average equity 12.50% 11.60% 11.62% 9.86% 7.63%
Dividend payout 34.34% 34.10% 29.70% 27.00% 29.90%
Efficiency ratio(3) 63.51% 65.90% 65.80% 68.30% 73.00%

ASSET QUALITY RATIOS:
Allowance for loan losses to period
end loans, net 1.24% 1.13% 1.27% 1.18% 1.16%
Nonperforming loans to allowance for
loan losses 5.49% 35.96% 38.93% 50.03% 51.09%
Net charge-offs to average loans 0.15% 0.23% 0.22% 0.28% 0.32%

CAPITAL AND LIQUIDITY RATIOS:
Leverage 8.80% 9.70% 11.90% 11.10% 10.90%
Risk Based Capital Ratios:
Tier 1 capital 12.20% 13.10% 16.40% 16.50% 16.70%
Total capital 13.40% 14.30% 17.70% 17.70% 17.80%

(1) Amounts have been restated to reflect a two-for-one stock split during 1998
and a four-for-one stock split during 1996.

(2) Net interest margin is calculated as fully taxable equivalent net interest
income divided by average earning assets and represents the Corporation's
net yield on its earning assets.

(3) Efficiency ratio is computed by dividing non-interest expense by the sum of
fully taxable equivalent net interest income and non-interest income.

17

The following table sets forth information relating to Bankshares' 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. Such 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
(In Thousands)

1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Average Income/ Average Average Income/ Average Average Income/ Average
ASSETS: Balances Expense Rate Balances Expense Rate Balances Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------

Loans
Taxable $169,731 $ 14,780 8.71% $141,265 $ 12,706 8.99% $123,737 $ 11,225 9.07%
Tax-exempt (1) 4,357 429 9.85% 4,102 373 9.09% 525 59 11.24%
Nonaccrual 770 0 -- 724 -- -- 84 -- --
-------- -------- -------- -------- -------- --------
Total Loans $174,858 $ 15,209 8.70% $146,091 $ 13,079 8.95% $124,346 $ 11,284 9.07%
-------- -------- -------- -------- -------- --------
Securities
Taxable $ 25,477 $ 1,510 5.93% $ 24,250 $ 1,464 6.04% $ 32,274 $ 1,881 5.83%
Tax-Exempt (1) 2,888 245 8.48% 4,435 323 7.28% $ 4,662 $ 377 8.09%
-------- -------- -------- -------- -------- --------
Total Securities $ 28,365 $ 1,755 6.19% $ 28,685 $ 1,787 6.23% $ 36,936 $ 2,258 6.11%
-------- -------- -------- -------- -------- --------
Deposits in banks $ 666 $ 32 4.80% $ 1,791 $ 89 4.97% $ 181 $ 10 --
Federal funds sold $ 11,317 $ 562 4.97% $ 9,126 $ 493 5.40% $ 2,849 $ 155 5.44%
-------- -------- -------- -------- -------- --------
Total Earning Assets $215,206 $ 17,558 8.16% $185,693 $ 15,448 8.32% $164,312 $ 13,707 8.34%
======== ======== ========

Less: Reserve for loan losses (2,213) (1,808) (1,718)
Cash and due from banks 9,704 9,593 7,417
Bank premises and equipment, net 5,268 5,494 5,607
Other assets 3,783 2,808 3,107
-------- -------- --------
Total Assets $231,748 $201,780 $178,725
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Demand deposits $ 33,906 $ -- $ 30,721 $ -- $ 27,135 $ --
-------- -------- -------- -------- -------- --------
NOW accounts $ 37,349 $ 544 1.46% $ 33,186 $ 661 1.99% $ 30,207 $ 610 2.02%
Money market accounts 36,390 1,297 3.56% 37,958 1,509 3.98% 29,259 1,078 3.68%
Savings accounts 33,220 973 2.93% 29,920 1,038 3.47% 29,685 1,020 3.44%
Time deposits 46,683 2,164 4.64% 40,266 1,970 4.89% 36,282 1,788 4.93%
-------- -------- -------- -------- -------- --------
Total Interest-Bearing Deposits $153,642 $ 4,978 3.24% $141,330 $ 5,178 3.66% $125,433 $ 4,496 3.58%
Federal funds purchased and
securities sold under
agreements to repurchase 0 0 3 0 0.00% 401 17 4.24%
Federal Home Loan Bank advances 20,733 1,065 5.14% 6,726 341 5.07% 4,155 238 5.73%
-------- -------- -------- -------- -------- --------
Total Interest-Bearing Liabilities $174,375 $ 6,043 3.47% $148,059 $ 5,519 3.73% $129,989 $ 4,751 3.65%
-------- -------- -------- -------- -------- --------
Other Liabilities $ 2,348 $ 1,967 $ 1,546
-------- -------- --------
Shareholders' Equity $ 21,119 $ 21,033 $ 20,055
-------- -------- --------
Total Liabilities & Shareholders'
Equity $231,748 $201,780 $178,725
======== ======== ========
Net interest spread $ 11,515 4.69% $ 9,929 4.59% $ 8,956 5.42%
======== ======== ========
Interest expense as a percent of average
earning assets 2.81% 2.97% 2.89%
Net interest margin 5.35% 5.35% 5.45%

(1) Income and rates on non-taxable assets are computed on a tax equivalent
basis using a federal tax rate of 34%.

(2) Non-accrual loan balances are included in the calculation of average
balances.

18

RATE/VOLUME ANALYSIS

The following table sets forth certain information regarding changes in interest
income and interest expense of Bankshares' for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to changes in volume (changes in volume
multiplied by old rate); and changes in rates (change in rate multiplied by old
volume). Changes in rate-volume (changes in rate multiplied by the changes in
volume) are allocated between changes in rate and changes in volume.

RATE/VOLUME VARIANCE
(In Thousands)

1999 Compared to 1998 1998 Compared to 1997
------------------------------------- -------------------------------------
Due to Due to Due to Due to
Change Volume Rate Change Volume Rate
---------- ---------- ----------- ----------- ----------- ----------

INTEREST INCOME:
Loans; taxable $2,074 $2,438 ($364) $1,481 $1,620 ($139)
Loans; tax-exempt 56 24 32 314 323 (9)
Securities; taxable 46 72 (26) (417) (488) 71
Securities; tax-exempt (78) (148) 70 (54) (18) (36)
Deposits in banks (57) (54) (3) 79 80 (1)
Federal funds sold 69 103 (34) 338 339 (1)
---------- ---------- ----------- ----------- ----------- ----------
Total Interest Income $2,110 $2,435 ($325) $1,741 $1,856 ($115)
---------- ---------- ----------- ----------- ----------- ----------

INTEREST EXPENSE:
NOW accounts ($117) $104 ($221) $51 $60 ($9)
Money market accounts (212) (60) (152) 431 338 93
Savings accounts (65) 158 (223) 18 9 9
Time deposits 194 286 (92) 182 197 (15)
Federal funds purchased and securities
sold under agreements to repurchase 0 0 0 (17) (17) 0
Federal Home Loan Bank Advances 724 719 5 103 127 (24)
---------- ---------- ----------- ----------- ----------- ----------
Total Interest Expense $524 $1,207 ($683) $768 $714 $54
---------- ---------- ----------- ----------- ----------- ----------
Net Interest Income $1,586 $1,228 $358 $973 $1,142 ($169)
========== ========== =========== =========== =========== ==========

LOAN PORTFOLIO

At December 31, 1999 and 1998 net loans accounted for 77.8% and 73.8%,
respectively, of total assets and was the largest category of Bankshares'
earning assets.

Loans are shown on the balance sheets net of unearned discounts and the
allowance for loan losses. Interest is computed by methods that result in level
rates of return on principal. Loans are charged-off when deemed by management to
be uncollectable after taking into consideration such factors as the current
financial condition of the customer and the underlying collateral and
guarantees.

Bankshares adopted FASB No. 114, "Accounting by Creditors for Impairment of a
Loan." This statement has been amended by FASB No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." FASB No. 114, as
amended, requires that the impairment of loans that have been separately
identified for evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable market price of the
loans or the fair value of the collateral. However, for those loans that are
collateral dependent (that is, if repayment of those loans is expected to be
provided solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment is to be based on
the fair value of the collateral. FASB No. 114, as amended also requires certain
disclosures about investments in impaired loans and the allowance for loan
losses and interest income recognized on loans.

19

Bankshares considers all consumer installment loans and residential mortgage
loans to be homogenous loans. These loans are not subject to impairment under
FASB No. 114. A loan is considered impaired when it is probable that TFB will be
unable to collect all principal and interest amounts according to the
contractual terms of the loan agreement. Factors involved in determining
impairment include, but are not limited to, expected future cash flows,
financial condition of the borrower, and the current economic conditions. A
performing loan may be considered impaired if the factors above indicate a need
for impairment. A loan on non-accrual status may not be impaired if it is in the
process of collection or there is an insignificant shortfall in payment. An
insignificant delay of less than 30 days or a shortfall of less than 5% of the
required principal and interest payment generally do not indicate an impairment
situation, if in management's judgement the loan will be paid in full. Loans
that meet the regulatory definitions of doubtful or loss generally will be paid
in full. Loans that meet the regulatory definitions of doubtful or loss
generally qualify as an impaired loan under FASB No. 114. Charge-offs for
impaired loans occur when the loan or portion of the loan is determined to be
uncollectible, as is the case for all loans.

Loans are placed on non-accrual status specifically determined to be impaired or
when principal or interest is delinquent for 90 days or more, unless such loans
are well secured and in the process of collection. Any unpaid interest
previously accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on other non-accrual
loans is recognized only to the extent of interest payments received.

Total loans on the balance sheet are comprised of the following classifications
as of December 31, 1999, 1998, 1997, 1996, and 1995.

LOAN PORTFOLIO
(In Thousands)

December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- -------------- ------------- -------------

Loans secured by real estate:
Construction and land development $ 11,746 $ 8,297 $ 6,998 $ 9,617 $ 8,058
Secured by farmland 903 1,163 1,449 1,345 700
Secured by 1-4 family residential 64,921 53,430 42,120 34,145 27,547
Nonfarm, nonresidential loans 50,988 49,814 34,513 36,354 32,421
Loans to farmers (except secured
by real estate) 0 0 0 51 63
Commercial and industrial loans
(except those secured by real estate) 16,689 16,933 15,844 12,689 12,810
Loans to individuals (except those
secured by real estate) 33,787 30,284 24,417 21,119 18,586
All other loans 4,868 4,620 5,176 1,147 486
------------- ------------- -------------- ------------- -------------
Total loans 183,902 164,541 130,517 116,467 100,671

Less: Unearned discount (115) (416) (709) (722) (675)
------------- ------------- -------------- ------------- -------------
Total Loans, Net $183,787 $164,125 $129,808 $115,745 $99,996
============= ============= ============== ============= =============

The following table sets forth certain information with respect to the Bank's
non-accrual, restructured and past due loans, as well as foreclosed assets, for
the periods indicated:

NON-PERFORMING ASSETS AND LOANS CONTRACTUALLY PAST DUE
(In Thousands)

Years ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------

Nonaccrual loans $125 $666 $551 $733 $621
Restructured loans 0 0 0 0 0
Other real estate owned 0 57 199 477 778
------------- ------------- ------------- ------------- -------------
Total Non-Performing Assets $125 $723 $750 $1,210 $1,399
============= ============= ============= ============= =============
Loans past due 90 days
accruing interest $170 $951 $491 $21 $195
============= ============= ============= ============= =============

Allowance for loan losses to
total loans at period end 0.07% 0.41% 0.43% 0.59% 0.62%

Non-performing assets to
period end loans and other
real estate owned 0.05% 0.33% 0.41% 0.67% 1.51%

Potential Problem Loans: At December 31, 1999, Management is not aware of any
significant problem loans not included in table.

20

SUMMARY OF LOAN LOSS EXPERIENCE

ANALYSIS OF LOAN LOSS EXPERIENCE. The allowance for loan losses is maintained at
a level which, in management's judgement, is adequate to absorb probable credit
losses inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, credit
concentration, trends in historical loss experience, specific impaired loans,
and current economic conditions. Management periodically reviews the loan
portfolio to determine probable credit losses related to specifically identified
loans as well as probable credit losses inherent in the remainder of the loan
portfolio that have been incurred. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Changes in the
allowances relating to impaired loans are charged or credited to the provision
for loan losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.

Additions to the allowance for loan losses, which are recorded as the provision
for loan losses on Bankshares' statements of earnings, are made monthly to
maintain the allowance at an appropriate level based on management's analysis of
the potential risk in the loan portfolio. The amount of the provision is a
function of the level of loans outstanding, the level of non-performing loans,
historical loan-loss experience, the amount of loan losses actually charged off
or recovered during a given period and current national and local economic
conditions.

At December 31, 1999, 1998, 1997, 1996, and 1995 the allowance for loan losses
was $2,284,000, $1,853,000, $1,655,000, $1,465,000, and $1,181,000 respectively.

The following table summarizes TFB's loan loss experience for each of the last
five years ended December 31, 1999, 1998, 1997, 1996, and 1995, respectively:

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(In Thousands)

Year Ended
December 31,
------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------

Allowance for Loan Losses, January 1 $1,853 $1,655 $1,465 $1,181 $1,050
------ ------ ------ ------ ------
Loans Charged-Off:
Commercial, financial and
agricultural 217 108 176 128 176
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 0 40 0 40 116
Consumer 110 223 187 225 97
------ ------ ------ ------ ------
Total Loans Charged-Off $ 327 $ 371 $ 363 $ 393 $ 389
------ ------ ------ ------ ------
Recoveries:
Commercial, financial and
agricultural 18 6 7 51 6
Real estate-construction
and development 0 0 0 0 0
Real estate-mortgage 4 0 0 1 7
Consumer 41 29 81 47 77
------ ------ ------ ------ ------
Total Recoveries $ 63 $ 35 $ 88 $ 99 $ 90
------ ------ ------ ------ ------
Net Charge-Offs $ 264 $ 336 $ 275 $ 294 $ 299
------ ------ ------ ------ ------
Provision for Loan Losses $ 695 $ 534 $ 465 $ 578 $ 430
------ ------ ------ ------ ------
Allowance for Loan Losses, December 31 $2,284 $1,853 $1,655 $1,465 $1,181
====== ====== ====== ====== ======
Ratio of Net Charge-Offs
to Average Loans: 0.15% 0.23% 0.22% 0.27% 0.31%
====== ====== ====== ====== ======

21

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES. The following table allocates the
allowance for loan losses at December 31, 1999, 1998, 1997, 1996, and 1995 to
each loan category. The allowance has been allocated according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories of loans at the dates indicated,
although the entire allowance balance is available to absorb any actual
charge-offs that may occur.

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(In Thousands)

1999 1998 1997
------------------------ ------------------------ -------------------------
Allowance Percentage Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total for Loan of Total
Losses Loans Losses Loans Losses Loans
----------- ----------- ----------- ------------ ----------- ------------

Commercial $ 895 9.08% $ 714 10.29% $ 777 12.14%
Agricultural 0.00% 0.00% 0.00%
Real Estate:
Construction 6.39% 5.04% 5.36%
Secured by Farmland 0.49% 0.71% 1.11%
1-4 Family Residential 264 35.32% 160 32.47% 274 32.27%
Other Real Estate 27.74% 30.27% 26.44%
Consumer 1,125 18.38% 979 18.41% 604 18.71%
All Other Loans 2.65% 2.81% 3.97%
--------- --------- --------- --------- ------ ---------
$ 2,284 100.00% $ 1,853 100.00% $1,655 100.00%
========= ========= ========= ========= ====== =========

1996 1995
------------------------ ------------------------
Allowance Percentage Allowance Percentage
for Loan of Total for Loan of Total
Losses Loans Losses Loans
----------- ----------- ----------- ------------

Commercial $ 522 10.89% $ 605 12.73%
Agricultural 0.04% 0.06%
Real Estate:
Construction 8.26% 8.01%
Secured by Farmland 1.15% 0.70%
1-4 Family Residential 293 29.32% 249 27.36%
Other Real Estate 31.21% 32.20%
Consumer 650 18.13% 327 18.46%
All Other Loans 1.00% 0.48%
--------- ------ ------ ------
$ 1,465 100.00% $1,181 100.00%
========= ====== ====== ======

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

The following is a schedule of maturities and sensitivities of loans subject to
changes in interest rates as of December 31, 1999:

MATURITY SCHEDULE OF SELECTED LOANS
(In Thousands)

1 Year
WIthin Within After
1 Year 5 Years 5 Years Total
------- ------- ------- -------

Commercial and industrial loans 7,724 7,963 1,002 16,689
Construction Loans 9,157 2,378 211 11,746
------- ------- ------- -------
$16,881 $10,341 $ 1,213 $28,435
======= ======= ======= =======
For maturities over one year:
Floating rate loans $ 9,205 $ 486 $ 9,691
Fixed rate loans 1,136 727 1,863
------- ------- -------
$10,341 $ 1,213 $11,554
======= ======= =======

22

INVESTMENT PORTFOLIO

At December 31, 1999, 1998 and 1997, the carrying values of the major
classifications of securities were as follows:

INVESTMENT PORTFOLIO
(In Thousands)

Available for Sale (1) Held to Maturity (1)
----------------------------------- -----------------------------------
1999 1998 1997 1999 1998 1997
------- ------- ------- ------- ------- -------

U.S. Treasury and other U.S.
Government agencies and
Corporations $10,639 $13,170 $14,723 $ 2,885 $ 4,230 $ 6,665
States and political subdivisions 682 688 689 2,491 2,738 3,241
Mutual funds 810 862 1,039
Restricted investment - Federal
Home Loan Bank stock 1,150 967 967
Other securities 122 122 622
------- ------- ------- ------- ------- -------
Total $13,403 $15,809 $18,040 $ 5,376 $ 6,968 $ 9,906
======= ======= ======= ======= ======= =======

(1) Amounts for held-to-maturity securities are based on amortized cost.
Amounts for available-for-sale securities are based on fair value.

MATURITY OR NEXT RATE ADJUSTMENT DATE

The following is a schedule of maturities or next rate adjustment date and
related weighted average yields of securities at December 31, 1999:

MATURITY DISTRIBUTION AND YIELDS OF SECURITIES
(in Thousands)

Due in one year Due after 1 Due after 5 Due after 10 years
or less through 5 years through 10 years and Equity Securities Total
---------------- ----------------- ----------------- -------------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- ------- ------- ------- ------- ------- ------- ------- -------

SECURITIES HELD TO MATURITY:
Obligations of U.S. government
corporations and agencies 1,522 6.26% 1,363 6.44% 0 0.00% 0 0.00% 2,885 5.86%
Obligations of states and political
subdivisions, taxable 0 0.00% 0 0.00% 0 0.00% 0 0.00% 0 0.00%
------- ------- ------- ------- -------
Total taxable 1,522 1,363 0 0 2,885
Obligations of states and political
subdivisions, tax-exempt 100 5.98% 2,391 6.49% 0 0.00% 0 0.00% 2,491 6.47%
------- ------- ------- ------- -------
Total $ 1,622 $ 3,754 $ 0 $ 0 $ 5,376
------- ------- ------- ------- -------
SECURITIES AVAILABLE FOR SALE:
Obligations of U.S. government
corporations and agencies $ 1,568 5.34% $ 6,540 6.39% $ 504 6.54% $ 2,027 6.25% 10,639 6.22%
Obligations of states and political
subdivisions, taxable 0 0.00% 474 7.10% 0 0.00% 0 0.00% 474 7.10%
Other taxable securities 0 0.00% 0 0.00% 0 0.00% 2,082 6.51% 2,082 6.51%
------- ------- ------- ------- -------
Total taxable $ 1,568 $ 7,014 $ 504 $ 4,109 $13,195
------- ------- ------- ------- -------
Obligations of states and political
subdivisions, tax-exempt 0 0.00% 208 9.44% 0 0.00% 0 0.00% 208 9.44%
------- ------- ------- ------- -------
Total $ 1,568 $ 7,222 $ 504 $ 4,109 $13,403
------- ------- ------- ------- -------
TOTAL SECURITIES: $ 3,190 $10,976 $ 504 $ 4,109 $18,779
======= ======= ======= ======= =======

Yields on tax-exempt securities have been computed on a tax-equivalent basis
using a federal tax rate of 34%.

23

DEPOSITS

The average daily amounts of deposits and rates paid on deposits is summarized
for the periods indicated in the following table:

DEPOSITS AND RATES PAID
(In Thousands)

December 31,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- -----------------------
Amount Rate Amount Rate Amount Rate
------ ------ ------ ------ ------ ------

Noninterest-bearing $ 33,906 $ 30,721 $ 25,325
-------- -------- --------
Interest-bearing:
NOW accounts 37,349 1.46% 33,186 1.99% 30,207 2.02%
Money market accounts 36,390 3.56% 37,958 3.98% 29,259 3.68%
Regular savings accounts 33,220 2.93% 29,920 3.47% 29,685 3.44%
Time deposits 46,683 4.64% 40,266 4.89% 36,282 4.93%
-------- -------- --------
Total interest-bearing $153,642 3.24% $141,330 3.66% $125,433 3.58%
-------- -------- --------
Total deposits $187,548 $172,051 $150,758
======== ======== ========

MATURITY OF TIME DEPOSITS OF $100,000 OR MORE

The following is a schedule of maturities of time deposits in amounts of
$100,000 or more as of December 31, 1999:

MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 AND MORE
(In Thousands)

Within Three to Six to One to Over
Three Six Twelve Five Five
Months Months Months Years Years Total
------ ------ ------ ----- ----- -----

At December 31, 1999 $ 3,679 $ 2,609 $ 2,994 $ 3,670 $ 0 $12,952
======= ======= ======= ======= ======= =======

BORROWED FUNDS

LONG-TERM BORROWINGS. Amounts and weighted average rates for long-term
borrowings for 1999, 1998 and 1997 are as follows:

BORROWED FUNDS
(in Thousands)

December 31, 1999 December 31, 1999 December 31, 1999
- -------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------

FHLB Advances $23,000 5.57% $18,000 5.19% -- --

SHORT-TERM BORROWINGS. This information is not required, as the average amount
of borrowings during the period did not exceed 30% of shareholders' equity.

24

CAPITAL

Bankshares and TFB are subject to various regulatory capital requirements
administered by banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
Bankshares' financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, Bankshares and TFB must meet
specific capital guidelines that involve quantitative measures of the assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. Bankshares' and TFB's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and TFB to maintain minimum amounts and ratios (set forth in
the table below) of Total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined in the regulations), and of Tier I Capital to
average assets (as defined in the regulations). Management believes, as of
December 31, 1999 that Bankshares and TFB meet all capital adequacy requirements
to which they are subject.

Bankshares and TFB exceeded their regulatory capital ratios, as set forth in the
following table:

RISK BASED CAPITAL RATIOS
(In Thousands)

December 31,
-------------------------------------
1999 1998
----------------- ----------------

Tier 1 Capital:
Shareholders' Equity $ 21,204 $ 21,122

Tier 2 Capital:
Allowable Allowance for Loan Losses 2,178 1,853

Total Capital: $ 23,382 $ 22,975

Risk Weighted Assets: $174,493 $160,664

Risk Based Capital Ratios:
Tier 1 to Risk Weighted Assets 12.20% 13.10%

Total Capital to Risk Weighted Assets 13.40% 14.30%

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and the accompanying notes presented
elsewhere in this document, have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. Unlike most industrial companies, virtually all the assets and
liabilities are monetary in nature. The impact of inflation is reflected in the
increased cost of operations. As a result, interest rates have a greater impact
on performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 2000. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other contract,
and requires that an entity recognize all derivatives as assets or liabilities
in the balance sheet and measure them at fair value. Because Bankshares and TFB
do not use these derivative instruments and strategies, management does not
expect the adoption of this Statement to have any effect on earnings or
financial position.

25

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

An important component of both earnings performance and liquidity is management
of interest rate sensitivity. Interest rate sensitivity reflects the potential
effect on net interest income of a movement in market interest rates. TFB is
subject to interest rate sensitivity to the degree that its interest-earning
assets mature or reprice at a different time interval from that of its
interest-bearing liabilities. However, TFB is not subject to any of the other
major categories of market risk such as foreign currency exchange rate risk or
commodity price risk.

TFB uses a number of tools to manage its interest rate risk, including
simulating net interest income under various scenarios, monitoring the present
value change in equity under the same scenarios, and monitoring the difference
or gap between rate sensitive assets and rate sensitive liabilities over various
time periods. Management believes that rate risk is best measured by simulation
modeling.

The earnings simulation model forecasts annual net income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effect on net interest income and
present value equity under varying market rate assumptions.

TFB monitors exposure to gradual changes in rates of up to 200 basis points up
or down over a rolling 12-month period. TFB's policy limit for the maximum
negative impact on net interest income and change in equity from gradual changes
in interest rates of 200 basis points over 12 months is 15% and 10%,
respectively. Management has maintained a risk position well within these
guideline levels during 1999.

The following tables present TFB's market value changes in equity under various
rate scenarios as of December 31, 1999 and 1998.

MARKET RISK

- ------------------------------------------------------------------------------------------------------------------------------
1999 Percentage Market Minus Current Plus Market Percantage
(Dollars in thousands) Change Value Change 200 pts Fair Value 200 pts Value Change Change
- ------------------------------------------------------------------------------------------------------------------------------

Federal funds sold 0.16% 23 14,033 14,010 13,987 (23) -0.16%
Securities 5.19% 974 19,727 18,753 18,011 (742) -3.96%
Loans receivable 6.20% 11,210 192,039 180,829 170,901 (9,928) -5.49%
------ ------- ------- ------- -------
Total rate sensitive assets 5.72% 12,207 225,799 213,592 202,899 (10,693) -5.01%
Other assets 0.00% -- 18,915 18,915 18,915 -- 0.00%
------ ------- ------- ------- -------
Total assets 5.25% 12,207 244,714 232,507 221,814 (10,693) -4.60%
====== ======= ======= ======= =======
Rate sensitive deposits 3.17% 5,626 183,370 177,744 172,542 (5,202) -2.93%
Borrowed funds 8.78% 1,997 24,744 22,747 21,891 (856) -3.76%
Other liabilities 0.00% -- 1,731 1,731 1,731 -- 0.00%
------ ------- ------- ------- -------
Total liabilities 3.77% 7,623 209,845 202,222 196,164 (6,058) -3.00%
Present Value Equity 15.14% 4,584 34,869 30,285 25,650 (4,635) -15.30%
------ ------- ------- ------- -------
Total liabilities and equity 5.25% 12,207 244,714 232,507 221,814 (10,693) -4.60%
====== ======= ======= ======= =======

- ------------------------------------------------------------------------------------------------------------------------------
1998 Percentage Market Minus Current Plus Market Percantage
(Dollars in thousands) Change Value Change 200 pts Fair Value 200 pts Value Change Change
- ------------------------------------------------------------------------------------------------------------------------------

Securities 4.09% 936 23,802 22,866 21,915 (951) -4.16%
Loans receivable 5.07% 8,233 170,720 162,487 155,040 (7,447) -4.58%
------ ------- ------- ------- -------
Total rate sensitive assets 4.95% 9,169 194,522 185,353 176,955 (8,398) -4.53%
Other assets 0.00% -- 34,964 34,964 34,964 -- 0.00%
------ ------- ------- ------- -------
Total assets 4.16% 9,169 229,486 220,317 211,919 (8,398) -3.81%
====== ======= ======= ======= =======
Rate sensitive deposits 3.45% 5,902 177,059 171,157 166,406 (4,751) -2.78%
Borrowed funds 14.14% 2,589 20,898 18,309 17,148 (1,161) -6.34%
Other liabilities 0.00% -- 1,632 1,632 1,632 -- 0.00%
------ ------- ------- ------- -------
Total liabilities 4.44% 8,491 199,589 191,098 185,186 (5,912) -3.09%
Present Value Equity 2.32% 678 29,897 29,219 26,733 (2,486) -8.51%
------ ------- ------- ------- -------
Total liabilities and equity 4.16% 9,169 229,486 220,317 211,919 (8,398) -3.81%
====== ======= ======= ======= =======

26

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEPENDENT AUDITOR'S REPORT

27

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

WARRENTON, VIRGINIA

CONSOLIDATED FINANCIAL REPORT

DECEMBER 31, 1999

C O N T E N T S

PAGE

INDEPENDENT AUDITOR'S REPORT ON THE

CONSOLIDATED FINANCIAL STATEMENTS F-1

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated balance sheets F-2
Consolidated statements of income F-3
Consolidated statements of cash flows F-4 and F-5
Consolidated statements of changes
in shareholders' equity F-6
Notes to consolidated financial statements F-7-F-31

INDEPENDENT AUDITOR'S REPORT

To the Shareholders and Directors of
Fauquier Bankshares, Inc. and Subsidiaries
Warrenton, Virginia

We have audited the accompanying consolidated balance sheets of Fauquier
Bankshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the years ended December 31, 1999, 1998 and 1997. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fauquier
Bankshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.

Winchester, Virginia
January 20, 2000, except for Note 21 as
to which the date is February 28, 2000

F-1

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998

DECEMBER 31,
---------------------------------------
1999 1998
------------- ------------

ASSETS
Cash and due from banks $ 10,697,343 $ 9,868,240
Interest-bearing deposits in other banks 278,123 3,680,430
Federal funds sold 14,010,000 13,182,000
Securities (fair value: 1999, $18,752,504;
1998, $22,852,212) 18,779,388 22,777,053
Loans, net of allowance for loan losses of $2,284,348 in 1999
and $1,853,150 in 1998 181,503,312 162,272,291
Bank premises and equipment, net 5,594,248 5,879,737
Accrued interest receivable 1,097,562 1,084,500
Other real estate -- 56,944
Other assets 1,247,649 1,225,180
------------ ------------
Total assets $233,207,625 $220,026,375
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
Deposits:
Noninterest-bearing $ 33,045,513 $ 34,438,128
Interest-bearing 154,227,161 144,779,014
------------ ------------
Total deposits $187,272,674 $179,217,142
Federal Home Loan Bank advances 23,000,000 18,000,000
Dividends payable 265,770 238,910
Other liabilities 1,464,826 1,393,487
Commitments and contingent liabilities -- --
------------ ------------
Total liabilities $212,003,270 $198,849,539
============ ============

SHAREHOLDERS' EQUITY
Common stock, par value, $3.13 per share; 8,000,000 shares authorized;
issued and outstanding, 1999, 1,774,037 shares; 1998, 1,837,770 shares $ 5,552,736 $ 5,752,220
Retained earnings 16,019,525 15,432,062
Accumulated other comprehensive (loss) (367,906) (7,446)
------------ ------------
Total shareholders' equity $ 21,204,355 $ 21,176,836
------------ ------------
Total liabilities and shareholders' equity $233,207,625 $220,026,375
============ ============

See Notes to Consolidated Financial Statements.

F-2

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1999

YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
----------- ----------- -----------

INTEREST AND DIVIDEND INCOME
Interest and fees on loans $14,862,821 $12,765,916 $11,279,165
Interest on investment securities:
Taxable interest income 214,773 338,217 455,783
Interest income exempt from federal income taxes 113,316 142,827 199,347
Interest and dividends on securities available for sale:
Taxable interest income 1,201,235 1,037,353 1,362,679
Interest income exempt from federal income taxes 48,551 70,493 49,774
Dividends 93,664 87,950 62,334
Interest on federal funds sold 561,842 492,677 155,531
Interest on deposits in other banks 32,478 88,862 9,960
----------- ----------- -----------
Total interest and dividend income $17,128,680 $15,024,295 $13,574,573
----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits $ 4,977,353 $ 5,178,122 $ 4,495,621
Interest on Federal Home Loan Bank advances 1,065,369 340,579 238,065
Interest on federal funds purchased -- 160 17,474
----------- ----------- -----------
Total interest expense $ 6,042,722 $ 5,518,861 $ 4,751,160
----------- ----------- -----------
Net interest income $11,085,958 $ 9,505,434 $ 8,823,413
Provision for loan losses 695,000 534,675 465,000
----------- ----------- -----------
Net interest income after provision for loan losses $10,390,958 $ 8,970,759 $ 8,358,413
----------- ----------- -----------
OTHER INCOME
Trust Department income $ 566,029 $ 555,659 $ 522,190
Service charges on deposit accounts 1,189,526 1,046,625 1,065,328
Other service charges, commissions and fees 676,675 593,832 575,295
Gains on securities available for sale -- 16,673 10,142
Other operating income 877 5,829 54,361
----------- ----------- -----------
Total other income $ 2,433,107 $ 2,218,618 $ 2,227,316
----------- ----------- -----------

OTHER EXPENSES

Salaries and employees' benefits $ 3,718,435 $ 3,186,240 $ 3,046,243
Net occupancy expense of premises 437,293 336,768 387,107
Furniture and equipment 830,603 792,402 883,089
Other operating expenses 4,036,795 3,393,369 3,037,217
----------- ----------- -----------
Total other expenses $ 9,023,126 $ 7,708,779 $ 7,353,656
----------- ----------- -----------

Income before income taxes $ 3,800,939 $ 3,480,598 $ 3,232,073

Income tax expense 1,161,999 1,039,053 981,510
----------- ----------- -----------

Net income $ 2,638,940 $ 2,441,545 $ 2,250,563
=========== =========== ===========

EARNINGS PER SHARE, BASIC $ 1.46 $ 1.31 $ 1.18
=========== =========== ===========
EARNINGS PER SHARE, assuming dilution $ 1.45 $ 1.30 $ 1.17
=========== =========== ===========

See Notes to Consolidated Financial Statements.

F-3

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1999

YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997
------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,638,940 $ 2,441,545 $ 2,250,563
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 764,862 773,863 824,725
Provision for loan losses 695,000 534,675 465,000
Provision for other real estate 6,000 30,000 40,000
Deferred tax (benefit) (154,757) (40,964) (81,861)
(Gain) on securities available for sale -- (16,673) (10,142)
(Gain) loss on other real estate 23 (1,127) (11,954)
(Gain) on sale of premises and equipment (877) (8,590) (2,861)
Net premium amortization on investment securities 58,477 29,272 62,537
Changes in assets and liabilities:
(Increase) decrease in other assets 304,919 (537,700) (178,567)
Increase (decrease) in other liabilities 71,339 (10,284) 339,447
------------ ------------ ------------
Net cash provided by operating activities $ 4,383,926 $ 3,194,017 $ 3,696,887
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of securities available for sale $ -- $ 2,734,130 $ 9,918,783
Proceeds from maturities, calls and principal
payments of investment securities 1,588,605 3,424,859 3,450,904
Proceeds from maturities, calls and principal
payments of securities available for sale 17,271,037 14,562,054 8,175,688
Purchase of investment securities -- (499,250) (25,000)
Purchase of securities available for sale (15,466,607) (14,932,919) (7,623,455)
Proceeds from sale of premises and equipment 877 8,590 2,861
Proceeds from sale of other real estate owned 175,175 121,368 249,991
Purchase of premises and equipment (479,373) (497,738) (1,281,972)
Net (increase) in loans (20,050,275) (34,661,912) (14,337,988)
------------ ------------ ------------
Net cash (used in) investing activities $(16,960,561) $(29,740,818) $ (1,470,188)
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and saving accounts $ 4,134,077 $ 13,797,360 $ 6,590,565
Net increase in certificates of deposit 3,921,455 3,550,678 2,340,206
Net increase in Federal Home Loan Bank advances 5,000,000 18,000,000 --
Cash dividends paid (978,308) (784,188) (620,539)
Issuance of common stock 42,286 -- --
Acquisition of common stock (1,288,079) (1,498,508) --
------------ ------------ ------------
Net cash provided by financing activities $ 10,831,431 $ 33,065,342 $ 8,310,232
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents $ (1,745,204) $ 6,518,541 $ 10,536,931

CASH AND CASH EQUIVALENTS
Beginning 26,730,670 20,212,129 9,675,198
------------ ------------ ------------
Ending $ 24,985,466 $ 26,730,670 $ 20,212,129
============ ============= ============

See Notes to Consolidated Financial Statements.

F-4

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For Each of the Three Years in the Period Ended December 31, 1999

YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ---------- ----------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $6,115,327 $5,432,911 $4,739,123
========== ========== ==========

Income taxes $1,281,000 $1,287,248 $1,021,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES

Other real estate acquired in settlement of loans $ 124,254 $ 17,267 $ --
========== ========== ==========

Unrealized gain (loss) on securities available for sale, net $ (546,152) $ 146,625 $ 190,270
========== ========== ==========

See Notes to Consolidated Financial Statements.

F-5

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For Each of the Three Years in the Period Ended December 31, 1999

ACCUMULATED
OTHER
COMPRE- COMPRE-
COMMON CAPITAL RETAINED HENSIVE HENSIVE
STOCK SURPLUS EARNINGS (LOSS) INCOME TOTAL
---------- ---------- ----------- --------- -------- -----------

BALANCE, DECEMBER 31, 1996 $5,978,150 $1,207,680 $12,305,012 $(220,723) $19,270,119
Comprehensive income:
Net income -- -- 2,250,563 -- $2,250,563 2,250,563
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities
available for sale, net of deferred income
taxes of $68,139 -- -- -- -- 132,273 --
Less reclassification adjustment, net
of income taxes of $3,448 -- -- -- -- (6,694) --
---------
Other comprehensive income, net of tax -- -- -- 125,579 $ 125,579 125,579
----------
Total comprehensive income -- -- -- -- $2,376,142 --
==========
Cash dividends ($0.35 per share) -- -- (668,363) -- (668,363)
---------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1997 $5,978,150 $1,207,680 $13,887,212 $ (95,144) $20,977,898
Comprehensive income:
Net income -- -- 2,441,545 -- $2,441,545 2,441,545
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities
available for sale, net of deferred income
taxes of $50,847 -- -- -- -- 98,702 --
Less reclassification adjustment, net
of income taxes of $5,669 -- -- -- -- (11,004) --
----------
Other comprehensive income, net of tax -- -- -- 87,698 $ 87,698 87,698
----------
Total comprehensive income -- -- -- -- $2,529,243 --
==========
Cash dividends ($0.45 per share) -- -- (831,797) -- (831,797)
Change in par value from $6.25 to
$3.13 per share 9,264 (9,264) -- -- --
Acquisition of 75,238 shares of
common stock (235,194) (1,198,416) (64,898) -- (1,498,508)
---------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1998 $5,752,220 $ -- $15,432,062 $ (7,446) $21,176,836
Comprehensive income:
Net income -- -- 2,638,940 -- $2,638,940 2,638,940
Other comprehensive income (loss) net of tax,
unrealized holding losses on securities
available for sale, net of deferred income
taxes of $185,692 -- -- -- (360,460) (360,460) (360,460)
----------
Total comprehensive income -- -- -- -- $2,278,480 --
==========
Cash dividends ($0.56 per share) -- -- (1,005,168) -- (1,005,168)
Acquisition of 68,213 shares of
common stock (213,507) -- (1,074,572) -- (1,288,079)
Exercise of stock options 14,023 -- 28,263 -- 42,286
---------- ---------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1999 $5,552,736 $ -- $16,019,525 $(367,906) $21,204,355
========== =========== =========== ========= ===========

See Notes to Consolidated Financial Statements.

F-6

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997

NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES

Fauquier Bankshares, Inc. and Subsidiaries (the Corporation) grant commercial,
financial, agricultural, residential and consumer loans to customers in
Virginia. The loan portfolio is well diversified and generally is collateralized
by assets of the customers. The loans are expected to be repaid from cash flows
or proceeds from the sale of selected assets of the borrowers.

The accounting and reporting policies of the Corporation conform to generally
accepted accounting principles and to the reporting guidelines prescribed by
regulatory authorities. The following is a description of the more significant
of those policies and practices.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Fauquier
Bankshares, Inc. and its wholly-owned subsidiaries, The Fauquier Bank and
Fauquier Bank Services, Inc. In consolidation, significant intercompany accounts
and transactions have been eliminated.

SECURITIES

Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as "available for sale" and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.

LOANS

The Corporation grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by commercial and
residential mortgage loans. The ability of the Corporation's debtors to honor
their contracts is dependent upon the real estate and general economic
conditions in the Corporation's market area.

Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for the allowance for loan losses, and any
deferred fees or costs on originated loans. Interest income is accrued on the
unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method.

F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Installment loans are typically charged off no later than
180 days past due. In all cases, loans are placed on nonaccrual or charged-off
at an earlier date if collection of principal or interest is considered
doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual
or charged-off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.

A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan-by-loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.

F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

BANK PREMISES AND EQUIPMENT

Premises and equipment are stated at cost less accumulated depreciation and
amortization. Premises and equipment are depreciated over their estimated useful
lives; leasehold improvements are amortized over the lives of the respective
leases or the estimated useful life of the leasehold improvement, whichever is
less. Depreciation and amortization are recorded on the accelerated and
straight-line methods.

Costs of maintenance and repairs are charged to expense as incurred. Costs of
replacing structural parts of major units are considered individually and are
expensed or capitalized as the facts dictate.

INCOME TAXES

Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.

DEFINED BENEFIT PLAN

The Corporation has a pension plan for its employees. Benefits are generally
based upon years of service and the employees' compensation. The Corporation
funds pension costs in accordance with the funding provisions of the Employee
Retirement Income Security Act.

EARNINGS PER SHARE

Basic earnings per share represents income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding stock options, and are determined using the treasury method.

INVESTMENTS AND TRUST SERVICES

Securities and other property held by the Investments and Trust Services
Division in a fiduciary or agency capacity are not assets of the Corporation and
are not included in the accompanying consolidated financial statements.

F-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased and sold for one-day
periods.

OTHER REAL ESTATE

Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at the lower of loan balance or fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes in the valuation allowance are included in
other operating expenses.

USE OF ESTIMATES

In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, and the
valuation of foreclosed real estate and deferred tax assets.

ADVERTISING

The Corporation follows the policy of charging the costs of advertising to
expense as incurred. Advertising expense of $215,119, $169,475 and $104,125 were
incurred in 1999, 1998 and 1997, respectively.

RECLASSIFICATIONS

Certain reclassifications have been made to prior period balances to conform to
the current year presentation.

RECENT ACCOUNTING PRONOUNCEMENT

In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 2000. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. Because the
Company does not use these derivative instruments and strategies, management
does not expect the adoption of this Statement to have any effect on earnings or
financial position.

F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2. SECURITIES

The amortized cost of securities held to maturity, with
unrealized gains and losses follows:

DECEMBER 31, 1999
---------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------------- ---------------- ------------- ------------

Obligations of U.S.
Government corporations
and agencies $ 2,885,488 $ -- $ (22,826) $ 2,862,662
Obligations of states and
political subdivisions 2,490,790 1,693 (5,751) 2,486,732
--------------- -------------- -------------- -------------
$ 5,376,278 $ 1,693 $ (28,577) $ 5,349,394
-=============== ============== ============== =------------

DECEMBER 31, 1998
---------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------------- ---------------- ----------------- ------------

Obligations of U.S.
Government corporations
and agencies $ 4,229,829 $ 25,582 $ (1,844) $ 4,253,567
Obligations of states and
political subdivisions 2,738,025 51,421 -- 2,789,446
----------------- ------------ ------------ ------------
$ 6,967,854 $ 77,003 $ (1,844) $ 7,043,013
================= ============ ============ =============

The amortized cost and fair value of securities, by contractual maturity, are
shown below. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations without penalties.

1999

---------------------------------
AMORTIZED FAIR
COST VALUE
----------------- ------------

Due in one year or less $ 1,622,204 $ 1,614,055
Due after one year through five years 3,754,074 3,735,339
------------ ------------
$ 5,376,278 $ 5,349,394
============ ============

F-11

The amortized cost of securities available for sale, with unrealized gains and
losses follows:

DECEMBER 31, 1999
--------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------------------------- ------------------ --------------- -----------------

Obligations of U.S.
Government corporations

and agencies $ 11,068,015 $ 5,376 $ (434,339) $ 10,639,052
Obligations of states and
political subdivisions 682,719 327 (894) 682,152
Mutual funds 937,809 -- (127,903) 809,906
Restricted investments:
Federal Home Loan
Bank stock 1,150,000 -- -- 1,150,000
Federal Reserve Bank
stock 72,000 -- -- 72,000
Community Bankers'
Bank stock 50,000 -- -- 50,000
--------------- --------------- ------------ --------------
$ 13,960,543 $ 5,703 $ (563,136) $ 13,403,110
=============== ==============- ============ ==============

DECEMBER 31, 1998
--------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------------- ------------------- -------------- -------------

Obligations of U.S.
Government corporations
and agencies $ 13,109,391 $ 76,979 $ (16,387) $ 13,169,983
Obligations of states and
political subdivisions 684,580 3,832 -- 688,412
Mutual funds 937,809 -- (75,705) 862,104
Restricted investments:
Federal Home Loan
Bank stock 966,700 -- -- 966,700
Federal Reserve Bank
stock 72,000 -- -- 72,000
Community Bankers'
Bank stock 50,000 -- -- 50,000
------------- ---------- ---------- ------------
$ 15,820,480 $ 80,811 $ (92,092) $ 15,809,199
============= ========== ========== ============

F-12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and fair value of securities available for sale, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations without penalties.

1999
---------------------------------
AMORTIZED FAIR
COST VALUE
------------- --------------

Due in one year or less $ 1,618,214 $ 1,568,115
Due after one year through five years 7,359,233 7,222,344
Due after five years through ten years 510,155 503,836
Due after ten years 2,263,132 2,026,909
Mutual funds 937,809 809,906
Equity securities 1,272,000 1,272,000
---------- -------------
$ 13,960,543 $ 13,403,110
============= ----==========

For the years ended December 31, 1998 and 1997, proceeds from sales of
securities available for sale amounted to $2,734,130 and $9,918,783,
respectively. Gross realized gains amounted to $54,249 and $46,967,
respectively. Gross realized losses amounted to $37,576 and $36,825,
respectively. The tax provision applicable to these net realized gains amounted
to $5,669 and $3,448, respectively. There were no sales of securities available
for sale during 1999.

The carrying value of securities pledged to secure deposits and for other
purposes amounted to $3,567,940 and $4,312,134 at December 31, 1999 and 1998,
respectively.

NOTE 3. LOANS

A summary of the balances of loans follows:

DECEMBER 31,
---------------------------
1999 1998
--------- ------------
(Thousands)

Real estate loans:
Construction and land development $ 11,746 $ 8,297
Secured by farmland 903 1,163
Secured by 1-4 family residential 64,921 53,430
Other real estate loans 50,988 49,814
Commercial and industrial loans (except
those secured by real estate) 16,689 16,933
Loans to individuals for personal expenditures 33,787 30,284
All other loans 4,868 4,620
--------- ----------
Total loans $ 183,902 $ 164,541
Less: Unearned income 115 416
Allowance for loan losses 2,284 1,853
--------- ----------
Net loans $ 181,503 $ 162,272
========= ==========

F-13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4. ALLOWANCE FOR LOAN LOSSES

Analysis of the allowance for loan losses follows:

1999 1998 1997
----------------- ------------------ --------------

Balance at beginning of year $ 1,853,150 $ 1,654,917 $ 1,465,390
Provision charged to operating expense 695,000 534,675 465,000
Recoveries added to the allowance 63,368 35,032 87,501
Loan losses charged to the allowance (327,170) (371,474) (362,974)
----------------- -------------- -------------
Balance at end of year $ 2,284,348 $ 1,853,150 $ 1,654,917
=============== =============== ==============

Information about impaired loans is as follows:

1999 1998
--------- ---------

Impaired loans for which an allowance
has been provided $ 75,933 $ 539,752
Impaired loans for which no allowance
has been provided -- --
--------- ----------
Total impaired loans $ 75,933 $ 539,752
========= ==========
Allowance provided for impaired loans,
included in the allowance for loan losses $ 7,593 $ 100,000
========= ==========

1999 1998 1997
---------- --------- ---------

Average balance in impaired loans $ 330,980 $ 545,286 $ 644,283
========== ========= =========
Interest income recognized $ 10,519 $ 15,853 $ 46,497
========== ========= =========

No additional funds are committed to be advanced in connection with impaired
loans.

Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted
to $49,534 and $126,704 at December 31, 1999 and 1998, respectively. If interest
on these loans had been accrued, such income would have approximated $1,421 and
$6,064 for 1999 and 1998, respectively. There were no nonaccrual loans excluded
from impaired loan disclosure under FASB 114 at December 31, 1997.

F-14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5. RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Corporation has granted loans to
executive officers, directors, their immediate families and affiliated companies
in which they are principal shareholders which amounted to $4,184,901 at
December 31, 1999 and $4,396,078 at December 31, 1998. During 1999, total
principal additions were $1,585,358 and total principal payments were
$1,796,535.

NOTE 6. BANK PREMISES AND EQUIPMENT, NET

A summary of the cost and accumulated depreciation of premises and equipment
follows:

DECEMBER 31,
----------------------------
1999 1998
------------ -----------

Land $ 864,667 $ 864,667
Buildings and improvements 5,839,444 5,737,359
Furniture and equipment 5,721,726 5,343,567
------------ -----------
$12,425,837 $11,945,593
Less accumulated depreciation and amortization 6,831,589 6,065,856
------------ -----------
$ 5,594,248 $ 5,879,737
============ ===========

Depreciation and amortization charged to operations totaled $764,862, $773,863
and $824,725 in 1999, 1998 and 1997, respectively.

NOTE 7. DEPOSITS

The aggregate amount of time deposits, in denominations of $100,000 or more at
December 31, 1999 and 1998 was $12,952,343 and $10,756,134, respectively.

At December 31, 1999, the scheduled maturities of time deposits are as follows:

2000 $34,658,371
2001 8,807,196
2002 2,824,518
2003 234,158
-----------
$46,524,243
-----------

F-15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8. EMPLOYEE BENEFIT PLANS

The following tables provide a reconciliation of the changes in the plan's
benefit obligations and fair value of assets over the three-year period ending
December 31, 1999, computed as of October 1st of each respective year:

1999 1998 1997
----------------- ----------------- -----------------

CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning $ 3,086,296 $ 2,768,023 $ 2,193,845
Service cost 193,629 191,082 140,968
Interest cost 229,513 205,697 162,425
Actuarial (gain) loss 19,907 (26,214) 335,902
Benefits paid (189,792) (52,292) (65,117)
----------------- ----------------- -----------------
Benefit obligation, ending $ 3,339,553 $ 3,086,296 $ 2,768,023
================= ================= =================
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning $ 3,154,626 $ 3,111,184 $ 2,523,098
Actual return on plan assets 714,230 (65,365) 653,203
Employer contributions -- 161,099 --
Benefits paid (189,792) (52,292) (65,117)
----------------- ----------------- -----------------
Fair value of plan assets, ending $ 3,679,064 $ 3,154,626 $ 3,111,184
================= ================= =================
FUNDED STATUS $ 339,511 $ 68,330 $ 343,161
Unrecognized net actuarial (gain) (726,229) (298,972) (631,080)
Unrecognized net obligation at transition (227,740) (246,719) (265,698)
Unrecognized prior service cost 93,201 100,967 108,733
----------------- ----------------- -----------------
Accrued benefit cost included in other liabilities $ (521,257) $ (376,394) $ (444,884)
================ ================ ================

The following table provides the components of net periodic benefit cost for the
plan for the years ended December 31, 1999, 1998 and 1997:

1999 1998 1997
----------------- ----------------- -----------------

COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 193,629 $ 191,082 $ 140,968
Interest cost 229,513 205,697 162,425
Expected return on plan assets (267,066) (277,721) (224,543)
Amortization of prior service cost 7,766 7,766 7,766
Amortization of net obligation
at transition (18,979) (18,979) (18,979)
Recognized net actuarial gain -- (15,236) (14,301)
----------------- ----------------- -----------------
Net periodic benefit cost $ 144,863 $ 92,609 $ 53,336
================= ================= =================

F-16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The assumptions used in the measurement of the Corporation's benefit obligation
are shown in the following table:

1999 1998 1997
------------ ------------ ------------

WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 5.0% 5.0% 5.0%

The Corporation has a defined contribution retirement plan under Code Section
401(k) of the Internal Revenue Service covering employees who have completed 6
months of service and who are at least 21 years of age. Under the plan a
participant may contribute an amount up to 15% of their covered compensation for
the year, subject to certain limitations. The Corporation may also make, but is
not required to make, a discretionary matching contribution. The amount of this
matching contribution, if any, is determined on an annual basis by the Board of
Directors. The Corporation made contributions to the plan for the years ended
December 31, 1999, 1998 and 1997 of $63,057, $61,566 and $62,868, respectively.

NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES

As members of the Federal Reserve System, the Corporation's subsidiary bank is
required to maintain certain average reserve balances. For the final weekly
reporting period in the years ended December 31, 1999 and 1998, the aggregate
amounts of daily average required balances were approximately $3,462,000 and
$1,573,000, respectively.

In the normal course of business, there are outstanding various commitments and
contingent liabilities, such as guarantees, commitments to extend credit, etc.,
which are not reflected in the accompanying financial statements. The
Corporation does not anticipate losses as a result of these transactions.

The Corporation has entered an agreement to invest a minimum of $287,500 in the
Virginia Bankers Insurance Center, LLC. As of December 31, 1999, $28,750 had
been invested.

See Note 15 with respect to financial instruments with off-balance-sheet risk.

F-17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10. INCOME TAXES

The components of the net deferred tax assets, included in other assets are as
follows:

1999 1998
-------- ---------

Deferred tax assets:
Allowance for loan losses $625,995 $454,105
Accrued pension obligation 166,320 127,480
Interest on nonaccrual loans 1,797 10,130
Allowance on other real estate owned 652 29,667
Securities available for sale 189,528 3,836
-------- ---------
$984,292 $ 625,218
-------- ---------
Deferred tax liabilities:
Accumulated discount accretion $ 1,416 $ 1,125
Accumulated depreciation 294,918 276,584
-------- ---------
$296,334 $ 277,709
-------- ---------
$687,958 $ 347,509
======== =========

Allocation of federal income taxes between current and deferred portions is as
follows:

YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
------------- -------------- ------------

Current tax expense $ 1,316,756 $ 1,080,017 $ 1,063,371
Deferred tax (benefit) (154,757) (40,964) (81,861)
------------- -------------- ------------
$ 1,161,999 $ 1,039,053 $ 981,510
============= ============== ============

The reasons for the difference between the statutory federal income tax rate and
the effective tax rates are summarized as follows:

1999 1998 1997
---------- ---------- ----------

Computed "expected" tax expense $1,292,319 $1,183,403 $1,098,905
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest income (116,442) (109,185) (134,591)
Other (13,878) (35,165) 17,196
---------- ---------- ----------
$1,161,999 $1,039,053 $ 981,510
========== ========== ==========

F-18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11. EARNINGS PER SHARE

The following shows the weighted average number of shares used in computing
earnings per share and the effect on weighted average number of shares of
diluted potential common stock. Weighted average number of shares for all years
reported have been restated giving effect to stock splits. Potential dilutive
common stock had no effect on income available to common shareholders.

1999 1998 1997
-----------------------------------------------------------------------------------------
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------- ------------ ------------- ------------ ------------

Basic earnings per share 1,802,165 $ 1.46 1,857,282 $ 1.31 1,913,008 $ 1.18
============= ============= ============
Effect of dilutive securities,
stock options 15,967 18,359 8,065
------------ ------------ ------------
Diluted earnings per share 1,818,132 $ 1.45 1,875,641 $ 1.30 1,921,073 $ 1.17
============ ============= ============ ============ ============ ============

Options on 61,978 shares of common stock were not included in computing diluted
EPS in 1999, because their effects were antidilutive.

NOTE 12. STOCK OPTION PLANS

STOCK-BASED COMPENSATION PLAN

In 1998, the Corporation adopted an incentive stock option plan under which
options may be granted to certain key employees for purchase of the
Corporation's stock. The effective date of the plan was April 21, 1998 with a
ten-year term. The plan reserves for issuance 200,000 shares of the
Corporation's common stock. The stock option plan requires that options be
granted at an exercise price equal to at least 100% of the fair market value of
the common stock on the date of the grant; however, for those individuals who
own more than 10% of the stock of the Corporation, the option price must be at
least 110% of the fair market value on the date of grant. Such options are
generally not exercisable until three years from the date of issuance and
generally require continuous employment during the period prior to exercise. The
options will expire in no more than ten years after the date of grant.

F-19

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Grants under the above plan are accounted for following APB Opinion No. 25 and
related interpretations. Accordingly, no compensation cost has been recognized
for grants under the plan. Had compensation cost for the stock-based
compensation plan been determined based on the grant date fair value of awards
(the method described in FASB No. 123), reported net income and earnings per
share would have been reduced to the pro forma amounts shown below:

YEARS ENDED DECEMBER 31,
----------------------------
1999 1998
------------ -----------

Net income As reported $ 2,638,940 $ 2,441,545
Pro forma $ 2,588,042 $ 2,353,600

Earnings per share As reported $ 1.46 $ 1.31
Pro forma $ 1.44 $ 1.27

Earnings per share - As reported $ 1.45 $ 1.30
assuming dilution Pro forma $ 1.42 $ 1.25

The fair value of each grant is estimated at the grant date using the
Black-Scholes Option-Pricing Model with the following weighted average
assumptions:

YEARS ENDED DECEMBER 31,
----------------------------
1999 1998
------------ -----------

Dividend yield 0.60% 0.58%
Expected life 7 years 7 years
Expected volatility 17.88% 15.65%
Risk-free interest rate 6.50% 4.50%

F-20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the status of the stock-based compensation plan is presented below:

1999 1998
---------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE
------------ ------------ ------------- ------------

Outstanding at January 1 17,977 $ 21.00 -- $ --
Granted 20,481 19.00 17,977 21.00
------- -------
Outstanding at December 31 38,458 $ 19.93 17,977 $ 21.00
======= =======
Exercisable at end of year -- --
Weighted-average fair value
per option of options granted
during the year $ 6.83 $ 5.90

DIRECTOR COMPENSATION PLANS

The Corporation maintains a Nonemployee Director Stock Option Plan. Under this
plan each director who is not an employee of the Corporation or its subsidiary
will receive an option grant covering 1,120 shares of Corporation common stock
on April 1 of each year during the five-year term of the plan. The first grant
under the plan was made on May 1, 1995. The exercise price of awards are fixed
at the fair market value of the shares on the date the option is granted. During
the term of the plan, a total of 61,600 shares of common stock may be granted.
The options granted under the Plan are not exercisable for six months from the
date of grant except in the case of death or disability. Options that are not
exercisable at the time a director's services on the Board terminates for reason
other than death, disability or retirement in accordance with the Corporation's
policy will be forfeited.

F-21

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of the director stock option plan is presented below:

1999 1998 1997
--------------------------- ---------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ------------- ------------ ------------- ------------- -----------

Outstanding at January 1 49,280 $ 12.71 38,080 $ 10.57 24,640 $ 9.52
Granted 12,320 19.50 11,200 20.00 13,440 12.50
Exercised (4,480) 9.44 -- -- -- --
------- ------- -------
Outstanding at December 31 57,120 $ 14.43 49,280 $ 12.71 38,080 $ 10.57
------- ------- -------
Exercisable at end of year 57,120 $ 14.43 49,280 $ 12.71 38,080 $ 10.57

The status of the options outstanding as of December 31, 1999 for both the
Stock-Based Compensation and Director Compensation Plans is as follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------------------
Weighted Weighted
Remaining Average Average
Contractual Number Exercise Number Exercise
Life Outstanding Price Exercisable Price
----------- --------------- ---------------- --------------- ---------------

5.33 years 8,960 $ 8.75 8,960 $ 8.75
6.25 years 11,200 10.13 11,200 10.13
7.25 years 13,440 12.50 13,440 12.50
8.25 years 11,200 20.00 11,200 20.00
8.66 years 17,977 21.00 -- --
9.25 years 12,320 19.50 12,320 19.50
9.66 years 20,481 19.00 -- --
------- -------
95,578 $16.64 57,120 $ 14.43
======= =======

The Corporation also maintains a Director Deferred Compensation Plan (the
"Deferred Compen- sation Plan"). This plan provides that any non-employee
director of the Corporation or the Bank may elect to defer receipt of all or any
portion of his or her compensation as a director. A participating director may
elect to have amounts deferred under the Deferred Compensation Plan held in a
deferred cash account, which is credited on a quarterly basis with interest
equal to the highest rate offered by the Bank at the end of the preceding
quarter. Alternatively, a participant may elect to have a deferred stock account
in which deferred amounts are treated as if invested in the Corporation's common
stock at the fair market value on the date of deferral. The value of a stock
account will increase and decrease based upon the fair market value of an
equivalent number of shares of common stock. In addition, the deferred amounts
deemed invested in common stock will be credited with dividends on an equivalent
number of shares. Amounts considered invested in the Corporation's common stock
are paid, at the election of the director, either in cash or in whole shares of
the common stock and cash in lieu of fractional shares. Directors may elect to
receive amounts contributed to their respective accounts in one or up to five
installments.

F-22

NOTE 13. FEDERAL HOME LOAN BANK ADVANCES

The Corporation's fixed-rate debt of $23,000,000 at December 31, 1999 matures
through 2008. At December 31, 1999 and 1998, the interest rates ranged from 4.89
percent to 5.95 percent and from 4.89 percent to 5.51 percent, respectively. At
December 31, 1999 and 1998, the weighted average interest rates were 5.57
percent and 5.19 percent, respectively.

Advances on the line are secured by all of the Corporation's first lien loans on
one-to-four unit single family dwellings. As of December 31, 1999, the book
value of these loans totaled approximately $62,131,000. The amount of the
available credit is limited to seventy-five percent of qualifying collateral.
Any borrowings in excess of the qualifying collateral requires pledging of
additional assets.

The contractual maturities of Federal Home Loan Bank advances are as follows:

DECEMBER 31,
---------------------------------
1999 1998
------------ ---------------

Due in 2000 $ 10,000,000 $ --
Due in 2001-2004 -- --
Thereafter 13,000,000 18,000,000
----------- ----------
$ 23,000,000 $ 18,000,000
============= ============

An advance dated June 19, 1998 has an imbedded call option that gives the
Federal Home Loan Bank the option to call after 1 year and quarterly thereafter.
The remaining advances also have imbedded call options that give the Federal
Home Loan Bank the option to call only on the five-year anniversary date.

NOTE 14. DIVIDEND LIMITATIONS ON AFFILIATE BANK

Transfers of funds from the banking subsidiary to the parent corporation in the
form of loans, advances and cash dividends are restricted by federal and state
regulatory authorities. As of December 31, 1999, the aggregate amount of
unrestricted funds which could be transferred from the banking subsidiary to the
parent corporation, without prior regulatory approval, totaled $2,194,937.

NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Corporation is party to credit-related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Such commitments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.

F-23

The Corporation's exposure to credit loss is represented by the contractual
amount of these commitments. The Corporation follows the same credit policies in
making commitments and as it does for on-balance-sheet instruments.

At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:

1999 1998
----------------- -----------------

Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 54,736,121 $ 29,747,714
Standby letters of credit $ 5,183,606 $ 4,568,044

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation, is based on management's credit evaluation
of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Corporation is committed.

Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation generally holds collateral supporting those commitments if
deemed necessary.

NOTE 16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

CASH, SHORT-TERM INVESTMENTS AND FEDERAL FUNDS SOLD

For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.

F-24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SECURITIES

For securities and marketable equity securities held for investment purposes,
fair values are based on quoted market prices or dealer quotes. For other
securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.

LOAN RECEIVABLES

For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. Fair values for
certain mortgage loans (e.g., one-to-four family residential), credit card
loans, and other consumer loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. Fair values for other loans (e.g.,
commercial real estate and investment property mortgage loans, commercial and
industrial loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. Fair values for nonperforming loans are estimated
using discounted cash flow analyses or underlying collateral values, where
applicable.

ACCRUED INTEREST

The carrying amounts of accrued interest approximate fair value.

DEPOSIT LIABILITIES

The fair values disclosed for demand deposits (e.g., interest and noninterest
checking, passbook savings, and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.

FEDERAL HOME LOAN BANK ADVANCES

The fair values of the Corporation's Federal Home Loan Bank advances are
estimated using discounted cash flow analyses based on the Corporation's current
incremental borrowing rates for similar types of borrowing arrangements.

F-25

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.

The fair value of standby letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.

At December 31, 1999 and 1998, the carrying amounts and fair values of loan
commitments and standby letters of credit were immaterial.

The estimated fair values of the Corporation's financial instruments are as
follows:

1999 1998
------------------- ----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------- --------------- -------------------- ------------------
(Thousands) (Thousands)

Financial assets:
Cash and short-term
investments $ 10,975 $ 10,975 $ 13,549 $ 13,549
Federal funds sold 14,010 14,010 13,182 13,182
Securities 18,779 18,753 22,777 22,852
Loans 181,503 180,829 162,272 162,487
Accrued interest receivable 1,098 1,098 1,085 $ 1,085

Financial liabilities:
Deposits $ 187,273 $ 177,744 $ 179,217 $ 171,157
FHLB advances 23,000 22,747 18,000 18,309
Accrued interest payable 330 330 402 402

F-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 17. OTHER OPERATING EXPENSES

The principal components of "Other operating expenses" in the Consolidated
Statements of Income are:

1999 1998 1997
----------- ----------- ----------

Advertising $ 215,119 $ 169,475 $ 104,125
Bank card 401,617 312,622 304,118
Consulting 219,682 197,200 221,460
Data processing 581,729 489,814 396,783
Non-loan charge-off 437,000 -- --
Postage 148,825 139,972 168,451
Professional fees 378,741 210,291 228,119
Taxes, other than income 231,279 233,740 189,150
Telephone 233,360 176,292 161,429
Other (no items exceed 1% of total revenue) 1,189,443 1,463,963 1,263,582
----------- ----------- ----------
$ 4,036,795 $3,393,369 $3,037,217
=========== =========== ==========

NOTE 18. CONCENTRATION RISK

The Corporation maintains its cash accounts in several correspondent banks. The
total amount by which cash on deposit in those banks exceeds the federally
insured limits is approximately $5,957,773 at December 31, 1999.

NOTE 19. CAPITAL REQUIREMENTS

The Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's and the Bank's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Bank must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.

Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999 and 1998, that the Corporation and the Bank met all capital adequacy
requirements to which they are subject.

F-27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 1999, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, an institution
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.

The Corporation's and Subsidiary's actual capital amounts and ratios are also
presented in the table. No amount was deducted from capital for interest-rate
risk.

MINIMUM CAPITAL
ACTUAL REQUIREMENT
-------------------------- -----------------------------------
AMOUNT RATIO AMOUNT RATIO
------------ ----------- ------------- ----------

As of December 31, 1999: (Amount in Thousands)
Total Capital (to Risk

Weighted Assets):
Consolidated $ 23,382 13.4% Greater than or $ 13,939 Greater than or 8.0%
equal to equal to

The Fauquier Bank $ 23,497 13.5% Greater than or $ 13,939 Greater than or 8.0% Greater than or
equal to equal to equal to
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated $ 21,204 12.2% Greater than or $ 6,969 Greater than or 4.0%
equal to equal to

The Fauquier Bank $ 21,319 12.2% Greater than or $ 6,969 Greater than or 4.0% Greater than or
Tier 1 Capital (to equal to equal to equal to
Average Assets):

Consolidated $ 21,204 8.8% Greater than or $ 9,630 Greater than or 4.0%
equal to equal to

The Fauquier Bank $ 21,319 8.9% Greater than or $ 9,630 Greater than or 4.0% Greater than or
As of December 31, 1998: equal to equal to equal to

Total Capital (to Risk
Weighted Assets):

Consolidated $ 22,975 14.3% Greater than or $ 12,884 Greater than or 8.0%
equal to equal to

The Fauquier Bank $ 23,058 14.3% Greater than or $ 12,884 Greater than or 8.0% Greater than or
Tier 1 Capital (to Risk equal to equal to equal to

Weighted Assets):

Consolidated $ 21,122 13.1% Greater than or $ 6,442 Greater than or 4.0%
equal to equal to

The Fauquier Bank $ 21,205 13.2% Greater than or $ 6,442 Greater than or 4.0% Greater than or
equal to equal to equal to
Tier 1 Capital (to
Average Assets):

Consolidated $ 21,122 9.7% Greater than or $ 8,676 Greater than or 4.0%
equal to equal to

The Fauquier Bank $ 21,205 9.8% Greater than or $ 8,676 Greater than or 4.0% Greater than or
equal to equal to equal to

MINIMUM
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
-------------------------------------
AMOUNT RATIO
------------ -----------

As of December 31, 1999:
Total Capital (to Risk

Weighted Assets):
Consolidated N/A

The Fauquier Bank Greater than or $ 17,423 Greater than or 10.0%
equal to equal to
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated N/A

The Fauquier Bank Greater than or $ 10,454 Greater than or 6.0%
Tier 1 Capital (to equal to equal to
Average Assets):

Consolidated N/A

The Fauquier Bank Greater than or $ 12,038 Greater than or 5.0%
As of December 31, 1998: equal to equal to

Total Capital (to Risk
Weighted Assets):

Consolidated N/A

The Fauquier Bank Greater than or $ 16,106 Greater than or 10.0%
Tier 1 Capital (to Risk equal to equal to

Weighted Assets):

Consolidated N/A

The Fauquier Bank Greater than or $ 9,663 Greater than or 6.0%
equal to equal to
Tier 1 Capital (to
Average Assets):

Consolidated N/A

The Fauquier Bank Greater than or $ 10,845 Greater than or 5.0%
equal to equal to

F-28

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 20. SUBSEQUENT EVENT

On February 28, 2000, the Bank was first advised by its accountants as to the
possible misappropriation of cash in the approximate amount of $437,000. The
Bank immediately reported the loss to its insurance carrier which is expected to
process the Bank's indemnity claim, subject to a reservation of rights under the
policy. The Bank has undertaken an aggressive investigation of the loss. The
Bank's counsel has reviewed the Bank's insurance coverage with respect to the
loss and, subject to further results of the ongoing investigation, is
preliminary of the view that the loss is within the coverage afforded. The loss
has been recorded in the year ended December 31, 1999 and any recovery under the
insurance policy will be recognized as income in the year in which it is
received.

NOTE 21. PARENT CORPORATION ONLY FINANCIAL STATEMENTS

FAUQUIER BANKSHARES, INC.
(PARENT CORPORATION ONLY)

BALANCE SHEETS
December 31, 1999 and 1998

DECEMBER 31,
-----------------------------------
1999 1998
--------------- --------------

ASSETS

Cash on deposit with subsidiary bank $ 37,387 $ 29,555
Investment in subsidiaries, at cost,
plus equity in undistributed net income 21,318,595 21,259,492
Dividend receivable 265,770 238,910
Other assets -- 23,957
--------------- --------------
Total assets $ 21,621,752 $ 21,551,914
=============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
Dividend payable $ 265,770 $ 238,910
Other liabilities 151,627 136,168
--------------- --------------
$ 417,397 $ 375,078
--------------- --------------
SHAREHOLDERS' EQUITY
Common stock $ 5,552,736 $ 5,752,220
Retained earnings, which are substantially
distributed earnings of subsidiaries 16,019,525 15,432,062
Accumulated other comprehensive (loss) (367,906) (7,446)
--------------- --------------
$ 21,204,355 $ 21,176,836
--------------- --------------
Total liabilities and shareholders' equity $ 21,621,752 $ 21,551,914
=============== ==============

F-29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAUQUIER BANKSHARES, INC.
(PARENT CORPORATION ONLY)

STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1999

YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------

REVENUE,
dividends from subsidiaries $ 2,315,247 $ 2,306,438 $ 668,365
---------------- ---------------- ----------------
EXPENSES
Legal and professional fees $ 105,153 $ 51,104 $ --
Directors' fees 11,959 4,047 12,872
Miscellaneous 28,149 15,313 4,644
---------------- ---------------- ----------------
Total expenses $ 145,261 $ 70,464 $ 17,516
---------------- ---------------- ----------------
Income before income tax (benefit)
and equity in undistributed net
income of subsidiaries $ 2,169,986 $ 2,235,974 $ 650,849

Income tax (benefit) (49,389) (23,958) (5,955)
---------------- ---------------- ----------------
Income before equity in
undistributed net income
of subsidiaries $ 2,219,375 $ 2,259,932 $ 656,804

Equity in undistributed net income
of subsidiaries 419,565 181,613 1,593,759
---------------- ---------------- ----------------
Net income $ 2,638,940 $ 2,441,545 $ 2,250,563
================ ================ ================

F-30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FAUQUIER BANKSHARES, INC.
(PARENT CORPORATION ONLY)

STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1999

YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997
---------------- ---------------- --------------

Cash Flows from Operating Activities
Net income $ 2,638,940 $ 2,441,545 $ 2,250,563
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed earnings of subsidiaries (419,565) (181,613) (1,593,759)
(Increase) in undistributed dividends
receivable from subsidiaries (26,860) (47,609) (47,825)
(Increase) decrease in other assets 23,959 (9,353) (5,955)
Increase in other liabilities 15,459 49,182 39,860
--------------- ------------- ------------
Net cash provided by operating activities $ 2,231,933 $ 2,252,152 $ 642,884
--------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid $ (978,308) $ (784,188) $ (620,539)
Issuance of common stock 42,286 -- --
Acquisition of common stock (1,288,079) (1,498,508) --
--------------- ------------- -----------
Net cash (used in) financing activities $ (2,224,101) $ (2,282,696) $ (620,539)
--------------- ------------- ------------
Increase (decrease) in cash
and cash equivalents $ 7,832 $ (30,544) $ 22,345

CASH AND CASH EQUIVALENTS

Beginning 29,555 60,099 37,754
--------------- ------------- ------------
Ending $ 37,387 $ 29,555 $ 60,099
=============== ============= ============

F-31

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS

Information concerning Bankshares executive officers is contained herein. All
other information concerning Bankshares required by this item is contained in
Bankshares' definitive proxy statement for the 2000 annual meeting of
shareholders to be filed within 120 days of the fiscal year ended December 31,
1999 and is incorporated herein by reference.

CLASS I

POSITION HELD WITH COMPANY
AND/OR PRINCIPAL OCCUPATIONS FIRST YEAR
AND DIRECTORSHIPS DURING THE AS DIRECTOR
NAME PAST FIVE YEARS OF COMPANY AGE
- ----- ---------------------------------- ---------- ---

C. Hunton Tiffany Chairman of the Board of the 1984 60
Company and Bank; President
Fauquier Bank Services, Inc.;
President of the Company since
1984; President of the Bank since
1982; Director of the Bank since 1974

Randy K. Ferrell Senior Vice President of Fauquier 49
Bankshares; Senior Vice President of
Bank, Commercial Banking, (Lending
Division); since 1994

Gary R. Shook Senior Vice President of Fauquier 39
Bankshares; Senior Vice President of
Bank, Investments & Trust Services,
Retail Banking, since 1995

Diane B. Coppage Treasurer/Senior Vice President of 50
Fauquier Bankshares; Treasurer/Senior
Vice President, Controller of Bank,
(Accounting, Data Processing, Bookkeeping);
since 1972

C. Hunton Tiffany has been an employee of TFB since 1965. He was elected to
TFB's Board in 1974 and to Bankshares' Board in 1984. He has served as President
of TFB since 1982 and Bankshares since 1984, and is currently Chairman of both
Boards of Directors. Mr. Tiffany is President and a Director of Fauquier Bank
Services, Inc., a subsidiary of TFB. Mr. Tiffany serves on the Executive,
Investment, Long Range Planning Committee and Trust Committees.

28

Randy K. Ferrell joined TFB in September 1994. He serves as Senior Vice
President, and heads the Commercial Banking Division, and as Senior Vice
President of Bankshares. From 1972 to September 1994, Mr. Ferrell was employed
by NationsBank and its predecessors, ending his career there as Senior Vice
President, responsible for all corporate banking activities for Northern
Virginia and Washington, D. C. Mr. Ferrell is a member of Senior Management, and
also serves on the Asset/Liability Management Committee of TFB. Mr. Ferrell is a
Senior Vice President and Director of Fauquier Bank Services, Inc., a subsidiary
of TFB. He participates in presentations to the Boards of TFB and Bankshares,
and leads the presentation of new loans and analysis of the loan portfolio at
the Executive Committee meetings. Mr. Ferrell is a member of Senior Management,
and serves on the Asset/Liability Management and Strategic Planning Committees
of TFB.

Gary R. Shook joined TFB in January 1995. He serves as Senior Vice President,
and heads the Retail Branch operations, Investment Sales and Trust Services
areas, and Senior Vice President of Bankshares. From 1988 to January 1995, Mr.
Shook was employed at Jefferson National Bank, as Vice President, Sales and
Marketing in the Trust and Investments Group. He oversees all aspects of the
branching system, third party investment sales, and the Trust Division products
and services of TFB. Mr. Shook serves as a Senior Vice President and Director of
Fauquier Bank Services, Inc., a subsidiary of TFB. Mr. Shook participates in
presentations to the Boards of TFB and Bankshares, and reports to the Trust
Committee of the Board of Directors on all trust activities. He is a member of
Senior Management and serves on the Asset/Liability Management and Strategic
Planning Committees of TFB.

Diane B. Coppage joined TFB in 1972. She serves as Senior Vice President,
Controller, and Treasurer of TFB and Senior Vice President and Treasurer of
Bankshares. As head of Support Services, she directs the activities of the
Accounting, Data Processing and Bookkeeping departments and is responsible for
the integrity of the financial systems of the organization. Mrs. Coppage is a
member of Senior Management, and also serves on the Technology, Human Resources,
Asset/Liability Management and Strategic Planning Committees of TFB. She
participates in presentations to the Boards of TFB and Bankshares.

COMMITTEES OF THE BOARD

During the year ended December 31, 1999, the Board of Directors acted as a
Committee of the Whole as to all matters. On October 21, 1999, the Board of
Directors established Audit and Executive Committees of the Company. The
Committees held no formal Meetings in 1999.

MEETINGS OF BOARD OF DIRECTORS

During the year ended December 31, 1999, the Board of Directors of Bankshares
held six meetings. All directors were in attendance at each meeting except for
two directors. Each of the two directors was unable to attend one meeting.

29

ITEM 11: EXECUTIVE COMPENSATION

Information relating to executive compensation is contained in Bankshares'
definitive proxy statement for the 2000 annual meeting of shareholders to be
filed within 120 days of the fiscal year ended December 31, 1999 and is
incorporated herein by reference.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is contained in Bankshares' definitive proxy
statement for the 2000 annual meeting of shareholders to be filed within 120
days of the fiscal year ended December 31, 1999 and is incorporated herein by
reference.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is contained in Bankshares' definitive proxy
statement for the 2000 annual meeting of shareholders to be filed within 120
days of the fiscal year ended December 31, 1999 and is incorporated herein by
reference.

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8K

(a) (1) - Financial Statements

The following consolidated financial statements of Fauquier Bankshares Inc. and
subsidiaries are filed as part of this document under Item 8. Financial
Statements and Supplementary Data.

Independent Auditor's Report on the Consolidated Financial Statements

Consolidated Balance Sheets - December 31, 1999 and December 31, 1998

Consolidated Statements of Income - Years ended December 31, 1999, 1998 and
1997

Consolidated Statements of Cash Flow - Years ended December 31, 1999, 1998
and 1997

Consolidated Statements of Changes in Shareholders' Equity - December 31,
1999, 1998 and 1997

Notes to Consolidated Financial Statements - Years ended December 31, 1999,
1998 and 1997

(a) (2) - Financial Statement Schedules

All schedules to the Consolidated Financial Statements required by Article 9 of
Regulation S-X are omitted since they are either not applicable or the required
information is show in the consolidated financial statements or notes thereto.

(a) (3) - Exhibits

EXHIBIT NUMBER

(3)(i) Articles of Incorporation of Fauquier Bankshares, Inc.
(including amendments)*

(3)(ii) Bylaws of Fauquier Bankshares, Inc.*

(10)(i) Fauquier Bankshares, Inc. Omnibus Stock Ownership and Long
Term Incentive Plan, Amended and Restated Effective January
1, 2000**

(11) Statement regarding computation of per share earnings

(21) Incorporated herein by reference to Part I of this Form 10-K

(27) Financial Data Schedule (filed herewith)

* Incorporated by reference to Bankshares' Securities Exchange Act of 1934
("Exchange Act") Registration Statement on Form 10, filed with the Securities
and Exchange Commission on April 16, 1999.

** Incorporated by reference to Bankshares' definitive proxy statement for the
2000 annual meeting of shareholders to be filed within 120 days of the fiscal
year ended December 31, 1999.

(b) Reports on Form 8-K Filed in the fourth quarter of 1999

None.

30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FAUQUIER BANKSHARES, INC.

/s/ C. Hunton Tiffany
-------------------------------------
C. Hunton Tiffany
President and Chief Executive Officer

Dated: April 11, 2000

Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

/s/ C. Hunton Tiffany
- --------------------------- President, Chief Executive Officer, April 11, 2000
C. Hunton Tiffany Director

- --------------------------- Director April 11, 2000
Alexander G. Green, Jr.

/s/ Stanley C. Haworth
- --------------------------- Director April 11, 2000
Stanley C. Haworth

- --------------------------- Director April 11, 2000
John J. Norman, Jr.

/s/ Douglas C. Larson
- --------------------------- Director April 11, 2000
Douglas C. Larson

/s/ C.H. Lawrence, Jr.
- --------------------------- Director April 11, 2000
C.H. Lawrence, Jr.

/s/ D. Harcourt Lees, Jr.
- --------------------------- Director April 11, 2000
D. Harcourt Lees, Jr.

- --------------------------- Director April 11, 2000
Randolph T. Minter

/s/ B.S. Montgomery
- --------------------------- Director April 11, 2000
B.S. Montgomery

- --------------------------- Director April 11, 2000
H.P. Neale

/s/ Pat H. Nevill
- --------------------------- Director April 11, 2000
Pat H. Nevill

- --------------------------- Director April 11, 2000
Henry M. Ross

/s/ H. Frances Stringfellow
- --------------------------- Director April 11, 2000
H. Frances Stringfellow

31