UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 2-25805
FAUQUIER BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1288193
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
10 COURTHOUSE SQUARE
WARRENTON, VIRGINIA 20186
(Address of principal executive offices) (Zip Code)
(540) 347-2700
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
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
---------- ------------
As of August 8, 2002, the latest practicable date for determination,
3,305,989 shares of common stock, par value $3.13 per share, of the registrant
were outstanding.
FAUQUIER BANKSHARES, INC.
INDEX
Part I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
December 31, 2001 2
Consolidated Statements of Income (unaudited) for the Three
Months Ended June 30, 2002 and 2001 3
Consolidated Statements of Income (unaudited) for the Six Months
Ended June 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity
(unaudited) for the Six Months Ended June 30, 2002 and 2001 5
Consolidated Statements of Cash Flows (unaudited) for the Six
Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 21
ITEM 1. FINANCIAL STATEMENTS
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
ASSETS
Cash and due from banks $ 21,489,982 $ 14,408,495
Interest-bearing deposits in other banks 67,763 352,536
Federal funds sold 5,612,000 15,421,000
Securities, at fair value 55,979,011 36,907,864
Loans, net of allowance for loan losses of $2,961,514
in 2002 and $2,856,743 in 2001 214,575,172 207,452,738
Bank premises and equipment, net 6,560,360 6,335,708
Accrued interest receivable 1,833,152 1,590,282
Other assets 2,542,425 2,733,384
-------------- --------------
Total assets $ 308,659,865 $ 285,202,007
============== ==============
LIABILITIES
Deposits:
Noninterest-bearing $ 52,642,104 $ 50,659,242
Interest-bearing 209,654,533 193,087,800
-------------- --------------
Total deposits $ 262,296,637 $ 243,747,042
Federal Home Loan Bank advances 15,000,000 15,000,000
Company obligated mandatorily redeemable capital securities 4,000,000 -
Dividends payable 331,311 318,356
Other liabilities 1,827,773 1,979,210
Commitments and contingent liabilities -- --
-------------- --------------
Total liabilities $ 283,455,721 $ 261,044,608
-------------- --------------
SHAREHOLDERS' EQUITY
Common stock, par value, $3.13; authorized 8,000,000 shares;
issued and outstanding, 2002, 3,313,112 shares; 2001, 1,675,559 shares 10,370,041 5,244,500
Retained earnings 14,251,516 18,685,761
Accumulated other comprehensive income 582,587 227,138
-------------- --------------
Total shareholders' equity $ 25,204,144 $ 24,157,399
-------------- --------------
Total liabilities and shareholders' equity $ 308,659,865 $ 285,202,007
============== ==============
See Accompanying Notes to Consolidated Financial Statements.
2
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
---------- ----------
INTEREST INCOME
Interest and fees on loans $4,345,051 $4,458,926
Interest and dividends on securities available for sale:
Taxable interest income 488,559 294,204
Interest income exempt from federal income taxes 28,180 38,929
Dividends 34,181 33,089
Interest on federal funds sold 57,797 177,625
Interest on deposits in other banks 340 610
---------- ----------
Total interest income 4,954,108 5,003,383
---------- ----------
INTEREST EXPENSE
Interest on deposits 1,126,095 1,668,094
Interest on Federal Home Loan Bank advances 175,807 235,066
Distribution on capital securities of subsidiary trust 56,467 --
---------- ----------
Total capital interest expense 1,358,369 1,903,160
---------- ----------
Net interest income 3,595,739 3,100,223
Provision for loan losses 93,750 100,000
---------- ----------
Net interest income after
provision for loan losses 3,501,989 3,000,223
---------- ----------
OTHER INCOME
Wealth management income 129,348 122,119
Service charges on deposit accounts 483,357 389,568
Other service charges, commissions and fees 254,992 232,575
Other operating income 9,517 9,699
---------- ----------
Total other income 877,214 753,961
---------- ----------
OTHER EXPENSES
Salaries and employees' benefits 1,373,564 1,190,795
Net occupancy expense of premises 173,714 151,014
Furniture and equipment 245,412 207,028
Marketing and business development 127,065 83,182
Bank card 126,332 109,166
Professional and consulting fees 151,675 237,017
Data processing 201,125 165,111
Non-loan charge-offs 32,938 26,844
Postage 49,532 43,343
Supplies 50,438 58,106
Taxes, other than income 58,483 41,649
Telephone 67,643 42,477
Other operating expenses 304,743 216,137
---------- ----------
Total other expenses 2,962,664 2,571,869
---------- ----------
Income before income taxes 1,416,539 1,182,315
Income tax expense 444,291 371,086
---------- ----------
Net income $ 972,248 $ 811,229
========== ==========
*EARNINGS PER SHARE, basic $ 0.29 $ 0.24
========== ==========
*EARNINGS PER SHARE, assuming dilution $ 0.28 $ 0.23
========== ==========
*DIVIDENDS PER SHARE $ 0.10 $ 0.085
========== ==========
*Amounts have been restated to reflect a 100% stock dividend during May 2002.
See Accompanying Notes to Consolidated Financial Statements.
3
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
---------- ----------
INTEREST INCOME
Interest and fees on loans $8,571,019 $8,779,289
Interest and dividends on securities available for sale:
Taxable interest income 858,274 512,339
Interest income exempt from federal income taxes 62,465 80,486
Dividends 63,067 77,075
Interest on federal funds sold 101,106 352,899
Interest on deposits in other banks 1,586 1,787
---------- ----------
Total interest income 9,657,517 9,803,875
---------- ----------
INTEREST EXPENSE
Interest on deposits 2,281,907 3,306,144
Interest on Federal Home Loan Bank advances 349,682 406,391
Distribution on capital securities of subsidiary trust 59,573 --
---------- ----------
Total capital interest expense 2,691,162 3,712,535
---------- ----------
Net interest income 6,966,355 6,091,340
Provision for loan losses 187,500 200,000
---------- ----------
Net interest income after
provision for loan losses 6,778,855 5,891,340
---------- ----------
OTHER INCOME
Wealth management income 331,602 254,721
Service charges on deposit accounts 955,051 774,453
Other service charges, commissions and fees 476,354 421,528
Gains on securities AFS -- 65
Non-loan chargeoff recovery -- 542,320
Other operating income 42,559 23,998
---------- ----------
Total other income 1,805,566 2,017,085
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OTHER EXPENSES
Salaries and employees' benefits 2,770,605 2,326,719
Net occupancy expense of premises 346,072 283,475
Furniture and equipment 490,071 410,906
Advertising and business development 253,458 151,979
Bank card 225,698 200,745
Consulting and professional fees 329,847 413,255
Data processing 396,704 335,135
Non-loan charge-offs 65,049 119,276
Postage 92,683 76,056
Supplies 105,836 105,116
Taxes, other than income 107,164 106,304
Telephone 123,904 92,617
Other operating expenses 550,607 464,675
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Total other expenses 5,857,698 5,086,258
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Income before income taxes 2,726,723 2,822,167
Income tax expense 842,937 884,086
---------- ----------
Net income $1,883,786 $1,938,081
========== ==========
*EARNINGS PER SHARE, basic $ 0.56 $ 0.57
========== ==========
*EARNINGS PER SHARE, assuming dilution $ 0.54 $ 0.56
========== ==========
*DIVIDENDS PER SHARE $ 0.20 $ 0.17
========== ==========
*Amounts have been restated to reflect a 100% stock dividend during May 2002.
See Accompanying Notes to Consolidated Financial Statements.
4
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME INCOME TOTAL
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 5,359,158 $ -- $ 17,145,324 $ (85,543) $ 22,418,939
Comprehensive income:
Net income -- -- 1,938,081 -- $ 1,938,081 1,938,081
Other comprehensive income (loss)
net of tax:
Unrealized holding gains on securities
available for sale, net of deferred
income taxes of $115,311 -- -- -- 223,839 223,839 223,839
------------
Total comprehensive income -- -- -- -- $ 2,161,920
============
Cash dividends -- -- (580,915) -- (580,915)
Acquisition of 5,748 shares of
common stock (17,991) -- (80,770) -- -- (98,761)
Exercise of stock options 4,150 -- 15,408 -- 19,558
--------------------------------------------------- ------------
BALANCE, JUNE 30, 2001 $ 5,345,317 $ -- $ 18,437,128 $ 138,296 $ 23,920,741
=================================================== ============
BALANCE, DECEMBER 31, 2001 $ 5,244,500 $ -- $ 18,685,761 $ 227,138 $ 24,157,399
Comprehensive income:
Net income -- -- 1,883,786 -- $ 1,883,786 1,883,786
Other comprehensive income (loss) net
of tax:
Unrealized holding gains on
securities available for sale,
net of deferred income taxes
of $183,110 -- -- -- 355,449 355,449 355,449
------------
Total comprehensive income -- -- -- -- $ 2,239,235 --
============
100% Stock Dividend 5,185,020 (5,185,020) (662,818)
Cash dividends -- -- (662,818) (662,818)
Acquisition of 23,135 shares of
common stock (72,413) -- (525,080) -- (597,493)
Issuance of common stock 5,547 -- 37,424 -- 42,971
Exercise of stock options 7,387 -- 17,463 -- 24,850
--------------------------------------------------- ------------
Balance, June 30, 2002 $10,370,041 $ -- $ 14,251,516 $ 582,587 $ 25,204,144
=================================================== ============
See Accompanying Notes to Consolidated Financial Statements.
5
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,883,786 $ 1,938,081
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 462,058 362,039
Provision for loan losses 187,500 200,000
Provision for non-loan chargeoff -- 68,500
Net premium amortization on investment securities 155,021 17,338
Gain on sale of fixed assets (6,651) --
Changes in assets and liabilities:
(Increase) in accrued interest receivable (242,870) (129,530)
Decrease in other assets 7,591 43,646
(Decrease) in other liabilities (151,437) (99,201)
------------ ------------
Net cash provided by operating activities 2,294,998 2,400,873
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls and principal
payments of securities available for sale 4,309,118 3,625,484
Purchase of securities available for sale (22,996,469) (12,182,644)
Proceeds from sale of premises and equipment 6,651 --
Purchase of premises and equipment (686,710) (884,584)
Net (increase) in loans (7,309,934) (12,937,057)
------------ ------------
Net cash (used in) investing activities (26,677,344) (22,378,801)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 16,767,173 14,963,867
Net increase in certificates of deposit 1,782,422 2,515,654
Proceeds from issuance of capital securities 4,000,000 --
Proceeds from Federal Home Loan Bank advances -- 10,000,000
Cash dividends paid (649,863) (581,666)
Issuance of common stock 67,821 19,558
Acquisition of common stock (597,493) (98,761)
------------ ------------
Net cash provided by financing activities 21,370,060 26,818,652
------------ ------------
Increase (decrease) in cash and cash equivalents (3,012,286) 6,840,724
CASH AND CASH EQUIVALENTS
Beginning 30,182,031 25,578,884
------------ ------------
Ending $ 27,169,745 $ 32,419,608
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 2,739,787 $ 3,686,607
============ ============
Income taxes $ 624,000 $ 1,019,500
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Unrealized gain on securities available for sale, net $ 538,817 $ 339,151
============ ============
See Accompanying Notes to Consolidated Financial Statements.
6
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The consolidated statements include the accounts of Fauquier
Bankshares, Inc. (the "Company") and subsidiary, The Fauquier Bank. All
significant intercompany balances and transactions have been
eliminated. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial positions as of June 30, 2002 and December 31, 2001, and the
results of operations and cash flows for the six months ended June 30,
2002 and 2001.
The results of operations for the three and six months ended June 30,
2002 and 2001 are not necessarily indicative of the results expected
for the full year.
2. SECURITIES
The amortized cost of securities available for sale, with unrealized
gains and losses follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
June 30, 2002
-----------------------------------------------------------------
Obligations of U.S.
Government corporations
and agencies $ 44,518,118 $ 680,017 $ -- $ 45,198,135
Obligations of states and political
subdivisions 2,250,853 69,143 -- 2,319,996
Corporate Bonds 5,067,574 156,807 -- 5,224,381
Mutual Funds 1,500,000 -- (501) 1,499,499
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
FHLMC Preferred
Bank stock 487,500 -- (22,500) 465,000
------------ ------------ ------------ ------------
$ 55,096,045 $ 905,967 $ (23,001) $ 55,979,011
============ ============ ============ ============
7
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---- ----- -------- -----
December 31, 2001
-----------------------------------------------------------------
Obligations of U.S.
Government corporations
and agencies $ 26,680,369 $ 202,404 $ (38,948) $ 26,843,825
Obligations of states and political
subdivisions 3,043,644 59,399 -- 3,103,043
Corporate Bonds 5,080,203 148,793 -- 5,228,996
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
FHLMC Preferred
Bank stock 487,500 -- (27,500) 460,000
------------ ------------ ------------ ------------
$ 36,563,716 $ 410,596 $ (66,448) $ 36,907,864
============ ============ ============ ============
3. LOANS
A summary of the balances of loans follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(Thousands)
Real estate loans:
Construction and land development $ 10,962 $ 16,851
Secured by farmland 2,414 2,220
Secured by 1-4 family residential 75,468 72,692
Other real estate loans 63,982 62,845
Commercial and industrial loans (except those secured by real estate) 19,501 15,154
Loans to individuals for personal expenditures 35,551 34,640
All other loans 9,687 5,962
-------- --------
Total loans $217,565 $210,364
Less: Unearned income 28 54
Allowance for loan losses 2,962 2,857
-------- --------
Net loans $214,575 $207,453
======== ========
8
Analysis of the allowance for loan losses follows:
SIX MONTHS SIX MONTHS
ENDING ENDING
JUNE 30, JUNE 30, DECEMBER 31,
2002 2001 2001
------- ------- -------
(Thousands)
Balance at beginning of period $ 2,857 $ 2,554 $ 2,554
Provision charged to operating expense 188 200 350
Recoveries added to the allowance 17 51 230
Loan losses charged to the allowance (100) (49) (277)
------- ------- -------
Balance at end of period $ 2,962 $ 2,756 $ 2,857
======= ======= =======
Nonperforming assets consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
------ ------
(Thousands)
Nonaccrual loans $1,319 $ 913
Restructured loans -- --
------ ------
Total non-performing loans 1,319 913
Foreclosed real estate -- --
------ ------
Total non-performing assets $1,319 $ 913
====== ======
Total loans past due 90 days or more and still accruing were $342,000
on June 30, 2002 and $541,000 on December 31, 2001.
4. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUST
On March 26, 2002, the Company's wholly-owned Connecticut statutory
business trust privately issued $4 million face amount of the trust's
Floating Rate Capital Securities ("Capital Securities") in a pooled
capital securities offering. Simultaneously, the trust used the
proceeds of that sale to purchase $4 million principal amount of the
Company's Floating Rate Junior Subordinated Deferrable Interest
Debentures due 2032 ("Subordinated Debentures"). Both the Capital
Securities and the Subordinated Debentures are callable at any time
after five years from the issue date. The Subordinated Debentures are
an unsecured obligation of the Company and are junior in right of
payment to all present and future senior indebtedness of the Company.
The Capital Securities are guaranteed by the Company on a subordinated
basis.
The Capital Securities are presented in the consolidated balance sheets
of the Company under the caption "Company-Obligated Mandatorily
Redeemable Capital Securities." The Company records distributions
payable on the Capital Securities as an Interest Expense in its
consolidated statements of income. The cost of issuance of the Capital
Securities was approximately $128,000. This cost is being amortized
over a five year period from the issue date.
9
5. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number
of shares of diluted potential common stock. Weighted average number of
shares for all periods reported have been restated giving effect to the
100% stock dividend during 2002.
THREE MONTHS SIX MONTHS SIX MONTHS
ENDING ENDING ENDING
JUNE 30, 2002 JUNE 30, 2002 JUNE 30, 2001
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ --------- ------
Basic earnings per share 3,332,184 $ 0.29 3,338,613 $ 0.56 3,420,670 $ 0.57
Effect of dilutive securities, stock options 162,861 ====== 142,880 ====== 32,834 ======
--------- --------- ---------
Diluted earnings per share 3,495,045 $ 0.28 3,481,493 $ 0.54 3,453,504 $ 0.56
========= ====== ========= ====== ========= ======
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The following discussion is qualified in its entirety by the more detailed
information and the financial statements and accompanying notes appearing
elsewhere in this Form 10-Q. In addition to the historical information contained
herein, this report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies, and expectations of management, are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project,"
"may," "will" or similar expressions. Although we believe our plans, intentions
and expectations reflected in these forward-looking statements are reasonable,
we can give no assurance that these plans, intentions, or expectations will be
achieved. Our ability to predict results or the actual effect of future plans or
strategies is inherently uncertain, and actual results, performance or
achievements could differ materially from those contemplated. Factors that could
have a material adverse effect on our operations and future prospects include,
but are not limited to, changes in: interest rates, general economic conditions,
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 our market area and accounting principles,
policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements contained herein, and you should not place
undue reliance on such statements, which reflect our position as of the date of
this report.
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 had issued and outstanding
3,313,112 shares of common stock, par value $3.13 per share, held by
approximately 396 shareholders of record on June 30, 2002.
TFB has seven full service branch offices located in the Virginia communities of
Warrenton, Catlett, The Plains, Manassas and New Baltimore. The executive
offices of Bankshares and the main branch office of TFB are located at 10
Courthouse Square, Warrenton, Virginia 20186.
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 Corporation
(the "FDIC"). 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 and
telephone. 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 types of consumer financing.
TFB provides automated teller machine (ATM) cards, as a part of the Star and
Plus ATM networks, thereby permitting customers to utilize the convenience of
larger ATM networks. TFB operates a Wealth Management Services division that
began with the granting of trust powers to TFB in 1919. The Wealth Management
Services division provides personalized services that include investment
management, trust, estate settlement, retirement, insurance, and brokerage
services.
11
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
advance borrowings from the Federal Home Loan Bank ("FHLB") of Atlanta. The
principal expenses of TFB are the interest paid on deposits and borrowings, and
operating and general administrative expenses.
TFB's general market area principally includes Fauquier and western Prince
William counties, and is located approximately sixty (60) miles southwest of
Washington, D.C.
CRITICAL ACCOUNTING POLICIES
GENERAL. Bankshares' financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). The
financial information contained within our statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. In addition, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our
transactions would be the same, the timing of events that would impact our
transactions could change.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the
losses that may be sustained in our loan portfolio. The allowance is based on
two basic principles of accounting: (i) Statement of Financial Accounting
Standards (SFAS) No. 5 "Accounting for Contingencies," which requires that
losses be accrued when they are probable of occurring and estimable and (ii)
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which requires
that losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has three basic components: the specific
allowance, the formula allowance and the unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur.
The specific allowance is used to individually allocate an allowance for larger
balance, non-homogeneous loans. The specific allowance uses various techniques
to arrive at an estimate of loss. First, analysis of the borrower's overall
financial condition, resources and payment record; the prospects for support
from financial guarantors; and the fair market value of collateral are used to
estimate the probability and severity of inherent losses. Additionally, the
migration of historical default rates and loss severities, internal risk
ratings, industry and market conditions and trends, and other environmental
factors are considered. The use of these values is inherently subjective and our
actual losses could be greater or less than the estimates.
The formula allowance is used for estimating the loss on pools of
smaller-balance, homogeneous loans; including one-to-four family mortgage loans,
installment loans, other consumer loans, as well as outstanding loan
commitments. Also, a formula allowance is used for the remaining pool of larger
balance, non-homogeneous loans which were not allocated a specific allowance
upon their review. The formula allowance begins with estimates of probable
losses inherent in the homogeneous portfolio based upon various statistical
analyses. These include analysis of historical and peer group delinquency and
credit loss experience, together with analyses that reflect current trends and
conditions. We also consider trends and changes in the volume and term of loans,
changes in the credit process and/or lending policies and procedures, and an
evaluation of overall credit quality. Since the formula for the allowance uses a
historical loss view as an indicator of future losses, actual losses could
differ in the future. However, since this history is updated with the most
recent loss information, the errors that might otherwise occur are mitigated.
12
The unallocated allowance captures losses that are attributable to various
economic events, industry or geographic sectors whose impact on the portfolio
have occurred but have yet to be recognized in either the formula or specific
allowances. In addition, an unallocated reserve is maintained to recognize the
imprecision in estimating and measuring inherent losses on individual loans or
pools of loans.
COMPARISION OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2002
AND JUNE 30, 2001
NET INCOME. Net income for the three months ended June 30, 2002 was $972,000 or
$0.28 per diluted share compared with $811,000 or $0.23 per diluted share for
the three months ended June 30, 2001. The increase in net income for the
three-month period was primarily due to the increase in net interest income.
NET INTEREST INCOME. Net interest income increased $496,000 or 16.0% to $3.6
million for the three months ended June 30, 2002 compared with $3.1 million for
the three months ended June 30, 2001. The net interest margin, computed on a tax
equivalent basis, for the March 2002 quarter was 5.21% compared with 4.92% for
the same quarter one year earlier. The increase in the net interest margin can
be primarily attributed to the declining interest rate environment over the last
twelve months, and the corresponding reduction in the average cost on total
deposits to 1.76% for the quarter ended June 30, 2002, from 2.96% for the
quarter ended June 30, 2001.
Average interest-earning assets grew 9.5% to $276.7 million for the second
quarter of 2002 compared with $252.7 million for the second quarter of 2001.
Total interest income declined $49,000 or 1.0% to $4.95 million for the three
months ended June 30, 2002 compared to $5.00 million for the three months ended
June 30, 2001, as a result of the declining interest rate environment and its
effect on the yield on interest-earning assets. The tax equivalent yield on
interest-earning assets declined to 7.17% for the quarter ended June 30, 2002,
from 7.93% for the quarter ended June 30, 2001. Interest and fees on loans
declined $114,000, or 2.6% to $4.3 million for the June 2002 quarter. Average
loans outstanding totaled $215.3 million and earned 8.06% on a tax-equivalent
basis for the quarter ended June 30, 2002, compared with $209.7 million and
8.49%, respectively, for the quarter ended June 30, 2001. Investment securities
income increased $185,000 or 50.3%, while interest on federal funds sold
decreased $120,000 or 67.5%. Investment securities and federal funds sold
averaged $47.6 million and $13.8 million, respectively, for the second quarter
of 2002 compared with $25.8 million and $17.1 million for the same quarter one
year earlier. The yield on investment securities and federal funds was 4.06% on
a tax-equivalent basis for the second quarter of 2002, compared with 5.23% for
the second quarter of 2001.
Total interest expense decreased $545,000 or 28.6% to $1.4 million for the three
months ended June 30, 2002 from $1.9 million for the three months ended June 30,
2001. Average interest-bearing liabilities grew 10.9% to $225.0 million for the
second quarter of 2002 compared with $202.8 million for the second quarter of
2001, while the average cost on interest-bearing liabilities decreased to 2.42%
from 3.76% for the same respective time periods. The decrease in total interest
expense and the average cost of interest-bearing liabilities was due to the
declining interest rate environment. Average certificates of deposit balances
for the second quarter of 2002 were $69.2 million at an average cost of 3.99%,
compared with $78.0 million at an average cost of 5.78% for the same quarter one
year earlier. Average FHLB of Atlanta advances were $15.0 million for the second
quarter of 2002 compared with $18.7 million during the second quarter of 2001.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $94,000 and
$100,000 for the three months ended June 30, 2002 and 2001, respectively. The
respective amounts of the provision for loan losses were 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, estimated values
of collateral, and the impact of economic conditions
13
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.
TOTAL OTHER INCOME. Total other income increased by $123,000 or 16.3% from
$754,000 for the three months ended June 30, 2001 to $877,000 for the three
months ended June 30, 2002, primarily due to the increase in service charge
income on deposit accounts. Service charges on deposit accounts increased
$94,000, or 24.1% to $483,000 for the quarter ended June 30, 2002 compared with
$390,000 for the same quarter one year earlier. Major factors in the increase in
service charges on deposit accounts were management's focus on meeting the needs
of its customers with new value-added, fee-based products such as "Courtesy
Pay," and the impact of TFB's deposit base increasing 14.2% from $229.6 million
at June 30, 2001 to $262.3 million at June 30, 2002.
TOTAL OTHER EXPENSES. Total other expenses increased 15.2% or $391,000 to $2.96
million for the three months ended June 30, 2002 compared with $2.57 million for
the three months ended June 30, 2001. Approximately $183,000 of the increase was
due to the increase in salary and benefit expenses. The primary factors causing
the increase in salary and benefit expense were the growth in staff from 111
full-time equivalent personnel at June 30, 2001 to 114 full-time equivalent
personnel at June 30, 2002; increases in the defined-benefit pension plan and
medical insurance expense; and the customary annual salary increases. The
increase in full-time equivalent personnel results primarily from the addition
of the retail banking and lending staff for the Old Town-Manassas branch office
opened in August 2001, and the expansion of TFB's Wealth Management Services
division. Occupancy and furniture and equipment expenses also increased over the
same time period by $23,000 and $38,000, respectively, due to the addition of
the Old Town-Manassas branch office. Marketing and business development expenses
increased by $44,000, primarily due to the marketing of TFB's new check imaging
program. Beginning in June 2002, TFB began processing checking accounts using
state-of-the-art Check Imaging. By providing customers a high quality photo
journal of checks issued, the ease and efficiency of their financial
recordkeeping was greatly enhanced. Data processing and telephone expenses
increased $62,000 and $31,000, respectively, primarily due to expenses related
to the improvement of TFB's customer relationship management and business
continuity capabilities, as well as the additional expenses related to the Old
Town-Manassas branch. Other operating expenses increased $89,000 primarily in
employee training/education expenses, and miscellaneous lending-related
expenses.
COMPARISION OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2002
AND JUNE 30, 2001
NET INCOME. Net income for the six months ended June 30, 2002 was $1.88 million
or $0.54 per diluted share compared with $1.94 million or $0.56 per diluted
share for the six months ended June 30, 2001. The decrease in net income for the
six-month period was entirely due to a $358,000 non-loan charge-off recovery,
net of tax, during the first quarter of 2001. Absent this one-time recovery and
associated income tax, net income from operations increased 19.2% from $1.58
million for the first six months of 2001 to $1.88 million.
NET INTEREST INCOME. Net interest income increased $875,000 or 14.4% to $7.0
million for the six months ended June 30, 2002 compared with $6.1 million for
the six months ended June 30, 2001. The net interest margin, computed on a tax
equivalent basis, for the six months ending June 30, 2002 was 5.19% compared
with 5.03% for the same period one year earlier. The increase in the net
interest margin can be primarily attributed to the declining interest rate
environment over the last twelve months, and the corresponding reduction in the
average cost on total deposits to 1.84% for the six months ended June 30, 2002,
from 3.03% for the same period ended June 30, 2001.
14
Average interest-earning assets grew 10.7% to $270.2 million for the first six
months of 2002 compared with $244.1 million for the first six months of 2001.
Total interest income declined $146,000 or 1.5% to $9.7 million for the six
months ended June 30, 2002 compared to $9.80 million for the six months ended
June 30, 2001, as a result of the declining interest rate environment and its
effect on the yield on interest-earning assets. The tax equivalent yield on
interest-earning assets declined to 7.20% for the six months ended June 30,
2002, from 8.09% for the six months ended June 30, 2001. Interest and fees on
loans declined $208,000, or 2.4% to $8.6 million for the first six months of
2002 compared with $8.8 million for the same period one year earlier. Average
loans outstanding totaled $214.3 million and earned 8.03% on a tax-equivalent
basis for the six months ended June 30, 2002, compared with $206.5 million and
8.54%, respectively, for the six months ended June 30, 2001. Investment
securities income increased $314,000 or 46.7%, while interest on federal funds
sold decreased $252,000 or 71.3%. Investment securities and federal funds sold
averaged $43.5 million and $12.4 million, respectively, for the first six months
of 2002 compared with $22.9 million and $14.8 million for the same period one
year earlier. The yield on investment securities and federal funds was 4.00% on
a tax-equivalent basis for the first six months of 2002, compared with 5.65% for
the first six months of 2001.
Total interest expense decreased $1.0 million or 27.5% to $2.7 million for the
six months ended June 30, 2002 from $3.7 million for the six months ended June
30, 2001. Average interest-bearing liabilities grew 12.1% to $201.4 million for
the first six months of 2002 compared with $179.7 million for the first six
months of 2001, while the average cost on interest-bearing liabilities decreased
to 2.48% from 3.82% for the same respective time periods. The decrease in total
interest expense and the average cost of interest-bearing liabilities was due to
the declining interest rate environment. Average certificates of deposit
balances for the first six of 2002 were $69.0 million at an average cost of
4.15%, compared with $76.9 million at an average cost of 5.85% for the same
period one year earlier. Average FHLB of Atlanta advances were $15.0 million for
the first six months of 2002 compared with $15.9 million during the first six
months of 2001.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $188,000 and
$200,000 for the six months ended June 30, 2002 and 2001, respectively. The
respective amounts of the provision for loan losses were 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, estimated values
of collateral, 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.
TOTAL OTHER INCOME. Total other income decreased by $212,000 or 10.5% from $2.02
million for the six months ended June 30, 2001 to $1.81 million for the six
months ended June 30, 2002. This decrease stemmed from the previously mentioned
non-loan charge-off recovery of $542,000 during the first quarter of 2001.
Excluding this one-time recovery, total other income increased $331,000 or
22.4%. Wealth management income increased $77,000 or 30.2% from the first six
months of 2001 to the first six months of 2002, primarily due to increased
investment brokerage activity. Service charges on deposit accounts increased
$181,000, or 23.3% from the first six months of 2001 to the first six months of
2002. Major factors in the increase in service charges on deposit accounts were
primarily those discussed in the quarterly comparison above.
TOTAL OTHER EXPENSES. Total other expenses increased 15.2% or $771,000 to $5.86
million for the six months ended June 30, 2002 compared with $5.09 million for
the six months ended June 30, 2001. Approximately $444,000 of the increase was
due to the increase in salary and benefit expenses. Major factors in the
increase in salary and benefit expenses were primarily those discussed in the
quarterly comparison above. Advertising and business development expenses
increased 66.8%, or $101,000, from the six months ended June 30, 2001,
to the six months ended June 30, 2002 primarily due to TFB's 100-year
anniversary celebration, as well as the marketing of TFB's new check imaging
program. Occupancy, furniture and equipment, and telephone expenses also
increased over the same time period due
15
to the addition of the Old Town-Manassas branch office. Other operating expenses
increased $86,000 primarily in employee training/education expenses, and
miscellaneous lending-related expenses.
COMPARISON OF JUNE 30, 2002 AND DECEMBER 31, 2001 FINANCIAL CONDITION
Assets totaled $308.7 million at June 30, 2002, an increase of 8.2% or $23.5
million from $285.2 million at December 31, 2001. Balance sheet categories
reflecting significant changes include loans, federal funds sold, securities,
deposits, and company obligated mandatorily redeemable preferred securities of
subsidiary trust. Each of these categories is discussed below.
LOANS. Net loans were $214.6 million at June 30, 2002, which is an increase of
$7.1 million or 3.4% from $207.5 million at December 31, 2001. The growth in
total loans can be attributed to the increases in 1-4 family residential loans
of $2.8 million, commercial and industrial loans of $4.3 million, and
miscellaneous other loans of $3.7 million, partially offset by the decrease in
construction and land development loans of $5.9 million.
FEDERAL FUNDS SOLD. Federal funds sold were $5.6 million at June 30, 2002,
compared with $15.4 million at December 31, 2001, representing a decrease of
$9.8 million. The decrease was due to investment of excess liquidity in
securities rather than federal funds sold as discussed below.
SECURITIES. Investment securities increased $19.1 million from December 31, 2001
to June 30, 2002. This increase was funded by the increase in deposits discussed
below, as well as decreasing the amount of federal funds sold, and investing the
proceeds in securities. Virtually all securities purchased during the quarter
ended June 30, 2002 were relatively short-term with projected durations of three
years or less.
DEPOSITS. On June 30, 2002, total deposits were $262.3 million, reflecting an
increase of $18.5 million or 7.6% from $243.7 million at December 31, 2001. The
growth was in interest-bearing deposits, which increased $16.5 million, and
non-interest-bearing deposits, which increased $2.0 million.
COMPANY OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUST
("Capital Securities.") During March 2002, Bankshares established a subsidiary
trust that issued $4.0 million of capital securities as part of a pooled trust
preferred security offering with other financial institutions. Bankshares
intends to use the offering proceeds for the purposes of expansion and the
repurchase of additional shares of its common stock. Under applicable regulatory
guidelines, the capital securities are treated as Tier 1 capital for purposes of
the Federal Reserve's capital guidelines for bank holding companies, as long as
the capital securities and all other cumulative preferred securities of
Bankshares together do not exceed 25% of Tier 1 capital.
SHAREHOLDERS' EQUITY
Total shareholders' equity was $25.2 million at June 30, 2002 compared to $24.2
million at December 31, 2001, an increase of $1.0 million, or 4.3%. During the
six months ended June 30, 2002, shareholders' equity was reduced by $597,000 due
to the repurchase of 23,135 shares of Bankshares' common stock.
ASSET QUALITY
Non-performing loans, in most cases, consist of loans that are 90 days or more
past due and for which the accrual of interest has been discontinued. Management
evaluates all loans that are 90 days or more past due, as well as 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.
16
Non-performing loans totaled approximately $1.3 million, or .61% of total loans
at June 30, 2002, as compared with $913,000, or .43% of total loans at December
31, 2001. The increase in non-performing loans is entirely due to the addition
of approximately $507,000 of loans to one borrower. The allowance for loan
losses allocated for these loans were increased to reflect the change in their
status. Non-performing loans as a percentage of the allowance for loan losses
were 44.5% and 32.0% at June 30, 2002 and December 31, 2001, respectively.
Loans that are 90 days past due and accruing interest totaled $342,000 and
$541,000 at June 30, 2002 and December 31, 2001, respectively. No loss is
anticipated on these loans.
There are no loans, other than those disclosed above as either non-performing or
impaired, where known information about the borrower has 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. To management's knowledge, no concentration
of loans to borrowers engaged in similar activities exceeds 10% of total loans.
CAPITAL RESOURCES AND LIQUIDITY
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 funds for existing and future loan
commitments, maturing certificates of deposit and demand deposit withdrawals, to
invest in other interest-earning assets, to maintain liquidity, and to meet
operating expenses. Management regularly monitors projected liquidity needs and
determines the desirable funding 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, interest-bearing deposits in
other banks and federal funds sold totaled $27.2 million at June 30, 2002. These
assets provide the primary source of liquidity for TFB. In addition, management
has designated the investment securities portfolio, totaling $56.0 million, as
available for sale, and TFB has a line of credit with the FHLB of Atlanta to
provide additional sources of liquidity. The FHLB of Atlanta line of credit had
a borrowing limit of approximately $45.6 million at June 30, 2002, of which
$15.0 million was in use.
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 establish minimums, and the federal regulators have
noted that banks and bank holding companies contemplating significant expansion
programs should maintain all ratios well in excess of the minimums and should
not allow expansion to diminish their capital ratios. 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 stockholder's 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.
17
The FDIC Improvement Act of 1991 ("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, 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 June 30, 2002, (i)
Bankshares' Tier 1, total risk-based capital and leverage ratios were 13.90%,
15.15% and 9.49%, respectively, and (ii) TFB's Tier 1 and total risk-based
capital and leverage ratios were 13.74%, 14.99%, and 9.38%, respectively. TFB
was notified by the Federal Reserve Bank of Richmond that, at June 30, 2002,
both Bankshares and TFB were considered "well capitalized."
FDICIA also provides that (i) only a "well capitalized" depository institution
may accept brokered deposits without prior regulatory approval and (ii) requires
the appropriate federal 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.
RECENT ACCOUNTING PRONOUNCEMENTS
There have been no new accounting pronouncements to disclose since the filing of
Bankshare's report on Form 10-Q for the quarter ended March 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 different time intervals than its interest-bearing
liabilities. However, TFB is not subject to 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 interest 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 instantaneous change in market rates of up to 200 basis
points up or down. TFB's policy limit for the maximum negative impact on net
interest income and change in the economic value of equity resulting from
instantaneous change in market interest rates of 200 basis points is 15% and
18
35%, respectively. Management has maintained a risk position well within these
guideline levels during the second quarter of 2002.
There have been no material changes in market risk since 2001 year end.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings to which Bankshares or TFB
is a party or to which the property of either Bankshares or TFB is subject that,
in the opinion of management, may materially impact the financial condition of
either company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Bankshares held its Annual Meeting of Shareholders on May 21, 2002. A quorum of
Shareholders was present, consisting of a total of 1,405,796 shares, 8,000
represented in person and 1,397,796 represented by proxy. At the Annual Meeting,
Class III directors A. G. Green, Jr., D. C. Larson, D. H. Lees, Jr., R. T.
Minter, and H. F. Stringfellow were elected to three-year terms. The following
Class I and Class II directors whose terms expire in 2003 and 2004 continued in
office: S. C. Haworth, C. H. Lawrence, Jr., B. S. Montgomery, H. P. Neale, P. H.
Nevill, J. J. Norman, Jr., H. M. Ross, and C. H. Tiffany. The Shareholders also
ratified the appointment of Yount, Hyde & Barbour, P.C. as independent auditors
of the Bank for the year ending December 31, 2002.
The vote on each matter was as follows:
1. For Directors: FOR WITHHELD
--- --------
Alexander G. Green, Jr. 1,379,760 26,036
Douglas C. Larson 1,349,348 56,448
D. Harcourt Lees, Jr. 1,343,440 62,356
Randolph T. Minter 1,395,956 9,840
H. Frances Stringfellow 1,351,800 53,996
2. Ratification of the appointment
of Yount, Hyde & Barbour,P.C. as
the independent auditors for
Bankshares and TFB: FOR AGAINST ABSTAIN
--- ------- -------
1,370,432 20,064 15,300
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(3)(i) Articles of Incorporation of Fauquier Bankshares, Inc.,
as amended*
(3)(ii) Bylaws of Fauquier Bankshares, Inc.*
19
Certain instruments relating to capital securities
not being registered have been omitted in accordance
with Item 601(b)(4)(iii) of Regulation S-K. The
registrant will furnish a copy of any such instrument
to the Securities and Exchange Commission upon its
request.
(11) Refer to Part I, Item 1, Footnote 5 to the Consolidated
Financial Statements.
* Incorporated by reference to Bankshares' Registration Statement on Form 10,
filed with the Securities and Exchange Commission on April 16, 1999.
(b) Reports on Form 8-K:
Current Report on Form 8-K, filed on April 19, 2002, attaching a press release
announcing Bankshares' two-for-one stock split of its common stock in the form
of a stock dividend. New shares resulting from this split were distributed on or
about May 15, 2002 to holders of record as of the close of business on April 30,
2002.
20
SIGNATURES
Pursuant to the requirements 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.
Dated: August 14, 2002 /s/ C. Hunton Tiffany
-------------------------------------------
C. Hunton Tiffany
Chairman, President and Chief Executive Officer
Dated: August 14, 2002 /s/ Eric P. Graap
-------------------------------------------
Eric P. Graap
Senior Vice President and Chief Financial
Officer
(Certifications of CEO and CFO under Section 906 of the
Sarbanes-Oxley Act of 2002 are enclosed
separately as correspondence with this filing.)
21