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 September 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 (I.R.S. Employer
incorporation or organization) 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 November 7, 2002, the latest practicable date for determination,
3,283,029 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 September 30, 2002 (unaudited) and December 31, 2001 2
Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 2002 and 2001 3
Consolidated Statements of Income (unaudited) for the Nine Months Ended September 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity
(unaudited) for the Nine Months Ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows (unaudited) for the Nine
Months Ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 22
CERTIFICATIONS 23
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
(UNAUDITED) (AUDITED)
--------------------- ---------------------
ASSETS
Cash and due from banks $ 17,857,882 $ 14,408,495
Interest-bearing deposits in other banks 253,423 352,536
Federal funds sold 8,714,000 15,421,000
Securities, at fair value 56,937,870 36,907,864
Loans, net of allowance for loan losses of $3,004,837
in 2002 and $2,856,743 in 2001 213,816,523 207,452,738
Bank premises and equipment, net 6,566,118 6,335,708
Accrued interest receivable 1,735,767 1,590,282
Other assets 2,686,929 2,733,384
------------ ------------
Total assets $308,568,512 $285,202,007
============ ============
LIABILITIES
Deposits:
Noninterest-bearing $ 50,683,297 $ 50,659,242
Interest-bearing 210,636,553 193,087,800
------------ ------------
Total deposits $261,319,850 $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 330,599 318,356
Other liabilities 2,241,443 1,979,210
Commitments and contingent liabilities -- --
------------ ------------
Total liabilities $282,891,892 $261,044,608
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, par value, $3.13; authorized 8,000,000 shares;
issued and outstanding, 2002, 3,297,748 shares; 2001, 1,675,559 shares 10,321,951 5,244,500
Retained earnings 14,779,444 18,685,761
Accumulated other comprehensive income 575,225 227,138
------------ ------------
Total shareholders' equity $ 25,676,620 $ 24,157,399
------------ ------------
Total liabilities and shareholders' equity $308,568,512 $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 SEPTEMBER 30, 2002 AND 2001
2002 2001
----------- -----------
INTEREST INCOME
Interest and fees on loans $ 4,205,327 $ 4,449,604
Interest and dividends on securities available for sale:
Taxable interest income 540,511 292,027
Interest income exempt from federal income taxes 24,566 37,539
Dividends 62,445 29,567
Interest on federal funds sold 55,278 209,413
Interest on deposits in other banks 248 657
----------- -----------
Total interest income 4,888,375 5,018,807
----------- -----------
INTEREST EXPENSE
Interest on deposits 1,030,030 1,593,067
Interest on Federal Home Loan Bank advances 177,739 293,695
Distribution on capital securities of subsidiary trust 55,882 --
----------- -----------
Total capital interest expense 1,263,651 1,886,762
----------- -----------
Net interest income 3,624,724 3,132,045
Provision for loan losses 65,000 75,000
----------- -----------
Net interest income after
provision for loan losses 3,559,724 3,057,045
----------- -----------
OTHER INCOME
Wealth management income 181,995 197,356
Service charges on deposit accounts 522,348 436,830
Other service charges, commissions and fees 250,698 221,613
Gains on securities available for sale 33,914 --
Other operating income 9,863 17,603
----------- -----------
Total other income 998,818 873,402
----------- -----------
OTHER EXPENSES
Salaries and employees' benefits 1,444,599 1,212,041
Net occupancy expense of premises 191,871 156,057
Furniture and equipment 252,709 212,317
Marketing and business development 81,123 82,480
Bank card 122,333 114,346
Professional and consulting fees 200,910 146,661
Data processing 213,076 205,193
Non-loan chargeoffs 48,725 (32,392)
Postage 32,330 41,123
Supplies 62,452 66,854
Taxes, other than income 70,358 60,247
Telephone 69,881 57,877
Other operating expenses 263,524 206,894
----------- -----------
Total other expenses 3,053,891 2,529,698
----------- -----------
Income before income taxes 1,504,651 1,400,749
Income tax expense 473,485 443,498
----------- -----------
Net income $ 1,031,166 $ 957,251
=========== ===========
*EARNINGS PER SHARE, basic $ 0.31 $ 0.28
=========== ===========
*EARNINGS PER SHARE, assuming dilution $ 0.30 $ 0.27
=========== ===========
*DIVIDENDS PER SHARE $ 0.10 $ 0.095
=========== ===========
*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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
2002 2001
----------- -----------
INTEREST INCOME
Interest and fees on loans $12,776,346 $13,228,893
Interest and dividends on securities available for sale:
Taxable interest income 1,398,785 804,366
Interest income exempt from federal income taxes 87,031 118,025
Dividends 125,512 106,642
Interest on federal funds sold 156,384 562,312
Interest on deposits in other banks 1,834 2,444
----------- -----------
Total interest income 14,545,892 14,822,682
----------- -----------
INTEREST EXPENSE
Interest on deposits 3,311,937 4,899,211
Interest on Federal Home Loan Bank advances 527,421 700,086
Distribution on capital securities of subsidiary trust 115,455 --
----------- -----------
Total capital interest expense 3,954,813 5,599,297
----------- -----------
Net interest income 10,591,079 9,223,385
Provision for loan losses 252,500 275,000
----------- -----------
Net interest income after
provision for loan losses 10,338,579 8,948,385
----------- -----------
OTHER INCOME
Wealth management income 513,597 490,667
Service charges on deposit accounts 1,477,399 1,211,283
Other service charges, commissions and fees 727,052 604,551
Gains on securities available for sale 33,914 --
Non-loan chargeoff recovery -- 542,320
Other operating income 52,422 41,666
----------- -----------
Total other income 2,804,384 2,890,487
----------- -----------
OTHER EXPENSES
Salaries and employees' benefits 4,215,204 3,538,760
Net occupancy expense of premises 537,943 439,532
Furniture and equipment 742,780 623,223
Advertising and business development 334,581 234,459
Bank card 348,031 315,091
Consulting and professional fees 530,757 559,916
Data processing 609,780 540,328
Non-loan chargeoffs 113,774 86,884
Postage 125,013 117,179
Supplies 168,288 171,970
Taxes, other than income 177,522 166,551
Telephone 193,785 150,494
Other operating expenses 814,131 671,769
----------- -----------
Total other expenses 8,911,589 7,616,156
----------- -----------
Income before income taxes 4,231,374 4,222,716
Income tax expense 1,316,422 1,327,584
----------- -----------
Net income $ 2,914,952 $ 2,895,132
=========== ===========
*EARNINGS PER SHARE, basic $ 0.88 $ 0.85
=========== ===========
*EARNINGS PER SHARE, assuming dilution $ 0.84 $ 0.83
=========== ===========
*DIVIDENDS PER SHARE $ 0.30 $ 0.265
=========== ===========
*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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
ACCUMULATED
OTHER
COMMON CAPITAL RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME
----------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 5,359,158 $ -- $ 17,145,324 $ (85,543)
Comprehensive income:
Net income -- -- 2,895,132 --
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $200,275 -- -- -- 388,770
Total comprehensive income -- -- -- --
Cash dividends -- -- (903,667) --
Acquisition of 16,718 shares of common stock (52,327) -- (303,189) --
Exercise of stock options 7,280 -- 21,028 --
------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 $ 5,314,111 $ -- $ 18,854,628 $ 303,227
============================================================
BALANCE, DECEMBER 31, 2001 $ 5,244,500 $ -- $ 18,685,761 $ 227,138
Comprehensive income:
Net income -- -- 2,914,952 --
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $179,318 -- -- -- 348,087
Total comprehensive income -- -- -- --
100% Stock Dividend 5,185,020 (5,185,020)
Cash dividends -- -- (993,417) --
Acquisition of 38,499 shares of common stock (120,503) -- (697,719) --
Issuance of common stock 5,547 -- 37,424 --
Exercise of stock options 7,387 -- 17,463 --
------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2002 $ 10,321,951 $ -- $ 14,779,444 $ 575,225
============================================================
COMPREHENSIVE
INCOME TOTAL
------------------------------
BALANCE, DECEMBER 31, 2000 $ 22,418,939
Comprehensive income:
Net income $ 2,895,132 2,895,132
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $200,275 388,770 388,770
------------
Total comprehensive income $ 3,283,902 --
============
Cash dividends (903,667)
Acquisition of 16,718 shares of common stock (355,516)
Exercise of stock options 28,308
------------
BALANCE, SEPTEMBER 30, 2001 $ 24,471,966
============
BALANCE, DECEMBER 31, 2001 $ 24,157,399
Comprehensive income:
Net income $ 2,914,952 2,914,952
Other comprehensive income (loss) net of tax:
Unrealized holding gains on securities available
for sale, net of deferred income taxes of $179,318 575,225 348,087
------------
Total comprehensive income $ 3,490,177 --
============
100% Stock Dividend
Cash dividends (993,417)
Acquisition of 38,499 shares of common stock (818,222)
Issuance of common stock 42,971
Exercise of stock options 24,850
------------
BALANCE, SEPTEMBER 30, 2002 $ 25,676,620
============
See Accompanying Notes to Consolidated Financial Statements.
5
FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
----------- ------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,914,952 $ 2,895,132
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 696,395 548,865
Provision for loan losses 252,500 275,000
Net premium amortization on investment securities 262,630 37,512
Gain on sale of fixed assets (7,006) --
Gain on sale of securities available for sale (33,914) --
Changes in assets and liabilities:
(Increase) in accrued interest receivable (145,485) (180,447)
(Increase) in other assets (132,863) (124,858)
Increase in other liabilities 262,233 144,832
------------ ------------
Net cash provided by operating activities 4,069,442 3,596,036
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls and principal
payments of securities available for sale 11,876,633 8,491,643
Purchase of securities available for sale (32,641,600) (22,389,942)
Proceeds from sale of securities available for sale 1,033,650 --
Proceeds from sale of premises and equipment 7,006 --
Purchase of premises and equipment (926,805) (1,369,177)
Net (increase) in loans (6,616,285) (12,552,550)
------------ ------------
Net cash (used in) investing activities (27,267,401) (27,820,026)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts 15,090,518 20,820,457
Net increase in certificates of deposit 2,482,290 4,665,756
Proceeds from issuance of capital securities 4,000,000 --
Proceeds from Federal Home Loan Bank advances -- 10,000,000
Cash dividends paid (981,174) (872,157)
Issuance of common stock 67,821 28,308
Acquisition of common stock (818,222) (355,516)
------------ ------------
Net cash provided by financing activities 19,841,233 34,286,848
------------ ------------
Increase (decrease) in cash and cash equivalents (3,356,726) 10,062,858
CASH AND CASH EQUIVALENTS
Beginning 30,182,031 25,578,884
------------ ------------
Ending $ 26,825,305 $ 35,641,742
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 4,029,932 $ 5,571,748
============ ============
Income taxes $ 1,165,000 $ 1,378,500
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Unrealized gain on securities available for sale, net $ 527,405 $ 589,046
============ ============
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. ("Bankshares") and its 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 September 30, 2002 and December 31, 2001, and
the results of operations and cash flows for the nine months ended
September 30, 2002 and 2001.
The results of operations for the three and nine months ended September
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
------------ ------------ ---------- ------------
September 30, 2002
--------------------------------------------------------------
Obligations of U.S.
Government corporations
and agencies $ 43,077,220 $ 666,050 $ -- $ 43,743,270
Obligations of states and political
subdivisions 2,149,829 91,732 -- 2,241,561
Corporate Bonds 4,061,200 122,763 -- 4,183,963
Mutual Funds 5,018,568 1,008 -- 5,019,576
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 -- (10,000) 477,500
------------ ------------ ------------ ------------
$ 56,066,317 $ 881,553 $ (10,000) $ 56,937,870
============ ============ ============ ============
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:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(Thousands)
Real estate loans:
Construction and land development $ 11,732 $ 16,851
Secured by farmland 2,266 2,220
Secured by 1-4 family residential 75,906 72,692
Other real estate loans 62,366 62,845
Commercial and industrial loans (except those secured by real estate) 18,060 15,154
Loans to individuals for personal expenditures 35,930 34,640
All other loans 10,628 5,962
-------- --------
Total loans $216,888 $210,364
Less: Unearned income 67 54
Allowance for loan losses 3,005 2,857
-------- --------
Net loans $213,817 $207,453
======== ========
8
Analysis of the allowance for loan losses follows:
NINE MONTHS NINE MONTHS
ENDING ENDING
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2002 2001 2001
------------- ------------ ------------
(Thousands)
Balance at beginning of period $ 2,857 $ 2,554 $ 2,554
Provision charged to operating expense 253 275 350
Recoveries added to the allowance 29 215 230
Loan losses charged to the allowance (134) (173) (277)
------- ------- -------
Balance at end of period $ 3,005 $ 2,871 $ 2,857
======= ======= =======
Nonperforming assets consist of the following:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(Thousands)
Nonaccrual loans $1,095 $ 913
Restructured loans -- --
------ ------
Total non-performing loans 1,095 913
Foreclosed real estate -- --
------ ------
Total non-performing assets $1,095 $ 913
====== ======
Total loans past due 90 days or more and still accruing were $330,000
on September 30, 2002 and $541,000 on December 31, 2001.
4. COMPANY-OBLIGATED MANDITORILY REDEEMABLE CAPITAL SECURITIES OF
SUBSIDIARY TRUST
On March 26, 2002, Bankshares' 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
Bankshares'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 Bankshares and are junior in right of
payment to all present and future senior indebtedness of Bankshares.
The Capital Securities are guaranteed by Bankshares on a subordinated
basis.
The Capital Securities are presented in the consolidated balance sheets
of Bankshares under the caption "Company-Obligated Mandatorily
Redeemable Capital Securities." Bankshares 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 to give effect to
the 100% stock dividend in May 2002.
THREE MONTHS NINE MONTHS NINE MONTHS
ENDING ENDING ENDING
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
PER SHARE PER SHARE PER SHARE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- --------- --------- ---------
Basic earnings per share 3,305,145 $ 0.31 3,319,043 $ 0.88 3,418,094 $ 0.85
========= ========= =========
Effect of dilutive securities, stock options 151,169 145,643 52,898
--------- --------- ---------
Diluted earnings per share 3,456,314 $ 0.30 3,464,686 $ 0.84 3,470,992 $ 0.83
========= ========= ========= ========= ========= =========
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 climate, monetary
and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Board of Governors of the Federal Reserve System,
the quality or composition of the 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 3,297,748 shares of common
stock, par value $3.13 per share, held by approximately 390
shareholders of record on September 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 has entered into a contract to buy a property in Bealeton,
Virginia, and subject to satisfaction of certain conditions, including
receipt of required governmental and regulatory approvals, plans to
open its eighth full service branch office in Bealeton during 2003.
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, based on measures of the financial effects of
transactions and events that have already occurred. A variety of
factors could affect the ultimate value that is obtained either when
earning income, recognizing an expense, recovering an asset or
relieving a liability. We use historical loss factors as one factor in
determining the inherent loss that may be present in our loan
portfolio. Actual losses could differ significantly from the historical
factors that we use in our estimates. In addition, GAAP itself may
change from one previously acceptable 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. The formula
allowance uses a historical loss view as an indicator of future losses
and, as a result, could differ from the loss incurred in the future.
However, since this history is regularly 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 SEPTEMBER
30, 2002 AND SEPTEMBER 30, 2001
NET INCOME. Net income for the three months ended September 30, 2002
was $1.03 million or $0.30 per diluted share compared with $957,000 or
$0.27 per diluted share for the three months ended September 30, 2001.
The 7.7% 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 $493,000 or 15.7% to
$3.6 million for the three months ended September 30, 2002 compared
with $3.1 million for the three months ended September 30, 2001. The
net interest margin, computed on a tax equivalent basis, for the
September 2002 quarter was 5.03% compared with 4.74% 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 1.54% for the quarter ended September 30,
2002, from 2.72% for the quarter ended September 30, 2001.
Average interest-earning assets grew 9.2% to $286.5 million for the
third quarter of 2002 compared with $262.4 million for the third
quarter of 2001. Total interest income declined $130,000 or 2.6% to
$4.89 million for the three months ended September 30, 2002 compared to
$5.02 million for the three months ended September 30, 2001, primarily
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 6.78% for the quarter ended
September 30, 2002, from 7.58% for the quarter ended September 30,
2001. Interest and fees on loans declined $244,000, or 5.5% to $4.21
million for the September 2002 quarter. Average loans outstanding
totaled $214.3 million and earned 7.31% on a tax-equivalent basis for
the quarter ended September 30, 2002, compared with $211.2 million and
7.81%, respectively, for the quarter ended September 30, 2001.
Investment securities income increased $268,000 or 74.7%, while
interest on federal funds sold decreased $154,000 or 73.6%. Investment
securities and federal funds sold averaged $58.7 million and $13.5
million, respectively, for the third quarter of 2002 compared with
$26.5 million and $24.7 million for the same quarter one year earlier.
The yield on investment securities and federal funds was 3.84% on a
tax-equivalent basis for the third quarter of 2002, compared with 4.56%
for the third quarter of 2001.
Total interest expense decreased $623,000 or 33.0% to $1.26 million for
the three months ended September 30, 2002 from $1.89 million for the
three months ended September 30, 2001. Average interest-bearing
liabilities grew 10.4% to $233.1 million for the third quarter of 2002
compared with $211.1 million for the third quarter of 2001, while the
average cost on interest-bearing liabilities decreased to 2.15% from
3.54% 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 third quarter of 2002 were
$71.1 million at an average cost of 3.66%, compared with $77.4 million
at an average cost of 5.53% for the same quarter one year earlier.
Average FHLB of Atlanta advances were $15.0 million at an average cost
of 4.64% for the third quarter of 2002, compared with $23.0 million at
an average cost of 5.00% during the third quarter of 2001.
Future trends regarding net interest income are dependent on the
absolute level of market interest rates, the shape of the yield curve,
the amount of lost income from non-performing assets, the amount of
prepaying loans and mortgage-backed securities, the reinvestment
strategy for loan and mortgage-backed security prepayments, the overall
volume of interest-earning assets and interest-bearing liabilities, and
other factors. One trend that resulted from the decrease in market
interest rates that began in early 2001 and has continued through 2002
is the increase in the magnitude of loan and mortgage-backed security
prepayments and the reduced yield on the reinvestment of the prepayment
proceeds. The continuation of this trend may cause downward pressure on
the net interest margin in future periods. The monitoring and
management of net interest income is the responsibility of TFB's Asset
13
and Liability Management Committee ("ALCO"). ALCO meets no less than
monthly, and is comprised of TFB's senior management.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $65,000
and $75,000 for the three months ended September 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 increased by $125,000 or 14.4%
from $873,000 for the three months ended September 30, 2001 to $999,000
for the three months ended September 30, 2002, primarily due to the
increase in service charge income on deposit accounts. Service charges
on deposit accounts increased $86,000, or 19.6% to $522,000 for the
quarter ended September 30, 2002 compared with $437,000 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 10.0%
from $237.6 million at September 30, 2001 to $261.3 million at
September 30, 2002.
TOTAL OTHER EXPENSES. Total other expenses increased 20.7% or $524,000
to $3.05 million for the three months ended September 30, 2002 compared
with $2.53 million for the three months ended September 30, 2001.
Approximately $233,000 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 increases in the defined-benefit
pension plan and medical insurance expense, and the customary annual
salary increases. Occupancy and furniture and equipment expenses also
increased over the same time period by $36,000 and $40,000,
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 September 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 $54,000 and $11,000, respectively,
primarily due to the improvement in TFB's customer relationship
management and business continuity capabilities, as well as the
additional expenses related to the Old Town-Manassas branch in August
2001. Other operating expenses increased $57,000 primarily in employee
training/education expenses, and miscellaneous lending-related
expenses. Non-loan chargeoffs increased $81,000 to $49,000 for the
third quarter of 2002 from a net recovery of $32,000 for the third
quarter of 2001. During 2001, reserves of approximately $69,000, which
were previously established for a potential loss on the
misappropriation of ATM cash by a subcontracted ATM servicer, were
reversed as a result of various subsequent events, including the "make
whole" guarantee from the vendor who had subcontracted with the ATM
servicer.
COMPARISION OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 2002 AND SEPTEMBER 30, 2001
NET INCOME. Net income for the nine months ended September 30, 2002 was
$2.91 million or $0.84 per diluted share compared with $2.90 million or
$0.84 per diluted share for the nine months ended September 30, 2001.
The absence of growth in net income when comparing the nine-month
periods was entirely due to a $358,000 non-loan chargeoff recovery, net
of tax, during the first quarter of 2001. Excluding this one-time
recovery and associated income tax, net income from operations
increased 14.9% from $2.54 million for the first nine months of 2001 to
$2.91 million.
14
NET INTEREST INCOME. Net interest income increased $1.37 million or
14.8% to $10.59 million for the nine months ended September 30, 2002
compared with $9.22 million for the nine months ended September 30,
2001. The net interest margin, computed on a tax equivalent basis, for
the nine months ending September 30, 2002 was 5.14% compared with 4.93%
for the same period one year earlier. The increase in the net interest
margin is primarily attributable to the declining interest rate
environment over the last twelve months, and the corresponding
reduction in the average cost on total deposits to 1.74% for the nine
months ended September 30, 2002, from 2.92% for the same period in
2001.
Average interest-earning assets grew 10.2% to $275.7 million for the
first nine months of 2002 compared with $250.3 million for the first
nine months of 2001. Total interest income declined $277,000 or 1.9% to
$14.55 million for the nine months ended September 30, 2002 compared to
$14.82 million for the nine months ended September 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 7.05% for the nine months ended
September 30, 2002, from 7.91% for the nine months ended September 30,
2001. Interest and fees on loans declined $453,000, or 3.4% to $12.78
million for the first nine months of 2002 compared with $13.23 million
for the same period one year earlier. Average loans outstanding totaled
$214.3 million and earned 7.45% on a tax-equivalent basis for the nine
months ended September 30, 2002, compared with $208.1 million and
7.93%, respectively, for the nine months ended September 30, 2001.
Investment securities income increased $582,000 or 56.6%, while
interest on federal funds sold decreased $406,000 or 72.2%. Investment
securities and federal funds sold averaged $48.7 million and $12.8
million, respectively, for the first nine months of 2002 compared with
$24.1 million and $18.2 million for the same period one year earlier.
The yield on investment securities and federal funds was 3.93% on a
tax-equivalent basis for the first nine months of 2002, compared with
5.20% for the first nine months of 2001.
Total interest expense decreased $1.64 million or 29.4% to $3.95
million for the nine months ended September 30, 2002 from $5.60 million
for the nine months ended September 30, 2001. Average interest-bearing
liabilities grew 11.3% to $223.5 million for the first nine months of
2002 compared with $200.8 million for the first nine months of 2001,
while the average cost on interest-bearing liabilities decreased to
2.36% from 3.72% 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 nine months of 2002 were
$69.7 million at an average cost of 3.98%, compared with $77.0 million
at an average cost of 5.74% for the same period one year earlier.
Average FHLB of Atlanta advances were $15.0 million with an average
cost of 4.64% for the first nine months of 2002 compared with $18.3
million and an average cost of 5.05% during the first nine months of
2001.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $253,000
and $275,000 for the nine months ended September 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 $86,000 or 3.0%
from $2.89 million for the nine months ended September 30, 2001 to
$2.80 million for the nine months ended September 30, 2002. This
decrease stemmed from the non-loan chargeoff recovery of $542,000
during the first quarter of 2001. Excluding this one-time recovery,
total other income increased $456,000 or 19.4%. Service charges on
deposit accounts increased $266,000, or 22.0%, from the first nine
months of 2001 to the first nine months of 2002. Major factors in the
increase in service charges on deposit accounts were primarily those
discussed in the quarterly comparison above. Other service charges,
commissions and fees increased $123,000, or 20.3%, from the first nine
months of 2001 to the first nine months of 2002 primarily due to
increased VISA check card income and increased bankcard merchant
discount fees.
15
TOTAL OTHER EXPENSES. Total other expenses increased 17.0% or $1.30
million to $8.91 million for the nine months ended September 30, 2002
compared with $7.62 million for the nine months ended September 30,
2001. Approximately $676,000 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 42.7%, or $100,000, from the nine months ended September 30,
2001, to the nine months ended September 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 to
the addition of the Old Town-Manassas branch office. Other operating
expenses increased $142,000 primarily in employee training/education
expenses, and miscellaneous lending-related expenses.
COMPARISON OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 FINANCIAL
CONDITION
Assets totaled $308.6 million at September 30, 2002, an increase of
8.2% or $23.4 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 mandatory
redeemable capital securities of subsidiary trust. Each of these
categories is discussed below.
LOANS. Net loans were $213.8 million at September 30, 2002, which is an
increase of $6.4 million or 3.1% from $207.5 million at December 31,
2001. The growth in total loans is attributable to the increases in
one-to-four family residential loans of $3.2 million, commercial and
industrial loans of $2.9 million, and miscellaneous other loans of $4.7
million, partially offset by the decrease in construction and land
development loans of $5.1 million.
FEDERAL FUNDS SOLD. Federal funds sold were $8.7 million at September
30, 2002, compared with $15.4 million at December 31, 2001,
representing a decrease of $6.7 million. The decrease was due to
investment of excess liquidity in securities rather than federal funds
sold as discussed in the next paragraph.
SECURITIES. Investment securities increased $20.0 million from December
31, 2001 to September 30, 2002. This increase was funded by the
increase in deposits discussed below, as well as a decrease in the
amount of federal funds sold, and investment of the proceeds in
securities. Virtually all securities purchased during the quarter ended
September 30, 2002 were relatively short-term with projected durations
of three years or less.
DEPOSITS. On September 30, 2002, total deposits were $261.3 million,
reflecting an increase of $17.6 million or 7.2% from $243.7 million at
December 31, 2001. The growth was in interest-bearing deposits, which
increased $17.5 million, while non-interest-bearing deposits were
substantially unchanged.Many factors may have contributed to the
increase in interest-bearing deposits, including the outflow of funds
from the equity investment markets into bank deposits.
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 is using 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 $25.7 million at September 30, 2002
compared to $24.2 million at December 31, 2001, an increase of $1.5
million, or 6.3%. During the nine months ended September 30, 2002,
16
shareholders' equity was reduced by $818,000 due to the repurchase of
38,499 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.
Non-performing loans totaled approximately $1.09 million, or .50% of
total loans at September 30, 2002, as compared with $1.32 million, or
.61% of total loans at June 30, 2002, and $913,000, or .43% of total
loans at December 31, 2001. The increase in non-performing loans since
December 2001 is entirely due to approximately $356,000 of loans to one
borrower that changed to non-performing status. The allowance for loan
losses allocated for these loans was increased to reflect the change in
their status. Non-performing loans as a percentage of the allowance for
loan losses were 36.4% and 32.0% at September 30, 2002 and December 31,
2001, respectively.
Loans that are 90 days past due and accruing interest totaled $331,000
and $541,000 at September 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 $26.8 million at
September 30, 2002. These assets provide the primary source of
liquidity for TFB. In addition, management has designated the
investment securities portfolio, totaling $56.9 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 $47.2 million at
September 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
17
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 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 losses up to 1.25%
of risk-weighted assets.
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."
As of September 30, 2002, (i) Bankshares' Tier 1, total risk-based
capital and leverage ratios were 14.23%, 15.48% and 9.35%,
respectively, and (ii) TFB's Tier 1 and total risk-based capital and
leverage ratios were 14.03%, 15.28%, and 9.33%, respectively. TFB was
notified by the Federal Reserve Bank of Richmond that, at September 30,
2002, both Bankshares and TFB were considered "well capitalized."
FDICIA also (i) provides that 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 PRONOUCEMENTS
In April 2002, the Financial Accounting Standards Board issued
Statement No. 145, Rescissions of FASB No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. This Statement
rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement
amends FASB Statement No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the rescission
of Statement No. 4 shall be applied in fiscal years beginning after May
15, 2002. The provisions of this Statement related to Statement 13 are
effective for transactions occurring after May 15, 2002, with early
application encouraged.
In June 2002, the Financial Accounting Standards Board issued Statement
146, Accounting for Costs Associated with Exit or Disposal Activities.
This Statement addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The
standard requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of this
Statement are effective for exit or disposal activities that are
initiated after December 31 2002, with early application encouraged.
18
The Financial Accounting Standards Board issued Statement No. 147,
Acquisitions of Certain Financial Institutions, an Amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9 in October
2002. FASB Statement No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying
APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for
by the Purchase Method, provided interpretive guidance on the
application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual
enterprises, Statement No. 147 removes acquisitions of financial
institutions from the scope of both Statement No. 72 and Interpretation
No. 9 and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets. Thus, the requirement in
paragraph 5 of Statement No. 72 to recognize (and subsequently
amortize) any excess of the fair value of liabilities assumed over the
fair value of tangible and identifiable intangible assets acquired as
an unidentifiable intangible asset no longer applies to acquisitions
with the scope of Statement No. 147. In addition, this Statement amends
FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to
the same undiscounted cash flow recoverability test and impairment loss
recognition and measurement provisions that Statement No. 144 requires
for other long-lived assets that are held and used.
Paragraph 5 of Statement No. 147, which relates to the application of
the purchase method of accounting, is effective for acquisitions for
which the date of acquisition is on or after October 1, 2002. The
provisions in paragraph 6 related to accounting for the impairment or
disposal of certain long-term customer-relationship intangible assets
are effective on October 1, 2002. Transition provisions for previously
recognized unidentifiable intangible assets in paragraphs 8-14 are
effective on October 1, 2002, with earlier application permitted.
Statement No. 147 clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business
combination, whereas a branch acquistion that does not should be
accounted for as an acquisition of net assets that does not result in
the recognition of goodwill.
The transition provisions state that if the transaction that gave rise
to the unidentifiable intangible asset was a business combination, the
carrying amount of that asset shall be reclassified to goodwill as of
the later of the date of acquisition or the date Statement No. 142 was
first applied (fiscal years beginning after December 15, 2001). Any
previously issued interim statements that reflect amortization of the
unidentifiable intangible asset subsequent to the Statement No. 142
application date shall be restated to remove that amortization expense.
The carrying amounts of any recognized intangible assets that meet the
recognition criteria of Statement No. 141 that have been included in
the amount reported as an unidentifiable intangible asset and for which
separate accounting records have been maintained shall be reclassified
and accounted for as assets apart from the unidentifiable intangible
asset and shall not be reclassified to goodwill.
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
19
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 35%, respectively. Management has
maintained a risk position well within these guideline levels during
the third quarter of 2002.There have been no material changes in market
risk since 2001 year end.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
such as Bankshares that file periodic reports under the Securities
Exchange Act of 1934 (the "Act") are now required to include in those
reports certain information concerning the issuer's controls and
procedures for complying with the disclosure requirements of the
federal securities laws. Under rules adopted by the Securities and
Exchange Commission effective August 29, 2002, these disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
by an issuer in the reports it files or submits under the Act, is
communicated to the issuer's management, including its principal
executive officer or officers and principal financial officer or
officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosure.
Bankshares has established disclosure controls and procedures to ensure
that material information related to Bankshares is made known to its
principal executive officer and principal financial officer on a
regular basis, in particular during the periods in which its quarterly
and annual reports are being prepared. These disclosure controls and
procedures consist principally of communications between and among the
chief executive officer and the chief financial officer, and the other
executive officers of Bankshares and its subsidiaries to identify any
new transactions, events, trends, contingencies or other matters that
may be material to Bankshares' operations. As required, management,
including the chief executive officer and chief financial officer, will
evaluate the effectiveness of these disclosure controls and procedures
on a quarterly basis, and most recently did so as of October 7, 2002, a
date within 90 days prior to the filing of this quarterly report. Based
on this evaluation, Bankshares' management, including the chief
executive officer and the chief financial officer, concluded that such
disclosure controls and procedures were operating effectively as
designed as of the date of such evaluation.
Changes in Internal Controls
----------------------------
There were no significant changes in Bankshares' internal controls or
in other factors that could significantly affect these controls
subsequent to the date of their evaluations.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
(3)(i) Articles of Incorporation of Fauquier Bankshares, Inc., as
amended*
(3)(ii) Bylaws of Fauquier Bankshares, Inc.*
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 August 14, 2002, stating that the
chief executive officer and chief financial officer of Fauquier
Bankshares, Inc. filed certifications in accordance with ss. 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. ss. 1350) on August 14, 2002.
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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: November 14, 2002 /s/ C. Hunton Tiffany
-------------------------------------
C. Hunton Tiffany
President and Chief Executive Officer
Dated: November 14, 2002 /s/ Eric P. Graap
-------------------------------------
Eric P. Graap
Senior Vice President and Chief
Financial Officer
(Certification of CEO and CFO under Section 906 of the
Sarbanes-Oxley Act of 2002 are enclosed separately
separately as correspondence with this filing.)
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CERTIFICATIONS
I, C. Hunton Tiffany, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fauquier
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ C. Hunton Tiffany
-------------------------------------
C. Hunton Tiffany
President and Chief Executive Officer
23
I, Eric P. Graap, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fauquier
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 /s/ Eric P. Graap
-----------------------------------------
Eric P. Graap
Senior Vice President and Chief Financial
Officer
24